FTC Must Pay Defendant’s Attorney’s Fees in Unjustified Deceptive Advertising Case

The FTC was ordered to pay a company’s attorney’s fees in a deceptive advertising enforcement action which the court found was overreaching and not substantially justified.

The FTC brought suit in the U.S. District Court for the Eastern District of Pennsylvania against a publishing company and its individual owner and CEO.  In relevant part, the FTC alleged that the publisher’s telemarketing scripts for certain business periodicals included deceptive claims that the product was a “no risk” subscription since recipients would receive two free issues and could then cancel before being charged for subsequent issues.  If they did not cancel, subsequent issues would be sent automatically and the recipient would be invoiced.

After a non-jury trial, the court ultimately ruled in favor of the publisher and rejected all of the government’s claims.  The publisher then moved for attorney’s fees under the Equal Access to Justice Act (EAJA).  The EAJA is a federal statute which allows private parties to recover their attorney’s fees if they are the prevailing party in a civil suit brought by or against the federal government.  The private party must be either an individual with a net worth under $2 million, or a business entity with a net worth under $7 million and fewer than 500 employees.  Further, the court must find that the government’s position was not substantially justified and that no special circumstances would make an award unjust.

The court found that the publishing company was below the business net worth and employee number requirements, but that the individual owner was above the net worth requirement.  The defendants had conducted a joint defense and moved jointly for the fees such that the fees could not be attributed between one versus the other.  The court concluded that since the real party in interest of the suit was the publishing company, and that the individual defendant was included solely due to his conduct on behalf of the company, the company would be eligible to receive the award of fees.

With respect to whether the government’s position was substantially justified, the FTC was required to show that it had a reasonable basis in truth for the facts alleged, a reasonable basis in law for the theory propounded, and a reasonable connection between the two.  The court found that the FTC’s claims were factually unsupported since the agency misconstrued and cherry-picked language from the telemarketing scripts at issue, failed to adequately review the customer complaints which were the purported basis for the case to determine if they were legitimate, and lacked evidence to support their alleged theory of the case.  Likewise, the agency did not have a reasonable basis in law for the claims because it ignored longstanding court precedent and the FTC’s own prior legal interpretations requiring that a significant minority of reasonable customers would likely be misled by the scripts.

Accordingly, the court granted the request for attorney’s fees against the FTC.