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Keywords

lawsuitdefendantattorneyliabilityappealtrustconstructive trust
defendantattorneyliabilitytrustappellantconstructive trust

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F.T.C. v. Network Services Depot, Inc., 617 F.3d 1127, 2010 Trade Cases P 77,131, 10 Cal. Daily Op. Serv. 10,561, 2010 Daily Journal D.A.R. 12,800

Facts

From 2001 to 2004, Network Services Depot, Inc. (NSD) and its principals sold internet kiosk business opportunities, promising substantial revenue from kiosks that were never installed. Despite receiving numerous complaints from customers about the non-existence of kiosks, NSD continued to market the opportunities and made misleading revenue projections. The FTC investigated the operation, which was ultimately revealed to be a fraudulent scheme, leading to the lawsuit against NSD and its principals.

Appellants are a group of related companies and their principals, engaged in the business of marketing and selling internet kiosk investment opportunities.

Issue

Whether the principals of NSD were personally liable for equitable monetary relief under the FTC Act and whether the imposition of a constructive trust on attorney fees was appropriate.

Whether the principals were personally liable for equitable monetary relief under the FTC Act, and imposing constructive trust on fees paid to attorney was appropriate.

Rule

Under the FTC Act, individuals can be held personally liable for deceptive practices if they had knowledge of the fraudulent conduct or were recklessly indifferent to the truth, resulting in consumer injury.

Section 5 of the FTC Act prohibits deceptive acts or practices in or affecting commerce and imposes injunctive and equitable liability upon the perpetrators of such acts.

Analysis

The court found that the undisputed evidence established that the principals, Castro and High, had actual knowledge of the misleading representations made by NSD regarding the kiosk opportunities. They received numerous complaints from customers and failed to verify the existence of the kiosks, demonstrating a reckless disregard for the truth. The court concluded that their actions warranted personal liability under the FTC Act.

The court explained: NSD's sales agreement and offering circular … incontrovertibly obligated NSD to locate and install the kiosks, and it was a misrepresentation for NSD to so promise given defendants' knowledge that the installations were not being done, or their reckless disregard for why….

Conclusion

The Court of Appeals affirmed the district court's ruling, holding that the principals were personally liable for equitable monetary relief and that the imposition of a constructive trust on attorney fees was justified.

Affirmed.

Who won?

Federal Trade Commission (FTC) prevailed because the court found that the defendants engaged in deceptive practices and were liable for consumer injuries.

The FTC now describes the operation as “a classic Ponzi scheme.”

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