It is a phrase you see or hear attorneys make when describing FTC settlements: “The order includes a suspended judgment.”
The Federal Trade Commission refers to allowing settling defendants to avoid paying a judgment in full as a suspended judgment. Often misunderstood, partially or totally suspended judgments are based upon a defendant’s inability to pay the full amount of consumer injury.
The FTC will not just take a defendant’s word for it when they represent that they are unable to pay. Agency staff will deliberately evaluate a defendant’s assets and require a defendant to swear to the accuracy of personal and corporate financial statements.
Caveat: Resolution of regulatory enforcement actions that include suspended judgments include “right to reopen” provisions. Typically, the right to reopen comes with an “avalanche clause” that is triggered when there is a finding of material misrepresentation or omission as to a defendant’s financial condition, including the failure to disclose any material asset or materially misstating the value of an asset.
If triggered, the entire amount of the suspended judgment becomes immediately due and payable.
As part of the order compliance process, the Federal Trade Commission keeps a close watch for any signs that a party may not have been truthful with respect to what they represented about their finances.
For example, in September 2015, the FTC asked a federal court in Arizona to lift the suspension in the HCG Diet Direct case based on a series of alleged misrepresentations and omissions in a party’s financial statements. The defendant claimed inaccuracies such as a $5,000 monthly income discrepancy and approximately $65,000 more in corporate financial assets than disclosed were inadvertent and immaterial.
The court disagreed. It ruled that the previously suspended judgment in the amount of more than $3 million was immediately due and could be executed upon.
Similarly, a federal court judge recently approved a stipulated order lifting the partial suspension of a $200,000 judgment imposed in an original order settling Federal Trade Commission charges against a defendant in a 2014 text spam case. The court did so following presentation by the FTC of evidence that the defendant concealed approximately $450,000 in assets and misrepresented his financial condition.
Individuals and their business can be exposed to significant liability for unfair or deceptive conduct that violates the FTC Act. Companies and individuals should consult FTC defense attorneys that possess experience defending regulatory enforcement actions.
Takeaway: The FTC is slow to accept a partially judgment and even more deliberate to accept a totally suspended judgment. The FTC will aggressively seek to hold defendants accountable for misleading disclosures regarding financial condition. Additionally, the FTC is extremely vigilant when it comes to evaluating a defendant’s finances while that same defendant pleads poverty, but all the while continuing to live a lavish lifestyle. Defendants that assume that various aspects of their financial condition are not material during the course of settlement negotiations are playing a dangerous game. If the FTC determines otherwise, the consequences are potentially severe, including the release of an avalanche of previously suspended liability.
Richard B. Newman is an Internet marketing compliance and regulatory defense attorney at Hinch Newman LLP focusing on advertising and digital media matters. His practice includes conducting legal compliance reviews of advertising campaigns, representing clients in investigations and enforcement actions brought by the Federal Trade Commission and state Attorneys General, commercial litigation, advising clients on promotional marketing programs, and negotiating and drafting legal agreements. You can follow him on LinkedIn at FTC defense attorney.
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