A federal judge is letting the Federal Trade Commission continue portions of its attempt to implicate Walmart for wire fraud committed using the retail giant’s money order service.
U.S. District Judge Manish Shah on March 27 ruled on the FTC’s October motion opposing Walmart’s August request to dismiss the action, which Walmart has called an “egregious overreach” rooted in “the criminal actions of completely unrelated third-party fraudsters” and ignores Walmart’s “extensive efforts” to thwart such conduct and also alleging the FTC lacks “constitutional or statutory authority to bring its lawsuit.”
At issue are Walmart’s money-transfer services offered for more than a decade through MoneyGram, Ria Financial Services and Western Union. The world’s largest retailer took credit for saving customers billions in fees by making the market competitive and further positioned itself like Western Union or the U.S. Postal Service — “overwhelmingly used for legitimate services even if scammers sometimes take advantage” — and said the scammers are the criminals, not the service provider.
Still, the FTC alleged Walmart violated the Federal Trade Commission Act and the Telemarketing Sales Rule by failing “to implement and maintain effective policies, properly train and oversee its employees, warn consumers or address suspicious transactions,” Shah wrote.
Shah first dismissed the FTC’s allegation Walmart violated the TSR through providing “substantial assistance” to fraud, invoking the rule’s accessory liability provision. He said a plaintiff is required to show specifics about which party committed the underlying fraud because the rule “doesn’t prohibit fraud generally or all fraud involving phone calls” so, as pleaded, it’s difficult to assess which facts the FTC wants to prove at trial.
“This is a case about a lot of fraud: hundreds of thousands of allegedly fraudulent money transfers involving many millions of dollars,” Shah wrote. “And while the complaint lays out the breadth of the alleged misconduct by fraudsters making use of Walmart’s services, the FTC hasn’t plausibly alleged that any of this fraud fits the TSR’s definitions of seller, telemarketer and telemarketing.”
Implying the FTC action included “allegations about allegations,” Shah said the claim lacked the required specificity and gave the agency room to amend its filing, such as by adding more detail about what Walmart knew, or what knowledge it might have consciously avoided, as well as stronger links between its actions and those of the people who directly defrauded customers.
However, Shah preserved part of the FTC’s allegation Walmart is guilty of unfair acts or practices. He said the FTC couldn’t pursue a claim it violated the FTC Act because of its alleged TSR violations, having already dismissed that claim, but will allow the federal regulators to argue the company failed to effectively prevent fraudulent transfers.
Only the FTC has the power to pursue this theory of liability, Shah explained, and there are congressional limits on its power to declare something unfair which “also restrict the circumstances when an act can be found unfair in court,” he wrote, saying the law’s primary focus is whether consumers suffer a substantial legal injury.
While Walmart has “waived argument as to causation, substantial injury, and whether the injury to consumers was outweighed by countervailing benefits,” the FTC has “waived argument that Walmart’s fraud-prevention practices were immoral, unethical, oppressive, or unscrupulous.”
Walmart argued the FTC failed to show corporate conduct erected an obstacle preventing eventual fraud victims from freely deciding whether to use its wire transfer service. But Shah said the complaint alleges “Walmart took advantage of an obstacle in the market — scams that caused consumers (lacking the knowledge or ability to protect themselves) to send money to fraudsters. Put differently, by failing to warn consumers or provide avenues to mitigate their losses, Walmart withheld crucial information from consumers, leaving fraud victims with insufficient information.”
Although Shah said the FTC “may ultimately fail” to prove Walmart could’ve changed outcomes through more strict fraud prevention policies, the agency’s allegations are sufficient to avoid dismissal.
Walmart further argued that even if that claim survives, Shah should dismiss the government’s request for a permanent injunction owing to a failure to allege ongoing misconduct. Shah disagreed, explaining the complaint adequately alleges potential for future harm.
“The complaint says that Walmart repeatedly failed to train its employees or institute robust fraud-prevention systems, despite waves of consumer complaints, repeated audits by its money transfer providers that reported deficiencies, and receipt of consent orders requiring more,” Shah wrote. “While the complaint doesn’t date all of its allegations (suggesting that the underlying conduct continues), the FTC identifies problems with Walmart’s inadequate fraud-prevention efforts as recently as 2019. Walmart corrected some of its practices only after the FTC began investigating in 2017. And the company has opportunity and incentive to continue its lax security practices: Walmart still processes large amounts of money transfers and makes millions of dollars in related fees.”
Shah further rejected Walmart’s position the FTC is violating its due process rights through a vague application of its own law, saying the relevant section “doesn’t implicate any constitutional rights, regulates economic behavior, and is a civil statute (not a criminal one). That means that Walmart is entitled to the lowest level of notice under the Due Process Clause.”
Finally, Shah said Walmart alleged the process for removing FTC commissioners is unconstitutional and therefore the agency is unduly exercising executive power. Shah explained the appointment process was constitutional and any concerns about how they may be removed from those posts “isn’t a reason to void the FTC’s action in this case.”
Walmart has been represented in the action by attorneys Sean M. Berkowitz, Johanna M. Spellman, Roman Martinez, Drew R. Wisniewski, Jessica L. Saba and Blake E. Stafford, of the firm of Latham & Watkins, of Chicago and Washington, D.C.; and Hashim M. Mooppan and Krista Perry Heckmann, of Jones Day, of Washington, D.C.