FTC v. Charles Gugliuzza ( 2016 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FEDERAL TRADE COMMISSION, No. 12-57064
Plaintiff-Appellee,
D.C. No.
v. 8:09-cv-01324-
CJC-RNB
COMMERCE PLANET, INC., a
corporation; MICHAEL HILL; AARON
GRAVITZ, OPINION
Defendants,
and
SUPERFLY ADVERTISING, INC., a
Delaware corporation, FKA Morlex,
Inc.; SUPERFLY ADVERTISING, INC.,
an Indiana corporation,
Third-party-defendants,
and
CHARLES GUGLIUZZA,
Defendant-Appellant.
Appeal from the United States District Court
for the Central District of California
Cormac J. Carney, District Judge, Presiding
2 FTC V. COMMERCE PLANET, INC.
Argued and Submitted
February 9, 2015—Pasadena, California
Filed March 3, 2016
Before: Consuelo M. Callahan, Paul J. Watford, and
John B. Owens, Circuit Judges.
Opinion by Judge Watford
SUMMARY*
Restitution
The panel affirmed in part, and vacated in part, the district
court’s order finding that Commerce Planet, Inc. violated § 5
of the Federal Trade Commission (“FTC”) Act; holding
Charles Gugliuzza, the former President of Commerce Planet,
Inc., personally liable for the company’s unlawful conduct;
and ordering him to pay $18.2 million in restitution.
The panel held that the district court had the authority to
award restitution under § 13(b) of the FTC Act. The panel
rejected Gugliuzza’s contention that any such award must be
limited to the unjust gains each defendant personally
received. The panel held that because joint and several
liability was permissible, restitution awards need not be
limited to the funds each defendant personally received from
the wrongful conduct. The panel noted that the judgment
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
FTC V. COMMERCE PLANET, INC. 3
against Gugliuzza did not actually hold him jointly and
severally liable for Commerce Planet’s restitution obligations,
and this appeared to be an oversight by the district court
which the panel did not have the power to correct. The panel
vacated the judgment and remanded. The panel concluded
that on remand the district court may reinstate the $18.2
million restitution award if it holds Gugliuzza jointly and
severally liable; otherwise the award must be limited to the
unjust gains Gugliuzza himself received.
The panel held that the district court did not abuse its
discretion in calculating the amount of the restitution award.
The panel held that the district court properly followed, and
applied, the two-step burden-shifting framework for
calculating restitution awards under § 13(b) of the FTC Act,
which other circuits have adopted and which the panel
adopted as the law of this circuit. Under the first step, the
FTC bore the burden of proving that the amount it sought in
restitution reasonably approximated the defendant’s unjust
gains; and at the second step, the burden shifted to the
defendant to show that the FTC’s figures overstated the
amount of the defendant’s unjust gains. The panel concluded
that the FTC met its burden at the first step, having proved
that all of the revenues represented presumptively unjust
gains; and Gugliuzza failed to meet his burden at step two to
show that the FTC’s figure overstated Commerce Planet’s
restitution obligations.
4 FTC V. COMMERCE PLANET, INC.
COUNSEL
Erwin Chemerinsky (argued), University of California,
Irvine, School of Law, Irvine, California; Theodore J.
Boutrous Jr., M. Sean Royall, and Blaine H. Evanson,
Gibson, Dunn & Crutcher LLP, Los Angeles, California;
Michael V Schafler and Jeffrey M. Chemerinsky, Caldwell
Leslie & Proctor, PC, Los Angeles, California, for Defendant-
Appellant.
Michele Arington (argued), Attorney, Jonathan E.
Nuechterlein, General Counsel, John F. Daly, Deputy General
Counsel for Litigation, Office of the General Counsel,
Federal Trade Commission, Washington, D.C.; Eric D.
Edmondson, David M. Newman, Kerry O’Brien, and Evan
Rose, Federal Trade Commission, San Francisco, California,
for Plaintiff-Appellee.
