United States Court of Appeals,
Eleventh Circuit.
No. 95-9008
Non-Argument Calendar.
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.
July 9, 1996.
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.
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
totalling $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 $487,500.1 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.2
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
1
This figure is based on the court's conclusion that $100
should be paid to 5,000 consumers. The court credited defendants
with $12,500, which had been paid to the State of Georgia.
2
The court denied the FTC's request for an order allowing it
to monitor defendants' future business activities.
"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.3 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. Oil & Gas Corp., this court held that under section
13(b) a district court may exercise its inherent equitable power.
3
Section 13(b) provides, in relevant part:
Whenever the Commission has reason to believe—
(1) that any person, partnership, or corporation
is violating, or is about to violate, any
provision of law enforced by the Federal Trade
Commission, and
(2) that the enjoining thereof ... would be in the
interest of the public—
the Commission ... may bring suit in a district court
of the United States to enjoin any such act or
practice. Upon a proper showing that, weighing the
equities and considering the Commission's likelihood of
ultimate success, such action would be in the public
interest ... a temporary restraining order or a
preliminary injunction may be granted without bond:
... Provided, further, That in proper cases the
Commission may seek, and after proper proof, the court
may issue, a permanent injunction....
15 U.S.C. § 53(b).
FTC v. U.S. 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 an
asset freeze, that may be needed to make permanent relief possible.
In reaching this conclusion, we relied on the principles of
statutory construction articulated in Porter v. Warner Holding Co.,
328 U.S. 395, 66 S.Ct. 1086, 90 L.Ed. 1332 (1946).
In Porter, the Supreme Court upheld the district court's
authority to refund illegal rent overcharges pursuant to section
205(a) of the Emergency Price Control Act of 1942, which expressly
granted only the power to enjoin illegal practices. In so holding,
the Court wrote that
[u]nless otherwise provided by statute, all the inherent
equitable powers of the District Court are available for the
proper and complete exercise of that jurisdiction. And since
the public interest is involved in a proceeding of this
nature, those equitable powers assume an even broader and more
flexible character than when only a private controversy is at
stake. Power is thereby resident in the District Court, in
exercising this jurisdiction, "to do equity and to mould each
decree to the necessities of the particular case." Hecht Co.
v. Bowles, 321 U.S. [321], 329[, 64 S.Ct. 587, 591, 88 L.Ed.
754 1994]....
Moreover, the comprehensiveness of this equitable
jurisdiction is not to be denied or limited in the absence of
a clear and valid legislative command. Unless a statute in so
many words, or by a necessary and inescapable inference,
restricts the court's jurisdiction in equity, the full scope
of that jurisdiction is to be recognized and applied.
Porter, 328 U.S. at 397-98, 66 S.Ct. at 1088-89 (citations
omitted).
As Porter makes plain, absent a clear command to the contrary,
the district court's equitable powers are extensive. Among the
equitable powers of a court is the power to grant restitution and
disgorgement. See, e.g., FTC v. Security Rare Coin & Bullion
Corp., 931 F.2d 1312, 1316 (8th Cir.1991) (restitution); Amy
Travel Services, 875 F.2d at 570 (restitution); SEC v. Blatt, 583
F.2d 1325, 1335 (5th Cir.1978) (disgorgement).4
Estfan contends that the district courts may not exercise
their full range of equitable powers under section 13(b). He
relies almost exclusively on FTC v. Figgie Int'l, Inc., 994 F.2d
595 (9th Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 1051,
127 L.Ed.2d 373 (1994), to argue that the district court lacked the
5
authority to order payment to the U.S. Treasury. In Figgie,
pursuant to section 19 of the FTC Act, 15 U.S.C. § 57b(b), the
district court had ordered the defendant to offer refunds for heat
4
The Eleventh Circuit, in Bonner v. City of Prichard, 661
F.2d 1206, 1209 (11th Cir.1981) (en banc), adopted as precedent
decisions of the former Fifth Circuit rendered prior to October
1, 1981.
