Court Opinion

ID: 2654466
Source: CourtListenerOpinion
Date Created: 2014-02-26 01:01:05.487649+00
Date Added: 2024-06-11T12:36:13.110657
License: Public Domain

PUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                               No. 12-2340

FEDERAL TRADE COMMISSION,

                 Plaintiff - Appellee,

           v.

KRISTY ROSS, individually       and   as    officer   of   Innovative
Marketing, Inc.,

                 Defendant – Appellant,

           and

INNOVATIVE MARKETING, INC., d/b/a Winsolutions FZ-LLC, d/b/a
Billingnow,   d/b/a   Winpayment   Consultancy   SPC,   d/b/a
BillPlanet PTE Ltd., d/b/a Revenue Response Sunwell, d/b/a
Globedat, d/b/a Winsecure Solutions, d/b/a Synergy Software
BV, d/b/a Innovative Marketing Ukraine; BYTEHOSTING INTERNET
SERVICES,    LLC;   JAMES    RENO,   d/b/a    Setupahost.net,
individually, and as an officer of ByteHosting Internet
Services, LLC; SAM JAIN, individually and as an officer of
Innovative Marketing, Inc.; DANIEL SUNDIN, d/b/a Vantage
Software, d/b/a Winsoftware, Ltd., individually and as an
officer of Innovative Marketing, Inc.; MARC D'SOUZA, d/b/a
Web Integrated Net Solutions, individually and as an officer
of Innovative Marketing, Inc.; MAURICE D'SOUZA,

                 Defendants.

Appeal from the United States District Court for the District of
Maryland, at Baltimore.    Richard D. Bennett, District Judge.
(1:08-cv-03233-RDB)

Argued:   October 31, 2013                 Decided:   February 25, 2014
Before DAVIS and FLOYD, Circuit Judges, and HAMILTON, Senior
Circuit Judge.

Affirmed by published opinion.    Judge Davis wrote the opinion,
in which Judge Floyd and Senior Judge Hamilton joined.

ARGUED: Robert P. Greenspoon, FLACHSBART & GREENSPOON, LLC,
Chicago, Illinois, for Appellant.      Theodore Metzler, FEDERAL
TRADE COMMISSION, Washington, D.C., for Appellee.      ON BRIEF:
William W. Flachsbart, FLACHSBART & GREENSPOON, LLC, Chicago,
Illinois, for Appellant.      David C. Shonka, Acting General
Counsel, John F. Daly, Deputy General Counsel, FEDERAL TRADE
COMMISSION, Washington, D.C., for Appellee.

                               2
DAVIS, Circuit Judge:

       The    Federal     Trade       Commission       sued   Kristy     Ross      in    U.S.

District     Court      for     the   District    of    Maryland       for   engaging      in

deceptive internet advertising practices. After a bench trial,

the    district         court     entered     judgment        enjoining       Ross       from

participating in the deceptive practices and holding her jointly

and severally liable for equitable monetary consumer redress in

the amount of $163,167,539.95. F.T.C. v. Ross, 897 F. Supp. 2d

369,   388-89      (D.    Md.     2012).     On   appeal,       Ross    challenges        the

district      court’s     judgment      on   several      bases:       (1)   the   court’s

authority to award consumer redress; (2) the legal standard the

court applied in finding individual liability under the Federal

Trade Commission Act; (3) the court’s prejudicial evidentiary

rulings; and finally, (4) the soundness of the district court’s

factual findings. For the reasons set forth within, we affirm.

                                             I

       The Commission sued Innovative Marketing, Inc. (“IMI”), and

several      of   its    high-level      executives       and    founders,      including

Ross, for running a deceptive internet “scareware” scheme in

violation of the prohibition on deceptive advertising in Section

5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a). The

core of the Commission’s case was that the defendants operated

“a massive, Internet-based scheme that trick[ed] consumers into

purchasing        computer        security        software,”       referred         to     as

                                             3
“scareware.” J.A. 29. The advertisements would advise consumers

that    a    scan      of    their      computers         had    been     performed       that    had

detected a variety of dangerous files, like viruses, spyware,

and    “illegal”         pornography;             in     reality,       no   scans      were     ever

conducted. J.A. 29.

