CORMAC J. CARNEY, District Judge.
The Federal Trade Commission ("FTC") brought this action for injunctive and monetary equitable relief against Commerce Planet, Inc. ("Commerce Planet") and several of its directors and officers, including Michael Hill, Aaron Gravitz, and Charles Gugliuzza (collectively, "Defendants"), for deceptive and unfair business practices arising from Defendants' website marketing of a web creation and hosting service called OnlineSupplier. OnlineSupplier was marketed as a free "Online Auction Starter Kit" that purported to help consumers sell products on eBay. Consumers were permitted a free trial period to use OnlineSupplier with payment of a small shipping and handling fee. If consumers did not cancel the service within the trial period, they were automatically charged a recurring monthly fee ranging from $29.95 to $59.95. The FTC alleges that during the relevant time period (July 2005 to March 2008), Defendants deceptively marketed OnlineSupplier as a free auction kit on its website without adequately disclosing the program's negative option plan, which required consumers to affirmatively cancel their membership or otherwise incur a monthly charge to their credit card. The FTC alleges that consumers unwittingly signed up for OnlineSupplier, believing they had ordered a free kit, only to discover later that they had been enrolled in OnlineSupplier's continuity program when they saw monthly charges on their credit card bill. The FTC alleges that between July 2005 and March 2008, Commerce Planet obtained over $45 million from over 500,000 consumers.
Commerce Planet marketed and sold OnlineSupplier, a webhosting service that purported to provide consumers an inexpensive platform to sell products online. Commerce Planet hired Mr. Gugliuzza to provide an assessment of the company and recommend ways to improve its profitability. From July 2005 to November 2007, Mr. Gugliuzza served in various capacities as the company's consultant, president, de facto executive and in-house counsel, and director. Mr. Gugliuzza helped transition the company from telemarketing to internet marketing of OnlineSupplier, whereby consumers could sign up for the program from its website. Internet sign-ups of OnlineSupplier dramatically improved the company's revenue. At the same time, numerous consumers complained to the Better Business Bureau ("BBB"), the Attorney General, and to Commerce Planet regarding confusion as to the nature and cost of OnlineSupplier and demanded refunds. OnlineSupplier was also subject to excessive credit card chargebacks. In March 2008, the FTC served a civil investigative demand ("CID") on Commerce Planet, after which Commerce Planet changed its webpages for OnlineSupplier under the guidance of outside counsel knowledgeable in FTC Act compliance. Sales of OnlineSupplier thereafter plummeted. In November 2009, the FTC filed suit against Commerce Planet and three of its key officers and employees, Messrs. Hill, Gravitz, and Gugliuzza, for their alleged involvement in the deceptive and unfair marketing of OnlineSupplier during the relevant time period.
The FTC is an independent agency of the United States Government created by statute. 15 U.S.C. §§ 41-58. The FTC enforces section 5(a) of the Act, 15 U.S.C. § 45(a), which prohibits unfair or deceptive acts or practices affecting commerce. The FTC is authorized to bring suit in federal court to enjoin violations of the Act and to
Commerce Planet is a Utah corporation with its headquarters in Goleta, California. (Exhs. 1175, 2043-2051.) Commerce Planet began operations as NeWave, Inc. ("NeWave"),
During the relevant time period, Legacy Media functioned as the marketing and advertising arm of Commerce Planet and shared the same office as the parent company. (Gravitz, 2/1/12, 82:19-83:1, 163:3-6, Exh. 31.) CLG handled the customer service component of the company and also shared the same office as Commerce Planet. (Exh. 31.) Christopher Seidel, who joined NeWave in 2004 and served as the company's vice president of operations, was the president of CLG from 2006 until his departure in 2009. (Seidel, 2/14/12, 52:7-11, 67:9-16; Exhs. 318, 1292a-24.) Jose Guardiola served as CLG's customer service manager from August 2006 to August 2007. (Guardiola, 2/21/12, 4:19-15, 7:3-4, 35:23-24.) Paul Daniel was Commerce Planet's Chief Financial Officer from July 2005 to May 2006. (Daniel, 2/14/12, 15:23-16:2.) David Foucar replaced Mr. Daniel as CFO from June 2006 to October 2007. (Foucar, 2/16/12, 130:19-23, 161:16-18.) Jaime Rovelo served as the company's final CFO from the end of 2007 to February 2009. (Rovelo, 2/10/12, 4:20-22, 5:20-25, 33:1-2.) The company's in-house counsel was Jeffrey Conrad from mid-2004 to the end of 2006. (Conrad, 2/8/12, 40:20-25, 86:19-24.) Paul Huff replaced Mr. Conrad as Commerce Planet's in-house counsel from 2007 until August 2008. (Huff, 2/15/12, 115:9-11; Exh. 117.) In January 2009, Commerce Planet's assets were acquired by Superfly and later purchased by Lenco Mobile, Inc. (Cruttenden, 2/28/12, 29:17-30:9, 33:13-21; Exh. 132.) Commerce Planet is currently no
Commerce Planet primarily marketed and sold OnlineSupplier. (Exh. 31.) The bulk of company's revenue was generated from OnlineSupplier and associated upsell products. (Gravitz, 2/1/12, 7:16-20, 133:16-134:9; Hill 2/7/12, 159:10-18.) Messrs. Gravitz and Hill developed the concept for OnlineSupplier. (Hill, 2/7/12, 112:25-113:5.) OnlineSupplier was a website hosting service designed to enable consumers to create and manage a website to sell products on that site and on other internet sites. (Gravitz, 2/1/12, 6:20-7:3.) The service included a hosted website created by the customer; access to an inventory of products; access to the customer service department; and an information kit consisting of a 23-page manual on how to use the service and program. (Gravitz, 2/1/12, 140:12-146:11; Exhs. 31, 2003.) Consumers signed up for OnlineSupplier initially by telephone and then later online on its webpages by entering their shipping address and credit card information. (Exh. 31.) Consumers paid for the initial handling and shipping fee of $1.95 (or $7.95 for expedited delivery) for the membership kit. (Exhs. 1270-2, 1271-2.) Consumers were permitted a free trial period ranging from 7 to 14 days to use the product and services. (Exhs. 1270-1, 1271-1.) If consumers did not cancel within the free trial period, they were automatically enrolled in the continuity program and charged a monthly membership fee ranging from $29.95 to $59.95 on their credit card. (Gravitz, 2/1, 66:25-67:5, 111:13-20; Gravitz, 2/2/12, 25:5-9, Hill, 2/17/12, 123:16-22.) Commerce Planet initially maintained its own warehouse from which goods were sold to customers. (Exh. 31.) The warehouse was discontinued in 2006, and products were subsequently offered to customers through Ingram Micro. (Seidel, 2/14/12, 100:8-101:12; Hill, 2/17/12, 115:23-117:20.) To cancel the service, customers could either call or email customer service at CLG. (Seidel, 2/14/12, 108:17-24.)
When Commerce Planet began operations in 2003, it initially marketed OnlineSupplier through classified advertising, newspapers, and emails, and the program was primarily sold through inbound telemarketing whereby consumers would call a toll-free number to sign up for the service. (Gravitz, 2/1/12, 7:4-6, 8:1-7; Hill, 2/7/12, 11:16-24.) At first, Commerce Planet charged consumers a flat fee of $58 or $98.90 for OnlineSupplier, depending on the particular package consumers purchased, and there was no free trial period or a negative option plan. (Gravitz, 2/1/12, 10:12-18.) However, the sale of OnlineSupplier was poor, and the company lost money. (Id. at 155:12-17; Hill, 2/17/12, 131:17-24.) The company later transitioned from telemarketing to online marketing between June and July 2005. (Gravitz, 2/1/12, 11:5-10; Seidel, 2/14/12, 56:6-16.)
Between July 2005 and March 2008, there were two versions of OnlineSupplier's sign-up pages. (Exhs. 1270, 1271.) The first working version was complete around July 2005. (Gravitz, 2/1/12, 17:15-24.) After several revisions, the final sign-up pages of the first version ("Version I") went live in October 2005. (Gravitz, 2/1/12, 21:11-19, 27:1-4; Gravitz, 2/2/12, 107:21-108:5; Hill, 2/17/12, 117:21-118:4; Exh. 1270.) Mr. Gravitz developed Version I in 2005 and 2006 with the legal advice of Jeff Conrad and Mr. Gugliuzza. (Gravitz, 2/1/12, 27:11-22; Gravitz, 2/2/12, 114:2-5.) Another version of the sign-up pages ("Version II") was used after some
The internet sign-up process of OnlineSupplier involved four steps. First, through affiliate marketing, such as emails and ads, consumers were directed to OnlineSupplier's website. (Gravitz, 2/1/12, 11:5-10, 12:11-13:20, 35:9-36:3; Exhs. 1274, 1277.) The landing page of the website represented OnlineSupplier as a free "Online Auction Starter Kit" that provided information to consumers on how to sell products on eBay. (Exhs. 1270-1, 1271-1.) Consumers could obtain a free kit if they filled out their shipping address and clicked the "Ship My Kit!" button. (Id.) Second, upon clicking the "Ship My Kit!" button, consumers were directed to the billing page where they could select their shipping method and submit their credit card information. (Exhs. 1270-2, 1271-2.) On the bottom of the landing and billing pages, below the "Ship My Kit!" button, there was a hyperlink to the "terms and conditions," which popped up on a separate page. (Exhs. 1270, 1271.) The terms and conditions page included information about OnlineSupplier's services, fees, and legal conditions, including the automatic charge of the monthly membership fee if consumers did not cancel within the trial period. (Id.) At the bottom of the billing pages, in fine print, there was also a disclosure about the negative option plan and membership fee. (Exhs. 1270-2, 1271-2.) The first draft of this disclosure was prepared by Mr. Gravitz using a competitor's site and circulated to management, including Mr. Gugliuzza, for review. (Gravitz, 2/1/12, 71:3-10.) Clicking on the "Ship My Kit!" button on the billing page completed the order for OnlineSupplier. (Exhs. 1270-2, 1271-2.) Third, after submitting their credit card information and clicking the "Ship My Kit!" button, consumers were directed to the upsell page, where they could chose additional products and services for a monthly or annual fee. (Exhs. 1270-3, 1271-3.) The products and services were pre-clicked to "Yes," but the consumer could change it to "No." (Id.) Fourth, upon clicking the "Submit" button on the upsell page, consumers were directed to the final confirmation page with the order information. (Exhs. 1270-4, 1271-4.) Commerce Planet experimented with sending post-transaction confirmation emails to consumers before charges to credit cards were posted, but these were inconsistently used and discontinued after a brief period of time. (Guardiola, 2/21/12, 11:20-25, 16:14-23; King, 2/3/12, 157:10-19.)
