762 F.3d 238 (2nd Cir. 2014), 11-374-cv, Federal Trade Commission v. BlueHippo Funding, LLC

• Docket Nº: 11-374-cv
• Citation: 762 F.3d 238
• Opinion Judge: Hall, Circuit Judge
• Party Name: FEDERAL TRADE COMMISSION, Plaintiff-Appellant, v. BLUEHIPPO FUNDING, LLC, BLUEHIPPO CAPITAL, LLC, AND JOSEPH K. RENSIN, Defendants-Appellees. [1]
• Attorney: DAVID C. SHONKA, SR., Deputy Chief Counsel (Michael D. Bergman, James A. Kohm, Robert S. Kaye, Amanda C. Basta, on the brief) for Lawrence DeMille-Wagman, Assistant General Counsel for Litigation, John F. Daly, Deputy General Counsel for Litigation, and Willard K. Tom, General Counsel, United Sta...
• Judge Panel: Before: LEVAL, SACK, and HALL, Circuit Judges.
• Case Date: August 12, 2014
• Court: United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 238

762 F.3d 238 (2nd Cir. 2014)

FEDERAL TRADE COMMISSION, Plaintiff-Appellant,

v.

BLUEHIPPO FUNDING, LLC, BLUEHIPPO CAPITAL, LLC, AND JOSEPH K. RENSIN, Defendants-Appellees. ¹

No. 11-374-cv

United States Court of Appeals, Second Circuit

August 12, 2014

Argued February 23, 2012,

As Amended August 13, 2014.

Page 239

The Federal Trade Commission (" FTC" ) appeals the damages portion of an order of the district court (Crotty , J.) granting, in part, the FTC's motion for contempt relating to defendants' violation of the Stipulated Final Judgment and Order of Permanent Injunction which enjoined the defendants from making any express or implied representations of material fact with respect to, inter alia, their store credit and refund policy. Arguing that it was entitled to a presumption that consumers relied, when deciding to purchase defendants' products, on defendants' omissions and misrepresentations, the FTC sought $14,062,627.51 in contempt damages, an amount equal to the defendants' gross receipts, i.e., the gross sales generated through its contumacious conduct. The district court's order is silent with regard to the presumption of reliance and plainly rejects the FTC's damages calculation. We agree with the FTC and join our sister circuits in adopting a presumption of consumer reliance in FTC civil contempt actions. Accordingly, we vacate the district court's order and remand for the district court to consider, in the first instance, whether the FTC has demonstrated that it is entitled to a presumption of consumer reliance. If so, the court should use defendants' gross receipts as a baseline for calculating the consumers' actual loss, and defendants should then be afforded an opportunity to proffer evidence showing that an offset of the baseline is warranted. Therefore, we VACATE the district court's judgment and REMAND for further proceedings consistent with this opinion.

DAVID C. SHONKA, SR., Deputy Chief Counsel (Michael D. Bergman, James A. Kohm, Robert S. Kaye, Amanda C. Basta, on the brief) for Lawrence DeMille-Wagman, Assistant General Counsel for Litigation, John F. Daly, Deputy General Counsel for Litigation, and Willard K. Tom, General Counsel, United States Federal Trade Commission, Washington, DC for Plaintiff-Appellant.

MARTIN S. HIMELES, JR. (John J. Connolly, on the brief) Zuckerman Spaeder LLP, Baltimore, MD for Defendants-Appellees.

Before: LEVAL, SACK, and HALL, Circuit Judges.

OPINION

Page 240

Hall, Circuit Judge

The Federal Trade Commission (" FTC" ) appeals the damages portion of a July 27, 2010 order of the District Court for the Southern District of New York (Paul A. Crotty, Judge ) granting, in part, the FTC's motion for contempt relating to defendants-appellees' (BlueHippo Funding, LLC, BlueHippo Capital, LLC (collectively " BlueHippo" ), and Joseph K. Rensin, the CEO of the BlueHippo entities) violation of a Stipulated Final Judgment and Order of Permanent Injunction (the " Consent Order" ). The FTC and BlueHippo had previously entered into the Consent Order to resolve an action initiated by the FTC against BlueHippo for violating section 5(a) of the Federal Trade Commission Act, codified at 15 U.S.C. § 45(a) (" FTC Act" ). The Consent Order enjoined the defendants from making any express or implied misrepresentations of material fact with respect to, inter alia, their store credit and refund policy.

