FEDERAL TRADE COMMISSION V. ROSS, NO. 12-2340
Decided: February 25, 2014
The Fourth Circuit Court of Appeals affirmed the district court’s judgment enjoining the defendant from participating in deceptive Internet advertising practices and holding her jointly and severally liable for equitable monetary consumer redress.
The Federal Trade Commission (the “Commission”) sued Innovative Marketing, Inc. (“IMI”), and several of its high-level executives and founders, including Kristy Ross (“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. The defendants operated a massive, Internet-based scheme that tricked consumers into purchasing computer security software, referred to as “scareware.”
On appeal, Ross challenged the district court’s judgment on four 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 (4) the soundness of the district court’s factual findings.
First, Ross contended that the district court did not have the authority to award consumer redress—a money judgment—under the Federal Trade Commission Act. The 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.” However, although the statute’s text does not expressly authorize the award of consumer redress, precedent dictates otherwise. The Supreme Court in Porter v. Warner Holding Co. 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.” Here, by authorizing the district court to issue a permanent injunction in the Federal Trade Commission Act, 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. Congress does not need to use the magic words, “other order” to invoke the full injunctive powers of the district court.
Second, Ross challenged the legal standard for finding individual liability under the Federal Trade Commission Act. The district court held that there was individual liability 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 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 proposed a standard 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.” The Fourth Circuit adopted the district court’s standard, recognizing that Ross’ 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.
Third, Ross mounted three evidentiary challenges. First, she contended that the district court improperly precluded her expert from testifying bout how “the advertisements linkable to Ross’ responsibilities’ were non-deceptive.” However, because the individual liability standard does not require a specific link from Ross to particular deceptive advertisements and instead looks to whether she had authority to control the corporate entity’s practices, the expert’s testimony was immaterial, and thus irrelevant, to the issue reserved for trial. Second, Ross challenged the admission of a 2004 to 2006 profit and loss statement that the district court relied on to calculate the amount of consumer redress. Ross’ co-defendant submitted an affidavit with this profit and loss summary. The Fourth Circuit recognized that although the district court admitted the profit and loss statement under the residual exception to the rule against hearsay, it may affirm on the basis of any ground supported by the record. The Fourth Circuit concluded the statement was admissible as an adoptive admission by Ross. Ross expressly adopted her co-defendant’s affidavit in her own affidavit. Third, Ross contended that the district court improperly admitted hearsay evidence: an email from a co-defendant to a payment processor, listing Skype numbers and titles for a group of high-level company executives. Ross’ telephone number is listed on the email, as is her title, “Vice President.” While it is true 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 statement,” that requirement was satisfied in this case. Moreover, the email 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.
Fourth, Ross contended that the district court erred in finding that she had “control” of the company, participated in any deceptive acts, and had knowledge of the deceptive advertisements. The Fourth Circuit concluded Ross had “control,” based on her affidavit, in which she swore she was a high-level business official with “product optimization” duties, and based on evidence that other employees requested her authority to approve certain advertisements. The Fourth Circuit also concluded Ross “directly participated in the deceptive marketing scheme.” She directed the design of particular advertisements, as memorialized in chat logs between her and other employees. Ross was a contact person for the purchase of advertising space for IMI, and there was evidence that she had the authority to discipline staff and developers when the work did not meet her standards. Finally, the Fourth Circuit concluded Ross had actual knowledge or was at least recklessly indifferent or willfully blind to the deceptive marketing scheme. There was evidence that she edited and reviewed the content of multiple advertisements and, at one point, ordered the removal of the word “advertisement” from a set of ads. Also, Ross was on notice of multiple complaints about IMI’s advertisements, including that they would cause customers to automatically download unwanted IMI products.
– Sarah Bishop