More than 500,000 consumers completed OnlineSupplier's sign-up process during the relevant time period. (Exh. 2061.) The transition to online sign-ups was followed by dramatic increases in company profits. From 2005 to 2006, when the company transitioned to online sign-ups, the company swung from over a 6.2 million-dollar net loss to over an 8.7 million-dollar net profit. (Foucar 2/16/12, 152:18-153:14;
Mr. Gugliuzza was employed with Commerce Planet as a consultant and president from July 2005 to November 2007 and retained a seat on the company's Board as an outside director until May 2008. (Gugliuzza, 2/21/12, 118:10-17, 122:18-20; Exh. 235.) Before joining Commerce Planet, Mr. Gugliuzza graduated from Loyola Law School and cofounded a company called eBatts with a law school friend. (Gugliuzza, 2/21/12, 102:1-20.) EBatts operated a consumer direct website that sold batteries, adapters, and chargers for laptops, cell phones, and digital cameras manufactured by Battery-Biz, the family business of his law school classmate. (Id.) Mr. Gugliuzza held the position of Chief Operating Officer at eBatts. (Id. at 103:16-17.) EBatts was financially successful and became the exclusive supplier for Duracell's camcorder and digital camera batteries. (Id. at 103:19-104:9.) Mr. Gugliuzza left eBatts to start his own business, American Power Supplies, a webstore that locally purchased products similar to those at eBatts and sold them directly to consumers via the internet. (Id. at 104:17-105:17.) Again, Mr. Gugliuzza had financial success with American Power Supplies. (Id. at 105:18-20.) Mr. Gugliuzza sold his interest in American Power Supplies to his business partner after selling back his interest in Battery-Biz and signing a noncompete clause with Battery-Biz. (Id. at 105:21-106:7.)
After he sold his interest in American Power Supplies, Mr. Gugliuzza sent a letter to NeWave's Board of Directors in April 2005, seeking the position of CEO. (Exh. 3.)
From July 1, 2005 to September 2006, Mr. Gugliuzza held the titular position of consultant to Commerce Planet. (Gugliuzza, 2/21/12, 110:25-111:5; Exh. 1035.) Mr. Gugliuzza was also a director of the company beginning in August 2006. (Exhs. 31, 1247.) After Mr. Gugliuzza conducted an assessment of the company, the Board of Directors hired him to implement the recommendations in his report. (Hill 2/7/12, 125:20-126:21; Gugliuzza, 2/21/12, 109:10-18; Exh. 1246.) Mr. Gugliuzza executed a "Corporate Consulting Agreement" with NeWave, dated June 28, 2005. (Exh. 1035.) The consulting agreement provided that, as a consultant, Mr. Gugliuzza, "shall assist in implementing operating strategies and procedures as prescribed by the Company's Board of Directors, and pursuant to the Consultant's Company Performance Assessment Report dated June 14, 2005" and "shall also use [] best efforts to introduce the Company to potential vendors, customers or business partners which would be beneficial to the Company's business." (Id.) Under the consulting agreement, Mr. Gugliuzza was paid $5000 in cash per week, with a signing and performance bonus. (Id.) Although the consulting agreement lasted three months, it had a renewable option under the same terms, and Mr. Gugliuzza renewed his contract until he became president in 2007. (Hill, 2/7/12, 131:5-20.)
The Board of Directors tasked Mr. Gugliuzza with the goal of reducing cost and increasing revenue. (Hill, 2/17/12, 120:6-121:7.) Although Mr. Gugliuzza held the title of consultant, the Board conferred broad, management authority upon Mr. Gugliuzza over the company's departments and daily operations, including over Mr. Gravitz, marketing, and customer service. (Hill, 2/7/12, 128:3-130:9, 137:20-138:7; Daniel, 2/14/12, 28:1-14; Gravitz, 2/2/12, 122:3-11.) Messrs. Gugliuzza and Hill comprised the company's executive staff,
Pursuant to an executive agreement, Mr. Gugliuzza became the president of the company, effective September 11, 2006. (Hill, 2/7/12, 152:21-153:10; Exhs. 259.) He signed another executive employment agreement on April 10, 2007. (Exh. 261.) Gugliuzza served as president until he stepped down on November 5, 2007. (Gugliuzza, 2/21/12, 110:21-24, 116:3-13; Exhs. 228, 259-61.) Mr. Hill remained the CEO, and David Foucar became the CFO. (Hill, 2/7/12, 151:19-152:1.) Although Mr. Gugliuzza assumed the title of president, as a practical matter, his duties and responsibilities did not materially change. (Id. at 153:18-25.) Mr. Gugliuzza continued to assert operational control over the company and its subsidiaries and had oversight authority over the department heads. (Foucar, 2/16/12, 137:19-138:6.) Mr. Gravitz reported to Mr. Gugliuzza, and Mr. Gugliuzza directed the marketing of OnlineSupplier, such as by reviewing and approving marketing agreements, approving landing and billing pages of OnlineSupplier, and reviewing weekly performance reports. (Hill, 2/7/12, 155:11-20.) Mr. Seidel also continued to report to Mr. Gugliuzza. (Seidel, 2/14/12, 67:9-16, 68:16-18.) After Mr. Huff was hired in 2007, Mr. Gugliuzza delegated some of his legal responsibilities to Mr. Huff, but remained the final authority on legal matters. (Gravitz, 2/1/12, 35:1-8; Gravitz, 2/2/12, 120:14-19; Hill, 2/7/12, 141:16-142:13.)
On November 5, 2007, Mr. Gugliuzza stepped down as president, and Anthony Roth took over as the company's CEO and president. (Roth, 2/8/12, 9:1-9; Exhs. 228, 234.) Mr. Gugliuzza continued working for the company as a consultant until December 31, 2007. (Gugliuzza, 2/21/12, 116:14-17, 117:4-19; Exh. 235.) At the end of 2007, Commerce Planet repurchased from Mr. Gugliuzza his 1.8 million shares of company stock in exchange for $185,000 cash down, $90,400 in additional payment terms, and a $427,000 promissory note, pursuant to a Share Repurchase Agreement on December 26, 2007. (Roth, 2/8/12, 10:10-12:1; Exhs. 264, 265.) Mr. Gugliuzza did not receive payment on the promissory note and received a total of $275,400 for the purchase of his company stock. (Rovelo, 2/10/12, 9:24-11:2; Exhs. 138, 264.) Mr. Gugliuzza remained on the company's Board as an outside director until May 2008. (Gugliuzza, 2/21/12, 118:10-17, 122:18-20; Exh. 1175.) From 2006 to 2007, Mr. Gugliuzza received over $3 million in compensation, bonuses, stock awards, and option awards for his services at Commerce Planet. (Rovelo, 2/10/12, 6:8-15:10, 36:18-36:7; Exhs. 138, 264, 1042.)
In March 2008, the FTC served a CID on Commerce Planet. (Gravitz, 2/1/12, 48:3-6; Roth, 2/8/12, 17:19-18:13.) The FTC filed suit against Defendants on November 10, 2009. (Dkt. No. 1.) Shortly thereafter, the FTC settled with Commerce Planet, Mr. Hill, and Mr. Gravitz, and final judgments for permanent injunction and equitable monetary relief in the amount of $19,730,000 were entered against them on November 18, 2009. (Dkt. Nos. 3-5, 7-9.) The parties agreed to suspend the judgment for monetary relief under certain conditions, including the payment of $100,000 by Commerce Planet, $330,000 in cash plus interest on a $100,000 loan by Mr. Hill, and $192,000 by Mr. Gravitz. (Dkt. Nos. 7-9; Hill, 2/7/12, 183:7-11; Hill, 2/17/12, 114:14-16.)
The FTC engaged in settlement discussions with Mr. Gugliuzza, but the parties were unable to reach a resolution. (Dkt. No. 142.) After the FTC and Mr. Gugliuzza engaged in substantial discovery, the FTC filed a motion for leave to amend the Complaint, which the Court granted. (Ct. Order, Dkt. No. 145, June 27, 2011.) The FTC filed the operative FAC on June 29, 2011. (Dkt. No. 147.) On July 18, 2011, Mr. Gugliuzza answered the FAC, asserting several affirmative defenses, including advice of counsel, reliance on professionals, good faith, and mootness. (Dkt. No. 149.) On July 27, 2011, Mr. Gugliuzza filed two motions for partial summary judgment, which the Court denied. (Ct. Order, Dkt. No. 164, Sept. 8, 2011.) The Court thereafter conducted its bench trial, and the parties submitted closing briefs. (Dkt. Nos. 242-43, 248-49.)
The FTC alleges that Defendants engaged in deceptive and unfair website marketing of OnlineSupplier as a free "Online Auction Starter Kit" from July 2005 to March 2008 without adequately disclosing the program's negative option plan. (FAC ¶¶ 17-24, 48-53.) The FTC also alleges that Mr. Gugliuzza participated in, controlled, or had authority to control as well as knew about or should have known about Commerce Planet's deceptive and unfair practices related to the marketing of OnlineSupplier via his various roles as the company's consultant, president, de facto executive, and in-house counsel from July
Section 5(a) of the FTC Act prohibits "unfair or deceptive acts or practices in or affecting commerce" and empowers the FTC to prevent such acts or practices. 15 U.S.C. § 45(a)(1), (2). An act or practice is deceptive if (1) there is a representation, omission, or practice, (2) that is likely to mislead consumers acting reasonably under the circumstances, and (3) the representation, omission, or practice is material. FTC v. Pantron I Corp., 33 F.3d 1088, 1095 (9th Cir.1994), cert. denied, 514 U.S. 1083, 115 S.Ct. 1794, 131 L.Ed.2d 722 (1995). District courts consider the overall, common sense "net impression" of the representation or act as a whole to determine whether it is misleading. See FTC v. Gill, 265 F.3d 944, 956 (9th Cir.2001) (holding that defendant failed to counter the FTC's substantial showing that he made statements and created an overall "net impression" of a misleading representation regarding the ability to remove negative information from consumers' credit report, "even if the information was accurate, complete, and not obsolete"); FTC v. Stefanchik, 559 F.3d 924, 928 (9th Cir.2009) ("Deception may be found based on the `net impression' created by a representation."). A misleading impression is material if it "involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product." FTC v. Cyberspace.com, LLC, 453 F.3d 1196, 1201 (9th Cir.2006) (citation and quotes omitted).
The FTC's theory of the case is that Defendants offered a free internet auction kit as a ruse to enroll consumers in OnlineSupplier. Defendants thereby grossed over $45 million in two years by tricking over 470,000 consumers into unwittingly submitting their credit card information, which was used to charge them a monthly subscription fee without their informed consent. (Opening Statements, Trial Tr., 1/31/12, 5:25-6:15, 10:8-10.) At trial, the FTC attempted to show that OnlineSupplier's landing and billing pages, (Exhs. 1270, 1271), created the net impression that OnlineSupplier was a free offer, except for a small shipping and handling fee, and that although there was a disclosure of the negative option plan, consumers were unlikely to see or understand it because of the way it was placed on the sign-up pages. (Trial Tr., 1/31/12, 11:7-13.)
