Eleventh Circuit Imposes Joint And Several Liability On Payment Processor For Fraud By Client

On November 13, the U.S. Court of Appeals for the Eleventh Circuit affirmed the imposition of joint and several liability on a payment processor that had provided "substantial assistance" to another entity that violated a federal ban on improper telemarketing practices. The decision leaves the payment processor responsible for paying the $1.7 million judgment with its co-defendants.

Background

In 2011 and 2012, a group of individuals known as Treasure Your Success ("TYS") allegedly operated a fraudulent scheme under which TYS promised to reduce consumer credit card interest rates in exchange for the consumer authorizing a charge to his or her credit card. TYS, however, never had the ability to honor its promises to lower interest rates. Using this approach, TYS amassed more than $2.5 million from the victims of its scheme.

To carry out this scheme, TYS relied on Universal Processing Services of Wisconsin, LLC, a payment processing company, to charge customers' credit cards. After receiving an internal referral, Derek DePuydt, Universal's president, personally reviewed TYS's merchant application and, despite several red flags indicating TYS might constitute a fraud risk, approved two accounts for TYS.

The FTC Complaint and First District Court Decision

In October 2012, the FTC filed a complaint in the U.S. District Court for the Middle District of Florida, naming members of the TYS scheme as defendants and alleging violations of the Federal Trade Commission Act ("FTCA"), 15 U.S.C. § 41 et seq., the Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. § 6101 et seq., and the Telemarketing Sales Rule ("TSR"), 16 C.F.R. § 310.1 et seq. The FTC later added other defendants, including Universal and DePuydt, and brought an additional count that alleged Universal and DePuydt provided substantial assistance to TYS and "knew, or consciously avoided knowing," that TYS was violating the TSR.

After various settlements, only Universal and two other defendants remained. The FTC moved for summary judgment against the three defendants. The district court granted the motion and found Universal substantially assisted TYS in perpetrating the scheme by establishing the merchant accounts and knew, or consciously avoided knowing, about TYS's fraud. The court ordered disgorgement in the amount of $1,734,972 and held that the three defendants were jointly and severally liable for the entire amount of restitution.

First Appeal and District Court...