In its contempt motion the FTC sought damages for BlueHippo's alleged violation of the Consent Order by failing to disclose, at the time of purchase, material details concerning BlueHippo's store credit policy. The FTC argued that it was entitled to a presumption that consumers relied, when deciding to purchase defendants' products, on defendants' omissions and misrepresentations. Accordingly, it sought $14,062,627.51 in contempt damages, an amount equal to the defendants' gross receipts, i.e., the gross sales generated through its contumacious conduct. The district court granted the FTC's motion for contempt, but awarded damages only with regard to consumers who complied with BlueHippo's payment requirements and thus qualified for but never received the promised computer. The court's order is silent with regard to the presumption of reliance and plainly rejects the FTC's damages calculation. The FTC filed a motion seeking an amendment or modification to the July 27 order to reflect the damages associated with all customer orders placed during the period of BlueHippo misrepresented or omitted information concerning its store credit and refund policy. The district court denied the motion and the FTC appealed.

BACKGROUND

A. The FTC's Preceding Direct Action

BlueHippo marketed computers and electronic products to consumers, regardless of their credit history. Prospective customers wishing to order a computer through BlueHippo would call a toll-free number, listen to a sales pitch, place their order, and provide relevant financial details. The premise of BlueHippo's sales pitch was if a customer made thirteen consecutive installment payments and

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signed an installment contract, BlueHippo would then ship a computer and allow the consumer to finance the remaining balance owed. If the customer skipped a payment, he or she would not qualify for financing but could continue to pay off the computer on a layaway program or convert the previous payments to store credit for the purchase of other merchandise from BlueHippo's online store.

With respect to the store credit and refund policy (the conduct relevant to this appeal), at the time of purchase BlueHippo informed consumers that they were entitled to cash refunds within the initial seven-day period after placing an order, and after that customers could cancel their orders and obtain a store credit for BlueHippo's online store. However, when consumers agreed to purchase a computer and entered into an installment contract, BlueHippo failed to disclose that store credits could not be applied to shipping and handling fees or tax charges, or that only one online store order could be placed at a time. BlueHippo would not inform a consumer about these restrictions until the consumer attempted to make a purchase with store credit.

In February 2008, the FTC filed a complaint in the Southern District of New York against BlueHippo Funding LLC and BlueHippo Capital. The complaint alleged that BlueHippo, in its advertising, sales pitches, and representations to consumers, had engaged in persistent practices of deception since 2003 in violation of Section 5(a)(1) of the FTC Act, 15 U.S.C. § 45(a)(1).² Pursuant to 15 U.S.C. § 53(b), the FTC sought permanent injunctive relief and disgorgement of the proceeds BlueHippo had obtained through these allegedly deceptive practices. In April 2008, the parties resolved the suit through entry of the Consent Order.

B. The FTC's Contempt Action & the District Court's Contempt Ruling

Based on compliance materials provided by BlueHippo, the FTC moved in late 2009 for an order to show cause why both BlueHippo and its CEO, Joseph Rensin, should not be held in civil contempt for violation of the Consent Order.³ Based on its assertion that BlueHippo had violated the Consent Order, the FTC sought $14,062,627.51 in damages on behalf of 55,892 customers.⁴

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On July 27, 2010, the district court issued a written ruling holding BlueHippo in contempt and finding that Rensin was jointly and severally liable for any damages. The district court found that BlueHippo had violated the Consent Order through (1) failing to provide computers for 1348 orders within the promised three week time frame; (2) failing to provide either a computer or store credit merchandise for 677 orders; (3) failing to disclose details of the store credit policy to consumers; and (4) conditioning the extension of credit on mandatory preauthorized transfers. It calculated damages in the amount of $609,856.38, basing this figure on the consumers who had qualified for BlueHippo's financing plan but had thereafter received neither a computer nor store credit. Order Granting Plaintiff's Motion for Contempt at 10, FTC v. BlueHippo, No. 08cv-1819 (PAC), (S.D.N.Y. July 27, 2010), ECF No. 76. As for BlueHippo's remaining violations, the district court concluded that the FTC " conceded [] it has failed to provide record evidence approximating damages to consumers."

The FTC accepted the court's finding of liability but moved for reconsideration on the issue of damages with respect to the misrepresentations BlueHippo made regarding its store credit policy.⁵ The district court denied that motion, and the FTC initiated this appeal.

Discussion

On appeal, the FTC asserts that the district court committed an error of law when it: (1) failed to take into account the express language of the Consent Order which establishes the time of injury as the moment the consumers sign up to buy a computer without having received all the material terms of the agreement; (2) failed to apply the presumption of consumer reliance and harm in an FTC civil contempt action; and (3) erroneously concluded that the FTC conceded that it had failed to prove damages associated with misrepresentations and omissions concerning the store credit and refund policy. We agree with the FTC and join our sister circuits in holding today that the FTC is entitled, when the proper showing has been made, to a presumption of consumer reliance. Because the district court's opinion and order does not reflect the application of this principle, we vacate the district court's July 27, 2010 order as to damages, and remand for the district court to consider, in the first instance, whether the requirements for this presumption have been met. Additionally, we agree with the FTC that the appropriate baseline for assessing contempt damages, i.e., the actual loss to consumers as a result of the defendants' contumacious conduct, is the...