Filed: Feb. 25, 2014
Latest Update: Mar. 02, 2020
Summary: PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 12-2340 FEDERAL TRADE COMMISSION, Plaintiff - Appellee, v. KRISTY ROSS, individually and as officer of Innovative Marketing, Inc., Defendant – Appellant, and INNOVATIVE MARKETING, INC., d/b/a Winsolutions FZ-LLC, d/b/a Billingnow, d/b/a Winpayment Consultancy SPC, d/b/a BillPlanet PTE Ltd., d/b/a Revenue Response Sunwell, d/b/a Globedat, d/b/a Winsecure Solutions, d/b/a Synergy Software BV, d/b/a Innovative Marketing Ukraine; BY
Summary: PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 12-2340 FEDERAL TRADE COMMISSION, Plaintiff - Appellee, v. KRISTY ROSS, individually and as officer of Innovative Marketing, Inc., Defendant – Appellant, and INNOVATIVE MARKETING, INC., d/b/a Winsolutions FZ-LLC, d/b/a Billingnow, d/b/a Winpayment Consultancy SPC, d/b/a BillPlanet PTE Ltd., d/b/a Revenue Response Sunwell, d/b/a Globedat, d/b/a Winsecure Solutions, d/b/a Synergy Software BV, d/b/a Innovative Marketing Ukraine; BYT..
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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-2340
FEDERAL TRADE COMMISSION,
Plaintiff - Appellee,
v.
KRISTY ROSS, individually and as officer of Innovative
Marketing, Inc.,
Defendant – Appellant,
and
INNOVATIVE MARKETING, INC., d/b/a Winsolutions FZ-LLC, d/b/a
Billingnow, d/b/a Winpayment Consultancy SPC, d/b/a
BillPlanet PTE Ltd., d/b/a Revenue Response Sunwell, d/b/a
Globedat, d/b/a Winsecure Solutions, d/b/a Synergy Software
BV, d/b/a Innovative Marketing Ukraine; BYTEHOSTING INTERNET
SERVICES, LLC; JAMES RENO, d/b/a Setupahost.net,
individually, and as an officer of ByteHosting Internet
Services, LLC; SAM JAIN, individually and as an officer of
Innovative Marketing, Inc.; DANIEL SUNDIN, d/b/a Vantage
Software, d/b/a Winsoftware, Ltd., individually and as an
officer of Innovative Marketing, Inc.; MARC D'SOUZA, d/b/a
Web Integrated Net Solutions, individually and as an officer
of Innovative Marketing, Inc.; MAURICE D'SOUZA,
Defendants.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. Richard D. Bennett, District Judge.
(1:08-cv-03233-RDB)
Argued: October 31, 2013 Decided: February 25, 2014
Before DAVIS and FLOYD, Circuit Judges, and HAMILTON, Senior
Circuit Judge.
Affirmed by published opinion. Judge Davis wrote the opinion,
in which Judge Floyd and Senior Judge Hamilton joined.
ARGUED: Robert P. Greenspoon, FLACHSBART & GREENSPOON, LLC,
Chicago, Illinois, for Appellant. Theodore Metzler, FEDERAL
TRADE COMMISSION, Washington, D.C., for Appellee. ON BRIEF:
William W. Flachsbart, FLACHSBART & GREENSPOON, LLC, Chicago,
Illinois, for Appellant. David C. Shonka, Acting General
Counsel, John F. Daly, Deputy General Counsel, FEDERAL TRADE
COMMISSION, Washington, D.C., for Appellee.
2
DAVIS, Circuit Judge:
The Federal Trade Commission sued Kristy Ross in U.S.
District Court for the District of Maryland for engaging in
deceptive internet advertising practices. After a bench trial,
the district court entered judgment enjoining Ross from
participating in the deceptive practices and holding her jointly
and severally liable for equitable monetary consumer redress in
the amount of $163,167,539.95. F.T.C. v. Ross, 897 F. Supp. 2d
369, 388-89 (D. Md. 2012). On appeal, Ross challenges the
district court’s judgment on several bases: (1) the court’s
authority to award consumer redress; (2) the legal standard the
court applied in finding individual liability under the Federal
Trade Commission Act; (3) the court’s prejudicial evidentiary
rulings; and finally, (4) the soundness of the district court’s
factual findings. For the reasons set forth within, we affirm.
