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FTC settles with MCA providers for $9.8 million
On April 22, the FTC announced a settlement with two New York-based merchant cash advance providers and two company executives (collectively, “defendants”) for allegedly engaging in deceptive practices by misrepresenting the terms of their merchant cash advances (MCAs), using unfair collection practices, making unauthorized withdrawals from consumers’ accounts, and misrepresenting collateral and personal guarantee requirements. As previously covered by InfoBytes, the FTC filed a complaint against the defendants last year claiming, among other things, that the defendants (i) falsely advertised that MCAs do not require collateral or personal guarantees, but when consumers defaulted on their financing agreements, the defendants frequently filed lawsuits against them, including against individual business owners who provided personal guarantees, to collect the unpaid amount; (ii) misrepresented the amount of total financing in the contract that consumers would receive by withholding fees that are deducted from the promised funds; and (iii) made unfair, unauthorized withdrawals from customers’ bank accounts in excess of consumers’ authorization without express informed consent, while continuing to debit customers’ bank accounts after the MCAs were fully repaid.
Under the terms of the stipulated order, which was approved by the court on May 5, the defendants are required to pay more than $9.8 million to the FTC to go towards redress to affected customers. The defendants are also permanently prohibited from making misleading statements to consumers about the terms of their financing or making withdrawals from consumers’ bank accounts without first receiving their express informed consent, and are required to clearly and conspicuously disclose any financing fees as well as the actual amount consumers will receive after the fees are assessed. Further, the defendants must establish a process to monitor any marketers or funding companies that work on their behalf to ensure, among other things, that such companies abide by the terms of the settlement.
Supreme Court: FTC may not seek restitution or disgorgement under 13(b)
On April 22, the U.S. Supreme Court unanimously reversed the U.S. Court of Appeals for the Ninth Circuit’s decision in AMG Capital Management v. FTC, holding that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement.” The opinion impacts petitioners who were ordered in 2018 to pay an approximately $1.3 billion judgment for allegedly operating a deceptive payday lending scheme and making false and misleading representations about loan costs and payments (covered by InfoBytes here). At the time, the 9th Circuit rejected the petitioner’s challenge to the judgment (based on, among other things, the argument that the FTC Act only allows the court to issue injunctions), concluding that a district court may grant any ancillary relief under the FTC Act, including restitution. As previously covered by InfoBytes, last year the Court granted review and consolidated two cases that had reached different conclusions regarding the availability of restitution under § 13(b): (i) the 9th Circuit’s decision in FTC v. AMG Capital Management; and (ii) the 7th Circuit’s ruling in FTC v. Credit Bureau Center (covered by InfoBytes here), which held that Section 13(b) does not give the FTC power to order restitution.
In examining “whether Congress, by enacting §13(b) and using the words ‘permanent injunction,’ granted the Commission authority to obtain monetary relief directly from courts and effectively bypass the requirements of the administrative process,” the Court unanimously held that § 13(b) “does not explicitly authorize the Commission to obtain court-ordered monetary relief,” and that “such relief is foreclosed by the structure and history of the Act.” As such, the Court determined that it is “highly unlikely” that Congress would grant the FTC authority to circumvent traditional § 5 administrative proceedings by collecting restitution or disgorgement as an equitable relief power. Moreover, the Court discussed § 19 of the FTC Act, which was enacted two years after § 13(b) and “authorizes district courts to grant ‘such relief as the court finds necessary to redress injury to consumers,’ including through the ‘refund of money or return of property.’” The Court noted that since § 19 has limited authority and is only available against those who have engaged in an unfair or deceptive act or practice through which the FTC has issued a final cease and desist order (i.e. through an administrative proceeding), the Court found it “highly unlikely that Congress would have enacted provisions expressly authorizing conditioned and limited monetary relief if the Act, via §13(b), had already implicitly allowed the Commission to obtain that same monetary relief and more without satisfying those conditions and limitations.” Further, the Court stated that it was unlikely that Congress would have granted the FTC authority to “so readily” circumvent traditional § 5 administrative proceedings.
The Court stated that nothing in its opinion, however, prohibits the FTC “from using its § 5 or § 19 authority to obtain restitution on behalf of consumers,” adding that if the Commission “believes that authority too cumbersome or otherwise inadequate, it is, of course, free to ask Congress to grant it further remedial authority”—a request that the FTC made before the Senate Committee on Commerce, Science, and Transportation on Oversight of the Federal Trade Commission in 2020 and again on April 20, 2021 (covered by InfoBytes here). The Court reversed the judgment against the petitioners and remanded the case for further proceedings in line with its opinion.
