A payment processor and its individual owner have entered into a settlement with the FTC to settle charges that they violated a 2009 federal district court order that required them to review and monitor their merchant clients to ensure that the merchants were not engaged in deceptive or unfair practices.  The order is a stark reminder of the risks to payment processors of failing to implement adequate policies and procedures designed to avoid establishing or maintaining relationships with disreputable merchants.

The FTC’s 2006 complaint alleged that using consumers’ names and bank account information provided by its merchant client, the processor continued to debit thousands of consumers’ accounts despite high rates of returned transactions and complaints from consumers and banks.  The FTC alleged that such conduct constituted unfair practices in violation of the FTC Act.

In 2009, the court granted the FTC’s motion for summary judgment and entered an order that prohibited the processor and its owner from continuing to engage in the unfair practices alleged in the complaint and required them to undertake a “reasonable investigation” of prospective merchant clients to ensure that the charges to be processed are authorized and the client is complying with the FTC Act.  The order detailed the steps to be taken by the processor in conducting a “reasonable investigation.”  It also required the defendants to pay $1,779,000 for consumer redress.

On April 10, the court entered a stipulated final judgment and order superseding its 2009 judgment and order except with respect to the payment of consumer redress.  The stipulated judgment and order (1) finds that the defendants violated the 2009 judgment and order by failing to conduct reasonable investigations of prospective merchant clients and monitor clients’ activities, (2) permanently enjoins them from engaging in, and assisting others with, payment processing, and (3) requires them to pay an additional $1.8 million as a “compensatory contempt relief.”

Last summer, in testimony before Congress, Andrew Smith, the Director of the FTC’s Bureau of Consumer Protection, discussed the FTC’s continued focus on payment processors.  While lawsuits against payment processors represent a small number of the total cases filed by the FTC, Mr. Smith indicated that the FTC views the payment processor’s role as integral to the agency’s anti-fraud efforts because of the processor’s role in facilitating fraudulent schemes.

In bringing claims against payment processors, the FTC has relied on two key legal theories. The first theory (which was used in the case described above) is that the payment processor, by failing to adequately monitor merchant clients, engages in unfair conduct in violation of the FTC Act.  The second theory is that the payment processor violates the FTC’s Telemarketing Sales Rule by “assisting and facilitating” a violation through its provision of services to an entity that the processor knows or consciously avoids knowing is violating the Rule.