This post
examines an opinion the U.S. Court of Appeals for the 4th Circuit
recently issued in a civil case: F.T.C. v. Ross, 743 F.3d 886
(2014). The Appellate Court judge who
wrote this opinion begins by explaining that the Federal Trade Commission sued
Kristy Ross in the U.S. District Court for the District of Maryland for engaging in deceptive internet advertising practices. After a
bench trial, the district court entered judgment enjoining Ross from
participating in the deceptive practices and holding her jointly and severally
liable for equitable monetary consumer redress in the amount of
$163,167,539.95. F.T.C. v. Ross, 897 F.Supp.2d 369 (U.S.
District Court for the District of Maryland 2012).
On appeal, Ross challenges the district court's judgment on
several bases. . . .
F.T.C. v. Ross (4th Circuit), supra.
The judge
then outlines the facts in the FTC’s original suit against Ross and explains
how they tie into the relevant law:
The [FTC] sued Innovative Marketing, Inc. (`IMI’), and
several of its high-level executives and founders, including Ross, for running
a deceptive internet `scareware’ scheme in violation of the prohibition on
deceptive advertising in Section 5(a) of the Federal Trade Commission
Act, 15 U.S. Code § 45(a). The core of the Commission's case was that the
defendants operated `a massive, Internet-based scheme that trick[ed] consumers
into purchasing computer security software,’ referred to as `scareware.’ . . . The
advertisements would advise consumers that a scan of their computers had been
performed that had detected a variety of dangerous files, like viruses,
spyware, and `illegal’ pornography; in reality, no scans were ever conducted. .
. .
Ross, a Vice President at IMI, hired counsel and
defended against the suit; the remaining defendants either settled or had
default judgment entered against them.
F.T.C. v. Ross (4th Circuit), supra.
The Court
of Appeals judge then explains what happened when Ross defended the suit:
The district court entered summary judgment in favor of the
Commission on the issue of whether the advertising was deceptive, but it set
for trial the issue of whether Ross could be held individually liable under the
Federal Trade Commission Act, i.e., whether Ross `was a “control person” at the
company, and to what extent she had authority for, and knowledge of the
deceptive acts committed by the company.’ . . . J
After a bench trial, the district court found in favor of the
Commission. Specifically, it found that Ross'
`broad responsibilities at IMI coupled with the fact that she
personally financed corporate expenses, oversaw a large amount of employees and
had a hand in the creation and dissemination of the deceptive ads prove[d] by a
preponderance of the evidence that she had authority to control and directly
participated in the deceptive acts within the meaning of Section 5 of the
[Federal Trade Commission] Act.’
F.T.C. v. Ross (U.S. District Court), supra. The District Court Judge further found Ross had actual knowledge of the deceptive marketing scheme, or was `at the very least recklessly indifferent or intentionally avoided the truth’ about the scheme. FTC v. Ross (U.S. District Court), supra. He therefore entered judgment against Ross in the amount of $163,167,539.95, and enjoined her from engaging in similar deceptive marketing practices. FTC v. Ross (U.S. District Court), supra. Ross appealed. F.T.C. v. Ross (4th Circuit), supra.
Ross’
first argument was that the Federal Trade Commission Act
authorizes the Commission to sue in federal district court so
that `in proper cases the Commission may seek, and after proper proof, the
court may issue, a permanent injunction.’ 15 U.S. Code § 53(b). Ross
contends that the district court did not have the authority to award consumer
redress—a money judgment—under this provision of the statute.
F.T.C. v. Ross (4th Circuit), supra.
The Court
of Appeals did not agree:
Ross first takes the position, correctly, that the statute's
text does not expressly authorize the award of consumer redress, but precedent
dictates otherwise: the Supreme Court has long held that Congress' invocation
of the federal district court's equitable jurisdiction brings with it the full
`power to decide all relevant matters in dispute and to award complete relief
even though the decree includes that which might be conferred by a court of
law.’ Porter v. Warner Holding Co., 328 U.S. 395 (1946). Once
invoked by Congress in one of its duly enacted statutes, the district court's
inherent equitable powers cannot be `denied or limited in the absence of a
clear and valid legislative command.’ Porter
v. Warner Holding Co., supra.
