On December 13, 2017, the Eleventh Circuit Court of Appeals affirmed a lower court decision finding a credit card payment processor jointly and severally liable – under a theory “substantial assistance” – for the full judgment entered against allegedly fraudulent telemarketers. Federal Trade Commission v. WV Universal Management, LLC (11th Cir. Dec. 13, 2017).
“Joint and several liability” permits a plaintiff to recover the full amount of damages from any defendant, regardless of a particular defendant’s percentage share of fault.
By way of background, in 2011 and 2012 a group of individuals allegedly operated a fraudulent scheme under which promises were made to reduce consumer credit card interest rates in exchange for consumers authorizing charges to their credit cards. The foregoing individuals allegedly never possessed the ability to honor such representations.
Allegedly, the payment processor reviewed the merchant applications and – despite several red flags – approved two accounts for the group of individuals.
In 2012, the FTC filed a complaint in the U.S. District Court for the Middle District of Florida, naming members of the purported scheme and alleging violations of the Federal Trade Commission Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act and the Telemarketing Sales Rule.
The processing defendant was subsequently added wherein the FTC brought an additional count alleging that it provided substantial assistance.” Specifically, the FTC alleged that the processing defendant perpetrated the scheme by establishing the merchant accounts, and that it “knew or consciously avoided knowing” that the group of individuals were violating the Telemarketing Sales Rule.
Numerous parties settled. The processing entity was one of the remaining defendants that did not. The FTC moved for summary judgment against the remaining defendants. The court ultimately ordered disgorgement in excess of $1M and held that all of the remaining defendants were jointly and severally liable for the entire amount.
The processor appealed and the Eleventh Circuit directed the lower court to explain why Universal should be jointly and severally liable. The district court reasoned that while the payment processor did not participate in the scheme, the language of the Telemarketing Sales Rule permits the imposition of joint and several liability where one provides “substantial assistance” to another that it knows, or consciously avoids knowing, is violating the TSR.
The decision was appealed, again. The Eleventh Circuit affirmed by rejecting the payment processor’s position that joint and several liability cannot exist absent a common enterprise. The court also found noteworthy that joint and several liability may be imposed on an aider-abettor.
The FTC routinely alleges in enforcement actions involving multiple defendants, that defendants “operated as a common business enterprise” and “conducted their business practices through an interrelated network of companies that have common ownership, business functions, employees, and office locations.” In doing so, the FTC systematically alleges that given the “common enterprise,” defendants are “jointly and severally liable.” The FTC will now likely be emboldened to pursue third-parties, including payment processors, under a substantial assistance theory alone where a determination is made that telemarketers commit fraud.
You can read the opinion, here.
Key Takeaway: Under certain circumstances, joint and several liability for the fraudulent conduct of third-parties can potentially be premised upon “substantial assistance” rather than upon a common enterprise theory.
Richard B. Newman is an Internet marketing compliance and regulatory defense attorney at Hinch Newman LLP focusing on advertising and digital media matters. His practice includes conducting legal compliance reviews of advertising campaigns, representing clients in investigations and enforcement actions brought by the Federal Trade Commission and state Attorneys General, commercial litigation, advising clients on promotional marketing programs, and negotiating and drafting legal agreements. You can find him on Twitter or on LinkedIn at FTC Defense Lawyer.
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