Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—E.D. Wash.: FTC denied TRO in action against sellers of credit, debit card payment processing services, (Aug 16, 2013)

By Jeffrey May, J.D.

The FTC was not entitled to a temporary restraining order in an action against sellers of credit and debit card payment processing services for engaging in deceptive acts and practices in violation of the FTC Act, the federal district court in Spokane, Washington, has ruled. The court also denied the agency's requests for an asset freeze and for the appointment of a temporary receiver (FTC v. Merchant Services Direct, LLC, August 13, 2013, Rice, T.).

The court noted that a more lenient standard applied to an FTC request for injunctive relief than to a request made by private litigants. The Commission did not need to show irreparable harm to obtain temporary injunctive relief. In any event, the TRO was denied because the FTC failed to demonstrate a likelihood of success on its claim for permanent injunctive relief, in the court's view.

According to the FTC's complaint, the defendants, an interrelated network of companies that had common ownership, sold processing services to small businesses that wanted to accept credit and debit cards. The FTC alleged that the defendants' sales representatives would “cold call” small businesses and claim that they could reduce the business's payment processing costs. The representatives allegedly would claim or imply that they were affiliated with the businesses’ current payment processors. The sales agents would claim they were there to upgrade the businesses’ processing services and would offer a discount rate considerably below the rate the businesses were currently paying, according to the FTC. In addition, the agents would offer leases on card processing terminals, claiming that the small businesses’ terminals were outdated, the agency charged.

In order to establish a likelihood that it would ultimately succeed on the merits, the FTC was required to demonstrate that the violations referenced in its complaint were likely to recur. The FTC failed to overcome this hurdle.

The court agreed with the defendants that much of the evidence submitted in support of the motions was substantially outdated. When the “stale” information was excised from the materials, there was little to suggest that the alleged violations were likely to recur.

The court took issue with the FTC's apparent position that future violations were simply a foregone conclusion. There was reason to believe that the prior alleged violations were not nearly as pervasive as the FTC contends. The number of complaints referenced in the FTC’s materials was not necessarily indicative of widespread deception. Further, the defendants appeared to have taken steps toward improving customer satisfaction in recent years and had terminated several sales agents who have been the subject of repeated customer complaints.

Asset freeze, appointment of receiver. Because the FTC failed to establish that past violations were likely to recur, the only relevant consideration with respect to an asset freeze and/or the appointment of a receiver was whether this “ancillary” relief was necessary to preserve effective relief for injured consumers. There was no support for the FTC’s assertion that an asset freeze was necessary to prevent Defendants from secreting away assets, according to the court. It was unlikely that the defendants would attempt to “cut and run.” Moreover, because the FTC had not meaningfully quantified the amount of damages attributable to the alleged violations, the court found it difficult to evaluate whether an asset freeze was truly necessary in order to preserve effective relief for injured consumers. Lastly, the court rejected the FTC's assertion that appointing a temporary receiver was necessary to reverse the “culture of fraud” in the defending businesses.

Balancing of public, private interests. Even though the court determined that the FTC was unlikely to succeed on the merits, it moved on the second factor for determining whether to grant the agency the requested relief. The court balanced the public and private equities and concluded that the equities weighed in the defendants’ favor. “[G]ranting the FTC’s requested relief would seriously jeopardize Defendants’ ability to stay in business,” according to the court.

This is Case 2:13-cv-00279-TOR.

Attorneys: Nadine S. Samter for FTC. Leslie R. Weatherhead (Lee & Hayes, PLLC) for Merchant Services Direct, LLC.

Companies: Merchant Services Direct, LLC.

Cases: ConsumerProtection FederalTradeCommissionNews WashingtonNews