Lifelock Getting Picked

Since February 2008, Lifelock, the company that guarantees that your identity will not be stolen has been hammered by legal problems. Lifelock charges consumers $10 a month for the privilege of allowing the company to manage your Fair Credit Reporting Act right to a free initial security alert and which automatically opts out a consumer from pre-approved credit offers for six months. The Lifelock website states:

LifeLock, the industry leader in proactive identity theft protection, offers a proven solution that prevents your identity from being stolen before it happens. We'll protect your identity and personal information for only $10 a month - and we guarantee our service up to $1,000,000. Lifelock website
A consumer must know what it is they are shopping for and buying. Part of the education of the consumer comes from the vendors or retailers where the consumer shops. Lifelock, as quoted above claims that their product “prevents your identity from being stolen before it happens”. Prevents? Come again? It would make sense to say, in the careful speech of legalese, “reduces the likelihood of identity theft” or “works to protect your identity”. The word “prevents” clearly implies a non-conditional protection. A consumer reading this, if he or she is able to overcome their natural inclination to say “too good to be true” might jump at the opportunity to purchase such protection.

But can Lifelock truly prevent your identity from being stolen. Three legal actions aimed at Lifelock beg to differ. First, on February 13, 2008, the Montana Attorney General, Mike McGrath opened a civil investigation of Lifelock based upon the appearance of CEO Todd Davis’s Social Security Number in a full page advertisement in the Great Falls Tribune. Assistant Attorney General Jesse Laslovich is quoted as saying in an article in the same newspaper “… there also are some businesses cropping up that may only claim to protect people from identity theft”, pointing out the nature of Lifelock’s business is the utilization of no-cost initial security alert placed on the credit file by the three credit repository agencies upon request. An additional concern implied by the Attorney General is that the advertisement including Davis’s Social Security Number may itself be contributing to attempted identity fraud, “The Social Security number in the advertisement is registered to numerous people, Laslovich said. Thats probably because people see it and try to use it to open lines of credit, he added.” Great Falls Tribune

Lifelock’s second blow came from the credit repository Experian filing a civil suit in the Federal District Court of Central California announced on February 21.

Experian’s suit alleges that Lifelock is abusing the Fair Credit Reporting Act right to an initial security alert, essentially comparing the use of the alert in a permanent fashion to crying wolf. The Fair Credit Reporting Act states in § 605A (a)(1) that “… a suspicion that the consumer has been or is about to become a victim of fraud or related crime, including identity theft,…” is the definition of an initial alert’s purpose.

Experian also claims that Lifelock’s advertising is “false and misleading.” Another claim is that Lifelock’s ordering of credit reports for it’s customers (which are provided free of charge according to the Fair Credit Reporting Act when requesting an initial fraud alert, § 612. Charges for certain disclosures (d) Free disclosures in connection with fraud alerts ) is being conducted “without adequate disclosure”, meaning that consumers are unaware or are not told by Lifelock that the credit reports they receive are provided free by the credit repositories per federal law. Experian goes on to claim that companies are not legally able to place the fraud alerts for consumers which seems to be a stretch provided that consumers are authorizing the company to do so.

Experian’s most pertinent complaint involves the applying of initial fraud alerts without the imminent fear of or possibility of fraud. The credit bureau’s argument is that the protective nature of an initial security alert will be diminished if the alerts become too common place. Experian argues that creditors will essentially be forced to treat every initial alert as equal implying that eventually the alerts will be ignored.

Lifelock is counting on the practice that creditors will always place a telephone call to the consumer upon discovering the initial security alert. However, The Fair Credit Reporting Act does not require a creditor to make a telephone call to the consumer every time an initial security alert is found, but is permitted to “ take reasonable steps to verify the consumer's identity and confirm that the application for a new credit plan is not the result of identity theft” meaning that it is possible that the use of database to verify the personal identifying information of the consumer probably suffices to meet the requirements of the law. If the database does not reflect new fraudulent activity, the alert may not work. Another possibility is to mail a letter to the consumer. Experian seems to have a good point.
Fair Credit Reporting Act

§ 605A. Identity theft prevention; fraud alerts and active duty alerts [15 U.S.C. §1681c-1]

(h) Limitations on Use of Information for Credit Extensions

(1) Requirements for initial and active duty alerts-

(B) Limitation on Users

(ii) Verification. If a consumer requesting the alert has specified a

telephone number to be used for identity verification purposes, before

authorizing any new credit plan or extension described in clause (i) in

the name of such consumer, a user of such consumer report shall

contact the consumer using that telephone number or take reasonable

steps to verify the consumer's identity and confirm that the application

for a new credit plan is not the result of identity theft.
Lastly, on 28 March 2008 a class action suit was filed in Arizona against Lifelock alleging similar claims as the Experian suit:
The lawsuit alleges that the three-year-old company defrauds customers by offering services it cannot legally perform, and by touting a $1 million guarantee that the suit alleges is wildly misleading. press release

The class action suit based upon Arizona's Consumer Fraud Act and the Arizona Insurance Code alleges that Lifelock misleads the consumer by overstating the protection it affords and reiterates the Experian claim that Lifelock cannot legally order the consumer’s credit report. The class action suit also calls into question the highly advertised $1,000,000 guarantee. The press release reports that the guarantee’s actual language is:

LifeLock will not pay any losses directly to the consumer and does not cover consequential or incidental damages to identity theft. The guarantee is limited to fixing failures or defects in the LifeLock services and paying other professionals to attempt to restore losses.
So a consumer who does become a victim of identity theft at the very least can claim remuneration from Lifelock for professional identity restoration services, something that could have been purchased on a monthly basis for not too much more than Lifelock’s $10 fee from competitors of Lifelock.

Will Lifelock survive this legal onslaught? Are more suits or investigations coming? Only time will tell. What is for certain is that Lifelock’s attorneys are going to be very busy in 2008. Lifelock continues to secure funding from prominent industry financial leaders such as Goldman Sachs Group Inc most recently $25 million in January 2008.

How much of this last funding round will be spent in legal fees or payouts remains to be seen.