In a decision affirming the standard of individual liability under the Federal Trade Commission Act, the Fourth U.S. Circuit Court of Appeals upheld a $163 million verdict against the vice president of a company accused of deceptive “scareware” tactics.
The FTC sued Innovative Marketing, Inc., and six executives for violating Section 5 of the FTC Act by running an Internet scam. Innovative tricked consumers into purchasing computer security software by using ads that stated a computer scan found viruses and spyware that needed to be removed. No scans were ever conducted and consumers paid for unnecessary spyware programs.
All of the defendants settled or had a default judgment entered against them except for vice president Kristy Ross. After a bench trial, a federal court judge in Maryland found Ross liable and imposed the $163 million judgment in October 2012.
Ross appealed. She 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 committed by Innovative. She also contended that the federal court lacked the power to award consumer redress.
Neither contention swayed the Fourth Circuit.
Precedent – from the Second, Seventh, Eighth, Ninth, and Eleventh Circuits – supported the district court’s authority to award consumer redress as an equitable adjunct to its injunctive power, the panel wrote. Accordingly, it refused to “obliterate a significant part of the Commission’s remedial arsenal.”
As for Ross’s argument that she could not be held individually liable, she pushed to import a standard of proof from securities fraud cases that extended personal liability only when an individual had actual awareness of a specific deceptive practice and failed to act to stop the deception.
But the Fourth Circuit stuck with the standard relied upon by the district court. “We hold that one may be found individually liable under the Federal Trade Commission Act if she (1) participated directly in the deceptive practices or had authority to control those practices, and (2) had or should have had knowledge of the deceptive practices.
The second prong of the analysis “may be established by showing that the individual had actual knowledge of the deceptive conduct, was recklessly indifferent to its deceptiveness, or had an awareness of a high probability of deceptiveness and intentionally avoided learning the truth,” the panel added.
The court also disagreed with Ross’s challenges to the evidence supporting her liability. The individual liability standard did not require a specific link from Ross to a particular deceptive ad, the panel explained, but only evidence of whether she had authority to control the corporate entity’s practices.
Evidence was presented by the FTC that Ross served in a managerial role, directed the design of particular advertisements, and was a contact person for the purchase of advertising space on Innovative’s behalf.
“Given these facts, the district court could have reasonably inferred that Ross was actively and directly participating in multiple stages of the deceptive advertising scheme – she played a role in design, directed others to ‘add aggression’ to certain advertisements, was in a position of authority, had the power to discipline entire departments, and purchased substantial advertising space,” the panel wrote. “Ross made ‘countless decisions’ that demonstrated her authority to control [Innovative].”
To read the opinion in FTC v. Ross, click here.
Why it matters: The standard used by the Fourth Circuit maintains uniformity among the federal appellate courts, the panel said, and comports with the analysis used by the First, Ninth, Tenth, and Eleventh Circuits. To avoid a similarly frightening verdict, executives should be aware of the potential for individual liability under the FTC Act and the standard for culpability that will apply.