OPINION
WATFORD, Circuit Judge:
The Federal Trade Commission (FTC) sued Commerce
Planet, Inc., and three of its top officers for violating § 5(a) of
the FTC Act, which prohibits unfair or deceptive business
practices. 15 U.S.C. § 45(a). The company and two of the
individual defendants settled with the FTC. The remaining
defendant, appellant Charles Gugliuzza, elected to stand trial.
After a 16-day bench trial, the district court found that
Commerce Planet had violated § 5(a) and held Gugliuzza, the
company’s former president, personally liable for the
company’s unlawful conduct. The court permanently
FTC V. COMMERCE PLANET, INC. 5
enjoined Gugliuzza from engaging in similar misconduct and
ordered him to pay $18.2 million in restitution.
In a memorandum disposition filed together with this
opinion, we reject Gugliuzza’s challenges to the district
court’s liability ruling. We address here his arguments
contesting the validity of the restitution award.1
I
The FTC brought suit to enjoin Commerce Planet’s
deceptive marketing of a product called “OnlineSupplier.”
The company touted OnlineSupplier as a website-hosting
service that would enable consumers to make money by
selling products online. The company charged a membership
fee for the service that ranged over time from $29.95 to
$59.95 per month.
1
We have jurisdiction over this appeal despite the fact that Gugliuzza
filed his notice of appeal shortly after filing a Chapter 7 bankruptcy
petition. The filing of a bankruptcy petition triggers an automatic stay,
which generally prohibits “the commencement or continuation” of a
preexisting judicial action against the debtor, even when the debtor
himself continues the case by filing a notice of appeal. 11 U.S.C.
§ 362(a)(1); Parker v. Bain, 68 F.3d 1131, 1135–36 (9th Cir. 1995).
However, the automatic stay does not prevent the commencement or
continuation of an action by a governmental unit such as the FTC to
enforce its police or regulatory power, 11 U.S.C. § 362(b)(4), which the
action against Gugliuzza clearly is. See City & County of San Francisco
v. PG & E Corp., 433 F.3d 1115, 1123–26 (9th Cir. 2006). Gugliuzza’s
bankruptcy filing would stay any effort by the FTC to enforce the
judgment in this case, see 11 U.S.C. § 362(a)(2), but it does not preclude
us from reviewing the propriety of the district court’s entry of judgment,
see NLRB v. Continental Hagen Corp., 932 F.2d 828, 834–35 (9th Cir.
1991).
6 FTC V. COMMERCE PLANET, INC.
Commerce Planet sold OnlineSupplier through its
website. The landing page for the website, however, said
nothing about OnlineSupplier. What consumers saw instead
was an offer for a free “Online Auction Starter Kit” that
explained how they could sell products on eBay. To obtain
the starter kit, consumers needed to enter their shipping
address and a valid credit card number to pay for shipping
and handling ($1.95 for standard delivery, $7.95 for
expedited delivery). Buried in the fine print for this
transaction was an advisement stating that, by ordering the
free starter kit, consumers were also agreeing to purchase
OnlineSupplier through what is known as a “negative
option.” Here, that meant consumers received
OnlineSupplier at no charge during a 14-day trial period, but
if they failed to take affirmative steps to cancel within that
period the company automatically charged their credit cards
for the recurring monthly membership fee. Many consumers
did not realize that by ordering the free starter kit they had
also agreed to purchase OnlineSupplier. They first learned of
that fact when the monthly charges for the service began
showing up on their credit card bills.
The district court found that Commerce Planet’s failure to
adequately disclose the negative option constituted an unfair
and deceptive practice that violated § 5(a) of the FTC Act. In
addition, the court held Gugliuzza personally liable for the
company’s unlawful conduct during the two-and-a-half-year
period he exercised operational control over the company,
first as a consultant and then as the company’s president.
Throughout that period Gugliuzza oversaw and directed the
marketing of OnlineSupplier, which included reviewing and
approving the manner in which the negative option was
disclosed to consumers.
