http://business.ftc.gov/blog/2011/09/second-circuit-unpacks-law-financial-remedies

Second Circuit unpacks law of financial remedies

* By Lesley Fair
* September 7, 2011 – 2:08pm

According to the ads, if you “carry on with your normal lifestyle” while wearing the Bio-Slim Patch, “repulsive, excess ugly fatty tissue will disappear at a spectacular rate.” (And by you, we don’t mean you, of course.) Promotions for Chinese Diet Tea promised similar miracles: “eliminates an amazing 91% of absorbed sugars,” “prevents 83% of fat absorption,” and “doubles your metabolic rate to burn calories faster.”

But according to the U.S. Court of Appeals for the Second Circuit, the products — sold by Bronson Partners doing business as New England Diet Center — were “thoroughly unmiraculous.” The Court’s opinion is a must-read if you’re interested in financial remedies under the FTC Act.

The company conceded liability for the Bio-Slim Patch and the judge granted summary judgment as to Chinese Diet Tea. So the primary issue involved the financial remedy. After a trial on damages, the court ruled that ordering monetary relief was within its authority.

In determining the amount, the trial court applied the two-step framework from the Second Circuit’s opinion in FTC v. Verity. How does that work? First, the FTC “show[s] that its calculations reasonably approximated the amount of the defendant[s’] unjust gains.” Then the burden shifts to the defendant if it wants to argue that the figures aren’t accurate. What if the company’s records are incomplete? “When defendants’ lack of record keeping renders it impossible to distinguish between just and unjust gains, the risk of the uncertainty falls on the wrongdoer.”

On appeal, the defendants challenged both the district court’s power to award financial remedies and the formula it used to calculate the amount. One argument they made was that they should be allowed to deduct from their $1.9 million in sales the amount they paid for things like advertising.

In a detailed opinion affirming the $1.9 million order, the Second Circuit concluded that Section 13(b) of the FTC Act allows courts to award both injunctive relief and monetary relief. A section of the decision the Second Circuit titled “Unpacking the Law of Restitution” offers insights into its reasoning. The opinion also explains how aspects of the Verity decision apply — and don’t apply — to the facts of this case.

What about Bronson’s argument that it should be able to subtract its ad expenses? Here’s what the Second Circuit had to say:

“Bronson seeks to deduct from its revenue not the (negligible) costs of the products that it fraudulently sold, but the (substantial) costs of placing its fraudulent advertisements. This argument, equivalent to an armed robber’s seeking to deduct the cost of his gun from an award of restitution, could stand with the classic patricide who claims mercy as an orphan as an illustration of the concept chutzpah.”