J.C. Penney’s Marketing Arm Slammed for $2.7M

(CN) - J.C. Penney's spun-off marketing division must refund customers for more than $2.7 million in discount club membership fees they incurred, a judge ruled.

Judge Richard Blane II approved a consent judgment Friday against J.C. Penney Direct Marketing Services and Stonebridge Benefit Services in Polk County, Iowa.

The defendants denied liability, but agreed to the refund and will comply with the state's Buying Club Law and Consumer Fraud Act regarding future sales of memberships.

Both companies, based in Plano, Texas, are owned by Dutch insurer Aegon.

Iowa had sued Stonebridge in August 2011, accusing it of having engaged in a marketing scheme that charged J.C. Penney customers for their memberships.

The state added J.C. Penney Direct Marketing as a defendant this year.

"As a result, a number of consumers absorb the losses, sometimes repeatedly over extended periods without realizing they are paying for a membership program and without using any of the membership services for which they are paying," Iowa's 37-page complaint stated. "The anamalous situations arises from the way defendant markets its memberships. For example, defendant arranges with established online marketers to present 'cash back' offers to consumers who have just completed a transaction on that other marketer's website. A consumer may thing the cash-back offer is from the familiar Internet merchant, and may uncritically click through in pursuit of the perceived rebate. By doing so, however, the consumer is deemed to have accepted a membership in a buying club and to have authorized membership charged."

Iowa Attorney General Thomas Miller described the practice as "stealth marketing," noting his office contacted 20 Iowans identified as the longest-term paying members of certain memberships.

"Such long-term members would be expected to be happy campers, people who were paying membership fees each month because they liked their memberships," Miller said in a statement after Blane issued his order. "Instead, we were astonished to find that none of the twenty wanted or had used their memberships, and fully nineteen of them were not even aware that they had been enrolled and were being charged each month."

Miller also highlighted Stonebridge's "obstructionist tactics, violations of court orders, and even a court-imposed sanction" during the case.

"A vigorous defense by those accused of consumer fraud is to be expected, but Stonebridge's ill-advised maneuvering in this case stands out," Miller said. "It's not every day that a district court fines a defendant $29,500 for violating the court's order to produce documents, as Stonebridge was fined in this case."

He added: "After many months of identifying witnesses to the court as company employees, Stonebridge did a 180-degree turn and announced that in fact it had no employees whatsoever. We regarded this as abusive conduct that could have led to additional sanctions, had the defendants not agreed to settle the case by paying almost $3 million."

Refund checks will be mailed out by early 2013, Miller said.

Follow @davejourno

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