Federal Trade Commission v. Bluehippo Funding, LLC et al
Filing
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OPINION & ORDER. The Court holds that the FTC has established that it is entitled to a presumption of consumer reliance. Defendants are directed to proffer the evidence they intend to offer, if any, to offset the compensatory baseline of gross receipts. (As further set forth in this order) (Signed by Judge Paul A. Crotty on 11/5/2015) (lmb)
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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FEDERAL TRADE COMMISSION,
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Plaintiff,
-against-
08 Civ. 1819 (PAC)
BLUEHIPPO FUNDING, LLC, et al. ,
OPINION & ORDER
Defendants.
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HONORABLE PAUL A. CROTTY, United States District Judge:
On July 27, 2010, the Court issued an order granting in part Plaintiff Federal Trade
Commission's ("FTC") motion for contempt related to violations of a Stipulated Final Judgment
and Order of Permanent Injunction (the "Consent Order") by Defendants BlueHippo Funding,
LLC and BlueHippo Capital, LLC (collectively "BlueHippo") and Joseph K. Rensin,
BlueHippo's CEO. The FTC appealed the damages portion of that order as to material omissions
regarding BlueHippo's store credit and refund policy. On August 14, 2014, the United States
Court of Appeals for the Second Circuit vacated the damages portion of the order and remanded
to this Court to determine if a presumption of consumer reliance applies to the facts of the case
and for reconsideration of damages. The Court now holds that the presumption applies.
BACKGROUND
The Court assumes familiarity with the underlying facts and procedural history, in
particular this Court's July 27, 2010 Order and the Second Circuit's Mandate & Opinion. See
Dkt. 76; FTC v. BlueHippo Funding, LLC, 762 F.3 d 238 (2d Cir. 2014). The following
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recitation of relevant facts is drawn from those documents.
BlueHippo was an installment credit company that marketed computers and other
electronic products to credit-challenged consumers. Under BlueHippo's installment credit
financing plan, BlueHippo sent installment credit agreements to consumers who made an initial
down payment followed by thirteen additional payments. BlueHippo would then send a
computer to those consumers who successfully made the series of payments, which served as
partial satisfaction of the full price of the computer. The consumer would then be enrolled in
BlueHippo's financing plan to pay the remaining balance.
In 2006, BlueHippo instituted the store credit and refund policy at issue. As
implemented, BlueHippo informed consumers at the time of their initial payment that they could
request a refund within seven days of the payment. After seven days, BlueHippo would not issue
a refund; instead, consumers would receive store credits that they could use to buy merchandise
in BlueHippo' s online store. But BlueHippo did not inform consumers at the time of their initial
payment that store credits could not be applied to any applicable shipping and handling fees or
taxes. Consumers were informed of those details only when they attempted to make a purchase
in the online store.
In February 2008, the FTC initiated this action alleging that BlueHippo, in its advertising,
sales pitches, and representations to consumers, had engaged in persistent practices of deception
since 2003 in violation of Section 5(a)(l) of the FTC Act, 15 U.S.C. § 45(a)(l). The FTC sought
permanent injunctive relief and disgorgernent of the proceeds BlueHippo had obtained through
those allegedly deceptive practices. In April 2008, the parties resolved the suit through entry of
the Consent Order.
In November 2009, based on compliance materials BlueHippo had provided to the FTC,
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the FTC moved to hold BlueHippo and Rensin in civil contempt for violation of the Consent
Order. Among other claims, the FTC alleged that BlueHippo had violated the part of the
Consent Order enjoining it from making representations about its "refund, cancellation,
exchange, or repurchase policy without disclosing clearly and conspicuously, prior to receiving
any payment from customers all material terms and conditions of any refund, cancellation,
exchange, or repurchase policy." Consent Order at 4 . The FTC sought $ 14,062,627.51 in
damages, which represented the losses of the 55,892 customers that had made at least one
payment in the relevant time period, but had received neither a computer nor store merchandise.
