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F.T.C. v. Gem Merchandising Corp.

July 09, 1996

FEDERAL TRADE COMMISSION, PLAINTIFF-APPELLEE,
v.
GEM MERCHANDISING CORPORATION, A GEORGIA CORPORATION; SUMMIT MEDI-ALERT, INC., A GEORGIA CORPORATION; STARCREST SERVICES, INC., A GEORGIA CORPORATION; WILLIE E. LENNON, INDIVIDUALLY; CHANTAL AZANGA, INDIVIDUALLY, DEFENDANTS, ALEXANDER S. ESTFAN, INDIVIDUALLY AND AS AN OFFICER AND DIRECTOR OF ONE OR MORE OF THE ABOVE CORPORATIONS, DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Georgia. (No. 1:94-CV-1307-GET). G. Ernest Tidwell, Chief Judge.

Before Kravitch, Edmondson and Barkett, Circuit Judges.

Author: Kravitch

KRAVITCH, Circuit Judge:

Alexander Estfan appeals an order by the district court issued pursuant to section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b). After finding that Estfan engaged in unfair practices in telemarketing medical alert devices, the court held that the defendants below must reimburse consumers in an amount totaling $487,500 and, to the extent repayment is not feasible, must pay the remainder to the United States Treasury. Estfan argues that the district court lacked the authority to order payment to any party other than purchasers of the medical alert devices. We affirm.

I.

Gem Merchandising Corporation was quite successful in its business of telemarketing medical alert systems. Unfortunately, much of its success could be attributed to its illegal telemarketing methods. As found by the district court, Gem lured customers by 1) misrepresenting the value of prizes a consumer would receive if the consumer purchased certain products, 2) misrepresenting the likelihood that a consumer would receive a particular prize, 3) misrepresenting the likelihood that a consumer would not receive a particular prize, and 4) failing to disclose the costs a consumer would have to pay and the conditions a consumer would have to satisfy to obtain the prize of a vacation.

Alfred Estfan was the sole owner, president, and director of Gem Merchandising. The district court found that he controlled the day-to-day affairs of Gem and knew about Gem's telemarketing practices. He was aware that salespeople made material misrepresentations to consumers to induce sales, and he was in a position to control the salespeople's behavior.

The Federal Trade Commission ("FTC") brought this action against Gem Merchandising, Estfan, and four other defendants, for engaging in "unfair or deceptive acts or practices in or affecting commerce," in violation of section 5 of the FTC Act. 15 U.S.C.A. § 45(a). In its summary judgment motion, the FTC sought a permanent injunction preventing defendants from engaging in telemarketing, a judgment holding defendants jointly and severally liable for consumer redress, and an order that would enable the FTC to monitor defendants' future business activities. The court found that the defendants violated section 5 and granted plaintiff's motion for permanent injunction. It denied summary judgment on the other two claims which were set down for a non-jury trial before the court.

At the trial, the court held that the FTC had established defendants' liability for "consumer redress" by showing that 1) defendants engaged in deceptive acts in violation of section 5, 2) the deceptive acts were widely disseminated, and 3) the consumers purchased defendants' products. The court set the amount to be paid by defendants at $487,500.*fn1 Further, because each defendant repeatedly participated in the wrongful acts and each defendant's acts materially contributed to the losses suffered, all defendants were held jointly and severally liable. The court ordered that the funds be distributed to consumers to the extent such distribution was feasible and that any excess be deposited in the United States Treasury.*fn2

II.

On appeal, Estfan makes three claims. First, he argues that the court's authority under section 13(b) was limited to redressing the losses of defrauded consumers and that the court lacked the power to order payment to the United States Treasury. Second, he claims that because the court ordered "consumer redress," the FTC cannot deposit funds collected pursuant to that judgment into the United States Treasury because such a payment would not constitute redress. Third, Estfan contends that his liability is limited to "consumer redress," because the "penalty" of disgorgement requires proof of individual liability, not simply "corporate liability."

A.

Section 13(b) of the Federal Trade Commission Act authorizes the FTC to seek, and the district courts to grant, preliminary and permanent injunctions against practices that violate any of the laws enforced by the Commission.*fn3 Although section 13(b) does not expressly authorize courts to grant monetary equitable relief, the FTC argues that the unqualified grant of statutory authority to issue an injunction under section 13(b) carries with it the full range of equitable remedies, including the power to grant consumer redress and compel disgorgement of profits. We agree with the FTC.

In FTC v. United States Oil & Gas Corp., this court held that under section 13(b) a district court may exercise its inherent equitable power. FTC v. United States Oil & Gas Corp., 748 F.2d 1431, 1433-34 (11th Cir.1984); see also FTC v. Amy Travel Service, Inc., 875 F.2d 564, 571-72 (7th Cir.) (in a proceeding under section 13(b), district court has the "power to order any ancillary equitable relief necessary to effectuate" its grant of authority), cert. denied, 493 U.S. 954, 110 S. Ct. 366, 107 L. Ed. 2d 352 (1989); FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1112-13 (9th Cir.1982) (power to grant permanent injunctive relief carries with it authority for ancillary equitable relief); FTC v. Southwest Sunsites, Inc., 665 F.2d 711, 717-19 (5th Cir.) (section 13(b) permits court to exercise full range of traditional equitable remedies), cert. denied, 456 U.S. 973, 102 S. Ct. 2236, 72 L. Ed. 2d 846 (1982). Specifically, we held that a district court may order preliminary relief, including ...


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