FTC v. Bluehippo

11-374-cv
FTC v. Bluehippo et al.

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
_____________________

August Term, 2011

(Argued: February 23, 2012 Decided: August 12, 2014)

Docket No. 11-374-cv

_____________________

FEDERAL TRADE COMMISSION,

Plaintiff–Appellant,

V.

BLUEHIPPO FUNDING, LLC, BLUEHIPPO CAPITAL, LLC, AND JOSEPH K. RENSIN,

Defendants–Appellees.1

_____________________

Before:
LEVAL, SACK, and HALL, Circuit Judges.

_____________________

The Federal Trade Commission (“FTC”) appeals the damages portion of an order of the
district court (Crotty, J.) granting, in part, the FTC’s motion for contempt relating to defendants’
violation of the Stipulated Final Judgment and Order of Permanent Injunction which enjoined the
defendants from making any express or implied representations of material fact with respect to,
inter alia, their store credit and refund policy. Arguing that it was entitled to a presumption that
consumers relied, when deciding to purchase defendants’ products, on defendants’ omissions and
misrepresentations, the FTC sought $14,062,627.51 in contempt damages, an amount equal to the
defendants’ gross receipts, i.e., the gross sales generated through its contumacious conduct. The
district court’s order is silent with regard to the presumption of reliance and plainly rejects the

1
The Clerk of Court is directed to amend the official caption as noted above.
FTC’s damages calculation. We agree with the FTC and join our sister circuits in adopting a
presumption of consumer reliance in FTC civil contempt actions. Accordingly, we vacate the
district court’s order and remand for the district court to consider, in the first instance, whether the
FTC has demonstrated that it is entitled to a presumption of consumer reliance. If so, the court
should use defendants’ gross receipts as a baseline for calculating the consumers’ actual loss, and
defendants should then be afforded an opportunity to proffer evidence showing that an offset of the
baseline is warranted. Therefore, we VACATE the district court’s judgment and REMAND for
further proceedings consistent with this opinion.
_____________________

DAVID C. SHONKA, SR., Deputy Chief Counsel (Michael D. Bergman,
James A. Kohm, Robert S. Kaye, Amanda C. Basta, on the brief) for
Lawrence DeMille-Wagman, Assistant General Counsel for Litigation,
John F. Daly, Deputy General Counsel for Litigation, and Willard K. Tom,
General Counsel, United States Federal Trade Commission, Washington,
DC for Plaintiff–Appellant.

MARTIN S. HIMELES, JR. (John J. Connolly, on the brief) Zuckerman
Spaeder LLP, Baltimore, MD for Defendants–Appellees.
_____________________

HALL, Circuit Judge:

The Federal Trade Commission (“FTC”) appeals the damages portion of a July 27, 2010

order of the District Court for the Southern District of New York (Paul A. Crotty, Judge) granting,

in part, the FTC’s motion for contempt relating to defendants-appellees’ (BlueHippo Funding,

LLC, BlueHippo Capital, LLC (collectively “BlueHippo”), and Joseph K. Rensin, the CEO of the

BlueHippo entities) violation of a Stipulated Final Judgment and Order of Permanent Injunction

(the “Consent Order”). The FTC and BlueHippo had previously entered into the Consent Order

to resolve an action initiated by the FTC against BlueHippo for violating section 5(a) of the

Federal Trade Commission Act, codified at 15 U.S.C. § 45(a) (“FTC Act”). The Consent Order

enjoined the defendants from making any express or implied misrepresentations of material fact

with respect to, inter alia, their store credit and refund policy.