       Ross, a Vice President at IMI, hired counsel and defended

against the suit; the remaining defendants either settled or had

default judgment entered against them.

       The district court entered summary judgment in favor of the

Commission         on       the    issue          of     whether     the      advertising        was

deceptive, but it set for trial the issue of whether Ross could

be held individually liable under the Federal Trade Commission

Act, i.e., whether Ross “was a ‘control person’ at the company,

and to what extent she had authority for, and knowledge of the

deceptive acts committed by the company.” J.A. 925.

       After a bench trial, the district court found in favor of

the Commission. Specifically, it found that Ross’

       broad responsibilities at IMI coupled with the fact
       that she personally financed corporate expenses,
       oversaw a large amount of employees and had a hand in
       the creation and dissemination of the deceptive ads
       prove[d] by a preponderance of the evidence that she
       had authority to control and directly participated in
       the deceptive acts within the meaning of Section 5 of
       the [Federal Trade Commission] Act.

Ross,       897   F.     Supp.     2d        at   384.     The     district       court    further

concluded         that      Ross       had    actual       knowledge         of   the    deceptive

marketing         scheme,         or     was       “at     the     very      least      recklessly
                                                     4
indifferent     or    intentionally     avoided      the   truth”    about   the

scheme. Id. at 386. It entered judgment against Ross in the

amount of $163,167,539.95, and it enjoined her from engaging in

similar deceptive marketing practices. Id. at 389. Ross timely

appealed.

                                       II

     The Federal Trade Commission Act authorizes the Commission

to sue in federal district court so that “in proper cases the

Commission    may     seek,   and   after   proper    proof,   the   court   may

issue, a permanent injunction.” 15 U.S.C. § 53(b). Ross contends

that the district court did not have the authority to award

consumer redress – a money judgment - under this provision of

the statute.

     Ross     first     takes   the    position,      correctly,     that    the

statute’s     text    does    not   expressly     authorize    the   award   of

consumer redress, but precedent dictates otherwise: the Supreme

Court has long held that Congress’ invocation of the federal

district court’s equitable jurisdiction brings with it the full

“power to decide all relevant matters in dispute and to award

complete relief even though the decree includes that which might

be conferred by a court of law.” Porter v. Warner Holding Co.,

328 U.S. 395, 399 (1946). Once invoked by Congress in one of its

duly enacted statutes, the district court’s inherent equitable

powers cannot be “denied or limited in the absence of a clear

                                       5
and valid legislative command.” Id. Porter and its progeny thus

articulate an interpretive principle that inserts a presumption

into what would otherwise be the standard exercise of statutory

construction:        we      presume        that      Congress,        in        statutorily

authorizing     the    exercise     of       the    district     court’s          injunctive

power,     “acted   cognizant      of       the    historic    power        of    equity   to

provide     complete      relief       in     light     of    statutory          purposes.”

Mitchell v. Robert DeMario Jewelry, Inc., 361 U.S. 288, 291–92

(1960).

      Applying this principle to the present case illuminates the

legislative branch’s real intent. That is, by authorizing the

district court to issue a permanent injunction in the Federal

Trade Commission Act, 15 U.S.C. § 53(b)(2), Congress presumably

authorized the district court to exercise the full measure of

its      equitable        jurisdiction.            Accordingly,             absent        some

countervailing indication sufficient to rebut the presumption,

the   court   had     sufficient       statutory       power    to     award       “complete

relief,” including monetary consumer redress, which is a form of

equitable relief. Porter, 328 U.S. at 399.

      Ross insists that the text of the Federal Trade Commission

Act   is   unlike     that    of   the      statutes    at     issue    in       Porter    and

Mitchell, and therefore argues that the interpretive principle

of those cases is inapplicable in her case. In Porter, a case

involving the Emergency Price Control Act of 1942, the statute

                                             6
authorized district courts to grant “a permanent or temporary

injunction, restraining order, or other order.” 328 U.S. at 397

(internal quotations and citation omitted). Ross contends that

the “other order” language, absent from the instant provision of

the Federal Trade Commission Act, cabins Porter’s applicability.

