F.T.C. v. Bronson Partners, LLC

• Decision Date: 04 December 2009
• Docket Number: Civil Action No. 3:04cv1866 (SRU).
• Citation: 674 F.Supp.2d 373
• Court: U.S. District Court — District of Connecticut
• Parties: FEDERAL TRADE COMMISSION, Plaintiff, v. BRONSON PARTNERS, LLC, Martin Howard, H & H Marketing, LLC, and Sandra Howard, Defendants.

674 F.Supp.2d 373

FEDERAL TRADE COMMISSION, Plaintiff, v. BRONSON PARTNERS, LLC, Martin Howard, H & H Marketing, LLC, and Sandra Howard, Defendants.

Civil Action No. 3:04cv1866 (SRU).

United States District Court, D. Connecticut.

December 4, 2009.

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Deborah A. Marrone, Michele Stolls, Nur-Ul-Haq, Robin E. Eichen, Federal Trade Commission, New York, NY, John B. Hughes, U.S. Attorney's Office, New Haven, CT, for Plaintiff.

Andrew B. Lustigman, Scott Shaffer, Sheldon S. Lustigman, The Lustigman Firm, P.C., New York, NY, Barbara S. Miller, Brody, Wilkinson & Ober, Southport, CT, for Defendants.

RULING AND ORDER

STEFAN R. UNDERHILL, District Judge.

The Federal Trade Commission ("Commission") brought this enforcement action challenging as false advertising the claims that the defendants, Bronson Partners, LLC ("Bronson") and Martin Howard (collectively "defendants") made in their advertisements for two products: Chinese Diet Tea ("Diet Tea") and the Bio-Slim Patch ("Patch"). On July 10, 2008, I granted the Commission's motion for summary judgment with regard to liability. I held that: (1) the subject Diet Tea advertisement made claims about weight loss expressly, or by such strong implication as to constitute the functional equivalent of express claims; (2) the claims were misleading; and (3) the claims were material.¹

On June 2, 2009, I held a hearing on damages. At that hearing, I heard argument concerning four questions that are now before me: (1) what is the proper baseline amount of the defendants' unjust gains; (2) what reductions, if any, are appropriate when calculating the defendants' ultimate liability and the proper amount of equitable restitution; (3) to what extent are the relief defendants, H & H Marketing, LLC ("H & H") and Sandra Howard (collectively "relief defendants"), jointly and severally liable with the defendants; and (4) is any injunctive relief appropriate, along with the order of equitable restitution? The following represents my findings of fact and conclusions of law. See Fed.R.Civ.P. 52(a).

I. Background

I assume familiarity with the facts and procedural background of this case. For a detailed discussion of that history, including the factual and legal bases for the defendants' liability, see FTC v. Bronson Partners, LLC, 564 F.Supp.2d 119 (D.Conn.2008).

II. Restitution Under the FTC Act

Section 13(b) of the Federal Trade Commission Act states 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). Many circuits have held that the Commission may also seek ancillary equitable relief under Section 13(b), even though it is not expressly provided for under the Act. See FTC v. Amy Travel Service, Inc., 875 F.2d 564, 571 (7th Cir.1989) ("the granting of permanent injunctive power `also gave the district court the authority to grant ancillary relief necessary to accomplish complete justice ....'" quoting FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020 (7th Cir.1988)); FTC v. Pantron I Corp., 33 F.3d 1088, 1102 (9th Cir.1994), cert. denied, 514 U.S. 1083, 115 S.Ct. 1794, 131 L.Ed.2d 722 (1995); FTC v. Gem Merch. Corp., 87 F.3d 466, 468-69 (11th Cir.1996); FTC v. Freecom Communications, Inc., 401 F.3d 1192 (10th Cir.2005) ("Although [Section] 13(b) does not expressly authorize a court to grant consumer redress (i.e., refund, restitution, rescission, or other equitable monetary relief), [Section] 13(b)'s grant of authority to provide injunctive relief carries with it the full range of equitable remedies, including the power to grant consumer redress."). In FTC v. Verity Int'l, Ltd., 443 F.3d 48 (2d Cir.2006), cert. denied, 549 U.S. 1278, 127 S.Ct. 1868, 167 L.Ed.2d 317 (2007) ("Verity"), the Second Circuit assumed without deciding that restitution is available as ancillary equitable relief under Section 13(b) of the FTC Act and held that the availability of ancillary equitable relief under Section 13(b) derives from the district court's equitable jurisdiction. In light of Verity and the decisions of other circuits, I conclude that equitable restitution is an available remedy under Section 13(b) of the FTC Act.

