Credit monitoring schemes have long been viewed as the low end of direct marketing. Industry leaders have applauded as the FTC put perpetrators out of business and made them pay millions in restitution to victims.
Times have changed. Last week, the U.S. Court Of Appeals for the Seventh District threw out a restitution order against Michael Brown and his firm, Credit Bureau Center LLC. This is unprecedented. The two law enforcement agencies that rarely -- if ever -- lost such a case were the FTC and the U.S. Postal Inspection Service. And fringe operators often complained bitterly.
But Michael Brown has poked a hole in the FTC’s seeming invulnerability.
It remains to be seen whether this is merely a sign of the times, part of the sweeping deregulation trend, or a one-off. Either way, lawyers will be looking at it carefully.
Here are the facts, as stated in the decision issued by Seventh Circuit Court of Appeals last week.
Brown’s websites offered a free credit report and score, while stating in smaller text that in applying for this freebie a person was signing up for "an unspecific $29.94 monthly 'membership subscription'." The monthly service sign-up -- a negative option -- was made clearer in a follow-up letter from the company, the court notes.
One could argue, based on the notification, that Brown was within the law, if getting close to stepping over the line.
Starting in 2014, however, Brown retained one Danny Pierce to direct customers to his service via Brown websites with names like “eFreeScore.com” and “FreeCreditNation.com.”
Of Pierce, the court states, “it’s undisputed that his method for drumming up referrals was fraudulent.”
Pierce subcontracted with Andrew Lloyd, who posted Craigslist advertising ads or “nonexistent rental properties at bargain prices.”
Posing as a landlord, Lloyd advised rental applicants to obtain a credit report and score through one of Brown’s websites, at which point they were unrolled in the paid monthly “service,” the court writes. Some of the back-and-forth on this level was by email.
To old-timers in this business, it looked like just another nickel-and-dime scheme to defraud -- a lucrative one involving several layers. “Pierce referred more than 2.7 million customers to Brown, generating just over $6.8 million in revenue,” the court notes.
Of course, consumers complained -- to their credit card issuers, which cancelled more than 10,000 of Brown’s charges, and to the FTC. And that body took action.
That lower court held that “Brown violated the FTCA as a principal for the Craigslist scheme and that the websites violated the FTCA, ROSCA, the FCRA, and the Free Credit Reports Rule.”
And it issued a permanent injunction that “imposed extensive conditions on Brown’s continued involvement in the credit-monitoring industry and ordered Brown to pay $5,260,671.36 in restitution,” the Seventh Circuit opinion continues. It also “denied Brown’s motion to unfreeze funds to pay his attorneys.”
But it went too far. In upholding the permanent injunction, the Seventh Circuit states that “the restitution award is a different matter.”
Not to get too technical, but in a prior case it was determined that “the FTC’s grant of authority to order injunctive relief does not implicitly authorize an award of restitution.”
This does not mean that Brown can pocket the $6 million -- the permanent inunction effectively puts his company out of business. But it does mean he doesn’t have to pay back the consumers.
This case could go to the Supreme Court. It probably won’t lead to a surge in new forms of rascality, although credit deadbeat email lists remain ever popular in some quarters.
Meanwhile, Michael Brown and his lawyers can lift a glass to celebrate this legal victory.