FTC acting Chairwoman Rebecca Kelly Slaughter issued a statement following the Court’s decision: “With this ruling, the Court has deprived the FTC of the strongest tool we had to help consumers when they need it most. We urge Congress to act swiftly to restore and strengthen the powers of the agency so we can make wronged consumers whole.”
FTC provides AI guidance
On April 19, the FTC’s Bureau of Consumer Protection wrote a blog post identifying lessons learned to manage the consumer protection risks of artificial intelligence (AI) technology and algorithms. According to the FTC, over the years the Commission has addressed the challenges presented by the use of AI and algorithms to make decisions about consumers, and has taken many enforcement actions against companies for allegedly violating laws such as the FTC Act, FCRA, and ECOA when using AI and machine learning technology. The FTC stated that it has used its expertise with these laws to: (i) report on big data analytics and machine learning; (ii) conduct a hearing on algorithms, AI, and predictive analytics; and (iii) issue business guidance on AI and algorithms. To assist companies navigating AI, the FTC has provided the following guidance:
- Start with the right foundation. From the beginning, companies should consider ways to enhance data sets, design models to account for data gaps, and confine where or how models are used. The FTC advised that if a “data set is missing information from particular populations, using that data to build an AI model may yield results that are unfair or inequitable to legally protected groups.”
- Watch out for discriminatory outcomes. It is vital for companies to test algorithms—both prior to use and periodically after that—to prevent discrimination based on race, gender, or other protected classes.
- Embrace transparency and independence. Companies should consider how to embrace transparency and independence, such as “by using transparency frameworks and independent standards, by conducting and publishing the results of independent audits, and by opening. . . data or source code to outside inspection.”
- Don’t exaggerate what your algorithm can do or whether it can deliver fair or unbiased results. Under the FTC Act, company “statements to business customers and consumers alike must be truthful, non-deceptive, and backed up by evidence.”
- Data transparency. In the FTC guidance on AI last year, as previously covered by InfoBytes, an advisory warned companies to be careful about how they get the data that powers their models.
- Do more good than harm. Companies are warned that if their models cause “more harm than good—that is, in Section 5 parlance, if it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers and not outweighed by countervailing benefits to consumers or to competition—the FTC can challenge the use of that model as unfair.”
- Importance of accountability. The FTC warns of the importance of being transparent and independent and cautions companies to hold themselves accountable or the FTC may do it for them.
FTC settles with sellers of antennas, signal amplifiers
On April 8, the U.S. District Court for the Southern District of New York issued a nearly $32 million judgment against the owners and operators of a New York-based enterprise that sells antennas and amplifiers (collectively, “defendants”) for allegedly misleading customers about the quality of their products. The agency alleges in its complaint that the defendants violated the FTC Act by “making deceptive performance claims for their over-the-air television antennas and related signal amplifiers, using deceptive consumer endorsements, and misrepresenting that some of their web pages were objective news reports about the antennas.” Under the terms of the order, the company is barred from making misleading claims about the products’ quality, the number of channels users can acquire, or any other claims about its ranking compared to other products. While the order imposes a $32 million judgment against the defendants, the full judgment will be suspended upon payment of $650,000, subject to certain conditions.
CFPB and FTC release 2020 FDCPA report
On March 22, the CFPB and the FTC released their 2020 annual report to Congress on the administration of the FDCPA. Under a memorandum of understanding, the agencies are provided joint FDCPA enforcement responsibility and may share supervisory and consumer complaint information, as well as collaborate on education efforts. Among other things, the report provides a broad overview of the debt collection industry during the Covid-19 pandemic and highlights enforcement actions, education efforts, policy initiatives, and supervisory findings. The report also notes that the Bureau handled roughly 82,700 complaints filed by consumers about first- and third-party debt collectors in 2020, up from the 75,000 complaints it received in 2019, and engaged in four public enforcement actions arising from alleged FDCPA violations. Judgments resulting from these actions yielded nearly $15.2 million in consumer redress and $80,000 in civil money penalties. Additionally, the report discusses the Bureau’s FDCPA-rulemaking actions taken last year, including the issuance of two final rules amending Regulation F, which implements the FDCPA (covered by InfoBytes here and here). The report notes that both final rules are scheduled to take effect on November 30, but also refers to a February statement released by acting Director Dave Uejio, in which he “directed staff to ‘explore options for preserving the status quo’” with respect to the debt collection rules.