Defendants and the Commission disagree about the proper amount of restitution as well as the conceptual framework for calculating restitution. The Commission argues that, in fashioning an award for consumer restitution, I should impose a remedy that would make consumers whole—that is, restitution should be set at the full amount that consumers paid for products that were falsely advertised. The defendants argue that the proper equitable restitution remedy consists of the amount of undeserved profit that they garnered, and should not include money spent on certain operating expenses, including the cost of the tea, federal income taxes, postage fees, credit card processing fees, advertising costs, and fulfillment fees. Anything more than the amount the defendants unjustly profited through their advertising, they argue, is impermissibly punitive in nature

As a general matter, equitable restitution is the appropriate remedy when funds identified as belonging in good conscience to the consumer are traceable to funds in the defendants' possession. See Verity, 443 F.3d at 67; see also Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204, 212, 122 S.Ct. 708, 151 L.Ed.2d 635 (2002). In Verity, the Court indicated that, although "in many cases in which the Commission seeks restitution, the defendant's gain will be equal to the consumer's loss because the consumer buys goods or services directly from the defendant ..." restitution is measured by the defendants' unjust gain, rather than the plaintiff's loss. Verity, 443 F.3d. at 68 (quoting Pereira v. Farace, 413 F.3d 330, 340 (2d Cir.2005)). In Pereira, the Court, applying the principles articulated in Great-West, held that restitution must not impose personal liability that is punitive in nature, but should restore to the plaintiff funds in the defendant's possession rightly belonging to the plaintiff.

The Commission, relying on FTC v. National Urological Group, Inc., 645 F.Supp.2d 1167, 1213 (N.D.Ga.2008), argues that restitution is measured "by the amount of loss suffered by the victim." That formulation is not binding on this court and directly conflicts with the holdings of Great-West and Verity. The Second Circuit clearly set forth that restitution is measured by the amount of the defendant's unjust gain. Verity, 443 F.3d at 67. The core principle of restitution is to "prevent the defendant's unjust enrichment by recapturing the gains the defendant secured in the transaction." 1 D. Dobbs, Law of Remedies § 4.1(1) at 552. The consumer's property, received by the defendant, is an appropriate measure of restitution; therefore, I must calculate a restitution award measured by the defendants' unjust gains. Id. at 556.

In their brief, defendants argue that a restitution award measured by the amount they received from consumers has the net effect of a punitive damages award because defendants are no longer in the beneficial possession of those funds. In support of their position, defendants point to the court's remand in Verity to argue that "the proper procedure in remedies for restitution/unjust enrichment is for the Commission to seek profits but not proceeds, and for a defendant to disgorge, a net amount rather than a gross amount." (Def. Tr. Br. 5.) They argue that the Verity Court's distinction between "unjust gains" and "overall gains" is a distinction between profits and proceeds, and that it supports an award based on principles of disgorgement, not restitution. Verity, 443 F.3d at 70, (Def. Tr. Br. 6.) Defendants misapply the holding of Verity and overlook the Second Circuit's conclusion that in the context of an FTC action, it does not matter whether a remedy is characterized as "consumer redress" or "disgorgement," each remedy is restitutionary in nature and does not alter the core principle that restitution is measured by a defendant's unjust gain. See Verity, 443 F.3d at 67. The Verity Court uses the term "gains" to mean receipts, not profits. Id. at 68.

In Verity, the Court distinguished between two scenarios, one where the defendant was a direct seller and received funds directly from consumers and then paid various third-parties, and one where consumer funds went through various third-parties, who were paid before funds reached the defendant. The difference between the two scenarios is whether consumer funds flowed directly to the defendant, or whether a third-party middleman took its payment before the funds reached the defendant. In transactions where the defendant sells directly to the consumer without the use of a middleman receiving any part of the payment, the defendant's unjust gains are equivalent to the consumer's loss. See Verity, 443 F.3d at 67-68; see also FTC v. Medical Billers Network, Inc., 543 F.Supp.2d 283, 324 (S.D.N.Y. 2008) ("Medical Billers"). If the funds flow directly to the defendant, the defendant is in receipt of the whole amount and thus liable in restitution for the whole amount, i.e., its gain, but if the funds flow through an intermediary who passes only a portion of the funds on to the defendant, the defendant has not unjustly received the whole amount. Verity, 443 F.3d at 67-68. Here, where there is no middleman, the proper measure of restitution is the full amount of consumer funds paid to the defendants.

With respect to defendants' reliance on the distinction between unjust gains and overall gains or consumer losses, however, the defendants misunderstand the Verity Court's holding and its purpose in remanding that case. Verity involved the practice of billing telephone customers for internet access to pornographers' web sites, regardless whether that access was undertaken or approved by the telephone...