Court Sets New Restitution Parameters in FTC False Advertising Case

Following a trial this past summer, an Illinois federal court recently ruled for the Federal Trade Commission in its case against the marketers of the Q-Ray ionized bracelet. While the court awarded the FTC significant monetary relief, importantly, the court refused to accept the FTC's demand for restitution equal to the company's gross sales to all purchasers, less only refunds.

The complaint against the defendants was originally filed in 2003 and alleged that the defendants misrepresented that the Q-Ray ionized bracelet "provides immediate significant or complete relief from various types of pain, including, but not limited to, musculoskeletal pain, sciatic pain, persistent headaches, sinus problems, tendinitis, or injuries," and that "tests prove that the Q-Ray bracelet relieves pain." The complaint also alleged the defendants falsely represented a 30-day satisfaction guarantee that permitted "consumers to readily obtain a full refund of the purchase price if they return the Q-Ray bracelet within 30 days."

FTC's Standard Formula Not Accepted

The court did not accept the FTC's usual position that restitution is always equal to gross sales less refunds. The court ordered restitution of net profits as a minimum, and the gross sales less refunds as a maximum. Significantly, it also used the measure of direct-to-consumer sales rather than sales to wholesalers as well.

Dollars and Cents

The retail price of the bracelet sold by the defendants ranged from $49.95 to $249.95. While the wholesale cost ranged from $7.50 to $28.00. The product's gross sales were $137,172,907 (yes that's over 137 million dollars). The product's gross "consumer direct" sales were $114,609,182. After refunds the net sales direct to consumer was $87,467,933. The court found that the total net profit from consumer sales was approximately $22,600,000.

The court ordered disgorgement of the entire amount of net profits plus interest. The court also ordered that all direct consumer purchasers should be entitled to be offered recession and restitution in the form of a full refund. However, the court stated the total amount of restitution must not exceed the $87 million, which were defendants' net sales direct to consumers.

Therefore the defendants must disgorge at least $22 million being their net profits but not more than $87 million in equitable relief. Thus, for example, if $10 million were paid out in refunds defendants would pay a total of $22 million dollars. However, if $40 million is paid out in refunds, defendants will pay a total of $40 million. And if $95 million is claimed in refunds, defendants will pay a maximum total of $87 million.

A New Standard Developing?

Some view the FTC's usual position of going after gross sales less refunds as an inequitable and draconian form of relief. The QT decision, which comes on the heels of the Second Circuit's decision in Verity International -- in which the appeals court held that a party can only be held liable for the amount of monies it received - is beginning to show a rejection of this line of thinking. Moreover, this decision appears to be a rejection of the FTC's position that a marketer should be liable for its wholesaler's sales. Future FTC settlements will show if this recent order has an impact on the FTC's willingness to accept a defendant's net profits as the measure of restitution.

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