I
The Commission sued Innovative Marketing, Inc. (“IMI”), and
several of its high-level executives and founders, including
Ross, for running a deceptive internet “scareware” scheme in
violation of the prohibition on deceptive advertising in Section
5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a). The
core of the Commission’s case was that the defendants operated
“a massive, Internet-based scheme that trick[ed] consumers into
purchasing computer security software,” referred to as
3
“scareware.” J.A. 29. The advertisements would advise consumers
that a scan of their computers had been performed that had
detected a variety of dangerous files, like viruses, spyware,
and “illegal” pornography; in reality, no scans were ever
conducted. J.A. 29.
Ross, a Vice President at IMI, hired counsel and defended
against the suit; the remaining defendants either settled or had
default judgment entered against them.
The district court entered summary judgment in favor of the
Commission on the issue of whether the advertising was
deceptive, but it set for trial the issue of whether Ross could
be held individually liable under the Federal Trade Commission
Act, i.e., whether Ross “was a ‘control person’ at the company,
and to what extent she had authority for, and knowledge of the
deceptive acts committed by the company.” J.A. 925.
After a bench trial, the district court found in favor of
the Commission. Specifically, it found that Ross’
broad responsibilities at IMI coupled with the fact
that she personally financed corporate expenses,
oversaw a large amount of employees and had a hand in
the creation and dissemination of the deceptive ads
prove[d] by a preponderance of the evidence that she
had authority to control and directly participated in
the deceptive acts within the meaning of Section 5 of
the [Federal Trade Commission] Act.
Ross, 897 F. Supp. 2d at 384. The district court further
concluded that Ross had actual knowledge of the deceptive
marketing scheme, or was “at the very least recklessly
4
indifferent or intentionally avoided the truth” about the
scheme. Id. at 386. It entered judgment against Ross in the
amount of $163,167,539.95, and it enjoined her from engaging in
similar deceptive marketing practices.
Id. at 389. Ross timely
appealed.
II
The Federal Trade Commission Act authorizes the Commission
to sue in federal district court so that “in proper cases the
Commission may seek, and after proper proof, the court may
issue, a permanent injunction.” 15 U.S.C. § 53(b). Ross contends
that the district court did not have the authority to award
consumer redress – a money judgment - under this provision of
the statute.
Ross first takes the position, correctly, that the
statute’s text does not expressly authorize the award of
consumer redress, but precedent dictates otherwise: the Supreme
Court has long held that Congress’ invocation of the federal
district court’s equitable jurisdiction brings with it the full
“power to decide all relevant matters in dispute and to award
complete relief even though the decree includes that which might
be conferred by a court of law.” Porter v. Warner Holding Co.,
328 U.S. 395, 399 (1946). Once invoked by Congress in one of its
duly enacted statutes, the district court’s inherent equitable
powers cannot be “denied or limited in the absence of a clear
5
and valid legislative command.” Id. Porter and its progeny thus
articulate an interpretive principle that inserts a presumption
into what would otherwise be the standard exercise of statutory
construction: we presume that Congress, in statutorily
authorizing the exercise of the district court’s injunctive
power, “acted cognizant of the historic power of equity to
provide complete relief in light of statutory purposes.”
Mitchell v. Robert DeMario Jewelry, Inc.,
361 U.S. 288, 291–92
(1960).
Applying this principle to the present case illuminates the
legislative branch’s real intent. That is, by authorizing the
district court to issue a permanent injunction in the Federal
Trade Commission Act, 15 U.S.C. § 53(b)(2), Congress presumably
authorized the district court to exercise the full measure of
its equitable jurisdiction. Accordingly, absent some
countervailing indication sufficient to rebut the presumption,
the court had sufficient statutory power to award “complete
relief,” including monetary consumer redress, which is a form of
equitable relief. Porter, 328 U.S. at 399.
Ross insists that the text of the Federal Trade Commission
Act is unlike that of the statutes at issue in Porter and
Mitchell, and therefore argues that the interpretive principle
of those cases is inapplicable in her case. In Porter, a case
involving the Emergency Price Control Act of 1942, the statute
6
authorized district courts to grant “a permanent or temporary
injunction, restraining order, or other order.” 328 U.S. at 397
(internal quotations and citation omitted). Ross contends that
the “other order” language, absent from the instant provision of
the Federal Trade Commission Act, cabins Porter’s applicability.
See also United States v. Phillip Morris USA, Inc.,
396 F.3d
1190, 1198 (D.C. Cir. 2005). In other words, her argument is
that Porter was a “magic words” case – if Congress uses the
magic words “other order,” then Congress has invoked the full
injunctive powers of the district court.
