FTC can seek gross revenue, not just profits

Two recent decisions held that the Federal Trade Commission can seek as restitution the full amount of loss incurred by consumers as opposed to disgorgement of defendant's profits.  Federal Trade Commission v. Stefanchik, 559 F.3d 934, 931-32 (9th Cir. 2009); Federal Trade Commission v. Medlab, Inc., 2009 WL 1066287 (N.D.Cal., Apr., 21, 2009).  Since the amount of loss incurred by consumers (or gross revenue), will be much higher than profits, these decisions increase the potential cost of an unfavorable decision in a matter involving the Commission. 

In Stefanchik the Commission charged that a corporation and its director violated the Federal Trade Commission Act and the Telemarketing Sales Rule by making false claims that consumers could become wealthy buying and selling privately held mortgages.  The district court granted the Commission's motion for summary judgment and defendants appealed arguing that there were issues of fact with respect to liability and that the facts did not support awarding $17 million in damages. In affirming the district court, the Ninth Circuit held that the Commission presented overwhelming evidence of liability.  On the issue of damages, the defendants argued that they should liable only for their profits, not the total amount paid by consumers.  The Court rejected this argument explaining, "[e]quity may require a defendant to restore his victims to the status quo where the loss suffered is greater than the defendant's unjust enrichment.  Moreover, because the FTC Act is designed to protect consumers from economic injuries, courts have often awarded the full amount lost by consumers, rather than limiting damages to a defendant's profits."  Stefanchik, 559 F.3d at 931.  Following the Stefanchik decision, the District Court for the Northern District of California held that the appropriate measure of damages was defendants' "gross sales, minus the amount already refunded to customers."  Medlab, 2009 WL at *10.  The Medlab Court rejected defendants' contention that "all legitimate business expenses should be subtracted from this sum[,]" and that the amount of damages would "financially obliterate" them.  Id. at *11.  The Court noted that the Stefanchik decision seemed to conflict with decisions in other circuits stating that disgorgement of profits is the appropriate measure of damages, but explained that it was bound by Stefanchik. 

Whether or not these decisions will be followed by other courts remains to be seen, however, the Commission will likely use them as a stick in trying to settle cases.

Comments

[Thomas Hughes]

Thanks for the comment. For clearly fraudulent practices, I think other courts might follow these decisions in an effort to make consumers whole, as opposed simply to taking away defendant's profit. In cases where there is not fraud, for example, an unsubstantiated claim or where substantiation is lacking, it is a tougher call.

[joannaas]

Do you think that these decisions will hold? They seem completely contradictory to the decision in Verity, and to the QT decision. THe FTC will get completley different financial penalties depending on where they file.