Connecticut-Based Company Ordered To Pay $40 Million In Iowa Case
By RYAN J. FOLEY, Associated Press
IOWA CITY, Iowa (AP) _ A Connecticut-based marketing company must pay $40 million in restitution and fines for duping hundreds of thousands of Iowans into signing up for buying club memberships they mostly did not want or use, the Iowa Supreme Court ruled Friday.
In a 6-0 ruling, the court blasted Vertrue Inc. for using misleading telemarketing and Internet solicitations to enroll 864,000 Iowans in programs in which they could buy discounted goods and services dating back to 1989. Most Iowans were tricked into enrolling after they thought they had accepted free gift cards or trial memberships, and were unaware that they had to cancel to avoid recurring monthly charges of up to $29.99, the court said.
The company’s practices were confusing for all consumers, Chief Justice Mark Cady wrote, but particularly so for elderly Iowans, who were more susceptible to the pitches and less likely to use the discounts. Vertrue’s own data showed that 85 percent of its memberships were never used, and a state survey of 400 Iowa customers showed that two-thirds of them were unaware they had signed up or said they hadn’t authorized the charges, Cady noted.
Attorney General Tom Miller, whose office has spent a decade investigating the practices of Vertrue and its subsidiaries, said the ruling was a “decisive victory for consumers, particularly older Iowans.” It is the largest judgment in a contested lawsuit brought by the Consumer Protection Division, aides said.
Assistant Attorney General Steven St. Clair said the ruling should lead to refunds for Vertrue customers, strengthen the state’s position in litigation against other deceptive marketers and deter unethical firms from operating in Iowa. Vertrue’s parent company is going through restructuring in bankruptcy, but the state should be able to recover $32.6 million– the appeal bond the company posted, he said.
St. Clair said the ruling shows the court will not tolerate practices that frustrate consumers, including the misuse of fine print and pitches that disguise key information.
“This ruling is very important in this case as a final resolution,” he said. “But it’s also helpful in our efforts … to protect consumers from all the various forms of trickery and over-reaching that occur.”
Miller’s office sued Vertrue in 2006, contending the company violated state laws that regulate buying clubs and protect consumers from fraud.
District Judge Robert Hutchison ruled in the state’s favor in 2010, ordering the company to pay roughly $30 million in restitution, fines and legal fees. Vertrue appealed, contending its sales practices were legal and the state’s buying club law was unconstitutional.
The high court rejected Vertrue’s arguments Friday, and ruled in favor of Miller’s office on separate issues that it had appealed. For instance, the court said Vertrue’s financial, privacy and health programs also violated the buying club law– overturning part of Hutchison’s decision– and increased the amount of restitution by more than $10 million.
The court also added $180,000 in penalties after concluding Vertrue’s frauds were committed against the elderly, again overturning Hutchison.
“The record was replete with testimony of Iowans over the age of sixty-five who testified they could not read important disclosures contained in Vertrue’s marketing and program materials because their vision, compromised by old age, rendered the fine print 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.”
Attorneys representing Vertrue didn’t return phone messages. The company has stopped operating in Iowa, but continues to collect monthly fees from those who haven’t canceled memberships, St. Clair said.
Iowa law treats buying club marketers the same as door-to-door salesmen, requiring them to provide buyers with a written contract at the time of sales and written and oral notice about the right to cancel within three days.
Vertrue argued those requirements were impractical for out-of-state companies who market by mail, telephone and Internet. Cady found the law mandated the disclosures regardless of the “difficulty of compliance under a particular business model.”
He described some of Vertrue’s common tactics.
One involved an offer of a $25 gift card and a “30-day risk-free trial membership” to customers who had purchased unrelated items over the phone. The script was deceptive because it falsely implied the gift card was a reward for the earlier purchase and didn’t inform consumers they were purchasing a membership, Cady wrote.
Another involved an Internet solicitation promising customers access to credit reports and scores if they signed up for a “FREE 7-day trial.” The fine print noted that it actually cost $29.95 monthly, and Cady said the deception didn’t stop there: Customers had call two separate numbers to cancel.
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