Connecticut Company Ordered to Pay $32.6M in Fines, Restitution in Iowa

A Polk County, Iowa, judge ordered Connecticut-based Vertrue Inc. to pay more than $30 million dollars in restitution, penalties and costs after ruling the corporation violated Iowa’s buying club law and used deceptive and unfair practices to market so-called buying club memberships to nearly a half-million Iowans over 20 years, the state attorney general’s office announced.

The $32.6 million ruling includes $29.8 million in consumer restitution, $2.8 million in civil penalties, and $725,000 in costs and fees.

In a ruling filed in Polk County District Court, District Judge Robert A. Hutchison ruled that, since 1993, Vertrue unlawfully marketed 639,721 “memberships” in discount programs to Iowans. These buying club “memberships” typically cost $9.95 to $19.95 per month, with charges usually made to consumers’ credit card or bank accounts. The memberships purport to provide discounts or savings on books, music, clothing, home improvement items, entertainment activities, dining out, and fashion and fitness products.

“It is certain that Iowans relied on the concealment and omission by Vertrue, and were damaged by the concealment and omission,” Hutchison wrote in his 45-page ruling. “The Court finds that 90 percent of the consumers who purchased Vertrue membership discount programs would have cancelled those programs within the statutory three-day period had they been properly and conspicuously advised of their right to cancel…”

Iowa Attorney General Tom Miller noted that the decision is the largest consumer protection verdict ever awarded in Iowa in a case filed by the attorney general, and one of the largest of its kind in the nation.

Miller also noted that Vertrue has the option to appeal the judgment, so it is premature to determine how restitution will be distributed to Iowans who suffered losses.

On March 18, 2010, Hutchison ruled Vertrue (formerly known as MemberWorks, Inc.) and its subsidiaries, Adaptive Marketing LLC and Idaptive Marketing LLC, violated Iowa’s Consumer Fraud Act and Iowa’s Buying Club Law. The liability ruling followed Miller’s consumer fraud lawsuit filed against the company in May of 2006.

The court found numerous violations of Iowa law. Among them, the court ruled that it was unfair and deceptive to lure consumers into trial memberships by holding out $25 gift cards or other premiums, and then set up obstacles designed to frustrate and delay efforts to redeem the premiums – a practice the company referred to as “breakage.” The court ruled that one form of this practice, called “double breakage” because it involved two separate hurdles, was especially “egregious.”

After Iowa’s lawsuit against Vertrue the U.S. Senate Commerce Committee condemned many of the tactics identified in the Iowa litigation. In a November 2009 report that focused on sharp practices in Internet marketing, the Committee charged that Vertrue used “aggressive sales tactics intentionally designed to mislead online shoppers.” In a follow-up report in May 2010, the Committee concluded that after charging for services that consumers “did not use and did not understand they had purchased,” Vertrue “made it as difficult as possible for consumers to get their money back.”

Source: Iowa Attorney General’s Office