On July 27, 2010, this Court held BlueHippo in contempt and found that Rensin was
jointly and severally liable for any damages. 1 See Dkt. 76. As relevant here, the Court found
that BlueHippo had violated the Consent Order by failing to disclose to consumers that store
credits could not be used to pay for shipping and handling fees and taxes for online orders. Id. at
8. Specifically, the Court held: " Information concerning cost[] is presumed material. Since the
cost of shipping, handling, and taxes increases the overall cost of merchandise, these costs are
material and BlueHippo should have clearly and conspicuously disclosed this information to
consumers." Id. (internal citations omitted). The Court awarded $609,856.38 in damages, which
represented the losses of the 677 consumers who had made all of the requisite installment
payments to qualify for BlueHippo's financing plan but had received neither a computer rior
store credit. Id. at 10. The Court wrote that " [f] or BlueHippo's remaining violations [including
the store credit policy], however, the FTC has conceded that it has failed to provide record
evidence approximating the damage to consumers." Id. at 10-1 1. The FTC appealed the
1
On November 23, 2009, BlueHippo filed for Chapter 11 bankruptcy relief. See Dkt. 69. Through its trustee,
BlueHippo declined to participate in the contempt proceedings, the subsequent appeal before the Second Circuit, and
the present proceedings on remand.
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damages portion of the Order.
On August 14, 2014, the Second Circuit issued its Mandate & Opinion. As an initial
matter, the Second Circuit noted that "BlueHippo, as the district court found and the defendants
do not dispute, violated the Consent Order" by failing to disclose material details about its store
credit policy. BlueHippo, 762 F.3d at 246. Consumer injury "occurs at the instant of a seller's
misrepresentations, which taint the consumer's subsequent purchasing decisions ." Id. at 244.
The court emphasized that information about the shipping and handling fees and taxes, "if it had
been revealed to consumers before they purchased computers from BlueHippo, in all likelihood
would have influenced their purchasing decisions." Id. at 246.
The Second Circuit vacated the order as to damages and remanded to this Court for a
determination of whether the FTC is entitled to a presumption of consumer reliance in the
calculation of damages. Id. at 242, 246. Recognizing the "inherent difficulty of demonstrating
individual harm," the Second Circuit wrote that "[p]ermitting a presumption of reliance in FTC
claims for contempt damages would thus further the Commission' s statutory purpose to protect
consumers." Id. at 244. The court held that "the FTC is entitled to a presumption of consumer
reliance upon showing that (1) the defendant made material misrepresentations or omissions that
were of a kind usually relied upon by reasonable prudent persons; (2) the misrepresentations or
omissions were widely disseminated; and (3) consumers actually purchased the defendants'
products." Id. (internal quotation marks omitted). If the FTC is entitled to the presumption, then
the court held that "the calculation of the appropriate measure ofloss begins with the defendants'
gross receipts derived from [the material misrepresentations]." Id. at 245. Defendants can rebut
the gross receipts baseline by "put[ing] forth evidence showing that certain amounts should
offset the sanctions assessed against them." id. (internal quotation marks omitted).
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DISCUSSION
On remand, the FTC and Rensin dispute the meaning of the Second Circuit's opinion and
whether the FTC is entitled to a presumption of consumer reliance. Rensin concedes that the
second and third elements of the test are met (wide dissemination of misrepresentations or
omissions; and actual purchasing), arguing only that the FTC has not met its burden on the first
element (misrepresentations or omissions of the kind usually relied upon by reasonable prudent
persons). Transcript of Proceedings, June 19, 2015 ("Tr."), Dkt. 100, at 3-4 (The Court: "I take
it you don't quarrel with two and three . ..."Counsel: "That's right."). Rensin also apparently
does not dispute the Court's initial finding that BlueHippo's omissions regarding shipping and
handling fees and taxes were material. Id. at 4 (Counsel: "We are not asking the Court to find,
to reject the finding of materiality .... "). 2
Rather, Rensin argues only that the FTC failed to establish that those material omissions
"were of a kind usually relief upon by reasonable prudent persons." See Rensin Mem., Dkt. 95
at 5-16. He contends that the FTC must (and did not) establish that BlueHippo actually charged
shipping, handling, or taxes to a significant number of consumers. Id. at 5-12. Absent that
showing, Rensin asserts, the FTC has not shown that the omissions were "of a kind usually relied
upon," and so it is not entitled to a presumption of consumer reliance. Id. at 13-16.
The FTC responds that it has fully satisfied the first element, and that the Court already
found as such in its initial order. FTC Mem., Dkt. 96 at 5-11. The FTC argues that the
2
We agree with Rensin that he did not waive the right to challenge the materiality findings on remand by declining
to raise the issue before the Second Circuit. See Rensin Mem. at 23-24. Since the Court did not award damages
based on the store credit policy omissions, Rensin did not have an incentive to-and perhaps could not- raise the
materiality issue on appeal. See United States v. Quintieri, 306 F.3d 1217, 1229 (2d Cir. 2002) ("An issue is not
considered waived [] if a party did not, at the time of the purported waiver, have both an opportunity and an
incentive to raise it."); Mathias v. WorldCom Tech., Inc., 535 U.S. 682, 684 (2002) (per curiam) ("As a general rule,
a party may not appeal from a favorable judgment simply to obtain review of findings it deems erroneous.").