Ross’ magic words argument fails because it ignores how the
Supreme Court subsequently untethered its reasoning from the
“other order” language of the Emergency Price Control Act and
significantly expanded Porter’s holding. The language of the
statute at issue in Mitchell, the Fair Labor Standards Act, was
different from the language of the statute in Porter, providing
only that the district court had jurisdiction to “restrain
violations of Section 15.” Mitchell, 361 U.S. at 289 (internal
quotation and citation omitted). Notwithstanding the silence of
the Fair Labor Standards Act as to the district court’s express
power to award reimbursement of lost wages and the absence of
the “other order” language, the Court held that ordering
reimbursement was nevertheless permissible under the holding of
Porter. 361 U.S. at 296. In comparing the language of the Fair
7
Labor Standards Act with the Emergency Price Control Act, the
Mitchell Court reasoned that the “other order” provision was
merely an “affirmative confirmation” — icing on the cake — over
and above the district court’s inherent equitable powers. See
id. at 291.
The point is that Mitchell broadened Porter’s
applicability, rendering the textual statutory differences
irrelevant to the ultimate conclusion: because there is no
affirmative and clear legislative restriction on the equitable
powers of the district court, ordering monetary consumer redress
is an appropriate “equitable adjunct” to the district court’s
injunctive power. Porter, 328 U.S. at 399.
Ross makes a series of arguments about how the structure,
history, and purpose of the Federal Trade Commission Act weigh
against the conclusion that district courts have the authority
to award consumer redress; her arguments are not entirely
unpersuasive, but they have ultimately been rejected by every
other federal appellate court that has considered this issue.
F.T.C. v. Bronson Partners LLC, 654 F.3d 359, 365-67 (2d Cir.
2011); F.T.C. v. Amy Travel Service, Inc.,
875 F.2d 564, 571
(7th Cir. 1989); F.T.C. v. Security Rare Coin & Buillion Corp.,
931 F.2d 1312, 1314-15 (8th Cir. 1991); F.T.C. v. Pantron I
Corp.,
33 F.3d 1088, 1101-02 (9th Cir. 1994); F.T.C. v. Gem
Merchandising Corp.,
87 F.3d 466, 468-70 (11th Cir. 1996). We
8
adopt the reasoning of those courts and reject Ross’ attempt to
obliterate a significant part of the Commission’s remedial
arsenal. A ruling in favor of Ross would forsake almost thirty
years of federal appellate decisions and create a circuit split,
a result that we will not countenance in the face of powerful
Supreme Court authority pointing in the other direction.
III
The Federal Trade Commission Act makes it unlawful for any
person, partnership, or corporation “to disseminate, or cause to
be disseminated, any false advertisement” in commerce, 15 U.S.C.
§ 52(a), and it authorizes the Commission to bring suit in
federal district court when it finds that any such person,
partnership, or corporation “is engaged in, or is about to
engage in, the dissemination or the causing of the dissemination
of any” false advertisement, 15 U.S.C. § 53(a)(1).
The district court ruled that one could be held
individually liable under the Federal Trade Commission Act if
the Commission proves that the individual (1) participated
directly in the deceptive practices or had authority to control
them, and (2) had knowledge of the deceptive conduct, which
could be satisfied by showing evidence of actual knowledge,
reckless indifference to the truth, or an awareness of a high
probability of fraud combined with intentionally avoiding the
truth (i.e., willful blindness). Ross, 897 F. Supp. 2d at 381.
9
Ross contends that the district court’s standard was wrong
and asks us to reject it. She proposes that we import a standard
from our securities fraud jurisprudence that requires proof of
an individual’s (1) “authority to control the specific practices
alleged to be deceptive,” coupled with a (2) “failure to act
within such control authority while aware of apparent fraud.”
App. Br. 35 (citing Dellastatious v. Williams, 242 F.3d 191, 194
(4th Cir. 2001)). Any other standard, argues Ross, would permit
a finding of individual liability based on “indicia having more
to do with enthusiasm for and skill at one’s job [rather] than
authority over specific ad campaigns, and allow fault to be
shown without any actual awareness of” a co-worker’s misdeeds.
App. Br. 36. Ross maintains that she would not have been held
individually liable under her proposed standard.
Ross’ proposed standard would permit the Commission to
pursue individuals only when they had actual awareness of
specific deceptive practices and failed to act to stop the
deception, i.e., a specific intent/subjective knowledge
requirement; her proposal would effectively leave the Commission
with the “futile gesture” of obtaining “an order directed to the
lifeless entity of a corporation while exempting from its
operation the living individuals who were responsible for the
illegal practices” in the first place. Pati-Port, Inc. v.
F.T.C., 313 F.2d 103, 105 (4th Cir. 1963).
