FAIR TRADE

Liable to Be Liable

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Liable to Be Liable

It’s conventional wisdom among entrepreneurs to protect their assets by incorporating their businesses. That’s sound advice, but the “Inc.” after a company name offers only so much protection. It won’t necessarily shield you from liability for deceptive or unfair practices if the Federal Trade Commission (FTC) comes calling, as two recent court rulings demonstrate.
In one case, the FTC challenged claims that a dietary supplement was a “clinically proven natural solution” to diabetes with “a 90 percent success rate.” A federal judge in California credited the testimony of the FTC’s medical expert, ruling that the expert had “offered detailed reasons for concluding that all nine of the Defendants’ claims lack adequate substantiation and, as to the establishment claims, are actually false.”
But the decision didn’t end there. The judge also found “extensive and undisputed evidence” that the company president “was at least recklessly indifferent to the truth or falsity of the representations” in the ads. What about his co-defendant, the CFO and secretary of the company? “No reasonable fact finder could conclude that she was anything but reckless,” the judge ruled. Although she wasn’t involved in formulating the products, she played “a significant role in running the company, and was extensively involved in the creation of the advertising that is the subject of this action, including drafting and editing website content, and helping with the selection of testimonials and keywords.” The $2.2 million judgment held both defendants—who happened to be father and daughter—personally liable for the total.

Consider your course of conduct as if your good name and personal assets were on the line–because they just might be.

A federal appellate court reached a similar conclusion in an unrelated case involving pop-up ads that claimed to detect the presence of viruses, spyware, and “illegal pornography” on consumers’ computers. As it turned out, it was really a ruse designed to dupe more than a million people into buying software to fix a problem that likely had not yet occurred. Most of those involved in the operation settled with the FTC, but the company’s vice president chose to go to trial.
Based on the evidence presented, the court concluded that the defendant “had authority to control and directly participated in the deceptive acts within the meaning of Section 5” of the FTC Act. The upshot: A broad injunction and a judgment holding her personally liable for—are you sitting down?—$163 million.
The appellate court affirmed the ruling and offered a pointed explanation of the legal standard: “We hold that one may be found individually liable under the Federal Trade Commission Act if she (1) participated directly in the deceptive practices or had authority to control those practices, and (2) had or should have had knowledge of the deceptive practices. The second prong of the analysis may be established by showing that the individual had actual knowledge of the deceptive conduct, was recklessly indifferent to its deceptiveness, or had an awareness of a high probability of deceptiveness and intentionally avoided learning the truth.”
The message for marketers is that any determination of individual liability is tied to the facts of each case. But before signing off on an iffy business practice or turning a blind eye to a questionable promotion, consider your course of conduct as if your good name and personal assets were on the line—because they just might be.

 

Lesley Fair is an attorney with the FTC’s Bureau of Consumer Protection.