Buying Club Fraudster Owes $36M in Penalties

(CN) - A seller of buying-club memberships owes more than $36 million for defrauding people it enrolled, sometimes without their knowledge, the Iowa Supreme Court ruled.

Delaware-based Vertrue has done business in Iowa since 1989, signing up more than 860,000 people to buying clubs, which offer its members discounts on various goods and services.

To attract customers, Vertrue has offered gift cards and other "cash back" rewards. Vertrue has also offered free-trial memberships, but these customers were charged the full membership price if they failed to cancel during the free-trial period.

Iowa Attorney General Thomas Miller had the Consumer Protection Division investigate the legality of Vertrue's business practices in 2004.

Of the 88 Vertrue customers the division surveyed, 67 percent said they did not know they were Vertrue members, did not authorize the membership charges, or both.

The attorney general then filed suit under the Iowa Consumer Fraud Act and the Buying Club Membership Law, leading Vertrue to fire back with a counterclaim for declaratory judgment upholding the legality of its sales practices.

Vertrue also said application of the Buying Club Membership Law would violate the dormant commerce clause of the U.S. Constitution.

A Polk County judge sided mostly with the state and ordered Vertrue to pay $25.2 million in consumer reimbursements plus $2.8 million in civil penalties.

Vertrue did nab some minor victories from that court, which nixed an additional charge of consumer fraud against the elderly and found that the buying-club law did not apply to Vertrue's financial, privacy or health membership programs.

Both sides appealed, but the Iowa Supreme Court ruled roundly for the state on Friday.

"Even a burdensome regulation does not necessarily violate the dormant commerce clause because it affects the profits of individual sellers," Chief Justice Mark Cady wrote for the mostly unanimous court.

Cady also wrote that Vertrue's "unintelligible telemarketing pitch that proceeded at a lightning pace was likely to mislead consumers as to the material terms of the transaction."

Likewise, the state also presented sufficient evidence that Vertrue defrauded old folks.

In another slap at Vertrue, the court reversed the ruling on its financial, privacy and health membership programs.

Iowa furthermore did not need to show "proof of reliance, damages, intent to deceive and knowledge of falsity," the court found.

With these revisions, the state's highest court increased the reimbursement judgment against Vertrue to $36.3 million and increased the penalties to $3 million.

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