FTC V. COMMERCE PLANET, INC. 7
In addition to enjoining future unlawful conduct, the
district court ordered Gugliuzza to pay $18.2 million in
restitution. The court arrived at that figure by determining
that Commerce Planet’s net revenues from the sale of
OnlineSupplier during the relevant period totaled $36.4
million. The court credited Gugliuzza’s assertion that it
would be unfair to assume that all consumers who purchased
OnlineSupplier were deceived by the company’s inadequate
disclosure of the negative option. But because Gugliuzza
failed to offer any reliable method of determining how many
consumers were not deceived, the court relied on testimony
from one of the FTC’s experts, who opined that “most”
consumers would have been deceived by the manner in which
the negative option was disclosed. Based on that testimony,
the court estimated as a “conservative floor” that at least half
the consumers who purchased OnlineSupplier were deceived
by Commerce Planet’s marketing practices. The court
therefore reduced the restitution award to $18.2 million, one-
half of the net revenues Commerce Planet received from the
sale of OnlineSupplier during the relevant period.
II
Gugliuzza challenges the validity of the restitution award
on two fronts. First, he contends that the district court either
lacked the authority to award restitution at all or at the very
least had to limit the award to the unjust gains he personally
received, which in this case totaled roughly $3 million.
Second, Gugliuzza argues that even if he can be held liable
for restitution exceeding his own unjust gains, the district
court’s $18.2 million award is nonetheless arbitrary and must
be reduced.
8 FTC V. COMMERCE PLANET, INC.
A
The district court had the authority to award restitution
under § 13(b) of the FTC Act. Section 13(b) provides in
relevant part that “in proper cases the Commission may seek,
and after proper proof, the court may issue, a permanent
injunction.” 15 U.S.C. § 53(b). Although this provision
mentions only injunctive relief, we have held that it also
empowers district courts to grant “any ancillary relief
necessary to accomplish complete justice,” including
restitution. FTC v. Pantron I Corp., 33 F.3d 1088, 1102 (9th
Cir. 1994) (quoting FTC v. H.N. Singer, Inc., 668 F.2d 1107,
1113 (9th Cir. 1982)).
We grounded this holding on the Supreme Court’s
decision in Porter v. Warner Holding Co., 328 U.S. 395
(1946). That case involved an action brought by the
government under § 205(a) of the Emergency Price Control
Act of 1942. The government sued to enjoin the defendant
from charging excessive rents in violation of the Act and to
obtain restitution of the excess rents already collected. The
defendant argued that § 205(a) did not authorize an award of
restitution, as the statute spoke only of applications for “a
permanent or temporary injunction, restraining order, or other
order.” Id. at 397. The Court disagreed. It held that by
authorizing the issuance of injunctive relief, the statute
invoked the court’s equity jurisdiction, which carries with it
“all the inherent equitable powers of the District Court”
unless the Act provided otherwise. Id. at 398. Those
equitable powers are comprehensive. To ensure that
“complete rather than truncated justice” is done, a court
sitting in equity may “go beyond the matters immediately
underlying its equitable jurisdiction and decide whatever
other issues and give whatever other relief may be necessary
FTC V. COMMERCE PLANET, INC. 9
under the circumstances.” Id. That is especially true in cases
involving the public interest, the Court held, such as actions
brought by the government to enforce a regulatory statute. In
those cases the court’s “equitable powers assume an even
broader and more flexible character than when only a private
controversy is at stake.” Id. Moreover, limitations on the
court’s equitable jurisdiction are not to be casually inferred.
“Unless a statute in so many words, or by a necessary and
inescapable inference, restricts the court’s jurisdiction in
equity, the full scope of that jurisdiction is to be recognized
and applied.” Id.
In light of these principles, the Court had little difficulty
concluding that ordering a defendant to pay restitution fell
comfortably within the scope of the broad equitable authority
conferred by § 205(a). “Nothing is more clearly a part of the
subject matter of a suit for an injunction than the recovery of
that which has been illegally acquired and which has given
rise to the necessity for injunctive relief.” Id. at 399. Indeed,
ordering a defendant to return unjust gains, the Court noted,
is “within the highest tradition of a court of equity.” Id. at
402.
