'NET FEE' CONTRACT NETS VALID CLAIM UNDER CONSUMER FRAUD ACT

September 7, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

Companies usually do not have to tell customers how much profit they are making on a particular deal. But if a firm says its "net fee" will be $X and the seller fails to disclose that it is also making money on an expense that is passed along to the customer -- leaving the false impression that no additional profit is being made on the transaction -- this slick maneuver can add up to deceptive conduct under the Illinois Consumer Fraud Act. Covarrubias v. Bancomer S.A., 2004 WL 1774220 (1st Dist., Aug 9).

Jose Covarrubias filed a class action in Cook County Circuit Court, alleging that Bancomer S.A. violated the Consumer Fraud and Deceptive Business Practices Act by misrepresenting the fee it was charging to wire money to Mexico.

When Covarrubias used Bancomer to wire $100 to Marisela Garcia Covarrubias in Mexico, he received a receipt stating that the "Net Sale Fee" was $12, and that Marisela would receive 971 pesos, based on a "Sure Money" exchange rate of 9.71 pesos to the dollar.

According to the complaint, Bancomer failed to disclose that it made additional profit by obtaining the 971 pesos for less than $100.
Moving to dismiss, Bancomer argued that there was no deceptive conduct because the receipt accurately disclosed that the exchange rate would be 9.71-to-1.

The Circuit Court granted the motion, reasoning: "The representation, in fact, is as follows: For $12, we will transfer your $100 at a 9.71 pesos per dollar exchange rate. That's a perfectly truthful statement. The issue here is whether the defendants were under a duty to disclose that the 9.71 [exchange rate] included a profit. I am simply not persuaded that there should be imposed on Bancomer by this court an obligation to disclose profit, which is not imposed on almost every other provider of goods or services."

Disagreeing, the Appellate Court concluded the facts alleged by Covarrubias could add up to deceptive conduct that violated the Consumer Fraud Act. Here are highlights of Justice Jill K. McNulty's opinion (with omissions not noted in the quoted text):

" 'To state a cause of action under the Consumer Fraud Act, the plaintiff must allege: (1) a deceptive act or practice; (2) the defendant intended for the plaintiff to rely on the deception; and (3) that the deception occurred in the course of conduct involving trade or commerce.' Bernhauser v. Glen Ellyn Dodge Inc.., 288 Ill.App.3d 984, 990 (1997).

"The parties focused their arguments in the trial court and on appeal only on the first factor.

"Jose contends that he alleged a deceptive act under the principles stated in Martin v. Heinold Commodities Inc., 163 Ill.2d 33 (1994). In that case the plaintiff purchased commodity options contracts through the defendant. The defendant's forms showed the price of the option, a commission and a separate amount labeled as a 'foreign service fee.' The defendant retained the foreign service fee as part of its commission.

"The trial court held that the defendant violated the act, and our Supreme Court affirmed, holding: 'By labeling a commission a foreign service fee rather than an additional commission, Heinold deceived the plaintiff class into believing the foreign service fee was an additional separate charge Heinold necessarily incurred and paid to third parties in [foreign options] transactions.'

"The Appellate Court applied similar reasoning in Bernhauser. The plaintiff in that case bought a car and an extended service contract. In the itemization of the total price, the defendant listed the price of the extended service contract as 'Amounts Paid to Others for You.'

"The plaintiff alleged that the defendant paid only part of the amount shown to a third party, keeping the remainder as profit. The defendant argued there, as here, that the plaintiff alleged no deception because he received exactly what the defendant said he would get for the contract price. The defendant sold the plaintiff a car, with an extended service contract, for the price stated.

"The trial court dismissed the complaint. The Appellate Court held that the plaintiff had alleged a deceptive act: 'The deceptions that plaintiffs allege stem from the allegation that the dealerships did not, as they represented, pay the entire charge for the extended-service contracts to third parties but, instead, retained substantial portions of the charges. The dealerships' argument is irrelevant to plaintiffs' allegations, and, accordingly, we ignore it.'

