Tuesday, December 13, 2011

The bond Kevin Trudeau doesn't want you to know about

Federal Trade Commission v. Trudeau, --- F.3d ----, 2011 WL 5927435 (7th Cir.)

Some background. Kevin Trudeau violated a court-approved settlement with the FTC by misrepresenting the content of his book The Weight Loss Cure “They” Don't Want You to Know About. The district court held Trudeau in contempt and ordered him to pay $37.6 million to the FTC and banned him from making infomercials for three years. The Seventh Circuit affirmed the district court's finding of contempt but vacated the sanctions, holding that the district court needed to explain its calculation and how the resulting funds would be administered. The court of appeals further held that the infomercial ban was inappropriate as a civil sanction because it did not give Trudeau an opportunity to purge, that is, to comply with the underlying order not to misrepresent his publications.

On remand, the court reinstated the fine, explaining that it reached that figure by multiplying the price of the book by the 800-number orders, plus the cost of shipping, less returns. The court instructed the FTC to distribute the funds to those who bought Trudeau's book using the 800–number; any remainder not paid to victims or used in administering the redress would be returned to Trudeau. The district court imposed a $2 million performance bond, effective for at least five years.

Trudeau again appealed, arguing that the sanction was improperly based on consumer loss rather than on his gain and that the bond violated the First Amendment. The court of appeals this time affirmed. The original consent order was too weak to protect consumers from deception; Trudeau aired violative infomercials at least 32,000 times. “He should not now be surprised that he must pay for the loss he caused.”

The court considered the $37.6 million fine a conservative measure of consumer loss, since it only considered sales from the 800 number, not sales in bookstores carrying his “As Seen on TV” titles, even though the conspicuous “As Seen on TV” sticker on those books made the link between those sales and the infomercial “less than speculative.” Moreover, the figure was reliable; Trudeau himself used that figure.

It was acceptable to measure the fine by consumer loss. That’s what remedial sanctions are for, and it was within the district court’s discretion to determine that, “unless the remedial sanction was measured by consumer loss, the victims of Trudeau's contempt would not receive full relief for their actual loss. This conclusion is informed—but not limited—by the remedies available in the underlying FTC action.” The consent agreement was aimed at protecting consumers from misrepresentations that caused them economic injury. “When that agreement was breached flagrantly and repeatedly, the district court chose a remedial sanction that might come close to putting Trudeau's victims in the same position they would have been had Trudeau not misrepresented his books in infomercials in violation of the agreement.”

FTC v. Verity Int'l, Ltd., 443 F.3d 48 (2d Cir. 2006), which was not a contempt case, created a narrow “middleman” exception to the usual rule that consumer loss may be the proper measurement of damages, where the defendants only received their cuts after other parties had taken some money out of the stream. Trudeau argued that he was compensated only indirectly for sales of his books. But this was a completely different situation:
Trudeau assigned his rights to payment from his company's assets to ITV Global in exchange for ten years of monthly million-dollar checks. This was not about middlemen taking a cut for their services, but about steadying Trudeau's cash flow. Now, having received only $1.05 million from ITV Global, Trudeau argues that the fine should be capped there. But what if ITV Global had not paid him at all? Would the district court have been powerless to impose any remedial fine? Of course not. The district court recognized that precisely how Trudeau decided to get paid for selling his books through deceptive infomercials in violation of a court order is irrelevant to the proper measure of his remedial fine.
The bond was also fine as a modification of the earlier consent order to increase the likelihood that Trudeau would comply going forward, in lieu of an infomercial ban. Instead, Trudeau has to post a $2 million bond before he participates in any “infomercial for any book, newsletter, or other informational publication, about the benefits, performance, or efficacy of any product, program or service referenced in any such [publication].” This is a purgeable sanction because the bond won’t be forfeited to the FTC unless Trudeau makes a deceptive infomercial. “After so many violations, the district court did not have to stick with the old plan.”

Moreover, the bond requirement did not violate the First Amendment. The only argument meriting discussion was whether Trudeau’s right to engage in commercial speech was violated by a requirement that he post a bond before participating in any infomercial, misleading or not. As applied to misleading commercial speech, “there is no possible First Amendment violation, of course, because misleading commercial speech gets no constitutional protection.” But the bond requirement was subject to intermediate scrutiny as a general restriction on commercial speech.

The FTC had the burden to show that (1) there was a substantial interest supporting the restriction, (2) the restriction directly advanced that substantial interest, and (3) the restriction was narrowly drawn. The first two requirements were obviously met: consumer protection is a substantial interest, and the performance bond directly advanced consumer protection by making it more likely that consumers would be compensated for future violations and less likely that there would be future violations via deterrence. As for tailoring, it was not a problem either. A restriction on commercial speech must not be more extensive than necessary, but a least-restrictive-means analysis is not required. Instead, the scope of the restriction must be proportionate and carefully calculated to the interest served, and not impose an inordinate cost.

The court of appeals found that the performance bond satisfied this standard. First, the bond applied only to infomercials, not books or any print medium, nor even to TV or radio ads under 2 minutes. It targeted only the commercial speech that had caused such “tremendous” harm in the past. Second, the district court took seriously Trudeau’s claim that he couldn’t afford $2 million by allowing him to file an audited financial statement and prove as much at a hearing. Third, the bond was proportional to the amount of harm Trudeau caused in the past; if anything, it was low, given that for nearly a year the infomercial sold thousands of books each day.

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