State of Iowa v. Vertrue Incorporated: A Connecticut-based marketing company must pay more than $40 million in restitution and penalties for allegedly duping hundreds of thousands of Iowa residents into signing up for buying club memberships they mostly did not want or use, the Iowa Supreme Court recently ruled.
Vertrue, located in Norwalk, and formerly known as Memberworks Inc., is a buying club that provides members with discounts for products purchased online, including books, music, clothing and fitness programs. Customers are required to pay monthly membership charges of up to $19.95 per month. To entice customers, the company frequently uses "cash back rewards," gift cards and free membership offers.
Customers in Iowa found the free membership offers especially confusing, and as a result made thousands of complaints to the Office of the Attorney General. In those complaints, the consumers said they felt duped by Vertrue's practice of automatically giving them "free membership" in the discount programs, and then charging monthly fees if those memberships were not cancelled. Over a five-year period beginning in 2009, thousands of Vertrue customers asked the Iowa Attorney General Thomas J. Miller to help them get their money back.
In 2006, Miller filed a lawsuit in Iowa state court claiming the company had defrauded nearly 864,000 Iowa residents who inadvertently signed up for the discount programs they didn't want and never used. Many of those customers were elderly, Miller wrote in the lawsuit, and were unfairly taken advantage of.
In the complaint, Miller wrote that his office completed a report in which 85 percent of 400 surveyed Vertrue customers said they were unaware that they had been signed on as members and felt they were charged for membership fees without their permission. In many cases, the complaint alleged, the memberships were created when customers made one-time purchases over the telephone, or using one of Vertrue's mailed-in or online offers.
"These consumers did not use the services of this membership they were charged for," Miller said when the lawsuit was filed. "And Vertrue made it as difficult as possible for the consumers to get their money back."
In the lawsuit, Miller contended that Vertrue violated Iowa state laws that regulate buying clubs and protect consumers from online fraud. He claimed the company acted to intentionally deceive the consumers. Miller sought restitution, along with extra civil penalties because the majority of the duped customers were over 65 years of age.
On March 8, 2010, Polk County District Judge Robert Hutchison ruled in the state's favor, although he rejected the argument that additional civil penalties should be imposed because many of the customers were elderly. Hutchison ordered the company to pay more than $30 million in restitution, fines and legal fees. Last year, Vertrue appealed to the Iowa Supreme Court.
In their appeal of the lower court's ruling, Babbin and the other Vertrue attorneys argued that the sales practices were perfectly legal, and the Iowa law regulating buying clubs was unconstitutional. They also argued Vertrue's practice of requiring its customers to actively cancel their memberships was perfectly legal.
The state, in turn, cross-appealed the lower court's decision not to award additional civil penalties because the company defrauded elderly consumers.
The Iowa Supreme Court rejected all of Vertrue's arguments. In addition, the court ruled in favor of Miller's office on the issue of extra penalties on behalf of elderly victims. In its decision, the court said Vertrue's financial, privacy and health programs also violated the buying club law. For that violation, the court increased the amount of restitution by $13.6 million.
The court also added $180,000 in civil penalties after concluding Vertrue's frauds were committed against the elderly. Chief Justice Mark Cady, who wrote the decision on July 5, said the record was replete with testimony of older Iowans who could not read important disclosures contained in Vertrue's marketing materials because their of their diminished eyesight. "The fine print was illegible," Cady wrote. "Common sense dictates that, similarly, the elderly were substantially more vulnerable to Vertrue's indecipherable, rapid-fire telemarketing pitches due to the auditory deficiencies that disproportionally affect the elderly."
Vertrue's lawyer, Babbin, declined to comment. "I'm sorry to report that I'm unable to comment on the decision," he said. "And no one else at my firm is in a position to comment." Other attorneys representing Vertrue did not return phone messages.
The ruling was one of the largest consumer protection verdicts ever reached in Iowa and, according to Iowa's Office of the Attorney General, one of the largest of its kind in the nation.•