On July 29, the Federal Trade Commission (“FTC”) announced a settlement with First American Payment Systems LP, a Texas-based nationwide payment processor, and two of its sales agent affiliates, Think Point Financial LLC and Eliot Management Group LLC (collectively, “First American”), in an action alleging hidden terms, “surprise” exit fees, and charges made to merchants without their consent.  Under the proposed stipulated order, First American has agreed to repay $4.9 million in redress to merchants.           

According to the FTC, First American made false claims regarding fees and costs to induce merchants, many of whom are small businesses – including sole proprietorships and individuals who did not speak English –  to enroll in its payment processing services.  First American and its sales agents purportedly made representations to merchants that their total monthly fees would be low and provided projections of monthly savings that failed to account for annual or semi-annual rate pricing increases.  Once enrolled, First American allegedly withdrew funds from the merchants’ accounts without their consent and made it difficult and costly to cancel their service. 

The FTC’s complaint states claims for violations of Section 5 of the FTC Act for misrepresentations made to merchants regarding monthly fees and the ability to cancel contracts, deceptive claims that customers would save a significant amount of money using their services, and unfair debiting practices, specifically withdrawing money from customers’ bank accounts after they had revoked authorization to do so.  The action also includes claims for violations of the Restore Online Shoppers’ Confidence Act (“ROSCA”), a law which, among other things, prohibits charging consumers for goods and services sold in online transactions with a “negative option”–where consumer silence or failure to affirmatively reject goods or services or cancel the contract is interpreted as acceptance–without clear and conspicuous disclosures, express informed consent, and a mechanism to stop recurring charges. 

Because ROSCA is a consumer protection statute, the FTC’s allegations of ROSCA violations in a case involving customers that are small businesses is noteworthy.  ROSCA does not define “consumer” but it incorporates the FTC’s enforcement authority under the FTC Act.  First American’s alleged failure to comply with ROSCA also constitutes an unfair or deceptive practice under Section 5 of the FTC Act, according to the FTC.  Last October, the FTC issued a policy statement regarding negative option marketing intended “to put companies on notice that they will face legal action if their sign-up process fails to provide clear, up-front information, obtain consumers’ informed consent, and make cancellation easy.”

Also noteworthy are the allegations related to First American’s online enrollment system and presentment of the contractual terms.  According to the FTC, First American’s enrollment system for new customers hid the fact that merchants were agreeing to a three year term that would automatically renew and that they would be charged a $495 cancellation fee.  The enrollment screen in which the merchants agreed to the terms and conditions of the contract did not include the full agreement or any mention of the contract term, early-termination fee, auto-renewal provision, or cancellation requirements.  Rather, it included hyperlinks to additional documents with those material terms.  Merchants could click to accept the contract without having to first click on the hyperlinks to review those terms.  In situations where merchants did cancel their contracts, the FTC alleges First American failed to provide a “simple mechanism” to stop recurring charges, including failing to disclose cancellation or ACH revocation requirements.  As a result, in addition to the cancellation charge, many merchants continued to have their accounts auto-debited after cancellation.

Under the terms of the proposed stipulated order, filed in a Texas federal district court, First American does not admit or deny the allegations in the complaint.  Law360 reported that First American issued a statement in which it “flatly denies” the allegations, claiming the FTC’s allegations are “one-sided and based on a flawed understanding of our business and industry,” but indicates that it agreed to settle with the FTC in order to avoid a protracted legal battle. 

Under the stipulated order, First American is enjoined from engaging in the practices alleged and must disclose specific terms and cancellation procedure, and obtain express informed consent to all terms and express authorizations to debit accounts as explicitly detailed in the settlement.  They must also establish and maintain a compliance program.  First American is enjoined from collecting early termination fees from merchants who enrolled before April 6, 2020 and must pay a monetary judgment of $4.9 million to the FTC to provide redress to impacted merchants.    

This matter is the most recent example of the FTC’s focus on small businesses and increasing use of Section 5 of the FTC Act, and now ROSCA, to protect small businesses.  It is also part of a growing body of legislative, regulatory, and enforcement activity on the federal and state levels directed at protecting small businesses from practices that are targeted by consumer protection laws.