How an Oil Baron's Heir Cleaned Up a $1.4 Billion Internet Scam


When Sen. John D. Rockefeller IV (D-W.Va.) took over the Senate Commerce Committee in 2009, he wisely decided to focus on using his leadership position to make life better for consumers. In December, Rockefeller enjoyed some of the fruits of that effort when he watched President Obama sign into law a bill that outlawed a $1.4 billion online scheme that tricked consumers into joining so-called membership clubs.

In 2009, the Commerce Committee completed a report, Aggressive Sales Tactics on the Internet and Their Impact on American Consumers, that detailed how three companies, all based in Norwalk, Conn., used dodgy web sites and consumer-unfriendly laws to get "reputable" e-commerce sites to pass consumer credit card information on to them without informing consumers. The three malefactors were Affinion (previously known as Trilegiant), Vertrue (previously known as Member Works), and Webloyalty. For the rest of this article, I'll just call them AVW.

The law sponsored by Rockefeller to clean up that mess was the Restore Online Shopping Confidence Act (ROSCA). In a way, it's fitting that he made battling these toxic scams one of his priorities: Rockefeller's great grandfather, John D. Rockefeller, founded Standard Oil, whose largest successor is ExxonMobil (XOM), which in 1989 had a fairly massive toxic problem of its own: The 10.9 million gallon Exxon Valdez oil spill in Alaska's Prince William Sound.

Anatomy of a Billion Dollar Online Scam

Here's how the AVW scam worked: Imagine you're buying, for example, an airline ticket on Priceline (PCLN), and you think you've completed your online purchase after providing Priceline your personal information, including your credit card number. Just before you're about to get confirmation for the purchase, a colorful pop-up appears that offers "$10 Cash Back on This Purchase" along with a big button with the word "Yes" or a much smaller "No Thank You" button.

You click on the "Yes" button, and the next month you discover an extra charge for $20 on your credit card statement along with the price you paid for that ticket. Surprise! You have unwittingly allowed yourself to be enrolled in one of AVW's membership clubs, thanks to the cooperation of the original e-commerce site and a little technique known as Card on File, which allowed them to give AVW your credit card information and sign you up for a membership without your specific consent.

Sponsored Links

According to the Committee report, at least 450 e-commerce websites partnered with AVW, and between 1999 and 2009, those partners received about $608 million in pure profit from the deals -- 88 got more than $1 million apiece, and Priceline received over $10 million -- with the other $792 million or so going to AVW.

Fully 98% of calls to AVW customer service lines were from consumers wanting to cancel as soon as they discovered these extra charges on their credit card bills -- payable to unfamiliar entities such as "WLI Reservation Rewards," according to the Committee report.

AVW use what are euphemistically called "Aggressive Marketing Tactics." (This industry is full of word games -- perhaps the worst of which was Member Works' decision to change its name in 2004 to Vertrue, a portmanteau word that melds virtue, truth, and the Latin word for truth, veritas. Talk about nerve!)

I recently interviewed Harvard Business School professor Ben Edelman, who testified in front of the Commerce Committee about these firms and their marketing tactics. According to Edelman, these include:

  • Making solicitations at a time when few consumers expect solicitations (during checkout); and

  • Automatically transferring customer payment information, such that a consumer can end up a member of a paid membership program, facing monthly credit card charges, without ever providing a card number to the company posting the charges.

Another aspect of AVW's aggressive marketing is in how it convinces partners to sign up. Edelman pointed out, for example, that to appear on the Priceline site, Webloyalty had to enter into a contract whereby Priceline sent customer name, credit card number, and more to Webloyalty; and Webloyalty paid Priceline. He also expressed concern that credit card companies were allowing this to happen -- despite their own rules against it.

Why would an e-commerce company risk sullying its reputation by doing business with AVW? Perhaps for millions in pure profit. And that profit flows from a commission scheme that rewards success handsomely. The higher the "net conversion rate" -- the proportion of consumers exposed to AVW's marketing that sign up -- the more the partner sites get paid per customer. According to the committee's report, a greater than 9.5% conversion rate yielded a commission of $2,650 per thousand customers, whereas the commission for a less than 3.29% conversion rate is a mere $850.

ROSCA to the Rescue

The Senate investigation led to some changes in the business even before ROSCA was signed into law. For example, Affinion and Webloyalty changed their practices in 2009 before the Committee report in November 2009. Affinion said that it had ended its practice of having the partner sites pass customers' payment information directly to them. And in August 2009, Webloyalty announced that it would require consumers to enter the last four digits of their credit card before signing up.

Those moves haven't stopped the lawsuits against AVW. In March 2011, a group of Webloyalty victims -- led by a 15 year old girl who unwittingly got signed up for a Webloyalty program when buying her mother a present online -- in Virginia filed a class action suit against the company alleging online larceny. Webloyalty was acquired in January 2011 by Affinion.

ROSCA makes if far more expensive for AVW to engage in this practice. According to the committee, it

  • Prohibits "companies from using misleading post-transaction advertisements by requiring them to clearly disclose the terms of their offers, and to obtain billing information, including full credit or debit card numbers, directly from consumers";

  • Prohibits "Internet retailers and other commercial websites from transferring a consumer's billing information, including credit and debit card numbers, to post-transaction third party sellers" like AVW; and

  • Requires companies that use "negative options" on the Internet -- in which consumers are signed up unless they explicitly decline -- "to meet certain minimum disclosure and enrollment requirements, so consumers will not end up paying recurring fees for goods and services they did not intend to purchase."

I contacted all of the AVW companies for comment, but only Affinion responded. Spokesperson Michael Bush told me on Feb. 17, online membership marketing accounts for less than 5% of Affinion's business. "In addition to discount clubs, we also offer travel, ID Theft protection, Insurance, Loyalty Points, Warranty and a host of other types of programs," Bush emphasized. "We operate similarly to an investment strategy; we identify the types of programs that we believe will resonate most, and then increase the marketing dollars behind those particular types of programs."

In a March 3 interview, a committee staffer told me that he thinks ROSCA passed so quickly because the evidence of consumer abuse was so compelling. He also said that it's his hope that with ROSCA's passage, the practice of tricking consumers into buying these club membership will go away. For his part, professor Edelman thinks three conditions will need to be satisfied before this "industry" evaporates:

  • Ads must be "clearly distinguished from the checkout process (through style, format, color, etc. -- not just through easily-overlooked disclosures), "

  • Sequencing must be "consistent with customer expectations (no ads appearing when a user is checking out)," and

  • "Consumers [must] retype all account details (name, address, email)."

In the meantime, Rockefeller's committee has achieved an admirable victory for consumers. We can only hope it leads to the permanent cleanup of this particular brand of online sludge.

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