Monetary Damages to FTC Based Upon Net Revenue
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Monetary Damages to FTC Based Upon Net Revenue

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On appeal from the United States District Court for the Middle District of Florida, the United States Court of Appeals for the Eleventh Circuit recently affirmed an award of damages to the Federal Trade Commission (“FTC”) for appellants’ (“Defendants”) deceptive marketing practices.  The ruling is particularly interesting in that the Eleventh Circuit rejected Defendants’ argument that the district court impermissibly calculated damages based on net revenue received, rather than the profits (Federal Trade Commission v. Washington Data Resources, Inc., et al., Jan. 16, 2013).

By way of background, Defendants were each involved in the same mortgage loan modification enterprise that solicited financially distressed homeowners and offered the possibility of relief through either a loan modification or bankruptcy.  The enterprise grabbed the attention of the Federal Trade Commission in 2009 and a complaint was filed soon thereafter.

The complaint alleged that Defendants violated section 5(a) of the FTC Act and the Telemarketing Sales Rule by engaging in deceptive activities relating to their sale and marketing of mortgage relief and home foreclosure services.  Following a bench trial in April 2011, Defendants were found liable.  Defendants subsequently appealed, representing that the district court abused its discretion when it ordered them to pay damages equal to the net revenues they received during the period they controlled the enterprise.

Defendants first argued that the district court improperly awarded damages based on consumer losses.  Defendants were correct that here, a damages award based on consumer losses would be improper.  “The equitable remedy of restitution does not take into consideration the plaintiff’s losses, but only focuses on the defendant’s unjust enrichment.”  However, the district court did not award damages based on consumer loss.  The district court awarded damages based upon Defendants unjust gains.

In the district court, the FTC conceded that the record lacked evidence to accurately determine consumer loss and chose not to establish consumer loss.  The FTC sought only to disgorge Defendants’ net revenue and thus proceeded to seek relief under section 13(b).  Section 13(b) provides “an unqualified grant of statutory authority” to issue “the full range of equitable remedies,” including disgorgement, which considers only the defendants’ unjust gain and ignores consumer loss.

Stated another way, section 13(b) permits disgorgement measured by unjust enrichment but prohibits disgorgement measured by consumer loss.  Here, the district court properly measured disgorgement by Defendants’ unjust gains, not consumer loss.

Defendants further contended that “net revenue was tantamount to consumer loss” because the total net revenue and the total consumer loss was the same.  This argument failed.  The district court expressly calculated Defendants’ unjust gains as the measure of equitable relief.

In 2006, the Second Circuit found that “in many cases in which the FTC seeks restitution, the defendant’s gain will be equal to the consumer’s loss because the consumer buys goods or services directly from the defendant.”  Thus, it was of no consequence that the measure of Defendants’ unjust gains happened to equal the amount of consumer loss.  The district court ultimately – and properly – based its calculation of damages on Defendants’ unjust gains.

Lastly, Defendants argued that the district court erred when it considered the net revenue (gross receipts minus refunds) when it calculated damages.  They contended that the district court should have instead considered Defendants’ profits (net revenue minus expenses) when it calculated damages.  The circuit court ruled that Defendants were incorrect.

In fact, other circuits have been presented with this issue and have found a damages award based on net revenue, rather than profit, to be proper.  Thus, Defendants were not entitled to deduct their  expenses from the restitutionary baseline.

Thus, the Eleventh Circuit agreed with its sister circuits and held last week that the amount of net revenue (gross receipts minus refunds), rather than the amount of profit (net revenue minus expenses), is the correct measure of unjust gains under section 13(b).  It echoed the Second Circuit’s sentiment that “defendants in a disgorgement action are not entitled to deduct costs associated with committing their illegal acts.”

Accordingly, the district court did not err when it considered Defendants’ net revenues, instead of their profits, in its calculation for damages.

Information conveyed in this interview/article is provided for information purposes only and does not constitute, nor should it be relied upon as legal advice. This information is not intended to substitute for obtaining legal advice from a regulatory litigation attorney. No person should act or rely on any information in this article without seeking the advice of an attorney.

Written by Richard B. Newman

Richard B. Newman is an Internet Lawyer at Hinch Newman LLP focusing on Internet law, online marketing compliance, regulatory defense and digital media matters. His practice includes complex commercial litigation defense, SPAM law compliance and litigation defense, intellectual property transactional and litigation matters, advising clients on promotional marketing programs, and negotiating and drafting legal agreements.

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