The U.S. Court of Appeals for the Ninth Circuit held that an online payday lender’s “loan note” violated § 5 of the Federal Trade Commission Act because, although it was “technically accurate,” the lender’s online loan portal made it difficult to discern the loan terms and therefore likely to mislead consumers about the terms of the loan.

Accordingly, the Ninth Circuit affirmed the trial court’s summary judgment and relief order in favor of the FTC.

The defendant owner controlled a series of companies that offered high-interest payday loans to borrowers. The loans were offered exclusively through a number of proprietary websites.

Potential borrowers would enter personal information into one of the owner’s websites, and approved borrowers would be directed to a webpage that disclosed the loan’s terms and conditions by hyperlinking to seven documents, including the Loan Note and Disclosures, which provided the essential terms of the loan as mandated by the federal Truth in Lending Act (TILA).

Borrowers could open the loan note if they chose, but they could also ignore the document and electronically sign their names by clicking a button that said: “I AGREE Send Me My Cash!”

In April 2012, the FTC filed a lawsuit against [the owner] and his businesses alleging their business practices violated § 5 of the FTC Act prohibition against “unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(1).

Specifically, the FTC alleged that the owner violated § 5 because the terms disclosed in the loan note did not reflect the terms that the owner actually enforced. Thus, the FTC asked the court to permanently enjoin the owner from engaging in consumer lending and to disgorge “ill-gotten monies.”

The parties agreed to bifurcate the proceedings in the trial court into a “liability phase” and a “relief phase.”

During the liability phase, the FTC moved for summary judgment on the FTC Act claim, which the trial court granted.

In the relief phase, the trial court enjoined the owner from assisting “any consumer in receiving or applying for any loan or other extension of Consumer Credit,” and ordered the owner to pay approximately $1.27 billion in equitable monetary relief to the FTC.

The trial court then directed the FTC to direct as much money as practicable to “direct redress to customers,” and then to “other equitable relief . . . reasonably related to the defendants’ practices alleged in the complaint,” and then to “the U.S. Treasury as disgorgement.”

The owner subsequently appealed both the entry of summary judgment and the relief order.

On appeal, the owner first argued that the trial court erred in granting the motion for summary judgment finding him liable for violating § 5 of the FTC Act.

As you may recall, to prevail on a claim under § 5, the FTC must show that a representation, omission, or practice is “likely to mislead consumers acting reasonably under the circumstances.” This consumer-friendly standard does not require the FTC to provide “[p]roof of actual deception,” only that the “net impression” of the representation would be likely to mislead – even if such representation “also contains truthful disclosures.”

The FTC argued that the loan note was likely to mislead borrowers about the terms of the loan. Specifically, although the top third of the loan note contained the so-called “TILA box,” which contained the “amount financed,” “finance charge,” total of payments,” and “annual percentage rate,” the fine print below the TILA box was essential to understanding the loan’s terms.

The densely packed text below the TILA box set out two alternative payments scenarios: (1) the “decline-to-renew” option, and (2) the “renewal” option.

Importantly, borrowers hoping to exercise the decline-to-renew option had to navigate through an online customer-service portal and affirmatively choose to “change the Scheduled” payment, and agree to “Pay Total Balance.” This had to be done at least three business days before the next scheduled payment.

Alternatively, borrowers who did nothing would default to the “renewal” option, which would end up costing the borrower significantly more than the amount listed in the TILA box.

Based on these facts, the Ninth Circuit agreed with the FTC “that the loan note was deceptive because it did not accurately disclose the loan’s terms.”

In reaching its conclusion, the Court noted that “under the terms that [the owner] actually enforced, borrowers had to perform a series of affirmative actions in order to decline to renew the loan and thus pay only the amount reported in the TILA box.”

Further, “the fine print’s oblique description of the loan’s terms fails to cure the misleading ‘net impression’ created by the TILA box.”

The owner argued that the loan note was not deceptive because it was “technically accurate,” but the Ninth Circuit explained that “the FTC Act’s consumer-friendly standard does not require only technical accuracy.”

The owner next argued that the court’s narrow focus on the loan note failed to capture the “net impression” on borrowers. The Court disagreed, ruling that the owner “wrongly assumes that non-deceptive business practices can somehow cure the deceptive nature of the loan note.” Instead, the FTC “must show only that a specific ‘representation’ was ‘likely to mislead.’”

Finally, the owner argued that summary judgment was inappropriate because he demonstrated a genuine issue of material fact. Specifically, the owner pointed to deposition testimony from consumers that they had not read the disclosures but understood them upon reading them at their depositions, and his expert’s testimony.

The Ninth Circuit again disagreed, ruling that because proof of “actual deception” is unnecessary to establish a violation, and the owner could be liable if the loan note “possesses a tendency to deceive.” The Court further ruled that the owner’s expert testimony was insufficient to create a question of fact.

Thus, the Ninth Circuit held “that the loan note was likely to deceive a consumer acting reasonably under the circumstances,” and therefore “the trial court did not err in entering summary judgment against [the owner] as to the liability phase.”

With respect to the relief phase, the owner argued that the FTC improperly used § 13(b) to pursue penal monetary relief under the guise of equitable authority, because § 13(b) provides only that trial courts may enter “injunction[s].” 15 U.S.C. § 53(b).

Although the Ninth Circuit found the argument to have “some force,” it concluded that it was “foreclosed by our precedent,” which had “repeatedly held that § 14 ‘empowers trial courts to grant any ancillary relief necessary to accomplish complete justice, including restitution.’”

The owner requested that the Court revisit its precedent in light of the Supreme Court’s decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), wherein the Court determined that a claim for “disgorgement imposed as a sanction for violating the federal securities law” was a “penalty” within the meaning of the federal catch-all statute of limitations.

The owner argued that Kokesh severs the line of reasoning that links “injunctions” to “equitable monetary relief.”

However, the Ninth Circuit explained that a “three-judge panel may not overturn prior circuit authority unless it is ‘clearly irreconcilable with the reasoning or theory of intervening higher authority,’” which threshold the Court determined was not met.

Further, the owner argued that the trial court abused its discretion in calculating the amount of the award, because the $1.27 billion judgment overstated his unjust gains. The Ninth Circuit again disagreed, ruling that “the trial court did not abuse its discretion when calculating the amount it ordered [the owner] to pay.”

Finally, the owner challenged the trial court’s decision to enjoin him from engaging in consumer lending, but the Ninth Circuit again could not “find fault with the trial court’s decision to enter a permanent injunction.”

Accordingly, the Ninth Circuit affirmed the judgment of the trial court in its entirety.