On Friday of last week, Lexington Law and related defendants filed a motion to dismiss a suit brought against them by the Consumer Financial Protection Bureau (CFPB).
The CFPB’s suit was filed in May of this year alleging Lexington Law relied on a marketing affiliate network that “used deceptive, bait advertising to generate referrals to Lexington Law’s credit repair service.” The CFPB also focused on Lexington Law’s referral fees, stating that the organizations failed to observe the mandatory waiting period required by federal law. As summarized in the complaint, “fees can only be collected after a certain period has elapsed and it has been demonstrated that the promised results have been achieved.”
Actions of Third Party “Hotswap” Partners
The primary argument in the motion to dismiss is that the alleged actionable allegations were actions of a third party, not the actions of the defendants. In other words, defendants argue that they cannot be indirectly liable for the actions of a third party because there are no facts showing that defendants inserted itself into how those third parties conducted their business.
According to the CFPB’s complaint, the third parties in question act as lead generators for defendants. For example, if the third party denies the consumer credit based on the consumer’s credit report, the third party will refer the consumer to defendants as an option to repair the credit report. In doing so, however, these third parties would mislead consumers. For example, they would offer products that don’t actually exist in order to deny the consumer and create the lead. The defendants’ motion to dismiss argues that the complaint provides allegations against the third party partners, but not against the actual defendants named.
The motion to dismiss also argues that “the Complaint all but expressly admits that CFPB does not have any facts that enable it to challenge any introducer relationship other than HSP1: alleging, in paragraph 71 at the start of the Complaint’s’ section on alleged deception by introducers, ‘[a]t least one, if not more, of Progrexion’s Hotswap Partners have made misrepresentations to consumers.’”
Additionally, the defendants argued for dismissal since the complaint does not allege that they had knowledge of nor assisted the third party’s deception toward consumers.
The motion to dismiss also throws in the argument that the CFPB is unconstitutionally structured. This issue brewed up in several courts throughout the country already, culminating in the U.S. Supreme Court denying a petition to hear the case in State National Bank of Big Spring v. Mnuchin back in January.
This suit is only one of many legal challenges currently faced by Lexington Law. Earlier this month, a jury found in favor of The CBE Group in its suit against Lexington Law, finding that the credit repair organizations mass dispute processes were fraudulent. While the litigation is not done yet, it is telling that a jury came to this conclusion. Lexington Law is also currently facing a RICO suit filed by Ad Astra Recovery Services, also alleging issues with the mass dispute process.
insideARM is following developments in all three of these suits and will provide updates as they come.