Business Law: The Southern District of New York recently decided Federal Trade Commission v. Medical Billers Network, Inc., et. al., in which it reaffirmed the holding that an individual company executive can be held liable for the company’s acts under the Federal Trade Commission Act. The Medical Billers case revolved around a “work at home” marketing program, where the defendant offered individuals the opportunity to purchase systems and then process medical billing claims from their homes in exchange with the promise of making “an average of $400-600 per week.” The Federal Trade Commission (FTC) was involved when purchases of these packages requested refunds that were either refused by Medical Billers, or to which Medical Billers simply did not respond.
The Federal Trade Commission Act (the “Act”) prohibits unfair and deceptive sales and marketing practices. 15 U.S.C. §5(a)(1). Three elements generally need to be demonstrated: “(1) a representation, omission, or practice, that (2) is likely to mislead consumers acting reasonably under the circumstances, and (3) [that] the representation, omission, or practice is material.”
The aspect of this case that is critical is that the FTC did not just pursue legal remedies against the corporate defendant. Rather, it also sued the individual owners. And notably, this pursuit was successful. In other words, the corporate shield was ineffective to protect the individual owners and officers of the company from FTC Act liability. In reaching this decision, the Court, citing its previous holdings, articulated the following:
“Individual defendants may be liable for corporate acts or practices if they (1) participated in the acts or had authority to control the corporate defendant and (2) knew of the acts or practices. . . . ‘Authority to control the company can be evidenced by active involvement in business affairs and the making of corporate policy, including assuming the duties of a corporate officer.” (citations omitted).
The case therefore reiterates the importance of ensuring that business practices and promotional materials do not, even inadvertently, fall under the classification of false or deceptive.
We therefore recommend the following:
- Ensure that all advertising and promotional materials have been cleared by legal counsel prior to their publication and distribution.
- Implement employee training to advance sales methods that are effective, but not violative of the Federal Trade Commission Act.
- Implement management controls to verify that the recommendations and training protocols are being internally adhered to.