If you’ve been following the ongoing story of the FTC’s law enforcement action stemming from Neovi, Inc.'s Qchex check-writing system, the Court’s recent contempt ruling will make for interesting reading. If those names aren’t familiar to you — and you have clients in the payments arena — it’s time to get up to speed.
By way of recap, the FTC sued defendants Neovi, G7 Productivity Systems, Thomas Villwock, and James M. Danforth for illegalities stemming from the operation of Qchex software. With Qchex, users could create and send checks by mail or email. But there was a big problem. According to the FTC, the defendants didn’t verify that users had authority to access the accounts, a system the United States Court of Appeals for the Ninth Circuit later described as “highly vulnerable to con artists and fraudsters.”
In 2009, a federal judge granted the FTC’s motion for summary judgment, finding that the defendants' “extreme lack of diligence,” their affirmative acts in creating and delivering numerous unverified checks — over 150,000 of which were from accounts later frozen for fraud — and the substantial injury to consumers made them liable under Section 5 of the FTC Act. The Court ordered them to disgorge $535,358. It also enjoined the whole kit and kaboodle (specifically, “Defendants, their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of this Order”) from engaging in any similar practices without taking specified measures to protect consumers.
What safeguards did the Court put in place? Among other things, before “creating or delivering any check for a customer,” the defendants had to perform certain account and identity verification procedures. They also had to put their contact information — a postal address, phone number, and website or email address — in their ads and marketing materials and on every check they directly or indirectly created or delivered. In addition, they had to follow a court-mandated process for addressing consumer complaints. In 2010 the Ninth Circuit upheld the Court’s Order.
The latest ruling arises from the FTC’s motion that defendants Villwock, Danforth, and G7 should be held in contempt for violating the Order. Also at issue is the conduct of two other companies: iProlog Corporation and FreeQuick Wire Corporation. According to the Court, “Neovi declared bankruptcy in October 2007 and subsequently went out of business; Villwock and Danforth established iProlog Corporation the very next day, hiring the same employees, using the same equipment and office location, conducting Neovi’s former business activities, and paying for many expenses using G7 funds.” What about FreeQuick Wire? As the Court found, “On November 8, 2007, Defendants Villwock and Danforth formed FreeQuick Wire Corporation, with Danforth as the COO, Villwock as President, and Villwock’s daughter, Diana Villwock, as the corporation’s sole director.”
Ruling on the FTC’s contempt motion, the Court held that the original Order applies to the defendants — Villwock, Danforth, G7, iProlog, and FreeQuick Wire — and that in their subsequent ventures, they had failed to live up to the terms of the Order, including the account and ID verification requirements and the mandated disclosure of contact information. The Court also imposed financial remedies. The Court reasoned that it had “attempted to take into account Contempt Defendants’ complete disregard for the Court’s Final Order, coupled with their troubling attempts to mislead the Court and cover up their web of deceit . . ."
What can businesses take from this case? As the Ninth Circuit ruled in affirming the original Order, “Courts have long held that consumers are injured for purposes of the Act not solely through the machinations of those with ill intentions, but also through the actions of those whose practices facilitate, or contribute to, ill intentioned schemes if the injury was a predictable consequence of those actions.”
Furthermore, FTC enforcement isn’t a matter of “one and done.” The FTC will take the steps necessary to see that companies comply with the terms of orders.