Under Porter and our cases applying it, district courts
have the power to order payment of restitution under § 13(b)
of the FTC Act. The equitable jurisdiction to enjoin future
violations of § 5(a) carries with it the inherent power to
deprive defendants of their unjust gains from past violations,
unless the Act restricts that authority. We see nothing in the
Act that does.
Gugliuzza contends that § 19(b) of the FTC Act, 15
U.S.C. § 57b(b), eliminates a court’s power to award
restitution under § 13(b), but we have refused to read § 19(b)
10 FTC V. COMMERCE PLANET, INC.
in that manner.2 For one thing, § 19 itself states that the
“[r]emedies provided in this section are in addition to, and not
in lieu of, any other remedy or right of action provided by
State or Federal law.” 15 U.S.C. § 57b(e); see H.N. Singer,
668 F.2d at 1113. For another thing, the Court in Porter
rejected essentially the same argument Gugliuzza makes here.
The defendant in that case argued that courts could not award
restitution under § 205(a) of the Emergency Price Control Act
because a separate provision of the Act—§ 205(e)—
authorized suits by the government to recover damages. The
Court held that, to the extent a court exercising its equitable
jurisdiction under § 205(a) might otherwise have been able to
award damages, Ҥ 205(e) supersedes that possibility and
provides an exclusive remedy relative to damages.” Porter,
328 U.S. at 401. However, § 205(e) in no way eliminated a
court’s power under § 205(a) to award restitution, a remedy
that “differs greatly” from the damages remedy available
under § 205(e). Id. at 402. We think the same can be said of
the relationship between §§ 13(b) and 19(b) of the FTC Act.
While § 19(b) precludes a court from awarding damages
when proceeding under § 13(b), it does not eliminate the
court’s inherent equitable power to order payment of
restitution.
Gugliuzza also contends that, even if a court may award
restitution under § 13(b), any such award must be limited to
the unjust gains each defendant personally received. We find
no support in our case law for this proposition. Restitution
does involve the return to the plaintiff of gains a defendant
has unjustly received. Restatement (Third) of Restitution and
2
Section 19(b) authorizes a court to award, in actions brought to
enforce the FTC’s cease-and-desist orders, “the refund of money or return
of property [and] the payment of damages.” 15 U.S.C. § 57b(b).
FTC V. COMMERCE PLANET, INC. 11
Unjust Enrichment § 1 cmt. a (2011). But the relevant
question in a case like this one—in which an individual
defendant violates the FTC Act by acting in concert with a
corporate entity—is whether the individual may be held
personally liable for restitution of the corporation’s unjust
gains. The answer is yes—provided the requirements for
imposing joint and several liability are satisfied, and here
they are.
We have established a two-pronged test for determining
when an individual may be held personally liable for
corporate violations of the FTC Act. That test requires the
FTC to prove that the individual: (1) participated directly in,
or had the authority to control, the unlawful acts or practices
at issue; and (2) had actual knowledge of the
misrepresentations involved, was recklessly indifferent to the
truth or falsity of the misrepresentations, or was aware of a
high probability of fraud and intentionally avoided learning
the truth. FTC v. Network Services Depot, Inc., 617 F.3d
1127, 1138–39 (9th Cir. 2010); FTC v. Stefanchik, 559 F.3d
924, 931 (9th Cir. 2009). The district court found that the
FTC’s proof satisfied both prongs of this test and, as
explained in the accompanying memorandum disposition,
those findings are adequately supported by the record.
If an individual may be held personally liable for
corporate violations of the FTC Act under this test, nothing
more need be shown to justify imposition of joint and several
liability for the corporation’s restitution obligations.