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frequency with which BlueHippo actually charged for shipping, handling, or taxes is irrelevant
because, as the Second Circuit held, the injury to the consumer (and thus BlueHippo's violation)
occurs at the moment the consumer makes his or her initial payment. Id. at 11-15. As such, the
FTC contends that it is entitled to a presumption of consumer reliance and baseline damages of
BlueHippo's gross receipts of $14,062,627.51.
The Court holds that the FTC has met its burden and is entitled to a presumption of
consumer reliance. We are unconvinced by Rensin' s attempted distinction between whether, on
the one hand, the omissions were "material" and, on the other hand, the omissions were "of a
kind usually relied upon by reasonable prudent persons." The Consent Order defines "material"
as "likely to affect a person's choice of, or conduct regarding, goods or services." Consent Order
at 3. That definition mirrors the widely accepted definition as used in the context of deceptive
business practices. See In re Thompson Medical Co., Inc., 104 F.T.C. 648, 816 (1984), ajf'd 791
F.2d 189 (D.C. Cir. 1986) ("A 'material ' misrepresentation or practice is one that is likely to
affect a consumer's choice of or conduct regarding a product").
Assuming it is theoretically possible for an omission to be "material," but not be "of a
kind usually relied upon by reasonable prudent persons," that is not the case here. Rensin argues
that to satisfy the latter, the FTC must introduce evidence that BlueHippo actually charged
shipping, handling, or taxes to consumers seeking to make online purchases with store credits.
See Rensin Mem. at 5-9. He also argues that the omission here was less likely to be relied upon
because "[a] consumer is less likely to rely upon the cost of merchandise that may be purchased
with a store credit if the consumer cancels the initial purchase than the cost of the item he is
purchasing." Id. at 21-22.
Those arguments mischaracterize the nature of the injury at issue. As the Second Circuit
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confirmed, " [t]he injury to a consumer occurs at the instant of a seller's misrepresentations,
which taint the consumer's subsequent purchasing decisions." Dkt. 97, at 8. The injury here
arose from the fact that BlueHippo led financially strapped consumers to believe, when they
made their initial payment, that they were making an essentially risk-free payment-either they
would eventually make adequate payments to receive a computer or, if not, they could apply
their payments towards purchases from the online store. BlueHippo' s misrepresentation was
misleading because the payment was not actually risk-free; there was a possibility that
consumers would have to make additional payments in the form of shipping, handling, or tax.es if
they sought to utilize the online store option. A reasonably prudent consumer would rely on the
representation that their payments were risk-free, so knowing that they might incur additional
fees later- even if they were not ultimately charged those fees-would affect a consumer's
decision to begin making payments in the first place.
Even if few or no consumers actually paid shipping, handling or taxes (as Rensin claims),
that says nothing about whether those fees, when eventually disclosed, deterred cash-strapped
consumers from making online purchases at all. Indeed, the FTC introduced evidence of exactly
that occurring. See FTC Mem. at 14 n.13. The Second Circuit also reached this conclusion when
it wrote that " [t]his information, if it had been revealed to consumers before they purchased
computers from BlueHippo, in all likelihood would have influenced their purchasing decisions."
BlueHippo, 762 F.3d at 246. The Court holds that Defendants "made material
misrepresentations or omissions that were of a kind usually relied upon by reasonable prudent
persons." Since the second and third elements are uncontested, the FTC is entitled to a
presumption of consumer reliance.
The next step is to determine whether Defendants are entitled to any offsets in damages
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from the gross receipts baseline of$14,062,627.51. Id. At oral argument, counsel for the FTC
recommended permitting Defendants to make a proffer of the evidence they intend to put
forward to show any offset. See Tr. at 23. That proffer would allow the FTC to file any motions
in limine and allow the Court to determine the proper scope of any further discovery. The Court
adopts that procedure and directs Defendants to proffer the evidence, if any, they intend to put
forward showing offsets of damages against them.
CONCLUSION
The Court holds that the FTC has established that it is entitled to a presumption of
consumer reliance. Defendants are directed to proffer the evidence they intend to offer, if any, to
offset the compensatory baseline of gross receipts.
SO ORDERED
Dated: New York, New York
November 5, 2015
p:£1lfoT3
United States District Judge
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