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 In its contempt motion the FTC sought damages for BlueHippo’s alleged violation of the

Consent Order by failing to disclose, at the time of purchase, material details concerning

BlueHippo’s store credit policy. The FTC argued that it was entitled to a presumption that

consumers relied, when deciding to purchase defendants’ products, on defendants’ omissions and

misrepresentations. Accordingly, it sought $14,062,627.51 in contempt damages, an amount

equal to the defendants’ gross receipts, i.e., the gross sales generated through its contumacious

conduct. The district court granted the FTC’s motion for contempt, but awarded damages only

with regard to consumers who complied with BlueHippo’s payment requirements and thus

qualified for but never received the promised computer. The court’s order is silent with regard to

the presumption of reliance and plainly rejects the FTC’s damages calculation. The FTC filed a

motion seeking an amendment or modification to the July 27 order to reflect the damages

associated with all customer orders placed during the period of BlueHippo misrepresented or

omitted information concerning its store credit and refund policy. The district court denied the

motion and the FTC appealed.

BACKGROUND

A. The FTC’s Preceding Direct Action

BlueHippo marketed computers and electronic products to consumers, regardless of their

credit history. Prospective customers wishing to order a computer through BlueHippo would call

a toll-free number, listen to a sales pitch, place their order, and provide relevant financial details.

The premise of BlueHippo’s sales pitch was if a customer made thirteen consecutive installment

payments and signed an installment contract, BlueHippo would then ship a computer and allow the

consumer to finance the remaining balance owed. If the customer skipped a payment, he or she

would not qualify for financing but could continue to pay off the computer on a layaway program

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or convert the previous payments to store credit for the purchase of other merchandise from

BlueHippo’s online store.

With respect to the store credit and refund policy (the conduct relevant to this appeal), at

the time of purchase BlueHippo informed consumers that they were entitled to cash refunds within

the initial seven-day period after placing an order, and after that customers could cancel their

orders and obtain a store credit for BlueHippo’s online store. However, when consumers agreed

to purchase a computer and entered into an installment contract, BlueHippo failed to disclose that

store credits could not be applied to shipping and handling fees or tax charges, or that only one

online store order could be placed at a time. BlueHippo would not inform a consumer about these

restrictions until the consumer attempted to make a purchase with store credit.

In February 2008, the FTC filed a complaint in the Southern District of New York against

BlueHippo Funding LLC and BlueHippo Capital. The complaint alleged that BlueHippo, in its

advertising, sales pitches, and representations to consumers, had engaged in persistent practices of

deception since 2003 in violation of Section 5(a)(1) of the FTC Act, 15 U.S.C. § 45(a)(1).2

Pursuant to 15 U.S.C. § 53(b), the FTC sought permanent injunctive relief and disgorgement of the

proceeds BlueHippo had obtained through these allegedly deceptive practices. In April 2008, the

parties resolved the suit through entry of the Consent Order.

2
The first count alleged that BlueHippo represented to consumers that it would ship products within a particular time
frame when, in fact, these consumers did not receive the products purchased within the represented timeframe, if at all.
The second count alleged that BlueHippo failed to disclose to consumers that payments made as part of a plan for the
purchase of computers and electronics goods were nonrefundable, even if the consumer never received the purchased
product. The complaint also alleged violations of the Mail Order Rule under regulations promulgated pursuant to the
FTC Act, violations of the Truth in Lending Act and associated regulations, and violations of the Electronic Fund
Transfer Act and associated regulations. These alleged violations are not at issue in the present appeal.
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B. The FTC’s Contempt Action & the District Court’s Contempt Ruling

Based on compliance materials provided by BlueHippo, the FTC moved in late 2009 for an

order to show cause why both BlueHippo and its CEO, Joseph Rensin, should not be held in civil

contempt for violation of the Consent Order.3 Based on its assertion that the FTC had violated the

Consent Order, the FTC sought $14,062,627.51 in damages on behalf of 55,892 customers.4

On July 27, 2010, the district court issued a written ruling holding BlueHippo in contempt

and finding that Rensin was jointly and severally liable for any damages. The district court found

that BlueHippo had violated the Consent Order through (1) failing to provide computers for 1348

orders within the promised three week time frame; (2) failing to provide either a computer or store

credit merchandise for 677 orders; (3) failing to disclose details of the store credit policy to

consumers; and (4) conditioning the extension of credit on mandatory preauthorized transfers. It

calculated damages in the amount of $609,856.38, basing this figure on the consumers who had

qualified for BlueHippo’s financing plan but had thereafter received neither a computer nor store

credit. Order Granting Plaintiff’s Motion for Contempt at 10, FTC v. BlueHippo, No. 08cv-1819

