Is the Better Business Bureau a protection racket?

How to protect your pockets.
Dec. 7 2010 7:38 PM

Busted Watchdog

Is the Better Business Bureau a protection racket?

Better Business Bureau.

If you want to check up on the bona fides of your plumber or your electrician, you contact your local chapter of the Better Business Bureau. Lately, though, news organizations have been questioning the BBB's own bona fides. The BBB's rating system, they say, is at best uninformed and at worst corrupt.

Until recently, the BBB had a reputation on par with motherhood and apple pie. The Better Business Bureau is a national network of local nonprofit groups that evolved during the early years of the 20th century to expose fraud—initially mainly patent medicines and stock swindles—in America's burgeoning advertising industry. From the start businesses were encouraged to join, but the imperative was that honest businesses had an interest in cracking down on dishonest practices that gave unscrupulous competitors an unfair advantage.

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In these early days, explains Kerry Ellen Pannell, associate professor of economics and dean of faculty at DePauw University (on whose 2002 paper "Origins of the Better Business Bureau: A Private Regulatory Institution in the Progressive Era" I rely here), BBBs spent most of their time either suing fraudulent businesses or lobbying state and local governments for stiffer consumer protections. Member businesses' names were made public in local BBBs' annual reports, but this information was not widely disseminated. Until the 1950s member businesses weren't permitted to publicize their BBB membership; BBB ratings ("satisfactory" or "unsatisfactory" and then, starting in 2009, letter grades) came later still. The BBBs recognized that such publicity might corrupt businesses into using their membership fees to bribe local BBBs. Worse still, it might corrupt local BBBs into using membership fees to shake down businesses, effectively turning the BBB into a protection racket.

That's not far from what has happened, according to a January 2009 article by David Lazarus in the Los Angeles Times and a November 2010 story by Brian Ross of ABC News' 20/20. (Dan Mitchell also had a good story  about this July 20 in Slate's late, lamented sister publication The Big Money.) Both the L.A. Times and the 20/20 stories led with the mysteriously poor grades the BBB gave restaurants owned by chef-to-the-stars (and BBB nonmember) Wolfgang Puck—a B-minus for his flagship Spago in Beverly Hills, according to the L.A. Times, and an F for some of his other restaurants, according to 20/20. On 20/20,Rossfurther reported that two other nonmember businesses—the Ritz-Carlton in Boston and Disneyland in Anaheim, Calif., (which, Ross duly noted, is owned by ABC's corporate parent)—had both received an F. Puck told 20/20's Ross that the BBB was punishing him for not joining. "If you become a member," Puck said, "[they think] you should get an A. But if you don't pay, it's very difficult to get an A." It was an outrageous accusation, but Ross and the L.A. Times' Lazarus found evidence to support it.

Lazarus reported that in searching through the BBB's North American database he found that "the roughly 400,000 accredited businesses, even those that get numerous complaints, very often receive higher grades than unaccredited companies with spotless complaint records." When Lazarus asked Stephen Cox, then-spokesman for the Council of Better Business Bureaus, to explain, Cox's answer wasn't reassuring: "There is no guarantee that an accredited business will get an A-plus." (Nearly two years later, Cox, who had since been promoted to chairman, had a better answer for Ross: "We have more than 500,000 nonaccredited businesses who have A ratings.") But Cox conceded to Lazarus that you couldn't qualify for an A-plus unless you were a member company—a criterion the BBB Web site  didn't bother to acknowledge. In fact, Lazarus reported, any company could raise its grade by one-half (from B-minus, for instance, to B) merely by joining.

Or maybe by more than one-half. Cameras from 20/20 rolled while two small-business owners phoned the Southern California BBB chapter to complain about their ratings. Both were told by BBB telemarketers that if they joined the BBB their ratings would improve. Both agreed to join, giving their credit card numbers, and both saw their ratings rise within 24 hours—a C and a C-minus each upgraded to A-plus. "That is in violation of our sales policy," said Cox when confronted with this information. "I believe they are anomalies."

Most hilariously, Ross reported (as The Big Money's Mitchell had earlier) that a man who goes by the pseudonym "Jimmie Rivers," says he's a former CBS affiliate news director, and runs a blog devoted to lacerating the BBB teamed up with some buddies to pay $425 to register Hamas with the Southern California chapter of the BBB. The terrorist group got an A-minus. For the same price, "Johnnie" scored an A-plus for the white supremacist Web site Stormfront, registering it under the name "Aryan Whitney." Cox replied, "We made mistakes."

On Nov. 10 Connecticut Attorney General and U.S. Senator-elect Richard Blumenthal wrote the Council of Better Business Bureaus to complain that "BBB's rating system is based, in part, on the payment of inadequately disclosed accreditation fees." He urged the BBB to "de-couple its ratings entirely from the paying of dues." Blumenthal had been angered to discover that a business called Custom Basements of Connecticut, which won an award from the Connecticut BBB at a ceremony where he was guest speaker, went bankrupt shortly thereafter, taking with it tens of thousands of dollars allegedly collected for work never done and occasioning a lawsuit from, yes, Blumenthal's own office.

The Council of Better Business Bureaus  cried uncle  one week after receiving Blumenthal's letter (which was also one week after the 20/20 report). It agreed to end its practice of giving additional rating points merely for being a member and promised to engage a third party in a review process. Letting bygones be bygones, it replaced the Boston Ritz-Carlton's F grade with a (previously unachievable) A-plus and Spago's B-minus with an A-minus. (The Southern California BBB had already changed Disneyland's F to an A after bloggers complained; that, too, is now an A-plus.) Even so, Blumenthal stated in a press release that he still found BBB ratings "unreliable and suspect."

George Gombossy, a former business editor of the Hartford Courant who now has a blog called CT Watchdog, has been covering the BBB's problems for a long time. He recommends, among other reforms, that the Council of Better Business Bureaus scrap its letter-grade system and return to its former "Satisfactory" and "Unsatisfactory" rankings; require that all complaints against a BBB board member's firm be handled by a third party (what, they aren't already?); limit salaries for chapter presidents to $175,000 (right now they go up to an astonishing $410,000); and "fire the entire management team" at the Southern California BBB, where the worst abuses have been discovered. These changes all sound reasonable to me. But even if the Better Business Bureau does all these things, it will probably be a long time before it gets its good name back. Too bad the BBB can't lay down a couple hundred to buy membership in ABC News, the L.A. Times, or the Connecticut attorney general's office.

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Timothy Noah is a former Slate staffer. His  book about income inequality is The Great Divergence.