F.T.C. v. Neovi, Inc.
| Decision Date | 16 September 2008 |
| Docket Number | Case No. 06CV1952 JLS (JMA). |
| Citation | 598 F.Supp.2d 1104 |
| Parties | FEDERAL TRADE COMMISSION, Plaintiff, v. NEOVI, INC., d/b/a Neovi Data Corporation and Qchex.com, et al., Defendants. |
| Court | U.S. District Court — Southern District of California |
Deborah Matties, Lara S. Kaufmann, Patricia Poss, Arturo A. Decastro, Russell Deitch, Sana Coleman Chriss, Federal Trade Commission, Washington, DC, John D. Jacobs, Federal Trade Commission, Los Angeles, CA, for Plaintiff.
James C. Stevens, Law Office of James C. Stevens, John H. L'Estrange, Jr., Wright and L'Estrange, San Diego, CA, for Defendants.
ORDER: GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT IN PART AND DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
Presently before the Court are Defendants' motion for summary judgment [Doc. No. 82], Plaintiffs opposition [Doc. No. 94], Defendants' reply [Doc. No. 96], Plaintiffs motion for summary judgment [Doc. No. 89], Defendants' opposition [Doc. No. 98], and Plaintiffs reply [Doc. No. 100.] For the following reasons, the Court DENIES Defendants' motion for summary judgment and GRANTS Plaintiffs motion for summary judgment in part.
Defendant Neovi is a California corporation.1 From 2000 through 2006, Neovi marketed a series of software programs that operated on an internet website known as "Qchex.com." Qchex users would enter their check and bank account information and use the site in order to send checks to third parties via email or the United States Postal Service. Consumers receiving the checks could take them to their banks for deposit. The Qchex system is no longer in operation. Neovi shut the website down on or about October 3, 2006. Neovi offered a similar service, called GoChex, in early 2007. In October 2007, Neovi filed for bankruptcy under Chapter 11.
Defendant G7 Productivity Systems Inc. ("G7") is a California corporation. G7 produces check software, ink, and paper for sale to U.S. retailers and consumers. G7 participated in the Qchex service by printing checks at its warehouse, among other things. G7's products, VersaCheck paper and VersaInk, were marketed by Neovi and on the Qchex website. G7 sold the GoChex service on its website, G7ps.com. In its bankruptcy filing, Neovi identified Defendant G7 as one of its largest creditors for monies owed in the amount of $996,699.
Defendant Thomas Villwock is the owner, President, and Chief Executive Office ("CEO") of Neovi. For G7, Villwock worked as a "business consultant," but employees of both companies considered him President of G7. Villwock, among other things, designed the Qchex business model.
Defendant James M. Danforth is Neovi's Vice President, Chief Operating Officer ("COO"), Chief Financial Officer ("CFO"), Treasurer, Secretary, and registered service agent. In addition to his positions at Neovi, Danforth is also G7's Executive Vice President ("EVP"), CFO, Secretary, and, as with Neovi, its registered service agent. Among other things, Danforth managed Qchex.
After Neovi declared bankruptcy in October 2007, Defendants Villwock and Danforth established iProlog Corporation, which hired all Neovi employees and conducts Neovi's former business activities. Defendant Villwock is the President of iProlog and Defendant Danforth is the Chief Operating Officer. In late December 2007, Defendants Danforth and Villwock launched another website, Free-Quickwire.com ("FQW"). FQW is a check delivery service that is similar to Qchex and GoChex. Defendant Danforth is the Chief Operating Officer of FQW and Defendant Villwock is the President.
To use Qchex, a user visited Qchex.com and established a Qchex account by entering his or her purported name and email address, and created a password for the Qchex account. Qchex generated a message to the email address that the user entered, and the user then activated the account by clicking on a link in the email. After activation of the account, the user was prompted to visit the Bank Account Setup Wizard page of the Qchex website to provide information on the bank account on which he or she wished to draw checks, including the bank account routing number and account number.