(PAC), (S.D.N.Y. July 27, 2010), ECF No. 76. As for BlueHippo’s remaining violations, the

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The Consent Order does not name Rensin as a party nor did he sign it on behalf of BlueHippo. At the time of the
contempt hearing, BlueHippo had filed for bankruptcy and the trustee declined to participate in the evidentiary
hearing, relying on its written submission instead. Rensin, however, presented his case to the district court in the
evidentiary hearing and argued for limiting BlueHippo’s liability as well limiting his own to the monies he actually
received. Ultimately the district court found Rensin and BlueHippo jointly and severally liable for contempt
damages. Rensin does not appeal that determination and BlueHippo, through its trustee, declined to participate in this
appeal.
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The FTC asserted BlueHippo violated the Consent Order in six ways: (1) by misrepresenting that it was in the
business of financing computers; (2) by misrepresenting that consumers who qualified for financing would receive
computers; (3) by misrepresenting that BlueHippo would ship computers to such customers within four weeks of their
qualifying for financing; (4) by misrepresenting that consumers who ordered merchandise through the online store
would actually receive the merchandise; (5) by failing to disclose in their store credit policy that consumers needed to
pay additional monies to cover shipping and handling fees as well as taxes; and (6) by conditioning the extension of
credit on mandatory preauthorized transfers. Memorandum of Law in Support of Plaintiff’s Order to Show Cause at
16–21, FTC v. BlueHippo, No. 08cv-1819 (PAC) (S.D.N.Y. Nov. 17, 2009), ECF No. 43.
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district court concluded that the FTC “conceded [] it has failed to provide record evidence

approximating damages to consumers.”

The FTC accepted the court’s finding of liability but moved for reconsideration on the

issue of damages with respect to the misrepresentations BlueHippo made regarding its store credit

policy.5 The district court denied that motion, and the FTC initiated this appeal.

Discussion

On appeal, the FTC asserts that the district court committed an error of law when it: (1)

failed to take into account the express language of the Consent Order which establishes the time of

injury as the moment the consumers sign up to buy a computer without having received all the

material terms of the agreement; (2) failed to apply the presumption of consumer reliance and

harm in an FTC civil contempt action; and (3) erroneously concluded that the FTC conceded that it

had failed to prove damages associated with misrepresentations and omissions concerning the

store credit and refund policy. We agree with the FTC and join our sister circuits in holding today

that the FTC is entitled, when the proper showing has been made, to a presumption of consumer

reliance. Because the district court’s opinion and order does not reflect the application of this

principle, we vacate the district court’s July 27, 2010 order as to damages, and remand for the

district court to consider, in the first instance, whether the requirements for this presumption have

been met. Additionally, we agree with the FTC that the appropriate baseline for assessing

contempt damages, i.e., the actual loss to consumers as a result of the defendants’ contumacious

conduct, is the defendants’ gross receipts. That baseline damages calculation is rebuttable, and

the district court, on remand, should therefore consider whether defendants have proffered

5
The FTC does not challenge the district court’s denial of recompense for BlueHippo’s failure to fulfill 1348
computer orders within a three week time frame, and BlueHippo’s conditioning of their extension of credit on
mandatory preauthorized transfers. Appellant’s Br. 14–15 n.12.
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sufficient evidence demonstrating that the baseline consumer loss should be offset and, if so, by

how much.

A. Standard of Review

“We review the district court’s conclusions of law de novo and its factual findings for clear

error.” FTC v. Verity Int’l, Ltd., 443 F.3d 48, 63 (2d Cir. 2006). “We review a finding of

contempt under an abuse of discretion standard that is more rigorous than usual . . . .” S. New

England Tel. Co. v. Global NAPs Inc., 624 F.3d 123, 145 (2d Cir. 2010) (internal quotation marks

omitted).

