State v. Vertrue, Inc.

Decision Date05 July 2013
Docket NumberNo. 11–0449.,11–0449.
Citation834 N.W.2d 12
PartiesSTATE of Iowa ex rel. Thomas J. MILLER, Attorney General for Iowa, Appellee, v. VERTRUE, INCORPORATED f/k/a Memberworks, Inc., a Delaware Corporation; Adaptive Marketing, LLC, a Delaware Limited Liability Company; Idaptive Marketing, LLC, a Delaware Limited Liability Company, Appellants.
CourtIowa Supreme Court

OPINION TEXT STARTS HERE

Mark McCormick and Margaret C. Callahan of Belin McCormick, P.C., Des Moines, and Jeffrey R. Babbin and Kim E. Rinehart of Wiggin and Dana LLP, New Haven, Connecticut, for appellants.

Thomas J. Miller, Attorney General, Jeffrey S. Thompson, Deputy Attorney General, and Steven M. St. Clair and Julia S. Kim, Assistant Attorneys General, for appellee.

CADY, Chief Justice.

In this appeal and cross-appeal, we must consider numerous issues in an action brought by the Attorney General of Iowa against Vertrue Incorporated alleging violations of the Buying Club Membership Law (BCL), pursuant to Iowa Code chapter 552A (2005), and the Iowa Consumer Fraud Act (CFA), pursuant to Iowa Code section 714.16. The State also sought civil penalties for consumer frauds committed against the elderly pursuant to Iowa Code section 714.16A. The district court found: (1) a number of Vertrue's marketing and sales practices violated the BCL and the CFA, (2) application of the BCL to Vertrue's solicitation practices did not violate the dormant Commerce Clause, and (3) Vertrue did not commit consumer frauds against the elderly in violation of section 714.16A. The court entered judgment awarding $25,250,736.19 in consumer reimbursement for fees paid in connection with memberships sold in violation of the BCL or CFA, civil penalties in the amount of $2,820,000, and $725,240.05 in attorney fees and costs. On our review, we affirm the judgment of the district court in part, reverse in part, and modify the judgment.

I. Factual and Procedural Background.

Vertrue sells memberships in buying programs that give members the option to purchase various goods and services at discounted rates. Since 1989, Vertrue has enrolled 863,970 Iowans in membership programs. To entice membership into the programs, Vertrue frequently offered gift cards and other “cash back” rewards. Further, Vertrue consistently offered consumers free trial memberships with a negative option—meaning consumers would be charged the full price of the membership if they failed to call and cancel within the designated trial period. Normally, once individuals were enrolled in one of Vertrue's membership programs, their credit cards or bank accounts were charged on a monthly basis until they contacted Vertrue and canceled the membership.

In 1999, the Consumer Protection Division (CPD) of the Iowa Attorney General's Office began receiving a high volume of complaints from Iowans regarding Vertrue's marketing and business practices. In response to these complaints, the CPD commenced an investigation in December 2004 to assess the legality of Vertrue's business practices. As part of the investigation, the CPD sent approximately 400 written surveys to Iowans who had been enrolled in one of four membership programs offered by Vertrue since April 1, 2003. Of the eighty-eight survey respondents, sixty-seven percent indicated they were either unaware of their membership or did not authorize the membership charges, or both. None of the survey respondents indicated consumer satisfaction.

Based in part on the results of the CPD investigation, on May 12, 2006, the Attorney General initiated this action against Vertrue alleging violations of the BCL and the CFA. The State sought consumer restitution, injunctive relief, and civil penalties under both the BCL and the CFA, and additional civil penalties for consumer frauds committed against the elderly pursuant to Iowa Code section 714.16A.

The State subsequently filed an amended petition to add Vertrue affiliates, Adaptive Marketing, LLC and Idaptive Marketing, LLC, as well as West Telemarketing Corporation and West Corporation, as defendants. The West defendants later settled and were dismissed from the litigation. The remaining defendants, Vertrue, Adaptive, and Idaptive (collectively Vertrue) 1 filed an answer to the State's amended petition denying liability under the BCL and CFA. Vertrue asserted counterclaims requesting declaratory orders establishing the legality of its sales practices under the BCL and CFA. Additionally, Vertrue sought a declaratory judgment establishing that application of the BCL to its mail, telephone, and Internet solicitations would violate the dormant Commerce Clause of the United States Constitution.

