FTC Suffers Legal Setback in Ability to Recover Monetary Damages

A recent Federal Trade Commission (“FTC”) lawsuit, FTC v. Noland (decided on May 11, 2023 in the District of Arizona), revisited an issue this blog has covered in the past pertaining to the degree of monetary recovery the FTC is entitled to recover after it has prevailed on claims of consumer-oriented unfair or deceptive practices. Continuing a trend set in motion by a U.S. Supreme Court decision more than two years ago, the FTC suffered a ruling that prevented it from recovering the full amount of monetary relief that it sought. Historically, courts awarded the FTC the remedy of disgorgement in the amount of all revenues connected to a defendant’s unfair or deceptive practices, even though there has never been any explicit statutory language permitting such recovery. The FTC accomplished this through a legal theory that disgorgement constituted equitable relief, not monetary damages, and there is a provision of the FTC Act that makes injunctive relief available to the FTC. However, in 2021, the U.S. Supreme Court held in AMG Capital Management LLC v. FTC that Section 13(b) of the FTC Act does not permit equitable monetary relief in federal court cases.

Although it prevailed in other aspects of this case against a pyramid scheme operator, the Noland ruling advanced the legal momentum that has limited the FTC’s ability to recover monetary damages. This time, the Court’s ruling was based on Section 19 of the FTC Act. With the defendants’ liability already determined on the FTC’s successful summary judgment motion, the FTC was seeking approximately $1.14 million in monetary remedies based on, among other things, the defendants’ failure to timely fulfill customer orders in violation of the Merchandise Rule.

But Judge Dominic W. Lanza disagreed, and awarded the FTC only $6,829 of the $1.14 million based on the unfulfilled refund requests that were made prior to the late shipments. Judge Lanza ruled that the FTC could not recover the full purchase price when consumers clearly had received something of value from their purchase.  Judge Lanza found that the FTC's “all-or-nothing” calculation of damages failed to account for the inherent value of the product, even though the product was shipped late. The FTC argued that if a consumer paid for $5,000 of products but the shipping deadline expired without notifying the consumer of the legal right to a refund, the FTC would nevertheless be entitled to $5,000 even if the products were shipped one day after the deadline expired and the consumer was otherwise satisfied with the products. Judge Lanza wrote, “It is difficult to see how such an outcome could be viewed as necessary to redress injury to the affected consumer. […] It assumes that a late-shipped product automatically ceases to have any value, such that there is no need to provide an offset for the value of the product received.” Critical to the sharply reduced monetary recovery was the fact that the defendants were not accused of misrepresenting the qualities of the goods sold. The legal violation was that the shipments were late and the refund option was not properly disclosed. Had there been false claims about the shipped products (coffee and other beverages) at issue, the outcome of this decision might have been very different.

TAKEAWAY: The case was not a total loss for the FTC because, for other reasons, it was previously awarded $7.3 million for the defendants’ contempt of prior court orders. The FTC also obtained injunctions limiting the defendants’ future conduct. From a legal standpoint, however, this ruling hurts the FTC by providing strong precedent for future FTC defendants to argue for reduced damages awards based on the value of the products and services that they actually provided to their customers.

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