The Ninth Circuit Court of Appeals affirmed that a California federal court had the power to impose an $18.2 million restitution award upon the former president of Commerce Planet, Inc. after a finding that the company violated Section 5 of the Federal Trade Commission Act.
The dispute began when the FTC filed suit against Commerce Planet, Inc. and three of its top officers for engaging in unfair or deceptive business practices with regard to the marketing of a product called "OnlineSupplier." Although the company touted the product as a Web site hosting service enabling consumers to make money by selling products online, the agency said it was a negative option scam that made millions by tricking purchasers who were surprised to find themselves paying $29.95 to $59.95 each month.
Two of the individual defendants and the company settled with the FTC but Commerce Planet's former president, Charles Gugliuzza, elected to stand trial. After a 16-day bench trial in California federal court, the judge ruled the company had violated Section 5 and held Gugliuzza personally liable for the unlawful conduct. The defendant exercised operational control over the company during the relevant time period, the court held, and oversaw and directed the marketing of the product, including approval of the negative option feature. Gugliuzza was permanently enjoined from engaging in similar misconduct and ordered to pay $18.2 million in restitution, an amount determined by reducing the $36.4 million total net revenues of the company.
Gugliuzza appealed, arguing that the district court lacked the authority to award restitution, or, alternatively, should have limited the award to the unjust gains he personally received, which was roughly $3 million.
The Ninth Circuit had no trouble finding that the district court had the authority to award restitution pursuant to Section 13(b) of the Federal Trade Commission Act, which provides that "in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction," with case law from the Circuit that district courts are empowered to grant "any ancillary relief necessary to accomplish complete justice."
This equitable jurisdiction includes the power to deprive defendants of their unjust gains from past violations, the panel said, and does not limit a court to award restitution limited to the unjust gains each defendant personally received.
"Restitution does involve the return to the plaintiff of gains a defendant has unjustly received," the court noted. "But the relevant question in a case like this one—in which an individual defendant violates the FTC Act by acting in concert with a corporate entity—is whether the individual may be held personally liable for restitution of the corporation's unjust gains. The answer is yes—provided the requirements for imposing joint and several liability are satisfied, and here they are."
Gugliuzza satisfied the two-part test for determining when an individual may be held personally liable for corporate violations of the Act, the court said, because the district court found he had the authority to control the unlawful acts or practices at issue and had actual knowledge of the misrepresentations involved, with an awareness of the high probability of fraud.
If an individual may be held personally liable for corporate violations of the FTC Act under this test, nothing more needs to be shown to justify imposition of joint and several liability for the corporation's restitution obligations, the panel explained. "Defendants held jointly and severally liable for payment of restitution are liable for the unjust gains the defendants collectively received, even if that amount exceeds (as it usually will) what any one defendant pocketed from the unlawful scheme," the court wrote.
However, the district court judge failed to enter judgment against Gugliuzza on the basis of joint and several liability. Lacking the power to correct the error, the Ninth Circuit vacated the judgment and remanded for the court to either hold Gugliuzza jointly and severally liable with Commerce Planet for the $18.2 million or limit the award to the unjust gains Gugliuzza himself received (about $3 million). The court added that Gugliuzza should receive a credit for any sums the FTC collected from the settling defendants, such as the $522,000 paid by the other individuals and the company.
The panel also rejected Gugliuzza's challenge to the amount of the restitution award. Under the two-step burden-shifting framework used to calculate restitution awards under Section 13(b), the FTC presented undisputed evidence that Commerce Planet received $36.4 million in net revenues from the sale of OnlineSupplier during the relevant period. The agency also proved that the company made widely disseminated material misrepresentations, entitling it to a presumption that all consumers who purchased the product did so in reliance on the misrepresentations.
When the burden shifted to the defendant, he argued that not all consumers who purchased OnlineSupplier were deceived, but he failed to offer a reliable method of quantifying what portion were free from deception, the panel said. The district court could therefore rely on testimony from the FTC's expert that "most" consumers were deceived—evidence that actually benefitted Gugliuzza as the court relied upon it to reduce the award.
"The district court did not abuse its discretion when it instead decided to err on the side of caution by slashing the otherwise-permissible award in half," the Ninth Circuit wrote. "Any error in that regard could only have benefitted Gugliuzza."
To read the opinion in FTC v. Commerce Planet, click here.
Why it matters: The Ninth Circuit decision offers a valuable roadmap to individual liability under the FTC Act. Federal district courts have the power to order restitution where an individual defendant is found to have violated the Act by directing or acting in concert with a corporate entity, and the amount of the award is not limited to the individual's unlawful gains. Joint and several liability can leave a company executive like Gugliuzza on the hook for millions of dollars when the court determines the individual had the authority to control the unlawful acts or practices at issue and had actual knowledge of the misrepresentations involved. In the defendant's case, although he claimed to have walked away with just $3 million, he may be liable for the $18.2 million judgment (less the $522,000 from the other defendants' settlement deal).