Federal Trade Commissioner v. Universal Processing Services of Wisconsin, LLC

Citation: 877 F.3d 1234Docket: 16-17727

Court: Court of Appeals for the Eleventh Circuit; December 12, 2017; Federal Appellate Court

Original Court Document: View Document

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The case involves an appeal in the Eleventh Circuit Court regarding the Federal Trade Commission's (FTC) enforcement of the Telemarketing Sales Rule (TSR) against WV Universal Management, LLC, operating as Treasure Your Success (TYS), and Universal Processing Services of Wisconsin, LLC. TYS engaged in a fraudulent scheme promising credit card interest reductions, misleading consumers into providing their credit card information for charges between $600 and $1000, with false promises of receiving $2500 or more in benefits. The scheme generated over $2.5 million, and Universal was found to have provided substantial assistance to TYS, leading to its joint and several liability for the violations of the TSR. The primary legal issue on appeal is whether joint and several liability was permissible under the law, which the court affirmed. The facts are largely undisputed, and Universal's prior appeals focused solely on the remedy rather than the summary judgment ruling itself. Universal's role as a payment processor facilitated TYS’s operations, as the company approved TYS as a merchant customer and processed the transactions.

Smith’s referrals to Universal over the past decade were highly profitable, leading to the personal review of merchant applications by Universal’s president, Derek DePuydt. On Smith's recommendation, DePuydt approved TYS's first merchant account despite evident fraud risks, notably the serious credit issues of TYS's owners, Plancher and Toska. Following the account's establishment, TYS faced an unusually high rate of chargebacks, prompting MasterCard to flag it as a potential fraud risk. Nonetheless, DePuydt approved a second merchant account for TYS. The FTC later exposed TYS’s fraudulent activities, filing suit against Plancher, Toska, and their entities in October 2012 for violations of various consumer protection laws, subsequently adding Smith, DePuydt, and Universal as defendants. Count Twelve of the amended complaint alleged that Universal and DePuydt knowingly assisted TYS in violating the Telemarketing Sales Rule (TSR). In 2014, the FTC sought summary judgment, resulting in Universal, Smith, and HES Merchant Services, Smith's corporation, being the remaining defendants. The district court granted summary judgment to the FTC on all counts, finding that Universal, through DePuydt, had substantially assisted TYS and was aware of the fraudulent activities. The FTC sought monetary relief of $1,734,972, and the court held the defendants jointly and severally liable. Appeals followed, with Smith and HES contesting the summary judgment and joint liability, while Universal only challenged the joint liability. The appeals court upheld the district court's ruling against Smith and HES, affirming their joint liability due to their collaboration in the fraud. However, it vacated the ruling against Universal, stating the district court needed to clarify Universal's connection to the common enterprise before imposing joint liability.

On remand, the district court determined that violations of the Telemarketing Sales Rule (TSR) are considered 'unfair or deceptive acts or practices' under the Federal Trade Commission (FTC) Act, which allows for restitution and disgorgement. The court specified that Universal's liability stems from substantial assistance to the primary violator rather than a common enterprise theory. Noting the lack of case law regarding substantial assistance under the TSR, the court referenced tort and securities law, concluding that joint and several liability applies when a defendant significantly aids another in violating the law. The court reaffirmed Universal's joint and several liability and Universal subsequently appealed.

The standard of review for equitable monetary relief is for abuse of discretion, which occurs when a judge fails to apply the correct legal standard, does not follow proper procedures, or makes clearly erroneous factual findings.

The FTC Act prohibits unfair or deceptive acts in commerce, and the TSR, established under the Telemarketing and Consumer Fraud and Abuse Prevention Act, outlines rules against deceptive telemarketing practices. It specifies that providing substantial assistance to a seller or telemarketer, while aware or willfully ignorant of their violations, constitutes a deceptive practice. Universal’s provision of merchant accounts to TYS, despite clear indications of fraudulent activities, is established as a TSR violation.

Section 13(b) of the FTC Act permits the FTC to seek injunctions against violations of its laws, and while it does not explicitly authorize monetary relief, courts have interpreted it to include the ability to grant equitable remedies like consumer redress and disgorgement. Disgorgement and restitution can be imposed jointly and severally, affirming the principle that equity courts can enforce such liability.

