Several retailers have recently been sued in a series of class action lawsuits alleging claims related to the processing of checks as electronic funds transfers. Although we believe that the theories advanced in the lawsuits lack merit, this edition of Morgan Lewis Retail Did You Know? describes the cases and how retailers may avoid such lawsuits.
Background
Many retailers accept checks from customers and then process them as an electronic funds transfer (EFT). This typically involves using the routing and account numbers at the bottom of a check to initiate a debit of the customer's bank account. Often referred to as an "electronic check conversion" (ECK), the process is quick, efficient, less expensive, and more secure than endorsing and depositing physical checks, thus benefiting both consumers and retailers.
Regulations promulgated under the Electronic Fund Transfer Act (EFTA) expressly permit ECKs so long as the retailer provides notice, including, among other things, that the transaction may be processed as an EFT and whether there are any applicable fees. Retailers provide this notice in a variety of ways, including by posting a sign at the cash register, distributing a handout or mailing, or printing it on the customer's receipt. Class actions brought under the EFTA allow for an award of actual damages, and the court can impose a statutory penalty of up to $500,000 or 1% of the defendant's net worth, whichever is less.
The Lawsuits
The class action complaints, filed in Florida federal courts, allege that retailers violate the EFTA by failing to provide the required notice. Although many retailers accomplish notice with a sign at the point of sale, the plaintiffs take the position that the retailer must also provide an actual physical copy of the notice to the consumer. Although the cases were only recently filed and we believe the cases lack merit, it is likely that similar cases may be brought against other retailers. The cases brought so far purport to assert claims on behalf of a class of a single state of residents only, which suggests that there may be similar cases brought in other states.
Practical Implications
Retailers should consider their own disclosure practices for ECK transactions. Considering the plaintiffs' reading of the EFTA regulations to require that retailers provide a physical copy of the notice, retailers should consider ways to provide a copy of the notice to customers. The most efficient way is likely to add language to the receipt provided at the point of sale.
How We Can Help
We can assist our clients with understanding these cases and their effect on retailers' point of sale and disclosure practices. We have experience advising U.S. and international retailers with respect to retail operations issues and representing them in EFTA and similar class actions.
This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.
