Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—2nd Cir.: FTC entitled to presumption of consumer reliance for contempt damages, (Aug 13, 2014)

By Greg Hammond, J.D.

The FTC successfully appealed a district court’s decision that failed to apply a presumption of consumer reliance and harm in a civil contempt action. In vacating and remanding the lower court’s decision, the U.S. Court of Appeals in New York City joined the Eighth, Ninth, Tenth, and Eleventh Circuits in applying a presumption of consumer reliance—once a proper showing is made—that attaches to potential consumers at the instant of the defendant’s initial misrepresentation (FTC v. BlueHippo Funding, LLC, August 12, 2014, Hall, P.).

Background. BlueHippo Funding, LLC marketed computers and other electronic goods to consumers based on conditional installment contracts. If consumers made a certain number of timely payments, BlueHippo would mail the computer to the customer and allow them to finance the rest of the balance. However, if customers missed a payment, they would not qualify for financing and could either pay off the computer on a layaway program or convert the previous payments to store credit for other products. The FTC alleged that the company failed to inform consumers that store credits could not be applied to shipping fees or taxes, or that only one purchase could be placed at a time. The FTC filed suit against BlueHippo in 2008 in the federal district court in New York City, and the parties subsequently reached a consent order.

In 2009, however, the Commission initiated contempt proceedings, alleging that BlueHippo violated the consent order by: (1) failing to ship 1,348 orders within the company’s promised three-week time frame; (2) failing to fulfill 677 orders by issuing a computer or store credit merchandise; (3) failing to provide consumers with details of the company’s store credit policy; and (4) conditioning the extension of credit on mandatory preauthorized transfers. Despite the Commission’s request for over $14 million in damages on behalf of 55,892 consumers, the district court awarded only $609,856, finding that the FTC “conceded [] it has failed to provide record evidence approximating damages to consumers.” The Commission appealed the district court’s decision.

Presumption of consumer reliance. On appeal, the FTC argued that the district court erred by: (1) failing to consider the express language of the consent order, which established the time of injury as the moment consumers sign up to buy a computer without having received all the material terms of the agreement; (2) failing to apply a presumption of consumer reliance and harm in an FTC civil contempt action; and (3) concluding that the Commission conceded it failed to prove damages associated with misrepresentations and omissions regarding BlueHippo’s store credit and refund policy.

The court agreed with the Commission, finding that an “injury to a consumer occurs at the instant of a seller’s misrepresentations, which taint the consumer’s subsequent purchasing decisions,” and that “permitting a presumption of reliance in FTC claims for contempt damages would thus further the Commission’s statutory purpose to protect consumers.” Consequently, the court joined the Eighth, Ninth, Tenth, and Eleventh Circuits, holding that the Commission is entitled to a presumption of consumer reliance upon a showing that: (1) BlueHippo made material misrepresentations or omissions that “were of a kind usually relied upon by reasonable prudent persons”; (2) the misrepresentations or omissions were widely disseminated; and (3) consumers actually purchased BlueHippo’s products. In the event the FTC makes a showing to trigger the presumption, the calculation of damages would be the measure of loss beginning with BlueHippo’s gross receipts derived from its deceptive conduct—over $14 million in damages. Consequently, the lower court’s decision was vacated, and the case was remanded to consider the presumption factors and calculation of contempt damages.

The case number is 11-374-cv.

Attorneys: David C. Shonka, Sr., Michael D. Bergman, James A. Kohm, Robert S. Kaye, Amanda C. Basta, Lawrence DeMille-Wagman, John F. Daly, and Willard K. Tom for the Federal Trade Commission. Martin S. Himeles, Jr. and John J. Connolly (Zuckerman Spaeder LLP) for BlueHippo Funding, LLC.

Companies: BlueHippo Funding, LLC

Cases: ConsumerProtection ConnecticutNews NewYorkNews VermontNews