Antitrust Law Daily Wrap Up, CONSUMER PROTECTION NEWS: Ninth Circuit’s rejection of damage award based on defendants’ gain rather than consumers’ loss in FTC case is subject of Supreme Court petition, (Mar 6, 2014)
By Peter Reap, J.D., LL.M.
A magazine subscription telemarketing business and other defendants (collectively, the “petitioners”) in an FTC action have asked the U.S. Supreme Court to review a ruling of the U.S. Court of Appeals for the Ninth Circuit holding that a district court 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 petition, filed February 27, 2014, asserts that there is a split among the circuits over whether the injunctive relief provisions of Section 13(b) of the FTC Act allow district courts to award the FTC damages for supposed consumer loss (Publishers Business Services, Inc. v. FTC, Dkt. 13-1045).
Background. 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 also 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.” Therefore, the Ninth Circuit 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 Ninth Circuit 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.
Petition for review. According to the petition, the split among the circuits was between the Ninth Circuit, which in this case not only endorsed legal damages as an appropriate remedy under Section 13(b) but made them mandatory, and the Second, Third, and Eleventh Circuits, which have followed the Supreme Court’s precedent on equitable jurisdiction in construing Section 13(b) as allowing uniquely equitable monetary relief. The petition claims that the stakes in this conflict are not only workable, consistent standards for Section 13(b) monetary relief, but the long tradition of deference accorded district courts in fashioning that relief.
The impact of the Ninth Circuit’s ruling are great, the petitioners argue. The decision engrafted remedies of customer redress and damages onto Section 13(b), remedies that Congress explicitly provided for in another section of the FTC Act, Section 19(b). Further, by making those remedies mandatory, the Ninth Circuit strips a district court’s discretion to do equity based on the circumstances as it finds them—the very thing courts had used to justify Section 13(b) monetary relief in the first place.
The questions presented in the petition are:
Does the Supreme Court’s analysis of equitable jurisdiction in Great West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), apply to Section 13(b) of the FTC Act so that relief is limited to typical equitable remedies, or does Section 13(b) allow district courts to award the FTC virtually unlimited legal relief including damages for alleged customer loss?
Does a district court abuse discretion under Section 13(b) by conforming monetary awards to the unique facts of the case and typical equitable remedies, such as a defendant’s unjust gain from alleged violations of the FTC Act?
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