FTC's $9.8 million settlement holds firm and its principals liable for "consumer protection" violations in transactions with small businesses


Financial Services Alert


On May 4, 2021, a federal district court entered a stipulated settlement between the Federal Trade Commission (FTC) and a closely held firm, its principals, and a related entity (the defendants) requiring the payment by the defendants of $9.8 million to resolve allegations that they had engaged in unfair and deceptive conduct towards small businesses in violation of the Federal Trade Commission Act (FTCA) in connection with merchant cash advances.

In particular, the FTC’s complaint alleged that Yellowstone Capital, LLC and the other defendants had misrepresented key aspects of their products, including the requirement that businesses provide collateral and personal guarantees, as well as the specific financing amounts that would be disbursed.  In addition, the defendants allegedly made excess, unauthorized withdrawals from accounts after the full amount had been repaid.

Notable points

The settlement is notable for two reasons.  First, the relevant provision in the FTCA protects “consumers” from unfair or deceptive acts or practices.  In this case, the targeted “consumers” were small businesses.  This is not the first time that the FTC has taken action to protect small businesses as consumers, but the Commission’s authority to do so is based on limited case law.  Firms should anticipate additional consumer compliance enforcement by the FTC in business-to-business transactions as the Biden Administration seeks to enhance protections for small businesses.

Second, the FTC held the firm’s principals directly liable for the unfair and deceptive conduct.  The FTC’s decision to hold the principals liable could foreshadow additional actions against the principals of closely held firmsincluding those that operate outside of the finance spacefor unfair or deceptive conduct towards small businesses, depending on the level of involvement by the principals in the unlawful conduct.

The case is Federal Trade Commission v. Yellowstone Capital LLC, et al., No. 1:20-cv-06023-LAK (SDNY). Learn more about its implications by contacting any of the authors.