September 26, 2022

Volume XII, Number 269

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September 26, 2022

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Payment Processor Agrees to Refund Customers After FTC Alleges Surprise Exit Fees and Zombie Charges On Small Businesses

On July 29, a payment processor company and its two sales affiliates (defendants) agreed to a stipulated order with the FTC to settle charges that they imposed hidden terms, surprise exit fees, and “zombie charges” on small businesses.

The payment processor, based in Texas, marketed services to small- and medium-sized businesses who relied on card payments and checks from customers—the payment processor would serve as an intermediary between the company and the banks that issued the cards or checks.

The FTC filed a complaint in federal court alleging that the companies made false claims to lure small businesses into using its products, promising low costs and easy exits. Many of the businesses targeted by deceptive pitches had limited English proficiency. The FTC alleged numerous practices that were harmful to merchants, including engaging in deceptive pitches—according to the FTC, the company falsely promised low monthly fees and long-term savings, but failed to mention its periodic raising of prices. The company also imposed surprise fees when its customers attempted to cancel, despite promises of easy cancellation at any time or within a trial period without a fee. The defendants’ online enrollment system also hid a three-year obligation, numerous cancellation requirements and fees, an automatic renewal, and other information critical to business owners when evaluating options for payment processors. Finally, the FTC alleged that the defendants imposed “zombie charges,” meaning they made withdrawals from customer bank accounts even after the businesses withdrew consent for automatic debits.

On July 29, the parties agreed to a stipulated order under which the defendants are, among other things, prohibited from misleading customers and from making unsubstantiated claims about their products and services and refunding $4.9 million to customers affected by their harmful practices.

Putting It Into Practice:

This FTC enforcement action is worth reviewing in light of the claims related to unfair/deceptive fees and violations of ROSCA (Restore Online Shoppers’ Confidence Act) claims based on (i) obscured contract terms buried on websites and (ii) automatic, recurring charges after merchants had withdrawn ACH consent/attempted to cancel services. Using ROSCA in the B2B context is somewhat novel for the FTC, since the statute is designed to protect consumers in the online shopping context. As a result, payment processors and other B2B businesses would be well-advised to pay attention to the result here and review operations around auto-debits and cancellations. In addition, ROSCA carries a punch because – unlike typical UDAP claims — ROSCA authorizes the FTC to levy heavy penalties and remediation/restitution (we discussed ROSCA in previous blog posts herehere, and here).

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 223
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About this Author

Moorari Shah Bankruptcy Lawyer Sheppard Mullin Law Firm
Partner

Moorari Shah is a partner in the Finance and Bankruptcy Practice Group in the firm's Los Angeles and San Francisco offices. 

Areas of Practice

Moorari combines deep in-house and law firm experience to deliver practical, business-minded legal advice. He represents banks, fintechs, mortgage companies, auto lenders, and other nonbank institutions in transactional, licensing, regulatory compliance, and government enforcement matters covering mergers and acquisitions, consumer and commercial lending, equipment finance and leasing, and supervisory examinations,...

213-617-4171
A.J. S. Dhaliwal Bankruptcy Attorney Sheppard Mullin Washington DC
Associate

A.J. is an associate in the Finance and Bankruptcy Practice Group in the firm's Washington, D.C. office. 

A.J. has over a decade of experience helping banks, non-bank financial institutions, and other companies providing financial products and services in a wide range of matters including government enforcement actions, civil litigation, regulatory examinations, and internal investigations.

With a diversified regulatory, compliance, and enforcement background, A.J. counsels financial institutions in matters involving...

202-747-2323
Katie Daw Government Investigations Attorney Sheppard Mullin Law Firm
Associate

Katie’s practice focuses on government investigations into antitrust and competition issues and antitrust litigation.

Prior to joining the firm, Katie completed internships with United States Senator Dianne Feinstein and with United Kingdom Member of Parliament Graham Allen, for whom she conducted nutritional poverty research and drafted initiatives. She also served as a law clerk for the Baltimore Police Department, where she focused on compliance with the city’s consent decree entered into with the Department of Justice.  

202-747-2191
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