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Officer Liable for Restitution of Corporation’s Gains in Violation of FTC Act
In Federal Trade Commission v. Commerce Planet, Inc. (9th Cir. March 3, 2016) 16 C.D.O.S. 2355, the Federal Trade Commission (FTC) sued Commerce Planet, Inc., and three of its top officers for violating § 5(a) of the FTC Act, which prohibits unfair or deceptive business practices (15 U.S.C. § 45(a)). The company and two of the individual defendants settled with the FTC. The remaining defendant, appellant Charles Gugliuzza, elected to stand trial. After a 16-day bench trial, the district court found that Commerce Planet had violated § 5(a) and held Gugliuzza, the company’s former president, personally liable for the company’s unlawful conduct. The court permanently enjoined Gugliuzza from engaging in similar misconduct and ordered him to pay $18.2 million in restitution.
Gugliuzza challenged the validity of the restitution award. Among other things, he contended that the district court either lacked the authority to award restitution at all or, at the very least, had to limit the award to the unjust gains he personally received, which in this case totaled roughly $3 million.
The federal courts have established a two-pronged test for determining when an individual may be held personally liable for corporate violations of the FTC Act. The FTC must prove that the individual: (1) participated directly in, or had the authority to control, the unlawful acts or practices at issue; and (2) had actual knowledge of the misrepresentations involved, was recklessly indifferent to the truth or falsity of the misrepresentations, or was aware of a high probability of fraud and intentionally avoided learning the truth. The court found that the FTC’s evidence satisfied both prongs of this test.
Gugliuzza contended that any such award must be limited to the unjust gains each defendant personally received. The court disagreed, holding that he could be held jointly and severally liable for the full amount of the award against the corporation, not just the amount he received as a result of the corporation’s unlawful conduct.