Does your business treat its FTC consent order like a big hippo in the room?  A recent ruling by the Second Circuit suggests it’s time to stop.  In Federal Trade Commission v. BlueHippo Funding, LLC, the Second Circuit joined others in holding that civil contempt sanctions for businesses caught violating the advertising prohibitions of FTC consent orders are measured based on the advertisers’ gross revenues for the advertised products or services.  While this decision obviously emphasizes the importance of careful compliance monitoring in the first place, it also escalates the already substantial litigation risks businesses face once they are subject to an FTC contempt motion.  Not only must accused businesses weigh the risk of losing their profits, they must also consider the potential of losing the out-of-pocket costs incurred manufacturing the product or providing the service at issue.

BlueHippo sold computers to consumers with bad credit by offering them a seemingly straightforward payment plan: after making thirteen consecutive installment payments, BlueHippo would send the computer and let the consumers finance the remainder owed.  If consumers missed an installment, they would need to either pay off the entire balance before receiving the computer or they could convert their previous installment payments to store credits for other BlueHippo products.  However, at the point of purchase, BlueHippo failed to disclose that consumers could not apply those store credits to shipping and tax costs, or that they could only place one online store order at a time.  As a result, in 2008, the FTC sued BlueHippo for Section 5 violations, and the parties negotiated a consent order that was entered by the Southern District of New York.

In late 2009, the FTC moved for an order to show cause why BlueHippo and its CEO should not be held in civil contempt for violating the 2008 consent order.  The district court agreed with the FTC that BlueHippo and its CEO had violated the order by failing to provide computers within promised timeframes (or at all) and failing to provide its store credit policy at the point of purchase.  Nonetheless, the court only awarded the FTC $609,856 for those consumers who never received any computer or store credit at all, rather than the roughly $14 million in gross revenues sought by the FTC for all consumers who purchased BlueHippo’s services during the contempt period.

On appeal by the FTC, the Second Circuit joined the EighthNinthTenth, and Eleventh Circuits in holding that in the context of FTC contempt actions arising out of prohibited advertising, consumers presumptively rely on such misrepresentations if they are “widely disseminated” and of the kind “usually relied upon by reasonably prudent persons.”  Going one step further, the Second Circuit also ruled that when such misrepresentations are made prior to purchase, the baseline for calculating damages is the defendant’s gross sales receipts for the advertised product or service, unless the defendant can demonstrate that “certain amounts should offset the sanctions assessed against them.”

The FTC in recent years has begun enforcing consent orders and stipulated judgments at an impressive pace, and the Second Circuit’s decision in Blue Hippo may be a harbinger of even more increased FTC scrutiny in years to come.  For an independent agency like the FTC with precious, limited resources, the civil contempt process offers an attractive alternative to traditional litigation.  Federal lawsuits under Section 5 of the FTC Act can drag on for years, gobbling up substantial agency resources as the parties plow their way through motions practices, discovery, pre-trial preparations, and eventually trial.  By contrast, where a party has already consented to a court order prohibiting specific conduct, the FTC can sidestep this whole costly process by demonstrating—via a civil contempt motion in the original district court—that the enjoined party has failed to abide by its court-ordered commitment.  This, in effect, offers the FTC a quick and efficient path to victory against a party that has already agreed not to engage in a certain practice from a judge who is already familiar with the litigation.

The Second Circuit’s BlueHippo decision provides yet another incentive for the FTC to dust off existing consent decrees to ensure that enjoined parties are upholding their ends of the bargain.  Now is the perfect time for businesses and individuals that are subject to FTC order to re-assess their advertising practices and to eliminate any problematic advertising.  Nobody wants to have a hippo in the room, but ignoring him once he’s there can lead to catastrophe.