“FTC enforcement isn’t a matter of ‘one and done.’”

I can’t recall the number of times I have heard from industry players that they had “issues” with the FTC but those are done now. The fact of the matter is that the “FTC will take the steps necessary to see that companies comply with the terms of orders.” I learned that lesson early in my work for clients before the FTC. It is not the damages that will take a company or individual out of the industry, it is the injunctive portion of the stipulated order. The same is true for State Attorney General inquires and subsequent stipulated orders. Most businesses can recover from the revenue loss from an FTC or AG inquiry, but later find they cannot overcome some portion of the stipulated order which has injunctive relief. As such, focus must be placed on the injunctive portion of the order during negotiations. Any ambiguities will be held against the business and its principals.

Further, it is important that the company and individuals who are going to be placed under that order consider their future business models and upcoming technology. These orders remain in place for 20 years and that is a long time to guess how the order will restrict the company or its principals from joining new markets and using new technologies. To the extent possible, owners and companies need to narrowly tailor any stipulated order to the violation that is the subject of the inquiry. They should also be well counseled as to what business models they may enter and which they must leave.

Furthermore, closing the company placed under an injunction and starting a new one does not relieve the principals of liability for failing to obey an injunction. A perfect example is the FTC’s recent contempt ruling stemming from Noevi, Inc’s Qchex check writing system. In the original action, the FTC sued Neovi, G7 Productivity Systems, Thomas Villwock, and James M. Danforth for alleged illegalities stemming from the operation of Qchex software. The Qchex software allowed users to create and send checks by mail or email. But according to the FTC, the defendants didn’t verify that the users had authority to access the accounts. In 2009, a federal court held them liable under Section 5 of the Federal Trade Commission Act. At that time, the Court ordered them to disgorge $535,358.00. It also issued an injunction against “Defendants, their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of [the] Order” from engaging in any similar practices without taking specified measures to protect consumers.

Among other things, the court ordered them to have in place specific account and identity verification procedures and a court-mandated process for addressing consumer complaints. They were also required to put their contact information (postal address, phone number, website URL or email address) in their ads and marketing materials and on every check they directly or indirectly created or delivered. In response, one defendant company closed and filed bankruptcy. Almost immediately thereafter, the principals created a new company, hiring the same employees, using the same equipment and office location, conducting the same business activities, and paid for many expenses using funds from the remaining company under the injunction. Notably, the new company did not follow the injunction including but not limited to identifying itself on all checks, websites, and marketing materials. Nor does it appear that they implemented the consumer protection procedures required under the injunction.

On October 15, 2009, the FTC brought an action for contempt against the individual defendants and their new company seeking complete disgorgement of all revenue generated since the entry of the Final Order which the FTC claimed was $9,484,463.98. The individual defendants’ argued, amongst other things, that they were not “sophisticated” and thus did not understand the provisions of the Final Order. This argument was immediately dismissed and on July 11, 2012, the Court held the individual defendants in contempt and fined them $15,000.00 per day until such time as they demonstrate compliance with the 2009 injunction. In addition they were ordered to provide consumers with restitution in an undetermined amount and a $100,000.00 fine to be paid immediately.

The lesson to be learned here – be sure you understand every provision of the injunction and be ready to live with it before you stipulate to it because as the FTC states in its press release on this matter, “FTC enforcement isn’t a matter of “one and done.” “The FTC will take the steps necessary to see that companies comply with the terms of an order.”

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