Reply Brief — Universal Processing Services of Wisconsin, LLC, Petitioner v. Federal Trade Commission

Supreme Court briefJun 1, 2018

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NO. 17-1309

In the Supreme Court of the United States

UNIVERSAL PROCESSING SERVICES

OF WISCONSIN, LLC,

Petitioner,

FEDERAL TRADE COMMISSION,

Respondent.

On Petition for Writ of Certiorari to the

United States Court of Appeals for the Eleventh Circuit

REPLY BRIEF FOR PETITIONER

Kymberly Kochis

Alexander P. Fuchs

EVERSHEDS

SUTHERLAND (US) LLP

1114 Avenue of the Americas

The Grace Building, 40th Floor

New York, NY 10036

T: (212) 389-5000

F: (212) 389-5099

kymberlykochis@evershedssutherland.com

alexfuchs@evershedssutherland.com

Lewis S. Wiener

Counsel of Record

EVERSHEDS

SUTHERLAND (US) LLP

700 Sixth Street N.W.

Suite 700

Washington, D.C. 20001

T: (202) 383-0140

F: (202) 637-3593

lewiswiener@evershedssutherland.com

Counsel for Petitioner

Becker Gallagher · Cincinnati, OH · Washington, D.C. · 800.890.5001

TABLE OF CONTENTS

TABLE OF CITED AUTHORITIES . . . . . . . . . . . . . ii

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Universal Was Not Part of the TYS Scheme

Common Enterprise. . . . . . . . . . . . . . . . . . . . 3

II.

The Eleventh Circuit’s Imposition of Joint

and Several Liability Is Unprecedented. . . . . 4

III.

Liability for Violating the TSR Should Not

Be Conflated With the Imposition of Joint

and Several Liability. . . . . . . . . . . . . . . . . . . . 6

IV.

The Imposition of Joint and Several Liability

Violates Universal’s Due Process Rights. . . . 8

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TABLE OF CITED AUTHORITIES

CASES

Delaware Watch Co. v. FTC,

332 F.2d 745 (2d Cir. 1964) . . . . . . . . . . . . . . . . . 5

FTC v. Bay Area Bus. Council, Inc.,

423 F.3d 627 (7th Cir. 2005) . . . . . . . . . . . . . . 4, 5

FTC v. E.M.A. Nationwide, Inc.,

767 F.3d 611 (6th Cir. 2014) . . . . . . . . . . . . . . . . 4

Great-West Life & Annuity Ins. Co., v. Knudson,

534 U.S. 204 (2002) . . . . . . . . . . . . . . . . . . . . . . . 8

Howmet Corp. v. EPA,

614 F.3d 544 (D.C. Cir. 2010) . . . . . . . . . . . . . . . 9

Kokesh v. SEC,

137 S. Ct. 1635 (2017) . . . . . . . . . . . . . . . . . . . . . 8

Louisville & Nashville Railroad Co. v. SlossSheffield Steel & Iron Co.,

269 U.S. 217 (1925) . . . . . . . . . . . . . . . . . . . . . . . 5

State Farm Mut. Auto. Ins. Co. v. Campbell,

538 U.S. 408 (2003) . . . . . . . . . . . . . . . . . . . . . . . 8

STATUTES

15 U.S.C. § 45 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

TREATISES

Restatement (Second) of Torts § 876(b) (1979) . . . . 7

iii

REGULATIONS

16 C.F.R. § 310.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Telemarketing Sales Rules, 60 Fed. Reg. 43,842

(Aug. 23, 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

ARGUMENT

The Federal Trade Commission Act (“FTC Act”)

vests the Federal Trade Commission (“Commission”)

with limited authority to enjoin violations of the FTC

Act. See 15 U.S.C. § 45(a)(1). The Eleventh Circuit’s

opinion improperly expands this limited authority to

include joint and several liability against an entity that

was not alleged to have violated the FTC Act, was only

found liable for a violation of the Telemarketing Sales

Rule (“TSR”) and was not part of the common

enterprise that perpetrated the scheme. This case

presents an important question regarding the opinion’s

unwarranted expansion of remedies under the TSR,

and the impact this expansion will have on payment

processors and other intermediaries who play a vital

role in processing electronic transactions, which

account for the lion’s share of all commerce.