Satisfaction of the test establishes the degree of collaboration
between co-defendants necessary to justify joint and several
liability in analogous contexts, such as actions brought by the
Securities and Exchange Commission (SEC) to obtain
disgorgement in securities fraud cases. See, e.g., SEC v. First
12 FTC V. COMMERCE PLANET, INC.
Pacific Bancorp, 142 F.3d 1186, 1191–92 (9th Cir. 1998);
Hateley v. SEC, 8 F.3d 653, 656 (9th Cir. 1993). For that
reason, in actions brought by the FTC, we have repeatedly
held individuals jointly and severally liable for a
corporation’s restitution obligations without requiring an
evidentiary showing beyond the findings needed to satisfy the
two-pronged test described above. See Network Services
Depot, 617 F.3d at 1138–39; Stefanchik, 559 F.3d at 927,
930–32; FTC v. Publishing Clearing House, Inc., 104 F.3d
1168, 1170–71 (9th Cir. 1997); cf. FTC v. Gill, 265 F.3d 944,
954, 958–59 (9th Cir. 2001) (joint and several liability for
two individual co-defendants).
Notwithstanding the cases just cited, Gugliuzza contends
that a court exercising its inherent equitable powers under
§ 13(b) lacks authority to impose joint and several liability
because that is a form of liability only the law courts could
impose. Gugliuzza is wrong. Equity courts have long
exercised the power to impose joint and several liability, most
notably in cases involving breach of the duties imposed by
trust law. See, e.g., Jackson v. Smith, 254 U.S. 586, 589
(1921); Restatement of Trusts § 258 cmt. a (1935); 4 John
Norton Pomeroy, A Treatise on Equity Jurisprudence § 1081,
at 231–32 (5th ed. 1941). We therefore see no basis for
holding that courts are categorically precluded from imposing
joint and several liability in actions brought under § 13(b).
Because joint and several liability is permissible,
restitution awards need not be limited to the funds each
defendant personally received from the wrongful conduct, as
Gugliuzza urges. Defendants held jointly and severally liable
for payment of restitution are liable for the unjust gains the
defendants collectively received, even if that amount exceeds
(as it usually will) what any one defendant pocketed from the
FTC V. COMMERCE PLANET, INC. 13
unlawful scheme. Indeed, we have previously upheld joint
and several liability for payment of restitution even though
the award exceeded the unjust gains any individual defendant
personally received. See Network Services Depot, 617 F.3d
at 1137–38; Stefanchik, 559 F.3d at 931–32; Gill, 265 F.3d at
954, 959. The same is true in disgorgement actions brought
by the SEC, cases in which courts also exercise the broad
equitable powers described in Porter. There, too, courts have
upheld disgorgement orders imposed jointly and severally
that exceeded the unjust gains any one defendant personally
received. See, e.g., SEC v. Platforms Wireless International
Corp., 617 F.3d 1072, 1098 (9th Cir. 2010); SEC v. Clark,
915 F.2d 439, 453–54 (9th Cir. 1990).
Gugliuzza’s argument against joint and several liability
rests primarily on Great-West Life & Annuity Insurance Co.
v. Knudson, 534 U.S. 204 (2002), but we do not think that
decision has any bearing on the analysis here. In Great-West,
the Court interpreted the meaning of the phrase “other
appropriate equitable relief” in § 502(a)(3) of the Employee
Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.
§ 1132(a)(3), a provision that authorizes suits by private
parties alleging violations of ERISA-imposed duties. The
Court held that a plaintiff may obtain an award of restitution
under that provision only if the plaintiff seeks “equitable”
rather than “legal” restitution. 534 U.S. at 213–14.
“Equitable” restitution requires tracing the money or property
the plaintiff seeks to recover to identifiable assets in the
defendant’s possession (thus permitting imposition of a
constructive trust or equitable lien), whereas “legal”
restitution seeks imposition of “a merely personal liability
upon the defendant to pay a sum of money.” Id. at 213
(quoting Restatement of Restitution § 160 cmt. a (1936)).
