Court Opinion

ID: 1041406
Source: CourtListenerOpinion
Date Created: 2013-09-19 20:28:20.686724+00
Date Added: 2024-06-11T13:10:13.247671
License: Public Domain

FILED
                           NOT FOR PUBLICATION                              SEP 19 2013

                                                                        MOLLY C. DWYER, CLERK
                    UNITED STATES COURT OF APPEALS                       U.S. COURT OF APPEALS

                            FOR THE NINTH CIRCUIT

FEDERAL TRADE COMMISSION,                        No. 11-17270

              Plaintiff-Appellant,               D.C. No. 2:08-cv-00620-PMP-GWF

  v.

PUBLISHERS BUSINESS SERVICES,                    MEMORANDUM*
INC.; ED DANTUMA ENTERPRISES,
INC., DBA Publishers Business Services,
DBA Publishers Direct Services; PERSIS
ANN DANTUMA; EDWARD FRED
DANTUMA; BRENDA DANTUMA
SCHANG; DRIES DANTUMA; DIRK
DANTUMA; JEFFREY DANTUMA,

              Defendants-Appellees.

                 On Appeal from the United States District Court
                            for the District of Nevada
                     Philip M. Pro, District Judge, Presiding

                              Argued May 15, 2013
                           Submitted September 19, 2013
                             San Francisco, California

Before:      CLIFTON and BEA, Circuit Judges, and KORMAN,

       *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
                                          1
             Senior District Judge.**
      The Federal Trade Commission (“FTC”) sued Publishers Business Services,

Inc.; Ed Dantuma Enterprises, Inc. (referred to collectively as “PBS”); and six of its

individual corporate officers and managers, all of whom are members of the same

family, alleging widespread deceptive and abusive telemarketing practices. The

district court granted the FTC’s motion for summary judgment and entered a

permanent injunction. FTC v. Publishers Bus. Servs., Inc., 821 F. Supp. 2d 1205,

1227–28 (D. Nev. 2010). After an evidentiary hearing, the district court awarded the

FTC equitable damages of $191,219.00. See FTC v. Publishers Bus. Servs., No. 08-

CV-00620, 2011 WL 7462205, at *2 (D. Nev. July 25, 2011). Moreover, the district

court held that only two individual defendants were liable for monetary relief, though

each was subject to the permanent injunction. Id. Only the FTC appeals, arguing that

damages should have been measured by defendants’ total gross receipts within the

relevant time period ($34.4 million) and that all individual defendants should have

been held jointly and severally liable for monetary relief.

      We “review[] a district court’s grant of equitable relief under the FTC Act only

for abuse of discretion or [for] the erroneous application of legal principles.” FTC v.

      **
             The Honorable Edward R. Korman, Senior United States District
Judge for the Eastern District of New York, sitting by designation.

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Network Servs. Depot, Inc., 617 F.3d 1127, 1141 (9th Cir. 2010). We hold that the

district court abused its discretion with respect to the amount of the award and the

individual liability of three of the defendants. We vacate and remand for further

proceedings.

      I.   The Measure of Damages

      The district court applied an incorrect legal standard when it focused on the

defendants’ gain rather than the loss to the consumers. “[C]ourts have often awarded

the full amount lost by consumers rather than limiting damages to a defendant’s

profits.” FTC v. Stefanchik, 559 F.3d 924, 931 (9th Cir. 2009).

      In rejecting this calculation, the district court relied on two cases: FTC v. Verity

Int’l, Ltd., 443 F.3d 48 (2d Cir. 2006), and FTC v. Figgie Int’l, Inc., 994 F.2d 595 (9th

Cir. 1993) (per curiam). This was improper. In Verity, the Second Circuit held that

the baseline for an equitable monetary award under the FTC Act is the defendant’s

unjust benefits, not the consumers’ losses. We have, however, held that the FTC Act

permits restitution measured by the loss to consumers. See Stefanchik, 559 F.3d at

931–32 (9th Cir. 2009).

      Figgie, 994 F.2d at 595, is also distinguishable. In Figgie, as here, the violation

arose under § 5 of the FTC Act. The remedy in that case, however, was governed by

§ 19(b) of the FTC Act, which explicitly limits recoverable monies to those necessary

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to provide “redress . . . to consumers” and prohibits the imposition of other types of

damages. Id. at 607 (quoting 15 U.S.C. § 57b(b)). In this case, recovery is authorized

under § 13(b), which contains no such limitation and which permits awards that may

even be “greater than the defendant’s unjust enrichment.” Stefanchik, 559 F.3d at

931; accord FTC v. Gem Merch. Corp., 87 F.3d 466, 469–70 (11th Cir. 1996) (noting

that § 13(b) does not have the same limitations as § 19 and distinguishing Figgie on

that basis); Febre, 128 F.3d at 537 (7th Cir. 1997) (same).