The outlier holding of the Eleventh Circuit is the

first time a court has imposed joint and several

liability: (1) for a violation of the TSR; and (2) on a

defendant that was not part of the common enterprise

(or had the requisite interrelatedness with or control

over its co-defendants) that perpetrated the underlying

substantive violations of the FTC Act. The opinion

below unreasonably expands the Commission’s ability

to seek joint and several liability against those who

played little to no role in the substantive FTC Act

violations, but received course of business payments

from defendants engaged in such misconduct.

Not only is the judgment incorrect as a matter of

law and in contrast to other circuits that have

addressed the applicability of joint and several liability,

it has significant implications for payment processors,

like Petitioner Universal Processing Services of

Wisconsin, LLC (“Universal”) and any entity acting as

a passive intermediary, in processing credit

transactions, which are ubiquitous in today’s economy.

They facilitate the vast majority of payments between

merchants and their customers. Without restraint,

under the rule espoused by the Eleventh Circuit, the

Commission will be free to find a financially-solvent

processor, like Universal, on which to allege

“substantial assistance” liability and, consequently,

joint and several liability, regardless of how tangential

that processor’s association with the underlying

wrongdoer. Payment processors will be turned into the

proverbial “brother’s keeper” for all merchants whose

transactions they process. This gives the Commission

extraordinary leverage to force processors to settle with

it to avoid the Damocles sword of potential massive

joint and several liability awards for the bad acts of

unrelated co-defendants that the processors do not

control.

The arguments raised by the Commission in

opposition to this petition lack merit and do not

diminish the need for Court intervention and guidance

on this crucial issue. The Commission contends that

the Eleventh Circuit’s holding does not conflict with the

holdings of other circuits, but neglects to note that no

other court has found a TSR violation alone sufficient

to impose joint and several liability, leaving the

Eleventh Circuit’s holding an outlier. Resp. Br. at 1314. Similarly, the Commission’s reliance on the

restatement of torts advances form over substance in

contending that being found to have provided

“substantial assistance” under the TSR, by virtue of its

name alone, is sufficient to impose joint and several

liability without any further analysis of the degree of

assistance provided. Id. at 11-13. Finally, the

Commission’s due process argument lacks merit as

Universal raised its lack of notice in its opening brief to

the Eleventh Circuit and Universal was not on notice

that its non-substantive violations of the TSR could

result in the imposition of joint and several liability.

Id. at 14-15.

This case presents the appropriate vehicle to

determine the proper scope of liability for companies

that are found solely liable for a TSR violation but are

not part of the common enterprise that perpetrated the

FTC Act violations. The Court should grant certiorari

and correct the Eleventh Circuit’s improper imposition

of joint and several liability beyond what the TSR and

FTC Act authorize.

Universal Was Not Part of the TYS Scheme

Common Enterprise.

In its opposition, the Commission portrays

Universal as an active participant in the Treasure Your

Success (“TYS”) scheme. Resp. Br. at 3-4. The

Commission’s insinuations of misconduct are contrary

to the findings below. The inconvenient fact is that the

Commission never even charged Universal with a

violation of the FTC Act, and no court ever found that

Universal was part of the common enterprise that

violated the FTC Act. App. 1-19.

Universal is in the business of helping merchants

process credit card transactions by linking merchants

with sponsoring bank members of the Visa and

MasterCard networks. The underlying action involved

a fraudulent scheme related to two merchant accounts

brought to Universal by an independent sales agent.

Id. at 5-6. For context, Universal maintained 15,000

merchant accounts at the time. Id. at 6. Eight months

after the first TYS account was opened, Universal shut

down the TYS accounts after noticing an increase in

refund claims (known as “chargebacks”). Id. That was

only the first of Universal’s many remedial steps.

