DirectBuy's Class-Action Settlement Opposed by 39 Attorneys General

The attorneys general of 37 states, as well as the District of Columbia and the Commonwealth of Puerto Rico, are objecting to the proposed settlement of a class-action lawsuit against DirectBuy Inc., which they say "offers no real benefits to consumers."

The 2009 lawsuit (Wilson et al v. DirectBuy, Inc., et al) accused Indiana-based DirectBuy of fraud because the company allegedly received tens of millions of dollars in kickbacks and incentives from suppliers and manufacturers, inflating the cost of the goods above the advertised wholesale prices. The lawsuit alleged that DirectBuy did not disclose this arrangement to customers until early 2009.DirectBuy promotes itselfas an insider's buyers' club where members can purchase brand-name goods directly from manufacturers at wholesale prices. Members pay anywhere from $3,000 to $7,000 to join the "clubs" of this privately held company, in addition to annual fees.

Washington Attorney General Rob McKenna, one of the law officials protesting the proposed settlement, said his office has received nearly 50 complaints from state residents who paid as much as $5,530 to become members of DirectBuy.

McKenna and the other attorneys general objected to the proposed settlement with a 36-page amicus curiae brief filed in U.S. District Court in Connecticut.

"The proposed settlement is, in essence, a sales vehicle for defendants designed to drive current and former customers into membership renewal contracts and to the same manufacturers and suppliers from whom defendants have acknowledged receiving kickbacks and incentives," the brief states.

The brief also complains that the attorneys' fees were excessive compared to the "scant relief" offered to consumers. Under the proposed settlement, absent class members are eligible for limited-time, free memberships and reduced-price membership extensions, while seven named plaintiffs stand to collect $4,000 each. Class counsel, the brief notes, stand to walk away with $350,000 to $1,000,000 in attorneys' fees.

The proposed settlement, the attorneys general also noted, does nothing to prohibit similar conduct by DirectBuy in the future. "In essence, the settlement does not attempt to address the core problems raised by the suit, yet releases strong state consumer protection causes of action that have more value to each class member," they wrote.

DirectBuy spokesman Mike Georgeff said the company was "completely surprised" by the announcement from the attorneys general, and remains confident the settlement is fair, an issue the company plans to address at the settlement fairness hearing on May 10 before U.S. District Judge Janet C. Hall.

"DirectBuy negotiated long and hard and in good faith to arrive at a settlement that is fair to all class members," Georgeff told Consumer Ally. "DirectBuy has consistently maintained that its business practices are honest and lawful in all respects. Furthermore, we are confident that Judge Hall will agree and will approve the settlement."

As Consumer Ally reported in an article about DirectBuy published last October, DirectBuy has faced a number of class-action lawsuits accusing it of a failure to pass all savings directly to customers.

An October 2009 lawsuit filed in Indiana District Court alleges that DirectBuy pressures people into paying a $5,000 membership fee and charges exorbitant mark-ups, excessive shipping fees and withholds millions in annual manufacturer rebates.

A September 2009 class-action filed in New York District Court accused DirectBuy of keeping millions of dollars in "kickbacks" from manufacturers, as well as overcharging members for shipping and taxes in order to pocket the difference. The suit also claims DirectBuy delays placing orders for prepaid items an average of two months in order to earn interest on orders that total some $1 billion annually.

Georgeff refuted all allegations in the lawsuits to Consumer Ally in the October article, while acknowledging the company does receive certain incentives from suppliers.

"We show members the cost of an item, freight, and any applicable costs up front for every member purchase, all of which are fully disclosed to both members and franchisees," Georgeff said. "Our Membership Agreement specifically informs prospective members that DirectBuy's Corporate Headquarters and franchisees reserve the right to accept prompt payment discounts and other incentives from suppliers, so long as pricing available to members is not adversely affected," he added.

Shortly after the attorneys general went public with their opposition to the proposed settlement, bonds issued by DirectBuy Holdings Inc. "plunged," Bloomberg reported.

The participating attorneys general (which don't include the attorney general of DirectBuy's home state of Indiana) are from Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, The District Of Columbia, Florida, Georgia, Idaho, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Puerto Rico, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Washington and West Virginia.
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