Federal Trade Commission v. Ross, 2014 WL 703739, No. 12-2340 (4th Cir. Feb. 25, 2014)
The hits (by which I mean FTC victories) just keep on coming. Here, the FTC sued Innovative Marketing and several of its high-level executives and founders, including Ross, for deceptive internet advertising. The district court enjoined Ross from participating in those deceptive practices and found her jointly and severally liable for over $163 million in consumer redress.
The court of appeals affirmed. The FTC contended that the defendants operated “a massive, Internet-based scheme that trick[ed] consumers into purchasing computer security software,” referred to as “scareware.” The ads told consumers that a scan of their computers detected a variety of dangerous files, like viruses, spyware, and “illegal” pornography, but no scans were ever conducted. Ross, a VP at IMI, defended, while the remaining defendants settled or defaulted.
The district court found that Ross was personally responsible for the deceptive advertising, based on her broad responsibilities, personal financing of corporate expenses, oversight of many employees, and involvement in the creation and dissemination of the ads. It also concluded that Ross had actual knowledge of the deceptive marketing scheme, or was “at the very least recklessly indifferent or intentionally avoided the truth” about the scheme.
Ross argued that the district court lacked the authority to award consumer redress, which is to say a money judgment, under the provision of the statute authorizing a court to issue a permanent injunction, 15 U.S.C. § 53(b). Consumer redress isn’t expressly authorized, but “the Supreme Court has long held that Congress’ invocation of the federal district court’s equitable jurisdiction brings with it the full ‘power to decide all relevant matters in dispute and to award complete relief even though the decree includes that which might be conferred by a court of law.’” Those equitable powers can’t be “denied or limited in the absence of a clear and valid legislative command.” Thus, by authorizing the issuance of a permanent injunction, Congress presumptively authorized the district court to exercise the full measure of its equitable jurisdiction. This included the power to order “complete relief,” including monetary consumer redress, which is a form of equitable relief.
Ross argued that the FTCA wasn’t like the statutes at issue in the relevant Supreme Court cases, and thus that the presumption of full power didn’t apply. But there’s no “magic words” rule here; the Supreme Court has applied the same rule where the statute only authorized the district court to “restrain violations” of the law. Ross’s arguments about the structure, history, and purpose of the FTCA (not described, but if they’re like others I’ve seen, involve comparison to the ALJ route provided for in the statute, and the relief available thereby) were “not entirely unpersuasive,” but every federal appellate court to consider them (a total of five before this decision) has rejected them: “We adopt the reasoning of those courts and reject Ross’ attempt to obliterate a significant part of the Commission’s remedial arsenal. A ruling in favor of Ross would forsake almost thirty years of federal appellate decisions and create a circuit split, a result that we will not countenance in the face of powerful Supreme Court authority pointing in the other direction.”
Turning to individual liability for corporate misdeeds, Ross argued that a securities fraud standard should apply, requiring (1) “authority to control the specific practices alleged to be deceptive,” coupled with a (2) “failure to act within such control authority while aware of apparent fraud.” Nope! Ross’ proposed standard would permit the Commission to pursue individuals only when they had actual awareness of specific deceptive practices and failed to act to stop the deception, i.e., a specific intent/subjective knowledge requirement; her proposal would effectively leave the Commission with the “futile gesture” of obtaining “an order directed to the lifeless entity of a corporation while exempting from its operation the living individuals who were responsible for the illegal practices” in the first place.
Instead, an individual may be liable if she (1) participated directly in the deceptive practices or had authority to control those practices, and (2) had or should have had knowledge of the deceptive practices. (2) can be shown by showing actual knowledge of the deceptive conduct, reckless indifference to its deceptiveness, or an awareness of a high probability of deceptiveness and intentional avoidance of learning the truth. This too preserves circuit uniformity with six other appellate courts.
Then Ross had some evidentiary challenges. Her expert was precluded from testifying about how the ads linkable to her were nondeceptive, but that issue had previously been resolved at summary judgment; the only issue at trial was Ross’s own liability. “Because the individual liability standard does not require a specific link from Ross to particular deceptive advertisements and instead looks at whether she had authority to control the corporate entity’s practices, [the expert’s] testimony was immaterial, and thus irrelevant, to the issue reserved for trial.” The district court also didn’t err in calculating redress.
Finally, the district court didn’t clearly err in finding that she had control of the company, participated in the deceptive acts, and had knowledge of the deceptive ads. In an affidavit in Canadian litigation, “she swore that she was a high-level business official with duties involving, among other things, ‘product optimization,’ which the district court could reasonably have inferred afforded her authority and control over the nature and quality of the advertisements. Other employees requested her authority to approve certain advertisements, and she would check the design of the advertisements before approving them. Chat logs showed that she served in a managerial role, directing the design of particular ads (e.g., requiring the word “advertisement” to be removed across ads and directing other people to “add aggression” to the ads). She was a contact person for IMI’s purchases of ad space, and she had the authority to discipline employees and contractors when work didn’t meet her standards.
“Given these facts, the district court could have reasonably inferred that Ross was actively and directly participating in multiple stages of the deceptive advertising scheme.” Though there was some indication that she personally didn’t perceive or believe that the ads were deceptive, she knew about multiple complaints about IMI’s advertisements, including that they would cause consumers to automatically download unwanted IMI products. There was no way the district court’s conclusion was clear error.