A 2009 screenshot of BlueHippo Funding's website
A 2009 screenshot of BlueHippo Funding’s website ()

There is a presumption that consumers relied on a business’s omissions and misrepresentations when assessing damages in civil contempt proceedings brought by the Federal Trade Commission, the U.S. Court of Appeals for the Second Circuit has ruled.

Vacating a lower court’s decision that rejected the FTC’s damage calculation, the Second Circuit agreed with the agency and other circuits to have considered the issue that judges can presume customers relied on the representations of a business from the outset.

The FTC has sought $14,062,627 from computer and electronics marketer BlueHippo Funding, which vows that it will sell to customers regardless of their credit history.

The FTC sued in 2008 for misstatements and omissions in BlueHippo’s store credit and refund policy under Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. §45(a), because the company allegedly failed to disclose to consumers who agreed to purchase a computer on an installment contract 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 any one time.

BlueHippo entered into a stipulated final judgment and order of permanent injunction in April, 2008, but when the company violated that injunction, FTC asked Southern District Judge Paul Crotty (See Profile) to make the contempt award against the company and CEO Joseph Rensin. The FTC figured $14 million in damages on behalf of 55,892 customers.

In July 2010, Crotty held the defendants in contempt for failing to provide computers for 1,348 customers within three weeks as promised, failing to provide a computer or store credit for 677 orders, failing to disclose details of its store credit policy, and conditioning credit extensions on mandatory preauthorized transfer. The judge set damages at $609,856 based on consumers who had qualified for financing but had not received a computer or store credit.

The FTC appealed and Judges Pierre Leval (See Profile), Robert Sack (See Profile) and Peter Hall (See Profile) heard oral argument in Federal Trade Commission v. BlueHippo Funding, 11-374-cv, on Feb. 23, 2012.

The agency argued that the consent order establishes the time of injury from the moment the consumers agree to buy a computer without possessing all the material terms of the agreement. It contended that the lower court erred both by failing to apply a presumption of consumer reliance and by finding the FTC had conceded it had not proved damages on the store credit and refund policy.

The Second Circuit agreed. In an opinion written by Hall, the court said “When the FTC seeks damages for contempt…a court should craft sanctions aimed at least in part on making whole the victims of the contumacious conduct.”

“The injury to a consumer occurs at the instant of a seller’s misrepresentations, which taint the consumer’s subsequent purchasing decisions,” Hall said. “Put alternatively, because the harm stems from the initial misrepresentations, the injury occurs at the moment the seller makes those misrepresentations.”

Hall said it would be an “onerous task” to require the FTC to prove that each consumer relied on the misrepresentations and such a requirement could “frustrate the purpose of the FTC’s statutory mandate.”

“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 customers at the instant of the initial misrepresentation,” he said, and the Second Circuit was joining them.

“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 misrepresentation receive ‘full compensation,’” he said.

The court went on to hold that the “in the context of a contempt action” for violating a promise to refrain from making misrepresentations as to material terms in an agreement “the calculation for the appropriate measure of loss begins with the defendants’ gross receipts derived from such contumacious conduct.”

Once that is accomplished, Hall said, the court should then allow the defendants to present evidence that they may be entitled to any offset against the amount of sanctions.

The circuit remanded the case for the lower court to determine in the first instance that the FTC has established the presumption, and, if so, to use the company’s gross receipts as the measuring stick.

Deputy Chief Counsel David Shonka argued for the FTC.

“Obviously, we’re pleased with the decision,” said James Kohm, associate director of the FTC’s enforcement division. “We’re hopeful that this will enable us to get more money back to injured consumers.”

Martin Himeles of Zuckerman Spaeder argued for the defendants.