See also United States v. Phillip Morris USA, Inc., 396 F.3d

1190, 1198 (D.C. Cir. 2005). In other words, her argument is

that Porter was a “magic words” case – if Congress uses the

magic words “other order,” then Congress has invoked the full

injunctive powers of the district court.

       Ross’ magic words argument fails because it ignores how the

Supreme   Court       subsequently   untethered        its    reasoning     from    the

“other order” language of the Emergency Price Control Act and

significantly     expanded     Porter’s       holding.       The   language    of   the

statute at issue in Mitchell, the Fair Labor Standards Act, was

different from the language of the statute in Porter, providing

only   that     the    district   court       had   jurisdiction      to    “restrain

violations of Section 15.” Mitchell, 361 U.S. at 289 (internal

quotation and citation omitted). Notwithstanding the silence of

the Fair Labor Standards Act as to the district court’s express

power to award reimbursement of lost wages and the absence of

the    “other    order”    language,      the       Court    held    that     ordering

reimbursement was nevertheless permissible under the holding of

Porter. 361 U.S. at 296. In comparing the language of the Fair

                                          7
Labor Standards Act with the Emergency Price Control Act, the

Mitchell Court reasoned that the “other order” provision was

merely an “affirmative confirmation” — icing on the cake — over

and above the district court’s inherent equitable powers. See

id. at 291.

     The      point      is    that      Mitchell      broadened        Porter’s

applicability,     rendering     the        textual   statutory    differences

irrelevant    to   the   ultimate     conclusion:     because     there   is   no

affirmative and clear legislative restriction on the equitable

powers of the district court, ordering monetary consumer redress

is an appropriate “equitable adjunct” to the district court’s

injunctive power. Porter, 328 U.S. at 399.

     Ross makes a series of arguments about how the structure,

history, and purpose of the Federal Trade Commission Act weigh

against the conclusion that district courts have the authority

to   award    consumer    redress;     her    arguments   are     not   entirely

unpersuasive, but they have ultimately been rejected by every

other federal appellate court that has considered this issue.

F.T.C. v. Bronson Partners LLC, 654 F.3d 359, 365-67 (2d Cir.

2011); F.T.C. v. Amy Travel Service, Inc., 875 F.2d 564, 571

(7th Cir. 1989); F.T.C. v. Security Rare Coin & Buillion Corp.,

931 F.2d 1312, 1314-15 (8th Cir. 1991); F.T.C. v. Pantron I

Corp., 33 F.3d 1088, 1101-02 (9th Cir. 1994); F.T.C. v. Gem

Merchandising Corp., 87 F.3d 466, 468-70 (11th Cir. 1996). We

                                        8
adopt the reasoning of those courts and reject Ross’ attempt to

obliterate       a    significant       part       of    the    Commission’s         remedial

arsenal. A ruling in favor of Ross would forsake almost thirty

years of federal appellate decisions and create a circuit split,

a result that we will not countenance in the face of powerful

Supreme Court authority pointing in the other direction.

                                            III

        The Federal Trade Commission Act makes it unlawful for any

person, partnership, or corporation “to disseminate, or cause to

be disseminated, any false advertisement” in commerce, 15 U.S.C.

§   52(a),     and    it    authorizes      the     Commission         to    bring    suit   in

federal       district      court    when   it      finds      that    any    such    person,

partnership,         or    corporation      “is     engaged      in,    or    is     about   to

engage in, the dissemination or the causing of the dissemination

of any” false advertisement, 15 U.S.C. § 53(a)(1).

      The      district         court    ruled          that    one     could        be   held

individually liable under the Federal Trade Commission Act if

the   Commission           proves    that   the      individual         (1)    participated

directly in the deceptive practices or had authority to control

them,    and    (2)       had   knowledge   of      the    deceptive        conduct,      which

could    be    satisfied        by   showing       evidence     of     actual      knowledge,

reckless indifference to the truth, or an awareness of a high

probability of fraud combined with intentionally avoiding the

truth (i.e., willful blindness). Ross, 897 F. Supp. 2d at 381.

