Eye on the Law: FTC Rings ‘Fire Alarm’ with ISO Case; Supreme Court Okays Arbitration

A lawsuit brought earlier this month by the Federal Trade Commission against a telemarketer and its merchant processor should serve as a warning to independent sales organizations and other acquirers that they could be held responsible for their clients’ actions, according to a prominent payments attorney.

“The FTC’s suit should be heard as a fire alarm throughout the card-processing industry,” says Holli Targan, a partner at Jaffe, Raitt, Heuer, and Weiss, Southfield, Mich., in a blog post on the law firm’s Web site. “The complaint serves both as a loud warning of the pitfalls of processing for certain types of telemarketing merchants, and as a guide on how to avoid the FTC’s wrath when doing so. The industry would be well advised to take heed.”

On June 4, the FTC filed an amended complaint in the U.S. District Court for the Middle District of Florida accusing a Clearwater, Fla.-based telemarketer, Innovative Wealth Builders Inc., of using deceptive tactics to sell services that would allegedly reduce consumers’ credit card interest rates. But the complaint also named as a defendant Independent Resources Network Corp., a Westbury, N.Y.-based ISO that, according to the complaint, handled IWB’s card transactions from August 2009 until January, when IWB was enjoined by a court order.

The FTC alleges IRN abetted IWB by processing its transactions, lending it cash advances totaling “hundreds of thousands of dollars,” and advising it on how to combat chargebacks. IWB’s monthly chargeback rate rose above 40% “multiple times” during the period IRN processed its transactions, the complaint says. The average chargeback rate from January 2010 until January 2013 was greater than 20%, it says.

Apparently, IRN took steps to protect itself. It required IWB to pay into a reserve account, for example, that totaled $700,000 by the time the FTC filed its suit, according to the agency’s complaint.

IRN continued processing for IWB even though it knew, or “consciously avoided” knowing, that the telemarketer was charging fees of $500 to $2,000 for rate-reduction services it never delivered, according to the complaint, which accuses the defendants of violations of the FTC Act and the Telemarketing Sales Rule. It asks the court for an injunction against the defendants and unspecified relief for allegedly defrauded consumers. IRN did not return a call from Digital Transactions News seeking comment on the complaint.

In her post about the case, attorney Targan says other ISOs would be well-advised to tread carefully in the wake of the FTC’s apparent interest in their relationship with telemarketers. “The filing of this action underscores that the FTC is serious about holding card processors liable for the acts of their merchants,” she says.

This is the second time in the past month the FTC has taken action with respect to the Telemarketing Sales Rule. Last month, it proposed to ban telemarketers from using four payment methods, including remotely created checks and prepaid authorization codes, as part of an amendment of the rule.

In other legal news related to payments, the U.S. Supreme Court voted 5-3 to uphold an arbitration clause in a merchant agreement from American Express Co. that barred merchants from using class actions to challenge the T&E giant in court.

The origins of the case lay in a 2003 suit in which restaurants, general retailers, and other plaintiffs claimed AmEx violated antitrust law with its practice of requiring merchants to accept its credit cards if they accept its charge cards. Merchants argued AmEx’s arbitration clause kept them from pursuing relief because individual actions against the company are too expensive. In his opinion for the majority, Justice Antonin Scalia wrote that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim,” according to Reuters. Justice Sonia Sotomayor recused herself from the case.