Court Lets FTC Keep Its Big Gun

A challenge to agency's power to seek damages.

, The National Law Journal

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Fourth Circuit Judge Andre DavisApril 29, 2009.
Fourth Circuit Judge Andre Davis

The U.S. Court of Appeals for the Fourth Circuit last week kept intact a key part in the Federal Trade Commis­sion's "arsenal," upholding a $163 million judgment against a woman who allegedly helped dupe consumers into buying computer-security software.

It was a high-stakes dispute, but not just because of the money — how much the FTC will actually collect is unclear. Rather, the defendant, Kristy Ross, mounted a novel and potentially devastating challenge to the FTC's ability to use its go-to statute, the FTC Act, to collect money and hold individuals liable.

A loss for the commission would have "obliterate[d] a significant part of the Commission's remedial arsenal," Fourth Circuit Judge Andre Davis wrote in the case of first impression for the appeals court. The panel, Davis added, found Ross' argument "not entirely unpersuasive."

Ross' lawyer, Robert Greenspoon, a name partner at Flachsbart & Green­spoon in Chicago, said the decision "shows the need for high court review" of what he termed the FTC's "business settlement extraction strategy."

Jessica Rich, director of the FTC's Bureau of Consumer Protection, called the decision "a huge victory for consumers. As this case shows, scareware causes enormous economic injury. We remain committed to protecting consumers against this kind of scam."The FTC sued Ross, Innovative Marketing Inc. and six others in December 2008 in federal court in Baltimore, alleging the company falsely claimed that scans had detected viruses, spyware and illegal pornography on consumers' computers. According to the FTC, more than 1 million people bought computer-security products such as WinFixer, DriveCleaner and XP Antivirus from the company for $39.95 or more to fix the purported problems.

The scans, the FTC said, were fake. "Although the Defendants go to great lengths to make the scans appear legitimate, no actual computer scans take place," according to the complaint, filed by FTC lawyers Ethan Arenson, Colleen Robbins and Carmen Christopher. The FTC charged the defendants with violating Section 5 of the FTC Act, which ­prohibits unfair or deceptive practices, and Section 13(b), which authorizes courts to issue injunctions for violations of the act.

Of the original eight defendants, two settled jointly for $8.2 million and two for $116,697, while three defaulted.

SCOPE OF AUTHORITY

Ross was left holding the bag. Vice president for business development at the 660-employee company, which was incorporated in Belize and had offices in Kiev, Ukraine, she was at different times the girlfriend of two of her co-defendants.

She was tried in absentia in U.S. District Court for Maryland in September 2012 but submitted extensive pretrial documents. She argued she was merely an employee, not a "control person," and bore no individual liability.

U.S. District Judge Richard Bennett didn't buy it. On Sept. 24, 2012, he found that Ross "had authority to control the deceptive practices or acts of Innovative Marketing and that she ­participated directly in these deceptive practices." He held her liable for the full $163 million.

On appeal, Ross focused less on defending the scans' legitimacy than on attacking the FTC.

The agency "has exceeded its authority in the district courts of this country. No case exemplifies that better than this one," Greenspoon wrote in the opening lines of his 78-page brief.

Greenspoon argued that the district court lacked jurisdiction to award monetary remedies. "It is an elementary principle of administrative law that agencies have only the power that Congress grants them," he wrote. "The plain text of Section 13(b) is clear, and provides only for the granting of injunctive relief."

By contrast, Section 19(b) of the FTC Act explicitly permits monetary relief, though it requires the agency first to exhaust its administrative remedies.

"To read monetary remedies into the language of Section 13(b), especially in light of complementary Section 19(b), would be to permit the FTC to expand its authority beyond the express command of Congress," he wrote. He urged the court to vacate the judgment and direct entry of a new judgment with no monetary remedies.

It was the first time the argument was made in the Fourth Circuit, though at least five other courts of appeal have considered and rejected similar pleas during the past three decades.

The Fourth Circuit panel — Davis, Judge Henry Floyd and Senior Judge Clyde Hamilton — found that Ross "takes the position, correctly, that the statute's text does not expressly authorize the award of consumer redress."

However, the panel concluded that when Congress, in the FTC Act, authorized the court to issue injunctions, it also "presumably authorized the district court to exercise the full measure of its equitable jurisdiction" — including monetary penalties.

To find otherwise, Davis wrote for the appellate panel, would "create a circuit split, a result that we will not countenance in the face of powerful Supreme Court authority pointing in the other direction."

Contact Jenna Greene at jgreene@alm.com.

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