Wednesday, May 19, 2010

FYI: 9th Cir Says State UDAP Law Not to Be Used in Interpreting FTC Act

The U.S. Court of Appeals for the Ninth Circuit recently upheld a district court's order for injunctive and equitable relief in a case brought by the FTC against a website company that created and delivered unverified checks at the direction of registered users for violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a)   A copy of the opinion is attached.

The website required minimal information to sign up for an account and accordingly, was "highly vulnerable to con artists and fraudsters."  After the website was in operation for approximately six years, the FTC brought this action for injunctive and other equitable relief.  The district court granted summary judgment in favor of the FTC and this appeal followed. 

In affirming the district court's holding, the Ninth Circuit determined that the key issue on appeal was whether defendants were liable under Section 5 of the FTC Act for: (1) causing; (2) substantial injury to consumers; (3) that was not reasonably avoidable or outweighed by countervailing benefits.    As to the causation element, the Court rejected defendants' argument that because only users can create checks, it could not be liable for unfair creation and delivery of checks.  The Court found this to be nothing more than a semantic argument which ignored the fact that the website "created and controlled a system that facilitated fraud and that the company was on notice as to the high fraud rate." 
In so holding, the Court also refused to use the California Business & Professions Code § 17200 - the "Little FTC Act" as interpretive guidance, noting that it would "create a sea of inconsistent rulings" to use state consumer protection statutes to aid in interpreting the FTC Act. 
Finally, also as to the causation issue, the Court reasoned that businesses can cause direct consumer harm in a variety of ways, and consumers can be injured for purposes of the FTC Act "through the actions of those whose practices facilitate, or contribute to, ill intentioned schemes if the injury was a predictable consequence of those actions." 

The Court also found that the FTC had met its burden in establishing substantial injury and there was no triable issue of fact with respect to that issue, that defendants had not shown that there was a material issue of fact as to whether consumer injuries were reasonably avoidable, and that the FTC met its burden of showing that consumer injury was not outweighed by countervailing benefits to consumers or to competition.    Finally, the Court upheld the district court's injunction order and its holding that the appropriate amount of equitable damages was disgorgement of total revenue.
Let me know if you have any questions.  Thanks.


Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

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Mobile:  (312) 493-0874


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