Federal Trade Commission v. Credit Bureau Center, LLC et al
Filing
238
MEMORANDUM Opinion and Order written by the Honorable Matthew F. Kennelly on 6/26/2018: For the foregoing reasons, the Court grants the FTC's motion for entry of summary judgment against Credit Bureau Service, LLC and Michael Brown [dkt. no. 1 92]. The Court will separately enter the FTC's proposed final judgment and order. The status hearing set for June 29, 2018, the final pretrial conference set for July 12, 2018, and the trial set for July 16, 2018 are vacated. Mailed notice. (pjg, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FEDERAL TRADE COMMISSION,
Plaintiff,
vs.
CREDIT BUREAU CENTER, LLC,
a limited liability company, formerly
known as MYSCORE LLC, also doing
business as EFREESCORE.COM,
CREDITUPDATES.COM, and
FREECREDITNATION.COM,
MICHAEL BROWN, individually and as
owner and manager of
CREDIT BUREAU CENTER, LLC,
DANNY PIERCE, individually, and
ANDREW LLOYD, individually,
Defendants.
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Case No. 17 C 194
MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
The FTC alleges that Danny Pierce and Andrew Lloyd operated a deceptive
marketing campaign on behalf of Michael Brown and Credit Bureau Center, LLC (CBC).
The campaign directed consumers to CBC websites. The FTC alleges these websites
misled consumers into enrolling in a monthly credit monitoring service that cost $29.94
per month. The FTC contends this conduct violated several consumer protection laws.
Pierce and Lloyd agreed to entry of a preliminary injunction against them, and after an
evidentiary hearing, the Court issued a preliminary injunction against CBC and Brown
on February 21, 2017. See FTC v. Credit Bureau Center, LLC, 253 F. Supp. 3d 1054
(N.D. Ill. 2017). The parties have now cross-moved for summary judgment.
Background
The Court briefly reviews the background to this case, relying on the parties'
filings and LR 56.1 statements. In these statements, the defendants have failed to
provide "a concise response" to the FTC's statements of fact using "specific references
to the affidavits, parts of the record, and other supporting materials relied upon[.]" LR
56.1(b)(3)(B). See also Malec v. Sanford, 191 F.R.D. 581, 585 (N.D. Ill. 2000) ("The
purpose of the 56.1 statement is to identify for the Court the evidence supporting a
party's factual assertions in an organized manner: it is not intended as a forum for
factual or legal argument.").
The FTC offers facts describing negative feedback to CBC in the form of phone
calls, e-mails, and credit card chargebacks. The FTC also offers facts that Brown
received e-mails from particular parties involved in CBC's business that notified him of
the Craigslist advertising scheme. Though the defendants' burden is to rebut these
facts through contrary evidence that show the existence of a genuine factual dispute,
the defendants have failed to do so. Instead they rely on an unsupported theory that it
is the customers who were defrauding CBC by lying about the websites' deceptive
character and other irrelevant or unfounded responses. This does not meet the
requirements of Local Rule 56.1. Thus the Court deems as admitted Defs.' Resp. to
Pl.'s Stmt. of Facts ¶¶ 57-61, 72-73, 80-82, 89, and 100.
2
I.
CBC and Brown
Michael Brown is the owner, director, and sole employee of CBC. Independent
contractors fulfilled many of CBC's marketing, sales, and customer service functions.
CBC owned and operated several websites, including CreditUpdates.com,
FreeCreditNation.com, and eFreeScore.com. For a monthly subscription fee,
customers can access credit scores, credit reports, and a credit monitoring service.
CBC does this through two lines of business: a "white label/co-branding" line, in which
other businesses can offer CBC's services under their own name, and an affiliate
marketing line, in which marketers direct customers to CBC sites. Affiliates who
marketed CBC's services were compensated based on the volume of customers they
referred. The practices of two affiliates are at issue in this suit: Danny Pierce and
Andrew Lloyd.
II.
Craigslist marketing
Pierce became an affiliate for CBC in January 2014. As an affiliate marketer,
Pierce received an identification number by which Brown could track the volume of his
referrals and determine compensation. Several months after Pierce began working as
an affiliate for CBC, he asked Brown to create specific websites to which he could direct
the customers he referred. CBC created these websites on December 1, 2015. The
websites, which are described in detail later in this decision, advertised that consumers
could obtain a "free credit score and report." In smaller type, the websites disclosed
that signing up for these services would enroll the customer in a monthly credit
monitoring service for $29.94 per month.
Pierce, working as an affiliate marketer for CBC, contracted out some marketing
3
functions to Andrew Lloyd. Lloyd began posting to Craigslist ads of attractive rental
properties. Interested customers were invited to e-mail the "landlord" for additional
information. The response e-mails were routed to Lloyd, who responded as though he
were the landlord (which he wasn't). In the reply, Lloyd would ask the customer to
obtain a credit report through the CBC websites and would promise to set up a tour of
the rental property once the customer had a credit report in hand. If interested, the
customer would then sign up for CBC's services and then follow up with the "landlord"—
but would never receive a reply. (One of these e-mails has been attached to this
opinion as Appendix I; screenshots of one of the CBC websites has been attached as
Appendix II.) As Pierce later testified, he knew that Lloyd was posting "phony ads," as
Lloyd was "not renting these places out," was "not a realtor" and "doesn't own the place.
. . . He has no connection to this property." D.E. 206, Defs.' Ex. C at 73 (Pierce Dep.).
The marketing effort proved extremely effective. Pierce was the most successful
of CBC's affiliate marketers: his efforts resulted in 2,741,268 visitors to CBC's websites.
(The next largest affiliate produced 369,869 visitors.) Pierce's traffic generated $6.8
million in revenue for CBC.
But the effort, unsurprisingly, also generated significant customer complaints.