B. FTC Civil Contempt Actions

Before addressing the FTC’s arguments on appeal, we must answer a threshold question:

whether the FTC can seek contempt damages on behalf of consumers when the defendant has

violated a lawful Consent Order and Permanent Injunction. Section 13 of the FTC Act empowers

the FTC to seek redress on behalf of injured consumers. 15 U.S.C. § 53; see FTC v. Figgie Int’l,

Inc., 994 F.2d 595, 605 (9th Cir. 1993) (per curiam) (“Section 13 serves a public purpose by

authorizing the Commission to seek redress on behalf of injured consumers.” (internal quotation

marks omitted)). We agree with the Tenth Circuit that “no reason exists to believe Congress

intended to withhold the traditional remedy of compensation to those consumers victimized by

defendants’ violations of [a] Permanent Injunction,” or in this case, a Consent Order. FTC v.

Kuykendall, 371 F.3d 745, 764 (10th Cir. 2004) (en banc); see also FTC v. Febre, 128 F.3d 530,

536 (7th Cir. 1997) (noting that a primary purpose of the FTC Act is “to protect consumers from

economic injuries”). Accordingly, we think it clear that the FTC may pursue recovery for

contempt damages based on alleged violations of a Consent Order.

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 Civil contempt sanctions may either serve “to coerce future compliance” or to remedy any

harm caused by noncompliance. Weitzman v. Stein, 98 F.3d 717, 719 (2d Cir. 1996) (citing

United States v. United Mine Workers of America, 330 U.S. 258, 302–04 (1947)). A court enjoys

broad discretion in setting the amount of coercive sanctions. Paramedics Electromedicina

Comercial, Ltda v. GE Med. Sys. Info. Techs., Inc., 369 F.3d 645, 657 (2d Cir. 2004) (citing

Perfect Fit Indus. v. Acme Quilting Co., 673 F.2d 53, 57 (2d Cir.1982)). But a court is “not free to

exercise its discretion and withhold an order in civil contempt awarding damages, to the extent

they are established.” Vuitton et Fils S. A. v. Carousel Handbags, 592 F.2d 126, 130 (2d Cir.

1979). When the FTC seeks damages for contempt, therefore, a court should craft sanctions

aimed at least in part on making whole the victims of the contumacious conduct. Paramedics

Electromedicina Comercial, 369 F.3d at 658 (citing King v. Allied Vision, Ltd., 65 F.3d 1051, 1062

(2d Cir. 1995)); see McComb v. Jacksonville Paper Co., 336 U.S. 187, 193 (1949) (“The measure

of the court’s power in civil contempt proceedings is determined by the requirements of full

remedial relief.”).

C. Presumption of Consumer Reliance and Calculating Damages under the Presumption

Although the district court found that BlueHippo had violated the terms of the Consent

Order—an issue unchallenged on this appeal—the court limited damages to $609,856.38, rejecting

the FTC’s damage assessment of $14,062,627.51. The FTC challenges the district court’s

measure of damages under the circumstances presented here.

The injury to a consumer occurs at the instant of a seller’s misrepresentations, which taint

the consumer’s subsequent purchasing decisions. Figgie Int’l, Inc., 994 F.2d at 606; FTC v. Sec.

Rare Coin & Bullion Corp., 931 F.2d 1312, 1316 (8th Cir. 1991) (“To satisfy the reliance

requirement in actions brought under section 13(b) of the Act, the FTC need merely show that the

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misrepresentations or omissions were of a kind usually relied upon by reasonable and prudent

persons.”); McGregor v. Chierico, 206 F.3d 1378, 1388 (11th Cir. 2000) (“Liability under the FTC

Act is predicated upon certain misrepresentations or misleading statements, coupled with action

taken in reliance upon those statements.”). Put alternatively, because the harm stems from the

initial misrepresentations, the injury occurs at the moment the seller makes those

misrepresentations. See Figgie Int’l, Inc., 994 F.2d at 606 (“The fraud in the selling . . . is what

entitles consumers . . . to full refunds[.]”); see also McGregor, 206 F.3d at 1388.