14 FTC V. COMMERCE PLANET, INC.
Gugliuzza concedes (correctly) that the tracing
requirements for “equitable” restitution do not apply in
§ 13(b) actions. See FTC v. Bronson Partners, LLC, 654 F.3d
359, 373–74 (2d Cir. 2011). Adopting those tracing
requirements would greatly hamper the FTC’s enforcement
efforts by, among other things, precluding restitution of any
funds the defendant has wrongfully obtained but already
managed to spend on non-traceable items. See Montanile v.
Board of Trustees of the National Elevator Industry Health
Benefit Plan, 136 S. Ct. 651, 657–62 (2016). We have never
applied that rule in § 13(b) cases.
Given Gugliuzza’s concession that tracing requirements
do not apply, it is far from clear what relevance he contends
Great-West has to this case. He appears to argue (contrary to
his concession) that courts proceeding under § 13(b) must
make the same “fine distinction” between legal and equitable
restitution required under ERISA § 502(a)(3). Great-West,
534 U.S. at 214. We take a different view.
The Court’s holding in Great-West relied heavily on
Mertens v. Hewitt Associates, 508 U.S. 248 (1993), where the
Court stated that the phrase “other appropriate equitable
relief” could be construed to mean one of two things: either
“whatever relief a court of equity is empowered to provide in
the particular case at issue,” or, more narrowly, only “those
categories of relief that were typically available in equity.”
Id. at 256. The Court felt compelled to adopt the latter, more
narrow reading because it assumed that Congress intended
“equitable relief” as a limitation on the relief available under
§ 502(a)(3). Because equity courts could award all forms of
relief—whether legal or equitable—for breach of trust, the
Court thought reading the phrase “equitable relief” to mean
FTC V. COMMERCE PLANET, INC. 15
whatever relief a court of equity could provide “would limit
the relief not at all.” Id. at 257.
The interpretive constraints facing the Court in Great-
West and Mertens are wholly absent here. We do not have
before us a statute that limits the court to providing “equitable
relief.” Section 13(b) invokes a court’s equity jurisdiction by
authorizing issuance of injunctive relief, so absent a clear
limitation expressed in the statute, Congress is deemed to
have authorized issuance of “whatever relief a court of equity
is empowered to provide in the particular case at issue.”
Mertens, 508 U.S. at 256. That includes the power “to award
complete relief even though the decree includes that which
might be conferred by a court of law,” Porter, 328 U.S. at
399, such as monetary relief that would traditionally be
viewed as “legal.” 1 Dan B. Dobbs, Law of Remedies § 2.7,
at 180 (2d ed. 1993). Absent a clear textual basis for doing
so, reading into § 13(b) the remedial limitations imposed in
Great-West and Mertens would be particularly ill-advised,
given the admonition in Porter that a court’s inherent
equitable powers “assume an even broader and more flexible
character” when the government seeks to enforce a regulatory
statute like § 13(b), as opposed to “when only a private
controversy is at stake,” as is true under § 502(a)(3). Porter,
328 U.S. at 398.
Gugliuzza contends that if the district court may award
what amounts to “legal” restitution as defined in Great-West,
then the Seventh Amendment afforded him the right to have
his case tried to a jury. The Supreme Court has held that the
Seventh Amendment preserves the right to trial by jury in
statutory actions seeking traditional legal remedies, such as
compensatory damages or civil penalties. Tull v. United
States, 481 U.S. 412, 422–23 (1987); Curtis v. Loether, 415
16 FTC V. COMMERCE PLANET, INC.
U.S. 189, 195–96 (1974). But the Court has consistently
stated that restitution is an equitable remedy for Seventh
Amendment purposes, without drawing any distinction
between the legal and equitable forms of that relief. See
Great-West, 534 U.S. at 229 (Ginsburg, J., dissenting). For
example, in Teamsters v. Terry, 494 U.S. 558 (1990), the
Court noted that “we have characterized damages as equitable
where they are restitutionary,” id. at 570 (emphasis added),
which strongly suggests that such an award is considered
equitable under the Seventh Amendment even if imposed as
a merely personal liability upon the defendant. That view
may need to be reconsidered in light of Great-West’s holding,
but we regard that as a matter the Supreme Court must
resolve. For now at least, so long as a court limits an award
under § 13(b) to restitutionary relief, the remedy is an
equitable one for Seventh Amendment purposes and thus
confers no right to a jury trial. See Bronson Partners, 654
F.3d at 374; FTC v. Verity International, Ltd., 443 F.3d 48,
66–67 (2d Cir. 2006).
