As we covered previously, courts are coming around to reading Section 19 of the FTC Act more narrowly than the Federal Trade Commission may hope. In the latest instance, on June 9, 2023, a magistrate judge in the Southern District of Texas issued a report and recommendation rejecting the FTC’s claim for consumer redress, even after finding there was consumer injury. The report and recommendation were adopted by the district judge on August 3.
In Federal Trade Commission v. Zaappaaz, LLC, the FTC argued at summary judgement, and the court agreed, that the defendants violated the Merchandise Rule by falsely advertising shipping speeds of personal protective equipment and refusing to offer refunds. For these rule violations, the FTC further argued that the appropriate measure of consumer redress under Section 19 was net revenue of the PPE sales—$37,549,472.14. In denying the FTC’s request for net revenue, the court distinguished between requiring the agency to demonstrate individual reliance as a means of proving consumer injury and the amount of compensation necessary to redress that consumer injury.
As to the former, the court determined that because the misleading claims were “widely disseminated,” the FTC is entitled to a presumption of actual reliance. That presumption establishes consumer injury, and thus the question becomes the scope and amount of that consumer injury.
Relying on the Noland decision we previously wrote about, the court determined that, to award the entire net revenue, the text of Section 19 requires the FTC to show that “a full refund to every customer who received a late shipment is necessary to redress the injury.” In short, though the FTC need not prove each and every consumer who was injured after it obtained the presumption of reliance, it does need to prove a reasonable approximation of the consumer injury.
Specifically, the court pointed to several reasons why it came to this conclusion. First, the court determined that, though some consumers had no need for PPE that arrived late, the FTC presented no evidence to conclude “this was the case for every customer who received a late shipment.”
Second, the court distinguished several cases that the FTC relied on because those cases found net revenue to be the appropriate measure of damages under Section 13(b) of the FTC Act. As we’ve highlighted, the Supreme Court struck down monetary relief under Section 13(b), and the test of Section 19 requires a greater showing. Accordingly, the court determined that, because it cannot render a punitive award under Section 19, a showing of an amount less than total net revenue is required to determine the basis for redress “necessary” for consumers. Thus, the amount of redress is a factual issue to be resolved at trial.
Given this recent trend of cases, it certainly seems that more courts will continue to require the FTC to show a reasonable approximation of damages that it seeks under Section 19.
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