We wrote previously that for payment processors the death of Operation Choke Point was greatly exaggerated.  We also noted that a prior challenge to the FTC’s ability to impose joint and several liability on an executive for his former employer’s actions had failed. A recent appellate victory for the FTC reinforces both these points.  In FTC v. Universal Processing Services, 11th Circuit affirmed the district court’s imposition of joint and several liability on a payment processor for substantially assisting the Telemarketing Sales Rule (TSR) violations of its merchants.

Simply put, the court’s ruling affirmed that a payment processor can be held responsible for the total volume of sales processed for a merchant when the processor’s conduct amounts and unfair or deceptive practice under the Federal Trade Commission Act (FTC Act).  A violation of the TSR constitutes a violation of the FTC Act, which allows for penalties including equitable monetary relief.

What is significant here is that the lower court did not find that the payment processor was part of a common enterprise with the merchants who perpetrated the scheme. Instead, the district court only found that payment processor provided substantial assistance or support and either knew or consciously avoided knowing of the merchant’s deceptive activities.  On that basis, the court found that the processor was liable for the full amount of funds processed to and received by the other defendants.  The 11th Circuit ruled that the district court did not abuse its discretion by so finding.

By way of background, the underlying facts in this case centered on a collection of individuals and closely held corporations known as Treasure Your Success (TYS) that operated a fraudulent credit card interest reduction scheme in 2011-2012.  The FTC alleged that TYS used automated calling techniques to contact consumers and persuade them to divulge their credit card numbers on the false promise of credit card interest rate reductions. The FTC shut down the scheme in 2012.  The FTC also sued Universal Processing Services (Universal), the merchants’ payment processor.

According to the district court, Universal approved TYS’s first merchant account despite several red flags indicating TYS might be a fraud risk. Once the account was established, TYS experienced an unusually high number of chargebacks, enough for MasterCard to indicate TYS as a potential fraud risk. Despite these red flags, Universal approved a second TYS merchant account.

The district court found that Universal knew or consciously avoided knowing of the fraudulent activities, and that Universal substantially assisted TYS in perpetrating the scheme by providing the merchant accounts.

The FTC sought disgorgement in the amount of $1,734,972 (the amount of the unjust gains that accrued to the TYS scheme less chargebacks and refunds already remitted), and the district court held that Universal was jointly and severally liable with the members of the TYS scheme for the entire amount of restitution.

Universal appealed, challenging the court’s imposition of joint and several liability, but not the finding that Universal substantially assisted the TYS scheme.

The 11th Circuit found that the district court had not explained why Universal’s conduct warranted joint and several liability, since it did not find Universal was part of the common enterprise. The 11th Circuit therefore remanded the case back to the district court with instructions to state whether Universal was a part of the common enterprise or, if not, what other grounds there were for imposing joint and several liability.

On remand, the district court reaffirmed its finding that Universal was subject to joint and several liability despite not being part of the common enterprise. The court reasoned that a violation of the TSR constitutes an “unfair or deceptive act or practice” in violation of the FTC Act, and therefore the district court was authorized to order restitution and disgorgement under the Act. The district court also looked to analogies in torts and securities law where an aider-abettor is liable to the injured party for the entire harm.

Universal appealed the decision back to the 11th Circuit, arguing that joint and several liability is only available where the defendant is in a common enterprise with the primary violators. This time around, however, the 11th Circuit agreed with the district court and held that substantial assistance under the TSR was itself sufficient to justify joint and several liability.

The 11th Circuit also ruled that while the amount of the equitable remedy of disgorgement/restitution is measured by a defendant’s gain, not the alleged loss to consumers, the gain to all defendants (not just Universal) was the appropriate measure for the relief awarded against Universal.  Frankly, this seems to turn the notion of disgorgement on its head:  How can a company “disgorge” money it never possessed?  Indeed, the remedy here seems more akin to a penalty than appropriate equitable monetary relief.  Processors can hope that perhaps the Supreme Court will exercise some of the skepticism it brought to the SEC’s use of its similar disgorgement authority in its recent Kokesh opinion.

Because the underlying rationale was that Universal’s conduct amounted to a violation of the FTC Act, and that a violation of the FTC Act is subject to a host of equitable remedies including disgorgement and joint and several liability, the decision implicates any conduct that could be considered a violation of the FTC Act. The implications of this decision for payment processers are significant, and the notion that a processor is responsible for all the volume it processes is potentially destabilizing to the processing industry.  As Fats Waller would say, the joint is indeed jumpin’.