Federal Trade Commission v. Cantkier, 2011 WL 742647 (D.D.C)
The FTC alleged that defendant Scot Lady placed deceptive ads on search engines whose ad text used the well-publicized names, phone numbers, and official websites of federal programs created in response to the recent housing market crisis, including "makinghomeaffordable.gov" and "financialstability.gov." The ads were targeted on keywords related to the federal programs. The FTC alleged that Lady falsely represented that he operated federal homeowner relief or financial stability websites and had an affiliation with the United States government.
The ads actually directed searchers to Lady’s private websites, which collected marketing leads for mortgage modification or foreclosure relief services. The FTC alleged that the lead collection websites themselves were deceptive, falsely claiming to obtain modifications for consumers in all or virtually all instances to make their mortgage payments substantially more affordable, and further claiming “97% success” in helping clients obtain mortgage modification. Lady moved to dismiss for failure to state a claim; the court denied the motion.
The court had already granted a preliminary injunction, finding good cause to believe that Lady and others violated Section 5 of the FTCA by placing ads that diverted consumers searching for the relevant federal programs. The court enjoined Lady from placing internet ads using hyperlinks labeled "MakingHomeAffordable.gov," "financialstability.gov," or any other term that identifies a federal homeowner relief or financial stability program, or that contain the top-level domain name "gov," or otherwise misrepresent an affiliation with a federal homeowner relief or financial stability program. Lady was also barred from making any false representation that he was affiliated with the U.S. government or that he operated federal homeowner relief or financial stability programs.
Lady first argued that the FTC failed to allege “substantial injury” to consumers not “reasonably avoidable” by consumers themselves. Under the FTC’s standard set forth in In re Cliffdale Associates, Inc., 103 F.T.C. 110, 165 (1984), a finding of a deceptive act or practice under Section 5 requires (1) a representation, omission, or practice that (2) is likely to mislead consumers acting reasonably under the circumstances, and that (3) is material. A representation is material if it involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product. Neither intent to deceive nor proof of actual deception is required.
Lady argued that the FTC had to show “consumer detriment,” language also derived from the policy statement appended to In re Cliffdale Associates and sometimes used in place of a materiality requirement. However, with deception (as opposed to unfairness), a material misrepresentation is presumed to create consumer detriment. As the FTC explained, “Injury exists if consumers would have chosen differently but for the deception. If different choices are likely, the claim is material, and injury is likely as well. Thus, injury and materiality are different names for the same concept."
Lady’s proposed standard, that the FTC must also allege and prove that Defendant's act or practice "causes or is likely to cause substantial injury to consumers" that was not "reasonably avoidable by consumers themselves," comes from Section 5(n) of the FTCA, which governs unfairness determinations. By its plain terms, Section 5(n) is inapplicable to an action based on deception, which provides a distinct rationale for FTC enforcement. Lady’s idiosyncratic interpretation of the legislative history notwithstanding, Section 5(n) was enacted based on controversy specific to the FTC’s activities regarding unfairness. Nor should the FTC’s claims here be recharacterized as unfairness claims; the FTC can sue on any cause of action for which it is possible to allege the elements necessary to establish a claim for relief.
Lady next argued that the FTC failed to plead with particularity under Rule 9(b). (The court noted that, ordinarily, Rule 9(b) also requires a pleading of what was retained or given up as a consequence of the fraud, but, because reliance, intent, and injury are not elements of a Section 5 claim, the FTC can’t be required to plead them.)
The court noted that other courts are split on whether Rule 9(b) applies to Section 5 claims. By its terms, Rule 9(b) covers only claims for “fraud or mistake,” and a claim for deceptive acts or practices under Section 5 is not a fraud claim. Lady argued that it nonetheless was covered because it sounded in fraud. There were no relevant cases in the D.C. Circuit, but the court of appeals had identified Rule 9(b)’s underlying rationales: discouraging nuisance suits and protecting potential defendants against frivolous accusations of moral turpitude, as well as guaranteeing defendants sufficient information to prepare a response, given that “fraud” encompasses a wide variety of activities.
The court concluded that when “an agency of the federal government, with all of its concomitant force, brings an accusation of implicit dishonesty against an individual, even if short of moral turpitude, the heightened pleading requirements of Rule 9(b) may serve an important safeguarding function.” (A standard tension in American law: do we trust the government more than private citizens, or do we trust it less?) The FTC argued that reputational concerns are minimal because intent is not an element of a Section 5 violation. But the court thought that there was still a risk of reputational damage because the general public might not understand the difference between intentional deception and deception.
