The Ninth Circuit handed the FTC a big win last week, affirming an $18 million award against Charles Gugliuzza, the former president and CEO of Commerce Planet. In its opinion, the Ninth Circuit affirmed the broad scope of equitable monetary remedies available to the FTC, especially in the Ninth Circuit. In doing so, the court rejected a host of arguments raised by Gugliuzza to the order against him including that imposing joint and several liability was a legal, not an equitable, remedy beyond the power of the court in an action brought by the FTC pursuant to Section 13(b). For those of you seeking a refresher on source and contours of the FTC’s ability to seek equitable monetary relief under Section 13 (b) see here.
The FTC sued Commerce Planet, Gugliuzza, and several other individuals for deceptively marketing a web-based money making opportunity including allegations that the defendants failed to properly disclose that the offer included a negative option renewal. The company and the other defendants settled at the time the complaint was filed. Gugliuzza decided to fight the case.
Click here to view image.
After a 14-day trial, Judge Cormac Carney of the Central District of California found that Commerce Planet’s failure to adequately disclose the negative option violated the FTC Act and that Gugliuzza was personally liable for the conduct that occurred during the time he exercised operational control over the company. Judge Carney enjoined future unlawful conduct and ordered Gugliuzza to pay $18.2 million in restitution. The court arrived at that figure in a somewhat Solomonic manner. The judge accepted Gugliuzza’s argument that the FTC had not proven that every consumer of Commerce Planet was deceived by the inadequate negative option language; however, the court also noted that Gugliuzza had not offered any reliable method for determining how many consumers were not deceived. Based on testimony from the FTC’s expert, the court found that at least “most” of Commerce Planet’s consumers were deceived and entered judgment for half of the company’s sales during the period in question.
Gugliuzza appealed raising two arguments: 1) The district court lacked the authority to award restitution beyond what he personally received (about $3 million); and 2) Even if the district court had authority, the court’s award of $18.2 million was arbitrary. The Ninth Circuit rejected both assertions.
The Ninth Circuit reaffirmed its prior rulings on this issue (among the most pro-FTC) and held that Section 13(b) of the FTC Act’s grant of the power to enter injunctive relief encompasses any ancillary relief necessary to accomplish complete justice and that a court sitting in equity may order restitution. The court rejected Gugliuzza’s assertion that any measure of restitution must be limited to his gain and that imposing “joint and several” liability for restitution exceeded the equitable power of the court. The Ninth Circuit observed that the scope of a court’s equitable powers should be read broadly where the government seeks to enforce a regulatory statute and that fine distinctions regarding the difference between purely legal and purely equitable remedies did not apply.
The Ninth Circuit also rejected Gugliuzza’s argument that the award was arbitrary. The court outlined the two step process to be followed in determining the appropriate amount of injunctive relief: 1) the FTC bears the burden of proving the approximate amount of defendants’ unjust gain; 2) if the FTC makes that showing, the burden then shifts to the defendants to show the FTC overstates the amount of the gain. In this case, the Ninth Circuit found that the trial court’s Solomonic decision to award half of Commerce Planet sales as the amount for restitution was not arbitrary and probably erred, if at all, in Gugliuzza’s favor.
Importantly for negative option sellers, the court dismissed Gugliuzza’s argument that evidence showing that 45% of customers who signed up for the Commerce Planet offer cancelled during the trial period showed that the total sales number did not equate with consumer harm. To the contrary, the Ninth Circuit ruled that the 45% figure was irrelevant to the amount non-cancelling consumers were harmed by the deceptive nature of the offer. It is interesting to note that both the district court and the Ninth Circuit had no trouble characterizing the offer as deceptive despite evidence that 45% of customers obviously understood the offer and cancelled within the trial period.
The Ninth Circuit’s decision stands as an important reminder of the broad tools the FTC can bring to bear on a defendant. Here, an individual who made $3 million over several years for a company that he worked for was held responsible (through joint and several liability with his employer) for $18 million in consumer restitution. Such an outcome cautions marketers and their executives to weigh carefully the claims they make in their advertising and to work with counsel to assess the risk of more aggressive claims.