Porter and its
progeny thus articulate an interpretive principle that inserts a presumption
into what would otherwise be the standard exercise of statutory construction:
we presume Congress, in statutorily authorizing the exercise of the district
court's injunctive power, `acted cognizant of the historic power of equity to
provide complete relief in light of statutory purposes.’ Mitchell v. Robert
DeMario Jewelry, Inc., 361 U.S. 288 (1960).
Applying
this principle to the present case illuminates the legislative branch's real
intent. That is, by authorizing the district court to issue a permanent
injunction in the Federal Trade Commission Act, 15 U.S. Code § 53(b)(2),
Congress presumably authorized the district court to exercise the full measure
of its equitable jurisdiction. Accordingly, absent some countervailing
indication sufficient to rebut the presumption, the court had sufficient
statutory power to award `complete relief,’ including monetary consumer
redress, which is a form of equitable relief. Porter v. Warner Holding Co., supra.
F.T.C. v. Ross (4th Circuit), supra.
The Court
of Appeals then noted that Ross made a
series of arguments about how the structure, history, and
purpose of the Federal Trade Commission Act weigh against the conclusion that
district courts have the authority to award consumer redress; her arguments are
not entirely unpersuasive, but they have ultimately been rejected by every
other federal appellate court that has considered this issue. . . . .
We adopt the reasoning of those courts and reject Ross'
attempt to obliterate a significant part of the Commission's remedial arsenal.
A ruling in favor of Ross would forsake almost thirty years of federal
appellate decisions and create a circuit split, a result that we will not
countenance in the face of powerful Supreme Court authority pointing in the
other direction.
F.T.C. v. Ross (4th Circuit), supra. So, Ross lost on that
issue.
But she still
had another argument:
The Federal Trade Commission Act makes it unlawful for any
person, partnership, or corporation “to disseminate, or cause to be
disseminated, any false advertisement” in commerce, 15 U.S. Code § 52(a), and
it authorizes the Commission to bring suit in federal district court when it
finds that any such person, partnership, or corporation `is engaged in, or is
about to engage in, the dissemination or the causing of the dissemination of any’
false advertisement, 15 U.S. Code § 53(a)(1).
The
district court ruled that one could be held individually liable under the
Federal Trade Commission Act if the Commission proves that the individual (1)
participated directly in the deceptive practices or had
authority to control them, and (2) had knowledge of the deceptive conduct,
which could be satisfied by showing evidence of actual knowledge, reckless
indifference to the truth, or an awareness of a high probability of fraud
combined with intentionally avoiding the truth (i.e., willful blindness). FTC
v. Ross (U.S. District Court), supra.
Ross contends the district court's standard was wrong and
asks us to reject it. She proposes that we import a standard from our
securities fraud jurisprudence that requires proof of an individual's (1) `authority
to control the specific practices alleged to be deceptive,’ coupled with a(2) `failure
to act within such control authority while aware of apparent fraud.’ Appellate
Brief at 35. . . .
Any other standard, argues Ross, would permit a finding of
individual liability based on `indicia having more to do with enthusiasm for
and skill at one's job [rather] than authority over specific ad campaigns, and
allow fault to be shown without any actual awareness of’ a co-worker's
misdeeds. Appellate Brief at 36. Ross maintains that she would not have been
held individually liable under her proposed standard.
F.T.C. v. Ross (4th Circuit), supra.
The Court
of Appeals was not persuaded:
Ross' proposed standard would permit the Commission to pursue
individuals only when they had actual awareness of specific deceptive practices
and failed to act to stop the deception, i.e., a specific intent/subjective
knowledge requirement; her proposal would effectively leave the Commission with
the `futile gesture’ of obtaining `an order directed to the lifeless entity of
a corporation while exempting from its operation the living individuals who
were responsible for the illegal practices’ in the first place. Pati–Port,
Inc. v. F.T.C., 313 F.2d 103 (U.S. Court of Appeals for the 4th
Circuit 1963).
