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Blue Hippo Pays $5 Million To Settle FTC Charges

Consumers complain computer layaway purchases went awry

By Mark Huffman
ConsumerAffairs.com

February 26, 2008 

The payments are part of a settlement with the Federal Trade Commission, which charged that the companies violated federal consumer protection laws.

Several states have also taken action against Blue Hippo. In May 2007 Maryland's Attorney General extracted a $1 million settlement from the firm.

Blue Hippo offered to extend credit to consumers to finance purchases of personal computers and other consumer electronics with down payments of $99 to $124 and a year of weekly or bi-weekly payments ranging from $36 to $88. In nationwide television and radio commercials, and on their Web site, the defendants touted the ability of consumers with "less than perfect credit, bad credit, no credit" to finance the purchase of a computer. But in fact, many consumers who ordered products paid hundreds of dollars and received nothing in return, according to consumers who complained to ConsumerAffairs.com.

Automatic debits

According to the FTC complaint, Blue Hippo required consumers to agree to a series of automatic, periodic debits from their bank accounts to purchase their products, promising that they would deliver the product once the consumer made 13 weekly, or seven bi-weekly, payments.

In many instances, the defendants debited consumers' accounts without first disclosing that consumers could not get a refund even if they cancelled before delivery of the product, regardless of the reason for cancellation.

Consumers who ordered products by calling a toll-free number were told that they would receive a "shipping verification form" with sale terms and shipping information, and that they had to sign and return the form to ensure product delivery, the complaint says. The form contained terms that were not disclosed previously, including disclosures regarding finance terms.

The defendants often failed to provide the forms and revolving account agreements before they debited accounts, so the finance terms and refund policy were not disclosed before consumers started making non-refundable payments.

The FTC says many consumers did not receive the merchandise they ordered or refunds. The agency took action, accusing Blue Hippo of failing to clearly and conspicuously disclose their policy of not providing refunds before debiting accounts, in violation of the FTC Act, and giving consumers no opportunity to make a timely and informed decision about whether or not to risk the potential loss of advance payments.

The defendants also allegedly failed to deliver the products after consumers made 13 weeks of payments, as promised during the sales call, also in violation of the FTC Act.

Right to cancel

For good measure, Blue Hippo was charged with violating the FTC's Mail Order Rule by failing to ship merchandise in a timely manner or give consumers the right to cancel and receive a refund. They allegedly violated the Truth in Lending Act (TILA) and Regulation Z by failing to make certain written disclosures before a transaction is made under an open-end consumer credit plan, and they allegedly violated the Electronic Fund Transfer Act (EFTA) and Regulation E by conditioning the extension of credit to consumers on repayment by preauthorized electronic debits.

Under the proposed stipulated final order, the defendants are barred from misrepresentations in the marketing of consumer electronics or any product requiring four or more periodic payments before shipment.

They also are barred from misrepresenting refunds, cancellations, exchanges, or repurchases of products without disclosing clearly and conspicuously, before receiving payment, the terms and conditions, and any policy of not refunding all payments when a consumer cancels the contract before product delivery.

In addition, they are permanently prohibited from violating the Mail Order Rule, the TILA and Regulation Z, and from conditioning the extension of credit on mandatory preauthorized transfers in violation of the EFTA and Regulation E.

The settlement includes a monetary judgment of at least $3.5 million and up to $5 million. This money will be used to provide redress to consumers who entered into contracts with the defendants before March 2006, made payments, and did not receive the ordered products, refunds, or other restitution.

If valid consumer claims exceed $3.5 million, the defendants will be required to pay up to an additional $1.5 million to pay those claims. The settlement also requires the defendants to stop collecting money from purchasers who are entitled to redress, to stop furnishing derogatory information about such purchasers to credit reporting agencies, and to notify any agency to which they have provided such information that the person's account is in good standing.

The company, based in Baltimore, sells computers and other electronic goods on a layaway program.

It was the center of a January 2007 investigation by ConsumerAffairs.com and targets low-income individuals with bad or no credit and sells cheap computers for as much as five times the value and often never delivers any product, even after hundreds of dollars have already been paid, according to customer complaints.

"I heard about BlueHippo on the radio," Littia of Oakland, Calif. wrote to ConsumerAffairs.com. "They said they have helped thousands of consumers, regardless of their credit, to get a computer of your own. All I had to do was send a $100 check to them and they would take $53.32 out of my account each month."

"It's been seven months and I have been calling them on why I have not gotten any more information from them." Littia continued. "They can take money from my account, but I can not get my money back, only store credit. I want my $500."

Littia is one of 291 consumers who, as of this writing, have filed similar complaints with ConsumerAffairs.com.

Tuesday's decision by the 4th U.S. Circuit Court of Appeals in Richmond, Va. does little to aid consumers in the short term, but in the long run, it could "put BlueHippo out of business," said David Marshall, the attorney who filed class-action lawsuits against BlueHippo in Maryland and California.

BlueHippo secures its orders when customers call to inquire. After a few weeks of payments, the company delivers a contract to customers which states that they cannot enter a class-action lawsuit, but rather, must use a third-party arbitrator to settle any claims. Marshall said the arbitrator BlueHippo uses rarely settles in favor of consumers.

Many consumers never sign or return that contract, Marshall said. Despite that, BlueHippo has tried to force all dissatisfied customers into arbitration. Tuesday's decision held up that only customers who signed the contract could be forced into arbitration rather than enter a class-action.

Although the Maryland class-action lawsuit was unsuccessful, Marshall said with the federal court's decision, it bolsters his case in California where class-action waivers are not recognized.

California comprises about 15 percent of BlueHippo's customer base, Marshall said – potentially enough to put the company out of business if the class-action is successful.

The company could appeal the court's decision but did not respond to a request for comment from ConsumerAffairs.com.

The company is also under investigation by the attorneys general in West Virgina, Florida and Illinois and settled with the Maryland attorney general in May.

As a result of that settlement, Maryland consumers who received nothing or overpaid for their BlueHippo products, will receive reimbursements starting in early 2008, attorney general spokeswoman Raquel Guillory, said.

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