Having said all this, we note that the judgment entered
against Gugliuzza does not actually hold him jointly and
severally liable for Commerce Planet’s restitution obligations.
The FTC asserts that it requested such relief below and that
the district court’s failure to provide it was a mere oversight.
That seems plausible, since the district court otherwise had no
basis for ordering Gugliuzza to pay $18.2 million in
restitution. Nevertheless, if the failure to impose joint and
several liability was indeed an oversight, we have no power
to correct it ourselves. We must therefore vacate the
judgment. If on remand the district court decides, in the
exercise of its discretion, to hold Gugliuzza jointly and
severally liable with Commerce Planet, it may reinstate the
FTC V. COMMERCE PLANET, INC. 17
$18.2 million restitution award. Otherwise, the award must
be limited to the unjust gains Gugliuzza himself received.3
B
Gugliuzza also contests the amount of the restitution
award, on the ground that the district court arbitrarily
determined that Commerce Planet’s unjust gains totaled $18.2
million. The district court did not abuse its discretion in
calculating the amount of the award. The court followed, and
properly applied, the two-step burden-shifting framework that
other circuits have adopted for calculating restitution awards
under § 13(b). See, e.g., Bronson Partners, 654 F.3d at
368–69; FTC v. Kuykendall, 371 F.3d 745, 766 (10th Cir.
2004) (en banc); FTC v. Febre, 128 F.3d 530, 535 (7th Cir.
1997). We have not yet had occasion to adopt that
framework as the law of our circuit in § 13(b) cases, but we
do so now. Cf. Platforms Wireless, 617 F.3d at 1096
(adopting essentially the same burden-shifting framework for
SEC disgorgement cases).
Under the first step, the FTC bears the burden of proving
that the amount it seeks in restitution reasonably
approximates the defendant’s unjust gains, since the purpose
of such an award is “to prevent the defendant’s unjust
enrichment by recapturing the gains the defendant secured in
a transaction.” 1 Dobbs, Law of Remedies § 4.1(1), at 552.
3
Commerce Planet and the other individual co-defendants settled with
the FTC before trial for a total of $522,000. The only argument Gugliuzza
makes with respect to the impact of these settlements is that any award
against him should be offset by what his co-defendants have already paid.
We agree that the FTC is not entitled to a double recovery. On remand the
district court should ensure that Gugliuzza receives a credit for any sums
the FTC has collected from the other defendants.
18 FTC V. COMMERCE PLANET, INC.
Unjust gains in a case like this one are measured by the
defendant’s net revenues (typically the amount consumers
paid for the product or service minus refunds and
chargebacks), not by the defendant’s net profits. Bronson
Partners, 654 F.3d at 374–75; accord FTC v. Washington
Data Resources, Inc., 704 F.3d 1323, 1327 (11th Cir. 2013)
(per curiam); Febre, 128 F.3d at 536. Nor are unjust gains
measured by the consumers’ total losses; that would amount
to an award of damages, a remedy available under § 19(b) but
precluded under § 13(b). See Porter, 328 U.S. at 401–02;
Bronson Partners, 654 F.3d at 366–68. In many cases,
however, the defendant’s unjust gain “will be equal to the
consumer’s loss because the consumer buys goods or services
directly from the defendant.” Verity, 443 F.3d at 68. The
defendant’s unjust gains and consumers’ losses may diverge
in cases where “some middleman not party to the lawsuit
takes some of the consumer’s money before it reaches a
defendant’s hands.” Id. But that is not a concern in this case;
consumers purchased OnlineSupplier directly from
Commerce Planet.
