Federal Trade Commission v. Publishers Business Services, Inc. , 540 F. App'x 555 ( 2013 )

FILED
NOT FOR PUBLICATION SEP 19 2013
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
FEDERAL TRADE COMMISSION, No. 11-17270
Plaintiff-Appellant, D.C. No. 2:08-cv-00620-PMP-GWF
v.
PUBLISHERS BUSINESS SERVICES, MEMORANDUM*
INC.; ED DANTUMA ENTERPRISES,
INC., DBA Publishers Business Services,
DBA Publishers Direct Services; PERSIS
ANN DANTUMA; EDWARD FRED
DANTUMA; BRENDA DANTUMA
SCHANG; DRIES DANTUMA; DIRK
DANTUMA; JEFFREY DANTUMA,
Defendants-Appellees.
On Appeal from the United States District Court
for the District of Nevada
Philip M. Pro, District Judge, Presiding
Argued May 15, 2013
Submitted September 19, 2013
San Francisco, California
Before: CLIFTON and BEA, Circuit Judges, and KORMAN,
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
1
Senior District Judge.**
The Federal Trade Commission (“FTC”) sued Publishers Business Services,
Inc.; Ed Dantuma Enterprises, Inc. (referred to collectively as “PBS”); and six of its
individual corporate officers and managers, all of whom are members of the same
family, alleging widespread deceptive and abusive telemarketing practices. The
district court granted the FTC’s motion for summary judgment and entered a
permanent injunction. FTC v. Publishers Bus. Servs., Inc., 821 F. Supp. 2d 1205,
1227–28 (D. Nev. 2010). After an evidentiary hearing, the district court awarded the
FTC equitable damages of $191,219.00. See FTC v. Publishers Bus. Servs., No. 08-
CV-00620, 2011 WL 7462205, at *2 (D. Nev. July 25, 2011). Moreover, the district
court held that only two individual defendants were liable for monetary relief, though
each was subject to the permanent injunction. Id. Only the FTC appeals, arguing that
damages should have been measured by defendants’ total gross receipts within the
relevant time period ($34.4 million) and that all individual defendants should have
been held jointly and severally liable for monetary relief.
We “review[] a district court’s grant of equitable relief under the FTC Act only
for abuse of discretion or [for] the erroneous application of legal principles.” FTC v.
**
The Honorable Edward R. Korman, Senior United States District
Judge for the Eastern District of New York, sitting by designation.
2
Network Servs. Depot, Inc., 617 F.3d 1127, 1141 (9th Cir. 2010). We hold that the
district court abused its discretion with respect to the amount of the award and the
individual liability of three of the defendants. We vacate and remand for further
proceedings.
I. The Measure of Damages
The district court applied an incorrect legal standard when it focused on the
defendants’ gain rather than the loss to the consumers. “[C]ourts have often awarded
the full amount lost by consumers rather than limiting damages to a defendant’s
profits.” FTC v. Stefanchik, 559 F.3d 924, 931 (9th Cir. 2009).
In rejecting this calculation, the district court relied on two cases: FTC v. Verity
Int’l, Ltd., 443 F.3d 48 (2d Cir. 2006), and FTC v. Figgie Int’l, Inc., 994 F.2d 595 (9th
Cir. 1993) (per curiam). This was improper. In Verity, the Second Circuit held that
the baseline for an equitable monetary award under the FTC Act is the defendant’s
unjust benefits, not the consumers’ losses. We have, however, held that the FTC Act
permits restitution measured by the loss to consumers. See Stefanchik, 559 F.3d at931–32 (9th Cir. 2009).
Figgie, 994 F.2d at 595, is also distinguishable. In Figgie, as here, the violation
arose under § 5 of the FTC Act. The remedy in that case, however, was governed by
§ 19(b) of the FTC Act, which explicitly limits recoverable monies to those necessary
3
to provide “redress . . . to consumers” and prohibits the imposition of other types of
damages. Id. at 607 (quoting 15 U.S.C. § 57b(b)). In this case, recovery is authorized
under § 13(b), which contains no such limitation and which permits awards that may
even be “greater than the defendant’s unjust enrichment.” Stefanchik, 559 F.3d at
931; accord FTC v. Gem Merch. Corp., 87 F.3d 466, 469–70 (11th Cir. 1996) (noting
that § 13(b) does not have the same limitations as § 19 and distinguishing Figgie on
that basis); Febre, 128 F.3d at 537 (7th Cir. 1997) (same).
In addition to its reliance on Verity and Figgie, the district court also erred when
it relied on the fact that, while consumer refunds might be an appropriate remedy, “the
evidence adduced demonstrates that it is either impossible or impracticable to locate
and reimburse those individual customers.” Publishers Bus. Servs., 2011 WL
7462205 at *2 (citing FTC v. Pantron I Corp., 33 F.3d 1088 (9th Cir. 1994)).