5
In light of the many cases that address the issue of
equitable remedies under section 13(b), curiously, appellant
claims he was able to find only one case relevant to this issue,
i.e., FTC v. Figgie Int'l, Inc.
detectors that had been sold through deceptive means. The court
also ordered that in the event refunds did not reach a certain
amount, the difference was to be given to nonprofit organizations
concerned with fire safety. The circuit court held that this
latter requirement was not within the district court's power under
section 19.
Assuming, arguendo, that we agree with the Ninth Circuit's
interpretation of section 19(b), that statute is distinguishable
from section 13(b) because it explicitly prohibits "exemplary or
punitive damages." 15 U.S.C. § 57b(b). This legislative command
expressly limits a court's equitable jurisdiction. See Porter, 328
U.S. at 398, 66 S.Ct. at 1089. In contrast, section 13(b) has no
such limitation. Thus, the Ninth Circuit was consistent when, a
year after the decision in Figgie, it stated that in a suit under
section 13(b) a court may order disgorgement of a defendant's
"unjust enrichment" when it is not possible to reimburse all of the
consumers who have been injured by the defendant's
misrepresentations. FTC v. Pantron I Corp., 33 F.3d 1088, 1103 n.
34 (1994), cert. denied, --- U.S. ----, 115 S.Ct. 1794, 131 L.Ed.2d
722 (1995). Thus, Estfan's reliance on Figgie is misplaced.
As in Porter, the court's authority to exercise full equitable
powers is especially appropriate in a case like the one at bar.
Section 13(b) plays an important role in enabling the FTC to
enforce consumer protection laws. Accordingly, disgorgement, the
purpose of which "is not to compensate the victims of fraud, but to
deprive the wrongdoer of his ill-gotten gain," is appropriate. SEC
v. Blatt, 583 F.2d at 1335; see, e.g., SEC v. First City Financial
Corp., 890 F.2d 1215, 1230 (D.C.Cir.1989) (permitting disgorgement
and observing that "[d]isgorgement is an equitable remedy designed
to deprive a wrongdoer of his unjust enrichment and to deter others
from violating the securities laws"); CFTC v. Co. Petro Marketing
Group, Inc., 680 F.2d 573, 583-84 (9th Cir.1982) (permitting
disgorgement and recognizing its deterrent effect). We conclude
that section 13(b) permits a district court to order a defendant to
disgorge illegally obtained funds. To hold otherwise would permit
a defendant to retain such funds simply by keeping poor records.
Such a result would permit unjust enrichment and undermine the
deterrence function of Section 13(b).
Further, because it is not always possible to distribute the
money to the victims of defendant's wrongdoing, a court may order
the funds paid to the United States Treasury. See, e.g., SEC v.
Blavin, 760 F.2d 706, 713 (6th Cir.1985) (funds remaining after all
claims have been satisfied shall revert to the U.S. Treasury).
B.
Estfan next argues that even if the district court had the
authority to order that unclaimed funds be given to the U.S.
Treasury, this is not what it ordered. Estfan contends that the
district court's order requiring consumer redress limits his
liability to paying each customer $100. In its order, however,
despite its use of the term "consumer redress," the district court
explicitly required that all unclaimed money be paid to the U.S.
Treasury. The court's order was clear.
C.
Estfan's final argument is that disgorgement is not an
appropriate remedy in this case because he was not found
individually liable. Instead, he claims, he was found liable on
the basis of corporate acts with which he was involved and that
under corporate liability only consumer redress would be
permissible.
Estfan misunderstands the basis of his liability. He is
individually liable. The fact that the actions for which he was
responsible were performed by Gem Merchandising does not lessen his
individual liability. Once the FTC has established corporate
liability, "the FTC must show that the individual defendants
participated directly in the practices or acts or had authority to
control them.... The FTC must then demonstrate that the individual
had some knowledge of the practices." Amy Travel Service, Inc.,
875 F.2d 564, 573. Having found that Estfan had direct control
over the activities of Gem Merchandising, and that he was aware of
the illegal practices, the court properly held Estfan individually
liable.
The decision of the district court is AFFIRMED.