A recently proposed multimillion-dollar settlement by a public company of a case brought against it under a Consumer Protection Act may lead unhappy customers and plaintiffs' attorneys to bring similar actions trying to take advantage of the substantial damages available under such statutes. As a result, companies doing business in states with Consumer Protection Acts, particularly those who bill merchants for services on an ongoing, transactional basis, should examine their billing practices to avoid being the next target.
   Generally, the goal of most state Consumer Protection Acts is to promote ethical business practices. For example, the Tennessee Consumer Protection Act declares that "unfair or deceptive acts or practices affecting the conduct of any trade or commerce constitute unlawful acts or practices." Under the TCPA, any person or entity, including any sophisticated corporation or other business, who suffers a loss due to these practices can sue under the statute for damages. If the violation is found to be intentional, three times the plaintiff's actual damages may be awarded. In addition to these treble damages, attorneys' fees are also available to prevailing plaintiffs.
   Tennessee is not the only state that has a "Consumer Protection Act." Many states have enacted legislation that, like the TCPA, closely follows Section 5 of the Federal Trade Commission Act, which provides that "unfair or deceptive acts or practices in or affecting commerce" are unlawful. Several states, including Tennessee, New York, Illinois and Florida, expressly provide that their consumer protection acts will be construed consistently with the interpretations of the FTC Act issued by the Federal Trade Commission and the federal courts. Unlike the state statutes, however, the FTC Act does not provide a private right of action for potential plaintiffs.
   A recent Tennessee case, American Golf Schools, L.L.C. v. EFS National Bank, clearly illustrates the need for companies providing electronic funds services, or other services charged on a transactional basis, to be aware of their potential liability under state consumer protection acts. According to publicly available government filings, in May, EFS, a processor of Visa and MasterCard transactions based in Memphis, Tennessee, agreed to a proposed $37.5 million settlement with a class of plaintiffs (consisting of similarly situated merchant customers billed by EFS). The plaintiffs' lawsuit alleged that EFS engaged in several unfair and deceptive trade practices and sought more than $70 million in damages. The plaintiffs alleged that the defendant violated the TCPA by:

• Withholding an increased discount rate for electronic transactions without prior notification.
• Charging an increased rate for manual or voice authorizations without prior notification.
• Applying new charges to bill statements without prior notification.
• Charging rates for services in excess of rates stated in the services agreement without prior notification.

   All of the claims are based upon EFS' failure to notify its customers of changed terms in the business relationship.

   Currently, the FTC is pursuing a similar case in Texas under Section 5(a) of the FTC Act. The FTC alleges that Certified Merchant Services, an independent sales organization serving merchant customers, violated Section 5(a) of the FTC Act by unilaterally modifying service contracts, debiting customers' bank accounts without authorization, failing to disclose the origin and existence of certain fees, and making other misrepresentations about services offered.
   EFS may have been willing to pay up to $37.5 million to settle its lawsuit because of the potential treble damages and attorneys' fees available under the TCPA, as well as concerns over the FTC's recent efforts in Texas. EFS may have avoided the litigation, or at least might have been in a better position to defend itself, by providing advance notice of fee changes and other alterations to customer terms, rather than by enacting such changes unilaterally.
   One lesson to be learned from EFS' situation is that changes to charges and fees, or other alterations to customer terms, should be fully disclosed to the customer in advance.
   Given the FTC's efforts in Texas and the recent proposed substantial settlement in Tennessee, companies providing electronic funds services to merchants likely may experience similar scrutiny. Ultimately, companies providing electronic funds services, or other services charged on a transactional basis, should heed the warnings in the lawsuit brought against EFS and the FTC action in Texas. Up-front disclosure of charges and fees not only provides a strong defense to a TCPA or similar state consumer protection act claim, as well as any possible FTC action, it also may prevent customers from becoming angry enough to sue in the first place. Straightforward, advance disclosure of changes to fees, charges or other customer terms is not only legally sound, it is good business.
   If your company is concerned about potential class action lawsuits in this area, one option to consider is inserting a mandatory arbitration clause into contracts with customers. By signing the contract, a customer would forfeit the right to have a judge or jury decide any dispute relating to the contract, with the only option being an arbitration proceeding. In addition to changing the forum for resolving claims, a mandatory arbitration clause may prevent claims from being filed altogether. The threshold dollar value of perceived "damages" at which a disgruntled customer would be willing to bring an individual claim would be substantially higher than the threshold for joining with others in a class action. There are, however, potential downsides to a mandatory arbitration clause, including: (1) arbitrators often are just as inclined to award substantial damages as juries, and (2) when an arbitrator reaches the wrong result, judicial review is extremely limited.