On March 3rd, the Ninth Circuit ruled that the president of Commerce Planet, Inc. could be held personally liable for violations of the Federal Trade Commission Act (FTC Act) after he ignored warnings from his in-house counsel that the company’s disclosures about the monthly fees for an online auction kit were inadequate under the FTC Act.
The FTC sued Commerce Planet and its former president, Charles Gugliuzza, as well as other individual defendants, after consumers complained that they were charged up to $60 per month for signing up for an initially “free” online auction kit. The FTC alleged that the company’s disclosures about the monthly fees were inadequate and constituted unfair and deceptive marketing under the FTC Act.
While the other defendants settled with the FTC for a total of $522,000, Gugliuzza opted for a bench trial. Applying the two part test for determining when an individual may be held personally liable for corporate violations of the FTC Act, the district court looked at whether Gugliuzza (1) had participated directly in, or had the authority to control, the unlawful acts or practices at issue; and whether he (2) had actual knowledge of the misrepresentations involved, was recklessly indifferent to the truth or falsity of the misrepresentations, or was aware of a high probability of fraud and intentionally avoided learning the truth. The district court found that both parts of the test had been satisfied, noting that Gugliuzza had acted as the company’s “de facto legal counsel” when he covered his ears to ignore warnings from his in-house counsel that the disclosures violated the FTC Act and refused to revise the disclosures despite numerous consumer complaints. The court ordered him to pay $18.2 million in restitution, which constituted approximately half of the fees paid by consumers who signed up for the auction kit.
On appeal, the Ninth Circuit agreed that Gugliuzza could be held jointly and severally liable for the company’s unjust gains, stating “[i]f an individual may be held personally liable for corporate violations of the FTC Act under [the two-part] test, nothing more need be shown to justify imposition of joint and several liability for the corporation’s restitution obligations.” The Ninth Circuit pointed out, however, that the district court had not actually found Gugliuzza jointly and severally liable – which the Court assumed was an oversight on the part of the lower court.
The Ninth Circuit affirmed in part and vacated in part, and remanded to the district court to determine whether Gugliuzza was, indeed, jointly and severally liable for the company’s unjust gains. The Ninth Circuit stated that, on remand, the district court may reinstate the $18.2 million restitution award against Gugliuzza, who earned $3 million as the company’s president, provided that the court indeed finds him jointly and severally liable. The Ninth Circuit explained that “because joint and several liability is permissible [for violations of the FTC Act], restitution awards need not be limited to the funds each defendant personally received from the wrongful conduct.”
The decision marks a significant victory in holding corporate executives responsible for their companies’ bad acts – something that the DOJ has promised to make a priority. In September of 2015, the DOJ released a memo from Deputy Attorney General Sally Quillian Yates (the Yates Memo), which announced new policies aimed at holding individuals, not just their companies responsible for corporate misdeeds.
The Gugliuzza case is an important reminder to executives that they should consult with legal counsel to ensure that their company’s business practices comply with applicable regulations. Failure to follow the advice of counsel can be costly, not just for companies, but for individuals as well, as the Ninth’s Circuit’s decision demonstrates.
The case is Federal Trade Commission v. Gugliuzza, case number 12-57064, in the U.S. Court of Appeals for the Ninth Circuit.