Federal Trade Commission v. Neovi, Inc.: Ninth Circuit Affirms Injunction Against Online Check-Issuer Qchex

Federal Trade Commission v. Neovi, Inc., No. 09-55093 (9th Cir. May 14, 2010)

Slip Opinion

On May 14, 2010, the Ninth Circuit affirmed a grant of summary judgment in favor of the Federal Trade Commission (FTC) and an injunction granted by the Southern District of California against appellant Neovi, Inc (“Neovi”). The FTC had brought claims alleging that Neovi, through its online Qchex service, had engaged in “unfair methods of competition” by issuing unverified checks through its website. The court agreed with the FTC, finding that appellant did not take sufficient measures to prevent and address fraud. The injunction prohibits Qchex from continuing to operate without following a court-specified verification process. It further orders Qchex to disgorge its total revenues, which the district court found to be in the amount of $535,358.

Eric Goldman provides an overview of the case and its factual background, and criticizes the opinion’s failure to discuss the relevance of the statutory protection for Internet services found in 47 U.S.C. § 230. Digital Society has a brief discussion of the decision. Ars Technica has two posts from 2009 (February and November) that provide useful background on the case.

Neovi, the appellant in the recent Ninth Circuit decision, managed Qchex.com, a service that allowed users to order checks online which could then be sent by post or e-mail. To register for a Qchex account, users only had to provide straightforward personal information and basic bank account information, like a routing and account number. After registering, users could then order checks that would draw from the user’s bank account. Qchex had no systematic method of verifying user information.

The Ninth Circuit described the Qchex process as “highly vulnerable to con artists and fraudsters” since “the information necessary to set up an account was relatively public and easy to come by.” The district court found that the facts support that assessment: over the course of six years, Qchex froze more than 13,750 accounts due to fraud. The frozen accounts were the source of almost 155,000 fraudulent checks with a value of over $400 million. The amount of money paid fraudulently through Qchex was greater than the amount paid legitimately.

The central issue in the Ninth Circuit’s decision was whether Qchex was “liable for causing substantial injury to consumers that is not reasonably avoidable or outweighed by countervailing benefits.” 15 U.S.C. § 45(n). The court found this standard satisfied, pointing to Qchex’s lack of diligence in policing and addressing the significant fraud that occurred through its site.

Qchex’s argument that causation was lacking because users—not Qchex— created the fraudulent checks was unpersuasive to the court. The court reasoned that the argument “ignores the fact that Qchex created and controlled a system that facilitated fraud and that the company was on notice as to the high fraud rate. Qchex’s approach would immunize a website operator that turned a blind eye to fraudulent business made possible only through the operator’s software.”

As Digital Society (citing the Volokh Conspiracy) points out, this decision has significance for the open question of how the law should treat “dual-use” services that can be used for both legitimate and illegal purposes. The court’s language is potentially broad and could be used to impose liability on many dual-use services. Although this case was decided within the context of the FTC Act, plaintiffs in other contexts, for example copyright infringement, might try to rely on the court’s reasoning to argue for expanding liability whenever a service makes illegal activity possible.

Leocadie Welling is a 3L at Harvard Law School.