By Robert B. Barnett Jr., J.D.
The FTC was entitled to summary judgment in a suit against Discount Gold Brokers (DGB), a nationally advertised company offering silver and gold investment opportunities, brought under the Federal Trade Commission Act and the Mail, Internet, or Telephone Order Merchandise Rule for DGB’s not delivering the gold and silver to customers after it was purchased, a federal district court in Los Angeles has ruled. The court, which on the unopposed summary judgment motion found DGB’s owners individually liable, awarded more than $6.5 million in restitution and permanently enjoined the owners from ever marketing investments to consumers again (FTC v. DiscountMetalBrokers, Inc., October 4, 2017, Wright, O.).
Background. Between 2008 and 2014, DiscountMetalBrokers, Inc. f/k/a Discount Gold Brokers, Inc., Discount Metal Brokers, Inc. d/b/a Discount Gold Brokers, and North American Discount Gold.com sold gold and silver as an investment opportunity throughout the U.S. The business model called for DGB to take orders from customers, to purchase whatever was ordered from third-party precious metal suppliers, and then to send the purchased precious metals to the customer. The business was owned by Donald and Katherina Dayer, a married couple, and was operated by Michael Berman. They marketed their investment opportunities through television ads, radio ads, and online platforms. Upon making an order, a consumer would pay a deposit. The remaining balance was due prior to delivery. Once the final payment was made, the consumer would receive a notice indicating that the product would arrive in a minimum of 2-4 weeks. On some occasions DGB would deliver the product, but many times it did not. It rarely, if ever, offered a refund if the shipment was delayed. The business was fairly lucrative. Between 2012 and 2014, DGB received an estimated $39,270,295.52 from customers and paid an estimated $32,743,735.56 to third-party precious metals suppliers.
Consumers who did not receive their order or whose order was greatly delayed filed complaints with the Better Business Bureau, local law enforcement, state attorneys general, and the FTC. In 2016, the FTC filed suit against DGB and the two owners individually, seeking equitable relief and a permanent injunction for violations of Section 5(a) of the FTC Act and for violations of the Mail, Internet, or Telephone Order Merchandise Rule. The FTC then filed for summary judgment. Neither DGB nor the individuals responded to the motion.
FTC Act. To recover under Section 5(a) of the FTC Act, the FTC was required to establish (1) a representation, omission, or practice (2) that was likely to mislead customers and (3) the representation, omission, or practice was material. The court ruled that all three elements were satisfied under these facts. Failing to deliver purchased goods constituted a representation, omission, or practice. Consumers have the right to expect delivery within a reasonable time (or at all). Failing to tell consumers the real timeframe for delivery was likely to mislead them. And, as the court noted dryly, information that goods may never be delivered is important information to consumers.
Mail order rule. The Mail, Internet, or Telephone Order Merchandise Rule provides that when a seller solicits consumers to purchase their goods through the mail, internet, or telephone, the seller must have a reasonable basis to believe that the order will ship within the time stated in the solicitation or, in any event, within 30 days. Furthermore, the Order requires the seller to offer the buyer the opportunity to elect a refund or to consent to a further delay. In addition, DGB’s failure to maintain adequate shipping records created a rebuttable presumption that it lacked a reasonable basis to believe the goods could be shipped within the Rule’s guidelines. DGB, the court said, clearly violated these rules. In any event, its failure to oppose the motion caused the court to presume that DGB lacked the required reasonable basis.
Individual liability. The court next turned to the question whether an individual owner could be held personally liable under the FTC Act. To hold an individually personally responsible for monetary restitution, the FTC must establish that the individual had knowledge of the corporation’s bad acts. In this case, the couple was actively involved in the deceptive acts. They wrote and aired the advertisements. They signed documents and maintained control of corporate funds. They did, in truth, place a great deal of confidence in Michael Berman but they knew of his shady past (for example, he was legally estopped from signing any checks), which meant at the least that they were recklessly indifferent to the bad acts. As a result, the court concluded that it the power under the FTC Act to hold the couple personally liable.
Permanent injunction. The next question was whether the FTC had the right under the FTC Act and these facts to obtain an injunction against the couple. Section 13(b) of the Act gives the FTC the right to an injunction if enjoining the defendants would be in the public interest. The court noted the likelihood that the couple would violate the FTC Act again. They had exhibited a "pattern of systematic wrongdoing" in their business lives. The court, therefore, granted a permanent injunction to ban the couple from marketing investments to consumers and from further violating the FTC Act or the Merchandise Rule. In doing so, however, the court refused to extend the injunction to mandatory compliance reporting to the FTC, as the FTC had requested.
Restitution. In determining restitution, the court adopted the Ninth Circuit’s two-step framework: (1) the FTC must prove that the restitution it seeks reasonably approximates the defendant’s unjust gains and (2) if so, the burden shifts to the defendant to show that the amount is overstated. Given the couple’s poor recordkeeping, the only real evidence of damages was the amount they took in from consumers and the amount they paid to third parties from 2012 and 2014. The court found that measure reasonable, and it awarded damages in the amount of the difference between the two numbers, or $6,526,559. Because the couple did not appear to oppose the motion, they failed to demonstrate that the amount was overstated, and the FTC was awarded that amount as restitution.
The court, therefore, granted the FTC’s motion for summary judgment.
The case is No. 2:16-cv-2112-ODW(JC).
Attorneys: Elizabeth J. Averill for the FTC.
Companies: Discountmetalbrokers, Inc. d/b/a Discount Gold Brokers d/b/a North American Discount Gold.Com
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