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Home | BakerHostetler

ADventures in Law

Seventh Circuit Reminds District Court That Civil Penalty Factors Must All Be Considered

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As we anticipate the forthcoming changes at the FTC and what enforcement will look like, one area that is often overlooked is the award of civil penalties in FTC cases. We previously wrote a <a href="https://www.adventures-in-law.com/blogs/understanding-the-ftc-penalty-box/" target="_blank" rel="noreferrer noopener">blog post</a> examining the statutory factors the court must consider in determining the amount of civil penalties – “the degree of culpability, any history of prior such conduct, ability to pay, effect on ability to continue to do business, and such other matters as justice may require.” A January 2025 decision from the 7th Circuit gave us additional insight into how it considers the FTC’s calculation and assessment of penalties. In FTC v. DayPacer,<a id="_ftnref1" href="#_ftn1">[1]</a> the 7th Circuit rejected the district court’s award of a $28.6 million penalty won by the FTC in a telemarketing case.

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In 2019, the FTC sued two companies, as well as individuals, who ran a telemarketing operation for allegedly calling millions of consumers on the Do Not Call Registry about educational programs. The telemarketing operation allegedly received these numbers from customers who had submitted their contact information to websites offering to help them apply for jobs, health insurance, and other public benefits. Count I alleged that Defendants personally or caused others to violate the Telemarketing Sales Rule (“TSR”) by making millions of calls to consumers on the Do Not Call Registry. Count II alleged that the defendants provided “substantial assistance” to the telemarketing affiliates (“IBT Partners”), who themselves violated the TSR.

In October 2023, the district court granted the FTC’s motion for summary judgment and found that the Defendants had made illegal, unsolicited calls in violation of the TSR and also found the individual defendants liable for these TSR violations. The district court scheduled a hearing to determine the civil penalty award and scope of the injunctive relief. The district court finalized the injunction and monetary judgment against the telemarketing operation on January 31, 2024. The defendants were ordered to pay $28.6 million and were permanently banned from participating in telemarketing or assisting and facilitating others engaged in telemarketing to consumers.

Now back to the penalties. The defendants appealed to the 7th Circuit challenging several parts of the district court’s order. Our focus here is on the defendant’s challenge of the district court’s damages award of $28.6 million in civil penalties. The first argument the defendants made regarding penalties is that they were “excessive, as it is grossly disproportionate to any harm suffered” and that the court’s calculation was “procedurally improper” because the court did not consider “required statutory factors.”<a href="#_ftn2" id="_ftnref2">[2]</a>

The 7th Circuit reviewed the district court’s civil penalty award for abuse of discretion. In the 7th Circuit, reversal under the abuse of discretion standard is only proper if “the record contains no evidence upon which the court could have rationally based its decision; the decision is based on an erroneous conclusion of law; the decision is based on clearly erroneous factual findings; or the decision clearly appears arbitrary.”<a href="#_ftn3" id="_ftnref3">[3]</a>

The defendants argued that the district court erred by “imposing a penalty equal to gross income, rather than basing it on harm inflicted.” The 7th Circuit rejected this argument, highlighting that 15 U.S.C. § 45(m)(1)(C) sets forth four mandatory factors (“degree of culpability, any history of prior such conduct, ability to pay, effect on ability to continue to do business, and such other matters as justice many require”) and none of those are consumer harm. The court further explained that this section at issue was meant to impose a greater punishment on those who had “actual” or “fairly” implied knowledge of the misconduct.

The 7th Circuit did find, however, that the district court did not consider all the mandatory factors. The court emphasized that in the $28.6 million award order, the district court failed to discuss the defendants ability to pay and also made no findings as to the companies’ ability to do business. Therefore, the court held that the failure of the district court to consider these mandatory factors was an abuse of discretion.

Interestingly, the 7th Circuit noted, “We do not take a position on whether the dollar amount of the award, standing alone, constituted an abuse of discretion. Rather, we hold only that the district court abused its discretion in the procedures used to arrive at the award.”<a href="#_ftn4" id="_ftnref4">[4]</a> This is particularly enlightening because it hints that courts, at least in the 7th Circuit, are not going to automatically reject these high-dollar penalties, but rather will require that the district courts properly consider these high-dollar penalties and apply the statutorily mandated factors.

The 7th Circuit affirmed the rest of the district court decision and reversed and remanded on the issue of calculation of damages and one other issued related to substitution of a deceased individual’s estate.  

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<a href="#_ftnref1" id="_ftn1">[1]</a> Fed. Trade Comm'n v. Day Pacer LLC, No. 23-3310 (7th Cir. Jan. 3, 2025).

<a href="#_ftnref2" id="_ftn2">[2]</a> Id. at 24.

<a href="#_ftnref3" id="_ftn3">[3]</a> United States v. Z Inv. Props., LLC, 921 F.3d 696, 698 (7th Cir. 2019)

<a href="#_ftnref4" id="_ftn4">[4]</a> Fed. Trade Comm'n v. Day Pacer LLC, No. 23-3310 at 29  (7th Cir. Jan. 3, 2025).

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