But anyway, the court didn’t need to make a definitive ruling, because Rule 9(b) was satisfied even if it did apply. Along with the other elements, the complaint included some allegedly deceptive ads and specified additional ad titles and text. Lady argued that “since at least 2008” was not a sufficiently specified time frame, but the court disagreed. “Defendant's statements, unlike traditional statements made orally or in a written document, are alleged to have been made dynamically online in response to search queries during the alleged time frame.” The complaint also specified the keywords on which Lady bid on various search engines, which included "financial stability.gov," "fha.com," "financialsecurity.gov," "hope now alliance," "hope for homeowners," "www.makinghomeaffordable.gov," and "makinghomeaffordable.gov." On Google, his advertisements displayed titles "Makinghomeaffordable.gov," "Financial Stability.gov," "Fha Gov," "wwwhud.gov," "www.995hope.org," and "www.hopenow.com/."
In a footnote of more general relevance, the court dealt with Lady’s argument that bidding on keywords is insufficient for Section 5 liability. The court agreed that bidding itself is not a deceptive act or practice. However, the key allegation was that “the advertisements purchased in connection with the keywords contained deceptive titles and hyperlinks that were likely to mislead consumers.” (If only courts dealing with other plaintiffs were as able to make this distinction!)
The other allegations of false or unsubstantiated claims about success also satisfied Rule 9(b). The court noted that not all the quoted statements appeared to be the kind that would mislead a reasonable consumer on their own, such as "Let Us Negotiate With Your Lender For You," “further facts about the overall presentation of these statements are required to assess how a reasonable consumer would interpret them.” The allegedly false or unsubstantiated statements included "97% Success Rate," and "Guaranteed Solutions to Lower Your Rate Today!" These representations were allegedly false because Lady did nothing directly, but simply sold consumers’ personal information to others, and they were unsubstantiated in terms of the high percentage of such consumers represented to have obtained a mortgage modification.
All of this satisfied Rule 9(b)’s purpose of giving adequate notice and ensuring that plaintiff had substantial prediscovery evidence of the facts.
Lady next argued that the complaint failed to state a claim. To the contrary, the pleaded facts allowed the court to draw the reasonable inference that he was liable. For example, a reasonable consumer might think that clicking on one of Lady’s “Makinghomeafforable.gov" ads that he or she would be redirected to that website or to a site affiliated with that website, but, in fact, he or she would be directed to a lead collection site. This was likely to be a material representation because a service’s affiliation with the federal government is important to consumers. (Interestingly, here we have the government as extra trustworthy, as well as extra dangerous.) The other challenged statements could also mislead a reasonable consumer; a servicer’s prior success rate and likelihood of success are material.
Lady argued that there was no likelihood of misleading reasonable consumers because the ads were labeled as such and because his websites weren’t alleged to have imitated actual government websites in any way that would mislead consumers into believing that they were visiting the website of a federal program.
The “ad” argument failed because the FTC wasn’t alleging that Lady misled consumers into thinking that his ads were organic search results. The alleged deception is that consumers were deceived into believing they were clicking on government-sponsored links or ads. “There is no reason for consumers to assume that search engines do not feature government-sponsored advertisements.”
Likewise, it didn’t matter whether Lady’s websites were designed to imitate federal program websites. “Internet users may not know what the real federal program website looks like until they successfully navigate to it. If they are diverted by advertisements bearing the name and web address of the federal program before ever reaching the program's actual website, reasonable consumers could assume they have reached their intended destination, when, in fact, they have reached a commercial service.” This also defeated Lady’s argument that there was no deception because his services were different from those offered by the federal government. “There is no reason to expect a consumer to know the precise services offered by the federal program until he or she actually reaches the program's website and obtains information about those services.” Deceptiveness was a factual question that couldn’t be resolved at the motion to dismiss stage.
The court also denied Lady’s motion to strike the portions of the complaint that sought equitable monetary relief. A motion to strike was inappropriate: seeking monetary relief wasn’t scandalous or prejudicial, nor was it clearly immaterial or impertinent. Lady admitted that his argument that the FTCA doesn’t authorize such relief contradicted three decades of unanimous precedent. At the least, the court wasn’t about to address the merits of the prevailing interpretation of the FTCA on a motion to strike.