To require proof of each individual consumer’s reliance on a defendant’s

misrepresentations would be an onerous task with the potential to frustrate the purpose of the

FTC’s statutory mandate. Sec. Rare Coin & Bullion Corp., 931 F.2d at 1316 (noting that it would

be impossible for the FTC to provide proof of subjective reliance by each investor); McGregor,

206 F.3d at 1388 (“Proof of individual reliance by each purchasing customer is not a prerequisite

to the provision of equitable relief needed to redress fraud.”). Permitting a presumption of

reliance in FTC claims for contempt damages would thus further the Commission’s statutory

purpose to protect consumers. Noting the inherent difficulty of demonstrating individual harm in

FTC cases, the Eighth, Ninth, Tenth, and Eleventh circuits have applied a presumption of

consumer reliance that attaches to potential consumers at the instant of the initial

misrepresentation. See, e.g., Kuykendall, 371 F.3d at 765 (applying presumption in contempt

action); McGregor, 206 F.3d at 1388 (applying presumption in contempt action); see also Figgie

Int’l, Inc., 994 F.2d at 605–06 (applying presumption in FTC Section 19 action); Sec. Rare Coin &

Bullion Corp., 931 F.2d at 1316 (applying presumption in FTC Section 13 action). We join these

courts and hold that the FTC is entitled to a presumption of consumer reliance upon showing that

(1) the defendant made material misrepresentations or omissions that “were of a kind usually

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relied upon by reasonable prudent persons;” (2) the misrepresentations or omissions were widely

disseminated; and (3) consumers actually purchased the defendants’ products. Kuykendall, 371

F.3d at 765; see also McGregor, 206 F.3d at 1388; Figgie Int’l, Inc., 994 F.2d at 605–06; Sec. Rare

Coin & Bullion Corp., 931 F.2d at 1316.

Once the FTC makes a showing sufficient to trigger this presumption, the district court

must calculate damages to ensure that all of the consumers who were presumed to have relied on

the defendant’s misrepresentations receive “full compensation.” Kuykendall, 371 F.3d at 765–

66. The Tenth Circuit, in Kuykendall, and the Eleventh Circuit, in McGregor, held that the total

gross receipts from all consumers entitled to compensation should serve as the baseline for

calculating the actual loss to consumers caused by the defendants’ contemptuous conduct. See

id.; 206 F.3d at 1387–88; see also FTC v. Trudeau, 579 F.3d 754, 771 (7th Cir. 2009) (“Consumer

loss is a common measure for civil sanctions in contempt proceedings and direct FTC actions.”).

Those courts recognized that when an injury by misrepresentation or omission precedes a

purchase, the full amount paid by the injured consumer must serve as the baseline for calculating

damages because the “seller’s misrepresentations tainted the customer’s purchasing decisions,”

McGregor, 206 F.3d at 1388. In this Circuit we have previously characterized monetary loss in

an FTC direct action arising out of unfair misrepresentations to consumers as the defendant’s

“unjust gains.” See FTC v. Bronson Partners, 654 F.3d 359, 368–69 (2d Cir. 2011); Verity, 443

F.3d at 67. Here, in the context of a contempt action arising out of violations of a promise to

refrain from misrepresentations concerning material terms or omissions of material terms, we hold

that the calculation of the appropriate measure of loss begins with the defendants’ gross receipts

derived from such contumacious conduct. After the court uses the defendants’ gross receipts as a

baseline for calculating damages, the court must permit the defendants “to put forth evidence

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showing that certain amounts should offset the sanctions assessed against them.” Kuykendall,

371 F.3d at 766.

To the extent that defendants argue that our Circuit precedent suggests rejecting a

presumption of consumer reliance, they misconstrue our prior holdings. Defendants rely chiefly

on FTC v. Verity International, Ltd., 443 F.3d 48 (2d Cir. 2006), which does not address the

presumption of reliance. Verity offers little guidance in this case, but insofar as it sheds light on

general principles of remedies in FTC cases, it nevertheless bolsters today’s holding. In that case,

the FTC brought a direct action against internet pornographers who wrongly billed telephone line

subscribers for internet access regardless of whether those subscribers had actually accessed the

pornographers’ websites. We held first that disgorgement, or equitable restitution, was the proper

measure of damages. Id. at 66. We then adopted a “two-step burden-shifting framework” for

calculating disgorgement, which “requires the FTC to first ‘show that its calculations reasonably

approximated’ the amount of the defendant's unjust gains, after which the ‘burden shifts to the

defendants to show that those figures were inaccurate.’” Id. (quoting Febre, 128 F.3d at 535).