To request that Qchex create and send a check, the user input the check amount and payee name on Qchex web pages and picked a delivery option. Depending on whether the user requested delivery by email or U.S. Mail, at the prompting of the Qchex website, the user entered information about the intended check recipient's email address or mailing address. After the user completed the fields in the Qchex check template and clicked the "FINISH" button, Qchex informed the user that Qchex had sent the check.
For e-mail checks, Qchex managed, recorded, and monitored all aspects of the delivery of the Qchex check. When a user submitted a request for an electronic check, the Neovi computer system processed the request and sent the recipient an e-mail from the address "memberservices@qchex.com," which informed the recipient that he or she had received a check payment. The notification e-mail also explained the features of Qchex and advertised paper and ink to purchase for printing of the check. Qchex required the recipient of an e-mail check to have a Qchex account and to download and install "Check Messenger" software from the Qchex website to print the check.
Once the recipient printed the check, the Check Messenger software communicated information about the printing progress and success from the recipient's computer to the Qchex server. Neovi then sent the user confirmation of when the recipient had printed the e-mail check that the user had requested.
In order to manage these deliveries and delivery notifications, all of the Qchex check data was stored on the Neovi server. Villwock explained that Neovi stored the data on its server because Qchex was a web browser-based system and users did not have databases on their own personal computers that could perform these delivery tasks.
If the user requested delivery by U.S. Mail, the check recipient received the Qchex check in the mail from Defendants. Neovi had a "print service center" where it printed Qchex checks for U.S. mail delivery. The "print service center" was a warehouse operation staffed almost entirely by G7 employees. G7 employees did everything necessary to physically make the check and get it to its intended destination. They printed the checks on blank check stock using a G7 laser printer, folded them, stuffed them in envelopes, ran the envelopes through the Cass (address verification) system, applied postage, and brought them to the post office. G7 performed quality control by scanning checks and looking for duplicates.
As described above, using an interrogative process, Qchex obtained transaction data from the user and then generated and sent checks. Qchex customers provided only the raw data-names addresses, and bank account numbers. Defendants promoted their checks as being negotiable instruments and added elements to the data supplied by the user to generate a negotiable instrument. Defendants converted users' raw data into a negotiable instrument by taking information from users' checking accounts and composing a check document that matched U.S. banking regulations when printed. If the Qchex user chose not to upload a signature for Qchex to place on the checks, Qchex automatically inserted bank accepted legal language in the signature field to tell a recipient that the check issuer authorized the check being deposited.
The format of a Qchex check was determined by Neovi and G7, and in fact, Neovi asserted a copyright over the design. Danforth acknowledged that the Qchex website determined the placement of all information on the checks. Qchex users could not make changes to Qchex check formats; they could only choose from a handful of preselected designs made by Neovi. Specifically, Neovi determined that the bank code line would appear at the bottom of a Qchex check. A Qchex user could not change the image of the Qchex check, including the placement of the words "memo," "to the order of," or "pay," or the placement of the signature or bank account lines, the font, or the appearance of a Qchex logo.
From the beginning, many "fraudsters" using Qchex began to request checks without having authority over the bank account upon which it was to be drawn. The FTC is alleging that Defendants substantially assisted these fraudsters by failing to take adequate steps to verify that they had actual authority over the bank accounts that they stated belonged to them.
Defendants stated that they tried four different fraud reduction procedures before 2005. First, starting in 2002 or 2003, Neovi utilized a "Qchex Monitor," which allowed Qchex employees to look for unusual activity in its U.S. Mail service, such as large volumes of high-denomination checks. However, no employee or employees had responsibility for checking it regularly and no specific resources were devoted to using it to detect fraud.
Second, Defendants stated that they encrypted check data and transmitted it using "Check Messenger," the software program that check recipients downloaded from Qchex. Defendants also offered a product called "CheckScape," which replaced the bank account and routing number line at the bottom of the check with the bar-coding to hide check data on the face of the check. Neither form of encryption did anything to verify that the person who had requested the check had authority over the bank account.
Third, Neovi claims it blacklisted Internet Protocol ("IP") addresses that were associated with fraudulent transactions. However, the blacklisting apparently had a low level of efficacy. Fourth, Defendants placed warnings on many of the checks that stated:
This check was created and delivered to you on order of a third party using the Qchex.com service....
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