Marketing Law Blog

Interesting findings from recent FTC case

A recent order out of the Ninth Circuit in an FTC telemarketing case provides some notable new case law. The case involves a magazine subscription seller who allegedly misled customers regarding pricing and other features. The Nevada trial court ruled in the FTC's favor, but only awarded $190,000. On appeal, the Ninth Circuit determined the lower court had not properly calculated the judgment and required the district court to redo the amount.  For the reasons explained below, the total award was then increased to $23 million.  Click here to read the FTC's perspective. Key findings:

Redress as a remedy

The defendant argued that the court lacked authority to order restitution to consumers, but the court held that District Courts have the authority under the FTC Act to "grant any ancillary relief necessary to accomplish complete justice."

Consumer reliance

The defendant also argued that for a court to order redress, there must be proof that each customer relied on the deceptive claims.  The Judge disagreed, finding that "The FTC is entitled to a 'presumption of actual reliance' once it is proven that the defendant made material misrepresentations, that they were widely disseminated, and that consumers purchased the defendant's product."

The legal effect of evidence that some consumers were satisfied

Defendants claimed that some customers were satisfied, and therefore the FTC's entitlement to a presumption of consumer reliance was rebutted. The court rejected that argument, stating, “the fact that some customers were ultimately satisfied with the magazines they purchased does not necessarily mean their original decision to purchase was free from the taint of the defendant's deceptive sales practices."

Calculation of the restitution amount

Although the trial court's original judgement was $190,000, it was based upon an erroneous "net revenue" standard.  On appeal it was held that a two-step burden-shifting framework would be more appropriate for calculating the restitution. This process first requires the FTC to prove the amount it seeks in restitution reasonably approximates the defendant's unjust gains. Then, the appropriate calculation becomes the amount that defendants collected from first-time orders. This two-step analysis ultimately increased the judgement to $24 million. The Ninth Circuit held that the district court applied an incorrect legal standard when it focused on the defendants’ gain rather than the loss to the consumers.