Customers complained that they were never connected with a landlord after obtaining a
credit report and that they did not realize that they had been enrolled in CBC's credit
monitoring service. A contractor who provided customer services for CBC logged
numerous calls from dissatisfied customers. CBC also received customer e-mails
complaining about the Craigslist marketing. In response, CBC's customer service often
denied that CBC was involved in the marketing effort or that CBC paid affiliate
4
marketers for referrals. Many customers also asked their credit card company to
reverse the CBC charges. Brown also received direct e-mails from many individuals
about the Craigslist marketing program. 1
III.
Procedural posture
Customers also directed their complaints to the FTC, which commenced an
investigation into CBC. The FTC sued CBC, alleging that the Craigslist marketing
program and the CBC websites violated several consumer protection laws. On January
11, 2017, Judge Sharon Johnson Coleman, acting as emergency judge, imposed a
temporary restraining order on the defendants, restraining them from continuing the
marketing program and freezing their assets. The FTC then moved for a preliminary
injunction. As indicated earlier, Pierce and Lloyd agreed to the motion. CBC and
Brown contested it, but the Court entered a preliminary injunction against them on
February 21, 2017.
Discussion
Both parties have moved for summary judgment. Summary judgment is
appropriate if "the movant shows that there is no genuine dispute as to any material
issue of fact." Fed. R. Civ. P. 56(a). There is a genuine issue of material fact if "the
evidence is such that a reasonable jury could return a verdict for the nonmoving party."
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); FTC v. World Media
Brokers, 415 F.3d 758, 763 (7th Cir. 2005).
1
Because the Court does not rely on any facts contained in customer complaints
submitted to the Better Business Bureau (BBB), it need not resolve whether the BBB
complaints or the affidavit submitted by Erin McCool, a BBB employee, are admissible.
5
I.
Liability of CBC
The FTC contends that CBC violated section 5 of the Federal Trade Commission
Act (FTCA), 15 U.S.C. § 45(a)(1); the Restoring Online Shoppers' Confidence Act
(ROSCA), 15 U.S.C. § 8403; and the Free Credit Reports Rule. 15 U.S.C. §
1681j(g)(1); 12 C.F.R. § 1022.138. The Court reviews each contention in turn.
A.
FTCA
The FTCA prohibits "unfair or deceptive acts or practices in or affecting
commerce[.]" 15 U.S.C. § 45(a)(1). "The FTC may establish corporate liability under
section 5 with evidence that a corporation made material representations likely to
mislead a reasonable consumer. The FTC is not, however, required to prove intent to
deceive." FTC v. Bay Area Bus. Council, Inc., 423 F.3d 627, 635 (7th Cir. 2005)
(citations omitted). A misrepresentation is material if it makes it more likely that the
consumer will choose the product being advertised. FTC v. Cyberspace.Com LLC, 453
F.3d 1196, 1201 (9th Cir. 2006); FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 573 (7th
Cir. 1989). The FTC contends that CBC violated the FTCA through (1) the Craigslist
marketing scheme that Pierce and Lloyd carried out and (2) the credit report websites
that CBC operated. (Because the websites are virtually identical, the Court refers to
"website" in the singular for ease of reference.) The FTC has moved for summary
judgment on its allegations under the FTCA.
1.
Craigslist marketing
First, the FTC contends the Craigslist advertising campaign violated the FTCA.
No reasonable jury could find that the Craigslist scheme did not involve unfair or
deceptive practices, as it was rife with material misrepresentations that were likely to
6
deceive a reasonable consumer. Bay Area Bus. Council, Inc., 423 F.3d at 635. Pierce
and Lloyd's marketing effort consisted of two parts, both of which were materially
misrepresentative. First, they posted to Craigslist advertisements of attractive rental
properties with an e-mail address for interested renters to contact. But the properties
either did not exist or the marketers did not have authority to rent them. Second, when
an interested renter asked about a property, Lloyd responded with a form e-mail that
promised a tour of the property once the renter obtained a credit report. But customers
found that, credit report in hand, there was no landlord that would provide a tour. There
is, therefore, no genuine dispute that the Craigslist scheme was misrepresentative.
Moreover, the misrepresentations were material, as the properties themselves and the
requirement that a prospective renter first obtain a credit report before touring the
property made it more likely that a reasonable consumer would choose to request a
credit report from CBC. Cyberspace.Com LLC, 453 F.3d at 1201.
The FTC has established that CBC is liable for the Craigslist campaign carried
out on its behalf; no reasonable jury could find otherwise. "Principals are liable for the
misrepresentations of their agents under the FTC Act." FTC v. Lifewatch Inc., 176 F.
Supp. 3d 757, 779 (N.D. Ill. 2016) (citing FTC v. World Travel Vacation Brokers, Inc.,
861 F.2d 1020, 1029 (7th Cir. 1988)). "To bind the principal, the agent must have either
actual authority, apparent authority, or the principal must ratify [the agent's] actions."
Anetsberger v. Me. Life Ins. Co., 14 F.3d 1226, 1234 (7th Cir. 1994).
Although the defendants initially contested whether Pierce and Lloyd acted as
agents with actual authority, apparent authority, or CBC's ratification, they now concede
that CBC ratified Pierce and Lloyd's conduct by accepting the benefits of their efforts
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while aware of their misconduct. See Defs.' Am. Reply in Supp. of Defs.' Mot. for
Summ. J. at 1 n.1 ("Defendants will not address the FTC's argument on ratification as to
CBC's corporate liability.").
But even if the defendants had not conceded the point, the Court would find that
CBC ratified Pierce and Lloyd's conduct. To establish that CBC ratified the affiliates'
conduct, the FTC must demonstrate that CBC knew of the conduct but provided "longterm acquiescence" by accepting "the benefits of an allegedly unauthorized
transaction." Sphere Drake Ins. Ltd. v. Am. Gen. Life Ins. Co., 376 F.3d 664, 677 (7th
Cir. 2004) (internal quotation marks and citation omitted). No reasonable jury could find
that CBC did not know of the affiliates' fraudulent conduct. Consumers called to
complain about the Craigslist advertisements and "landlord" e-mails that prompted them
to enroll in CBC's service, sent e-mails to the same effect, and initiated chargebacks.