The Commission did not allege that Universal

violated the FTC Act, controlled any of the common

enterprise defendants or participated in the common

enterprise. App. 8. Yet the Commission successfully

petitioned for an award of $1.7 million in equitable and

monetary relief against Universal under a theory of

joint and several liability. That sum represents the

entire amount of unjust gains accrued by the

participants in the TYS scheme (less chargeback

refunds already remitted by Universal) and nearly 255

times the amount by which Universal was unjustly

enriched. App. 5.

II.

The Eleventh Circuit’s Imposition of Joint

and Several Liability Is Unprecedented.

The Commission does not dispute that the Eleventh

Circuit’s Order is the first to impose joint and several

liability against a passive intermediary solely liable for

a TSR violation or on an entity that was not part of the

common enterprise. To date, courts of appeals have

imposed joint and several liability only where the

defendant is found to have violated the FTC Act and

been a member of the common enterprise (or had the

requisite interrelatedness or control over the entity)

that violated the FTC Act. See e.g., FTC v. E.M.A.

Nationwide, Inc., 767 F.3d 611, 636-37 (6th Cir. 2014);

FTC v. Bay Area Bus. Council, Inc., 423 F.3d 627, 635

(7th Cir. 2005); Delaware Watch Co. v. FTC, 332 F.2d

745, 746 (2d Cir. 1964). The absence of any case

imposing joint and several liability in the manner in

which it was imposed against Universal is striking.

The courts below went beyond the bounds of what other

courts have held, finding Universal jointly and

severally liability despite it only being found to have

violated the TSR and no proof—or even allegations—

that Universal was part of the common enterprise. The

Court should review the Eleventh Circuit’s opinion to

resolve this split so that businesses operating in

different jurisdictions can be guided accordingly.

The Commission’s reliance on Louisville &

Nashville Railroad Co. v. Sloss-Sheffield Steel & Iron

Co., 269 U.S. 217 (1925), is misplaced. The statute at

issue in Louisville specifically provided for the

imposition of joint and several liability by providing

that “common carrier[s] shall be liable for the full

amount of damages sustained in consequence of any

such violation of the provisions of [the statute].” Id. at

232. On the other hand, the TSR does not specifically

provide for the imposition of joint and several liability.

Moreover, in Louisville, the railroad’s liability was

premised on the fact that the excessive rates were

established by a joint agreement among various

railroads. Id. Although the railroad independently set

its own rate, it was done in concurrence with the other

railroads.

It is precisely this kind of common

agreement or enterprise that is lacking in this case and

therefore Louisville does not support the

unprecedented imposition of joint and several liability

against Universal.

III.

Liability for Violating the TSR Should Not

Be Conflated With the Imposition of Joint

and Several Liability.

The Eleventh Circuit incorrectly found that

violation of the TSR § 310.3 alone justifies the

imposition of joint and several liability. The

Commission, and the courts below, conflate the

substantial assistance rule with the imposition of joint

and several liability.

The TSR, however, explicitly draws a distinction

between joint and several liability and “substantial

assistance” under 16 C.F.R. § 310.3(b). Prior to the

promulgation of the TSR, the Commission “decline[d]

to read joint and several liability for sellers and

telemarketers into the Telemarketing Act.” TSR, 60

Fed. Reg. 43,842, 43,845 (Aug. 23, 1995). In its

response brief, the Commission explains that this

statement means only that “sellers and telemarketers

should not automatically be held jointly responsible for

the actions of the other.” Resp. Br. at 13. But that is

precisely what the Eleventh Circuit did here: it held

Universal jointly and severally liable solely because it

provided the TYS common enterprise defendants with

substantial assistance (credit card merchant accounts)

in violation of the TSR. App. 3.

In accepting the false premise that “substantial

assistance” permits the imposition of joint and several

liability, the Eleventh Circuit abrogated its duty to

conduct an analysis as to whether Universal’s conduct

was sufficient to warrant imposition of joint and

several liability.

