Minnesota, MemberWorks Agree to Settle Fraud Suit

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The Minnesota attorney general's office yesterday said it reached a settlement in a consumer fraud lawsuit filed against MemberWorks Inc. last year.


MemberWorks, which uses telemarketing to offer a variety of shopping clubs, insurance programs and other fee-based services to customers of banks and other affinity groups, agreed to pay $75,000 to the state and to make certain modifications in its telemarketing and fulfillment procedures.


Among other concessions, the company agreed to use specific verbiage in its telemarketing scripts and to use a minimum font size on its envelopes when it notifies customers about annual membership renewals. The concessions only apply when MemberWorks is marketing to Minnesota residents.


Wayne Gattinella, president of MemberWorks North America, Stamford, CT, said the company felt vindicated by the settlement because the Minnesota attorney general's office modified its original suit substantially, dropping its allegations that the direct marketer violated consumers' privacy rights and billed customers for services they did not agree to receive.


"We're pleased that we were able to demonstrate that our business and privacy practices withstood the scrutiny of the Minnesota attorney general's office," Gattinella said. "We always felt that those original charges were politically motivated and untrue."


Leslie Sandberg, a spokeswoman for Minnesota Attorney General Mike Hatch, said MemberWorks was diverting attention away the real issue, and she also claimed a victory for the attorney general's office in the settlement.


"We charged them with consumer fraud, and that's the charge they agreed to the settlement for," said Sandberg. "I think MemberWorks is reaching. What we wanted to see was a change in business practices, and MemberWorks has agreed to change its business practices."


One of the terms of the settlement requires the company to reimburse customers double their money if MemberWorks does not have a recorded verification of its sale to the customer.


Gattinella said MemberWorks refunds money to people who cancel their memberships, and he said the impact on MemberWorks' business of the double-money-back provision would be "negligible."


MemberWorks offers consumers 30-day free trials for its membership clubs, and consumers must call to cancel the service by the end of the 30-day period to prevent their checking or credit card accounts from being billed automatically. Annual fees for products range from about $50 to $120.


The agreement also calls for MemberWorks to use, word-for-word, a script provided by the attorney general's office when the company is selling a product or service to bank customers. The script includes the phrase, "Will it be alright to charge the annual fee of [dollar amount] on your [bank name] account unless you call to cancel?"


If MemberWorks cannot provide a tape of this wording with the voice of the customer saying "yes," the company must reimburse the consumers with double their money.


Also, MemberWorks must tell consumers on the first page of their enrollment kits that that their account will be charged in 30 days unless they cancel and that their account will be recharged each year unless they cancel. The attorney general also specified that MemberWorks must send a letter and envelope with 14-point type stating "upcoming charge for membership renewal" before each annual renewal. The letter also must state, "If you take no action, your account will be charged to automatically renew your membership."


MemberWorks also agreed to follow several other procedures when marketing to consumers in Minnesota, including "clearly and prominently" disclosing that MemberWorks is a separate company when marketing products on behalf of a bank.


The flap over MemberWorks' practices started last year when Hatch filed a lawsuit against U.S. Bank, a subsidiary of U.S. Bancorp, Minneapolis, accusing it of sharing information about its customers with MemberWorks and other marketing companies without providing adequate disclosure of these practices to its customers. The bank settled that lawsuit for about $3 million without admitting guilt.


Although MemberWorks was not named in that complaint, the state filed a separate lawsuit against MemberWorks last July alleging that "scores" of customers had complained about being billed for services that they said they had not agreed to pay.


Meanwhile, a related piece of state legislation was sidetracked Tuesday when the Minnesota House Commerce Committee voted to table a bill that would have required telemarketers to obtain written permission or have customers recite the last four digits of their bank account number in order to bill the customer for the product. Sandberg said the bill was tabled along party lines, with 10 Republicans in the committee voting against it and eight Democrats supporting it.


Other telemarketing legislation, along with privacy-related legislation concerning consumers' financial, medical and state records, has passed the Minnesota Senate this session.
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