                                               9
     Ross contends that the district court’s standard was wrong

and asks us to reject it. She proposes that we import a standard

from our securities fraud jurisprudence that requires proof of

an individual’s (1) “authority to control the specific practices

alleged to be deceptive,” coupled with a (2) “failure to act

within such control authority while aware of apparent fraud.”

App. Br. 35 (citing Dellastatious v. Williams, 242 F.3d 191, 194

(4th Cir. 2001)). Any other standard, argues Ross, would permit

a finding of individual liability based on “indicia having more

to do with enthusiasm for and skill at one’s job [rather] than

authority    over     specific       ad    campaigns,    and       allow    fault   to   be

shown without any actual awareness of” a co-worker’s misdeeds.

App. Br. 36. Ross maintains that she would not have been held

individually liable under her proposed standard.

     Ross’    proposed        standard       would    permit       the     Commission    to

pursue    individuals        only     when    they    had     actual       awareness      of

specific    deceptive        practices       and   failed     to    act     to   stop    the

deception,      i.e.,        a       specific      intent/subjective             knowledge

requirement; her proposal would effectively leave the Commission

with the “futile gesture” of obtaining “an order directed to the

lifeless     entity     of       a   corporation      while    exempting         from    its

operation the living individuals who were responsible for the

illegal     practices”       in      the   first     place.    Pati-Port,        Inc.    v.

F.T.C., 313 F.2d 103, 105 (4th Cir. 1963).

                                             10
       We hold that one may be found individually liable under the

Federal Trade Commission Act if she (1) participated directly in

the    deceptive          practices         or    had        authority       to    control     those

practices,         and    (2)     had    or      should       have    had    knowledge       of   the

deceptive practices. The second prong of the analysis may be

established by showing that the individual had actual knowledge

of    the    deceptive          conduct,      was       recklessly         indifferent       to   its

deceptiveness,            or    had    an   awareness          of    a    high     probability    of

deceptiveness and intentionally avoided learning the truth.

       Our     ruling          maintains      uniformity            across    the    country      and

avoids a       split       in    the    federal         appellate         courts.     Every    other

federal appellate court to resolve the issue has adopted the

test    we    embrace          today.    F.T.C.         v.    Direct       Marketing      Concepts,

Inc., 624 F.3d 1, 12 (1st Cir. 2010); Amy Travel Service, 875

F.2d at 573-74; F.T.C. v. Publishing Clearing House, Inc., 104

F.3d        1168,        1170     (9th        Cir.       1997);           F.T.C.     v.    Freecom

Communications, Inc., 401 F.3d 1192, 1207 (10th Cir. 2005); Gem

Merchandising Corp., 87 F.3d at 470. Ross’ proposed standard, by

contrast, invites us to ignore the law of every other sister

court       that    has    considered            the    issue,       an    invitation      that   we

decline.

                                                   IV

        Ross next mounts three evidentiary challenges. First, Ross

contends       that       the     district         court       improperly          precluded      her

                                                   11
expert,        Scott        Ellis,        from        testifying       about        how     “the

advertisements            linkable       to    Ms.     Ross’s      responsibilities         were

nondeceptive.”         App.       Br.    29.     As   the    district       court     correctly

ruled, however, Ellis’ testimony was irrelevant because it had

already     decided         the     deceptiveness            issue     in     favor    of    the

Commission at summary judgment. The only issue held over for

trial    was    whether       Ross       had   the     requisite       degree    of    control

necessary      to    hold     her       individually         liable    for    the     company’s

deceptive practices, i.e., whether she participated directly in

the company’s deceptive practices or had authority to control

those practices and had or should have had knowledge of those

practices. Because the individual liability standard does not

require    a    specific          link     from       Ross    to    particular        deceptive

advertisements and instead looks at whether she had authority to

control the corporate entity’s practices, Ellis’ testimony was

immaterial,         and    thus     irrelevant,         to    the     issue    reserved      for

trial. Fed. R. Evid. 401.

