Question: What’s the difference between US$600,000 and US$14 million in a contempt action? Answer: Presumption of consumer reliance, according to the Second Circuit Court of Appeals in Federal Trade Commission v. BlueHippo Funding, LLC.
The case began in 2003, when BlueHippo first began marketing computers and electronic products to consumers regardless of their credit history. BlueHippo offered the following deal to consumers: if a consumer made 13 consecutive installment payments and signed an installment contract, BlueHippo would ship the computer and permit the consumer to finance the remaining balance. If the consumer missed a payment, the consumer would not qualify for financing, but could continue to pay off the computer on layaway, or convert the previous payments to store credit for the purchase of other merchandise from BlueHippo’s online store. What BlueHippo did not tell consumers was the store credits could not be applied to shipping and handling fees or taxes, or that only one online store order could be placed at a time—consumers only learned these facts when they attempted to make a purchase with store credit.
In 2008, the Federal Trade Commission charged BlueHippo with deception under Section 5 of the FTC Act, and the parties entered into a consent order. In late 2009, the FTC claimed that BlueHippo was violating the consent order, and sought more than $14 million in damages, based on the gross receipts from Blue Hippo’s 55,892 customers. The district court agreed that BlueHippo was in contempt of the consent order, but limited damages to approximately $600,000, based on the consumers who had qualified for the financing plan but had received neither a computer nor store credit. The trial court opinion was silent with respect to any presumption of consumer reliance on the misrepresentations in this civil contempt action.
On August 12, 2014, the Second Circuit vacated the district court ruling and remanded the case, holding that “the FTC is entitled to a presumption of consumer reliance upon showing that (1) the defendant made material misrepresentations or omissions that ‘were of a kind usually relied upon by reasonable prudent persons;’ (2) the misrepresentations or omissions were widely disseminated; and (3) consumers actually purchased the defendants products.” (Slip op at 9-10.) The Second Circuit joined the Eighth, Ninth, Tenth, and Eleventh Circuits in rejecting a standard requiring proof of each individual consumer’s reliance on the misrepresentations and instead applying “a presumption of consumer reliance that attaches to potential consumers at the instant of the initial misrepresentation.” (Slip op. at 9.) The calculation of consumer loss “begins with the defendants’ gross receipts derived from such contumacious conduct” but defendants would have the opportunity to show “’that certain amounts should offset the sanctions assessed against them.’” (Slip op. at 10-11, citations omitted.)
Section 5 of the FTC Act does not give the FTC general authority to issue fines, so it is common for FTC settlement agreements and orders to require no payments from defendants to settle a matter. As this case demonstrates, violating those agreements and orders can be extremely expensive.
This article was prepared by Susan Ross of Norton Rose Fulbright’s Los Angeles office (susan.ross@nortonrosefulbright.com and +1 212 318 3280).