December 20, 2017 Practice Points

Joint and Several Liability on Payment Processor for Substantially Assisting Deceptive Telemarketer Opinion Upheld

Opinion underscores the need for rigorous underwriting and risk-monitoring to detect and prevent consumer fraud by their merchants

by Edward A. Marshall and Morgan E. M. Harrison

The Federal Trade Commission (FTC) recently obtained an appellate victory that underscores the severe repercussions that can befall payment processors and independent sales organizations (ISOs) that provide services to "high-risk" merchants.

In FTC v. WV Universal Mgmt., LLC, No. 16-17727, 2017 WL 6346656 (11th Cir. Dec. 13, 2017), the FTC alleged that a telemarketing scheme, known as "Treasure Your Success," gained and maintained access to the payments grid through Universal Processing Services of Wisconsin, LLC (UPS), despite the presence of multiple red flags (e.g., a high-risk business model, extremely high chargeback ratios, twenty-percent reserves, and failure to abide by internal UPS policies). It contended that UPS provided "substantial assistance" to the telemarketers while knowing or "consciously avoid[ing] knowing" of multiple violations of the Telemarketing Sales Rule (TSR), 16 C.F.R. Part 310. Based on those allegations, the FTC sought relief under Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), which authorizes the award of equitable relief, including disgorgement and restitution, and Section 19 of the FTC Act, 15 U.S.C. § 57b, which authorizes a court to redress consumer injury.

Several defendants, including the telemarketers themselves, settled quickly for either no money or relatively miniscule sums. But UPS chose to fight, claiming that the individual who facilitated the telemarketers and allegedly turned a blind eye to the red flags was acting in violation of company policy. Ultimately, the court rejected that argument and awarded the FTC summary judgment. When asked to fashion a remedy, the court—while never finding that UPS was part of a "common enterprise" with the telemarketing defendants—held that UPS was responsible for the entire consumer harm caused by the telemarketers under Section 13(b) of the FTC Act. That is, while the fraudulent telemarketers themselves settled for virtually nothing, UPS, which had netted just a few thousand dollars in processing fees (before giving over $400,000 in refunds to injured consumers pre-judgment), was held jointly and severally liable for $1.7 million—the totality of the telemarketers' processing activity minus only chargebacks and refunds.

UPS appealed, arguing that the district court could not impose joint and several liability since it also found that UPS was not part of the common enterprise of the telemarketing defendants. The Eleventh Circuit seemed to sympathize with UPS's position, questioning how the district court had arrived at such a severe award and directing the district court to explain why joint and several liability was warranted despite the fact that its common enterprise finding did not extend to UPS. See FTC v. HES Merchant Servs. Co., No., No. 15-11500, 2016 WL 3254652, at *1 (11th Cir. June 14, 2016).

On remand, the district court doubled-down on its holding, reasoning that UPS could be jointly and severally liable by virtue of its violation of the TSR alone. Specifically, the district court held that by violating the TSR, UPS violated the FTC Act itself and was therefore subject to its host of equitable remedies. Once again, UPS appealed.

This time, however, the Eleventh Circuit showed no sympathy to UPS. The appellate court agreed that joint and several liability is appropriate where a processor substantially assists its merchant in violating the TSR, explaining:

The substantial assistance rule itself states that any violation of it constitutes a violation of the TSR. 16 C.F.R. § 310.3(b) . . . . Similarly, the Telemarketing and Consumer Fraud and Abuse Prevention Act states that any violation of a rule promulgated thereunder (such as the TSR) constitutes a violation of the FTC Act and subjects the violator to its penalties. 15 U.S.C. § 6105(b). Finally, Section 13(b) of the FTC Act authorizes "the FTC to seek, and the district courts to grant, preliminary and permanent injunctions against practices that violate any of the laws enforced by the Commission," and this includes the power to grant equitable monetary relief of the kind sought here. Gem Merch. Corp., 87 F.3d at 468; 15 U.S.C. § 53(b). Therefore, by violating the TSR, Universal violated the FTC Act and is subject to its penalties.

WV Universal Mgmt., 2017 WL 6346656, at *4.

The Eleventh Circuit also added that it was not concerned that its holding would lead to any unjust results. "The requirement of a culpable mind," it noted, "assures us that joint and several liability will not result in collateral damage to innocent third parties."

Advocates for the payments industry will continue to question whether joint and several liability for processors and ISOs—even those bearing some culpability—disproportionately allocates responsibility to actors who played bit parts, and received minor rewards, in merchants' deceptive conduct. But with the Eleventh Circuit's decision in WV Universal Mgmt., processors and ISOs are well advised to vigilantly scrutinize new merchant applications and police merchants' conduct.

Like with Twain, rumors of Operation Choke Point's demise have been greatly exaggerated.

Edward A. Marshall is a partner and Morgan E. M. Harrison is an associate with Arnall Golden Gregory LLP in Atlanta, Georgia.


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