On November 2, the FTC and the State of Washington announced a proposed settlement resolving allegations against a payment processor, its equipment leasing affiliate, and two individual defendants. The complaint, filed in the U.S. District Court for the Western District of Washington, alleges that the defendants deceived small businesses about processing costs and cancellation terms in violation of Section 5 of the FTC Act, Section 521 of the GLBA, and the Washington Consumer Protection Act.

Specifically, the complaint alleges that the defendants: (i) promised savings and low rates for payment processing services based on a “strategic alliance” with two card networks that did not exist; (ii) failed to disclose that the payment processing equipment is provided through a lease and subscription agreement with the company’s equipment leasing affiliate, which has a non-cancelable four-year term, automatically renews if the client does not take action, and could cost more than the equipment itself; (iii) marketed enrollment as “risk free,” with a $500 payment to switch back, although the agreements carried an automatically renewing three-year term and a $695 early termination fee; (iv) advertised point-of-sale payment processing equipment as “free” or at “no cost”; (v) unfairly erected barriers to cancellation and did not provide businesses with simple mechanisms to cancel services; and (vi) made false claims regarding prospective sales agent earnings in connection with its recruit and training practices.

Under the proposed stipulated order, which awaits court approval, the defendants neither admitted nor denied the allegations. The order would: (i) bar misrepresentations about costs, savings, and cancellation terms; (ii) require disclosures, express informed consent, and a simple cancellation mechanism for any offer or agreement to sell or provide any goods or services containing a provision under which the consumer’s silence or failure to take an affirmative action to reject a good or service or cancel the agreement is interpreted as acceptance or continued acceptance of the offer (i.e., negative option feature); and (iii) prohibit defendants from making unsubstantiated claims. Within 30 days after entry of the order, the defendants would also have to notify merchants that they may rescind their processing agreements, but not their equipment leases, within a 60-day window without an early termination fee. The order would further impose a $32,083,921 judgment, $600,000 of which would be satisfied through a merchant redress fund distributed pro rata based on merchant processing volume, with the remainder suspended based on the defendants’ sworn financial representations. The full judgment, less amounts paid, would become due as to any defendant if the defendants fail to fund and distribute the redress fund or if the court finds a material misstatement in their financial representations.