Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—9th Cir.: Damage award based on defendants’ gain rather than consumers’ loss was abuse of discretion, (Sep 20, 2013)

By Tobias J. Gillett, J.D., LL.M.

In an FTC action against a magazine subscription telemarketing operation, the federal district court in Las Vegas abused its discretion in awarding damages based on the defendant’s unjust benefit, rather than the loss to consumers, and in holding three individual defendants not individually liable for monetary relief, the U.S. Court of Appeals in San Francisco has ruled (FTC v. Publishers Business Services, Inc., September 19, 2013, Per Curiam).

On May 20, 2008, the FTC filed a complaint in the federal district court in Las Vegas, alleging that Publishers Business Services, Inc., Ed Dantuma Enterprises, Inc., and six of its corporate officers and managers had engaged in deceptive and abusive telemarketing practices in connection with the sale of magazine subscriptions. The court granted the FTC’s motion for summary judgment and issued a permanent injunction (2010-1 Trade Cases ¶76,955). Following a hearing, the court awarded the FTC $191,219 in equitable damages and held two of the six individual defendants liable for monetary relief. The FTC appealed.

Damages. The appellate court concluded that the district court abused its discretion with respect to the amount of the damages award. The court found that the district court erred in focusing on the unjust gain to defendants in calculating the award rather than the loss to consumers. The court noted that the award in the present case was authorized under Section 13(b) of the FTC Act, which allows awards that may be greater than the defendant’s unjust enrichment rather than Section 19(b), which limits recovery to amounts necessary to provide redress to consumers.

The court also found that the district court erred in relying on the fact that it would be “either impossible or impracticable” to locate consumers in order to provide refunds, noting that returning value to individual consumers was not required for a Section 13(b) disgorgement remedy.

The district court improperly relied on a report by the defendant’s damages expert, which was premised “on the assumption that most consumers heard all the terms of the subscription so that they were not misled by the telemarketing operation.” The appellate court observed that the district court, in granting summary judgment, had found that the fraud “was not simply the failure to disclose all pertinent terms,” but rather that, even though the telemarketers disclosed all of the terms of the agreement by the end of a call, the net effect of the defendants’ sales practices was nonetheless misleading. Moreover, the expert’s assumption that the magazine subscriptions had some value was “not relevant, even if true,” because full restitution could be obtained even when the product purchased was not worthless.

Therefore, the court vacated the damages award and remanded it to the district court. The district court did not have to accept the FTC’s calculation of $34.4 million in damages based on gross receipts, but it “should base its calculation on the injury to consumers, not on the net revenues received by defendants,” the court instructed.

Individual liability. The court also found the district court abused its discretion in finding only two of the six corporate officers individually liable. The court observed that, to be liable for equitable restitution under the FTC Act, an individual would have to have directly participated in the deceptive acts or had the authority to control them, and have had “knowledge that the corporation or one of its agents engaged in dishonest or fraudulent conduct.” The FTC could establish knowledge by showing the defendant had actual knowledge of the misrepresentations, was recklessly indifferent to their truth or falsity, or had an awareness of the high probability of fraud and intentionally avoided learning the truth.

Here, three defendants held not liable by the district court had knowledge of—and some degree of control over or direct participation in—the misrepresentations. Therefore, the appellate court directed the district court to hold them liable on remand, as well as the two defendants previously found liable. However, the court found that the FTC had failed to present any evidence of the final defendant’s knowledge. Thus, the district court did not abuse its discretion in finding her not individually liable.

The case is No. 11-17270.

Attorneys: Faye Chen Barnouw for Federal Trade Commission. Brian R. Reeve (Snell & Wilmer, LLP) for Publishers Business Services, Inc.

Companies: Publishers Business Services, Inc.; Ed Dantuma Enterprises, Inc.

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