FTC Expert

The Federal Trade Commission (FTC) brought an action against a corporation and several of its executives—including the company’s former president—seeking injunctive and monetary equitable relief for misleading and unfair business practices surfacing from its website marketing under § 5(a) of the FTC Act.

The FTC settled with two of three individual defendants, but one executive went to trial. The U.S. District Court found that company violated FTC Act, holding company’s former president personally liable for company’s unlawful conduct, ordering him from engaging in similar misconduct and charging him $18.2 million restitution. The former president appealed.

The company sold the product through its website, but its landing page it didn’t mention the product. What consumers saw instead was an offer for a free “Online Auction Starter Kit” that explained how they could sell products on eBay. To obtain this kit, consumers needed to enter their shipping address and credit card number to pay for shipping and handling. The company advertised the product as a website-hosting service that would enable consumers to make money by selling products online. The company charged a membership fee for the service that ranged over time from $29.95 to $59.95 per month.

But somewhere buried in the fine print for the transaction was an advisement stating that by ordering the free starter kit, consumers were also agreeing to purchase the product through what is known as a “negative option.” Consumers received the product at no charge during a 14–day trial period, but if they didn’t affirmatively cancel within that period, the company automatically charged their credit cards for the recurring monthly membership fee. Many consumers didn’t realize that by ordering the free starter kit they had also agreed to purchase the product. They first learned of that fact when the monthly charges for the service began showing up on their credit card bills.

The district court held that the company’s failure to adequately disclose the negative option constituted an unfair and deceptive practice that violated the FTC Act. The court also held Defendant personally liable for the company’s unlawful conduct during the two-and-a-half-year period he was head of the company.

The court credited Defendant’s assertion that it would be unfair to assume that all consumers who purchased the product were deceived by the company’s inadequate disclosure of the negative option. But because Defendant failed to offer any reliable method of determining how many consumers were not deceived, the court relied on testimony from one of the FTC’s experts, who opined that “most” consumers would have been deceived by the manner in which the negative option was disclosed. Based on that testimony, the court estimated as a “conservative floor” that at least half of the consumers who purchased the product were deceived by the company’s marketing practices. The court reduced the restitution award to $18.2 million—one-half of the net revenues.

Defendant challenged the validity of the restitution award, claiming that even if he could be held liable for restitution exceeding his own unjust gains, the district court’s $18.2 million award was nonetheless arbitrary and should be reduced.

Circuit Judge Paul J. Watford of the Ninth Circuit Court of Appeals, held that the district court properly refused to consider Defendant’s expert’s testimony who would opine that not many of company’s consumers were deceived.
The FTC met its initial burden and presented undisputed evidence that the company received $36.4 million in net revenues from the sale of the product during the relevant period. The FTC proved that the company made material misrepresentations—by not adequately disclosing the negative option—and that the misrepresentations were widely disseminated. As a result, the FTC was entitled to a presumption that all consumers who purchased the product did so in reliance on the misrepresentations. With the FTC having proved that all of the $36.4 million in net revenues represented presumptively unjust gains, the burden shifted to Defendant to show that the FTC’s figure overstated the company’s restitution obligations.

Defendant tried to meet his burden by arguing that not all of the consumers who purchased the product were deceived by the company’s misrepresentations. Judge Watford explained that had Defendant offered a reliable method of quantifying what portion of the consumers who purchased the product did so free from deception, he might’ve succeeded in showing that not all of the revenue represented unjust gains. But Judge Watford found that Defendant failed to do so.

Defendant attempted to introduce the testimony of an expert witness, who opined, based on the results of a consumer survey conducted by a third party, that not many of the company’s consumers were actually deceived. However, the district court properly refused to consider that testimony because the expert didn’t conduct the survey himself, and neither he nor Defendant could demonstrate that the survey was conducted according to accepted principles.

Finally, Defendant challenged as arbitrary the district court’s reliance on testimony from the FTC’s expert that “most” consumers were deceived by the company’s misrepresentations. Judge Watford said that Defendant really shouldn’t complain about this part of the district court’s ruling, since the court relied on the expert’s testimony to cut the award in half.

Given Defendant’s failure to produce any reliable evidence demonstrating what portion of the $36.4 million in net revenues should not be deemed unjust gains, the court did not abuse its discretion. The judgment was affirmed.

Federal Trade Commission v. Commerce Planet, No. 12–57064, — F.3d —-, 2016 WL 828065 (March 3, 2016).