Mr. Gugliuzza denied liability and any wrongdoing on his part. He contended that OnlineSupplier was not a devious internet scheme, but a legitimate product that people wanted to use. (Id. at 20:24-21:7.) Mr. Gugliuzza argued that there was no empirical evidence of deception or unfairness arising from the negative option disclosures on OnlineSupplier's website. (Dkt. No. 187 [Def.'s Trial Brief], at 2.) Mr. Gugliuzza also argued that there was no evidence that consumers were deceived by the webpages, and any consumer confusion about OnlineSupplier resulted from third-party marketing fraud. (Id.; see also Trial Tr., 1/31/12, 22:18-23:8.)
The Court finds that the landing and billing pages of OnlineSupplier were materially misleading because those webpages created the net impression that consumers could obtain a free auction kit, when in fact, consumers were subscribing to a continuity program with monthly subscription fees. The clear weight of the evidence simply does not support Mr. Gugliuzza's position that affiliate fraud was the primary cause of consumer confusion.
The most compelling evidence that the website marketing of OnlineSupplier was misleading are the sign-up pages themselves. The landing and billing pages of the webpages created the net impression that OnlineSupplier was a free kit containing information on how to sell products online, rather than a continuity plan with a monthly membership fee. The central message on the landing page of Version I is that consumers will get a free kit that gives them information about how to sell products on eBay. (Exh. 1270.) When looking at the landing page, the most prominent graphic is the red boxed message on the upper left corner that states, "AS SEEN ON TV," which then leads the eye to the main message in caps "OVER $3.2 BILLION WAS MADE ON ebay LAST YEAR!" The phrase "$3.2 Billion" and "On ebay" are also in red, except that the eBay logo is in primary colors. Above this in smaller, dark blue font is the phrase "Work From Anywhere Using Your Computer!" Underneath the main headline about eBay is the message in a green banner that states "JOIN OVER 724,000 AMERICANS MAKING A LIVING ON EBAY." (Exhs. 1270-1, 1271-1.) Below the banner, the webpage is divided into two sections. The left section contains information about an "Online Auction Starter Kit" that "provides detailed instructions to maximize profits, using little known but proven strategies." Just below this statement in Version I is the directive "GET YOUR KIT NOW FOR FREE." The word "FREE" is in red, as is the phrase "STARTER KIT." The kit is advertised to include the following benefits: (1) a step-by-step quick start guide, (2) no experience required, (3) advanced training for experienced auctioneers, (4) and up to 50% discounts on thousands of name brand products. The right section of the webpage contains a light blue box where the user may submit her shipping address. There is a countdown clock on top that ticks off the number of minutes left until the offer expires. Just below is the question "Where do we ship your FREE KIT?" The phrase "FREE KIT" is in red. The button "Ship My Kit!" appears below the spaces for filling in one's name and contact information. Below that is the message inserted in light gray that states "GET YOUR ONLINE AUCTION STARTER KIT TODAY FREE!" The price 19.95 is crossed out and next to it is the offer "NOW FREE! (limited time offer)!" Again, "FREE" is in red. Below the fold,
Overall, the predominant message is that consumers can order a free kit on how to make money by selling products on eBay. This is underscored by the repetition and placement of the phrase "Free Kit," which is bolded in red, and by the use of name eBay at the center top of the webpage. Notably, there is no mention of
While the terms of the continuity program are disclosed in a separate, hyperlinked "Terms of Membership" page, this is an insufficient cue. Disclaimers do not automatically exonerate deceptive activities. See FTC v. Gill, 71 F.Supp.2d 1030, 1044 (C.D.Cal.1999), aff'd, 265 F.3d 944 (9th Cir.2001). "A solicitation may be likely to mislead by virtue of the net impression it creates even though the solicitation contains truthful disclosures." Cyberspace.com, 453 F.3d at 1200. There are multiple reasons why the hyperlinked "Terms of Membership" page is inadequate to overcome the net impression that OnlineSupplier was a free auction kit. First, the hyperlink is buried at the bottom and is not placed in close proximity to the "Ship My Kit!" button, making it unlikely that consumers would notice or click on the link. There is also no indication that the "Terms of Membership" are specifically in regard to a negative option plan. Second, when the viewer clicks on the hyperlink, the actual terms of membership appear on a separate pop-up page rather than being directly inserted on the landing page. Such separation suggests that the disclosure is inadequate because it appears in a different context than the claims they purport to repudiate. See Gill, 71 F.Supp.2d at 1044 (holding that a disclaimer in contract consumers eventually signed was inadequate to overcome deceptive representations in defendants' advertisements). Third, the information about the continuity plan, contained under numeral 4 ("Payment of Fees"), is buried with other densely packed information and legalese, which makes it unlikely that the average consumer will wade through the material and understand that she is signing up for a negative option plan.
Once the consumer clicks the "Ship My Kit!" button, she is taken to the billing page. (Exhs. 1270-2.) The eBay logo, along with the message "AS SEEN ON TV," is repeated on top, reinforcing the message that the kit is affiliated with eBay. The space for filling in one's payment information is inserted in a light blue vertical box to the right. At the top are two shipping options, regular shipping for $1.95 and expedited shipping for $7.95. Below the space for the credit card information is the "Ship My Kit!" button. At the very bottom, below the fold, in slightly darker blue font and in fine print is the disclosure regarding the negative option plan and payment terms. Although information about OnlineSupplier's negative option plan is disclosed on the webpage, fine-print disclosures may not overcome the net impression of a deceptive representation. Cyberspace.com, 453 F.3d at 1200-1201 (finding that disclosures in small-print on the back of a check regarding the monthly fee for internet access was insufficient to defeat the net impression that the check was a refund or rebate); see also FTC v. Brown & Williamson Tobacco Corp., 778 F.2d 35, 42-43 (D.C.Cir.1985) (holding that
After the consumer clicks on the "Ship My Kit!" button on the payment page, she is next taken to the upsell page where various products and services are advertised. (Exh. 1270-3.) The product offers are pre-clicked to "Yes," and the consumer must change it to "No" to decline the offer. Each of the products and services involves a free trial offer and a monthly or annual membership fee. Again, there is no clarification that the kit is a negative option plan. Instead, the top banner states "Come Work Online Using Ebay!" and "Join Over 724,000 Americans ... Making a Living on Ebay!," which reinforces the central message of using the kit to make money on eBay. If the consumer clicks on the submit button, she is taken to the final confirmation page. (Exh. 1270-4.) That page contains the same message and graphics as the previous upsell page and states that the order has been completed. Even assuming that the upsell and confirmation pages included clarifying information about OnlineSupplier's negative option plan, it is not enough because the transaction would have been completed upon submitting the "Ship My Kit!" button on the billing page. See Resort Car Rental Sys., Inc. v. FTC, 518 F.2d 962, 964 (9th Cir.) ("The Federal Trade Act is violated if [an advertisement] induces the first contact through deception, even if the buyer later becomes fully informed before entering the contract."), cert. denied, 423 U.S. 827, 96 S.Ct. 41, 46 L.Ed.2d 42 (1975).
The sign-up pages of Version II are similarly misleading because they create the net impression that consumers are getting a free kit to sell products on eBay. The landing and billing pages of Version II are largely similar to those of Version I. (Exh. 1271.) On the landing page, the phrase "AS SEEN ON TV" and the eBay logo have been removed, although the word eBay (in red) is still included in the header, and there is a reference to a CBS news story regarding people making a living on eBay. (Exh. 1271-1.) The figure $3.2 billion is now increased to $52 billion. The phrase "GET YOUR KIT NOW FOR FREE" in Version I has been changed to "GET YOUR KIT NOW." (Exh. 1271-1.) The phrase "Just Pay S/H" has also been
The most significant change appears on the billing page of Version II. (Exh. 1271-2.) The name eBay has been removed altogether from the top, and "onlinesupplier.com" has been added on the right. Second, the disclosure text has been taken out of the right blue box, centered at the bottom, and written in black font. As the defense team pointed out during trial, the shipping and handling fee, along with the monthly fee, is now in red while the remaining text is in black. Although these modifications do somewhat improve readability, the Court finds that they are inadequate to change the net impression of the landing and billing pages. As in Version I, the disclosure is not placed in close proximity to the "Ship My Kit!" button, but placed at the very bottom of the page, below the fold, so that a reasonable consumer is not likely to scroll to the bottom and see or read it. Furthermore, the main information about the negative option plan is in the smallest text size on the page and densely packed with the other text, rendering it difficult to read.
The remaining pages in Version II follow the same flow as the pages in Version I. When the consumer clicks the "Ship My Kit!" button, she is taken to the upsell page. (Exh. 1271-3.) Here, the eBay logo has been removed, and "onlinesupplier.com" has been added to the header. Version II contains an increased number of upsell offers, which, again, have been pre-clicked to "Yes." Clicking the submit button takes the consumer to the final confirmation page. (Exh. 1271-4.) This page also has "onlinesupplier.com" in the header. The final confirmation page includes some additional information regarding a 7-day trial membership for $1.95, when the consumer will receive the product, customer service information, and OnlineSupplier's website address. It also contains a link to the terms and conditions. But the added information does not change the net impression of OnlineSupplier, as the transaction would already have been completed upon clicking the "Ship My Kit!" button on the billing page. See Resort Car Rental Sys., Inc., 518 F.2d at 964.
In short, the sign-up pages of Version I and II are misleading because the overall, net impression from the content, layout, and design of the webpages is that consumers are ordering a free kit on how to sell goods on eBay with payment of a small shipping and handling fee, not that they
Although a facial examination of the sign-up pages sufficiently demonstrates that the website marketing of OnlineSupplier was misleading to a reasonable consumer, the Court may consider extrinsic evidence as corroborating evidence. See Kraft, Inc. v. FTC, 970 F.2d 311, 318-19 (7th Cir.1992). The FTC presented additional evidence that corroborates the Court's conclusion that OnlineSupplier is facially misleading. In particular, the Court finds the expert testimony of Jennifer King to be on-point and persuasive. Ms. King is a researcher and a third-year Ph.D. candidate at the U.C. Berkeley School of Information, with a master's degree in information management and systems, a program that focuses on graduating professionals in Human Computer Interaction ("HCI"). (King, 2/3/12, 101:7-8, 107:2-9, 109:22-110:3.) At Berkeley, Ms. King studies privacy using HCI-based methods, which is the study of how humans interact with computers. (Id. at 101:9-18.) HCI research is an interdisciplinary study that encompasses both qualitative and quantitative methods and draws upon such fields as computer science, cognitive psychology, and social psychology, among others. (Id. at 103:14-17, 104:22-105:9.)