We hold that one may be found individually liable
under the Federal Trade Commission Act if she (1) participated directly in the
deceptive practices or had authority to control those practices,
and (2) had or should have had knowledge of the deceptive practices. The second
prong of the analysis may be established by showing that the individual had
actual knowledge of the deceptive conduct, was recklessly indifferent to its
deceptiveness, or had an awareness of a high probability of deceptiveness and
intentionally avoided learning the truth.
F.T.C. v. Ross (4th Circuit), supra.
It also noted that
[o]ur ruling maintains uniformity
across the country and avoids a split in the federal appellate courts. Every other federal appellate court to resolve the issue has adopted the test we
embrace today. F.T.C. v. Direct Marketing Concepts, Inc., 624
F.3d 1 (U.S. Court of Appeals for the 1st Circuit 2010); F.T.C. v. Amy Travel Service, Inc., 875 F.2d 564 (U.S. Court of
Appeals for the 7th Circuit 1989); F.T.C. v. Publishing Clearing
House, Inc., 104 F.3d 1168 (U.S. Court of Appeals for the 9th Circuit 1997); F.T.C.
v. Freecom Communications, Inc., 401 F.3d 1192 (U.S. Court
of Appeals for the 10th Circuit 2005); F.T.C.
v. Gem Merchandising Corp., 87 F.3d 466 (U.S. Court of Appeals
for the 11th Circuit 1996).
Ross' proposed standard . . . invites
us to ignore the law of every other sister court that has considered the issue,
an invitation that we decline.
F.T.C. v. Ross (4th Circuit), supra.
Ross also argued that the U.S. District Court Judge “erred in finding that she had
“control” of the company, participated in any deceptive acts, and had knowledge
of the deceptive advertisements.” F.T.C. v. Ross (4th Circuit),
supra. The Court of Appeals found, first, that the
District Court Judge did not err in finding that Ross had
`authority to control the deceptive acts within the meaning’
of the Federal Trade Commission Act. F.T.C. v. Ross (U.S. District Court), supra.
In an affidavit in the Canadian litigation, she swore that she was a high-level
business official with duties involving, among other things, `product
optimization,’ which the district court could reasonably have inferred afforded
her authority and control over the nature and quality of the advertisements. .
. Moreover, there was evidence that other employees requested Ross' authority
to approve certain advertisements, and that she would check the design of the
advertisements before approving them.
F.T.C. v. Ross (4th Circuit), supra.
The court
also found that the District Court Judge did not err in finding that Ross
`directly participated in the deceptive marketing scheme.’ .
. . Ross' statements to other employees,
as memorialized in chat logs between her and other employees were evidence that
she served in a managerial role, directing the design of particular
advertisements. . . . Ross was a contact person for the purchase of advertising
space for IMI, and there was evidence Ross had the authority to discipline
staff and developers when the work did not meet her standards. Joint Appendix
at 1466 (`please ensure its [sic] going to be done or im [sic] going to fine
the department and MCs for not finishing it’).
Given these facts, the district court could have reasonably
inferred that Ross was actively and directly participating in multiple stages
of the deceptive advertising scheme -- she played a role in design, directed
others to `add aggression’ to certain advertisements, was in a position of
authority, had the power to discipline entire departments, and purchased
substantial advertising space.
F.T.C. v. Ross (4th Circuit), supra.
Finally, the Court of Appeals found that the U.S. District
Court Judge did not err in finding that Ross
`had actual knowledge of the deceptive marketing scheme’ and/or was `at the very least recklessly indifferent or intentionally avoided the truth.’ F.T.C. v. Ross (U.S. District Court), supra. There was evidence she edited and reviewed the content of multiple advertisements. At one point, she ordered the removal of the word `advertisement’ from a set of ads. . . . Codefendant Sundin, the Chief Technology Officer of IMI and its sole shareholder and director, attested that Ross assumed some of his duties during his long-term illness. And although there was some indication Ross acted in a manner suggesting she personally did not perceive (or believe) that the advertisements were deceptive, Ross was on notice of multiple complaints about IMI's advertisements, including that they would cause consumers to automatically download unwanted IMI products.
F.T.C. v. Ross (4th Circuit), supra.
The Court of Appeals therefore affirmed the judgment of the
U.S. District Court Judge. F.T.C. v. Ross (4th Circuit), supra. If you are
interested, you can read more about the case in the news story you can find
here.
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