On March 3, 2016, the Ninth Circuit affirmed a district court decision holding the former president of Commerce Planet, Inc., Charles Gugliuzza, personally liable for the company's violations of Section 5 of the FTC Act. The FTC sued Commerce Planet, Gugliuzza, and other individual defendants over the deceptive marketing of "Online Supplier," a monthly web-hosting service sold on the company's website. Online Supplier was not actually advertised on the website. Instead, the company advertised an "Online Auction Starter Kit," which taught consumers how they could sell products on eBay. This product was advertised as free, plus a $1.95 shipping charge, which consumers were required to pay by credit card. However, in the fine print there was a hidden negative option for enrollment in Online Supplier. Consumers who did not opt out were automatically enrolled and charged up to $60 per month.
The company and the other individual defendants settled with the FTC, but Gugliuzza chose to go to trial. After a bench trial, the district court found that the company's failure to adequately disclose the negative option was unfair and deceptive and that Gugliuzza was personally liable for the company's conduct during the time that he oversaw and directed the marketing of Online Supplier, which included reviewing and approving the manner in which the negative option was disclosed. He was ordered to pay $18.2 million in restitution.
The Ninth Circuit (in an opinion written by potential Supreme Court nominee Judge Paul Watford) affirmed in part but held that in order for Gugliuzza to be liable for more than he personally had received from the unlawful conduct (estimated at $3 million), liability would have had to be imposed jointly and severally, which the judgment did not actually state. Sensing that this was an oversight, the Court remanded to the district court for clarification.
The most interesting part of the case was Gugliuzza's apparent refusal to listen to the advice of Commerce Planet's counsel regarding the marketing of Online Supplier. According to the FTC's brief submitted to the Ninth Circuit, Commerce Planet's in-house counsel Paul Huff testified that when questions about the legality of the webpages were brought to his attention, Huff advised Gugliuzza that there was likely a problem. Huff testified that Gugliuzza "put his hands over his ears, and refused to discuss the matter further." Because of Gugliuzza's decision to ignore the advice of his in-house attorney, the district court found that the former president had acted as the company's de facto legal counsel. The Ninth Circuit agreed that Gugliuzza's decision to bury his head in the sand was a proper basis on which to find him personally liable.
Cautionary tales about a company's failure to heed the warnings of its counsel are not rare. Gugliuzza's story is a reminder that such failures can be costly to individual executives as well, in his case, to the tune of millions.
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