The district court's ruling that Universal violated the TSR's substantial assistance rule, thereby justifying its joint and several liability with the TYS scheme members, is the central issue. Although the court did not classify Universal as part of a common enterprise with the other defendants, it determined that Universal's violation alone warranted this liability. Universal argues that joint and several liability requires participation in a common enterprise, a claim not supported by legal precedent. The court clarifies that while a common enterprise can support joint and several liability, it is not a prerequisite.

The ruling establishes that violating the TSR’s substantial assistance rule can indeed lead to joint and several liability for the unjust gains obtained. The TSR explicitly states that any violation constitutes an infringement of the rule, and by extension, a violation of the FTC Act, exposing Universal to its penalties. The court references aider-abettor principles, indicating that knowledge of and substantial assistance to another's wrongdoing is sufficient for liability, as outlined in both the FTC's rule-making and the relevant legal standards from tort law. This interpretation aligns with the FTC's guidance in formulating the TSR, which emphasizes that knowledge and substantial assistance can lead to liability.

The Restatement, 876(b) and the Telemarketing Sales Rule (TSR) share three key elements: a primary violation, substantial assistance (or support), and a culpable state of mind (knowledge or conscious disregard). Aiding and abetting in tort law can lead to joint and several liability, meaning that the aider-abettor is responsible for the full harm caused to the injured party. This principle applies to Universal, which may be held jointly and severally liable alongside the TYS defendants for their substantial assistance in violating the TSR. In tort law, if multiple defendants jointly cause harm, each is liable for the entire amount, though the plaintiff can only recover once. The securities law framework for aiding and abetting also aligns with the TSR's requirements, necessitating a primary violation, substantial assistance, and a culpable state of mind. Notably, severe recklessness can satisfy the mental state requirement in securities cases, paralleling the TSR’s criteria. The Federal Trade Commission (FTC) acknowledged this connection when establishing the TSR, referencing securities law. Joint and several liability is deemed appropriate under the TSR for substantial assistance cases. Historical context indicates that, prior to 1994, aiders and abettors were often liable for securities violations and considered viable sources for monetary recovery. Finally, liability under the TSR requires that the defendant knows or consciously avoids knowing about the telemarketing violations of the party receiving assistance, mitigating concerns about unjust outcomes for innocent third parties.

The district court's determination of restitution owed by Universal was upheld, as Universal's arguments for apportioning liability were insufficient. Universal argued against joint and several liability, claiming that its financial involvement could be separated from that of TYS. However, apportionment applies only when distinct harms can be identified, which was not the case here. The harm was indivisible, as both Universal and TYS contributed jointly to the total harm suffered by the consumers. Universal's role was crucial, as without its payment processing services, the scheme would not have been viable, thus negating its claim for apportionment based on relative contribution.

Additionally, Universal contended that it should only be liable for the amount it retained from the scheme, arguing that restitution focuses on unjust enrichment rather than consumer losses. However, the district court determined the total unjust gains across all defendants, amounting to $1,734,972, and this total did not support Universal's claim. The court maintained that differentiating between Universal’s retained funds and those transferred to TYS was merely a restatement of its earlier arguments regarding joint liability. Lastly, Universal attempted to liken its situation to a past case involving a different context, but this analogy did not provide a valid basis for its claims. The court affirmed that the method of calculating restitution was appropriate and consistent with legal principles.

Defendants established a pornography website that charged users for international calls to Madagascar instead of accepting credit card payments, resulting in charges appearing on customers’ phone bills. The international telephone companies incurred fees from these calls, leading to the defendants receiving only a fraction of the billed amount. The Second Circuit ruled that these telephone companies' fees should not be included in restitution calculations since they represented losses to consumers but never reached the defendants, thus they were not unjustly enriched. Universal’s attempt to equate its payments to TYS defendants with the withheld fees in Verity was rejected, as those payments were part of the collective unjust enrichment of all involved parties. The ruling clarified that defendants cannot deduct business expenses from their unjust enrichment in a disgorgement action, affirming that gross receipts should be used to assess unjust gains, not net revenue after expenses. The district court's decision to hold Universal jointly and severally liable with the TYS scheme members was affirmed.