A number of tech news outlets reported a Federal Trade Commission memo filed this past Thursday in an ongoing case in U.S. District Court (Southern District of New York) against a firm called BlueHippo. The FTC, which had successfully reached a settlement with the firm in April 2008, alleges that the terms of the agreement have been violated, and attorneys for the FTC are not amused — they are seeking restitution for customers, as well as a ban to prevent the company from offering financing with goods or services, selling consumer electronics, and regulating its refund practices.
BlueHippo touts itself as a consumer electronics seller, offering weekly payment plans and financing options without a credit check. For products which offer the payment plan and finance option, the customer agrees to pay an initial fee plus 52 weekly payments, and after 6 to 13 weeks’ worth of payments, BlueHippo will ship the product, as if it had been traditionally financed. In fact, they even offer to report your payment history to the trio of credit reporting agencies if you want the good karma on your report. Their FAQ states that they are not a rent-to-own or leasing company.
Before getting into the current legal tussle in U.S. District Court, let’s consider a few things:
- At a minimum, you’re putting up an initial fee plus 6-13 weeks’ worth of payments before they order your computer. This alone is playing with fire — unlike Kmart, you don’t get to hand over the physical product at the store, and you have no way of verifying that they physically have your product as you make the payments.
- The people at BlueHippo don’t know what the $*&# layaway means. (Clue: get a dictionary.) Consider the following sources:
- Oxford English Dictionary: the word “lay-away” has a vague definition in the 1997 update, nothing more. Unusual, so we take a quick trip to Wikipedia to see if there might be a geographical (i.e. U.S./U.K.) difference in spelling.
- Wikipedia: now we find a more specific definition, but it’s Wiki…so not using it as a valid source. However, it does point out that there is a different term for some countries, including Great Britain. Time to head back to the trusty OED with “lay-by”…
- Oxford English Dictionary revisited: the word “lay-by,” according to definition 2b, specifically states that the customer pays an initial deposit and then pays the full price over time, while the seller holds the product until it is fully paid off. This is not what BlueHippo is doing — it is letting customers have their computer with less than 25% of the product paid off, not to mention they don’t hold the computer while the layaway payments are being made. They do state that they are financing the balance of the purchase price, but that means the customer would never make 52 “layaway” payments, only 6 to 13.
- They expect users to use their Social Security number and mother’s maiden name as their username and password on their online account system. In fact, they let you retrieve “forgotten” login information given certain combinations of the following:
- SSN (!)
- Home phone number
- House number
- ZIP Code
- Bank account number (!)
- Password (!)
- Their computer prices are only slightly higher than the manufacturers’ MSRPs. For instance, take the HP Mini 5101, which is sold in two configurations at $399 and $425. The BlueHippo price is $466.76 — it’s unclear which model is being sold, since they don’t provide specific model numbers — which is a 10% to 15% markup on MSRP. Using the cheaper model, HP would finance the same laptop over 24 months with a $1 buy-out option for $19/mo. or $456 total. Since BlueHippo is offering a shorter term, one would expect the BlueHippo price to be lower.
So now on to the legal fight between the FTC and BlueHippo. The firm had previously been sanctioned for not shipping products when promised and not disclosing that installment payments were non-refundable. To ensure that they were in compliance with the settlement, the court ordered BlueHippo to provide a compliance report and various other documents; the court found them in contempt and forced BlueHippo in April 2009 to cough up $12,500 in sanctions (five days) before it filed the compliance report, and $20,000 in sanctions (four days) in May 2009 before providing responsive information to FTC requests. An information request in May 2009 remains unanswered, despite the Court ordering BlueHippo to produce responsive information.
These FTC requests provide insight into why the commission has been so aggressive in pursuing legal action. In the memo filed on Thursday, the FTC discovered that customers “pay an activation fee (generally $99) and then make weekly payments of approximately $35 or bi-weekly payments of approximately $70 for a year.” You don’t even need to do fuzzy math to realize that those numbers add up to a very expensive computer. (It’s $1919, given the previous numbers).
Of over 36,000 computer orders that the FTC examined through responsive documents, only one was financed. However, the FTC doesn’t even consider that single computer shipment to be accurate — according to the memo, “The shipment of this computer was most likely in error [...]. The consumer [...] only paid $185.32 towards a computer with a total sale price of $2,515.00 and never entered into a financing agreement.” BlueHippo finally shipped computers once the company was found in contempt, ordering most of the computers during the three-month reporting period over the course of just seven days, or over 3,300 computers. Thrown bone, meet FTC and court.
Then there’s the matter of the firm’s return policy. Consider the following policy:
- Cash refunds within 7 days, store credit after 7 days. Cancellations permitted until order is shipped. Second part is pretty standard; first part is restrictive (usually see 14-30 days on refunds) but not outrageously so.
- Store credit cannot be used on shipping, handling, and taxes. Anyone who has used a gift card knows this is not standard. This is not disclosed on the website.
- Costs not covered by store credit must be paid in advance via money order. Yes, they really don’t care that you’re buying a $14 gaming controller and have $300 in credit — you’re paying the shipping, handling, and taxes out of your own pocket, plus the money order fee, and they won’t ship until they receive your payment. Again, not disclosed on the website.
- Only one order paid with store credit will be accepted at a time; order must be delivered to customer before a new order can be placed. [There's just nothing to be said for this.] Not disclosed on the website.
Like the computer orders, the majority of customers who have store credit didn’t agree to paid the extra fees to use their store credit, and the majority of those who did order with store credit never had their orders fulfilled.
In addition, the FTC alleges that BlueHippo was not permitted to represent itself as a financing company or extend credit on the basis of preauthorized bank account transfers. The company apparently logged revenue of at least $15.1 million on unfulfilled orders, a truly shocking amount. It looks like BlueHippo has hit the end of the road, especially after thumbing its nose at the court multiple times, but then again, consider how long it took for SCO Linux (ding dong, la de da de da) to finally bite the dust.
Computers have become relatively inexpensive in the past year or two, especially due to the success of the so-called “netbook” market segment. (I don’t consider most of the computers in this group to be netbooks, but clearly the retailers disagree. It’s an argument left for another post.) It’s not uncommon to find a laptop in the netbook category for $300, and desktops can still be found in the sales circulars for $400 and $500. You’d be better off saving ahead of time than playing around with layaway and financing if you just need a cheap computer for the Internet, e-mail, and a few documents here and there. It isn’t worth risking your money with firms like this out there, and there are better ways to fix your credit, if that’s the goal.
