Personal Liability for Deceptive Advertising

Response Magazine

Individuals involved in deceptive or unfair advertising practices may be personally liable under the Federal Trade Commission (FTC) Act for judgments against advertisers. When the FTC sues an advertiser for deceptive advertising practices, individuals involved in the creation of the advertising are often surprised to learn that they may be personally liable for a monetary judgment of consumer redress. Generally, individuals that act recklessly indifferent to the truth or falsity of the representations in advertisements can be found personally liable regardless of their corporate position in the company.

In FTC v. Kristy Ross, a federal appellate court affirmed a district court’s judgment entered against the defendant (Ross), holding her jointly and individually liable for equitable monetary consumer redress in the amount of $163 million. The FTC sued Innovative Marketing Inc. (IMI) and several of its high-level executives and founders, including the defendant, for running a deceptive Internet “scareware” scheme in violation of the prohibition on deceptive advertising in Section 5(a) of the FTC Act. The core of the FTC’s case was that IMI operated a massive, Internet-based scheme that tricked consumers into purchasing computer security software, referred to as “scareware.” The advertisements would advise consumers that a scan of their computers had been performed that had detected a variety of dangerous files, like viruses, spyware, and “illegal” pornography. In reality, no scans were ever conducted.

The defendant, a vice president at IMI, was tried on the issue of whether she could be held individually liable under the Act – i.e., whether she was a “control person” at the company, and to what extent she had authority for (and knowledge of) the deceptive acts committed by the company. After the trial, the district court found in favor of the FTC. Specifically, it found that the defendant’s broad responsibilities at IMI coupled with the fact that she personally financed corporate expenses, oversaw a large amount of employees, and had a hand in the creation and dissemination of the deceptive ads proved by a preponderance of the evidence that she had authority to control and directly participated in the deceptive acts. Based on the evidence presented at trial, the district court concluded that the defendant had actual knowledge of the deceptive marketing scheme, or was at the very least recklessly indifferent or intentionally avoided the truth about the scheme. It entered judgment against the defendant and enjoined her from engaging in similar deceptive marketing practices.

The appellate court affirmed the judgment, holding that one may be found individually liable under the Act if she: (1) participated directly in the deceptive practices or had authority to control those practices; and (2) had or should have had knowledge of the deceptive practices. The second prong of the analysis may be established by showing that the individual had actual knowledge of the deceptive conduct, was recklessly indifferent to its deceptiveness, or had an awareness of a high probability of deceptiveness and intentionally avoided learning the truth.

While a determination of individual liability is tied to the facts of each case, the lesson from the Ross case is clear. An individual that plays a significant role in running a company and takes part in the advertisement process should scrutinize any questionable business practices and challenge potentially deceptive advertising promotions. Otherwise, that individual’s reputation and personal assets may be subject to a FTC enforcement action.

"Personal Liability for Deceptive Advertising" by Arthur Yoon and Jeffrey Richter was originally published online in DRMA, a property of Response Magazine, November 14, 2014.