Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—S.D. Tex.: FTC wins monetary relief for deceptive advertising of PPE shipping times during the pandemic, (Mar 25, 2024)

By Seth Abrams, J.D., M.A.

Injunctive relief was also entered that, among other things, prevented the further sale of PPE products.

The federal district court in Houston issued its findings of fact and conclusions of law after a bench trial in an action brought by the FTC against defendants, Zaappaaz LLC and Azim Makanojiya, over their conduct selling personal protective equipment (PPE) during the pandemic. The court found that injunctive relief was appropriate, and the FTC is entitled to an award of total monetary relief around $37.5 million. This relief was divided into two groups: (1) for those who paid for PPE products not received (about $12.2 million) and (2) for those who received late-shipped PPE products (about $25.3 million) (FTC v. Zaappaaz, LLC, March 21, 2024, Ellison, K.).

Zaappaaz is a Texas corporation owned and operated by Makanojiya. Until March 2020, it primarily sold consumer promotional goods, such as wristbands, lanyards, keychains, and can coolers. Zaappaaz began selling PPE in March 2020, but experienced issues filing PPE orders in a timely manner. Nevertheless, it advertised its PPE as in stock and advertised and “provided” rush and same day shipping options. For example, its website stated that the products were “guaranteed to ship today,” “in stock – ships same day,” and “all products in stock ready to ship.” Despite these assertions, Zaappaaz failed to timely deliver PPE to a large portion of its customers and “failed to notify them of the anticipated delay after their orders were placed or provide them with an option to cancel their orders.” It did not ship within the advertised time frames. It also delivered defective PPE and denied refunds to consumers. Zaappaaz is still operating and sells products on six different websites. Makanojiya operates other businesses that sell and ship consumer goods.

The FTC previously won summary judgment on the issue of liability when a magistrate judge’s report and recommendation was adopted. The issues remaining for trial were “(1) whether Defendants’ occupation, failure to recognize their wrongdoing, and failure to make assurances against repetition weighed in favor of injunctive relief; and (2) whether the FTC could show by a preponderance of evidence if some amount of monetary relief—less than full refunds—was necessary to redress the injury of consumers who received late delivered orders.” The FTC sought injunctive relief pursuant to Section 13 of the FTC Act. It FTC sought monetary relief pursuant to Section 19 of the FTC ACT and the Mail, Internet, or Telephone Order Merchandise Rule (“MITOR”). The court had previously ruled that Zaappaaz violated MITOR and the FTC Act and that Makanojiya is personally liable for these violations.

Injunctive relief. The court considered six factors to determine whether to issue a permanent injunction. The first factor was egregiousness, which the court found in the behavior of Zaappaaz and Makanojiya. They “took advantage of consumers’ desperation” and knowingly engaged in false advertising about shipping times, and then failed to ship orders on time, if at all. They “consistently misled consumers by aggressively marketing guaranteed delivery date and ‘in stock’ PPE despite struggling to source and ship the products.” Second, Zaappaaz and Makanojiya’s actions were not isolated and impacted over 50,000 orders. Third, they acted with a “high degree of scienter.” Fourth, Zaappaaz and Makanojiya offered no assurances against future violations. There is no evidence that they currently have a MITOR policy in place. Fifth, they “refused to recognize the wrongful nature of their conduct.” Sixth, their occupations present opportunities for future violations of Section 5 and MITOR. Zaappaaz is still operating, and Makanojiya owns several other businesses that also sell products online.

As a result, the court concluded that a permanent injunction was required preventing Zaappaaz and Makanojiya from advertising or selling PPE. The court also concluded that a ban prohibiting misrepresentations “involving the sale of any product” was also necessary. The court found that monitoring measures were necessary and narrowly tailored to help ensure Zaappaaz and Makanojiya’s compliance with the injunctive relief. The court found that these provisions were “required to allow the FTC to effectively monitor [Zaappaaz and Makanojiya’s] business activities and take appropriate enforcement action in the future, if necessary.”

Monetary relief. The court previously ruled that approximately $12.2 million was required compensation for consumers that paid for PPE but received nothing. The court revised its previous conclusion that full refunds were not necessary for those were received their shipment late. Zaappaaz’s false statements tainted the purchasing decisions. The court had found that the total unrefunded amount consumer paid for late shipped goods was approximately $25.3 million. The court also noted that MITOR required refunds for these purchases because consumers were never offered the option of obtaining a refund or consenting to delay. The FTC was entitled to a total award of relief of approximately $37.5 million.

The court noted that “some customers who received late orders may have been satisfied with their PPE orders,” and the FTC Act prohibits punitive damage awards. As a result, the court implemented a redress plan applicable to refunds for consumers who received late-shipped goods. The $25.3 million will be held in an escrow and funds must be returned (minus administrative costs) if they remain unclaimed 120 days after consumers are notified of their availability. The customers who did not receive their orders are not subject to the redress plan and shall receive refunds automatically.

The case is No. 4:20-cv-02717.

Attorneys: Adrienne Janine Lighten for the FTC. Jillian Marie Perry (Butch Boyd Law Firm) and Jeremy Richard Stone (Mehaffy Weber PC) for Zaappaaz, LLC d/b/a Wrist-Band.com d/b/a Customlanyard.Net.

Companies: Zaappaaz, LLC d/b/a Wrist-Band.com d/b/a Customlanyard.Net

Cases: ConsumerProtection TexasNews FederalTradeCommissionNews