CBC could easily trace these complaints to Pierce and Lloyd's practices. Not only could
CBC track the traffic it received back to Pierce through an identification number, CBC
could also determine that approximately 89 percent of its chargebacks were attributable
to Pierce's traffic.
Despite this, CBC continued to permit Pierce and Lloyd to market on its behalf.
CBC could have terminated Pierce's affiliate arrangement whenever it liked, yet it never
did so, despite mounting complaints. Thus CBC was aware of the Craigslist scheme
but continued to accept the traffic (and revenues) generated by that conduct. As Pierce
testified, he never stopped the Craigslist ads because he "assumed that it was fine,
because Mike Brown wanted the traffic. He continuously took the traffic, and I just went
based on that[.]" D.E. 206, Defs.' Ex. C at 74 (Pierce Dep.). The Court concludes there
8
is no issue for trial on the question of agency. The Craigslist campaign was materially
misrepresentative, and CBC ratified Pierce and Lloyd's conduct.
2.
CBC website
Next, the FTC contends that the website to which the interested renters were
directed to obtain a credit report also violated the FTCA. 2 To determine whether the
website was misrepresentative, the Court first identifies what claims the website
conveys. FTC v. QT, Inc., 448 F. Supp. 2d 908, 957-58 (N.D. Ill. 2006). "In determining
what messages or claims [the website] communicates to reasonable consumers, the
Court looks to the overall, net impression made by the advertisement[.]" Id. at 958
(citing FTC v. Colgate-Palmolive Co., 380 U.S. 74 (1965)). Next, the Court determines
if those claims are misrepresentative, that is, if they have a "tendency" or "capacity" to
deceive a reasonable customer. FTC v. US Sales Corp., 785 F. Supp. 737, 745 (N.D.
Ill. 1992). "[M]isrepresentations . . . need not be made with an intent to deceive." World
Travel Vacation Brokers, 861 F.2d at 1029 (citation omitted). The parties dispute
whether consumers must exercise reasonable care when subjected to express
misrepresentations, but the Court need not resolve this dispute to decide the issue.
First, the Court finds that, based on the net impression conveyed by the website,
the website claims that consumers who enroll in the service will obtain a free credit
score—not that they will enroll in a credit monitoring service with monthly charges. The
first page that consumers see, the landing page, features a banner that states: "Get
Your Free Credit Score and Report as of [the date on which the site was visited]."
2
The FTC directs the Court to the images of the websites located at D.E. 11, Pl.'s Ex. 4.
The defendants do not contest that these are the proper sites to analyze; therefore, the
Court restricts its analysis to these sites. Because the sites are virtually identical, only
the eFreeScore.com images are included in Appendix 2 to this opinion.
9
There are three panels that describe the offer: the left panel shows a "Sample Score";
the central panel asks the consumer to add his or her information, which is submitted
through a button that states "Your Score – Now!"; and right panel describes the benefits
of CBC's service, which promises instant and secure access to one's credit score. If the
website is visited via a desktop computer, the website also states "Monthly membership
of $29.94 automatically charged after trial[,]" in light gray text against a white
background. This text is not found on the mobile version of the website. The landing
page does not describe what the membership entails. If a consumer scrolls down the
page, the website displays in small text: "Monitoring services may take up to 3 days to
become active so this service within your membership may not be available during the
whole 7-day trial period."
On the next page, the consumer is invited to enroll by completing several fields,
including name, address, e-mail address, and phone number. The website contains two
questions in a panel to the right of these fields: "What is a good Credit Score?" and
"Will I find errors on my credit report?" Consumers are then directed to a page in which
they may enter their payment information. The largest test on the page is the website
logo. There is a large banner in black text below the logo; it reads, "Your credit score is
ready once we confirm your identity!" Below that is a bright-green graphic consisting of
a check mark and text stating "Located Credit File." Above the fields into which
consumers may enter payment information, the website requests: "Tell us which card
you would like to use for your $1.00 refundable processing fee and membership[.]"
Below all of the payment information is a paragraph of small-sized text. The paragraph
begins with a heading that reads "Payment Information" and then includes the following
10
text:
When you place your order here you will begin your membership in [the
website]. You will be billed $1.00 today and start your trial membership.
After your 7-day trial period you will be charged $29.94 every month. If
you wish to cancel just call us at [the customer service number] to stop
your membership.
D.E. 11, Pl.'s Ex. 4 at 15, 43, 65. Consumers may complete the transaction by clicking
a large, orange button with "Submit & Continue" superimposed over it. There is no
description of what membership entails.
Although CBC contends that the membership disclosures are sufficient to change
the website's impression, courts routinely hold that explanatory text is insufficient to cure
a misleading description unless the text changes the overall impression. See
Cyberspace.Com, 453 F.3d at 1200-01; Porter & Dietsch, Inc. v. FTC, 605 F.2d 294,
301 (7th Cir. 1979). Here, the net impression is that consumers are signing up to obtain
a free credit score, not enrolling into a costly monthly service. 3 The website lacks any
description of the monthly membership; consumers can discern that submitting payment
information will enroll them in the membership only by reviewing text that is smaller and
less noticeable than the surrounding text. In FTC v. Johnson, 96 F. Supp. 3d 1110 (D.
Nev. 2015), the court considered a website that prominently advertised the customer's
ability to access grant money and a free CD. Id. at 1141. The website actually signed
the consumer up for a membership program, but "[c]laims about grant money and free
CDs always overwhelm these brief mentions of . . . memberships[.]" Id. The Court
3
Indeed, the Court could not put it much better than the defendants do: "The overall
net impression created by the website is that the consumer is signing up for a free credit
score and can cancel within seven (7) days [if] they don't want to continue the service."
