Hilary B. Miller November 1, 2012

Why does it matter?  FTC and CFPB have concurrent enforcement authority over financial practices  FTCA § 5 and D-F § 1031 are in pari materia

FTC Has Various Theories For Holding Actors Vicariously Liable  “Enterprise” liability  “Control person” liability  “Relief” defendants

“Common Enterprise” liability  Defendants that operate in a common enterprise may be held liable for one another's deceptive acts and practices.  FTC v. Think Achievement Corp., 144 F.Supp.2d 993, 1011 (N.D. Ind. 2000)  Defendants found to be a common enterprise are held jointly and severally liable for their violations.  FTC v. J.K. Publications, Inc., 99 F. Supp.2d 1176, 1202 (C.D. Cal. 2000).

Factors considered  common control  sharing of office space and officers  business is transacted through "a maze of interrelated companies”  commingling of corporate funds and failure to maintain separation of companies  unified advertising  any other evidence of no real distinction between the corporate defendants.

Enterprise Liability  A “common enterprise” exists when an enterprise transacts business through “a maze of interrelated companies,” i.e., when, as a whole, “the pattern or framework” of an enterprise indicates that the several companies are actually transacting the same or similar business.  Delaware Watch v. FTC, 332 F.2d 745, 746 (2d Cir. 1964).

Broad catch-all  Inasmuch as no one factor is controlling, courts must consider "the pattern and frame- work of the whole enterprise....”  Delaware Watch Co., 332 F.2d at 746.

“Control” liability  A corporate officer or other employee can be held individually liable for company malfeasance  Once corporate liability is established, the FTC must then generally demonstrate that “the individual defendants participated directly in the practices or acts or had the authority to control them.”  FTC v. Amy Travel Svc., Inc., 875 F.2d at ; FTC v. Transnet Wireless Corp., 506 F.Supp.2d 1247, (2007).

“Control” factors  Active involvement in business affairs and the making (direction, formulation, control, etc.) of corporate policy, including assuming the duties of a corporate officer.  Not limited to respondeat superior  Importantly, in a small closely-held corporation, an individual’s status as a corporate officer gives rise to a presumption of ability to control.  FTC Operating Manual, Chapter Four

Standard of liability  The FTC is not required to prove that an individual defendant intended to deceive consumers.  The individual must have “knowledge” of the unlawful conduct, but the “knowledge” may be satisfied by showing reckless indifference, or an awareness of a high probability of wrongfulness.  FTC v. Amy Travel Svc., Inc., 875 F.2d at 574.

Extent of liability  Individual liability is truly joint and several – i.e., not limited to disgorgement of the benefit received by the individual  FTC v. Windward Marketing, Ltd., 1997 WL , at 15 (September 30, 1997)

“Relief” defendants  Federal courts may order equitable relief against a ‘nominal’ or ‘relief’ defendant, an individual who is not accused of wrongdoing, where that person has:  received ill-gotten funds; and  does not have a legitimate claim to those funds.  Targets: usually wives, but also lawyers, etc.  FTC v. Transnet Wireless Corp., 506 F. Supp.2d at 1273

Summary  Federal common law permits the imposition of vicarious liability on corporate officers, owners, control persons, affiliates and alter egos.  Liability is joint and several, and not limited to disgorgement of benefits received  Third parties may be “relieved” of ill-gotten gains, even if blameless  CFPB will likely follow FTC precedent

The End