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Home | BakerHostetler

July IP Litigation Newsletter

The Cloakroom with Peter Roskam

The Cloakroom with Peter Roskam: 2024 Republican National Convention

Elise Elam Moderates Panel at ACLI Compliance and Legal Sections Annual Meeting

James Sherer Speaks on Panel at The Masters Conference

<img decoding="async" loading="lazy" class="alignright wp-image-5584" src="https://www.adventures-in-law.com/wp-content/uploads/sites/33/2021/11/advertising-media-data-digital-GettyImages-913589018-650x366.jpg" alt="" width="409" height="230" />As many of our readers know, the <a href="https://www.bakerlaw.com/podcasts/ad-ttorneyslaw-the-future-of-consumer-redress-after-supremes-rule-in-amg-capital-management-v-ftc">U.S. Supreme Court decision in AMG</a> dramatically changed things with respect to the ability of the Federal Trade Commission (FTC) to obtain certain monetary remedies. A lot has been written and theorized about the FTC’s post-AMG strategies, but certainly Section 19 of the FTC Act was lined up and ready for its <a href="https://www.youtube.com/watch?v=jMTT0LW0M_Y">Norma Desmond close-up</a>. Section 19 provides that in many situations where the FTC alleges a rule violation, a federal court would have the authority to:
grant such relief as the court finds necessary to redress injury to consumers or other persons, partnerships, and corporations resulting from the rule violation or the unfair or deceptive act or practice, as the case may be. Such relief may include, but shall not be limited to, rescission or reformation of contracts, the refund of money or return of property, the payment of damages, and public notification respecting the rule violation or the unfair or deceptive act or practice, as the case may be; except that nothing in this subsection is intended to authorize the imposition of any exemplary or punitive damages.

This is pretty important language going forward, which up until now has generally not been parsed by many courts. And a recent district court decision may create some challenges as the agency tries to develop case law based on Section 19. Today, I am here to tell you about just one decision, and it is a single district court opinion, but it is worth discussing nevertheless. (And of course, it remains to be seen whether the agency will move to reconsider or eventually appeal this ruling.) But bottom line – in assessing redress theories under Section 19, this district court set forth a very high burden for the agency on what it would have to show going forward.
In a pending litigation filed in 2020 involving a wide range of claims – including pyramid allegations as well as claims involving the <a href="https://www.ftc.gov/enforcement/rules/rulemaking-regulatory-reform-proceedings/mail-internet-or-telephone-order">Mail Order Rule</a> (MOR) and the <a href="https://www.consumer.ftc.gov/articles/buyers-remorse-ftcs-cooling-rule-may-help">Cooling-Off Rule</a> (COR), an Arizona judge issued a decision that was not on board with the FTC’s broad attempted reading of the above provision. The case is <a href="https://www.ftc.gov/news-events/press-releases/2020/09/new-charges-defendants-case-against-alleged-pyramid-scheme">FTC v. Noland</a>, and the decision at issue focused on the FTC’s attempt to obtain redress for consumers who experienced MOR and COR violations. (And my colleague <a href="https://www.bakerlaw.com/AmyRalphMudge">Amy</a> is currently hard at work on a blog with her thoughts on MOR issues more broadly.)
So, turning to the decision. The pending motion was the FTC’s effort to obtain redress stemming from MOR and COR violations. For today’s purposes, let’s focus on the MOR violations, which were largely undisputed. The question for the court was the extent of the shipping violations and the harm. The court described the FTC’s proposed harm calculation as follows – at the moment the shipment was overdue and the defendant failed to provide consumers with notice about their potential recourse, consumers suffered “harm equal to the purchase price of the unshipped product, irrespective of whether the consumer later received the product.” The court acknowledged that it was possible that consumers suffered “some form of cognizable harm” but was not on board with the FTC’s “all-or-nothing methodology,” which failed to account for the value of the products that consumers ultimately received, even if they were late. Focusing on the Section 19 language from above, the court emphasized that the key phase was “necessary to redress injury to consumers” and was concerned that the FTC’s approach provides a potential windfall to consumers. The FTC, in the court’s opinion, was asking the court “to assume that every consumer who received a late shipment was dissatisfied and would have requested an immediate refund if aware that such refunds were available.” Instead, the court said that “for each consumer on whose behalf a damage award is sought,” the FTC must show that consumer was harmed and the amount of money necessary to redress that consumer’s injury. In short, in the context of these rule violations, the court read Section 19 to require the FTC to show individualized harm for each consumer at issue, a huge sea change from how the agency had approached redress amount when litigating under Section 13(b), and the court noted that it was not “at liberty” to rewrite the statute based on FTC concerns about the burdensomeness of this approach. (And no doubt this would be a difficult process.)
The court goes through a similar analysis under the Cooling-Off Rule and distinguishes the seminal FTC case of Figgie, which is one of the few litigated Section 19 cases. Figgie involved misrepresentations that were made with respect to the sale of a heat detector. The Ninth Circuit Court of Appeals held that because of the existence of material misrepresentations that were widely disseminated, consumer reliance on those claims could be presumed; the misrepresentations tainted the purchasing decision. Figgie also noted that the district court required consumers to return the heat detectors to obtain full refunds, thus addressing the windfall concern.
Now, before we read too much into this decision, let’s be mindful of a few things. These are Mail Order Rule violations, and by and large, the consumers ultimately received their products, albeit in a manner that violated the rule. If this were some other rule violation that went more to the core merits of the purchase, the court’s discussion of Figgie certainly suggests that the Section 19 analysis would likely have landed differently. But that said – to put it bluntly, this is not a decision you want to get if you are an agency looking to find good substitutes to the all-purpose tool that was Section 13(b). And of course, this is a case that was filed before AMG was decided and that involved other issues that are not premised on rule violations.
So what does this mean for future Mail Order Rule cases? Well, for starters, the FTC can seek civil penalties for Mail Order Rule violations. This case was filed before AMG was decided and also had pyramid allegations. When this case was filed, seeking penalties would probably not have made strategic sense, and of course, the FTC has generally focused on getting redress back to consumers, instead of penalties, whenever possible. Things are quite different now, and I would certainly be surprised if a case premised mostly on MOR violations did not take the civil penalty route going forward. And the penalty route, it is worth noting, of course, could result in a vastly higher payment calculation than a redress model. (Civil penalties can ratchet up very, very quickly.)
The post-AMG landscape is complex and will evolve a lot over the next few months and years. But as courts start to look more closely at the language in Section 19, that will certainly be quite relevant to how the FTC approaches future law enforcement matters.

A Stumble out of the Section 19 FTC Gate

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