The shoplifter was caught red-handed at the California Walmart and taken to a back room by a store employee. Until recently, the next step might have been a call to the police, but, instead, the shoplifter was offered another option.

He was shown a short video about how terrible a criminal record would be. He was told that if he confessed to his crime and agreed to participate in a privately run diversion program—six hours of online behavior therapy—he could avoid arrest, a fine or worse.  The cost was $400. The shoplifter would be billed. He signed up.

Later, it turned out, he didn’t have the money, not even the $50 minimum installment required to keep his case out of court. And while eventually he did end up in court, it was not as a defendant but as evidence in a 2015 suit brought by the San Francisco City Attorney, who asserted that the tactics used by the company, Corrective Education Company, were illegal. In fact, the City Attorney, Dennis Herrera, equated CEC’s business model with “a Hobson’s choice, which is really no choice at all.”

“This company has set up a private, pseudo-justice system that is based on profit,” he said, calling the program “textbook extortion.”

A Superior Court judge in San Francisco agreed.

In a ruling in mid-August, Judge Harold Kahn, barred CEC from operating in California, where the company has about 20 percent of its business.

The City Attorney’s office says it is in the process of working out an agreement with CEC to continue operations in California but would not disclose details.

Neither CEC nor Walmart responded to requests for comment. In a response to the lawsuit, filed  two years ago, CEC issued a statement calling it “without merit.” After Judge Kahn’s ruling, the company posted on its blog that it was “a sad day for Californians” and predicted that “police will be inundated with calls from retailers.”

Walmart, which operates 4,600 retail outlets in the U.S., including Sam’s Club and other stores, says it has placed CEC programs in at least 2,000 stores across the country as a way to decrease losses from shoplifting. The National Retail Association has sponsored studies that indicate shoplifting is a substantial cause of store losses.

CEC does not staff the stores. But Walmart has said in the past that it hoped  the diversion program would allow it to gradually cut back on security personnel. It has also said that contracting with CEC was a way for the company to give back to the community by drawing on fewer community resources, namely the police. Wal-Mart representatives say that the programs in its stores have reduced police calls by 35 percent.

CEC has said its business provides “restorative justice for retail theft,” offering a “second chance at accountability.” The company’s motto, emblazoned at the bottom of debt-collection letters, reads, “Together we are building a more responsible society…One individual at a time.”

While other big box retailers rely on CEC, or its competitors, Walmart remains the largest user of these shoplifting diversion programs at least in part because the chain has suffered from highly publicized increases in crime in and around Walmart locations.

CEC, which was started in 2011, markets itself to many stores as an effective and cost-free way to manage theft, advertising itself as completely “offender funded.” It provides the iPads, video software and scripts that store employees use to recruit shoplifters to the diversionary program. The employees also enter the names of the offenders into a proprietary database. This component of CEC is a big selling point to retailers, because it lets them track repeat offenders, who can then get sent straight to the cops.   

The CEC  program isn’t correlated to the cost of merchandise, so someone stealing polo shirts and a jacket for work from Bloomingdale’s pays the same as someone lifting a few toiletries from Walmart. The video, according to the San Francisco City Attorney’s Office, also fails to properly explain the law. Instead, the City Attorney says,  it frightens viewers by talking about the high cost of hiring a defense lawyer and makes no mention of  constitutional rights or diversion programs available through county DA offices.

CEC says it has been highly successful, claiming only two percent recidivism among people who complete the program and a 90 percent success rate in getting people to sign up for the service after viewing the video. At the same time, the company acknowledges that the people who enter the program are often the least able to pay for it.

CEC acknowledged in its court filings that the company has never called law enforcement to turn over people who cannot pay or do not complete the program. According to data CEC provided in the course of the lawsuit, about 45 percent of people who sign an agreement with CEC never pay the fees.

Akiva Freidlin, a lawyer at the Southern Center for Human Rights who focuses on profiteering in the criminal justice system, said, “Pay-for-play ‘pretrial diversion’ schemes are one of the many avenues that allow private companies to earn a profit by extracting coerced ‘user fees’ from people ensnared in local criminal justice systems.”

But some groups remain supportive of CEC, including the National Retail Federation, which praises CEC’s program as a good way to solve the problems associated with shoplifting, with an emphasis on the utility of data collection to prevent repetitive thefts and with a nod to the common cause of social responsibility.

Law enforcement, too, is supportive in most states, seeing CEC as an opportunity for it to unload some of the costs associated with criminal justice and crime prevention. WalMart has claimed that there was a 35 percent decrease in police calls after it began the CEC program.

While it’s not yet clear what the effect of the lawsuit will be, there are already other jurisdictions where law enforcement has looked askance at CEC’s business practices. The prosecutor in Tippecanoe County, Indiana, Patrick Harrington, told a local newspaper that he strongly disagreed with Walmart’s use of CEC programs, arguing that they are “open to abuse” and should be illegal. Harrington says he asked the State Attorney General’s office to investigate. The Minnesota legislature is considering a bill that would make CEC-type programs illegal in the state.