Defs.' Resp. to Pl.'s Mot. for Summ. J. at 20. Notably absent from this impression is any
sense of what service CBC will render through a monthly subscription.
11
concludes that CBC's website presents a similar situation, in which "brief mentions" of a
costly service are "overwhelm[ed]" by other advertising. No reasonable jury could
conclude that the website conferred the net impression that consumers were enrolling in
a monthly credit monitoring service.
Because the website claimed that consumers were obtaining a free credit score
and report, not a membership in a monthly credit monitoring service, the website was
misrepresentative. Moreover, this was a material misrepresentation, as consumers
would be less likely to enroll if they knew they were signing up for a $29.94 monthly
service of unknown utility instead of than a free credit score and report. No reasonable
jury could find otherwise.
Further buttressing this conclusion is the pervasive evidence of consumer
confusion. Proof of actual deception is "highly probative" evidence of a misleading or
deceptive practice. Cyberspace.Com, 453 F.3d at 1201. See also Bay Area Bus.
Council, 423 F.3d at 635 (considering evidence of consumer confusion in analyzing an
FTCA violation); Amy Travel Serv., 875 F.2d at 575 (same). The FTC has offered a
variety of evidence indicating consumers did not realize they had enrolled in a monthly
credit monitoring service until they found CBC charges on their bank statements. Defs.'
Resp. to Pl.'s Stmt. of Facts ¶ 61. Numerous consumers provided declarations that
generally described their experience requesting a free credit score and noticing an
unexpected $29.94 charge several days later. Id. Many customers also asked their
credit card company to reverse CBC charges, which is known as a "chargeback." Since
December 2015, CBC has had over 10,000 chargebacks. Id. ¶ 73. The reasonable
inference from these chargebacks is that consumers did not realize they enrolled in a
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monthly membership service and, when they saw the membership charges, asked the
credit card company to withdraw the payment. Amy Travel Serv., 875 F.2d at 574-75
(noting that "excessive credit card chargebacks" are a "signal[]" of consumer "trouble").
The defendants propose a different inference: that all of these customers were
engaged in "friendly fraud," in which they purposefully signed up CBC's services and
then falsely claimed deception in order to get out of paying for the membership services
for which they had enrolled. But the CBC presents no admissible evidence that would
support this proposition, and the Court does not consider the "friendly fraud" theory to
be the sort of reasonable inference to which CBC is entitled as the non-moving party.
The defendants also note that there is evidence that some customers knew they were
expected to pay a $1 processing fee for their credit report. Because this notice was
contained in the same paragraph as one of the notices of the credit monitoring service,
the defendants conclude that some customers knew of the credit monitoring service.
But the requirement is not that "every customer" was deceived by the defendant, just
"that some customers actually misunderstood the thrust of the message." World Travel
Vacation Brokers, 861 F.2d at 1029. The Court concludes that the FTC is entitled to
summary judgment.
B.
ROSCA
Under ROSCA, it is unlawful to charge consumers using a negative option
feature unless the seller satisfies certain requirements. A negative option feature is "a
provision [in an offer] under which the customer's silence or failure to take an affirmative
action to reject goods or services or to cancel the agreement is interpreted by the seller
13
as acceptance of the offer." 16 C.F.R. § 310.2(w). The seller must establish that (1) the
material terms of the transaction are "clearly and conspicuously" disclosed and (2) the
seller obtains the consumer's "express informed consent." 15 U.S.C. § 8403. 4 ROSCA
also establishes that a violation of the statute is also a violation of a rule promulgated
under the FTCA. Id. § 8404(a). CBC employed a negative option feature, as
consumers who requested their free credit report had seven days to opt out of the credit
monitoring program before they were enrolled. The FTC contends that it is entitled to
summary judgment, as no reasonable jury could find that the disclosure of the negative
option feature was clear and conspicuous or that CBC obtained consumers' express
informed consent.
But CBC contends that it is entitled to summary judgment, as Brown designed
CBC's website by reference to another site created through an FTC consent decree.
The Court disagrees with the premise of CBC's argument, that an attempt to conform to
conduct approved under a consent decree renders the conduct lawful. "The entering of
a consent decree . . . is not a decision on the merits and therefore does not adjudicate
the legality of any action by a party thereto." Beatrice Foods Co. v. FTC, 540 F.2d 303,
312 (7th Cir. 1976). Rather than analyze whether CBC's website is sufficiently similar to
this other website, the Court determines if any reasonable jury could find that CBC
satisfied ROSCA's requirements.
In ROSCA, Congress did not define what satisfies the requirement of "clear[] and
conspicuous[] disclos[ure]" of "all material terms of the transaction." 15 U.S.C. § 8403.
But other courts have routinely noted that that a disclosure in small type is unlikely to be
4
ROSCA also includes a third element that is not at issue in this case.
14
clear or conspicuous when accompanied by type that is larger, bolded, or italicized.
Murray v. New Cingular Wireless Servs., Inc., 523 F.3d 719, 725 (7th Cir. 2008) (small
type is not conspicuous when "the bulk of the page contains much larger type"); Cole v.
U.S. Capital, 389 F.3d 719, 730 (7th Cir. 2004) (text that "appears to be designed to
ensure minimal attention by the reader" is not clear or conspicuous); FTC v. Health
Formulas, LLC, No. 2:14-cv-01649-RFB-GWF, 2015 WL 2130504, at *17 (D. Nev. May
6, 2015) (disclosures of a negative option were not clear or conspicuous, as the
disclosures were "either buried in fine print on the payment page of Defendants'
websites or stated in separate Terms and Conditions documents"). As discussed
above, CBC embedded its disclosures into pages with larger, bolded text that promised
"free" credit reports and scores. The disclosures were not prominent when compared to
the rest of the page. Indeed, the disclosures appear "designed to ensure minimal
attention by the reader." Cole, 389 F.3d at 730. For this reason, the Court is
unconvinced by CBC's repeated mention that the text was in twelve-point font: the
analysis of the disclosure is necessarily contextual, meaning that the Court must
consider the text, whatever size it is, in relation to the other elements on the page. The
FTC is entitled to summary judgment; no reasonable jury could find that the disclosures
were clear and conspicuous.
