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Federal Trade Commission v. Kevin Trudeau

November 29, 2011

FEDERAL TRADE COMMISSION, PLAINTIFF-APPELLEE,
v.
KEVIN TRUDEAU, DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 03-c-03904--Robert W. Gettleman, Judge.

The opinion of the court was delivered by: Tinder, Circuit Judge.

ARGUED SEPTEMBER 24, 2010

Before RIPPLE, MANION, and TINDER, Circuit Judges.

Infomercialist Kevin Trudeau violated a court-approved settlement with the Federal Trade Commission by misrepresenting the content of his book The Weight Loss Cure "They" Don't Want You to Know About. FTC v. Trudeau, 567 F. Supp. 2d 1016 (N.D. Ill. 2007). The district court held Trudeau in contempt and ordered him to pay $37.6 million to the FTC and banned him from making infomercials for three years. On appeal, we affirmed the district court's finding of contempt but vacated the sanctions. We noted that although a $37.6 million fine "might be correct," the district court needed to explain its math and how the funds would be admin- istered. We did not question the imposition of a coercive sanction in addition to a remedial sanction, but we held that the infomercial ban was inappropriate as a civil sanction because it did not give Trudeau an opportunity to purge, that is, to comply with the underlying order not to misrepresent his publications. FTC v. Trudeau, 579 F.3d 754 (7th Cir. 2009) ("Trudeau I"). (We assume familiarity with the contempt proceedings discussed in Trudeau I and so do not repeat that background here.)

On remand, the district court reinstated the $37.6 million remedial fine. This time, however, the court explained that it reached that figure by multiplying the price of the book by the 800-number orders, plus the cost of shipping, less returns. Addressing our questions about administration, the court instructed the FTC to distribute the funds to those who bought Trudeau's book using the 800-number; any remainder not paid to those victims or used in the administration of the sanction was to be returned to Trudeau. In addition, as a coercive sanction, the district court imposed a $2 million performance bond, effective for at least five years.

Trudeau appeals the sanctions. He argues that the $37.6 million remedial sanction was improperly based on consumer loss rather than his unjust gain. Against the coercive sanction, he argues that the district court's modification of the consent order to include a performance bond was beyond its authority and, even if it had authority to modify the order, the bond requirement violates the First Amendment.

We disagree and therefore affirm the district court. The consent order was intended to protect customers from deceptive infomercials. The protections, unfortunately, were too weak: Trudeau aired infomercials in violation of the order at least 32,000 times. He should not now be surprised that he must pay for the loss he caused. At a minimum, it was easily within the district court's dis-cretion to conclude that he should. And $37.6 million correctly measures the loss. The figure is conservative-- it only considers sales from the 800-number, not sales in bookstores carrying his "As Seen on TV" titles--and reliable--Trudeau cited this figure himself in briefing Trudeau I. As for the coercive sanction, the district court properly modified the 2004 order to increase the likelihood that Trudeau will comply going forward. After so many violations, the district court did not have to stick with the old plan. And the new plan, and the performance bond in particular, does not violate the First Amendment. The government is not impotent to protect consumers--nor is the court powerless to enforce its orders--by imposing narrowly tailored restric- tions on commercial speech.

I. The Remedial Sanction

We review the district court's contempt rulings for abuse of discretion. United States v. Dowell, 257 F.3d 694, 699 (7th Cir. 2001). A district court abuses its discretion if it bases its decision on an incorrect legal principle or clearly erroneous factual finding. In re KMart Corp., 381 F.3d 709, 713 (7th Cir. 2004).

For Trudeau's contempt, the district court imposed a remedial fine measured by consumer loss. That was not error. Longstanding precedent dictates that the district court had power to provide "full remedial relief," McComb v. Jacksonville Paper Co., 336 U.S. 187, 193 (1949), "to com-pensate the complainant for losses sustained," United States v. United Mine Workers of Am., 330 U.S. 258, 303-04 (1947) (emphasis added). In other words, "[r]emedial sanctions . . . are backward looking and seek to com- pensate an aggrieved party for losses sustained as a result of the contemnor's disobedience." Dowell, 257 F.3d at 699 (quoting Jones v. Lincoln Elec. Co., 188 F.3d 709, 738 (7th Cir. 1999)).