The district court bifurcated trial. The first phase addressed the issue of liability. The district court reaffirmed its previous summary judgment rulings and held the BCL was applicable to Vertrue's mail, telephone, and Internet solicitations and that these solicitations violated the BCL. The district court further held that application of the BCL to Vertrue's solicitations did not violate the dormant Commerce Clause. Additionally, the district court concluded several of Vertrue's marketing and business practices constituted unfair practices and deceptive acts under the CFA. However, the court found the BCL did not apply to Vertrue's financial, privacy, or health membership programs, and the State was not entitled to additional civil penalties for consumer frauds committed against the elderly.

During the remedies phase of the trial, the district court interpreted Iowa Code section 714.16(7) to require the State to prove reliance, damages, intent to deceive, and knowledge of falsity in order to obtain a consumer reimbursement award for both the BCL and CFA violations. The court found the State proved ninety percent of Iowa consumerswould have canceled Vertrue's programs had they received BCL-compliant disclosures and accordingly ordered consumer reimbursement of ninety percent of Vertrue's net revenues from non-BCL-compliant solicitations. This figure amounted to $22,715,073.65. An additional $2,535,662.54 was awarded for CFA violations, making the total reimbursement award $25,250,736.19. The court also awarded a total of $2,820,000 in civil penalties for the BCL and CFA violations and $725,240.05 for costs and attorney fees. Finally, the court entered various injunctive orders requiring Vertrue to comply with the provisions of the BCL and CFA.

Vertrue appealed. It claimed the district court erred in finding the BCL applied to its mail, telephone, and Internet sales; the application of the BCL to Vertrue's mail, telephone, and Internet sales did not violate the dormant Commerce Clause; there was sufficient evidentiary support for the BCL reimbursement award and such an award was equitable; there was sufficient evidence of the CFA violations regarding Vertrue's telemarketing solicitations and sufficient evidence for the respective reimbursement award; and there was sufficient evidence to support a CFA reimbursement award for the practice of requiring dual cancellation requests for memberships bundled into a single Internet transaction.

The State cross-appealed. It argued the district court erred in finding the record did not support an award of additional civil penalties for consumer frauds committed against the elderly; the BCL did not apply to Vertrue's financial, privacy, and health programs; a BCL reimbursement award requires proof of reliance, damages, intent to deceive, and knowledge of falsity; a reimbursement reward for a CFA claim of concealment, suppression, or omission of a material fact requires proof of reliance, damages, intent to deceive, and knowledge of falsity; and there was insufficient evidence of reliance, damages, intent to deceive, and knowledge of falsity to support a finding of a CFA violation for Vertrue's “breakage” practices.2

II. Application of the Buying Club Membership Law.

A. Scope of Review. Our review of this equity ruling is de novo; however, we review the district court's interpretation of chapter 552A for correction of errors at law. See Iowa Film Prod. Servs. v. Iowa Dep't of Econ. Dev., 818 N.W.2d 207, 217 (Iowa 2012). We also review de novo the district court's ruling on questions of constitutional law. Homan v. Branstad, 812 N.W.2d 623, 628–29 (Iowa 2012). In reviewing a challenge under the dormant Commerce Clause of the United States Constitution, [o]ur function is to determine, to the best of our ability, how the United States Supreme Court would decide this case under its case law and established dormant Commerce Clause doctrine.” KFC Corp. v. Iowa Dep't of Revenue, 792 N.W.2d 308, 322 (Iowa 2010). Thus, we do not “engage in independent constitutional adjudication” or “seek to improve or clarify Supreme Court doctrine.” Id.

Preservation of Error. The State contends Vertrue's proposed interpretation of section 552A.3, as well as its dormant Commerce Clause claim, were not properly preserved for appeal. Our error preservation rules provide that error is preserved for appellate review when a party raises an issue and the district court rules on it. Meier v. Senecaut, 641 N.W.2d 532, 537 (Iowa 2002). Vertrue clearly presented to the district court the issue of whether section 552A.3 applied to solicitations that were not made in person. The record demonstrates the parties debated the “irrespective of the place or manner of sale” clause of section 552A.3 at length and the district court rejected Vertrue's interpretation. Moreover, the State acknowledges that “the court ruled the BCL did not violate the Commerce Clause [and] Vertrue filed a motion to reconsider.” Accordingly, we conclude Vertrue has properly preserved error on both of these arguments.

C. Statutory Framework. In 1993, our legislature enacted the BCL to protect consumers by regulating the sale of buying club memberships. See 1993 Iowa Acts ch. 60, §§ 1–5 (codified at Iowa Code §§ 552A.1–.5 (Supp.1993)).3 The Act essentially regulates membership sales in two...

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