Attributing damages to individual consumers and returning value to them is not
required for a § 13(b) disgorgement remedy and Pantron I so held. We there held
that, if it is “impossible or impracticable to locate and reimburse all of the consumers
who have been injured by [the defendant’s] misrepresentations, [the district court]
may order some other remedy which requires [the defendant] to disgorge its unjust
enrichment. Such an alternative remedy should provide direct benefits to consumers
to the extent possible, however.” Pantron I, 33 F.3d at 1103 n.34; see also Gem
4
Merch. Corp., 87 F.3d at 470 (“[B]ecause it is not always possible to distribute the
money to the victims of defendant's wrongdoing, a court may order the funds paid to
the United States Treasury.”).
The district court also erred when it relied on the damage calculation contained
in PBS's expert report by Dr. Gregory Duncan. That report was premised first on the
assumption that most consumers heard all the terms of the subscription so that they
were not misled by the telemarketing solicitation. The fraud, however, was not simply
the failure to disclose all pertinent terms. Instead, the defendants were found in
violation of § 5 by the misrepresentations that launched the process, among other
reasons. Indeed, in granting summary judgment, the district court held that, “[a]lbeit
true that by the end of the verification call PBS has informed the consumer of all the
terms of the agreement,” the net effect of PBS's sales tactics was misleading.
Publishers Bus. Servs., 821 F. Supp. 2d at 1224. Thus, the deception was
“self-evident.” Id. at 1225.
Dr. Duncan's calculation was also premised on the assumption that the
subscriptions were not valueless. This assumption is not relevant, even if true.
“Courts have previously rejected the contention ‘that restitution is available only when
the goods purchased are essentially worthless.’” Figgie, 994 F.2d at 606 (quoting
FTC v. Int'l Diamond Corp., No. 82-0878, 1983 WL 1851, at *5 (N.D. Cal. July 12,
5
1983)); see also FTC v. Kuykendall, 371 F.3d 745, 766 (10th Cir. 2004) (holding, in
similar magazine subscription sales scheme, no need to offset gross receipts “by the
value of the magazines the consumers received”). This is particularly true where the
injury to consumers arises out of misrepresentations made in the sales process, which
lead to a “tainted purchasing decision.” Figgie, 994 F.2d at 606. “The fraud in the
selling, not in the value of the thing sold, is what entitles consumers . . . to full
refunds.” Id.The district court's calculation of damages is vacated. On remand, the district
court should base its calculation on the injury to the consumers, not on the net
revenues received by defendants. That does not mean that the district court must
accept the calculation proposed by the FTC. PBS has argued, for example, that a
customer who renewed subscriptions necessarily knew the actual terms of the
transaction at the time of renewal. A similar argument was made regarding customers
who added on to a subscription order. The district court may consider these and other
arguments in determining the appropriate amount of damages to be awarded.
II. Individual Liability
To be individually liable for equitable restitution under the FTC Act, the
individual must have “participated directly in the deceptive acts or had the authority
to control them,” Stefanchik, 559 F.3d at 931 (emphasis omitted), and “had knowledge
6
that the corporation or one of its agents engaged in dishonest or fraudulent conduct,
that the misrepresentations were the type upon which a reasonable and prudent person
would rely, and that consumer injury resulted.” FTC v. Network Servs. Depot, Inc.,
617 F.3d 1127, 1138 (9th Cir. 2010) (emphasis in Network Services Depot). The FTC
may establish knowledge by showing that an individual “had actual knowledge of
material misrepresentations, [was] recklessly indifferent to the truth or falsity of a
misrepresentation, or had an awareness of a high probability of fraud along with an
intentional avoidance of the truth.” Id. at 1138 (citation omitted) (alteration in
Network Services Depot).
The district court’s finding that Dirk, Brenda and Jeff Dantuma were not
individually liable was an abuse of discretion. They had knowledge, and, by virtue
of their individual roles, had some degree of either control or direct participation in
the misrepresentations. Indeed, by way of example, Dirk filed a sworn declaration
stating that he was “familiar with the business operations, policies and procedures of
[Ed Dantuma Enterprises] and Publishers Business Services,” and specifically attested
to PBS’s alleged efforts to “comply with the [Telemarketing Sales Rule], the FTC Act,
and debt collection laws.”
On the other hand, the FTC did not present any evidence beyond Persis
Dantuma’s corporate titles as to her knowledge and declined even to cross-examine
7
her at the hearing on damages. Under these circumstances, it was not an abuse of
discretion to hold that she was not individually liable and the district court’s order is
affirmed as to her.
We therefore remand this case for further proceedings. On remand, the district
court is directed to recalculate the damage award, and to hold Dirk, Brenda, and Jeff
Dantuma individually liable, in addition to Edward and Dries Dantuma.
AFFIRMED in part, VACATED in part, and REMANDED.
8