Ms. King was retained by the FTC to review OnlineSupplier's webpages and determine whether (1) customers would understand that a negative option was present when they reviewed the sign-up pages, and (2) after they finished the check-out process, whether they would understand that they were enrolled in a continuity program. (Id. at 113:2-10.) Here, Ms. King applied a usability inspection method, a type of HCI qualitative-based approach that is "user-centered" — meaning that it focuses on what the user can perceive and what the user should do. (Id. at 103:23-104:1, 115:23-116:10.) Ms. King likened the method to a preflight checklist whereby she analyzes the webpages to see if they are consistent with certain HCI heuristics or principles of usability. (Id. at 114:22-115:15; 116:16-117:4.) Thus, like an airline pilot who goes through a pre-flight checklist trying to determine if the plane should fly, an expert conducting a usability inspection looks for major flaws in a website to determine whether it should be launched. (Id.)
With respect to Version I, Ms. King focused on what consumers are drawn to based on principles of usability. These principles include the fact that users typically do not scroll, tend to scan very quickly and read only 20% of what is on the page, and seek cues for what to do next on a webpage. (Id. at 123:19-125:6, 125:20-23.) Ms. King testified that on the landing page of Version I, the things that draw the most attention are the "AS SEEN ON TV" logo, the eBay logo, and the word "kit" used multiple times. (Id. at 124:7-11.) The primary call to action on the landing page is the "Ship My Kit!" button. (Id. at 124:13-18, 124:23.) On the billing page, the primary call to action is filling out the payment information and the "Ship My Kit!" button. (Id. at 127:6-18.) Ms. King testified that there is nothing on the screen to cause a typical consumer to believe that they would be signing up for a free trial and would incur monthly charges on their credit card. (Id. at 127:21-25.) As to the hyperlinked "Terms of Membership," Ms. King testified that she had grave concerns with the pop-up window, as a lot of factors could potentially interfere with viewing that window, such as a pop-up blocking software installed on the computer or other windows on the screen. (Id. at 135:12-136:4.) Ms. King also pointed out that the terms and conditions contain at least 6,000 words in giant blocks of text; the disclosure about the membership fee is buried in section 4; and the terms and conditions are written in legal language, which most people do not understand and immediately ignore. (Id. at 137:2-17, 138:4-9.) Ms. King testified that the "Terms of Membership" hyperlink and the adjacent "Privacy Policy" hyperlink are also terms that most people are trained to immediately tune out. (Id. at 136:5-19, 136:20-137:1.)
Ms. King further identified several key flaws with regard to the disclosure. First, Ms. King provided screenshots of the landing and billing pages, which showed that the disclosure appeared below the fold, as seen on a computer screen with the resolution size of 1024 by 768 pixels (the most common resolution for computers during the time the webpages were live from 2005 and 2006) and allowing for the maximum amount of screen space. (Id. at 131:3-132:25, 133:1-4, 133:20-134:25; Exhs. 1324, 1325.) Ms. King explained that the placement of the disclosure below the fold violates the cardinal heuristic of usability because people do not read the entire webpage and do not tend to scroll down to look for information below the fold. (King, 2/3/12, 128:1-7, 130:5-16, 133:5-9.) Generally, what one wants people to read the least is placed at the bottom while the thing one cares about the most is placed at the top of the webpage and above the fold. (Id. at 128:8-12.)
In rebuttal, Gugliuzza provided evidence of a screenshot from his computer showing the disclosure on the billing page of Version I to be above the fold. (Exh. 19; see also Exh.2002.) But the net impression test under section 5(a) is from the perspective of a reasonable consumer, not that of the seller or the seller's employee. While Gugliuzza's computer may, indeed, have shown a part of the billing page disclosure to be above the fold, it is not representative of the resolution size of the typical consumer. Ms. King testified that the most common resolution size at the time Version I was live was 1024 by 768 pixels. (King, 2/3/12, 126:16-21.) Ethan Brooks, the company's Chief Technology Officer from 2006 to 2007, also confirmed that
A second flaw Ms. King observed was that the disclosure is located far away from the "Ship My Kit!" button, at the very bottom of the page, and after the hyperlinked terms of membership and "Privacy Policy." (King, 2/3/12, 128:18-22.) Ms. King testified that her research in user cognition and privacy policies demonstrates that "as soon as you put the word `privacy policy' in front of a consumer, they completely tune out. They're one of the most unread components of a web page." (Id. at 128:23-129:6.) Thus, "the location of the disclosure after that privacy policy link basically signals to somebody that here is something you don't need to read; this is not relevant to your shopping experience. If it were crucial, it would have been placed up near the `ship my kit' button." (Id. at 129:7-13.) Third, Ms. King testified that the visibility of the disclosure was poor given the blue-on-blue lettering, the small and blocky text, the all-cap font (rendering it more difficult, not easier to read), and the legalese language (most people are not familiar with the term "negative option"). (Id. at 128:13-17, 129:21-130:2.)
Ms. King concluded that Version I did not appear to be offering for sale a membership program because (i) that messaging was absent from the entire user flow and the focus of the pages was instead on obtaining a free kit, and (ii) there was no mention of the continuity program in the area of the webpage where she believed most people would spend their viewing time. (Id. at 139:11-21.) Ms. King stated that she would not recommend launching Version I until the core flaws she identified were fixed. (Id. at 139:22-140:4.)
With regard to Version II, Ms. King similarly opined that the landing and billing pages did not contain anything that would cause a typical consumer to believe she would be signing up for a free trial in OnlineSupplier and would incur monthly charges until she affirmatively cancelled. (Id. at 141:5-9, 142:2-6.) The primary message of Version II's landing page is consistent with that of Version I — the focus is on the words eBay, starter kit, and free online auction. (Id. at 140:5-24.) The billing page does include the word OnlineSupplier for the first time, but the call to action remains "Ship My Kit!" (Id. at 141:15-142:1.) As to the disclosure on the billing page, Ms. King acknowledged that some changes were made to improve visibility, but that they were inadequate because "key flaws" were not addressed — i.e., the disclosure is still ensconced in a very large block of small text, printed in caps, dressed in legal language, placed at the bottom of the page away from the primary call to action ("Ship My Kit!"), and appears below the fold. (Id. at 142:7-25, 152:23-154:2.) Ms. King testified that because most major webpages tend to always put their legal disclosures in the footer, "people have been trained to know
Mr. Gugliuzza did not produce any expert rebutting Ms. King's usability inspection of OnlineSupplier's webpages. Rather, Mr. Gugliuzza attempted to minimize Ms. King's testimony by pointing out that she did not incorporate any analysis of empirical data in reaching her conclusions. (Def.'s Closing Brief, at 44.) For example, Mr. Gugliuzza relies on evidence that approximately 45% of the consumers who purchased OnlineSupplier cancelled within the free trial period, (Exh. 31), and that there were thousands of websites created between January 2005 and March 2007 using OnlineSupplier, (see Cruttenden, 2/28/12, 8:18-10:9, 12:6-8, 60:23-61:7; Exh. 2057). Mr. Gugliuzza's criticism misses the mark. There was no explanation of how an empirical analysis is relevant to a usability inspection, which focuses on what the user can perceive and do on a webpage given certain HCI principles of usability. Ms. King explained why she conducted a usability inspection, as opposed to other methods (such as a focus group), given the scope of the project and the size of OnlineSupplier's website. (See King, 2/3/12, 117:12-24.) The Court finds that a usability inspection, with its emphasis on user perception and comprehension of the information presented to them on a webpage, is consonant with a "net impression" test under section 5(a) of the FTC Act, which turns on a facial examination of the relevant marketing materials.
Mr. Gugliuzza further argued that a close analysis of user data reveals that the "vast majority" of consumers signed up for OnlineSupplier knowing the terms of the negative option plan. (Def.'s Closing Brief, at 39-40.) Mr. Gugliuzza's reliance on user data is misguided and uncorroborated by the evidence in the record. Mr. Gugliuzza introduced the testimony of its accounting expert, Dr. Stefano Vranca, who submitted a rebuttal report to the consumer injury calculation of Dr. Daniel Becker, the FTC's consumer injury expert. Dr. Vranca testified that for the period from 2005 to April 2008, using the company's Microsoft Access Realtime (RT3) database, 46.32% of those who ordered OnlineSupplier cancelled within the free trial period. (Vranca, 2/28/12, 74:3-76:5; Exh. 2061.) Dr. Vranca further testified that nearly 20% of OnlineSupplier subscribers
There is also no showing that consumers who remained OnlineSupplier members did so knowing the terms of the membership upon submitting their credit card information. As true of Joan Cirillo, (see infra Part III.A.4), consumers simply could not have checked or seen the membership fee on their credit card bill for several months. Mr. Gugliuzza also pointed to the fact that there were thousands of websites created between January 2005 and March 2007 using OnlineSupplier, (Cruttenden, 2/28/12, 8:18-10:9, 12:6-8, 60:23-61:7; Exh. 2057), and that fourteen consumers — including Eric and Lucia Carter — provided positive testimonials of OnlineSupplier, (Carter, 2/17/12, 28:8-19, 37:24-38:24; Exh. 2004.) But the evidence shows that the Carters and others who submitted positive testimonials did so in early March 2005, and thus likely purchased OnlineSupplier through in-bound telemarketing, not via the sign-up pages, which were not live until July 2005. (See Seidel, 2/14/12, 150:20-151:20; Gravitz, 2/2/12, 108:17-109:1; Exh. 2004.)
To establish a section 5 violation, proof of actual deception is unnecessary; it only requires a showing that misrepresentations "possess a tendency to deceive." Trans World Accounts, Inc. v. FTC, 594 F.2d 212, 214 (9th Cir.1979); see also Feil v. FTC, 285 F.2d 879, 896 (9th Cir.1960) (stating that "[a]ctual deception is not necessary" for the FTC to exercise its extensive power to prevent the use of deceptive acts). Although proof of actual deception is not necessary, "such proof is highly probative to show that a practice is likely to mislead consumers acting reasonably under the circumstances." Cyberspace.com, 453 F.3d at 1201.