If the FTC makes the required threshold showing, the
burden then shifts to the defendant to show that the FTC’s
figures overstate the amount of the defendant’s unjust gains.
Any risk of uncertainty at this second step “fall[s] on the
wrongdoer whose illegal conduct created the uncertainty.”
Bronson Partners, 654 F.3d at 368 (quoting Verity, 443 F.3d
at 69).
The FTC carried its initial burden at step one. It
presented undisputed evidence that Commerce Planet
received $36.4 million in net revenues from the sale of
OnlineSupplier during the relevant period. The FTC proved
that Commerce Planet made material misrepresentations—by
FTC V. COMMERCE PLANET, INC. 19
not adequately disclosing the negative option—and that the
misrepresentations were widely disseminated. As a result, the
FTC was entitled to a presumption that all consumers who
purchased OnlineSupplier did so in reliance on the
misrepresentations. See FTC v. Figgie International, Inc.,
994 F.2d 595, 605–06 (9th Cir. 1993) (per curiam). The FTC
having proved that all of the $36.4 million in net revenues
represented presumptively unjust gains, the burden shifted to
Gugliuzza to show that the FTC’s figure overstated
Commerce Planet’s restitution obligations.
Gugliuzza attempted to meet his burden by asserting that
not all of the consumers who purchased OnlineSupplier were
deceived by Commerce Planet’s misrepresentations. Had
Gugliuzza offered a reliable method of quantifying what
portion of the consumers who purchased OnlineSupplier did
so free from deception, he might well have succeeded in
showing that not all of the $36.4 million in revenues
represented unjust gains. But he failed to do so. He did
attempt to introduce the testimony of an expert, Dr. Kenneth
Deal, who opined, based on the results of a consumer survey
conducted by a third party, that not many of Commerce
Planet’s consumers were actually deceived. The district court
properly refused to consider that testimony because Dr. Deal
did not conduct the survey himself, and neither he nor
Gugliuzza could demonstrate that the survey was “conducted
according to accepted principles.” M2 Software, Inc. v.
Madacy Entertainment, 421 F.3d 1073, 1087 (9th Cir. 2005)
(internal quotation marks omitted); see Southland Sod Farms
v. Stover Seed Co., 108 F.3d 1134, 1142 (9th Cir. 1997).
Gugliuzza attempted to support his contention that not all
consumers were deceived by pointing out that 45% of
consumers cancelled within the trial period, which indicated
20 FTC V. COMMERCE PLANET, INC.
that those consumers, at least, must have known about the
negative option. That fact, however, sheds no light on what
portion of the $36.4 million in net revenues represents unjust
gains. Consumers who cancelled within the trial period may
indeed not have been deceived, but the payments made by
those consumers were not included in the $36.4 million
figure. Consumers who cancelled during the trial period paid
only shipping and handling for the free starter kit, and those
fees were excluded when calculating the $36.4 million in net
revenues. The consumers who paid the monthly fees that
comprise the $36.4 million figure were those who did not
cancel during the trial period. They were presumptively
deceived and, absent a contrary showing by Gugliuzza, the
fees they paid to Commerce Planet were properly deemed
unjust gains.
Lastly, Gugliuzza challenges as arbitrary the district
court’s reliance on testimony from the FTC’s expert that
“most” consumers were deceived by Commerce Planet’s
misrepresentations. Gugliuzza has no basis to complain
about this aspect of the district court’s ruling. The court
relied on the testimony in question to reduce the award from
$36.4 million to $18.2 million. Given Gugliuzza’s failure to
produce any reliable evidence demonstrating what portion of
the $36.4 million in net revenues should not be deemed unjust
gains, the court could simply have awarded that amount and
been done with it. The district court did not abuse its
discretion when it instead decided to err on the side of caution
by slashing the otherwise-permissible award in half. Any
error in that regard could only have benefitted Gugliuzza.
AFFIRMED IN PART, VACATED IN PART, AND
REMANDED.
No costs.