Metropolitan News-Enterprise


Wednesday, September 5, 2018


Page 3


Ninth Circuit:

$24 Million Award Against Telemarketer Is Not Barred

Panel Says 2017 U.S. Supreme Court Does Not Definitively Scuttle Circuit’s Holdings That Disgorgement May be Ordered in Cases Brought Under FTC Act


By a MetNews Staff Writer


An opinion last year by the U.S. Supreme Court holding that disgorgement is a “penalty” does not aid a telemarketing firm that duped consumers into purchasing magazine subscriptions and was ordered to pay nearly $24 million in equitable monetary relief, the Ninth U.S. Circuit Court of Appeals has held, rejecting the contention that the act under which award was made does not authorize penalties.

The decision came Friday in a memorandum opinion, in which the court sided, for the second time, with the Federal Trade Commission (“FTC”) in its false-advertising action against Publishers Business Services (“PBS”). In 2013, the FTC appealed a $191,219 award against PBS, protesting that it was inadequate, and the Ninth Circuit reversed, ordering a recomputation.

On remand, the figure on Feb. 1 of last year was boosted to $23,773,147.78.

High Court Decision

At issue before the Ninth Circuit on PBS’s appeal from the 2017 decision was the effect of the Supreme Court’s June 5, 2017 unanimous decision in Kokesh v. Securities Exchange Commission. There, Justice Sonia Sotomayer said:

“A 5-year statute of limitations applies to any ‘action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.’ 28 U.S.C. §2462. This case presents the question whether §2462 applies to claims for disgorgement imposed as a sanction for violating a federal securities law. The Court holds that it does. Disgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of §2462, and so disgorgement actions must be commenced within five years of the date the claim accrues.”

She added:

“SEC disgorgement thus bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.”

Oral Argument

At oral argument on Aug. 15 in Pasadena, Senior Circuit Judge Diarmuid O’Scannlain advised PBS’s lawyer, Peter Homer of Miami, that to prevail, he would need to persuade the panel that Kokesh “overrules” the Ninth Circuit’s 2016 opinion in F.T.C. v. Commerce Planet, Inc. The court said in that case that “district courts have the power to order payment of restitution under §13(b) of the FTC Act.”

It was reasoned in Commerce Planet that the power to enjoin future breaches “carries with it the inherent power to deprive defendants of their unjust gains from past violations, unless the Act restricts that authority,” adding: “We see nothing in the Act that does.”

Before Homer could respond to O’Scannlain, District Court Richard G. Stearns of the District of Massachusetts, sitting by designation, directed the lawyer’s attention to footnote 3 in Kokesh, which says:

“Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context. The sole question presented in this case is whether disgorgement, as applied in SEC enforcement actions, is subject to 2462’s limitations period.”

Recurrent Theme

Homer told the judges that while that the sole issue in which the Supreme Court granted certiorari in Kokesh was whether the five-year statute of limitation came into play, the persistent theme in the opinion was that “disgorgement was, in fact, a penalty.”

In the present case, he asserted, the judgment constituted a penalty because the disgorgement order went beyond ordering relinquishment of profits. It did not take into account expenses, including moneys paid by his client to the magazine publishers for the subscriptions, Homer noted.

He said the District Court’s objective can also be seen as punitive because the $24 million judgment was “imposed jointly and severally on people who were making $50,000 or $60,000 a year” working for PBS.

Leslie Mellman, the FTC’s assistant general counsel for litigation, insisted that Kokesh has “nothing to do with this case” because it deals solely with a statute of limitation issue.

Memorandum Opinion

In Friday’s opinion, a three judge panel—comprised of Senior Circuit Judge Diarmuid O’Scannlain, Circuit Judge Carlos Bea, and District Court Judge Richard G. Stearns of the District of Massachusetts, sitting by designation—cited Commerce Planet and two earlier decisions, saying:

“We have repeatedly held that section 13(b) of the FTC Act grants district courts the power to impose equitable remedies, including restitution and disgorgement of unjust gains.”

It declares that Kokesh “has not abrogated this long-standing precedent.”

The opinion points to footnote 3, limiting the effect of the decision, and adds:

Kokesh is far from definitive enough regarding our interpretations of section 13(b) to cause us to depart from our long-standing precedent.”

The court also rejected PBS’s contention that the allegation of consumer-victimization was belied by the showing that persons induced by PBS telemarketers into buying subscriptions frequently renewed those subscriptions. It said:

“The fact that a customer was satisfied months or years after the fact does not mean that the customer did not rely on PBS’s deceptive sales techniques at the time of the original purchase.”

The case is FTC v. Publishers Business Services, No. 17-15600.

Major Operations

The action against PBS was part of a massive crackdown on fraudulent telemarketing efforts. A May 20, 2008 press release by the FTC said:

“The Federal Trade Commission today, in cooperation with more than 30 international, federal, state, and local law enforcement agencies, announced the largest telemarketing fraud sweep ever coordinated by the agency.

“Through ‘Operation Tele-PHONEY,’ the FTC has filed federal district court complaints against 13 allegedly deceptive telemarketing operations.”

Allegations of Complaint

The May 12 complaint against PBS, signed by Assistant U.S. Attorneys Faye Chen Barnouw, Raymond E. McKown, and Maricela Segura of the Central District of California, alleged:

“Defendants’ typical method of contacting consumers is to call small businesses and engage whoever answers the phone. In many cases, the pitch starts with an invitation to take part in a short survey. At the end of the survey, Defendants offer consumers a gift of some magazines to thank them for their time. When consumers agree to receive the magazines, Defendants ask for their home address so that Defendants can have the magazines shipped to them. In the initial call. Defendants either do not disclose any cost or state that there is a nominal shipping and handling fee, In other cases. Defendants offer magazine subscriptions for sale but misrepresent the total cost of the subscriptions.

“In some cases, the initial call is consumers’ only contact with Defendants. In other cases. Defendants make one or two other calls to confirm the address and the terms of the gift or subscriptions. In some cases. Defendants appear to use a verification system that produces a recording of the consumer’s consent to receive the magazines. Even when there are ‘verification calls,’ however. Defendants fail to cure their earlier representation that the magazines are free or for a specified low price. Within a matter of a few weeks, consumers receive an invoice, typically listing five-year subscriptions for three to six magazines and informing them that they are being billed for two years of monthly payments, typically totaling $720, for the subscriptions to which they had allegedly agreed.

“Defendants tell consumers who call to complain or cancel that they have a verbal contract that cannot be cancelled and that Defendants have recorded the verification calls. Defendants also routinely represent that they cannot cancel the subscriptions because they have a no-cancellation policy and because they have already paid the magazine publishers.”

PBS did not appeal from the determination of liability.


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