Update (December 5, 2018): Following up on the post below about how one commits a massive fraud, let’s hypothesize a situation where a company falsely charges people for services that the people do not owe but stops doing so immediately when the invoiced people object (or hire lawyers to object on their behalf).

Could an intended victim, who incurred legal fees hiring a lawyer to fight the false charge, sue for consumer fraud?

On the one hand, this “intended victim” suffered no loss. On the other hand, the “intended victim” incurred legal fees to avoid suffering a loss. Furthermore, this “intended victim” might be a good candidate to vindicate the rights of ALL of the ACTUAL victims, right?

What would be wrong or problematic about allowing the intended victim to bring a lawsuit to enjoin the improper conduct?

These are issues to be addressed by the Minnesota Supreme Court in Engstrom v. Whitebirch. Here is the plaintiff’s petition for Supreme Court review, here is the response, and the Supreme Court granted the petition for review last week.

Original post (November 7, 2018): (under the headline: How To Get Away with Massive Fraud: A Case Study (Google Mobile Phone Trade-In Program): Minnesota Litigator normally focuses on civil litigation within the state of Minnesota (as the name implies). From time to time, however, we have been known to take detours to neighboring jurisdictions or non-Minnesota-specific legal news or commentary. This post is one of our detours.

This post is not intended to encourage anyone to commit fraud of any kind. It is intended to be descriptive, not prescriptive.

Furthermore, while the post is descriptive, the post is not intended and cannot be used as a road-map as you will see if you read the post. Successful massive fraud is expensive to perpetrate. It cannot be kluged with common items from the hardware store in the bedroom, backyard, basement, or garden shed.

So please refrain from expressing any indignation and condemnation on our headline. We are not advocating massive fraud nor are we spilling any secrets that will unleash a torrent of massive fraud.

Rule #1: To get away commit massive fraud, commit tiny frauds millions of times.

This is an extremely important first step. If Google (to take one example of innumerable potential fraudsters) were to steal a large amount of money from a particular person or business, this would probably go badly for Google.

If, on the other hand, Google were to steal small amounts of money from millions of people, the fraud would be harder (if not impossible) to stop.

Smaller dollar amounts and many victims make the fraud harder to stop for several related reasons.

First, the vast majority of victims will not even notice or care. Life’s too short and moves to fast.

Second, among the few who do notice, very few will have the time or will want to invest the time to vindicate their rights.

(Related Rule #1.1: make any refund process or dispute resolution process time consuming, frustrating, and “not worth the effort.” A great method here is to field complaints in call centers staffed with people with little command of English, little if any training, and no knowledge or expertise.)

(Related Rule #1.2: for the determined and dogged consumers who persist in seeking vindication in spite of all the obstacles placed before them, once you have run them ragged, give them complete refunds. Your business will make so much money on the many others that settling with these rare and tenacious objectors will be a minuscule expense.)

Third, there’s the well-recognized “collective action” problem. It can be very difficult if not impossible for many victims of tiny frauds to band together to aggregate their losses and bankroll a lawsuit. Through lawyering (see Rule #4, below), the odds can be pushed from “remote” to “impossible” or close to it.

Rule #2: Diversify. The massive fraud should be one of many profit centers in your business, not the centerpiece of the enterprise.

This is a critical second step. If Google (to take one example of innumerable potential fraudsters) were to steal small amounts of money from millions of people, over time, the scam might be exposed. A critical component of a successful massive fraud is to be able to close the doors, pack up, and skedaddle if the cost/benefit ratio starts to tilt unfavorably. This can happen through government regulatory action or intervention, bad/unflattering P.R., or other miscalculation). Quick exit is easier if you have an escape or back-up plan. This is simply diversification of risk.

Rule #3: Mitigate risk of bad consequences still further by layering “business partners” or “affiliates” in the fraudulent scheme.

If Google (to take one example of innumerable potential fraudsters) were to steal small amounts of money from millions of people, it would not want to sully its name or brand with such deviousness. Rather, it would likely set up layers of “middle-men” (with comprehensive indemnification agreements up and down the line (See Rule #4, below)).

In this way, if the massive fraud were ever brought to light, the fraudsters could point fingers elsewhere, mitigating, if not eliminating the reputational and, perhaps, financial risks.

Even better if all the blame can eventually fall on a shell company with insufficient assets to handle the liability. Better still if the primary fraudster is able to construct its matryoshka dolls of liability insulation in such away as to share in the affiliates’ profits but be immune from their liabilities (over-seas parent companies?). (See Rule #4, below.)

Rule #4: Mitigate risk of bad consequences by lawyering the fraud.

While lawyers, in general, are highly principled and ethical, they can be extremely helpful when devising successful fraudulent schemes. (Best practices though: keep the fraud component of the business secret from the lawyers. This helps them sleep better at night and who doesn’t want well-rested lawyers?)

If Google (to take one example of innumerable potential fraudsters) were to steal small amount of money from millions of people, with layers of “business partners” so that responsibility for the wrong-doing is diffused and unclear, it would also want to have the individual tiny rip-offs “lawyered up.”

For example, it might require that all disputes must be brought in small claims court in Santa Clara County, California, or, alternately be subject to arbitration. It might require a class action waiver, as hinted at above in Rule 1.3. It might require that lawsuits be brought only against the middle-man with any claims against Google waived.

And this brings us to our case study: Google’s “Pixel Phone Trade-In Program.” (Rule # 2.)

Here is how it seems to work, in a nutshell:

Google promotes a “phone trade-in program” whereby it encourages you to trade in your old phone for a sharp discount on the price for the newest model. It gives your phone a value estimate (first encouraging you with a vague tease of “up to $400 for your phone“) based on your description of your phone (model and condition). Then you send in your phone based on their estimated trade-in value (in fraud law, we call this “reliance”). Google then purports to give you credit toward the new phone based on their inspection of the one you’ve sent them. (So far, so good, right?)
Google works with a third-party for its “trade-in program,” Texas-based Hyla Inc. (Rule #3.)
For some significant number of people, however, Google/Hyla quotes a fair estimated value for the trade-in phone but, after the phone’s been sent in, Google/Hyla gives a false explanation for the sharp discount on the submitted phone’s trade-in value (for example, falsely claiming you “incorrectly reported the phone model”). (Rule #1.) (This is the part to “forget” to tell the lawyers.)
When some small number of these defrauded customers (Rule #1.1) contact Google to raise issues with the sharply and illegitimately discounted “trade-in” values, they are put through a phone-tree run-around, shuttled from one person to another who do not seem to understand the nature of the complaint and/or who are powerless to address the issue raised. (Rule #1.1.) If the callers are determined enough, they eventually get Google to rescind the “low-ball” “trade-in” value and give the estimated value they’d represented up front. (Rule #1.2.)
And, of course, the Google/Hyla phone trade-in program includes an arbitration provision and a “no class” provision in the Google/Hyla trade-in scheme. (Rule # 4.) (Likely, no one ever reads these conditions until class action lawyers get calls to investigate potential consumer fraud claims.)

LEVENTHAL pllc is currently one of a team of consumer class action law firms with an unrelated class action pending against Google, related to Google’s “Local Guide” program and an illusory promise (in our view) of “1 Terabyte of Free Storage”) (Roley v. Google, Santa Clara County District Court, Court File No.18-CV-336773. Time will tell whether Google followed all of our points, above, to avoid liability in our case.

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