Antitrust Law Daily Wrap Up, CONSUMER PROTECTION NEWS: Government insurance refund business opportunity marketers settle FTC charges, (Nov 26, 2013)

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

The marketers of a home-based government insurance refund processing business opportunity have settled FTC charges that they misled consumers into paying a recurring monthly charge and failed to provide a disclosure form required under the FTC’s revised Business Opportunity Rule, the FTC announced today (U.S. v. Smart Tools LLC, FTC File No. 122 3212, Case No. 3:12-cv-02006-HZ).

According to the complaint, filed in the federal district court in Portland, Oregon, Smart Tools LLC and its principals, Kirstin Hegg and Curtis Dawn, sold a business opportunity that promised consumers they could earn up to $38, 943 per year by locating people who are eligible for a partial refund of their FHA mortgage loan insurance premium and charging them a fee for information on how to obtain the refund. The defendants informed consumers that they could receive a manual describing how to process the refunds in exchange for a $3.91 fee. The defendants allegedly offered to provide ongoing access to lists of people owed refunds and software to make refund processing easier through a Smart Tools membership service that involved recurring monthly charges of $29.99, after the expiration of a free trial period.

However, the defendants’ 31-page manual allegedly only noted on page 8 that the Department of Housing and Urban Development had made those lists available for free online. The defendants’ website also repeated the claim that to obtain lists of consumers who are due refunds, consumers would have to either pay the government “a ‘per state’ fee” and keep paying it “every time you want an update” or access, purportedly for “free,” the defendants’ database. Access to the database allegedly actually cost consumers a membership fee of $29.99 per month.

The defendants also allegedly failed to provide a disclosure form required by the FTC’s updated Business Opportunity Rule. The form must include basic information about the seller, such as the seller’s name, address, phone number, and salesperson’s name; litigation involving the seller; the seller’s cancellation and refund policies; information supporting any earnings claims the seller makes; and contact information for prior purchasers. The form must also include any earnings claims, the start and end dates when the earnings were made, and the number and percentage of people who purchased the business opportunity and earned at least that amount.

The complaint charged the defendants with violations of Section 5 of the FTC Act based on their allegedly deceptive earnings claims and claims regarding the cost of the lists. The complaint also asserted that the defendants violated the Business Opportunity Rule by (1) failing to provide consumers with the disclosure form; (2) making earnings claims without a reasonable basis or written substantiation for them, and without providing an earnings claim statement to the purchaser; and (3) making earnings claims in the general media without providing in conjunction with those claims the beginning and ending dates when the represented earnings were achieved, and the number and percentage of all persons who purchased the defendants’ business opportunity prior to that ending date and achieved at least the stated level of earnings.

Under the terms of the stipulated final judgment and order, the defendants must provide the required disclosure form at least seven days before a prospective purchaser signs a contract or makes a payment in connection with a business opportunity. The defendants are also barred from making earnings claims without a reasonable basis for the claims, without providing written substantiation for them upon request to a prospective purchaser, or without furnishing a written earnings claim statement containing, among other things, (1) the name of the person making the earnings claim, the earnings claim, and the date of the earnings claim; (2) the beginning and ending dates when the represented earnings were achieved; (3) the number and percentage of all persons who purchased the business opportunity or work-at-home opportunity who achieved at least the stated level of earnings; and (4) any characteristics of the purchasers who achieved at least the represented level of earnings, such as their location, that may differ materially from the characteristics of the prospective purchasers being offered the business opportunity. The defendants are also generally prohibited from failing to comply with the Business Opportunity Rule and from making any material misrepresentations in connection with the sale of any good or service.

Within ten days of entry of the order, the defendants must also provide to the Commission a list of all consumers who purchased any mortgage insurance refund business opportunity from the defendants on or after January 1, 2009 until the final date of the order, and who had not canceled their subscription to the defendants’ services or were still being charged or billed by the defendants as of the final date of the order. The defendants must send each consumer a notice of the order, and cancel the subscriptions of all consumers that do not provide notification in writing within 30 days that they wish to remain subscribed to the defendants’ services. The defendants are barred from benefitting from customer information obtained through the operation, and from failing to dispose of the information within 30 days of entry of the order, except when consumers have not canceled their subscriptions.

The order also imposes a $7,425,051 monetary judgment on the defendants jointly and severally, which will be suspended due to their inability to pay after they pay the Commission the sum of $234,847.

Companies: Smart Tools LLC

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