Our holding today adheres to this framework. That we required a different method for calculating

disgorgement in Verity from that which we are endorsing today merely reflects the material factual

disparities between the two cases. See Verity, 443 F.3d at 66–69 (explaining that the restitution

award in that case should be calculated based on monies actually received, rather than the “full

amount lost by consumers,” because consumer dollars had passed through a middleman and

therefore defendants had not received the full amount consumers paid).

It is undisputed that BlueHippo was permanently enjoined from making material

misrepresentations to its customers about its store credit policy, and the Consent Order

affirmatively required BlueHippo to disclose all material conditions of their store credit refund

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policy prior to receiving any money from consumers.6 BlueHippo, as the district court found and

the defendants do not dispute, violated the Consent Order. Based on the FTC’s proffered

evidence, the district court found that during the period of violation 62,673 customers made

purchases and 55,892 customers had not been compensated in any form. The district court noted

that at the time of these purchases BlueHippo informed these consumers that if they chose not to

have their purchases refunded within seven days of placing their order, they could cancel their

order later and obtain usable store credit. In making these representations, the district court

further observed, BlueHippo had conveniently omitted several material caveats accompanying

their store credit policy, namely, that store credit could only be used for one online store order at

time and could not be applied towards shipping and handling fees or taxes. Unfortunate

customers learned of these restrictions only after trying to use their credit.

This information, if it had been revealed to consumers before they purchased computers

from BlueHippo, in all likelihood would have influenced their purchasing decisions. Although

the district court noted these facts, the record does not reveal specifically whether the court applied

the presumption of consumer reliance in calculating damages. Indeed, despite the fact that the

FTC’s economic expert testified that the 55,892 customers to whom BlueHippo failed to provide

either a computer or store merchandise had suffered $14,062,627.51 in damages, the district court

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The Consent Order states in pertinent part,

[Defendants] are permanently restrained and enjoined from . . . [m]aking any
representation regarding any refund, cancellation, exchange or repurchase policy
without disclosing clearly and conspicuously, prior to receiving any payment
from customers all material terms and conditions of any refund, cancellation,
exchange or repurchase policy, or if there is a policy of not making any refunds,
cancellations, exchanges, or repurchases whatsoever, a statement informing the
customer of such policy, prior to receiving any payment from customers[.]

Stipulated Final Judgment and Order of Permanent Injunction at 3–4, FTC v. BlueHippo, No. 08cv-1819 (PAC),
(S.D.N.Y. April 10, 2008), ECF No. 2.
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concluded that the FTC conceded it could not prove the credit policy damages. In light of this

discrepancy between the FTC’s evidence and the court’s finding, and in light of our recognizing

today a presumption of consumer reliance, the district court erred in not assessing, in the first

instance, whether the FTC demonstrated the prerequisite conditions entitling it to a presumption of

consumer reliance.

Because the district court did not specifically address the issue in this context, however, we

remand to allow that court to determine in the first instance that the FTC has established the

presumption appropriately applies on the facts of this case. If the court concludes that the FTC

has demonstrated the conditions necessary to establish a presumption of consumer reliance, it

should use the defendants’ gross receipts as a baseline for calculating the actual loss to consumers

caused by defendants’ conduct. Kuykendall, 371 F.3d at 766. The district court should then give

the defendants the opportunity to rebut the determined baseline loss calculation, allowing them to

“put forth evidence showing that certain amounts should offset the sanctions assessed against

them.” Id.

Conclusion

We VACATE that portion of the district court’s contempt order that has calculated

damages and REMAND the case to the district court for further proceedings consistent with this

opinion.

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