Friday, October 8, 2010
A Tale in Tyranny
On September 24, 2010, after three years and over $300,000 in legal fees, I was informed that the Federal Trade Commission (FTC) had accepted my settlement proposal of $850,000 in a civil suit in which they accused my company, Swish Marketing, of misleading advertising. I proposed a settlement not because I felt that I had done anything wrong, or that I would ultimately lose in court (in fact my lawyers are confident that I would have prevailed), but rather because the FTC made it clear they would vigorously pursue their action against me through both the trial and appellate courts, meaning that even if I prevailed in the end, I would spend all of my savings in the process.
My story began almost three and a half years ago, April 22, 2007, when Swish Marketing, a small (20 person) internet marketing company which I co-founded , received a CID (Civil Investigative Demand) from the FTC. Although the FTC regional office told us we were not the target of their investigation, the CID asked for every email, piece of computer code, and shred of data my company had ever generated. The FTC agents were investigating another company whose advertising we had posted on our web site. We dutifully began the careful task of gathering the requested data and sent it in to the FTC.
Months passed. Summer came and went. Then Fall. Finally, on December 22, nearly six months after we sent the last of the documents requested, we got an ominous email from our lawyer. The FTC investigation had “changed direction”: they were coming after us.
When I say “us”, I mean me. You see, the FTC‘s policy when they are doing an enforcement action against a large or publicly traded company is to go after the corporation- rarely individuals. But for small businesses, like mine, the FTC goes after individuals. In this case, the individual was me. The FTC was concerned with misleading advertising. I had nothing to do with the advertising, or the company whose product was being advertised. I was the VP of Products, head of engineering at my company with no responsibilities for advertising or marketing.
My lawyers told the FTC that my partners and I were prepared to negotiate a settlement with them in the interest of ending a matter that, however it turned out, was going to cost a great deal of time and money for both sides. The FTC steadfastly refused to even talk to us unless we were willing to say that we could not afford to pay them what they sought (millions of dollars), in which case they said they were willing to settle for all our money, houses, cars, and even pianos if anyone of us had one. Needless to say, we could not accept any such “deal” and the FTC proceeded to sue us.
Instead of going after the amount of money my company had actually generated from the allegedly-deceptive advertisements that appeared on our web sites, the FTC demanded a much greater amount, more than $6,000,000, which represented the entire amount consumers had spent on a product we weren’t even selling, and the proceeds from which we did not even receive. It didn’t seem to matter to the FTC that little of this money had actually been paid to Swish. In fact, the FTC had already settled with the Company that was selling the actual product, and its principal, for nothing. Not one penny. At this point, I began to suspect that the FTC was suing us not because we had done anything wrong, but for some other reason.
My suspicions were confirmed when I looked up the law the FTC said I had violated, a law that was vague and didn’t seem to have much to do with what the FTC was accusing me of. And it certainly did not say that the FTC was entitled to the amount of money it wanted. My lawyers explained that the amount the FTC was suing for was based not on laws that Congress had passed but seemed to be based on what judges had awarded in previous cases over the years.
Moreover, in our case, the FTC was now trying to go beyond what previous judges had awarded. What lay behind their actions seemed to be this: they were trying out a new legal theory. They wanted to establish a new principle – that a person who was in any way connected to the advertising at issue, no matter how trivial their involvement, was liable for the entire amount of all purchases of the product by consumers. I felt as if I had been struck by lightning. I was the sacrificial lamb. I had the rotten luck to be chosen, of all people, to be the test of their novel legal theory.
After a long year of motions, depositions, and affidavits, I came to the realization that, considering all of the possible moves the FTC could make, the tactics they could use, their deep/unlimited pockets, and their dogged persistence, I was going to run out of money to pay my lawyers long before the case was ever going to be settled. The FTC simply had more staying power than I did.
Finally I hired a new attorney, someone who had formerly worked at the FTC and who was able to get a meeting with the FTC’s
Regional Office, something my many previous attorneys had been unable to do. I endured hours of questions as I patiently explained that I was the head of engineering for the company and had nothing to do with marketing, advertising, or copywriting. Eventually, they were convinced enough of my non-involvement to pass on a recommendation to settle with me to their San Francisco offices. Washington, DC
And so I went to
to tell my tale to the Director of Consumer Protection. Mr. Vladeck laid out his thoughts: Well…..we have come this far and spent a lot of time and money. And who knows, perhaps your partners will rat you out to save themselves. He wanted $850,000 to settle. Washington, DC
Then I was summoned again a few months later to
to meet with one of the FTC Commissioners. In a 10 minute minute meeting he said the money was good and he would settle. Washington DC
I was faced with a choice: either cough-up $850,000 or face the prospect of endless legal proceedings. There was also the possibility, however remote, that some judge might actually decide I owed $6,000,000. The lawyers told me “This is the 9 Circuit, a famously anti-business jurisdiction.” Grudgingly, I settled.
I’m all for getting tough on deceptive advertising, including Internet fraudsters. But what seems terribly wrong is the FTC playing Goliath where they just outspend everyone they go after, regardless of whether there was any wrongdoing. Unfortunately, that appears to be the direction in which they’re going. David Vladeck, the new head of the Bureau of Consumer Protection (the person I met with), advocates pursuing test cases “even if the legal theory has not been accepted by the court prior to that time.” (see) In other words, you may be violating a law that doesn’t exist yet. That is downright scary. The only thing the FTC is going to “prove” by “winning” these cases is that they can establish their new principles by bankrupting anybody but the very wealthiest Americans – the only people who could afford to take them on.
Sadly, I fear things are about to get much worse for small business with the introduction of the Consumer Financial Protection Agency (CFPA). In a recent article, Mr. Vladeck was quoted as saying, “We have been collaborating very closely with the folks at the Treasury Department [where the CFPA is being incubated].” (http://voices.washingtonpost.com/political-economy/2010/09/qa_ftc_consumer_protection_chi.html)
Recently the Kauffman Foundation released a study suggesting that, since 1977, net job growth in the
has occurred only because new companies, or “start-ups,” have generated these jobs. Entrepreneurship has become a matter of survival for our country. America must do everything it can to support, nurture, encourage, and respect entrepreneurs. It would be a tragedy for the country, and for the economy, if the FTC, the CFPA, or any other regulator, pursued policies of harassing or bullying small business people. But this is precisely what happened in my case. I wonder how many other entrepreneurs have had similar experiences. United States