FTC Sues Processors for Being ‘Unfair’ to Consumers

We think of the Federal Trade Commission (FTC) as an anti-deception agency, and it is just that. The vast majority of its cases are brought against deceptive business practices. By statute, however, the FTC is also empowered to prevent practices that are “unfair.” This authority comes in handy when the FTC may not be able to make a deception charge stick. It is a particularly convenient tool to use against third parties who allegedly facilitate deception but are not involved in the deceptive advertising itself and may be able to defeat a deception count on that ground.

The FTC has no problem pinning “aiding and abetting” liability on those who facilitate telemarketing fraud, because its Telemarketing Sales Rule expressly holds accountable anyone who provides “substantial assistance or support” to a deceptive telemarketing campaign while “knowing or consciously avoiding knowing” of it. In all other cases, however, if it wants to nail parties that did not participate in the deception itself but still played an important support role, such as payment processors, it has to rely on its “unfairness” authority and demonstrate that what the party did was “unfair” under the FTC Act.

As interpreted by the FTC, a business act or practice is unfair if it: (a) causes substantial consumer injury; (b) the injury is not “reasonably avoidable”; and (c) the injury is not outweighed by any benefit to consumers or competition. This standard has been upheld against third party facilitators of consumer deception, including payment processors. In the 2009 case of FTC v. Interbill Ltd. et al, a federal district court found that a processor engaged in unfair conduct by processing sales that resulted in substantial and unavoidable consumer injury with knowledge, or reason to know, that the merchant was billing consumers without authorization. The court ordered redress of $1.7 million and prohibited Interbill from processing unless it first conducted a “reasonable investigation” of a prospective client and instituted a compliance monitoring system.

Last month, in a case that sent shock waves through the payments industry, the FTC sued Card Flex Inc. and others under its unfairness authority for processing allegedly deceptive and unauthorized free trial negative option sales by I Works, an Internet marketer sued by the FTC in 2010 in a case that is still pending. I Works’ owner was also criminally indicted over the same conduct.

The FTC alleges that defendants committed unfair acts and practices by engaging in lax underwriting, falsifying merchant account applications, manipulating account signers and billing descriptors, utilizing “load balancing” to artificially suppress chargeback levels, and ignoring excessively high chargebacks. They allegedly did so with knowledge that I Works’ customers could not protect themselves because the free trial and negative option terms were not clearly disclosed. The FTC is seeking $26 million in consumer redress and lifetime bans on working in the payments industry. It has already obtained bans in settlements with some of the defendants.

While the injury in both cases was substantial and allegedly unavoidable, what the two cases really have in common – along with FTC unfairness complaints against other payment processors – are allegations that the processor knew or should have known about its clients’ deceptive practices and looked the other way (or even actively enabled them). “Knowledge” and “conscious avoidance” of wrongdoing are conspicuously absent from the FTC’s legal definition of “unfairness,” yet in reality they are the unspoken critical elements of the standard as applied to third parties such as processors.

What is an express basis for “aiding and abetting” liability in FTC telemarketing cases is the implicit sine qua non for the FTC’s exercise of its unfairness authority against third parties in other cases. It works especially well against payment processors, and especially in unauthorized billing cases, because they are in a unique position to oversee merchant behavior and transactions and spot the “red flags” typically associated with fraud and deception.

With Card Flex, the FTC has escalated its ongoing effort to widen the net of liability beyond the advertiser. Where its anti-deception authority won’t work to widen the net, its unfairness authority seems up to the task – especially against members of the payments industry who make the wheels of commerce spin. Card Flex is the latest, but surely not the last, reminder that payment processors have a big FTC bull’s-eye on their chests, and need to redouble their risk underwriting and monitoring efforts.

Talking about Direct Response, FTC, Online Marketing

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