"Here defendants listed the 'Net Sale Fee' as $12. Defendants indicated an exchange rate of 9.71 pesos to the dollar, without indicating that they paid much less than $100 for the 971 pesos. Defendants' description of the transaction would lead a reasonable consumer to believe that defendants retained only $12 as their fee, and they paid $100 to others in exchange for the 971 pesos. We find that Jose has adequately pleaded a deceptive act.

"Defendants contend that we should follow several federal cases concerning facts very similar to those Jose alleged here. In re Mexico Money Transfer Litigation, 164 F.Supp.2d 1002 (N.D. Ill. 2000), involved allegations that the defendants advertised that the plaintiffs could '[s]end up to $300 to Mexico for only $15.' The defendants charged a $15 fee, and they retained substantial additional profit by buying the number of pesos delivered for much less than the amount paid. The parties to that case reached a settlement, and some members of the class of the plaintiffs objected to the settlement.

"The trial court found the multimillion-dollar settlement fair. The court evaluated the strength of the various claims and found all of them vulnerable.

"The court reasoned: 'At the time of each of the challenged transactions, the class members received a receipt that sets forth the fee paid for the exchange, the exchange rate offered by defendants, and the number of pesos that were to be conveyed to the recipient in Mexico. Although they acknowledge that the receipt does not disclose the fact that defendants are able to purchase pesos at a more favorable exchange rate, defendants argue that no such disclosure is required. As in any other commercial exchange, defendants argue, they are entitled to recover a profit on their services without disclosing the amount of that profit.

" 'Absent a legal requirement that information be disclosed, there is ordinarily no claim for fraud based on non-disclosure of the information.'

"The court of appeals affirmed. In re Mexico Money Transfer Litigation, 267 F.3d 743 (7th Cir. 2001). First, the court estimated the value of the settlement at somewhat more than $40 million, and then the court held that the claims did not merit any greater settlement.

"The court added: 'But since when is failure to disclose the precise difference between wholesale and retail prices for any commodity "fraud"? Neiman-Marcus does not tell customers what it paid for the clothes they buy, nor need an auto dealer reveal rebates and incentives it receives to sell cars. Nothing in this transaction smacks of fraud, so the settlement cannot be attacked as too low.'

"The trial court here apparently relied on this reasoning in deciding to dismiss the complaint.

"Federal courts, like Illinois courts, have recognized that misleading descriptions of transactions can violate the act. In Alexander v. Continental Motors Werks Inc., 933 F.Supp. 715 (N .D. Ill. 1996), the plaintiff alleged that an automobile dealer violated the act when it failed to disclose that it profited from an 'upcharge' on a maintenance service fee. The court denied the motion to dismiss the claim, despite the fact that the plaintiff received the agreed car with the agreed service contract for the agreed price.

"Here, Jose has alleged a similarly deceptive practice. Defendants advertised that they would send $100 to Mexico for a $12 fee. On the transaction slip they indicated a 'Net Sale Fee' of $12. The plaintiffs in Alexander and Bernhauser had reason to believe that the amounts indicated for the service contracts corresponded to the cost to the dealers of those contracts, just as the plaintiff in Heinold had reason to believe that the 'foreign service fee' represented a cost to that defendant. Jose here had similar reason to believe that the pesos sent to Marisela cost defendants $100, and the $12 'Net Sale Fee' indicated the portion defendants would retain. The allegation that defendants paid less than $100 for the pesos suffices to allege a deceptive act here.

"In terms of the examples the federal court used in Mexico Money, imagine a shoe salesman who says, 'for a $5 fee, I'll sell you a $50 pair of shoes.' On the transaction slip he shows a 'Net Sale Fee' of $5 and shoes for $50, for a total price of $55. If the seller purchased the shoes for $40, he has described the transaction deceptively. His net is $15, not the $5 represented. While no law requires the seller to disclose his profit, if he represents a specific amount as his net without disclosing that he earns further profit on the transaction, he has acted deceptively.

"We find Jose's similar allegations regarding the transaction here sufficient to describe a deceptive act. Accordingly, we reverse the judgment entered in favor of the defendants, and we remand for further proceedings in accord with this opinion."

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