Merchant cash advance providers move to dismiss FTC lawsuit

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The defendants in the lawsuit filed by the FTC in August 2020 in a New York federal district court against two merchant cash advance providers and their chief executive officer and president for alleged unfair and deceptive conduct in violation of Section 5 of the FTC Act have filed a motion to dismiss.  The FTC has filed its opposition to the motion and the defendants have responded to the FTC’s opposition.  The lawsuit is a reminder that the FTC Act applies to business-to-business (“B to B”) activity, including small business financing, and not just business-to-consumer transactions.  Such B to B financing is often treated the same way as consumer financing for purposes of other federal laws as well as state laws.

The defendants make the following principal arguments in support of dismissal:

  • The FTC does not have statutory authority to bring the lawsuit because Section 13(b) of the FTC Act only allows the FTC to file suit in federal court to enjoin acts or practices if the FTC has reason to believe a defendant “is violating, or is about to violate” a provision of law.  Thus, Section 13(b) only applies to imminent or ongoing conduct, not past conduct.  The FTC cannot (and does not) plausibly allege imminent or ongoing unlawful conduct by the defendants.
  • The FTC alleged in its complaint that the defendants engaged in deceptive acts or practices by representing in advertisements that they did not require collateral or personal guarantees from business owners when, in reality, they did require business owners to grant a purported security interest or lien on all business property they owned including accounts, equipment, inventory and other assets and to sign personal guarantees of the entire amount funded should the business default. In making this allegation, the FTC has isolated “three to twelve words from each advertisement it challenges and fails to plead sufficient context to evaluate any of the advertisements from the perspective of a reasonable merchant.”
  • The FTC alleged that the defendants also engaged in deceptive acts or practices by representing in contracts that the defendants would provide a certain amount of funding (labeled the “Purchase Price”) when, in reality, the amount provided was substantially less than the Purchase Price as result of the withholding of fees that are mentioned “several pages in to the contract without any indication that they are deducted from the ‘Purchase Price’—the funds promised to [small business] consumers.”   In making this allegation, the FTC “cherry-pick[s] language from a discontinued version of [the defendants’] MCA Agreement, while omitting any mention of the clear and conspicuous language in the very same document that expressly discloses these fees.”
  • The FTC alleged that the defendants engaged in unfair acts or practices by withdrawing money from customers’ accounts in excess of the amounts authorized by continuing to withdraw money after a customer had fully repaid the “Purchased Amount.”  These continued withdrawals were the result of a lag period in ACH processing and were expressly authorized by the MCA Agreement.
  • The FTC has failed to state a claim for individual liability against the individual defendants because it has failed to sufficiently allege that the individual defendants participated in or had authority over the alleged illegal acts.

In its opposition to the motion to dismiss, the FTC asserts that it has plausibly alleged that the defendants were violating or about to violate the FTC Act at the time it filed the lawsuit, has alleged facts sufficient to state a claim for deception and unfairness under the FTC Act, and has alleged facts sufficient for individual liability.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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