ID-theft protection firm thrives, but legal challenges mount - East Valley Tribune: Business

ID-theft protection firm thrives, but legal challenges mount

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Posted: Sunday, April 13, 2008 4:22 am | Updated: 10:12 pm, Fri Oct 7, 2011.

Monday’s “The Montel Williams Show” focused on identity theft nightmares, and featured LifeLock CEO Todd Davis as an identity-theft expert.

VIDEO: LifeLock CEO talks about his company's identify theft program

As the show aired across the United States, the Tempe-based, ID-theft protection company logged more and more calls from panicked viewers.

“I think the biggest piece (of what drives customer growth) is people have been hearing about ID theft and they have the fear,” Davis said. “They’ve heard of it, but they don’t really know what it is, where does it happen and how does it happen. They just know there’s this black cloud out there. And what they don’t know is what we do about it.”

According to LifeLock, its service “helps consumers to render their personal information useless to thieves.” The company charges $10 per month for its service, and backs it up with a $1 million service guarantee.

But amid the groundswell of consumer enthusiasm is growing criticism of LifeLock’s advertising and practices. The company is facing multiple lawsuits, including one filed by a major credit bureau, Experian, and two seeking class-action status. Among other allegations, the suits question whether the company’s practice of placing “fraud alerts” is legal.

“They’re charging you for services that are free,” said Donald Girard, Experian spokesman. “They’re overstating what fraud alerts do, and their advertising says that if you take their service for $10 a month you’ll never be a victim of ID fraud. That’s patently false.”

Davis welcomes the legal challenges.

“Certainly we believe we’re in great legal standing,” he said.

The company’s impressive headquarters, at Hayden Ferry Lakeside, includes a sea of cubicles with employees constantly fielding calls from consumers afraid someone, somewhere will steal their identity and turn their lives upside down. LifeLock ended 2006 with 50,000 customers and now has about 900,000.

The company’s advertising, which often features Davis’ Social Security number, is a regular presence in print, broadcast and on the Internet.

Davis expects to exceed 1 million customers early next month. He freely publicizes the fact that his system didn’t stop a thief from obtaining a $500 payday loan online using his personal information, but insists nobody can do a better job than LifeLock.

NextAdvisor.com, an independent source that compares various online services, recently awarded LifeLock its five-star rating, the highest one possible, in its comparison of ID theft protection services.

“We’ve looked at a lot of different services and there’s no 100 percent sure way to totally foolproof protect your credit other than credit freezes, but those aren’t really workable from a day-to-day standpoint because that’s when you tell the credit bureaus not to allow anybody to access your credit reports ever,” said Joe Fahrner, NextAdvisor.com vice president of research. “LifeLock is as effective as you can be.”

FRAUD ALERT FLAP

When a consumer signs with LifeLock, the first thing the company does is ask the three major credit bureaus — Experian, Equifax and TransUnion — to set free fraud alerts on his or her credit file.

Much of the criticism surrounding LifeLock centers on the fact that many of its services, like placing fraud alerts, can be accomplished by consumers free of charge if they take the time and effort to monitor their credit closely.

According to the federal Fair Credit Reporting Act, consumers are entitled to free fraud alerts if they suspect they have been or are about to become victims of ID theft. The act regulates the collection, dissemination and use of consumer credit information.

The fraud alerts warn potential creditors that they must use what federal law calls “reasonable policies and procedures” to verify a consumer’s identity before they issue credit in his or her name.

“You can place these as a preventative tool, but they only last for 90 days,” Davis said, adding his service will automatically renew the alerts as long as the consumer remains a client.

If someone is an actual victim and files a police report, he or she can request an extended alert, which will stay on his or her credit file for seven years. The extended alert, which also is free, means no credit is granted without first speaking with the victim.

Consumers also can have themselves removed from the Direct Marketing Association list and can opt out of receiving pre-approved credit offers, also free of charge and part of LifeLock’s service, Davis said.

“But if you’re the type of person who would like to pay for the convenience of someone doing it for you, we’re there for you and then there are additional services if something goes wrong.” Davis said. Subscribers not only are paying for the convenience, but also for the guarantee in case their ID is stolen, he said.

Experian’s suit alleges all of LifeLock’s fraud alerts are illegal. The bureau also alleges LifeLock’s activities constitute false and misleading advertising and fraud, and that those activities have caused damage to both it and consumers. The suit was filed in February in the U.S. District Court for the Central District of California.

Experian’s suit is not financially motivated because it does not compete with LifeLock, Girard said.

“We’re just trying to protect a system that has proven to be very effective in decreasing ID fraud,” he said. “What they charge money for, we give away for free.”

The Fair Credit Reporting Act was never intended to allow fraud alerts to be placed and constantly renewed on behalf of hundreds of thousands of consumers who may have no reason to suspect they may be victims of ID theft, Girard said. Experian wants the fraud alerts to be declared a violation of the act, therefore rendering LifeLock unable to place and renew any fraud alerts, he said.

“The person who signs up for LifeLock ... who says ‘Well, for $10 a month this can’t hurt, I might as well do it’ is not a person who is in imminent danger of becoming a victim, so it fails the test of the law in several ways,” he said. “And having a for-profit company put these on the credit bureaus’ systems also does not meet the test of the law.”

Experian is concerned eventually so many fraud alerts will be out there that the “cry wolf syndrome kicks in,” Girard said.

“Over time we believe (fraud alerts) will start to lose their effectiveness and degrade the system,” he said.

CLASS ACTION SUITS

Two proposed class-action lawsuits — one filed in the U.S. District Court in Arizona and the other in New Jersey Superior Court in New Brunswick — want to include all LifeLock customers as plaintiffs against the company.

The Arizona suit, filed late last month, alleges LifeLock defrauds customers by offering ID theft protection services it cannot legally perform (fraud alerts) and promoting a $1 million guarantee it says is “wildly misleading.” It seeks to have all members’ fees refunded because of the “illegality of the contract and LifeLock’s misrepresentations about its services.”

Around the same time, another proposed class-action suit was filed in New Jersey. It alleges the company misled customers about the limited level of ID protection it provides and didn’t warn them about the alleged potentially adverse effect the services could have on their credit profiles.

David Paris of Marks & Klein, the plaintiffs’ attorney, claims LifeLock overstates the level of protection provided by its primary service, which is the fraud alerts. He also claims the company misleads subscribers by advertising a $1 million guarantee that is limited only to fixing failures in the company’s services and paying third parties to attempt to restore subscriber losses.

“I intend to increase the scope of these cases by filing in other states,” Paris said. “One of the primary goals of our lawsuit is to just have LifeLock’s advertisements more accurately reflect the services that they provide.”

Davis said LifeLock will “vigorously defend” itself against “anyone who wants to challenge our authority or wants to challenge our positions because it is our priority and our mission to be the most comprehensive, preventable solution that’s out there.”

LifeLock has a “satisfactory record” with the Better Business Bureau.

“LifeLock is a BBB-accredited business, which means they meet our standards,” said Felicia Overton of the Better Business Bureau of Central, Northern and Western Arizona.

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