ROSCA also requires CBC to obtain a consumer's "express informed consent"
before entering into a negative option. CBC contends that it can satisfy this standard,
as a consumer is notified of the negative option at three points: on the landing page,
the payment page, and in a welcome e-mail to those who enroll. The welcome e-mail is
obviously unhelpful to CBC's case, as that e-mail follows the transaction, so it cannot
15
affect whether the consumer rendered express informed consent before entering into
the negative option.
CBC's remaining contentions are also insufficient. The Court concludes that
summary judgment is warranted where, as here, the website is virtually devoid of any
mention of the service aside from the statement that the customer is to be billed for it.
Except for a handful of disclosures that the consumer will be enrolled in a service that
costs $29.94 per month, the consumer would not know that CBC was offering a service.
And there is no description of what the service constitutes or why it is beneficial. A
website that fails to provide a consumer any information about a service cannot obtain a
consumer's express informed consent to purchase that service. CBC suggests that
credit monitoring was a "bonus" for consumers, but the Court overrules this rather odd
argument. If credit monitoring was a "bonus" that CBC had not promised consumers,
then consumers could not have expressly consented to be billed for a service they had
not been told about.
In sum, the FTC is entitled to summary judgment on its ROSCA claim because
no reasonable jury could find that CBC "clearly and conspicuously" disclosed that the
site involved a negative option transaction or that consumers rendered their express
informed consent.
C.
Free Credit Report Rule
The FTC also brings a claim under the Free Credit Report Rule, which requires
any advertisement for a free credit report to disclose that a consumer may obtain a free
credit report annually as of right under federal law. 15 U.S.C. § 1681j(g)(1); 12 C.F.R. §
1022.138. Because it is undisputed that there was no notice of the as-of-right annual
16
free credit report, the only question before the Court is whether CBC advertised a free
credit report.
Given that CBC website contained a banner advertising a "free credit score and
report," one could justifiably ask what there is to discuss. But the defendants present
two arguments against the application of the Free Credit Report Rule. First, the
defendants contend that the formatting of their advertisement of a "free credit score and
report" places their site outside the reach of the Rule. They note that the text is split into
two lines and that the text is colored differently: "free credit score" is in orange text, but
"and report" is in black text. CBC contends there is a clear implication: the black
lettering of "report" indicates that it, unlike the orange-lettered "free credit score," is not
free.
But the defendants' proposed "black-letter" rule runs smack into the reality of
actual black-letter law. Under "generally accepted rules of syntax," an initial modifier
applies to each noun or phrase in a conjunctive series. Wash. Educ. Ass'n v. Nat'l Right
to Work Legal Def. Found., Inc., 187 F. App'x 681, 682 (9th Cir. 2006) (citing The
American Heritage Book of English Usage ch. 2 ¶ 10 (Houghton Mifflin 1996)). Any
reasonable consumer would read "free" as modifying both "credit score" and "report," no
matter the color of the text or its formatting.
Next, CBC argues that the Free Credit Report Rule applies to advertisements of
free credit reports alone; it does not apply to advertisements of CBC's services, which
include a credit report, score, and credit monitoring service. The defendants argue that
the FTC, while promulgating the relevant rule, rejected the use of the term "consumer
report" because it swept broadly enough to include credit scores. See Free Annual File
17
Disclosures, 75 Fed. Reg. 9725, 9732 (Mar. 3, 2010) (originally to be codified at 16
C.F.R. § 610, now codified at 12 C.F.R. § 1022.130). Because the FTC purposefully
excluded ads for free credit scores from the scope of the Free Credit Report Rule, their
service—which includes access to a credit score—is also outside the scope of the Rule.
But the FTC, in adopting the rule, expressly addressed and rejected this argument:
Several commenters urged the Commission to clarify that section 610.4
does not apply to advertisements for every bundle of products or services
that may include a "free credit report." . . . The Commission disagrees that
the types of bundled products do not cause consumer confusion. Indeed,
the Commission believes that advertising for bundled products that
promote free credit reports, in addition to other products and services,
such as credit monitoring, is the very type of advertising that is likely to
confuse consumers.
Id. at 9733 (emphasis added). CBC's service is therefore within the ambit of the Free
Credit Report Rule.
In their reply brief, the defendant raised two additional arguments against the
application of the Free Credit Report Rule: the FTC was required to first issue a ceaseand-desist letter before suing under the Rule, and any violation of the Rule is without
damages. "[A]rguments raised for the first time in the reply brief are waived." Mendez
v. Perla Dental, 646 F.3d 420, 423-24 (7th Cir. 2011). The Court concludes that FTC is
entitled to summary judgment on its Free Credit Report Rule claim.
Although the defendants have asserted in their summary judgment briefing
several of the defenses they raised in their answer, their briefs do not discuss at least
four: the FTC's failure to mitigate; standing; mootness; and bad faith / unclean hands.
First Am. Answer at 7-11.
Particularly when the FTC has presented unrebutted
arguments against these defenses, the Court is not required to "construct arguments
regarding the Defendants' affirmative defenses." Ramada Franchise Sys., Inc. v. Royal
18
Vale Hosp. of Cincinnati, Inc., No. 02 C 1941, 2005 WL 435263, at *10 (N.D. Ill. Feb.
16, 2005). The Court finds the defendants cannot defeat summary judgment through
these defenses.
In sum, the Court concludes that the FTC is entitled to summary judgment on
each of its claims brought under the FTCA, ROSCA, and the Free Credit Report Rule.
II.
