Addressing the Redress: District Court Limits the Scope of FTC Consumer Redress for Rule Violations

In the wake of AMG Capital Management v. FTC and Liu v. SEC, uncertainty has loomed as to how courts should measure the consumer redress available to the FTC under Section 19 of the FTC Act. Earlier this month, a court in the District of Arizona squarely addressed this issue.

Before AMG, the FTC used its ability to obtain injunctive relief in federal court under Section 13(b) of the FTC Act for violations of Section 5 of the FTC Act to also obtain equitable monetary relief. As we’ve previously discussed, the Supreme Court’s decision in AMG put an end to that. As a result, the FTC turned to its authority under Section 19 to obtain redress for rule violations.

The Supreme Court’s decision in Liu, which we also previously covered, held that equitable monetary relief cannot exceed a defendant’s gains after legitimate business expenses. This results in the quandary of how to reconcile this with the text of Section 19, which provides for “such relief as the court finds necessary to redress injury to consumers.”

In FTC v. Noland, the district court held an 11-day bench trial to decide, among other issues, the scope of damages for violations of the Merchandise Rule and the Cooling-Off Rule. Previously at summary judgment, the court held that Defendants violated the FTC’s Merchandise Rule by failing to disclose a shipping date and failing to ship products within 30 days, in addition to violating the Cooling-Off Rule by failing to provide customers with notice of their right to recission.

With respect to the Merchandise Rule, the FTC sought $561,798.80 in damages, which reflected the entire amount of consumer purchases subject to the shipping delays associated with the Merchandise Rule violations. However, the court determined that the “FTC’s all-or-nothing methodology fails to account for the inherent value of the product that consumers ultimately received.”

The court reasoned that it could not reconcile the statutory authorization in Section 19 to provide remedies “necessary to redress injury to consumers” with the flawed assumption that a late-shipped product automatically ceases to have any value. Accordingly, the court awarded the FTC $6,829 in Merchandise Rule damages, which reflected five specific instances in which a consumer’s refund request, as a result of a shipping delay, was denied.

Similarly, the court’s consumer redress analysis under the Cooling-Off Rule violations showed that there was a missing link between the violations and any injury or loss. Specifically, the court determined that there was no evidence or “methodology for identifying whether consumers would have made cancellation requests if aware of the right to do so.”

Important to the court’s analysis are the three types of relief that a court may authorize as “necessary to redress injury to consumers”:

• The “recission or reformation of contracts”
• The “refund of money or return of property”
• The “payment of damages”

The first is a type of equitable relief that, as discussed above, is subject to the constraints of Liu. As to the second, courts have ordered the refund of money on a claims-made basis. For example, in FTC v. QYK Brands, the court noted, “given that some customers may have been satisfied . . . the Court prefers to implement a redress plan requiring customers to make refund requests rather than receiving the funds outright.”

Similarly, the court in FTC v. American Screening determined that “the FTC shall implement a plan that requires customers to make refund requests rather than receiving refunds outright.”

And finally, as the Noland court demonstrated, the burden is on the FTC to prove “a reasonable estimate of damages” that accounts for the value of the product received. The Noland decision plainly provides some much-needed guidance in interpreting the damages provision of Section 19.

As the FTC continues to utilize its Section 19 authority to enforce rule violations, it will be interesting to see if other courts follow suit in requiring the FTC to show a reasonable approximation of damages.

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