Friday, August 28, 2009

Remedies Imposed on Kevin Trudeau for Violation of FTC Consent Decree Vacated

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Infomercial pitchman Kevin Trudeau has convinced a federal appeals court to vacate a $37.6 million sanction and a three-year ban on his appearance in infomercials awarded in a Federal Trade Commission (FTC) enforcement action.

Yesterday, the U.S. Court of Appeals in Chicago affirmed a district court finding that Trudeau was in contempt of a 2004 consent decree; however, the court was “troubled” by the sanctions imposed to remedy the contempt. The court vacated the sanctions and remanded for further proceedings.

The Duel

“For years Trudeau has dueled with the FTC in and out of court,” the appellate court noted. The agency’s earliest attacks were in the late 1990s. Trudeau entered into various consent decrees to resolve the FTC enforcement actions.

The current contempt proceeding involves Trudeau’s violation of a September 2004 consent decree (CCH Trade Regulation Reporter ¶15,653). Under the terms of that decree, Trudeau agreed to pay $2 million for consumer redress and to refrain from advertising in infomercials any products, except books. Thus, Trudeau could sell his books through infomercials under the consent decree, as long as the infomercial for the book did not “misrepresent the content of the book.”

In 2007, Trudeau began promoting his book, entitled The Weight Loss Cure “They” Don’t Want You to Know About, through infomercials. The FTC challenged Trudeau’s claims in the Weight Loss Cure infomercial, arguing that the author misled consumers by describing a weight loss program that was “easy,” “simple,” and able to be completed at home. The federal district court in Chicago found Trudeau in contempt and ordered monetary and injunctive relief (CCH 2007-2 Trade Cases ¶75,949).

Contempt Finding

Trudeau was properly found in contempt for violating the 2004 FTC consent decree, the appellate court ruled. To succeed on its contempt petition, the FTC had to show that: (1) the underlying order set forth an unambiguous command; (2) Trudeau violated that command; (3) Trudeau's violation was significant; and (4) Trudeau failed to take reasonable and diligent steps to comply with the order.

The agency established that Trudeau misrepresented the content of the book when he asserted that the diet protocol was “easy” and when he said that dieters who completed the protocol could eat “anything you want.”

The author unsuccessfully argued that he merely quoted or paraphrased the book or offered his subjective opinion when he described the protocol as “easy.” While the book repeatedly stated that the protocol was “easy,” the author failed to mention in the infomercials that the protocol involved the combination of daily injections, heavily restricted diets, colonics, organ cleanses, and daily exercise, among dozens of other restrictions.

Use of the term “easy” did not constitute mere puffing in the context of the infomercials, and even if part of Trudeau’s pitch was mere puffery, the infomercials were still loaded with statements that were patently false, the court explained.

Monetary Sanction

The $37.6 million monetary sanction imposed on Trudeau could not be upheld as a proper compensatory sanction, according to the appellate court. The $37.6 million figure might ultimately be correct; however, the lower court’s order lacked two key ingredients needed in any compensatory contempt sanction: (1) the order failed to explain how the court arrived at the $37.6 million figure; and (2) the order lacked any mention of how the sanction should be administered. The matter was remanded to allow the court to provide greater detail on how it arrived at the specific amount of the sanction imposed.

The district court would need to explain the method it used to calculate the award, why the court chose that method, and how the evidence of record supported the figures plugged into that method. Because the district court had broad discretion to fashion an appropriate remedy in a civil contempt action, the appellate court did not direct the district court on which calculation method to employ. Whether the court chose consumer losses or ill-gotten gains, it would have to explain why it chose the calculation method it did and how the record supported its calculations.

Further, the lower court's order would need to outline how the sanction should be administered. The author's requests for greater procedural safeguards on remand—such as a neutral factfinder (presumably a jury or at least a different district judge) and a proof-beyond-a-reasonable-doubt standard—were also rejected by the appellate court.

Infomercial Ban

The three-year ban on Trudeau appearing in infomercials for any product, including books and other publications, was vacated.

Civil contempt sanctions were either compensatory or coercive, the court explained. The infomercial ban was clearly not compensatory. Nor was it a proper coercive contempt sanction. A coercive sanction seeks to bring the contemnor’s conduct into compliance with the court’s order. An essential ingredient to any coercive contempt sanction is the opportunity to purge, according to the court.

A “purgeable” sanction is one that allows the contemnor to free himself of the sanction by complying with the court’s order. The infomercial ban, however, lasted for three years, no matter what Trudeau did. Thus, the infomercial ban was vacated.

The text of the August 27, 2009, decision in FTC v. Trudeau, No. 08-4249, will appear at CCH 2009-2 Trade Cases ¶76,718.

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