10
We hold that one may be found individually liable under the
Federal Trade Commission Act if she (1) participated directly in
the deceptive practices or had authority to control those
practices, and (2) had or should have had knowledge of the
deceptive practices. The second prong of the analysis may be
established by showing that the individual had actual knowledge
of the deceptive conduct, was recklessly indifferent to its
deceptiveness, or had an awareness of a high probability of
deceptiveness and intentionally avoided learning the truth.
Our ruling maintains uniformity across the country and
avoids a split in the federal appellate courts. Every other
federal appellate court to resolve the issue has adopted the
test we embrace today. F.T.C. v. Direct Marketing Concepts,
Inc., 624 F.3d 1, 12 (1st Cir. 2010); Amy Travel
Service, 875
F.2d at 573-74; F.T.C. v. Publishing Clearing House, Inc.,
104
F.3d 1168, 1170 (9th Cir. 1997); F.T.C. v. Freecom
Communications, Inc.,
401 F.3d 1192, 1207 (10th Cir. 2005); Gem
Merchandising
Corp., 87 F.3d at 470. Ross’ proposed standard, by
contrast, invites us to ignore the law of every other sister
court that has considered the issue, an invitation that we
decline.
IV
Ross next mounts three evidentiary challenges. First, Ross
contends that the district court improperly precluded her
11
expert, Scott Ellis, from testifying about how “the
advertisements linkable to Ms. Ross’s responsibilities were
nondeceptive.” App. Br. 29. As the district court correctly
ruled, however, Ellis’ testimony was irrelevant because it had
already decided the deceptiveness issue in favor of the
Commission at summary judgment. The only issue held over for
trial was whether Ross had the requisite degree of control
necessary to hold her individually liable for the company’s
deceptive practices, i.e., whether she participated directly in
the company’s deceptive practices or had authority to control
those practices and had or should have had knowledge of those
practices. Because the individual liability standard does not
require a specific link from Ross to particular deceptive
advertisements and instead looks at whether she had authority to
control the corporate entity’s practices, Ellis’ testimony was
immaterial, and thus irrelevant, to the issue reserved for
trial. Fed. R. Evid. 401.
Second, Ross challenges the admission of a 2004 to 2006
profit and loss statement that the district court relied on to
calculate the amount of consumer redress. The documents were
produced during discovery in corporate litigation involving some
of Ross’ co-defendants in Canada. Daniel Sundin and Sam Jain
sued Marc D’Souza, all of whom were co-defendants of Ross in
this case and executives at IMI. Jain submitted an affidavit
12
along with a profit and loss summary for the company for the
period of 2004 to 2006; the documents were “litigation-purpose
financial summaries [of IMI’s profits] described in [Jain’s]
affidavit as a Quickbooks printout.” App. Br. 31, J.A. 1790,
1799.
Although the district court admitted the profit and loss
statement under Federal Rule of Evidence 807, the residual
exception to the rule against hearsay, F.T.C. v. Ross, 2012 WL
4018037, at *1-3 (D. Md. Sept. 11, 2012), we may affirm the
district court “on the basis of any ground supported by the
record even if it is not the basis relied upon by the district
court,” Ostrzenski v. Seigel,
177 F.3d 245, 253 (4th Cir. 1999),
and we conclude that the profit and loss summary plainly was
admissible as an adoptive admission by Ross. Fed. R. Evid.
801(d)(2)(B). Ross expressly adopted Jain’s affidavit: she swore
in her own affidavit produced during the Canadian litigation
that she had read Jain’s affidavit and was “in agreement with
[its] contents.” J.A. 1590. She did take some exceptions, but
she did not object to the profit and loss statement attached to
Jain’s affidavit, nor did she object to the authenticity or
reliability of the statements.
The third of Ross’ evidentiary assignments of error also
rests on the improper admission of hearsay evidence: an e-mail
from Sundin to Jettis, a payment processor, listing Skype
13
numbers and titles for a group of high-level company executives.
Ross’ telephone number is listed on the e-mail, as is her title,
“Vice President.” The district court admitted the e-mail
pursuant to the hearsay exception for statements made by a co-
conspirator in furtherance of the conspiracy. Fed. R. Evid.
801(d)(2)(E). Ross argues that there was insufficient evidence
establishing as a predicate for the e-mail’s admission the
existence of the conspiracy, and that admission of the e-mail
itself was improper “bootstrapping” of the existence of the
conspiracy to the document’s admissibility. See Bourjaily v.
United States, 483 U.S. 171, 176-81 (1987).