Earlier in the week, the FTC announced it provided the CFPB last month with its annual summary of debt collection-related activities taken in 2020. While the FTC’s debt collection program primarily focuses on enforcement investigations and litigation with respect to violations of the FDCPA and the FTC Act, the summary also highlights Commission efforts to engage in public outreach, as well as partnerships with the Bureau and other government agencies to combat unlawful debt collection practices. Highlights of the summary include:
- The creation of Operation Corrupt Collector, a nationwide enforcement and outreach effort led by the FTC in coordination with the CFPB and more than 50 federal and state law enforcement partners to target illegal debt collection practices (covered by InfoBytes here).
- The FTC filed or resolved seven cases against 39 defendants, obtaining $26 million in judgments.
- The FTC accused a company and three of its officers of allegedly engaging in passive debt collection—a practice known as “debt parking”—in which the defendants placed debts that consumers did not owe or the defendants were not authorized to collect on consumers’ credit reports without first attempting to communicate with the consumers about the debts (covered by InfoBytes here).
- The FTC and the New York attorney general permanently banned an individual defendant accused of engaging in “serious and repeated violations of law” from participating in debt collection activities (covered by InfoBytes here).
- The FTC produced educational materials for both consumers and debt collectors covering rights and responsibilities under the FDCPA and FTC Act, including resources specifically for Spanish speakers.
FTC, multiple states halt charitable telefunding operation
On March 4, the FTC, together with state attorneys general from 38 states and the District of Columbia, the secretaries of state from Colorado, Georgia, Maryland, North Carolina, and Tennessee, the Florida Department of Agriculture and Consumer Services, and the Utah Division of Consumer Protection (collectively, “plaintiffs”), announced settlements with a telefunding operation whose charitable fundraising calls allegedly collected over $110 million using deceptive solicitations. The plaintiffs’ complaint alleged, among other things, that the defendants engaged in deceptive fundraising by placing more than 1.3 billion prerecorded robocalls to convince consumers to donate to “practically nonexistent charitable programs.” The charitable organizations then paid the defendants typically 80 to 90 percent of every donation, the complaint states, noting that certain defendants knew that almost none of the donations would be spent supporting the charitable programs. The plaintiffs contended that these false or misleading actions violated the FTC Act. Moreover, in many instances, the plaintiffs alleged that the defendants knowingly violated the Telemarketing Sales Rule (TSR) by using soundboard technology to place the telemarketing calls. Using pre-recorded messages in calls to first-time donors is a violation of the TSR, the plaintiffs stated, as is using soundboard technology in calls to prior donors without first disclosing to recipients that they may opt-out of all future calls and providing them with a mechanism to do so.
Proposed settlements (see here, here, and here) reached with one group of defendants will, among other things, permanently ban them from engaging in any fundraising activities, conducting telemarketing to sell goods or services, or using existing donor information. The defendants will also be required to pay $110,063,848 each, which is either partially or fully suspended due to the defendants’ inability to pay.
Additionally, proposed settlements reached with the two fundraising company defendants and their senior managers (see here, here, and here) will permanently prohibit them from engaging in any fundraising activities or consulting on behalf of a charitable organization or nonprofit organization claiming to work on behalf of causes similar to those noted in the complaint. These defendants will also be banned from using robocalls connected to telemarketing, engaging in abusive calling practices, or making misrepresentations about a good, service, or contribution. The defendants will further be required to disclose when a donation is not tax deductible. The individual defendants also are required to pay $110,063,843 each, which is partially suspended due to the defendants’ inability to pay, while the two corporate defendants, along with two of the individual defendants, are subject to a partially suspended monetary judgment of $1.6 million.
