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August 29, 2012

Court Hands Down Record-Breaking Judgement in FTC Case

Consumer Blog Report

Four months ago, the US District Court for the Central District of California granted the FTC's request for summary judgment in a case involving infomercials for what the court called "wealth creation products." The court delayed entering final judgment, however, so that the parties could submit briefing on the appropriate remedy for the violations of the FTC Act. Last week, the judge ordered that the marketers of the products pay a record $478 million for deceiving close to one million consumers and imposed a lifetime ban on their involvement with telemarketing and infomercials.

The case involved marketers of three different products or "systems" advertised nationwide through infomercials and the Internet. The court described the challenged conduct as follows: all of the systems cost $39.95 and included a starter kit and a purportedly free month-long membership in a club. The marketers also offered coaching services. In one system, the materials taught consumers how to buy real estate at tax foreclosure sales by paying the delinquent taxes. It represented that the consumers could obtain this real estate "free and clear" for just "pennies on the dollar" and then make a substantial amount of money turning around and selling for full market value or renting it out. Under a second system, an infomercial marketed that consumers could acquire real estate through an inverse ownership system in which consumers put together real estate transactions and get the cash out at closing without using any of their own money or credit. A final system marketed materials for a "proven, turnkey internet business" that even consumers without prior internet business experience could make work. All of the systems included a free 30-day membership to a club, but, according to the court, they did not adequately disclose that, after the initial 30 days expired, a $39.95 monthly fee began, unless consumers took the affirmative step of canceling it.

In its order issued last week, the court discussed two forms of relief: injunctive relief and monetary award. For injunctive relief, the court imposed a broad, lifelong injunction preventing the marketers "from engaging, participating, or assisting others in telemarketing and the production or dissemination of any infomercial." The court found this necessary because of what it described as the parties' "long history of blatantly disregarding the law," a conclusion it based on a series of previous cases brought against the defendants for violation of Utah consumer protection laws and previous actions brought by the FTC. It also noted that the "technique of deception" it found to have been used in this case could be transferred easily to other types of products and that it found the level of personal involvement in the case was "excessive and highly deliberate." The court recognized that such a broad injunction may well affect the livelihood of the individuals involved, but found that such a broad proscription was necessary nonetheless.

As to monetary relief, the court awarded a record $478 million. This amount represented the total net revenue that the defendants had received for sales of the starter kits, coaching sales, and two years of club membership fees. The figure represents the largest litigated judgment ever obtained by the FTC.

© Arnold & Porter Kaye Scholer LLP 2012 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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