The U.S. Court of Appeals for the Fourth Circuit recently upheld a $163 million judgment against a woman that allegedly assisted in duping consumers into buying computer-security software. In doing so, the court validated the ability of the Federal Trade Commission (“FTC” or “Commission”) to seek monetary damages for unfair competition and deceptive trade practices that are injurious to consumers.
The FTC sued the defendants in 2008 in federal court in Baltimore, alleging that they falsely claimed that scans had detected viruses, spyware and illegal pornography on consumers' computers. The FTC alleged that more than 1 million people purchased computer-security products from the company for $39.95 or more to fix the purported problems.
According to the Commission, the scans were fake and charged the defendants with violating Section 5 of the FTC Act (the “Act”), which prohibits unfair or deceptive practices, and Section 13(b), which authorizes courts to issue injunctions for violations of the Act.
All defendants settled or had a default judgment entered against them except for the corporate vice president. A federal court judge found her liable and imposed the multi-million dollar judgment in October 2012.
The interesting part about this case is the defense offered on appeal.
Specifically, the appellant contended that the federal court lacked the ability to use the Act to collect money and hold individuals liable. The argument was predicated upon the plain text of Section 13(b) which only provides for the granting injunctive relief. Appellant also told the federal appellate panel that she was not a “control person” at the company and that the FTC failed to prove that she had authority for and knowledge of the deceptive acts.
Given the increasing number of regulatory actions and coercive settlements based upon the cost-prohibitive nature of defending such enforcement actions, such a ruling would have been a rather devastating one for the Commission, if ultimately successful. A loss for the FTC would have "obliterate[d] a significant part of the Commission's remedial arsenal," Fourth Circuit Judge Andre Davis wrote in the case of first impression for the appeals court.
Appellant argued that only Section 19(b) of the FTC Act explicitly permits monetary relief but the Commission is first required to exhaust all administrative remedies. Moreover, appellant asserted, "to read monetary remedies into the language of Section 13(b), especially in light of complementary Section 19(b), would be to permit the FTC to expand its authority beyond the express command of Congress."
A number of other courts of appeal have considered and rejected similar arguments during the past few decades. Although appellant’s contentions did not sway the Fourth Circuit, the court did not find the arguments entirely unpersuasive. In fact, the court held that the “statute’s text does not expressly authorize the award of consumer redress.”
However, the Fourth Circuit panel ultimately stated that when Congress, in the Act authorized the issuance of injunctions, it also “presumably authorized the district court to exercise the full measure of its equitable jurisdiction” – including monetary penalties.
The Fourth Circuit also rejected appellant’s argument that she could not be held individually liable because she did not possess actual awareness of a specific deceptive practice. The court held that one may be found individually liable under the Act if he/she participates directly in the deceptive practices (or, has authority to control those practices) and has, or should have, knowledge of the deceptive practices.
Clearly, specific intent and subjective knowledge are not necessarily required. Corporate executives should contact an FTC defense lawyer with questions regarding the potential for individual liability under the Act and the applicable standard of culpability.
This decision by the Fourth Circuit Court of Appeals was watched closely by legal and business communities. To read the opinion in FTC v. Ross, click here.
Appellant is expected to seek Supreme Court review shortly and it appears as though some heavy hitters are lining up in support as amici. The Supreme Court has never approved of the FTC’s use of Section 13(b) to seek monetary remedies. The Court had the issue presented to it in a 1980’s Seventh Circuit case but denied cert. However, that was prior to a 1990’s decision that appellant has argued nullifies FTC justifications.
Anyone interested in materials for researching amicus participation should contact the author of this article.
Information conveyed in this article is provided for informational purposes only and does not constitute, nor should it be relied upon, as legal advice. No person should act or rely on any information in this article without seeking the advice of an attorney.