        Second, Ross challenges the admission of a 2004 to 2006

profit and loss statement that the district court relied on to

calculate the amount of consumer redress. The documents were

produced during discovery in corporate litigation involving some

of Ross’ co-defendants in Canada. Daniel Sundin and Sam Jain

sued Marc D’Souza, all of whom were co-defendants of Ross in

this case and executives at IMI. Jain submitted an affidavit

                                                 12
along with a profit and loss summary for the company for the

period of 2004 to 2006; the documents were “litigation-purpose

financial    summaries      [of    IMI’s     profits]      described    in   [Jain’s]

affidavit as a Quickbooks printout.” App. Br. 31, J.A. 1790,

1799.

       Although the district court admitted the profit and loss

statement    under       Federal   Rule      of   Evidence     807,    the   residual

exception to the rule against hearsay, F.T.C. v. Ross, 2012 WL

4018037, at *1-3 (D. Md. Sept. 11, 2012), we may affirm the

district court “on the basis of any ground supported by the

record even if it is not the basis relied upon by the district

court,” Ostrzenski v. Seigel, 177 F.3d 245, 253 (4th Cir. 1999),

and we conclude that the profit and loss summary plainly was

admissible    as    an    adoptive     admission      by     Ross.    Fed.   R.   Evid.

801(d)(2)(B). Ross expressly adopted Jain’s affidavit: she swore

in her own affidavit produced during the Canadian litigation

that she had read Jain’s affidavit and was “in agreement with

[its] contents.” J.A. 1590. She did take some exceptions, but

she did not object to the profit and loss statement attached to

Jain’s   affidavit,       nor   did    she   object     to   the     authenticity    or

reliability of the statements.

       The third of Ross’ evidentiary assignments of error also

rests on the improper admission of hearsay evidence: an e-mail

from    Sundin     to    Jettis,   a    payment     processor,        listing     Skype

                                           13
numbers and titles for a group of high-level company executives.

Ross’ telephone number is listed on the e-mail, as is her title,

“Vice     President.”            The     district          court        admitted      the      e-mail

pursuant to the hearsay exception for statements made by a co-

conspirator       in       furtherance         of    the        conspiracy.        Fed.   R.    Evid.

801(d)(2)(E). Ross argues that there was insufficient evidence

establishing         as     a    predicate          for    the        e-mail’s     admission         the

existence of the conspiracy, and that admission of the e-mail

itself    was    improper          “bootstrapping”               of    the   existence         of    the

conspiracy      to     the       document’s         admissibility.           See    Bourjaily         v.

United States, 483 U.S. 171, 176-81 (1987).

       We disagree. It is true, of course, that the proponent for

admission       of    a     co-conspirator’s              out-of-court         statement        “must

demonstrate          the        existence       of        the     conspiracy         by     evidence

extrinsic to the hearsay statements.” United States v. Stroupe,

538 F.2d 1063, 1065 (4th Cir. 1976). But that requirement was

satisfied       in    this       case.    There          was    independent        evidence         that

established the existence of the conspiracy: Ross produced an

affidavit during the corporate litigation in Canada in which she

stated that she was a Vice President and one of the founders of

IMI,     and    she       adopted        the    affidavits             of    her    co-defendants

attesting       to        the     same     facts.          The        affidavits      provided        a

sufficient basis upon which the district court could conclude,

prima facie, see United States v. Vaught, 485 F.2d 320, 323 (4th

                                                    14
Cir. 1973), the existence of a conspiracy. Moreover, the e-mail

from    Sundin       to   Jettis     was       a     quintessential       example      of     a

statement made “in furtherance” of the conspiracy because its

role    was     to   maintain       the    logistics         of   the     conspiracy        and

“identify       names     and   roles”         of      members     of     the       deceptive

advertising       endeavor.     Michael        H.     Graham,     Handbook      of    Federal

Evidence 421 (7th ed. 2013).

       In sum, we find no reversible error in the district court’s

evidentiary rulings that are challenged on appeal by Ross.

