Publishers Business Services: Quotable quotes on remand

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As any golfer will tell you, consistent follow-through is essential. And when the FTC files a lawsuit to protect consumers, the agency is in it for 18 holes – and a play-off, if necessary. Filed as part of Operation TELE-PHONEY, a nationwide crackdown on deceptive telemarketing, the FTC sued Publishers Business Services in 2008. After a summary judgment hearing, an appeal to the Ninth Circuit, the defendants’ unsuccessful attempt to have the Supreme Court hear the case, and a remand for further proceedings, a District Judge in Nevada issued an order in February that you’ll want to read. In case you missed it, take out your highlighter because it’s a notable compendium of quotable caselaw.

First, a brief summary of years of litigation. The defendants typically called people at their place of business and told them they would get a “surprise” if they participated in a phone survey. Consumers got a “surprise” all right in the sense that they later found themselves on the hook for pricy magazine subscriptions the FTC says they hadn’t agreed to buy. As the District Judge later described it, “The transaction was presented in a confusing and misleading manner by fast-talking sales representatives, resulting in a net impression that the consumer was receiving free magazines while having to pay only a nominal shipping and handling fee.” When people refused to pay for the subscriptions, the defendants fired back with threatening collection calls and tough-talking letters from their “legal department.” (And no, they didn’t have a legal department.)

The trial court entered summary judgment in the FTC’s favor, but awarded only $191,219 – much less than the multimillions the FTC alleged was the real financial harm to consumers. Ruling that it would be impossible to locate and reimburse injured consumers, the court instead set the redress amount as what defendants’ expert claimed was their net revenue. The trial court also declined to hold certain defendants individually liable for redress.

On appeal, the Ninth Circuit held that the named individuals were indeed financially liable. The appellate court also ruled that “[t]he district court applied an incorrect legal standard when it focused on the defendants’ gain rather than the loss to the consumers.” What about the defendants’ argument that the magazine subscriptions “were not valueless”? “Not relevant even if true,” ruled the Court, given that the defendants’ deception led to a “tainted purchasing decision.” Quoting FTC v. Figgie, the Ninth Circuit concluded that the “fraud in the selling, not in the value of the thing sold, is what entitles consumers . . .  to full refunds.” The case was sent back with instructions to base the calculation “on the injury to the consumers, not on the net revenues received by defendants.” (By that time, the trial judge had retired, so the remand was assigned to a different judge.)

On remand, here is how the District Judge ruled on key matters related to the FTC Act. (We’ve omitted the citations, which is another reason why you’ll want to read the 13-page Order.)

Redress as a remedy

The defendants’ opening salvo was that the FTC Act doesn’t give courts the right to order money back for consumers. Citing FTC v. Commerce Planet and FTC v. Stefanchik, the District Judge rejected that argument: “District courts have the authority under Section 13(b) of the FTC Act to ‘grant any ancillary relief necessary to accomplish complete justice, including restitution.’ The defendants’ argument that I lack authority to enter monetary equitable relief is foreclosed by controlling authority.”

Consumer reliance

The defendants argued that for a court to order redress, there must be proof that customers relied on the deceptive claims. Here’s how the District Judge responded:  “‘[P]roof of individual reliance by each purchasing customer is not needed’ under section 13 of the FTC Act. Requiring a showing of individual reliance in FTC enforcement actions would thwart effective prosecutions of large consumer redress actions and frustrate the statutory goals of the section. Thus, in such cases, the FTC is entitled to a ‘presumption of actual reliance’ once it ‘has proved 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 

The defendants claimed that even if the FTC were entitled to a presumption of consumer reliance, that presumption was rebutted by evidence that some customers were satisfied. Citing the Second Circuit in FTC v. BlueHippo and the Ninth Circuit in FTC v. Figgie, the District Judge ruled, “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 defendants’ deceptive sales practices. ‘The injury to a consumer occurs at the instant of a seller’s misrepresentations, which taint the consumer’s subsequent purchasing decisions.’” Finding that “the defendants made millions of sales calls using scripts that were materially misleading as a matter of law,” the District Judge concluded that the FTC had shown consumer reliance “to support an award of monetary equitable relief.”

Calculation of the restitution amount

After the Ninth Circuit rejected the “net revenue” method applied by the trial court, the Court adopted a “two-step burden-shifting framework” for calculating restitution under Section 13(b) of the FTC Act. On remand, the District Judge cited the Ninth Circuit’s opinion in FTC v. Commerce Planet for the appropriate standard: “Under the first step, the FTC bears the burden of proving that the amount it seeks in restitution reasonably approximates the defendant’s unjust gains, since the purpose of such an award is ‘to prevent the defendant’s unjust enrichment by recapturing the gains the defendant secured in a transaction.’ Unjust gains ‘are measured by the defendant’s net revenues (typically the amount consumers paid for the product or service minus refunds and chargebacks), not by the defendant’s net profits.’” If the FTC meets its burden, “the burden then shifts to the defendant to show that the FTC’s figures overstate the amount of the defendant’s unjust gains.” The Court again quoted Commerce Planet for the proposition that “Any risk of uncertainty at this second step fall[s] on the wrongdoer whose illegal conduct created the uncertainty.”

Applying that standard, the District Judge ruled that the FTC had met its burden. Therefore, the appropriate calculation was the amount the defendants collected from first-time orders – $24,038,392 – minus what they paid in chargebacks and refunds – $265,244 – for total restitution of $23,773,147.  (The Order contains an interesting discussion of the legal significance of renewals and add-on orders, if those sales methods apply to your company.)

The District Judge expressly rejected three alternative calculations proposed by the defendants’ expert that purported to set the economic harm to consumers at $465,000, $698,446, or $1.15 million. The Judge also ruled that the expert didn’t adequately support “his assumption that 67.5 percent of customers who were unhappy called the defendants to cancel or complained to a third party.” Instead the District Court entered the Order holding two corporate defendants and five individuals liable for $23,773,147 in consumer redress.

That’s not the end of the story, however. The defendants have appealed the District Judge’s Order back to the Ninth Circuit.


Great news! Now to stop all the false credit card rate reduction calls!

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