FTC settles with income scam operation targeting Latina consumers
On March 2, the FTC announced a settlement with a company and its owners (collectively, “defendants”) that used Spanish-language ads targeting Latina consumers with false promises of large profits reselling luxury products. The action—a part of the FTC’s “Operation Income Illusion” sweep (covered by InfoBytes here)—alleged the defendants violated the FTC Act by making false or unsubstantiated earnings claims when marketing work-at-home opportunities. The FTC also claimed the defendants violated the Telemarketing Sales Rule by, among other things, misrepresenting material aspects of the investment opportunities and routinely using threats or intimidation “to coerce consumers to pay Defendants, including but not limited to threatening consumers with damage to consumers’ credit history, false legal actions, and reports to federal government authorities.” The proposed settlement imposes a $7 million judgment, which is partially suspended due to the defendants’ inability to pay. The defendants are also permanently banned from (i) selling any goods or service that is represented as a means for consumers to make money working from home or elsewhere; (ii) making any deceptive claims about the risk, liquidity, earnings potential, or profitability of any goods or services, and making such claims through telemarketing; and (iii) using threats or intimidation to coerce consumers to pay for goods or services.
FTC adds two defendants to real estate investment scheme suit
On February 25, the FTC and the Utah Division of Consumer Protection announced the addition of two additional defendants in an action taken against a Utah-based company and its affiliates (collectively, “defendants”) for allegedly using deceptive marketing to persuade consumers to attend real estate events costing thousands of dollars. As previously covered by InfoBytes, the FTC and the Utah Division of Consumer Protection claimed that the defendants violated the FTC Act, the Consumer Review Fairness Act (CRFA), and Utah state law by marketing real estate events with false claims and using celebrity endorsements. The defendants allegedly promised consumers they would (i) earn thousands of dollars in profits from real estate investment “flips” by using the defendants’ products; (ii) receive 100 percent funding for their real estate investments, regardless of credit history; and (iii) receive a full refund if they do not make “a minimum of three times” the price of the workshop within six months. In October 2019, the U.S. District Court for the District of Utah granted a temporary restraining order against the defendants, prohibiting the defendants from continuing to make unsupported marketing claims and from interfering with consumers’ ability to review their products.
FTC settles with payday lender
On February 11, the FTC announced a settlement with the owners and operators of a payday lending enterprise (collectively, “defendants”) for allegedly deceptively overcharging consumers and withdrawing money from consumers’ accounts without permission. The FTC filed a complaint against the defendants last year claiming, among other things, that the defendants violated the FTC Act, the Telemarketing Sales Rule, TILA/Regulation Z, and EFTA/Regulation E, by advertising loans with fixed payback terms and promising consumers that their loans would be repaid after a pre-determined number of payments. However, the FTC claimed that in many cases the payback terms defaulted to debiting the financial fee only, and the U.S. District Court for the District of Nevada granted a temporary restraining order against the defendants (covered by InfoBytes here). Under the terms of the stipulated final order, the FTC ordered that any consumer debt for loans issued and assigned to the defendants are “deemed paid in full to the extent that such [e]xisting [d]ebt exceeds the amount financed plus one finance charge. . . .” The defendants are also (i) permanently banned from the payday lending industry, including making loans or extending credit of any kind; (ii) prohibited from making any misrepresentations related to the collection of any debt; (iii) prohibited from making unauthorized electronic fund transfers from consumers’ bank accounts; and (iv) permanently banned from creating, or causing to be created, any remotely created payment orders. A $114 million monetary judgment will be partially suspended upon completion of asset transfers from all financial institutions holding accounts in the defendants’ names.
FTC settles with credit card laundering defendants
On February 10, the FTC announced settlements with several defendants that allegedly violated the FTC Act and the Telemarketing sales Rule by assisting an operation responsible for laundering millions of dollars in credit card charges through fraudulent merchant accounts. As previously covered by InfoBytes, the defendants engaged in a credit card laundering scheme with the operation to process credit card charges through merchant accounts set up by the operation under fictitious company names instead of processing charges through a single merchant account under the operation’s name. According to the FTC’s complaint, the defendants purportedly (i) underwrote and approved the operation’s fictitious companies; (ii) set up merchant accounts with its acquirer for the fictitious companies; (iii) used sales agents to market processing services to merchants; (iv) processed nearly $6 million through credit card networks; and (v) transferred sales revenue from the transactions to companies controlled by the defendants.
The settlements (see here, here, and here) permanently ban three of the defendants from payment processing and telemarketing or acting as independent sales organizations or sales agents in the payment processing industry. A previously issued settlement against a fourth defendant banned him from payment processing or acting as an independent sales organization or sales agent in the payment processing industry. Monetary judgments totaling more than $10.7 million collectively have been suspended due to the defendants’ inability to pay.