Brown's personal liability
The next issue is whether Brown is personally liable for the conduct for which
CBC is liable. To establish Brown's personal liability, the FTC must prove three
elements: (1) CBC's corporate liability (which the Court has just found); (2) Brown's
knowledge of the practices; and (3) Brown's control over or direct participation in the
practices at issue. Amy Travel Serv., 875 F.2d at 573. The FTC can satisfy the
knowledge element by presenting "evidence that the individuals had actual knowledge
of material misrepresentations, reckless indifference to the truth or falsity of such
misrepresentations, or an awareness of a high probability of fraud along with an
intentional avoidance of the truth." Bay Area Bus. Council, 423 F.3d at 636 (internal
quotation marks and citations omitted).
The FTC's claims rest on two practices or acts. First is the creation of the CBC
websites, which contain misrepresentations about the monthly subscription service. No
reasonable jury could find that Brown did not know of these misrepresentations, as he
wrote and edited the contents of the websites. Brown also controlled the practice in
question: he owned, operated, and controlled the websites at issue, as he was the sole
member, managing director, and owner of CBC. Pl.'s Resp. to Defs.' Stmt. of Facts ¶ 3.
Brown is personally liable for the violations associated with this conduct.
19
Second is the Craigslist marketing scheme, in which Pierce and Lloyd posted
false Craigslist advertisements of attractive rental properties and required interested
customers to obtain credit reports through CBC websites. The Court concludes that
there is no genuine issue for trial here; the evidence is such that no reasonable jury
could not find that Brown was not, at the very least, recklessly indifferent towards or
intentionally ignorant of the truth. Bay Area Bus. Council, 423 F.3d at 636.
Pierce and Lloyd sent e-mails purportedly from landlords to induce interested
customers to request their credit reports through CBC; Brown admits he knew that
Pierce and Lloyd did not have any relationship with actual landlords. But Brown claims
that it does not follow that he knew that Lloyd's e-mails were false. Rather, Brown
argues he believed that Lloyd was acting as an affiliate for others who wanted to rent
out their properties, just as Pierce acted as an affiliate for CBC.
But this argument cannot account for the numerous signals Brown that received
indicating that Pierce and Lloyd were not acting on behalf of actual landlords or
advertising real properties. Brown received an e-mail on April 29, 2015 from a
contractor who "happened to notice this fake ad for apartment to get credit report",
Defs.' Resp. to Pl.'s Stmt. of Facts ¶ 81; a forwarded e-mail from a person who
"flagg[ed] for removal vast number of fake ads your people are putting on Craiglist [sic] .
. . I have also been in contact with more than several of the legitimate rental properties
that you are using as bait to entice people to come to your site," id. ¶ 82; an e-mail on
September 17, 2015 from his customer service contractor regarding complaints about
the Craigslist postings, id.; and an e-mail on November 15, 2015 from a company
asking for removal of its logo from CBC's website, given its "deceptive listings" on
20
Craigslist, id. ¶ 89.
Additionally, Brown was aware of the campaign's fraudulent character through
the voluminous consumer complaints that CBC received via customer calls, id. ¶ 57; emails, id. ¶ 58; and credit card chargebacks. Id. ¶ 72 (noting that 72 percent of the
16,828 chargebacks were attributable to Pierce). Brown contends he was not told
about these complaints, but the Court finds that argument particularly weak, as the
evidence shows that Brown specifically requested his customer service contractor not to
escalate real estate-related customer complaints to him. Id. ¶ 84. "To claim ignorance
in the face of the consumer complaints . . . amounts to, at the least, reckless
indifference to the corporations' deceptive practices." Bay Area Bus. Council, 423 F.3d
at 239.
Still, Brown downplays the significance of all of this evidence through a variety of
arguments: Pierce and Lloyd's e-mails were not obviously false, given their purported
relationship with a real estate website known as RentFind; the e-mails Brown received
from others about the Craigslist campaign were not adequately specific to notify him of
fraud; the consumer complaints were not properly forwarded to him; and some of the
consumer complaints appeared (to him) to be mere "friendly fraud." But, taken
together, no reasonable jury could consider all of this evidence without finding that
Brown, having received all these signals of fraud, was either recklessly indifferent
toward or intentionally ignorant of Pierce and Lloyd's fraudulent practices.
Brown not only knew about the Craigslist scheme; he had the ability to control it.
As the chief officer of CBC, Brown had "[a]uthority to control the company," given his
"active involvement in business affairs." Amy Travel Serv., 875 F.2d at 573. Brown
21
may contend he could not control Pierce or Lloyd but, through the click of a button,
Brown had the ability to stop receiving the customers that they referred. As Brown
testified, "I'm able to tell Pierce and set limits on how much I want to accept. It's my
business, my website." Id. ¶ 100. As in Bay Area Business Council, in which the
Seventh Circuit held the defendant personally liable in part because he personally
controlled who would conduct telemarketing, the Court holds Brown personally liable
because he controlled whether Pierce and Lloyd could continue their conduct. Bay
Area Bus. Council, 423 F.3d at 637. The Court concludes that the FTC is entitled to
summary judgment on the question of Brown's personal liability.
III.
Injunctive relief
The FTC has requested equitable relief in the form of a permanent injunction
against CBC and Brown and equitable monetary relief. The Court reviews each request
in turn.
A.
Permanent injunction
Under 15 U.S.C. § 53(b), the FTC may seek a permanent injunction to restrict a
defendant from future violations of the FTCA. To obtain a permanent injunction, "the
moving party need only show that there is a reasonable likelihood of future violations in
order to obtain relief." SEC v. Holschuh, 694 F.2d 130, 144 (7th Cir. 1982). This
standard is distinct from the ordinary standard for injunctive relief. CFTC v. Hunt, 591
F.2d 1211, 1220 (7th Cir. 1979). In assessing whether there is a reasonable likelihood
of future violations, the Court must consider (1) the gravity of the harm, (2) the extent of
CBC and Brown's participation, (3) the nature of the infraction and the likelihood that
they may become involved in similar conduct in the future; (4) any recognition of
22
culpability; and (5) the sincerity of assurances against further violations. Holschuh, 694
F.2d at 144; Hunt, 591 F.2d at 1220.