We disagree. It is true, of course, that the proponent for
admission of a co-conspirator’s out-of-court statement “must
demonstrate the existence of the conspiracy by evidence
extrinsic to the hearsay statements.” United States v. Stroupe,
538 F.2d 1063, 1065 (4th Cir. 1976). But that requirement was
satisfied in this case. There was independent evidence that
established the existence of the conspiracy: Ross produced an
affidavit during the corporate litigation in Canada in which she
stated that she was a Vice President and one of the founders of
IMI, and she adopted the affidavits of her co-defendants
attesting to the same facts. The affidavits provided a
sufficient basis upon which the district court could conclude,
prima facie, see United States v. Vaught,
485 F.2d 320, 323 (4th
14
Cir. 1973), the existence of a conspiracy. Moreover, the e-mail
from Sundin to Jettis was a quintessential example of a
statement made “in furtherance” of the conspiracy because its
role was to maintain the logistics of the conspiracy and
“identify names and roles” of members of the deceptive
advertising endeavor. Michael H. Graham, Handbook of Federal
Evidence 421 (7th ed. 2013).
In sum, we find no reversible error in the district court’s
evidentiary rulings that are challenged on appeal by Ross.
V
Ross’ last contention is that the district court clearly
erred in finding that she had “control” of the company,
participated in any deceptive acts, and had knowledge of the
deceptive advertisements. In a bench trial, we review the
district court’s factual findings for clear error and its legal
conclusions de novo. Fed. R. Civ. P. 52; Helton v. AT&T, Inc.,
709 F.3d 343, 351 (4th Cir. 2013). “In cases in which a district
court’s factual findings turn on assessments of witness
credibility or the weighing of conflicting evidence during a
bench trial, such findings are entitled to even greater
deference.”
Helton, 709 F.3d at 351.
The district court did not clearly err in finding that Ross
had “authority to control the deceptive acts within the meaning”
of the Federal Trade Commission Act. Ross, 897 F. Supp. 2d at
15
383. In an affidavit in the Canadian litigation, she swore that
she was a high-level business official with duties involving,
among other things, “product optimization,” which the district
court could reasonably have inferred afforded her authority and
control over the nature and quality of the advertisements. J.A.
1589. Moreover, there was evidence that other employees
requested Ross’ authority to approve certain advertisements, and
that she would check the design of the advertisements before
approving them.
Nor did the district court clearly err in finding that Ross
“directly participated in the deceptive marketing scheme.” Ross,
897 F. Supp. 2d at 384. Ross’ statements to other employees, as
memorialized in chat logs between her and other employees were
evidence that she served in a managerial role, directing the
design of particular advertisements. J.A. 3580 (“anyway we have
to get all this advertisement stuff off these ads can you please
[make] sure it happens it needs to happen for all domains”);
J.A. 1491 (“btw we have some 30 creatives for errclean [sic] not
just 2-3 just add aggression tot hem [sic]”). Ross was a contact
person for the purchase of advertising space for IMI, and there
was evidence that Ross had the authority to discipline staff and
developers when the work did not meet her standards. J.A. 1466
(“please ensure its [sic] going to be done or im [sic] going to
fine the department and MCs for not finishing it”). Given these
16
facts, the district court could have reasonably inferred that
Ross was actively and directly participating in multiple stages
of the deceptive advertising scheme – she played a role in
design, directed others to “add aggression” to certain
advertisements, was in a position of authority, had the power to
discipline entire departments, and purchased substantial
advertising space.
The district court did not clearly err in finding that Ross
“had actual knowledge of the deceptive marketing scheme” and/or
that she was “at the very least recklessly indifferent or
intentionally avoided the truth.” Ross, 897 F. Supp. 2d at 386.
There was evidence that she edited and reviewed the content of
multiple advertisements. At one point, she ordered the removal
of the word “advertisement” from a set of ads. J.A. 3580. Co-
defendant Sundin, the Chief Technology Officer of IMI and its
sole shareholder and director, attested that Ross assumed some
of his duties during his long-term illness. And although there
was some indication that Ross acted in a manner suggesting that
she personally did not perceive (or believe) that the
advertisements were deceptive, Ross was on notice of multiple
complaints about IMI’s advertisements, including that they would
cause consumers to automatically download unwanted IMI products.
All of this evidence paints a picture that the district
court was wholly capable of accepting as a matter of fact: Ross
17
made “countless decisions” that demonstrated her authority to
control IMI. F.T.C. v. Bay Area Business Council, Inc., 423 F.3d
627, 637 (7th Cir. 2005). Although a different fact-finder may
have come to a contrary conclusion from that reached by the
experienced district judge in this case, the “rigorous” clear
error standard requires more than a party’s simple disagreement
with the court’s findings. PCS Nitrogen, Inc. v. Ashley II of
Charleston, LLC,
714 F.3d 161, 174-75 (4th Cir. 2013).
VI
The judgment of the district court is
AFFIRMED.
18