Nor did the Eleventh Circuit

articulate a standard by which the imposition of joint

and several liability can be assessed. While the

Eleventh Circuit may be correct that a finding of a

common enterprise can suffice to justify the imposition

of joint and several liability, substantial assistance

alone cannot. To hold otherwise deviates from other

circuits and ignores the Commission’s unambiguous

guidance in the TSR’s commentary.

Furthermore, the Restatement (Second) of Torts

§ 876(b) does not state or imply that joint and several

liability attaches merely because one tortfeasor

assisted the other, regardless of the degree of

assistance. Restatement (Second) of Torts § 876(b)

comment D (“The assistance of or participation by the

defendant may be so slight that he is not liable for the

act of the other.”). The Restatement contemplates that

factors such as “the nature of the act encouraged, the

amount of assistance given by the defendant, his

presence or absence at the time of the tort, his relation

to the other and his state of mind are all considered.”

Id. These factors determine ultimate liability for the

tort of another and are akin to the common enterprise

test. Id.

The Commission dismisses the exceptions to joint

and several liability contained in the Restatement by

asserting that “the Telemarketing Sales rule applies by

its terms only to those who provide ‘substantial

assistance or support.’” Resp. Br. at 12. There is no

standard for when assistance of support is

“substantial” enough to constitute a violation of the

TSR, and the titling used in the TSR is not a substitute

for the analysis of factors contemplated by the

Restatement. The Court should articulate a standard

for courts determining whether substantial assistance

is enough to impose joint and several liability for the

bad acts of unrelated common enterprise defendants.

IV.

The Imposition of Joint and Several

Liability Violates Universal’s Due Process

Rights.

The Commission claims that joint and several

liability is equitable relief and not the type of penalty

that requires notice. Resp. Br. at 15. On the contrary,

it is irrelevant that the court of appeals called the relief

“equitable.” Indeed this relief was anything but

equitable: the Eleventh Circuit imposed penalties of

restitution and disgorgement on Universal in an

amount far beyond what Universal received as part of

its involvement in the TYS scheme. The cost to

Universal is precisely the type of impermissible

“grossly excessive or arbitrary punishment[] on a

tortfeasor” that requires notice. State Farm Mut. Auto.

Ins. Co. v. Campbell, 538 U.S. 408, 416 (2003); Kokesh

v. SEC, 137 S. Ct. 1635, 1644 (2017) (finding

disgorgement that exceeds the profits gained as a

result of a violation to be punitive rather than

remedial); see also Great-West Life & Annuity Ins. Co.,

v. Knudson, 534 U.S. 204, 214 (2002) (noting an award

of equitable restitution “must seek not to impose

personal liability on the defendant, but to restore to the

plaintiff particular funds or property in the defendant’s

possession”).

Universal was not on notice that its non-substantive

violations of the TSR could result in the imposition of

joint and several liability for the simple reason that the

Commission’s regulations do not contemplate such a

remedy and no court had imposed it. Despite the

unambiguous language in the Commission’s guidance

(see Sec. III supra) and no other court’s imposition of

joint and several liability in this context, the

Commission, without fair (or any) warning, pursued

the unprecedented imposition of joint and several

liability against Universal, following the district court’s

entry of summary judgment. The assessment of such

a penalty against Universal violates the due process

clause of the Fifth Amendment. See Howmet Corp. v.

EPA, 614 F.3d 544, 553 (D.C. Cir. 2010).1

CONCLUSION

The petition for a writ of certiorari should be

granted.

The Commission argues that Universal waived its due process

argument because it did not raise it in the court of appeals

proceedings. Resp. Br. at 14. This is plainly false. Appellant’s Br.

at 54 (11th Cir. Case No. 16-17727) (arguing that “because UPS

was not alleged to have violated the FTC Act, nor in fact found to

be in violation of the Act, UPS was not on notice that it could be

subject to remedies available under Section 13(b), including joint

and several liability”). Universal did not therefore waive its due

process argument.

Respectfully submitted,