What is the court’s proper role in approving a settlement between a government agency and a corporate defendant? Under what conditions is such a settlement in the public interest? Can a no-fault settlement, in which the defendant does not admit any wrongdoing, satisfy this interest? These are among the questions posed by FTC v. Circa Direct.
Circa Direct is a New Jersey marketing company that, among other things, promoted acai berry-based weight loss products to US consumers. According to the Federal Trade Commission (FTC) Complaint, Circa frequently advertised these products through websites designed to look like news reports, with domain names like onlinenews6.com and memphisgazette.net. In some cases, the websites included the names and logos of well-known television networks like Fox News and CNN. The product “reports,” alleges the FTC, were frequently styled as first-person success stories, and included “reader comments” — all fictional. According to David Vladeck, Director of the FTC’s Bureau of Consumer Protection, “Almost everything about these sites [was] fake.” Moreover, according to the FTC, Circa had no reasonable basis for its weight-loss representations.
In February, the parties agreed to settle the case, and submitted a stipulated order for the court’s approval. The proposed order mandated a number of sanctions against Circa, including a permanent injunction and a monetary judgment of $11.5 million with a carve-out allowing for some of these monies to pay Circa’s attorney’s fees, the latter to be suspended subject to certain conditions. Significantly, however, the stipulated order contained no admission of wrongdoing.
The New Jersey District Court declined to enter the Order, citing SEC v. Citigroup Global Markets, Inc. In Citigroup — a case linked to the Wall Street collapse that kicked off the “Great Recession” — the New York District Court held that it could not approve a settlement between the SEC and Citigroup where the settlement provided for damages and injunctive relief, but did not require Citigroup to concede any of the SEC’s allegations. Following Citigroup, the Circa court concluded that it must independently ensure that the settlement was fair, adequate, reasonable, and in the public interest, and required supplemental briefing by both parties on whether the Citigroup standard of review should be applied.
Both parties responded to the court’s order with briefs that clarified, among other things, that the parties agreed that Citigroup furnished the applicable standard; that the $11.5 million judgment was based on Circa’s gross revenue; and that the actual amount of damages was likely to equal $2.89 million, which constituted all of Circa’s remaining assets. The briefing also indicated that the $11.5 million represented a fraction of the consumer loss, since Circa only marketed the products, and did not profit from their sale.
In mid-June, the court ordered further briefing by the FTC to address its remaining reservations. Chief among these is whether a settlement with no admission of liability can be in the public interest. In addition, the court requested briefing on the applicable legal scope of, and standard for, its fairness review.
The implications of the court’s decision could be substantial. If the FTC and other federal agencies are effectively required to extract admissions of liability from the companies they prosecute, those companies will, in all likelihood, be much less willing to settle, particularly given the potential for follow-on litigation by consumers. Adjudication, inevitably, will increase legal costs and delays and may reduce recoverable assets. Nevertheless, there appear to be advocates within the FTC for an active and rigorous review by the courts of proposed settlements. For example, FTC Commissioner Rosch wrote to the Circa court in April, noting that he spoke only for himself, but urging that such settlements should not simply be “rubber-stamped,” particularly where the defendant has refused to admit liability.
In the meantime, Citigroup has appealed the New Jersey District Court’s rejection of its settlement with the SEC to the Second Circuit, and the Second Circuit has said it will likely reverse the lower court’s decision. At this point, it seems clear that the questions posed by the Circa and Citigroup cases will rankle the courts, the agencies, and the industries they regulate for some time to come.