Florida Federal Court Says FTC Must Support Disgorgement Calculation
The Federal Trade Commission recently sustained another hit to its enforcement authority when a federal court in Florida recently rejected the FTC’s claim for disgorgement in a false advertising action.
The case stems from the 2017 announcement of “Operation Tech Trap,” a regulatory enforcement sweep aimed at companies that alleged tricked consumers into believing that their computers had been diagnosed and were infected with malware and viruses in order to charge them for unnecessary repairs. Vylah Tec LLC was sued by the FTC and the State of Florida as part of the sweep for its alleged participation.
In 2019, a federal district court in Florida granted the FTC summary judgment on the issue of liability under Section 5 of the FTC Act and under Florida’s Deceptive and Unfair Trade Practices Act. In doing so, the court ruled that the FTC had established Vylah Tec’s “widespread practice of disseminating false or misleading information about computers and computer security to induce consumers to buy the software.”
On the issue of damages, the FTC sought $3,400,000 in disgorgement. It did so by using Vylah Tec’s banking records to establish what it considered to be a the amount of the alleged ill-gotten gains, arguing that each and every sale made was the result of falsity and deception. Vylah Tec took the position that the FTC failed to demonstrate that its disgorgement figure “reasonably approximated” the amount of its unjust gains.
The court agreed.
The court held that the FTC’s evidence was insufficient to “identify with any precision which transactions originated from consumer sales, the number of transactions included in each deposit, or the purpose of each purchase.” It also held the FTC’s current disgorgement calculation practices are a “moving target.”
“While Plaintiffs argue that Mr. George’s methodology gives an approximate amount of net revenue based on consumer purchases, [the Receiver] testified that he could not differentiate between consumer receipts and business-to-business transactions in bank records. (Tr. 394 (“Q: Based on the bank statements, how can you tell whether a transaction, an incoming merchant transaction, includes only consumer sales or also includes business to business credit card sales? A: You couldn’t.”).)”
“However, the remainder of [the Receiver’s] calculation required guesswork and speculation. Numerous inconsistencies and contradictions in Plaintiffs’ methodology were exposed during cross-examination; [the Receiver] was unable to explain why a multitude of figures were either included or excluded from his final calculation. (See Tr. 295-377.) By choosing to rely only on Defendants’ bank records when calculating the disgorgement figure, Plaintiffs undermined the reasonableness of their approximation. Plaintiffs claim that these shortcomings are due to Defendants’ poor recordkeeping, invoking the theory that “the risk of uncertainty should fall on the wrongdoer whose illegal conduct created the uncertainty.” FTC v. Verity Int’l, Ltd., 443 F.3d 48, 69 (2nd Cir. 2006) (quotations omitted). However, “[t]his presumption against the wrongdoer should not [be] invoked without first establishing a reasonable approximation of unjust gain.” Id.
”Additionally, Plaintiffs did not establish that Defendants’ “illegal activity” created the uncertainty in Plaintiffs’ calculation. Rather, the evidence presented at trial establishes that much more detailed information was available to aid in Plaintiffs’ calculation, and they chose not to use it.”
Another blow to the FTC compliance, investigation and enforcement authority.
You can read the decision, here.
Takeaway: The FTC may be forced to satisfy a heightened standard of proof to support its disgorgement calculations. Additional due diligence with respect to the utilization of all available financial records may be required of the FTC when calculating the total disgorgement figure.
If you are the subject of an FTC investigation (CID) or an FTC enforcement action, contact FTC attorneys with experience representing marketers in government litigation proceedings.
Richard B. Newman is a digital marketing attorney at Hinch Newman LLP. Follow FTC defense lawyer on Twitter.
Information conveyed herein is for informational purposes only and does not constitute, nor should it be relied upon, as legal advice. Attorney advertising.