Advertising Law Blog

In FTC v. Vylah Tec LLC (decided on May 10, 2019 in the Middle District of Florida), on the issue of disgorging guilty defendants’ profits, District Judge Paul A. Magnuson held the Federal Trade Commission (“FTC”) to a higher standard of proof compared to most courts’ benchmarks.  Because the FTC and co-plaintiff the State of Florida failed to meet the standard, the guilty defendants were able to avoid disgorging their ill-gotten gains.

The defendants advertised, distributed and sold computer technical support services and security software. The FTC alleged—and sufficiently proved—deceptive trade practices and sought $3,400,000 in disgorgement of unjust gains from the defendants.

In January 2019, the court granted judgment against the defendants on the issue of liability. However, after a four-day trial, the court denied judgment on the issue of monetary relief, finding genuine issues of material fact existed regarding the FTC’s calculation of unjust enrichment. Specifically, the court found that questions lingered regarding the accuracy of defendants’ records and the FTC had not adequately tied its disgorgement figure to the amount of the unjust gains.

When seeking disgorgement, the FTC bears the burden of proving the disgorgement figure reasonably approximates the amount of unjust enrichment. The power to order disgorgement extends only to the amount (plus interest) by which the defendant profited from his or her wrongdoing.

Under prior case law, disgorgement is considered remedial, not punitive, so any award exceeding the limits of disgorgement would constitute an improper penalty that the FTC is not entitled to collect. The correct measure of unjust gains is the amount of net revenue, or gross receipts minus refunds. It is a court’s duty to assess the reasonableness of the FTC’s calculations.

In this case, the FTC’s reliance on bank records alone was insufficient to establish that the amount of disgorgement requested reasonably approximated the defendants’ unjust gains. The bank records admitted into evidence were not sufficiently specific to identify with any precision which transactions originated from consumer sales, the number of transactions included in each deposit, or the purpose of each purchase. Thus, the court was unable to differentiate between consumer receipts and business-to-business transactions in the bank records. The court criticized the FTC, writing, “By choosing to rely only on Defendants’ bank records when calculating the disgorgement figure, Plaintiffs undermined the reasonableness of their approximation… Rather, the evidence presented at trial establishes that much more detailed information was available to aid in [the] calculation, and they chose not to use it.”

Rather than give the FTC a do-over, the court denied the request for monetary relief, stating, “Plaintiffs have failed to establish a reasonable approximation of unjust gains. Plaintiffs are therefore not entitled to monetary relief... disgorgement is not a proper remedy[.]”

TAKEAWAY: Defendants in actions where a governmental entity seeks disgorgement of profits should be vigilant in holding the government to its burden of proof. While not every court wil hold the government to the high standard applied in this case, the defendants’ efforts here seem to have saved them $3,400,000.