The Court finds a reasonable likelihood of future violations. First, the gravity of
the harm was significant, as CBC and Brown's deceptive practices caused customers to
lose millions of dollars on an unwanted service and to needlessly expose their sensitive
personal and financial information, including their credit card and Social Security
numbers. Moreover, both CBC and Brown were deeply involved in these practices.
Third, CBC and Brown's ongoing participation in the credit information industry
increases the likelihood that similar conduct could occur again, as these schemes are
easy to facilitate. The Court notes that, after the onset of this litigation, it held Brown in
contempt for violating the preliminary injunction, which barred him from, among other
things, operating a website with a negative option feature without first obtaining express
informed consent, processing payments from CBC customers, or transacting any
business as CBC. See D.E. 106. Though Brown argues that he was misadvised by
attorneys when he engaged in this conduct, the Court only relies on this fact to show the
ease with which parties can engage in this conduct, not to show Brown's scienter.
Finally, Brown's ongoing litigation of this claim in the face of significant contrary
evidence—and the assertion that it is the consumers who engaged in misconduct
through "friendly fraud"—undercuts any belated recognition of culpability or assurance
that similar misconduct will not happen again. The Court concludes that a permanent
injunction against CBC and Brown is proper.
Brown argues that the FTC's proposed injunction should be narrowed in two
ways. First, he contends that the injunction should not apply to all of CBC's websites,
23
just those created to receive traffic referred from Pierce and Lloyd. Brown also
contends that he should not be enjoined, as he was fooled by Pierce and Lloyd into
believing the properties existed, just like CBC's dissatisfied customers. The Court
declines to narrow the injunction in either respect. First, the injunction should extend to
all sites, as the Court has found a reasonable likelihood of future violations, and any site
could be used to facilitate a similar scheme. Second, as already discussed, no
reasonable jury could find that Brown did not know of, and have control over, Pierce's
practices. Just because it was Pierce and Lloyd who directly facilitated the Craigslist
marketing does not mean that Brown should escape an injunction. Brown has not
presented a viable reason that he should not be subject to a permanent injunction.
B.
Equitable monetary relief
In addition to the permanent injunction, the FTC seeks relief from CBC and
Brown in the amount of consumer losses. "The district court's power to grant a
permanent injunction also includes the power to grant other ancillary relief," which
"includes the power to order repayment of money for consumer redress as restitution or
[rescission]." FTC v. Febre, 128 F.3d 530, 534 (7th Cir. 1997) (citing Amy Travel Serv.,
875 F.2d at 571). In line with substantial precedent, the Court concurs with the FTC
and orders equitable relief in the amount of consumer losses. See, e.g., FTC v.
Trudeau, 579 F.3d 754, 771 (7th Cir. 2009) ("Consumer loss is a common measure for
civil sanctions in contempt proceedings and direct FTC action"); Febre, 128 F.3d at 536
("A major purpose of the Federal Trade Commission Act is to protect consumers from
economic injuries. Courts have regularly awarded, as equitable ancillary relief, the full
amount lost by consumers.") (citation omitted); Amy Travel Serv., 875 F.2d at 571-72
24
(same).
CBC and Brown introduce an array of arguments against the FTC's position,
which the Court groups into four contentions: the Court lacks the authority to order
restitution; the FTC cannot trace the funds, which it must do to obtain restitution; the
FTC's proposed relief would violate the Eighth Amendment's prohibition on excessive
fines and fees; and the FTC has overstated the amount of losses.
First, CBC and Brown contend that the FTC has requested restitution, but the
Court lacks authority under section 13(b) of the FTCA, 15 U.S.C. § 53(b), to provide this
relief. Section 13(b) only authorizes the Court to "enjoin any such act or practice" that
violates the FTCA. CBC and Brown contend that this provision does not expressly
encompass restitution and that the Supreme Court case law that authorized a broad
interpretation of this language has been undercut. CBC and Brown concede that the
Court "has previously ruled on and generally denied" this contention, but they contend
that, had the Court fully considered the legislative history or the text of section 13(b), it
would have found in favor of this argument. Defs.' Resp. to Pl.'s Mot. for Summ. J. at
23. The Court disagrees. CBC and Brown still rely upon what this Court already
described as a "considerable overstatement" of Kokesh v. SEC, 137 S. Ct. 1635 (2017).
See D.E. 183 at 2 (Order on Defs.' Mot. to Modify Prelim. Inj.). The plain language and
legislative history arguments do not change the Court's view on this point, especially in
light of the Seventh Circuit authority that continues to control the disposition of this issue
before this Court. See, e.g., Trudeau, 579 F.3d at 772; Febre, 128 F.3d at 534; Amy
Travel Serv., Inc., 875 F.2d 571-72.
Next, CBC and Brown contend that the FTC's request for "equitable monetary
25
relief" is a request for restitution. But, CBC and Brown contend, restitution is unavailing,
as the FTC must be able to trace the funds it identifies for restitution, and here the funds
have been commingled. CBC and Brown urge the Court to consider several cases in
which courts declined to order restitution because the funds requested were not
traceable. See, e.g., Montanile v. Bd. of Trustees of Nat. Elevator Indus. Health Benefit
Plan, 136 S. Ct. 651, 658, 662 (2016) (remanding restitution order in ERISA litigation to
determine whether funds were dissipated); Alexander v. Bosch Auto. Sys., Inc., 232 F.
App'x 491, 501 (6th Cir. 2007) ("Plaintiffs seeking equitable restitution have the burden
of establishing that the funds they seek are traceable and readily identifiable.").