The FTC presented abundant evidence that consumers were actually misled by OnlineSupplier's webpages. Two fairly sophisticated consumers, David Suckling and Joan Cirillo, testified that they were misled by OnlineSupplier's webpages. Mr. Suckling, a former owner of an internet company that built websites for clients, testified that he signed up for OnlineSupplier from a webpage advertising that he could obtain a free information if he just paid for shipping. (Suckling, 1/31/12, 61:6-15, 61:11-16.) His overriding impression was that he was being offered a free information kit on how to make money on eBay. (Id. at 62:15-17.) When he ordered the kit by submitting his address and credit card information on the sign-up pages, he did not believe that he was going to be charged anything in addition to the shipping fee. (Id. at 61:25-62:8.) Mr. Suckling later discovered he was charged $49.95 when he examined his credit card bill and called customer service to request a full refund. (Id. at 65:4-9.) Mr. Suckling received only a partial refund for $24.95. (Id. at 65:1-17.) After his call with customer service, he filed a complaint with the BBB. (Id. at 65:18-20.) Like Mr. Suckling, Ms. Cirillo, a corporate attorney for ten years, is well-versed in computer usage. She testified that she believed that she was ordering a free kit to learn how to be a seller on eBay, only to discover that she had been charged $49.95 five times, totaling approximately $250, from November 2006 to April 2007. (Cirillo, 1/31/12, 74:3-19, 76:16-19, 82:21-24.) Ms. Cirillo also called customer service to request a refund and filed a complaint with the BBB. (Id. at 74:23-75:7, 88:14-22.) Ms. Cirillo did not receive any refund. (Id. at 90:2-6.) Mr. Suckling's and Ms. Cirillo's overall impression that they were ordering a free information kit to sell products on eBay are consistent with the Court's overall net impression of OnlineSupplier's webpages and Ms. King's usability inspection of the sign-up pages.
There is also ample evidence that Commerce Planet, through its customer service department CLG, received thousands of telephone complaints regarding OnlineSupplier and requests for refunds. Jose Guardiola, the customer service manager for CLG, handled customer complaints regarding billing issues on a daily basis, either by personally taking a call or by interacting with customer service representatives on the floor. (Guardiola, 2/21/12, 7:22-8:4, 90:19-23.) The most common type of complaint Mr. Guardiola identified were "free-kit-only" complaints — i.e., people thought they were just paying $1.95 in shipping for a starter kit, only to discover they were being charged a monthly fee. (Id. at 8:11-21.) Mr. Guardiola
In addition to telephone complaints, thousands of written complaints regarding OnlineSupplier were submitted to the BBB, the Attorney General, and Commerce Planet via emails, mail, and website submissions. (Exhs. 163, 193, 1180, 1177-79.) The Court admitted a total of approximately 4,000 complaints consisting of over 500 BBB complaints (Exh. 163); 3,272 archived email complaints to Commerce Planet from July 2005 to March 2008 (Exh. 1180); and over 200 Consumer Sentinel FTC database complaints (Exhs. 1177-79). (Trial Tr., 2/9/12, 97:22-98:7; Exh. 1176[excluding declaration and categorizations].)
The FTC presented additional evidence of excessive chargeback rates for OnlineSupplier during the relevant time period, which corroborates the Court's finding that the program's sign-up pages were misleading. A "chargeback" consists of a returned sales transaction from the issuing bank to the acquiring bank sponsoring a particular merchant into the credit card payment system. (Chen, 2/2/12, 133:22-134:11, 135:7-11.) When a chargeback occurs, the funds associated with that transaction flow back to the issuer bank. (Id. at 135:12-16.) The average chargeback rate in the United States is 0.2% of the transaction rate. (Id. at 136:22-137:13.) Visa Credit Cards, one of the credit cards accepted for purchasing OnlineSupplier, identifies merchants who exceed a chargeback rate of about 1% in any given month. (Id. at 138:8-22, 140:18-141:4.)
Visa's business records show that OnlineSupplier was enrolled in Visa's Merchant Chargeback Monitoring Program ("MCMP") starting in 2004. (Exh. 1057.) OnlineSupplier continued to be in Visa's MCMP when the webpages of Version I and Version II were live during Mr. Gugliuzza's tenure at Commerce Planet. (Exhs. 1058-62.) OnlineSupplier was also part of Visa's Global Merchant Chargeback Monitoring Program ("GMCMP") in 2007. (Exhs. 1064-65.) From February 2006 to July 2007, OnlineSupplier exceeded Visa's 1% chargeback threshold for most months, reaching peaks of 5% in June 2006 and April through May 2007, 7% in June 2007, and 8% in July 2007 with certain acquiring banks. (Exh. 1312; see also Exhs. 1058-62; Exhs. 1317-19, 1321-22.) Commerce Planet incurred substantial fees in connection with OnlineSupplier chargebacks, totaling more than one million dollars between February 2006 and July 2007. (Seidel, 2/14/12, 74:24-75:20; Chen, 2/3/12, 5:9-23; Exhs. 1126, 1162, 1317, 1320.) From February 2006 to July 2007, Andrew Chen, who works at Visa's management division and is responsible for monitoring merchants with excessive chargebacks, testified that Visa monitored OnlineSupplier in all four of its risk management programs: (1) the MCMP, (2) the GMCMP, (3) the Risk Identification Service Online ("RIS"), and (4) the Merchant Fraud Performance Program. (Chen, 2/3/12, 131:3-12.) Mr. Chen opined that OnlineSupplier's
Mr. Chen testified that the frequent source of OnlineSupplier's excessive chargeback rates was e-commerce fraud, meaning that "consumers didn't recognize the transactions." (Chen, 2/3/12, 26:7-24.) Commerce Planet's chargeback reductions plans identify inadequate disclosure of OnlineSupplier's billing terms in their advertisement as one source of the company's chargeback problem. (Id. at 28:17-30:18; Exhs. 1076-77, 40.) Although Visa did not specifically link OnlineSupplier's excessive chargeback rates to deceptive website marketing during its monitoring of OnlineSupplier, Mr. Chen testified that Visa was just beginning to witness e-commerce deceptive marketing from 2004 to 2007 so that Visa did not know how to exactly identify that kind of problem until a few years later. (Chen, 2/3/12, 28:3-14.) In 2008 and 2009, Visa identified certain features employed by continuity merchants, such as use of a free trial offer, a pay-forshipping model, and a negative option plan, as being potentially deceptive marketing tactics. (Id. at 2/2/12, 156:21-157:21.) All these characteristics were marketing features of OnlineSupplier. The Court finds OnlineSupplier's history of excessive chargeback rates to be consistent with deceptive website marketing.
Mr. Gugliuzza does not dispute that at least some consumers were confused and misled into signing up for OnlineSupplier or that Commerce Planet had high chargeback rates resulting from consumers requesting that their credit card company rescind the charges on their purchase. Rather, Mr. Gugliuzza heavily relies on the defense that consumer confusion and high chargeback rates were the result of third-party affiliate marketers
The FTC has provided sufficient evidence that Commerce Planet's website marketing of OnlineSupplier was also unfair under section 5(a). An act is unfair if it (1) causes substantial injury (2) not outweighed by countervailing benefits to consumers or competition, and (3) one that consumers themselves could not reasonably have avoided. 15 U.S.C. § 45(n); see also FTC v. Neovi, Inc., 604 F.3d 1150, 1155 (9th Cir.2010); FTC v. J.K. Publ'ns, Inc., 99 F.Supp.2d 1176, 1201 (C.D.Cal. 2000).
The substantial injury prong is satisfied if the FTC offers sufficient evidence that consumers "were injured by a practice for which they did not bargain." Neovi, 604 F.3d at 1157 (citation and quotes omitted); accord J.K. Publications, 99 F.Supp.2d at 1201. "An act or practice can cause substantial injury by doing a small harm to a large number of people, or if it raises a significant risk of concrete harm." Neovi, 604 F.3d at 1157-58 (citation and quotes omitted). "Both the Commission and the courts have recognized that consumer injury is substantial when it is the aggregate of many small individual injuries." Pantron I Corp., 33 F.3d at 1102; see also Orkin Exterminating Co. v. FTC, 849 F.2d 1354, 1365 (11th Cir.1988) ("As the Commission noted, although the actual injury to individual customers may be small on an annual basis, this does not mean that such injury is not `substantial.'"), cert. denied, 488 U.S. 1041, 109 S.Ct. 865, 102 L.Ed.2d 989 (1989). Here, the evidence shows that thousands of consumers were misled into signing up for OnlineSupplier, thinking that they were ordering a free auction kit, instead of a continuity program with an automatic monthly charge to their credit card. Although the precise dollar amount of injury cannot be calculated here, there were thousands of consumers who were misled into signing up for OnlineSupplier and incurred monthly charges ranging from $29.95 to $59.95. The FTC approximated the total amount of consumer injury to be at least $18.2 million, which the Court finds reasonable and substantial. (See infra Part IV.B.)
"The second prong of the test is easily satisfied when a practice produces clear adverse consequences for consumers that are not accompanied by an increase in services or benefits to consumers or by benefits to competition." J.K. Publications, 99 F.Supp.2d at 1201 (citations and quotes omitted). This prong is satisfied here because consumers who were misled into ordering OnlineSupplier would not have known that they had subscribed to a web hosting program; hence, they would not have utilized its product and services. Consumers also did not give their consent to enrollment in OnlineSupplier, and thus, the harm resulted from a practice for which they did not bargain. Neovi, 604 F.3d at 1157. Although there is evidence that some consumers did in fact set up webstores and were satisfied with OnlineSupplier,
"In determining whether consumers' injuries were reasonably avoidable, courts look to whether the consumers had a free and informed choice." Neovi, 604 F.3d at 1158. As discussed above, OnlineSupplier's landing and billing pages created the net impression that consumers could order a free kit to learn how to sell products online. They were not adequately informed that they were signing up for a continuity program with monthly charges. Ms. King testified that most consumers would have been confused by the sign-up pages. Most consumers thus could not have reasonably avoided the monthly charge. Accordingly, the website marketing of OnlineSupplier constituted unfair practice in violation of section 5(a).
An individual may be held liable for corporate violations of the FTC Act if the individual (1) participated directly in the wrongful practice or act or had authority to control it, (2) had knowledge of the wrongful practice or act, was recklessly indifferent to the truth or falsity of the misrepresentation, or was aware of a high probability of fraud along with an intentional avoidance of the truth. Stefanchik, 559 F.3d at 931; FTC v. Garvey, 383 F.3d 891, 900 (9th Cir.2004); Amy Travel Serv., 875 F.2d at 573. If the FTC proves direct participation in or authority to control the wrongful act, then the individual may be permanently enjoined from engaging in acts that violate the FTC Act. Garvey, 383 F.3d at 900. To hold an individual liable for monetary redress, the FTC must additionally establish knowledge. FTC v. Affordable Media, 179 F.3d 1228, 1234 (9th Cir.1999); FTC v. Publ'g Clearing House, Inc., 104 F.3d 1168, 1171 (9th Cir.1997). Proof that the defendant intended to deceive consumers or acted in bad faith is unnecessary to establish a section 5(a) violation. FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020, 1029 (7th Cir.1988) ("An advertiser's good faith does not immunize it from responsibility for its misrepresentations." (citation and quotes omitted)); Feil, 285 F.2d at 896 ("Whether good or bad faith exists is not material, if the Commission finds that there is likelihood to deceive.")
