FTC v. BlueHippo Funding, LLC, No. 11-374-cv (2d Cir. Aug. 12, 2014) (random side note: decided two and a half years after oral argument!)
The FTC appealed the damages portion of a 2010 SDNY order granting in part the FTC’s motion for contempt against BlueHippo’s violation of a consent order. The consent order had enjoined the defendants from making any express or implied misrepresentations of material fact with respect to, inter alia, their store credit and refund policy. The FTC sought damages for alleged violations of the consent order from failing to disclose, at the time of purchase, material details concerning BlueHippo’s store credit policy.
BlueHippo’s sales model was to offer consumers an installment contract; if they made 13 straight payments, BlueHippo promised to send them a computer and finance the rest. If they skipped a payment, they could continue with a layaway plan but no financing or buy something else for store credit. BlueHippo failed to disclose when consumers entered into contracts that store credits couldn’t be applied to shipping and handling or tax, and that only one online store order could be placed at a time. After the 2008 consent order initially resolved FTC charges, the FTC moved in late 2009 for contempt. The district court found that BlueHippo violated the consent order by (1) failing to provide computers for 1348 orders within the promised three week time frame; (2) failing to provide either a computer or store credit merchandise for 677 orders; (3) failing to disclose details of the store credit policy to consumers; and (4) conditioning the extension of credit on mandatory preauthorized transfers.
The FTC sought over $14 million in damages—an amount equal to defendants’ gross receipts—on the theory that it was entitled to a presumption of consumer reliance on these omissions and misrepresentations. The district court awarded damages only relating to consumers who complied with BlueHippo’s payment requirements and qualified for but never received a promised computer—a bit over $600,000.
The court of appeals reversed. “[T]he FTC is entitled, when the proper showing has been made, to a presumption of consumer reliance.” The district court was instructed to consider, in the first instance, whether the requirements for such a presumption had been met. Moreover, the appropriate baseline for contempt damages was defendants’ gross receipts, though the baseline was rebuttable.
First, the court of appeals clarified that the FTC had authority to seek redress on behalf of injured consumers under §13 of the FTCA (15 USC §53), which included the ability to seek contempt damages on behalf of consumers. A court can exercise broad discretion in setting the amount of coercive damages, but isn’t free to withhold a civil contempt damage award to the extent damages are established. “[A] court should craft sanctions aimed at least in part on making whole the victims of the contumacious conduct.”
“The injury to a consumer occurs at the instant of a seller’s misrepresentations, which taint the consumer’s subsequent purchasing decisions.” The fraud entitles consumers to full refunds. “To require proof of each individual consumer’s reliance on a defendant’s misrepresentations would be an onerous task with the potential to frustrate the purpose of the FTC’s statutory mandate.” Thus, presuming reliance in contempt cases would further the statutory purpose, as four other circuits have already recognized. The FTC is therefore entitled to a presumption of consumer reliance upon showing that “(1) the defendant made material misrepresentations or omissions that ‘were of a kind usually relied upon by reasonable prudent persons;’ (2) the misrepresentations or omissions were widely disseminated; and (3) consumers actually purchased the defendants’ products.”
Once that presumption is triggered, damages must be calculated to ensure that all consumers who presumptively relied on the misrepresentations receive full compensation, and total gross receipts from all consumers provide the baseline. It’s the full amount because the misrepresentations tainted the whole purchasing decisions. Then defendants can provide evidence to justify offsets.
FTC v. Verity International, Ltd., 443 F.3d 48 (2d Cir. 2006), was not on point. That case was a direct action against content providers who wrongly billed telephone line subscribers for internet access regardless of whether those subscribers had actually accessed the providers’ websites. There, the Second Circuit held that disgorgement/equitable restitution was the proper measure of damages, requiring the FTC to show that its calculations reasonably approximated the defendant’s unjust gains and then shifting the burden to the defendant to show inaccuracies.
This case did not disrupt that framework. In that case, restitution had to be calculated based on money the defendants actually received, since the payments had passed through a middleman who’d taken a bite. But this was still disgorgement. BlueHippo had been enjoined from making material misrepresentations about its store credit policy and enjoined to affirmatively disclose all material conditions before receiving any money from consumers. This it did not do.
During the violation period, 62,673 customers made purchases and 55,892 customers had not been compensated in any form. At the time of those purchases, BlueHippo told consumers that they could cancel orders even more than seven days after ordering and receive store credit, but “conveniently omitted several material caveats accompanying their store credit policy …. Unfortunate customers learned of these restrictions only after trying to use their credit.” This was information that likely would have influenced purchase decisions. Nonetheless, the district court didn’t appear to have applied a presumption of damages. This was error.