The Federal Trade Commission has demonstrated that it intends to vigorously enforce its authority by employing aggressive new enforcement methods that run contrary to popular beliefs regarding liability.
The following is a look at some pitfalls that marketers should guard against.
Myth 1: Only the corporation is liable: Many marketers are under the false impression that because they operate through a corporation and observe corporate formalities, it is the business — not the individual — that may be liable if a campaign is challenged for violating the law. Governmental regulators — unlike private litigants — can routinely “pierce the corporate veil” and hold not just the company, but the individuals who operate it, liable as well.
Regulators take the position that a corporation doesn't act in and of itself; rather, regulators allege that the individuals who either own or operate the business make decisions and, therefore, should be liable for the corporate misdeeds. The FTC has routinely shown that it won't hesitate to name individual defendants in an enforcement action, whether they are part of a small entrepreneurial venture or a well-capitalized corporation with millions of dollars in revenue.
Myth 2: I'm just a supplier — not a marketer: The FTC has been using a provision of the Telemarketing Sales Rule to prosecute companies and their principals for assisting or facilitating telemarketers who violate the rule. Under this regulation, it is a violation for any person to provide substantial assistance or support to any seller or telemarketer when that person knows or consciously avoids knowing that the telemarketer is engaged in practices that violate the rule. Providing assistance to a telemarketer without undertaking reasonable due diligence regarding the marketing program may led to liability for the alleged wrongdoing of the marketer.
The FTC seems especially keen on holding third parties liable when they should be aware of problems relating to the underlying program. The FTC recently sued individual principals of companies who acted as third-party billing services outside the context of telemarketing sales; even though their company was not directly involved in the creation, distribution or marketing of the campaign. The FTC charged that the billing service was liable because it handled customer service and was, therefore, aware of complaints being generated by the marketing campaign and the company derived profits from providing services to the marketer.
Myth 3: The government can't touch offshore accounts: Marketers, who think their assets will be safe from the government's grasp by investing in an offshore trust, may want to re-evaluate their investment decision. Many are aware that the FTC seeks an asset freeze as part of an enforcement action in which the agency doesn't think there are sufficient assets to provide for consumer redress. As part of interim relief, a court may order a freeze of all assets in the name of the business and its principals.
While courts may not have jurisdiction over assets deposited overseas, they do have jurisdiction over the “keys” to these assets — the individuals who are in the United States. As a result, the FTC has been obtaining criminal contempt orders against defendants who fail to repatriate these funds. For example, the FTC recently filed obtained injunctive relief against the Sterling Group and its principals, charging that defendants engaged in an alleged Ponzi scheme relating to investments for the sale of goods on television. As part of the injunctive order, the FTC obtained an asset freeze and a repatriation order against the defendants corporately and personally.
After investigating the defendants‚ finances, the FTC believed that two defendants — a husband and wife — were holding $1.3 million in an offshore trust in the Cook Islands. When the defendants refused to repatriate these funds (which they may or may not have been able to do), a federal court found them in contempt and ordered them incarcerated. The defendants have been in jail since June 17 and will likely be held until the money is recovered. By jailing defendants until they repatriate assets that the government thinks are being held overseas, the government may be able to close the door on this asset protection device.
Myth 4: Assets: Who's gonna know? Usually shortly after the FTC obtains an injunction against a business and its principals regarding certain activity, the defendants usually are required to complete financial disclosure statements and undergo asset depositions. Defendants who settle FTC enforcement actions are generally required to reaffirm previous asset disclosure statements. These statements provide for the disclosures of bank accounts, real estate, cars, jewelry and other valuables. The FTC has advised that it will be requiring an “avalanche” clause in future settlements assessing a significant penalty if a defendant has been found to materially misrepresent the value of his or her assets. The amounts of the penalty usually will be the amount of total consumer injury alleged; i.e., a complete disgorgement of all consumer funds received.
Businesses and the individuals who run them need to be on alert as to their company's practices. Regulators have shown that they will not hesitate to hold anyone who they think is involved, accountable for alleged wrongdoing and will otherwise challenge shelters created to provide protections.
Andrew B. Lustigman is a partner in The Lustigman Firm, a New York law firm specializing in direct marketing law.