G7, Neovi and Qchex.com file appeal challenging FTC Novel legal theory

Source: G7 Productivity Systems

G7 Productivity Systems ("G7") announces that G7, Neovi, Inc. d/b/a Qchex.com ("Neovi" or "Qchex") and their respective officers named below (collectively herein "Defendants") have filed an appeal with the Ninth Circuit Court of Appeals on January 16th, 2009.

In September 2006, the Federal Trade Commission ("Commission") filed a suit alleging that the marketing and sale of Qchex check creation and delivery software ("Qchex Software") violated federal law because the Qchex Software caused harm to consumers. The Defendants contested this allegation, saying that Qchex Software allowed consumers the benefit of creating and delivering their own checks to third parties through an economical online service without the hassle of writing out and mailing their own bank checks. Neovi and G7 are separate, distinct and independently owned enterprises. Neovi operated Qchex.com and G7 was an advertiser on the Qchex.com website.

In an effort to inform users and handle frequently asked questions (FAQ) online, checks created by consumers using the Qchex Software were marked with the Qchex.com name. These checks were otherwise indistinguishable from standard paper checks. The resulting visibility provided an easy target for aggrieved consumers who were victims of fraud from unidentified third parties and the Commission, which sought to hold the Defendants accountable for the third party identity theft.

Initially, the United States District Court for the Southern District of California ("District Court") denied the Commission's motion for a preliminary injunction, holding that the Commission's suit was likely to fail. In September 2008, however, the District Court granted the Commission's motion for summary judgment ("Order") and held the Defendants liable for the acts of unknown, unaffiliated third parties who intentionally and unlawfully used Qchex Software to perpetrate fraud on consumers. The Order provides for $535,358 in monetary relief, which constitutes Qchex's gross revenues, not consumer injury, and orders the Defendants to retain third party validation services to gather substantial sensitive and personal data and authenticate online users.

The Defendants were not found liable for fraud or for participating in any fraud, and no such allegations were made by the Commission. The fraud was committed by identity thieves, who are unknown and were otherwise not parties to the action. The Defendants firmly believe requiring increased personal data disclosures by consumers will increase fraudster driven identity theft, and will eventually cause more - not less - consumer harm.

"The District Court's Order does not conclude this litigation. The Defendants filed an appeal on January 16, 2009, requesting that the Ninth Circuit Court of Appeal ('Appellate Court') review and reverse the District Court's decision. The appeal challenges the Commission's legal theory, adopted by the District Court, that an uninvolved third party which offers a technologically advanced check service for the benefit of consumers and businesses alike can be held liable for the acts of unknown third parties who use fraudulent information stolen from consumers to create checks through the Qchex Software service," said Michael L. Mallow of Loeb & Loeb, who is joining the defense team. "Particularly troubling is that the monetary relief claimed and ordered in this case is not authorized under the FTC Act and is an example of the FTC trying to expand its enforcement powers beyond that granted by Congress. Based on existing law and court precedent directly addressing the issue, the Defendants should not and cannot be held responsible and financially liable for individuals over whom it has no relationship and no control, especially when the Defendants did not receive any money from consumers who were injured as a result of the third-party frauds."

"We are deeply sympathetic to identity theft victims and do not condone any form of payment fraud. We are fighting this decision because it is bad for business and bad for consumers. It sets a dangerous precedent by shifting the blame for fraudulent conduct from the fraudsters themselves to unwitting business owners with legitimate businesses who have no involvement or connection with these fraudsters. Under this ruling, all business owners around the country are at risk if their goods and services are used in the course of fraudulent activity. We cannot stand idly by and accept this decision without further judicial review," says Thomas Villwock, Ph.D., former CEO of Neovi, Inc.

James Danforth, Executive VP & CFO of G7, added, "Creating a validation process that prevents individuals who have stolen consumer personal and financial information is extremely difficult and complex. Short of checking a government-issued identification for each person, most validation procedures are going to be vulnerable to potential fraud when a consumer's identity and financial information has already been stolen. The validation procedures themselves can be circumvented using a person's stolen personal information. In addition, the potential danger of a validation process which requires consumers to provide additional personal information is that more sensitive consumer information is obtained, which could be sold without consumer consent or stolen by fraudsters."

Qchex Software was created because electronic check creation and delivery compatible with existing U.S. paper check processing systems is a beneficial step into the future and will ultimately eliminate handwritten or manual check processing or physical mailings. Like the advent of electronic downloads in the music industry and electronic tax filing in the financial services industry, electronic check services are inevitable. These electronic services reduce the costs of mailing, provide consumers and businesses with more flexibility in withdrawing funds from financial institutions without wasting or having to create new pre-printed checks, and speed delivery.

The Qchex appeal is currently pending. While the Defendants await the Appellate Court's decision, Qchex's services were voluntarily suspended in 2007 and are undergoing redevelopment by an international business entity holding ownership in the Qchex domain.

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