                                               V

       Ross’ last contention is that the district court clearly

erred     in    finding      that    she       had     “control”     of    the       company,

participated in any deceptive acts, and had knowledge of the

deceptive       advertisements.           In   a     bench    trial,      we    review      the

district court’s factual findings for clear error and its legal

conclusions de novo. Fed. R. Civ. P. 52; Helton v. AT&T, Inc.,

709 F.3d 343, 351 (4th Cir. 2013). “In cases in which a district

court’s        factual    findings         turn       on     assessments       of     witness

credibility or the weighing of conflicting evidence during a

bench     trial,      such    findings         are     entitled     to     even       greater

deference.” Helton, 709 F.3d at 351.

       The district court did not clearly err in finding that Ross

had “authority to control the deceptive acts within the meaning”

of the Federal Trade Commission Act. Ross, 897 F. Supp. 2d at

                                               15
383. In an affidavit in the Canadian litigation, she swore that

she was a high-level business official with duties involving,

among other things, “product optimization,” which the district

court could reasonably have inferred afforded her authority and

control over the nature and quality of the advertisements. J.A.

1589.   Moreover,   there   was   evidence   that   other   employees

requested Ross’ authority to approve certain advertisements, and

that she would check the design of the advertisements before

approving them.

    Nor did the district court clearly err in finding that Ross

“directly participated in the deceptive marketing scheme.” Ross,

897 F. Supp. 2d at 384. Ross’ statements to other employees, as

memorialized in chat logs between her and other employees were

evidence that she served in a managerial role, directing the

design of particular advertisements. J.A. 3580 (“anyway we have

to get all this advertisement stuff off these ads can you please

[make] sure it happens it needs to happen for all domains”);

J.A. 1491 (“btw we have some 30 creatives for errclean [sic] not

just 2-3 just add aggression tot hem [sic]”). Ross was a contact

person for the purchase of advertising space for IMI, and there

was evidence that Ross had the authority to discipline staff and

developers when the work did not meet her standards. J.A. 1466

(“please ensure its [sic] going to be done or im [sic] going to

fine the department and MCs for not finishing it”). Given these

                                  16
facts, the district court could have reasonably inferred that

Ross was actively and directly participating in multiple stages

of    the   deceptive      advertising     scheme        –   she   played    a    role    in

design,       directed      others    to    “add         aggression”        to     certain

advertisements, was in a position of authority, had the power to

discipline       entire        departments,        and       purchased      substantial

advertising space.

       The district court did not clearly err in finding that Ross

“had actual knowledge of the deceptive marketing scheme” and/or

that    she    was   “at    the   very     least    recklessly        indifferent        or

intentionally avoided the truth.” Ross, 897 F. Supp. 2d at 386.

There was evidence that she edited and reviewed the content of

multiple advertisements. At one point, she ordered the removal

of the word “advertisement” from a set of ads. J.A. 3580. Co-

defendant Sundin, the Chief Technology Officer of IMI and its

sole shareholder and director, attested that Ross assumed some

of his duties during his long-term illness. And although there

was some indication that Ross acted in a manner suggesting that

she    personally        did    not   perceive           (or   believe)          that    the

advertisements were deceptive, Ross was on notice of multiple

complaints about IMI’s advertisements, including that they would

cause consumers to automatically download unwanted IMI products.

       All of this evidence paints a picture that the district

court was wholly capable of accepting as a matter of fact: Ross

                                           17
made “countless decisions” that demonstrated her authority to

control IMI. F.T.C. v. Bay Area Business Council, Inc., 423 F.3d

627, 637 (7th Cir. 2005). Although a different fact-finder may

have come to a contrary conclusion from that reached by the

experienced district judge in this case, the “rigorous” clear

error standard requires more than a party’s simple disagreement

with the court’s findings. PCS Nitrogen, Inc. v. Ashley II of

Charleston, LLC, 714 F.3d 161, 174-75 (4th Cir. 2013).

                               VI

     The judgment of the district court is
                                                         AFFIRMED.

                               18