Authority to control may be evidenced by "active involvement in business affairs and making of corporate policy, including assuming the duties of a corporate officer." Amy Travel Serv., 875 F.2d at 573. An individual's position as a corporate officer and/or authority to sign documents on behalf of the corporate defendant is sufficient to show requisite control. See Publishing Clearing House, 104 F.3d at 1170 (holding that individual's "assumption of the role of president of [the corporation] and her authority to sign documents on behalf of the corporation demonstrate that she had the requisite control over the corporation" for purposes of finding individual liability under section 5(a)); J.K. Publications, 99 F.Supp.2d at 1181-82 (holding a consultant liable because he had "ownership in and/or control over" the company).
Although a titular consultant from July 2005 to September 2007, the evidence shows that Mr. Gugliuzza at least shared, if not supplanted, Mr. Hill's role as CEO and president. Mr. Hill testified that when Mr. Gugliuzza was hired as a consultant, his own authority was curtailed and that his responsibilities changed from overseeing the company's day-to-day operations to implementing Mr. Gugliuzza's recommendations. (Hill, 2/7/12, 129:14-130:6.) The Board of Directors conferred upon Mr. Gugliuzza a large portion of Mr. Hill's authority to help manage the company, which included the day-to-day oversight over marketing and supervising Mr. Gravitz. (Hill, 2/7/12, 129:14-130:6; Hill, 2/17/12, 121:9-25.) While still a consultant, Mr. Gugliuzza signed an "Executive Compensation" agreement with Commerce Planet in March 2006, which entitled him to the same terms of compensation as Mr. Hill. (Foucar, 2/16/12, 167:24-168:13; Exhs. 16, 1331.) Mr. Gugliuzza, in fact, had identified the company's "dire need of a leader" with management skills in his report, (Exh. 6), and it appears that Mr. Gugliuzza filled that role from the very beginning. (See Hill, 2/7/12, 137:20-138:7 (testifying that Mr. Gugliuzza "was given the authority by the Board to ultimately take over the entire operation of the company and was told to replace me").) Mr. Gugliuzza also had the power to negotiate contracts on behalf of Commerce Planet and did so in 2005 with respect to NeWave's contract with Netchemistry, a vendor for the company that hosted and managed the store-builder product software for OnlineSupplier. (Cruttenden, 2/28/12, 5:11-17, 40:11-42:1.) Mr. Gugliuzza had the power to hire and fire and exercised that authority with respect to various employees at Commerce Planet, including Paul Daniel, whom he terminated as the company's CFO, and David Foucar whom he hired to replace Mr. Daniel in June 2006. (Hill, 2/17/12, 129:19-130:9; Gugliuzza, 2/22/12, 46:4-7; Foucar, 2/16/12, 130:24-25.)
Mr. Gugliuzza also oversaw and regularly met with department heads, who were required to submit weekly reports to him. (Hill, 2/7/12, 132:9-133:24; Gugliuzza, 2/23/12 Vol. I, 57:8-11; Exhs. 1124, 1130, 1354, 1356, 1368-71, 1292a, 1293, 1295.) Specifically, Mr. Gugliuzza had supervisory authority over Aaron Gravitz, who was responsible for marketing OnlineSupplier. (Hill, 2/7/12, 134:20-135:3; Gravitz, 2/2/12, 122:3-11.) Mr. Gravitz reported directly to Mr. Gugliuzza and met with him daily. (Hill, 2/7/12, 136:21-23, 137:13-19.) Mr. Gugliuzza also set marketing goals, budgets, and action items. (Exh. 1120.) Although Mr. Gugliuzza did not come up with the design or concept of OnlineSupplier's
Although Mr. Gugliuzza formally served as president of Commerce Planet from September 2006 to November 2007, the evidence shows that he had already been serving as a de facto executive of Commerce Planet since July 2005. As a practical matter, his responsibilities and duties did not materially change. (Hill, 2/7/12, 153:18-25.) Mr. Gugliuzza continued to have operational control over the company and its subsidiaries and had oversight over the department heads. (Foucar, 2/16/12, 137:19-138:6.) Mr. Gugliuzza averred that as president of Commerce Planet, the "success of [the company's four subsidiaries] were important and ultimately rolled up to some degree and capacity to Commerce Planet, which [he] had responsibility for." (Gugliuzza, 2/22/12, 52:5-13.) Mr. Gugliuzza continued to oversee Mr. Gravitz and to be involved in the marketing of OnlineSupplier, including reviewing and approving its sign-up pages. (Hill, 2/7/12, 155:8-10, 155:11-20.) The evidence shows that Mr. Gugliuzza participated in and had the authority to control the website marketing of OnlineSupplier as the president of Commerce Planet.
The knowledge requirement is satisfied by establishing that "the individual had actual knowledge of the material misrepresentation, was recklessly indifferent to the truth or falsity of a misrepresentation, or had an awareness of a high probability of fraud along with an intentional avoidance of truth." Garvey, 383 F.3d at 900 (citing Publishing Clearing House, Inc., 104 F.3d at 1171). "The degree of participation in business affairs is probative of knowledge." FTC v. Am. Standard Credit Sys., 874 F.Supp. 1080, 1089 (C.D.Cal.1994); see also Amy Travel Serv., 875 F.2d at 574; Affordable Media, 179 F.3d at 1235 ("The extent of an individual's involvement in a fraudulent scheme alone is sufficient to establish the requisite knowledge for personal restitutionary liability.").
The evidence demonstrates that, at the very least, Mr. Gugliuzza was recklessly indifferent to the misleading representations of OnlineSupplier on its landing and billing pages. From his 30-day assessment
Specifically, with respect to the landing and billing pages, the evidence shows that Mr. Gugliuzza knew or at least was recklessly indifferent to the fact that they were misleading. Mr. Gugliuzza testified that he had seen, reviewed, commented on, and approved various versions of the OnlineSupplier sign-up pages. (Gugliuzza, 2/21/12, 179:12-20, 179:21-180:22; Exh. 1026.) Mr. Seidel and Mr. Guardiola, the president and manager of CLG, respectively, reported to Mr. Gugliuzza and sent him weekly reports of the call logs in customer service that contained the cancellation rates and refund amounts. Mr. Gugliuzza had ample notice of consumer complaints, including the free-kit-only type of complaints to which Mr. Guardiola testified. (Guardiola, 2/21/12, 15:11-18, 17:7-23, 23:2-15, 27:8-21, 30:25-31:4; Exhs. 1292a, 1293-95.) Mr. Guardiola also testified that one of the primary suggested changes brought up during the weekly meetings was to enlarge the font of the disclosure. (Guardiola, 2/21/12, 16:14-19.) Mr. Guardiola testified that based on his weekly staff reports and meetings that Mr. Gugliuzza periodically attended, he believed Mr. Gugliuzza knew about the number and substance of the billing complaints received by the company. (Id. at 32:14-23.) Mr. Gravitz and Mr. Hill testified that when Commerce Planet received complaints, they discussed them with Mr. Gugliuzza. (Gravitz, 2/1/12, 75:25-77:6; Exh. 1027; Hill, 2/7/12, 155:21-156:12, 160:10-161:25; 163:18-164:10.) Mr. Hill and others discussed the problem of OnlineSupplier's chargeback rates with Mr. Gugliuzza. (Hill, 2/7/12, 156:13-157:9; Exhs. 186-87, 1289) Mr. Hill testified that OnlineSupplier's chargeback problems were never resolved and remained above the 1% threshold for almost the entire time that Mr. Gugliuzza worked at the company. (Hill, 2/7/12, 168:9-25.) Mr. Gugliuzza also rejected the company's experiments in placing clearer disclosures and sending post-transaction emails because they hurt conversion rates. (Exh. 1097.) Mr. Gugliuzza's pervasive role and authority at Commerce Planet, which extended to almost every facet of the company's business and operations, also creates a strong inference that Mr. Gugliuzza had the requisite knowledge that OnlineSupplier's webpages were misleading. American Standard Credit Systems, 874 F.Supp. at 1089; Amy Travel Serv., 875 F.2d at 574; Affordable Media, 179 F.3d at 1235. Accordingly, Mr. Gugliuzza had the requisite knowledge to be held individually liable for the deceptive website marketing of OnlineSupplier.
Finally, Mr. Gugliuzza argues that he did not know OnlineSupplier's webpages were misleading because there is no specific statute, law, or industry standard banning the use of a negative option plan or specifying how a negative option plan should be disclosed. (See Def.'s Closing Brief, at 47-48; Def.'s Closing Rebuttal, at 6.) This argument is unpersuasive. Although there is no specific law or industry standard prohibiting the use of a negative option plan or a bright-line rule on how such a plan should be disclosed, the FTC's Dot.Com Disclosures on internet advertising was published in May 2000 and readily available to Commerce Planet before its sign-up pages were live. (Gravitz, 2/2/12, 118:19-119:5; Exh. 377.) The Dot.com Disclosures provided guidelines on how to make clear and conspicuous disclosures that are consistent with the "net impression" test and principles of usability identified by Ms. King. (Exh. 377.) More importantly, the test under section 5(a) draws on well-established principles of advertising law and common sense. A bright-line rule on how precisely to disclose a negative option plan on a webpage is practically impossible, given the myriad variations of products, services, and webpages that are both extant and imaginable. Such a rule also calls for a rigid formula that undermines the very usefulness and flexibility of the law permitting it to be applied to a multitude of factual circumstances under sustained principles.
In his Answer to the FAC, Mr. Gugliuzza asserted several affirmative defenses, including advice of counsel, reliance on professionals, and good faith. Mr. Gugliuzza alleged that the FTC's claims are barred because he relied on the advice of counsel and professionals and acted in good faith. (Answer to FAC, at 8-9; see also Def.'s Trial Brief, at 3.) Specifically, Mr. Gugliuzza's defense is that he relied in good-faith on the advice of Commerce Planet's two in-house counsel, Jeffrey Conrad and Paul Huff, as to whether OnlineSupplier's sign-up pages were compliant under
Neither of these affirmative defenses has merit. As a matter of law, advice of counsel and good faith are not defenses to whether the defendant had the requisite knowledge under section 5(a). "`[R]eliance on advice of counsel [is] not a valid defense on the question of knowledge' required for individual liability." Cyberspace.com, 453 F.3d at 1202 (quoting Amy Travel Serv., 875 F.2d at 575). This is because counsel cannot sanction something that the defendant should have known was wrong. Amy Travel Serv., Inc., 875 F.2d at 575 ("Obtaining the advice of counsel did not change the fact that the business was engaged in deceptive practices."). Good faith is also irrelevant to the question of knowledge. See Feil, 285 F.2d at 896 ("Whether good or bad faith exists is not material, if the Commission finds that there is likelihood to deceive."); World Travel Vacation Brokers, 861 F.2d at 1029 ("An advertiser's good faith does not immunize it from responsibility for its misrepresentations." (citation and quotes omitted)).
