Antitrust Law Daily Wrap Up, ADVERTISING—N.D. Ohio: Affirmative defenses remain in FTC diploma misrepresentation suit, (Jul 18, 2016)

By Greg Hammond, J.D.

In an action in which the FTC claimed that a distance learning correspondence school falsely advertised that its diploma program was equivalent to a valid high school diploma, the school could proceed with affirmative defenses of estoppel, that it acted in good faith and in a lawful manner, and that its ads were privileged under the First Amendment, the federal district court in Cleveland has decided. The FTC’s motion to strike those three affirmative defenses was denied because they were not invalid as a matter of law (FTC v. Stratford Career Institute, July 15, 2016, Gwin, J.).

Stratford Career Institute is a distance learning correspondence school that falsely represented that consumers can successfully use Stratford’s diploma as a valid secondary school equivalency credential when seeking enrollment in higher educational institutions, applying for jobs, or for other purposes, the FTC alleged in its complaint. Stratford raised 11 affirmative defenses. The FTC moved to strike four of the affirmative defenses, including: (1) estoppel; (2) Stratford acted in good faith and in a lawful manner towards consumers and in conformity with all lawful laws and regulations in its advertising, marketing, and sales practices; (3) Stratford’s actions were privileged under the First Amendment; and (4) the FTC failed to take reasonable efforts to mitigate damages, if any, by delaying in bringing such claims and by failing to enter into a reasonable settlement agreement.

Estoppel. Stratford identified valid exceptions to the general estoppel rule—that an estopped party be a party to or in privity with a party to the initial suit—including that there was a substantive legal relationship between the non-party and party to judgment. The court determined that since there were valid exceptions that could validate Stratford’s defense, the court could not rule that the defense was invalid as a matter of law without resolving a factual dispute.

Good faith, lawfulness. The good faith defense was not insufficient as a matter of law, the court next decided, because Stratford’s good faith remains relevant to the determination of appropriate relief in this case, including permanent injunction. This affirmative defense—that Stratford acted lawfully and in good faith—also provided sufficient notice, according to the court, because the affirmative defense explicitly reports good faith action, in conformity with "all lawful laws," thereby notifying the FTC that the scope of the defense includes all "lawful laws." Stratford was not required to present further facts in pleading an affirmative defense.

First Amendment privilege. Stratford’s advertisements constituted commercial speech because the speech proposed an economic transaction by advertising the availability and price of their high school program, the court stated. This affirmative defense did not fail as a matter of law because the relation between the controversy and defense supports the defense’s validity.

Mitigation. The court, however, did strike the mitigation affirmative defense—that the FTC failed to mitigate damages. Mitigation of damages, according to the court, is not relevant to this claim because the plaintiffs seek injunction, the refund of monies paid, and disgorgement of ill-gotten monies. These are equitable remedies dependent upon the amount of gain received by the defendant, rather than the FTC. The FTC has no established duty to mitigate damages by bringing suits earlier or entering into settlements, the court stated. The defense also failed as a matter of law because the FTC acts on behalf of the government and brought this action to protect the public.

The case is No. 16-CV-371.

Attorneys: Amy Cadle Hocevar for the FTC. Allison B. Shealy (Shulman, Rogers, Gandal, Pordy & Ecker P.A.) and Justin L. Monday (Benesch, Friedlander, Coplan & Aronoff LLP) for Stratford Career Institute.

Companies: Stratford Career Institute

Cases: Advertising OhioNews