FTC’s Amended TSR Complaint ‘Fares No Better’ Than Original, Says Walmart
Four months ago, U.S. District Judge Manish Shah for Northern Illinois rejected the FTC’s “unprecedented effort” to use the “substantial-assistance” provision of the Telemarketing Sales Rule “to impose novel liability on Walmart for processing money transfers at the request of customers who later claimed that they had been defrauded by third-party criminals,” the retailer said. It filed a memorandum of law Friday (docket 1:22-cv-03372) in support of its motion to dismiss the FTC’s June 30 amended complaint for failure to state a claim.
The FTC alleges Walmart continued to process fraud-induced transfers at its stores while failing to do enough to warn consumers of the risks and help them make informed choices. Shah’s March 27 order partially denied Walmart’s motion to dismiss the FTC’s original complaint, permitting the commission to proceed on its FTC Act Section 5 unfair competition claims. Walmart seeks to certify the order for interlocutory appeal before the 7th Circuit for a constitutional challenge of the FTC’s litigation powers. The FTC’s June 30 amended complaint sought to bolster its TSR allegations against Walmart that the judge previously rejected (see 2307030001).
Shah’s March 27 ruling was “comprehensive” on the TSR claims, said Walmart’s memorandum. It said the FTC’s original complaint failed to allege underlying TSR violations by telemarketers, or that Walmart “knew of, or consciously disregarded,” those underlying TSR violations when processing its customers’ money transfers. Shah also said the FTC failed to allege that Walmart’s processing of money transfers “constituted substantial assistance to the criminal fraudsters,” it said. The FTC’s amended complaint is an attempt “to remedy those fundamental pleading deficiencies, but it fares no better than the original,” it said.
The FTC “still fails to sufficiently allege that the vast majority of transfers at issue in this case” satisfy the TSR’s definition of telemarketing, said Walmart. Most of the alleged schemes don’t involve purchase of goods or services, Shah’s “rejection of the FTC’s original TSR claim on precisely that ground,” it said. The “handful” of isolated telemarketing allegations that arguably do satisfy that threshold requirement “otherwise lack the particularity required under Rule 9(b),” it said.
The FTC also failed to fix the other problems the court “identified with its TSR theory,” said Walmart. The agency still fails to allege details about the majority of transactions in this case that would show Walmart knew or consciously avoided knowing about underlying TSR violations, it said. “Its red-flag theory of conscious avoidance is still alleged in the abstract, divorced from the alleged transactions" underlying its claims, it said.
The amended complaint also fails to state a claim that Walmart’s conduct qualifies as “substantial assistance,” which in this case “requires actual knowledge of TSR violations,” said Walmart. The FTC certainly didn’t allege Walmart knew its own conduct violated the TSR, “as required for civil penalties,” it said.
The FTC’s TSR claims should again be dismissed, "this time with prejudice,” said Walmart’s memorandum. Walmart also asks Shah to revisit his decision to allow the FTC to proceed on its Section 5 claim. The FTC’s allegations don’t reflect conduct traditionally classified as unfair under Section 5, it said.
Because the U.S. Supreme Court upheld the FTC’s independence on the ground that the agency in 1935 possessed no executive power, Congress’ attempt in the 1970s to grant the FTC the executive power to file this suit “was unconstitutional, void, and severable,” said Walmart: “At a minimum, because these issues are dispositive and readily debatable on the merits, if the Court adheres to its prior rulings on those two issues, it should certify its decision for interlocutory appeal.”