Antitrust Law Daily Wrap Up, TOP STORY—4th Cir.: Judgment against executive for company’s deceptive advertising upheld, (Feb 26, 2014)

By Jody Coultas, J.D.

A district court did not err in finding that an Innovation Marketing, Inc. (IMI) executive was individually liable for the company’s deceptive advertising that violated the FTC Act, according to the U.S. Court of Appeals in Richmond, Virginia (FTC v. Ross, February 25, 2014, Davis, A.).

The FTC sued IMI and several of its high-level executives and founders for running a deceptive internet “scareware” scheme that tricked consumers into purchasing computer security software in violation of the FTC Act. The advertisements stated that a scan of consumers’ computers had been performed and detected viruses, spyware, and “illegal” pornography when no such scans were ever conducted.

Following a bench trial, the district court enjoined the IMI executive from participating in the deceptive practices and hold the executive jointly and severally liable for equitable monetary consumer redress in the amount of $163,167,539. On appeal, the executive argued that the district court did not have the authority to award consumer redress or a money judgment.

Jurisdiction. The executive argued that the structure, history, and purpose of the Federal Trade Commission Act weighed against the conclusion that district courts have the authority to award consumer redress. Congress’ invocation of the federal district court’s equitable jurisdiction brings with it the full “power to decide all relevant matters in dispute and to award complete relief even though the decree includes that which might be conferred by a court of law.” By authorizing the district court to issue a permanent injunction under the FTC Act, Congress allowed district courts to exercise the full measure of its equitable jurisdiction. Precedent required the court to reject the executive’s argument, as it would forsake years of federal appellate decisions and create a circuit split. Accepting the executive’s argument would obliterate a significant part of the FTC’s remedial arsenal.

Individual liability. The court declined to find that the district court used the incorrect standard to determine whether the executive was individually liable for the FTC Act violations. The district court held that an individual could be held liable under the Federal Trade Commission Act if the FTC proves that the individual (1) participated directly in the deceptive practices or had authority to control them, and (2) had knowledge of the deceptive conduct. The executive argued that the court should have required proof of an individual’s (1) authority to control the specific practices alleged to be deceptive and a (2) failure to act within such control authority while aware of apparent fraud. The proposed standard would only allow the FTC to pursue individuals when they had actual awareness of specific deceptive practices and failed to act to stop the deception. This proposed standard ignored the law of every other sister court that has considered the issue.

The district court did not err in finding that the executive had authority to control the deceptive acts and directly participated in the deceptive marketing scheme, according to the court. The executive’s duties included “product optimization,” which the district court could reasonably have inferred afforded her authority and control over the nature and quality of the advertisements. Other employees requested the executive’s authority to approve certain advertisements, and the executive would review and/or edit the advertisements before approving them. The executive played a role in design, was in a position of authority, and purchased substantial advertising space. Although the executive did not believe that the advertisements were deceptive, she was on notice of multiple complaints about IMI’s advertisements, including that they would cause consumers to automatically download unwanted IMI products.

Evidentiary issues. There was no reversible error in the district court’s evidentiary rulings challenged by the executive, according to the court.

The case is No. 12-2340.

Attorneys: Robert P. Greenspoon (Flachsbart & Greenspoon, LLC) for Kristy Ross. Theodore Metzler for FTC.

Companies: Innovation Marketing, Inc.

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