It was within the district court's discretion to decide that unless the remedial sanction was measured by con- sumer loss, the victims of Trudeau's contempt would not receive full relief for their actual loss. This conclusion is informed--but not limited--by the remedies available in the underlying FTC action. See FTC v. Kuykendall, 371 F.3d 745, 753 (10th Cir. 2004) (en banc); McGregor v. Chierico, 206 F.3d 1378, 1387-88 (11th Cir. 2000). The FTC enforcement action and the consent agreement aimed to protect consumers from economic injuries based on Trudeau's misrepresentations. See FTC v. Febre, 128 F.3d 530, 537 (7th Cir. 1997). When that agreement was breached flagrantly and repeatedly, the district court chose a remedial sanction that might come close to putting Trudeau's victims in the same position they would have been had Trudeau not misrepresented his books in infomercials in violation of the agreement. Kuykendall, 371 F.3d at 764; Febre, 128 F.3d at 537. To achieve that remedial end, the district court did what many other courts have done in similar situations and awarded relief based on consumer loss instead of the defendant's unjust gain. FTC v. Direct Mktg. Concepts, Inc., 624 F.3d 1, 14 (1st Cir. 2010). That was not error.

Trudeau misunderstands a Second Circuit case, FTC v. Verity Int'l, Ltd., 443 F.3d 48 (2d Cir. 2006), to require a different conclusion. Verity was not a contempt case, but a direct action under section 13(b) of the FTC Act. At issue on appeal in Verity was the correct measure of damages where the defendants only profited from their phone-sex scheme after several middlemen, the phone companies, took their cuts for processing calls. Id. at 68. On those facts, Verity created a narrow middleman ex- ception to the usual rule that consumer loss may be the proper measure of damages in a section 13(b) action. Direct Mktg. Concepts, 624 F.3d at 15. Trudeau has tried to assimilate his case to Verity by emphasizing that he was compensated only indirectly for sales of The Weight Loss Cure. But Trudeau's situation bears no resemblance to the defendants' situation in Verity: Trudeau assigned his rights to payment from his com- pany's assets to ITV Global in exchange for ten years of monthly million-dollar checks. This was not about middlemen taking a cut for their services, but about steadying Trudeau's cash flow. Now, having received only $1.05 million from ITV Global, Trudeau argues that the fine should be capped there. But what if ITV Global had not paid him at all? Would the district court have been powerless to impose any remedial fine? Of course not. The district court recognized that precisely how Trudeau decided to get paid for selling his books through deceptive infomercials in violation of a court order is irrelevant to the proper measure of his remedial fine.

To calculate his fine, the district court relied on Exhibit 20, a table of 800-number sales figures for Trudeau's Weight Loss Cure book, and the testimony of George Potts, ITV's director of financial planning and analysis. According to the table, as explained by George Potts, the 800-number sales plus shipping and handling, minus returns, equals $37.6 million, the amount the district court ultimately concluded Trudeau should pay. Trudeau challenges the evidence supporting that number, but his arguments are unpersuasive: In his first appeal in this case (Trudeau I), Trudeau himself relied on the $37.6 million figure as the measure of ITV's gross revenues from the Weight Loss Cure. The district court's reliance on that evidence was not error, much less clear error. See FTC v. Stefanchik, 559 F.3d 924, 931 (9th Cir. 2009). In fact, it is worth emphasizing that the district court showed restraint in calculating the remedial sanction based only on 800-number sales.

Most of the sales caused by Trudeau's violation of the court order may have been made through the 800- number, but not all. Out of an abundance of caution--in order to avoid using any questionable figures--the dis-trict court decided not to include internet sales or in-store sales of the Weight Loss Cure, even though those books were sold with a conspicuous "As Seen on TV" sticker, making the link between those sales and the infomer- cial less than speculative. In the end, the district court's ...


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