The Ninth Circuit Court of Appeals today affirmed a lower court ruling against Qchex. The Federal Trade Commission had brought the action against Qchex, claiming that Qchex violated federal law by operating an online check creation and delivery service with inadequate safeguards in place to prevent fraud.
The lower court’s decision, issued in February 2009, had permanently barred Neovi, Inc., doing business as Neovi Data Corporation and Qchex.com, G7 Productivity Systems, Inc., James M. Danforth, and Thomas Villwock from operating a similar site without verifying that customers are authorized to draw checks from the bank accounts they have specified. Qchex appealed the court’s decision. In its ruling today, the appellate court rejected Qchex’s claim that it was not liable:
The district court found that Qchex is liable for them “[u]nfair creation and delivery of unverified checks.” Qchex urges that this charge is both “legally” and “literally” impossible. It claims that only users can create checks because “without user input nothing, and certainly not a check, . . . could be created or delivered.” This semantic argument is meant to encompass not only the causation requirement, but also
Qchex’s claim that it was not given adequate notice of the charges.[2] Qchex’s challenge to causation is best captured in its statement that it did not “obtain, input or direct” the delivery of consumer information nor facilitate the theft. This spin 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. Even if the creation of the checks was impossible without user input, that does not mean Qchex did not create the checks that it later delivered.
[…]
Qchex had reason to believe that a vast number of checks were being drawn on unauthorized accounts—checks that it legitimized in the eyes of consumers. Aside from the prodigious number of complaints Qchex received, its president testified that Qchex expected the site would be used for fraudulent purposes from the beginning. Qchex nonetheless continued to create and deliver checks without proper verification. By doing so it engaged in a practice that facilitated and provided substantial assistance to a multitude of deceptive
schemes.[6] To be clear, none of this is to say that Qchex is liable under a theory of aiding and abetting. Qchex engaged in behavior that was, itself, injurious to consumers. Qchex’s business practices might have served to assist others in illicit or deceptive schemes, but the liability under the FTC Act that attaches to Qchex is not mediated by the actions of those third parties. Qchex caused harm through its own deeds—in this case creating and delivering unverified checks—and thus § 5 of the FTC Act easily extends to its conduct.
For those unfamiliar with the case, the court opinion includes the relevant background on the case including how the system worked, and the staggering impact the business had on innocent victims:
Indeed, over a six-year period, Qchex froze over 13,750 accounts for fraud. Those accounts spawned nearly 155,000 checks, supplied over 37,350 bank account numbers, and were the source of checks totaling more than $402,750,000—an amount more than half of the total drawn during that time.
Qchex’s web site, last updated in November 2009 concerning the appeal, has not yet been updated to reflect today’s decision and still reads:
As of August 2007, the Qchex.com website has discontinued its service to restructure and improve key service levels.