Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—M.D. Fla.: Payday loan and long distance telephone discount operation liable for $9.5 million in FTC action, (Jul 19, 2013)

By Tobias J. Gillett, J.D., LL.M.

In an action brought by the FTC, an operation that induced consumers to enroll in discount long distance telephone programs during an online payday loan application process, and that charged bank accounts revealed during the loan application process for the discount programs’ fees, were liable for unfair billing practices and deceptive acts under Section 5(a) of the FTC Act, the federal district court in Orlando has ruled (FTC v. Direct Benefits Group, LLC, July 18, 2013, Antoon, J.). Four corporate and two individual defendants were held liable as a common enterprise for $9,512,172 in equitable relief, and the individual defendants were held individually liable. The defendants were also permanently enjoined from continuing their operation.

WKMS, Inc. operated websites on which customers could fill out payday loan applications, which WKMS would refer to lenders or intermediaries that would locate lenders. The discount programs Thrifty Dial, Voice Net Global, Direct Benefits Online, and Unified Savings offered long-distance telephone membership services, under which consumers could make long-distance telephone calls through an 800 number for the price of the membership fee.

WKMS’s websites promoted the discount programs during the loan application process. The websites would present consumers with the option to select a box to enroll in the discount programs prior to submitting their applications, as well as a popup box when the consumers would submit an application that would enroll the consumers in the programs if they clicked the “OK” button. When consumers enrolled in the programs, debits for the discount programs’ fees were made to the bank accounts listed by the consumers in their payday loan applications.

Following complaints to government agencies and Better Business Bureaus, the FTC initiated an investigation. The investigation led it to file a lawsuit against the four corporate entities and two individuals behind the operation under Section 5(a) of the FTC Act.

The court concluded that the FTC had established at trial that the defendants had engaged in unfair billing practices in violation of Section 5(a) “by obtaining consumers’ bank account information and debiting those accounts without the consumers’ consent,” and had engaged in deceptive practices in violation of Section 5(a) “by failing to adequately disclose material information.” The court initially concluded that the defendants’ acts affected commerce for purposes of Section 5(a) because the defendants engaged in transactions with customers throughout the United States.

Unfair billing practices. The court explained that an “unfair practice” under Section 5(a) is “one that (1) causes or is likely to cause substantial injury to consumers (2) which is not reasonably avoidable by consumers themselves and (3) not outweighed by countervailing benefits to consumers or to competition.”

The court found the FTC had established substantial harm to consumers because “[e]ach consumer who was enrolled in the discount programs incurred a bank account debit of between $39.95 and $99.90,” resulting in net payments to the defendants of over $9.5million. “[T]he FTC established that the injury was not reasonably avoidable by consumers because of the confusing and misleading way the payday loan process operated,” according to the court. The fact that some consumers were able to obtain refunds did not change that decision. Finally, since “the vast majority of the more than 628,000 consumers who were enrolled in the discount programs never used any of the discount offerings,” the benefit to consumers did not outweigh the injury.

Deceptive acts. The court explained that a practice is deceptive under Section 5(a) if it is likely to materially “mislead consumers acting reasonably under the circumstances,” and that “courts consider the overall, common sense ‘net impression’ of the representation or act as a whole to determine whether it is misleading.”

The manner in which consumers were enrolled in the discount programs “was likely to mislead reasonably-acting consumers,” the court found. The FTC provided “highly probative” evidence that many consumers had actually been deceived into enrolling in the programs. The defendants’ expectation that they would experience a large percentage of returns, and the large number of returns they actually received, were “also indicative of the nature of this venture, as is the low usage of the discount memberships.”

The “net impression” of the websites was that they offered a service to apply for payday loans, and that the information consumers provided would be used for that purpose, not to pay for unrelated services. Moreover, the “net impression” of the appearance of the popup box on submission of an application was not that clicking “OK” would result in the purchase of an unrelated product or that clicking “Cancel” would lead to submission of the application with no additions or changes.

Further, the court rejected the defendants’ arguments that their websites complied with the FTC’s guidance for online advertising laid out in their “Dot Com Disclosures.” The disclosures on the websites were not “clear and conspicuous,” and “consumers often did not notice the banner advertisements describing the discount club memberships.” The popup box “was confusing, distracting, and counterintuitive in its operation,” and consumers testified that they had “unknowingly and unwittingly enrolled in the discount clubs.”

Common enterprise. The defendants acted as a “common enterprise” such that they were liable for each other’s acts, the court concluded. “The two individual Defendants were each sole owners and principals of two of the four corporate entities, were close working partners with each other, and were involved with one another’s companies,” the court observed. Moreover, the defendants shared the same office space, employees, and equipment, and they worked together to induce consumers to enroll in the discount programs. Although WKMS did operate for a period without offering the discount programs with its payday loan services, the websites “played an integral role in the discount club enrollment process,” and the websites’ content “blurred the two types of products and the offerors of those products.”

Individual liability. The FTC also established that the individual defendants could be held individually liable as well as the corporate defendants. The court explained that, to establish individual liability under the FTC Act, “the FTC must show that the individual defendants participated directly in the practices or acts or had authority to control them,” and “must then demonstrate that the individual had some knowledge of the practices.”

The individual defendants were “actively involved” in businesses “that they formed and managed,” and had directly participated in the conduct the FTC had challenged. Moreover, the evidence “overwhelmingly” showed that the individual defendants knew of the content of the websites and of the “probability and fact of deception.” The court noted that advice of counsel and good faith were not valid defenses “to whether the defendant had the requisite knowledge under section 5(a).”

Remedies. The court found that the two-year period during which the conduct occurred, the significant harm to consumers, the defendants’ ability to restart the operation at any time, the defendants’ lack of recognition of their culpability, and their state of mind as demonstrated by “their awareness of complaints and their expectation of a significant number of returns” justified a permanent injunction.

The court cited the Eleventh Circuit’s 2013 decision in FTC v. Wash. Data Res., 704 F.3d 1323, for the proposition that “the amount of net revenue (gross receipts minus refunds), rather than the amount of profit (net revenue minus expenses), is the correct measure of unjust gains under section 13(b).” Here, the gross receipts amounted to $35,628,176. Returns, chargebacks, and refunds amounted to $26,116,004, resulting in net revenue, and therefore equitable monetary relief, of $9,512,172, for which the court held the defendants jointly and severally liable.

The case is No. 6:11-cv-1186-Orl-28TBS.

Attorneys: Harold E. Kirtz for Federal Trade Commission. Richard A. Schonfeld (Chesnoff & Schonfeld) for Direct Benefits Group, LLC.

Companies: Direct Benefits Group, LLC; Voice Net Global, LLC; Solid Core Solutions, Inc.; WKMS, Inc.

Cases: ConsumerProtection FederalTradeCommissionNews