Federal Trade Commission v. Publishers Business Services, Inc.

          ORDER (1) GRANTING FEDERAL TRADE COMMISSION'S MOTION FOR JUDGMENT AND (2)DENYING AS MOOT THE PARTIES' MOTIONS TO EXCLUDE EXPERTS (ECF Nos. 297, 312, 315)

          ANDREW P. GORDON UNITED STATES DISTRICT JUDGE.

         The Federal Trade Commission (FTC) filed this enforcement action seeking injunctive and other equitable relief based on the defendants' unfair and deceptive practices when selling magazine subscriptions, in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a), and the FTC's Telemarketing Sales Rule, 16 C.F.R. Part 310. Judge Philip Pro entered summary judgment in favor of the FTC on liability and issued a permanent injunction. ECF Nos. 151, 152. He also awarded $191, 219.00 in equitable relief against some of the defendants. ECF No. 248. The FTC appealed the monetary award and the Ninth Circuit reversed and remanded for a recalculation of monetary equitable relief. ECF No. 266. Following Judge Pro's retirement, the case was assigned to me. ECF No. 273.

         The parties have briefed their respective positions on the proper amount of monetary equitable relief. They also move to exclude each other's experts. I award monetary equitable relief in favor of the FTC and against defendants Publishers Business Services, Inc.; Ed Dantuma Enterprises, Inc.; Edward Dantuma; Brenda Dantuma Schang; Dries Dantuma; Dirk Dantuma; and Jeffrey Dantuma in the amount of $23, 773, 147.78.

         I. BACKGROUND

         The facts are laid out extensively in the summary judgment order. ECF No. 151. In brief, the defendants operated a magazine subscription service. The defendants would telephonically contact individuals at their place of business and tell them that they would get a “surprise” if they participated in a survey. The surprise was that the defendants were selling the consumer magazine subscriptions. The full details of the transaction were spread out over three stages: the initial call with the sales representative, who then transferred the consumer to a shift supervisor, and a later verification call. The transaction was presented in a confusing and misleading manner by fast-talking sales representatives, resulting in a net impression that the consumer was receiving free magazines while having to pay only a nominal shipping and handling fee. In fact, the consumer was agreeing to pay hundreds of dollars in magazine subscription fees. At summary judgment, these practices were found as a matter of law to create a net impression likely to mislead the consumer in a material way.

         In addition to the deceptive initial sales practices, the defendants also engaged in misleading and abusive collections practices when consumers refused to pay. The defendants would falsely tell consumers their accounts could not be canceled because the defendants had already paid the publishers for the full subscription when in fact the defendants had not done so. They also sent misleading collection letters from their “legal department” even though they had no legal department. Finally, the defendants made harassing and threatening phone calls.

         Judge Pro entered summary judgment in favor of the FTC on liability and issued a permanent injunction. ECF Nos. 151, 152. The parties then presented evidence regarding monetary equitable relief during a multi-day evidentiary hearing. ECF Nos. 239-41, 252-53, 255. Judge Pro ruled that the FTC had not shown that complete disgorgement of profits was necessary to redress consumer injury. ECF No. 248 at 3. He considered full reimbursement to complaining customers but concluded it would be impossible or impracticable to locate and reimburse those customers. Id. at 3-4. He thus concluded disgorgement of net revenues the defendants received as a result of their violations was the proper remedy, and he adopted the analysis of the defendants' expert, Dr. Gregory Duncan, to impose monetary equitable relief in the amount of $191, 219.00. Id. at 4. Finally, Judge Pro ruled that there was insufficient evidence to hold defendants Persis Dantuma, Brenda Dantuma Schang, Dirk Dantuma, and Jeffrey Dantuma individually liable. Id. He therefore entered judgment in the amount of $191, 219.00 against defendants Publishers Business Services, Inc.; Ed Dantuma Enterprises, Inc.; Edward Dantuma; and Dries Dantuma. Id. at 4-5.

         The FTC appealed the monetary award and the Ninth Circuit reversed and remanded. ECF No. 266. As to individual liability, the Ninth Circuit directed that individual liability be imposed on Dirk, Brenda, and Jeff, as well as Edward and Dries. Id. at 8. As to the amount of monetary relief, the Ninth Circuit ruled that Judge Pro “applied an incorrect legal standard when [he] focused on the defendants' gain rather than the loss to the consumers.” Id. at 3. Judge Pro also erred by relying on the fact that it may be impossible to locate and reimburse individual customers. Id. at 4.

         The Ninth Circuit found further error in the reliance on the defendants' expert, Dr. Duncan, because his report was based on two flawed assumptions. Id. at 5. First, Duncan assumed most customers heard all the terms of the magazine subscriptions so they were not misled. Id. But the defendants' “fraud . . . was not simply the failure to disclose all pertinent terms.” Id. Rather, they violated Section 5 “by the misrepresentations that launched the process, among other reasons.” Id. Second, Duncan assumed the magazine subscriptions were not valueless. Id. But the Ninth Circuit stated this “assumption is not relevant even if true” because restitution may be appropriate where the consumer injury “arises out of misrepresentations made in the sales process, which lead to a tainted purchasing decision.” Id. at 5-6 (quotation omitted). Thus, consumers are entitled to a full refund where, as here, the “fraud is in the selling, not in the value of the thing sold . . . .” Id. (quotation omitted).

         The Ninth Circuit vacated the award and remanded for recalculation. Id. at 6. In doing so, the Ninth Circuit stated that the court “should base its calculation on the injury to the consumers, not on the net revenues received by defendants.” Id. But “[t]hat 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.

Id.

         Following remand, the parties attempted to settle, and when that failed they engaged in another round of expert discovery and briefing on the issue of monetary equitable relief. In relation to that briefing, the FTC moves to exclude the defendants' expert, Dr. Armando Levy. The defendants move to exclude the FTC's psychological expert, Dr. Alan D. Castel. The parties also filed competing analyses of how the monetary equitable relief ought to be calculated.

         II. ANALYSIS

         The FTC contends I should enter judgment in the amount of $23, 773, 147.78 based on the presumption that all first-time orders were made in reliance on the deceptive practices. The FTC argues it is entitled to the presumption that every first-time customer relied on the deceptive sales practices because the summary judgment order established the defendants' deceptive practices were material and widely disseminated. The FTC excluded from its calculation payments by customers who renewed or added on to their subscriptions, consistent with the Ninth Circuit's remand order. However, the FTC did not exclude those same customers' initial subscriptions because it takes the position that all first-time orders were tainted by the misleading practices, even for those customers who later renewed or added on.

         The defendants argue this court is not authorized to award monetary relief. The defendants also assert the FTC is not entitled to a presumption of consumer reliance because the FTC has not shown the defendants' revenues were the result of widespread deception. Rather, the defendants contend, they had many satisfied customers. Alternatively, the defendants argue their expert has provided three ...