Furthermore, the record does not support a finding that Mr. Gugliuzza relied in good-faith on the advice of Commerce Planet's in-house counsel as to whether OnlineSupplier's webpages complied with the FTC Act. Neither Mr. Conrad nor Mr. Huff had experience or specialized knowledge in regulatory or advertising law. They also were not hired specifically to review the landing and billing pages of OnlineSupplier for compliance under the FTC Act. The evidence does not demonstrate that Mr. Gugliuzza deferred to the legal advice of Mr. Conrad or Mr. Huff. Rather, the record shows that Mr. Gugliuzza had superseding authority over both in-house counsel. For example, Mr. Conrad initially performed general business consulting for the company in January 2004 and then began reviewing advertisements and promotional materials in mid-2004. (Conrad, 2/8/12, 39:15-40:17; Exh. 100.) Mr. Conrad, however, did not have a background in advertising law. (Conrad, 2/8/12, 41:3-9.) Mr. Conrad and Mr. Gugliuzza shared the role of reviewing legal materials, and Mr. Gugliuzza eventually replaced Mr. Conrad as legal counsel and assumed responsibility for reviewing the marketing materials. (Gravitz, 2/1/12, 15:21-16:9; Hill, 2/7/12, 139:11-140:8.) Mr. Gugliuzza also held himself out to be legal counsel of OnlineSupplier, Inc. (Hill, 2/7/12, 140:9-141:13; Exh. 177.) Mr. Gugliuzza reviewed Mr. Gravitz's work to ensure that the email creatives and OnlineSupplier's sign-up pages produced by Mr. Gravitz and his team complied with applicable laws from 2005 to 2006. (Hill, 2/17/12, 122:8-13.) Mr. Gugliuzza testified that before Mr. Huff was hired, he was doing most of the legal review for the company. (Gugliuzza, 2/22/12, 119:5-14.) In effect, Mr. Gugliuzza acted as Commerce Planet's de facto legal counsel.
Similarly, Mr. Huff, who had a background in business and employment litigation, did not have any experience in FTC Act compliance or advertising law before working at Commerce Planet. (Huff, 2/15/12, 47:15-48:5, 50:15-19.) Mr. Huff was hired as in-house by Commerce Planet to review contracts and for litigation, rather than for the purpose of reviewing OnlineSupplier's sign-up pages. (Id. at 49:1-25, 50:20-25, 53:9-16.) Mr. Gugliuzza delegated some responsibilities to Mr. Huff, but Mr. Huff reported to Mr. Gugliuzza, who had authority to overrule him on legal matters. (Gravitz, 2/1/12, 35:1-8; Gravitz, 2/2/12, 120:14-19; Huff, 2/15/12, 54:1-8.) Mr. Gravitz continued to seek legal advice from Mr. Gugliuzza, and both Mr. Huff and Mr. Gugliuzza gave their input to Mr.
Mr. Gugliuzza did not offer evidence showing that he relied on any specific recommendations or approvals from Mr. Huff regarding OnlineSupplier's webpages. The defense makes much of the fact that in early 2007, Mr. Gugliuzza directed Mr. Huff to attend a conference in Washington D.C. on the possibility of new guidelines on acceptable marketing practices for negative options. (Id. at 54:2-65:17; Exh. 1193.) While Mr. Huff attended the conference and changes were subsequently implemented to OnlineSupplier's landing and billing pages in February 2007, (Exh. 1198), the evidence does not show that Mr. Huff conducted a meaningful, independent review of the entire OnlineSupplier sign-up process, that he recommended changes that Mr. Gugliuzza and Mr. Gravitz adopted as reflected in Version II, or that he approved any specific changes to the sign-up pages. (Huff, 2/15/12, 73:22-86:21; Exh. 1203.)
Commerce Planet did not conduct a comprehensive review of the landing and billing pages until after the CID was served on the company in March 2008 and in conjunction with outside counsel, Linda Goldstein, who was experienced in the area of FTC Act compliance. (Huff, 2/15/12, 72:8-19, 93:13-95:22.) Although Commerce Planet utilized outside counsel for certain matters, including the company's use of the eBay logo, contracts with third-party marketers, and securities filings, the company did not specifically hire outside counsel to review OnlineSupplier's sign-up pages for compliance with the FTC Act until after Mr. Gugliuzza stepped down as president and the CID was served on the company. (Hill, 2/7/12, 178:18-21; Hill, 2/17/12, 92:11-93:22, Gravitz, 2/1/12, 108:10-21.) In sum, the evidence does not show that Mr. Gugliuzza relied in good faith on the advice of Mr. Conrad or Mr. Huff as to whether the sign-up pages complied with the FTC Act.
The FTC requests both a permanent injunction against Mr. Gugliuzza and
A permanent injunction is justified if there exists "some cognizable danger of recurrent violation," United States v. W.T. Grant Co., 345 U.S. 629, 633, 73 S.Ct. 894, 97 L.Ed. 1303 (1953), or "some reasonable likelihood of future violations," CFTC v. Co Petro Marketing Group, Inc., 502 F.Supp. 806, 818 (C.D.Cal.1980), aff'd, 680 F.2d 573 (9th Cir.1982). The Court examines the totality of the circumstances involved and a variety of factors in determining the likelihood of future misconduct. Co Petro Marketing Group, 502 F.Supp. at 818; SEC v. Murphy, 626 F.2d 633, 655 (9th Cir.1980). Nonexhaustive factors include the degree of scienter involved, whether the violative act was isolated or recurrent, whether the defendant's current occupation positions him to commit future violations, the degree of harm consumers suffered from the unlawful conduct, and the defendant's recognition of his own culpability and sincerity of his assurances, if any, against future violations. Murphy, 626 F.2d at 655; FTC v. Magui Publishers, Inc., No. 89-3818, 1991 WL 90895, at *15-16, 1991 U.S. Dist. LEXIS 20452, at *44-*45 (C.D.Cal. Mar. 28, 1991).
The Court finds that a permanent injunction against Mr. Gugliuzza is appropriate under the circumstances to enjoin him from engaging in similar misleading and deceptive marketing of products and services. Here, Mr. Gugliuzza did not participate in an isolated, discrete incident of deceptive marketing, but engaged in sustained and continuous conduct that perpetuated the deceptive marketing of OnlineSupplier for over two years. Mr. Gugliuzza oversaw the migration from telemarketing to internet marketing of OnlineSupplier and served as a key leader and executive of the company. Mr. Gugliuzza supervised and had authority over Mr. Gravitz and the marketing of OnlineSupplier as well as over the company's in-house counsel. Mr. Gugliuzza reviewed and approved the various iterations of OnlineSupplier's sign-up pages and, at the very least, was recklessly indifferent to the fact that OnlineSupplier's webpages were misleading, given the ample notice of consumer confusion regarding OnlineSupplier's membership terms. Mr. Gugliuzza assessed the financial state of the company and helped turn Commerce Planet into a profitable business, mainly through the internet marketing and sale of OnlineSupplier from 2005 to 2007. Mr. Gugliuzza did not express any recognition of his culpability, but has firmly stood behind the sign-up pages and has obdurately insisted that at no time did he ever believe consumers were misled by OnlineSupplier's billing and landing pages. (Gugliuzza, 2/21/12, 182:16-21; 2/22/12, 152:3-8.) Instead, Mr. Gugliuzza placed blame on third-party marketers and the advice of in-house counsel — defenses that the Court has found thin in evidentiary support. All these factors weigh in favor of imposing a permanent injunction against Mr. Gugliuzza.
In his Answer to the FAC, Mr. Gugliuzza asserted mootness as an affirmative defense. He alleged that "because the challenged conditions no longer exist,
Mr. Gugliuzza has not shown that it is "absolutely clear" that he will not repeat his wrongful activities. Since leaving Commerce Planet, Mr. Gugliuzza has founded Grow Commerce, a website servicer for businesses, and has worked for Oakley, a sunglass company, as an e-Commerce strategy manager. Mr. Gugliuzza also testified that after the completion of trial he planned to work for "Trust Commerce," a merchant processor. (Gugliuzza, 2/21/12, 130:11-131:14.) Mr. Gugliuzza pointed out that none of his post-Commerce Planet activities have involved direct consumer marketing of a continuity program. Before joining Commerce Planet, Mr. Gugliuzza also never marketed a continuity program or was held liable for violations of the FTC Act. Mr. Gugliuzza further testified that after five years of his last contact with Commerce Planet, he "wouldn't touch a negative option with a ten-foot pole." (Gugliuzza, 2/23/12 Vol. II, 39:2-11.) While Mr. Gugliuzza has not specifically engaged in the internet marketing of a negative option plan before or after his involvement with Commerce Planet, Mr. Gugliuzza has consistently worked for an e-Commerce company engaged in the internet marketing of a product or service. He began his post-law school career co-founding a company that marketed and sold batteries to consumers online. He then founded a competitor website that marketed and sold the same products online. After leaving Commerce Planet, Mr. Gugliuzza promptly founded Grow Commerce, another website servicer, and then joined Oakley as an e-Commerce strategy manager. For all these companies, Mr. Gugliuzza was the founder and/or executive and profited considerably from the website marketing of products and services. At Commerce Planet, he earned over $3 million from 2006 to 2007. Mr. Gugliuzza also expressed plans to join another e-Commerce company at the end of trial. Given his past work experience and financial rewards, there is a reasonable likelihood that Mr. Gugliuzza will be incentivized to continue his work in e-Commerce and be involved in the internet marketing of products or services. It is also reasonably likely that Mr. Gugliuzza will seek to serve in an executive position, given his prior leadership roles and eagerness
Section 13(b) permits a panoply of equitable remedies, including monetary equitable relief in the form of restitution and disgorgement, as well as miscellaneous reliefs such as asset freezing, accounting, and discovery to aid in providing redress to injured consumers. Pantron I Corp., 33 F.3d at 1103 & n. 34 (9th Cir.1994); Figgie Int'l, 994 F.2d at 606-608; FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1113 (9th Cir. 1982).
