On December 13, the Eleventh Circuit Court of Appeals affirmed the decision of the U.S. District Court for the Middle District of Florida finding a credit card payment processor jointly and severally liable, under a theory of aiding and abetting, for the full judgment entered against fraudulent telemarketers. Federal Trade Commission v. WV Universal Management, LLC, No. 6:12-cv-01618-ACC-KRS (11th Cir. Dec. 13, 2017) (hereinafter “Appellate Opinion”). The payment processor, Universal Processing Services of Wisconsin, LLC (“Universal”) and its then President, Derek DePuydt, did not appeal the trial court’s finding of aiding and abetting liability under the Federal Trade Commission’s (“FTC’s”) telephone sales rule (“TSR”), but challenged the amount of judgment. Id. at 2. While some courts have rejected efforts by the Consumer Financial Protection Bureau (“CFPB”) to establish vicarious liability for the acts of payment processors, the decision provides useful guidance to payment processors as to the appropriate steps required at the merchant underwriting and monitoring phases.

FACTUAL BACKGROUND -

The principal merchant defendants were found to have operated a telemarketing boiler room scheme to exact payments from consumers in exchange for fraudulent credit card interest reduction services. Id. at 3; Federal Trade Commission v. HES Merchant Services Company, Inc. et al., No. 6:12-cv-1618-Orl-22KRS, at 1 (M.D. Fla. Oct. 26, 2016) (hereinafter “Dist. Ct. Opinion”). After some discovery, the FTC amended its complaint to assert claims of aiding and abetting against Universal and DePuydt under the TSR. Universal provided processing services for two accounts referred by its independent sales agent, Hal Smith. Smith had worked with Universal for more than a decade, and his referrals were so profitable that DePuydt personally reviewed and approved the merchants’ applications, glossing over “a slew of red flags” of the potential fraud risk. Appellate Opinion at 4, 8. The FTC alleged, and the trial court found, “that [the payment processor defendants] knew or consciously avoided knowing of the fraudulent activities [the principal merchant defendants] conducted, and that Universal substantially assisted … in perpetrating the scheme by providing the merchant accounts.” Id. at 5. The trial court entered judgment of disgorgement jointly and severally against all defendants, including the payment processor, in the amount of $1,734,972, reflecting the net amounts collected from consumers as a result of the fraud. The trial court premised the payment processor’s liability on “substantial assistance rather than on a common enterprise theory,” finding that the processing of payments constituted “substantial assistance or support” to the actors committing fraud. Id. at 7, 8. The payment processor defendants challenged the joint and several liability determination, arguing that their liability should be limited to the $410,000 in fees they received. Id. at 20. Dist. Ct. Opinion at 12.