Antitrust Law Daily Wrap Up, CONSUMER PROTECTION NEWS: FTC alleges operation deceived small businesses into purchasing credit and debit card payment processing services and equipment, (Jul 30, 2013)

By Tobias J. Gillett, J.D., LL.M.

The FTC has filed a complaint in the U.S. District Court for the Eastern District of Washington, charging several corporate entities and individuals with deceptively marketing credit and debit card payment processing services to small businesses (FTC v. Merchant Services Direct, LLC, FTC File No. 132 3013). The Washington State Attorney General’s Office announced that it has simultaneously filed a complaint against the operation in the Superior Court for Spokane County, Washington.

According to the FTC’s complaint, Merchant Services Direct LLC (MSD) operates as an independent sales organization (ISO) for financial institutions that are members of credit card associations such as MasterCard and Visa. In that role, MSD sold processing services to small businesses that wanted to accept credit and debit cards.

The FTC alleges that MSD’s sales representatives would “cold call” small businesses and claim that MSD could reduce their payment processing costs and would set up appointments for MSD’s sales agents to visit the businesses. 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. They allegedly would claim that the rate represented a wholesale price obtained by eliminating “middlemen,” and would claim there were no additional fees. The defendants’ website also claimed that merchants could “save 30%” with their “whole sale [sic] processing.”

In addition, the agents would offer leases on card processing terminals, claiming that the small businesses’ terminals were outdated or incompatible with MSD’s services, the agency charged. They would either claim that the cost of the terminals would be recouped by the savings represented by MSD’s services, or that the terminals were “free.”

The agents would have the small businesses sign purported “applications,” and falsely inform them that they could cancel at any time, the complaint claimed. The “applications” would contain numerous fine print terms and conditions, and incorporate by reference 40-50 more pages of terms only available by going to the defendants’ website.

According to the FTC, the defendants were actually “middlemen” in the card processing transaction, and did not charge “wholesale” rates, since the processing was actually performed by a third party processor. The defendants’ fees were generally higher than merchants were already paying, and included surcharges and miscellaneous fees (concealed in the contracts’ fine print) which the sales agents would not inform the merchants about in their sales presentations.

The FTC asserts that the terminal “applications” were actually binding leases held by third party companies, and the terminals were generally not actually required to use the defendants’ services. Merchants would be unable to cancel the leases and would be obligated to pay for the terminals whether they used them or not, and whether or not they already had a lease for a different terminal, the agency charged. If the merchants cancelled the “applications,” they would be charged substantial cancellation fees. MSD’s customer service department would also falsely claim they would provide refunds or waive cancellation fees in response to complaints.

The complaint charges the operation with violations of Section 5 of the FTC Act for making misrepresentations and unsubstantiated savings claims, and for failing to disclose material information.

The FTC’s complaint names as defendants Merchant Services Direct LLC, doing business as Sphyra Inc.; Boost Commerce Inc.; Generation Y Investments LLC; Kyle Lawson Dove; and Shane Patrick Hurley. It seeks preliminary and permanent injunctive relief and redress of the injury to consumers, including rescission or reformation of contracts, restitution, the refund of monies paid, and the disgorgement of ill-gotten monies.

In its complaint, the Washington State Attorney General’s Office seeks injunctive and other relief under the Washington Consumer Protection Act.

“Scamming small business owners in Washington will not be tolerated,” said Attorney General Bob Ferguson. “When businesses don’t play by the rules, the Attorney General’s Office will hold them accountable.”

Companies: Merchant Services Direct LLC; Boost Commerce Inc.; Generation Y Investments LLC

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