The FTC Act is designed to protect consumers from economic injuries. Stefanchik, 559 F.3d at 931. To effect that purpose, courts may award restitution to redress consumer injury. Gill, 265 F.3d at 958 ("We have held that restitution is a form of ancillary relief available to the court in these circumstances to effect complete justice."). Restitution may be measured by the "the full amount lost by consumers rather than limiting damages to a defendant's profits." Stefanchik, 559 F.3d at 931 (affirming restitution of over $17 million for the full amount of consumer loss); see also FTC v. Febre, 128 F.3d 530, 536 (7th Cir.1997) (affirming restitution for more than $16 million against company and officer as consumer loss under section 13(b)). Consumer loss is calculated by "the amount of money paid by the consumers, less any refunds made." FTC v. Direct Marketing Concepts, Inc., 648 F.Supp.2d 202, 213-14 (D.Mass.2009), aff'd, 624 F.3d 1 (1st Cir.2010); see also Stefanchik, 559 F.3d at 931; Figgie Int'l, 994 F.2d at 606; Gill, 265 F.3d at 958.
As an alternative to restitution, "[s]ection 13(b) permits a district court to order a defendant to disgorge illegally obtained funds." Febre, 128 F.3d at 537. Disgorgement is measured by the amount of profits causally connected to the violation. SEC v. Happ, 392 F.3d 12, 31 (1st Cir.2004). The purpose of disgorgement is not to redress consumer injuries but to deprive wrongdoers of ill-gotten gains. Febre, 128 F.3d at 537.
Irrespective of the measure used to calculate monetary equitable relief, courts apply a burden-shifting framework
In the FAC, the FTC alleged that between July 2005 and March 2008, Commerce Planet obtained over $45 million from over 500,000 consumers. (FAC ¶ 27.) In its Closing Brief, the FTC requests a maximum amount of $36.4 million in consumer loss after adjustments or, at a minimum, $18.2 million. (Pl.'s Closing Brief, at 52.) The FTC relies on calculations performed by Dr. Daniel Becker, an expert in the field of Econometrics, who has worked for the FTC in the areas of enforcement, policy issues, and consumer protection. (Becker, 2/15/12, 7:24-12, 8:13-8, 8:19-9:11.) The FTC requested that Dr. Becker calculate the net consumer injury for consumers who enrolled in OnlineSupplier's membership program between July 2005 and March 2008. (Id. at 10:2-6.) The FTC also requested that Dr. Becker apply two assumptions: (i) no consumer would have joined OnlineSupplier if the nature of the membership had been fully disclosed to them, and (ii) consumers derived no benefit from their OnlineSupplier memberships. (Id. at 10:17-24.) Dr. Becker used Commerce Planet's RT3 database containing customer records and transactions involving OnlineSupplier. (Id. at 10:13-16.) Using the information from the RT3 database, Dr. Becker employed two steps to calculate the amount of consumer injury. (Id. at 18:3-20:10.) First, he calculated the population of injured consumers who purchased OnlineSupplier and created a subset of data that only contained consumers who signed up for the program with an order date between July 1, 2005 to March 31, 2008. Second, he calculated the net payments from the population of consumers who purchased OnlineSupplier during the relevant time period by adding up all the payments. Dr. Becker then subtracted off the refunds and chargeback amounts from the payments. (Id. at 18:21-24.)
Time Period Consumer Injury
Consultant (July 1, 2005 to $19.1 million
August 31, 2006)
President (September 1, 2006 $19.6 million
to October 31, 2007)
Total Consumer Injury $38.7 million
(Id. at 20:11-21:4; see also Pl.'s Closing Brief, at 50-51.)
In its Closing Brief, the FTC provided an adjusted estimate. Mr. Gugliuzza's accounting expert, Dr. Stefano Vranca, pointed out that Dr. Becker used data from the company's RT3 database rather than from its Quickbooks database,
Original Calculation Adjusted Calculation
Time Period of Consumer Injury of Consumer Injury
Consultant (July 1, 2005 to August 31, $19.1 million $18 million
2006)
President (September 1, 2006 to October $19.6 million $18.4 million
31, 2007)
Total Consumer Injury $38.7 million $36.4 million
(Pl.'s Closing Brief, at 52.)
Mr. Gugliuzza challenged the accuracy of Dr. Becker's estimate through the rebuttal testimony of Dr. Vranca. Dr. Vranca testified that the two assumptions applied by Dr. Becker — that no consumer would have joined OnlineSupplier if she had known about the terms of membership and consumers derived no benefit from the program — were unsupported. Dr. Vranca testified that a certain percentage of consumers cancelled within the free trial period or maintained their membership in excess of three or six months, suggesting that some consumers knew about the terms of membership and yet purchased
Dr. Vranca's critique is flawed in several respects. The Court agrees with the FTC that, as a matter of law, the FTC need not show that all consumers were deceived, relied upon the misrepresentations, or that consumers did not derive any utility from the product. Under section 13(b) of the FTC Act, proof of injury by every individual consumer is not required to justify a restitutionary award. Stefanchik, 559 F.3d at 929 n. 12 (citation omitted); Figgie Int'l, 994 F.2d at 605 ("It is well established with regard to Section 13 of the FTC Act ... that proof of individual reliance by each purchasing customer is not needed.") This is because, unlike a private suit for fraud, "[s]ection 13 serves a public purpose by authorizing the Commission to seek redress on behalf of injured consumers," and "[r]equiring proof of subjective reliance by each individual consumer would thwart effective prosecutions of large consumer redress actions and frustrate the statutory goals of the section." Figgie Int'l, Inc., 994 F.2d at 605 (citation omitted). Rather, "[a] presumption of actual reliance arises once the Commission has proved that the defendant made material misrepresentations, that they were widely disseminated, and that consumers purchased the defendant's product." Id.; see also FTC v. Inc21.com Corp., 745 F.Supp.2d 975, 1011 (N.D.Cal. 2010) ("[I]t is sufficient for the FTC to prove that misrepresentations were widely disseminated (or impacted an overwhelming number of consumers) and caused actual consumer injury."), aff'd, 475 Fed. Appx. 106 (9th Cir.2012). Nor does the FTC need to prove that OnlineSupplier was essentially worthless to obtain restitution. Figgie Int'l, 994 F.2d at 606. This is because the injury occurs from the seller's misrepresentations that "tainted the customers' purchasing decisions" — it is "[t]he fraud in the selling, not the value of the thing sold" that entitles consumers to the refund. Id.
Here, the FTC has proven that the representations of OnlineSupplier on its webpages as a free auction kit were materially misleading; the representations were widely disseminated on the internet; and numerous consumers ordered OnlineSupplier. Once the FTC has met this burden, it must then "show that its calculations reasonably approximated the amount of customers' net loss," and then the burden shifts to the defendant to show those figures are inaccurate. Febre, 128 F.3d at 535. Mr. Gugliuzza attempted to challenge Dr. Becker's figures by referencing Dr. Vranca's user data. However, Mr. Gugliuzza does not challenge the validity of the actual data used by Dr. Becker in the RT3 database. Dr. Vranca himself relied on the data in the RT3 database for many of his own calculations. (Vranca, 2/28/12, 74:3-10, 106:21-107:3.) Nor did Dr. Vranca take issue with the accurateness of Dr. Becker's mathematical calculations. (Vranca, 2/28/12, 110:18-113:13.) Moreover, Dr. Vranca's citation of user data does not necessarily track consumers who knew of OnlineSupplier's continuity program at the time they placed their order, as they may have simply not noticed the charges to their credit card for several months or discovered the terms of membership through a post-transaction communication. (Vranca, 2/28/12, 108:12-23; see also supra Part III.A.3.) The FTC has shown through overwhelming evidence that thousands of consumers were misled
Nevertheless, although the FTC need not show that all consumers were misled, not all consumers were in fact deceived by OnlineSupplier's webpages. As discussed above in detail, the Court found that a reasonable consumer would likely be deceived by OnlineSupplier's webpages. Jennifer King testified that "most" consumers would not have known they were purchasing a negative option or signing up for a continuity program. (King, 2/3/12, 114:9-21.) Jose Guardiola testified that at least 70% of calls to the customer call center — about 1,000 calls per week — comprised free-kit-only complaints. (Guardiola, 2/21/12, 8:11-9:6, 31:20-32:13.) The FTC acknowledged that the Court may adjust their estimate of consumer injury using these approximations. Assuming that the lower bound of "most" is 50%, the FTC argued that the Court could reasonably find that the actual consumer injury was not less than 50% of $36.4 million or $18.2 million. (Pl.'s Closing Brief, at 54-55.) The FTC's second adjusted amount is summarized as follows:
50% of Adjusted
Adjusted Calculation Calculation of
Time Period of Consumer Injury Consumer Injury
Consultant (July 1, 2005 to August $18 million $9 million
31, 2006)
President (September 1,2006 to $18.4 million $9.2 million
October 31, 2007)
Total Consumer Injury $36.4 million $18.2 million
The Court finds that the FTC's second adjusted amount of $18.2 million to be appropriate and reasonable. The Court takes into account the inherent difficulty of tracking and retaining consumer data regarding consumers' experience that thwarts a precise calculation of consumer injury. The Court also considers the limitation of the financial data and records maintained by Commerce Planet as to the user experience with OnlineSupplier's website and services. (See Brooks, 2/9/12, 117:14-18; Seidel, 2/14/12, 101:18-102:20.) The evidence strongly supports the conclusion that most reasonable consumers would have been misled by OnlineSupplier's landing and billing pages. A conservative floor then is that at least 50% of consumers who ordered OnlineSupplier were misled by the sign-up pages, which results in a reduction of the FTC's original adjusted estimate by half. Accordingly, the Court finds $18.2 million to be a reasonably conservative estimate of consumer injury.
In response, Mr. Gugliuzza countered that the Court should not award any restitution because the consumer injury essentially amounts to zero. (Def.'s Closing Brief, at 58.) Mr. Gugliuzza relies on Dr. Vranca's expert opinion that he believed the consumer injury to be de minimis or zero, as estimated by applying three assumptions that defense counsel requested he adopt during his testimony: (i) if people were confused by the terms, they were primarily in the group that cancelled after getting billed once or twice within 60 days of signing up, (ii) there were some people in the zero to 60 day group who were not confused, but understood the terms and cancelled within the 60 days after being charged once or twice, and (iii) people who felt they were confused were the most likely to obtain refunds and chargebacks. (Vranca, 2/28/12, 100:16-102:23.) Based on these assumptions, and figuring in the total
For the foregoing reasons, the Court finds in favor of the FTC and against Mr. Gugliuzza on both counts for deceptive and unfair practices under section 5(a) of the FTC Act. The Court finds Mr. Gugliuzza individually liable for the deceptive and unfair marketing of OnlineSupplier in violation of section 5(a). The Court finds that a permanent injunction against Mr. Gugliuzza is warranted. The Court further awards the FTC restitution for consumer redress in the amount of $18.2 million. The FTC is directed to file a proposed permanent injunction and a proposed judgment consistent with the Court's decision within ten (10) days of this memorandum.