      In addition to its reliance on Verity and Figgie, the district court also erred when

it relied on the fact that, while consumer refunds might be an appropriate remedy, “the

evidence adduced demonstrates that it is either impossible or impracticable to locate

and reimburse those individual customers.”         Publishers Bus. Servs., 2011 WL

7462205 at *2 (citing FTC v. Pantron I Corp., 33 F.3d 1088 (9th Cir. 1994)).

Attributing damages to individual consumers and returning value to them is not

required for a § 13(b) disgorgement remedy and Pantron I so held. We there held

that, if it is “impossible or impracticable to locate and reimburse all of the consumers

who have been injured by [the defendant’s] misrepresentations, [the district court]

may order some other remedy which requires [the defendant] to disgorge its unjust

enrichment. Such an alternative remedy should provide direct benefits to consumers

to the extent possible, however.” Pantron I, 33 F.3d at 1103 n.34; see also Gem

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Merch. Corp., 87 F.3d at 470 (“[B]ecause it is not always possible to distribute the

money to the victims of defendant's wrongdoing, a court may order the funds paid to

the United States Treasury.”).

      The district court also erred when it relied on the damage calculation contained

in PBS's expert report by Dr. Gregory Duncan. That report was premised first on the

assumption that most consumers heard all the terms of the subscription so that they

were not misled by the telemarketing solicitation. The fraud, however, was not simply

the failure to disclose all pertinent terms. Instead, the defendants were found in

violation of § 5 by the misrepresentations that launched the process, among other

reasons. Indeed, in granting summary judgment, the district court held that, “[a]lbeit

true that by the end of the verification call PBS has informed the consumer of all the

terms of the agreement,” the net effect of PBS's sales tactics was misleading.

Publishers Bus. Servs., 821 F. Supp. 2d at 1224.            Thus, the deception was

“self-evident.” Id. at 1225.

      Dr. Duncan's calculation was also premised on the assumption that the

subscriptions were not valueless. This assumption is not relevant, even if true.

“Courts have previously rejected the contention ‘that restitution is available only when

the goods purchased are essentially worthless.’” Figgie, 994 F.2d at 606 (quoting

FTC v. Int'l Diamond Corp., No. 82-0878, 1983 WL 1851, at *5 (N.D. Cal. July 12,

                                           5
1983)); see also FTC v. Kuykendall, 371 F.3d 745, 766 (10th Cir. 2004) (holding, in

similar magazine subscription sales scheme, no need to offset gross receipts “by the

value of the magazines the consumers received”). This is particularly true where the

injury to consumers arises out of misrepresentations made in the sales process, which

lead to a “tainted purchasing decision.” Figgie, 994 F.2d at 606. “The fraud in the

selling, not in the value of the thing sold, is what entitles consumers . . . to full

refunds.” Id.

      The district court's calculation of damages is vacated. On remand, the district

court should base its calculation on the injury to the consumers, not on the net

revenues received by defendants. That does not mean that the district court must

accept the calculation proposed by the FTC. PBS has argued, for example, that a

customer who renewed subscriptions necessarily knew the actual terms of the

transaction at the time of renewal. A similar argument was made regarding customers

who added on to a subscription order. The district court may consider these and other

arguments in determining the appropriate amount of damages to be awarded.

      II.   Individual Liability

      To be individually liable for equitable restitution under the FTC Act, the

individual must have “participated directly in the deceptive acts or had the authority

to control them,” Stefanchik, 559 F.3d at 931 (emphasis omitted), and “had knowledge

                                          6
that the corporation or one of its agents engaged in dishonest or fraudulent conduct,

that the misrepresentations were the type upon which a reasonable and prudent person

would rely, and that consumer injury resulted.” FTC v. Network Servs. Depot, Inc.,

617 F.3d 1127, 1138 (9th Cir. 2010) (emphasis in Network Services Depot). The FTC

may establish knowledge by showing that an individual “had actual knowledge of

material misrepresentations, [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 the truth.” Id. at 1138 (citation omitted) (alteration in

Network Services Depot).

      The district court’s finding that Dirk, Brenda and Jeff Dantuma were not

individually liable was an abuse of discretion. They had knowledge, and, by virtue

of their individual roles, had some degree of either control or direct participation in

the misrepresentations. Indeed, by way of example, Dirk filed a sworn declaration

stating that he was “familiar with the business operations, policies and procedures of

[Ed Dantuma Enterprises] and Publishers Business Services,” and specifically attested

to PBS’s alleged efforts to “comply with the [Telemarketing Sales Rule], the FTC Act,

and debt collection laws.”

      On the other hand, the FTC did not present any evidence beyond Persis

Dantuma’s corporate titles as to her knowledge and declined even to cross-examine

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her at the hearing on damages. Under these circumstances, it was not an abuse of

discretion to hold that she was not individually liable and the district court’s order is

affirmed as to her.

      We therefore remand this case for further proceedings. On remand, the district

court is directed to recalculate the damage award, and to hold Dirk, Brenda, and Jeff

Dantuma individually liable, in addition to Edward and Dries Dantuma.

      AFFIRMED in part, VACATED in part, and REMANDED.

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