A federal lawsuit over the use of fraud alerts on consumer credit reports has raised questions about how the security measure is meant to be used, and some executives worry that misuse could render ineffective one of the industry's more potent antifraud tools.
Experian Information Solutions Inc. announced Thursday that it has sued LifeLock Inc., a Tempe, Ariz., company that sets up fraud alerts for consumers. These alerts require all lenders to contact applicants before granting credit and erect a significant additional hurdle for identity thieves.
However, Peg Smith, an executive vice president at Experian, said that LifeLock's service could create an environment of "never cry 'wolf'," in which lenders might pay less attention to a potential deluge of consumer fraud alerts.
At the heart of Experian's complaint is the question of how alerts are meant to be used. Ms. Smith said Experian's position is that they were intended for use by people who have been victims of identity theft or have reason to think they could be. Placing temporary alerts on their credit reports would tip them off if anybody, authorized or not, tries to apply for credit in their name.
But offering alerts to any consumer who wants one could "bog down the lending process and desensitize lenders," she said, through overuse of a tool intended only for "alerting a fraud victim and a potential fraud victim," she said. The alerts expire after 90 days.
In its lawsuit, filed last week in U.S. District Court in California, Experian also alleged that LifeLock's service violates the Fair Credit Reporting Act, which it says bars companies from filing fraud alerts on behalf of consumers.
"LifeLock has surreptitiously placed hundreds of thousands of fraud alerts on Experian's files by posing as the consumer," the complaint said. "Once an initial fraud alert is placed, it triggers costly statutory obligations for consumer reporting agencies such as Experian."
LifeLock charges people $10 per month to set up a fraud alert through the three main credit bureaus, Experian, Transunion LLC, and Equifax Inc.
Experian also alleged that LifeLock's advertising is deceptive and false for failing to inform consumers that they can initiate alerts themselves for free.
Ms. Smith said Experian and other credit bureaus spends millions every year handling alerts for LifeLock customers.
Todd Davis, the chief executive and a co-founder of LifeLock, conceded in an interview Thursday that the three credit bureaus "bear some costs" for processing fraud alerts, as well as for generating customers' credit reports, which is typically triggered when his company sets up an alert.
However, he also defended his company's role in the credit industry, which he said was controlled by a monopolistic "triumvirate" of credit bureaus. Experian and the other bureaus "don't want any new intruders," he said; they are just "trying to throw something into the road as we grow."
"The Goliath of Experian has met [its] David in LifeLock," he said, "because we will vigorously defend our consumers' rights to have these alerts set and renewed every 90 days."
Mr. Davis called the filing a "nuisance suit" aimed at preventing new entrants from providing other credit monitoring and fraud alert services already offered by Experian, a Costa Mesa, Calif., company. The service honors the "spirit of the law," he said, because LifeLock acts as an authorized third party for consumers who purchase the alerts.
However, he also said he hopes to collaborate with Experian to automatically deliver requests for alerts, which could dramatically trim the credit bureau's processing costs.
Gilbert T. Schwartz, a lawyer at Schwartz & Ballen LLP, said, "What LifeLock's product is doing is distorting what was intended by Congress when they authorized consumers to add fraud alerts." However, he said he was unsure whether Experian has legal standing to sue LifeLock on this ground. Such a suit might need to be filed by consumers, he said.
Experian is seeking reimbursement for its costs to handle alerts initiated by LifeLock and compensation for damages. It also wants an injunction barring LifeLock from placing any more fraud alerts.
LifeLock was started three years ago and already has placed about 700,000 fraud alerts for consumers.Mr. Davis played down claims made in the Experian complaint that the other co-founder of LifeLock, Robert Maynard, had been arrested on charges of financial fraud and barred by the Federal Trade Commission from "certain credit reporting-related activities." Mr. Davis said Mr. Maynard got a "no-fault" judgment from the FTC and left the company in June.
An FTC spokesman declined to comment on the complaint. Spokespeople fopr Equifax and Transunion would not comment on the lawsuit.
