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.
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 Clarification
Universal appealed, and the Eleventh Circuit directed the district court to further explain why it subjected Universal to joint and several liability. In a new opinion, the district court reasoned that although Universal did not participate in the scheme, the language of the TSR, in conjunction with how such situations are treated in tort and securities law, allowed for joint and several liability where an entity provides substantial assistance to another that it knows, or consciously avoids knowing, is violating the TSR.
The Second Appeal and Affirmation of District Court’s Decision on Joint and Several Liability
The decision was appealed again and the Eleventh Circuit affirmed. In so doing, the Eleventh Circuit first rejected Universal’s claim that joint and several liability cannot exist absent a common enterprise, explaining no authority supported that conclusion.
Next, the court looked to the history behind the TSR’s adoption and noted that the FTC expressly relied on tort and securities concepts when it formulated the rule. Specifically, the FTC invoked § 876(b) of the Restatement (Second) of Torts, which contemplates imposing liability on a person who gives substantial assistance to another person whose conduct breaches a duty, resulting in harm to a third party, where the offeror of the assistance knows the other party’s conduct is a breach. According to the court, § 876(b) shares three elements with the TSR—a primary violation, substantial assistance and knowledge. As a result, the court found borrowing from tort law appropriate. The court also found noteworthy that the Second Restatement expressly allows for imposing joint and several liability on an aider-abettor.
The Eleventh Circuit additionally focused on the FTC’s reference to securities law in its explanation of the final TSR. Securities law also provides for joint and several liability in the same situation as tort law, but it expands the requisite mental culpability from “knowing” to reckless. Recklessness, the court believed, even more closely tracked the “consciously avoid[ing] knowing” language adopted by the FTC in the TSR.
Finally, the court rejected Universal’s various arguments that the unjust gains could be fairly apportioned between the three remaining defendants, which Universal argued precluded joint and several liability. The court’s decision left Universal (with its potentially deeper pockets) on the hook for the $1.7 million judgment.
The case is Federal Trade Commission v. WV Universal Management, LLC, et al., No. 16-17727 (11th Cir. Dec. 13, 2017), and the opinion can be located here.