Judge Denies Proposed Settlement of DirectBuy Class-Action Suit

DirectBuyA Connecticut federal judge has rejected as "meager" the proposed settlement of a nationwide, class-action lawsuit against DirectBuy Inc. for fraudulent pricing practices.

"The court cannot conclude that this settlement falls within the range of reasonableness," U.S. District Judge Janet C. Hall said yesterday in a written opinion.

Judge Hall explained her decision by noting that the proposed settlement called for DirectBuy to provide free memberships worth some $3,000 each to approximately 800,000 class members.

"The best possible recovery...may amount to well over $2 billion," Judge Hall wrote. "In light of this best possible recovery, the Settlement Agreement -- which the court has calculated as being worth, at most, between $15 million and $27 million -- appears quite small."In late April, the attorneys general of 27 states, as well as those from the District of Columbia and Puerto Rico, objected to the proposed settlement, arguing in a 36-page amicus curiae brief that it "offers no real benefits to consumers.

"The proposed settlement is, in essence, a sales vehicle for defendants designed to drive current and former customers into membership renewal contracts and to the same manufacturers and suppliers from whom defendants have acknowledged receiving kickbacks and incentives," the brief stated.

DirectBuy promotes itself as an insider's buyers' club where members can purchase brand-name goods directly from manufacturers at wholesale prices. In addition to annual fees, members pay anywhere from $3,000 to $7,000 to join the privately held company's "clubs."

The 2009 lawsuit (Wilson et al v. DirectBuy, Inc., et al) accused the Indiana-based company of fraudulent misrepresentation, alleging it received tens of millions of dollars in kickbacks and incentives from suppliers and manufacturers, inflating the cost of its goods well above the advertised wholesale prices. The lawsuit accused DirectBuy of failing to disclose this arrangement to customers until early 2009.

DirectBuy spokesman Mike Georgeff told Consumer Ally in April the company was confident
Judge Hall would approve the settlement. While yesterday's decision was disappointing, he said it wasn't completely unexpected.

"We were disappointed to learn of Judge Hall's decision, but not entirely surprised given the great deal of publicity that has surrounded this case," Georgeff told Consumer Ally.

"We were hopeful for a quick resolution to this matter which would have ultimately benefited class members. While we disagree with the decision, we look forward to successful closure of the matters at hand, and will continue to work with the attorneys general of any state to ensure we remain compliant with all state consumer protection laws," he added.

The consumer advocacy group Public Citizen, which represented a class member who objected to the terms of the proposed settlement, applauded Judge Hall's decision.

Had the proposed settlement stood, the group said a statement, more than 836,000 class members would have been forced to relinquished "a broad set of claims" against the company in exchange for extended DirectBuy memberships.

"We are pleased that the judge agreed with our argument that the proposed settlement was essentially a coupon of little or no value to the class," Michael Kirkpatrick, the Public Citizen attorney representing one of the objecting class members, said in a statement. "Absent class members should not have valuable claims released in exchange for so little."

Public Citizen also cited other class-action suits against the company, which alleged a number of abuses, including high-pressure sales tactics to pressure consumers into spending thousands of dollars on DirectBuy memberships, as well as prices that often result in little or no savings compared to traditional or online retailers.

"Within the last several years, a number of lawsuits have been filed in addition to this one, accusing DirectBuy of misrepresentation, fraud, and coercion, " Judge Hall noted in her decision. Consumer Ally wrote about several of the lawsuits in an October 2010 feature on the company.

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