But CBC and Brown elide a significant distinction between the cases cited and
the present case. When restitution is ordered as an equitable remedy, it is "directed
against some specific thing; they give or enforce a right to or over some specific thing."
Montanile, 136 S. Ct. at 658-59. CBC and Brown rely primarily on ERISA cases in
which plaintiffs seek to reclaim benefits from a defunct employer. ERISA is
distinguishable from the FTCA in a significant way: ERISA only authorizes equitable
restitution, not legal restitution. The FTCA authorizes legal restitution, which does not
impose the same tracing requirements. FTC v. Commerce Planet, Inc., 815 F.3d 593,
601 (9th Cir. 2016) ("the tracing requirements for 'equitable' restitution do not apply in §
13(b) actions"); FTC v. Bronson Partners, LLC, 654 F.3d 359, 373-74 (2d Cir. 2011) (in
ordering monetary relief under the FTCA, a district court need not "apply equitable
tracing rules to identify specific funds in the defendant's possession that are subject to
return"). CBC and Brown contend that these cases are not convincing, as they have
been undercut by Kokesh. But, as the Court has already noted, it has rejected this
26
reading of Kokesh; the Court need not interrogate it in greater depth. The Court
concludes that, even if the funds at issue were commingled with other CBC funds, the
FTC is not barred from obtaining restitution.
Third, Brown contends that the permanent injunction and the proposed restitution
would violate his Eighth Amendment rights. But the order of restitution is not a "fine,"
nor would it be "grossly disproportional," as Brown must show to establish an Eighth
Amendment violation. See United States v. Bajakajian, 524 U.S. 321, 339-40 (1998).
Brown cites to SEC v. Metter, 706 F. App'x 699 (2d Cir. 2017), but the case is not
helpful to his position, as the Second Circuit concluded there was no Eighth
Amendment violation in an order that "almost precisely equaled the gains from the illicit
conduct." Id. at 704. Here, the FTC's proposed order is also "directly keyed" to Brown's
misconduct. Id. The Court overrules Brown's Eighth Amendment argument.
Finally, CBC and Brown challenge how the FTC calculated the amount of losses.
The FTC began its calculation with the amount of revenue obtained through traffic that
Pierce directed to CBC: $6,832,435.81. The FTC subtracted the amount of refunds
CBC paid to customers ($414,860.77), chargebacks that customers successfully
obtained ($394,903.68), and the amount already paid by Pierce and Lloyd in settlement
of their claims ($762,000), for a net of $5,260,671.36. CBC and Brown present several
arguments against this amount.
First, they contend that the revenues must be limited to the period beginning after
CBC created websites to which Pierce could direct his traffic. The Court disagrees: the
amount of liability is based on the duration of the campaign of misrepresentation
conducted through the Craigslist marketing scheme, not the existence of certain
27
websites. The date on which certain websites became active is irrelevant to the
calculation. 5
Next, CBC and Brown contend that the amount of restitution should be limited to
the customers referred by Pierce. The description of how the FTC calculated losses
refutes this argument; the losses are already based on revenue obtained through traffic
that Pierce referred.
Third, they contend that the FTC should deduct the revenue obtained from
customers who contacted CBC's customer service but then chose not to cancel their
credit membership. The FTC argues that a setoff would be inappropriate, as CBC lied
to customers about its involvement in the Craigslist marketing scheme. See, e.g., Defs.'
Resp. to Pl.'s Stmt. of Facts ¶ 60 (recording of a CBC customer service employee telling
a customer, "We don't . . . do any Craigslist posts. . . . [W]e're not affiliated with any third
party companies posting any rental ads or anything like that."). The Court concurs:
CBC and Brown are not entitled to keep the revenue obtained from customers who
were retained through additional misrepresentations.
Fourth, CBC and Brown contend that the losses should be limited to the period
during which Brown had actual notice of the purported scheme. They contend that
Brown did know of the fraudulent marketing until he saw complaints from the Better
Business Bureau on June 30, 2016. CBC and Brown's argument is unpersuasive.
First, they do not point to any authorities supporting the premise that liability can only
attach to particular losses of which the defendant was specifically aware; the Seventh
5
Defendants arguably raise an additional point in their reply brief asking the Court to
dismiss any claims relating to CBC's "pre-existing" websites. Defs.' Am. Reply in Supp.
of Defs.' Mot. for Summ. J. at 8. This argument is underdeveloped and, to the extent it
is a new point, defendants forfeited it by failing to raise it in the initial brief.
28
Circuit only requires that a defendant be "adequately alerted . . . to the corporation's
deceptive trade practices." Bay Area Bus. Council, 423 F.3d at 637. But no reasonable
jury could conclude that Brown only learned of Pierce's campaign on June 30, 2016. As
the record makes clear, Brown was e-mailed in April 2015—just months after the
campaign began—by a contractor with concerns about the campaign. As already
discussed, this e-mail was joined by numerous other signs of misconduct, all of which
occurred well before June 30, 2016. The Court declines to reduce the loss figure on
this ground.
CBC and Brown also ask the Court to set off business expenses and the loss of
CBC revenues. But restitution seeks to protect consumers from "economic injuries" by
recovering the full amount of consumer loss. Febre, 128 F.3d at 536. The Court does
not think it appropriate to reduce consumer recovery in order to compensate the
defendants for the costs of administering a service that relied upon misrepresentations
to consumers.
Conclusion
For the foregoing reasons, the Court grants the FTC's motion for entry of
summary judgment against Credit Bureau Service, LLC and Michael Brown [dkt. no.
192]. The Court will separately enter the FTC's proposed final judgment and order. The
status hearing set for June 29, 2018, the final pretrial conference set for July 12, 2018,
and the trial set for July 16, 2018 are vacated.
________________________________
MATTHEW F. KENNELLY
United States District Judge
Date: June 26, 2018
29
Appendix I
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Appendix II
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