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.
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