FTC Settlements: ‘Ability to Pay,’ as Amended (or Repealed?) - 04/09/2014

For anyone who reads this column or otherwise has followed the Federal Trade Commission (FTC) under the Obama Administration — or who has had the misfortune to cross swords with it — it is no secret that the FTC now takes no prisoners in monetary settlements of marketing cases. While always a tough negotiator, the FTC would consider a reasonable compromise before. That approach to resolving disputes now seems like a relic from a bygone era.

The shift has been most evident in the FTC’s application of an "ability to pay” standard to consumer redress settlements. Regardless of the claimed amount of consumer injury, the FTC long has used a financial means test to reach monetary agreements. The test used to weigh liabilities as well as assets in determining an appropriate settlement amount. Now, only assets matter. If you have cash, securities, a home with value, other real estate, expensive art or jewelry, loans owed to you, or even a pending inheritance, the FTC will demand it — all of it — as a condition of settlement. If you say no thanks, it will seek the full amount of consumer injury (often tens of millions of dollars) in court.

Now, in a further "redefinition” (or obliteration) of the meaning of "ability to pay,” the FTC has been rejecting settlements unless the defendant not only disgorges all assets, but agrees to "claw back” allegedly "ill gotten” gains paid to others, or pay back all funds he himself received from the business. Previously, the FTC would settle and then bring monetary "relief” claims against those third parties. At least three times in the past two years, however, the FTC has refused to settle in this traditional manner. Instead, as a price of settlement, it has demanded that the defendant go after the money itself — regardless of ability to recover it.

In FTC v. Direct Benefits Group, the case failed to settle and went to trial because a defendant, while agreeing to an FTC demand for all his assets, could not satisfy an ultimatum that he force his parents to turn over rental condos they owned that he had purchased for their retirement. The FTC made this non-negotiable demand after first receiving an extension of time from the court to bring a relief claim against the parents, and then letting the extension lapse without actually bringing the claim. After voluntarily relinquishing its right to sue the parents, the FTC told the defendant that he needed to prevail upon them to relinquish the rental condos, despite the fact that their survival depended on them. When he didn’t, the FTC shut down settlement negotiations and took the matter to trial.

In two pending matters, offers of full asset disgorgement also haven’t been enough to satisfy the FTC. In one, it won’t settle unless the defendant claws back debt payments he made to certain individuals and capital payments he made to maintain an investment interest. In addition to these recoupment demands, the FTC also is insisting that he pay an amount equal to the full value of the investment. In the other matter, FTC staff are demanding not only the recovery of payments made by the defendants to certain individuals, one of whom received the money in his capacity as an employee, but the full return of "all payments or other consideration received by or for the benefit of” the defendants in connection with the business.

The FTC made these demands despite sworn financial disclosure statements revealing zero ability of the defendants to meet them. This "sample size” is too small on which to base a conclusion that the traditional standard of "ability to pay” — even as amended to apply now only to the asset side of the balance sheet — is no longer the norm. But it is not too small to suggest the beginning of an FTC rethinking of this long-standing policy, and to wonder what goes into the thinking behind making settlement demands that, on their face, are impossible to satisfy.

If these examples in fact are not anomalies, but are reflective of a new and even more unyielding attitude toward settlement that simply brushes off a defendant’s true ability to pay, then the FTC should make this change known to the advertising industry as a whole. At least that way, accused marketers won’t be aghast when they too are told they must create money out of thin air in order to settle with the FTC.

William I. Rothbard is a former FTC attorney and practices in Los Angeles, specializing in advertising and marketing law. He can be reached at (310) 453-8713, Rothbard@FTCAdLaw.com, and www.ftcadlaw.com.

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