FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. VERITY INTERNATIONAL, LTD., Defendant-Appellant, Automatic Communications, Ltd.; Robert Green, individually and as owner of Verity International, Ltd.; Marilyn Shein, individually and as owner of Verity International, Ltd., Defendants-Third-Party-Plaintiffs-Appellants, Integretel, Inc., a California corporation; Ebillit, Inc., a subsidiary of Integretel, Inc., Defendants, AT & T Corp., Third-Party-Defendant.
Docket No. 04-5487-CV.
United States Court of Appeals, Second Circuit.
Argued: October 7, 2005. Decided: March 27, 2006.
443 F.3d 48
Before: WALKER, Chief Judge, FEINBERG and STRAUB, Circuit Judges. JOHN M. WALKER, JR., Chief Judge.
John J.D. McFerrin-Clancy (Jeffrey M. Eilender, on the brief), Schlam Stone & Dolan, New York, NY, for Defendant-Appellant and Defendants-Third-Party-Plaintiffs-Appellants.
The Federal Trade Commission (“FTC“) took a dim view of this billing system and brought suit to shut it down as a deceptive and unfair trade practice within the meaning of
BACKGROUND
The district court found the following facts upon a bench trial.
I. Structure of the Billing System
The defendants-appellants’ billing system operated as follows: When a computer user visited a website providing adult-entertainment services, the website offered the user the ability to buy adult content using a downloadable “dialer program.” The user downloaded the dialer program after clicking through a series of website disclosures containing the terms and conditions of use and an explanation that charges for the adult content would be billed to the telephone-line subscriber as the cost of an international phone call. The computer user then initiated the dialer program, and if the computer was connected by modem to a telephone line, the dialer program placed an international phone call to a Madagascar telephone number, bypassing the line subscriber‘s designated carrier in favor of AT & T and later Sprint.
Either AT & T or Sprint carried the call to London where it handed off the call to a separate carrier, AT & T U.K. (later renamed Viatel). Instead of routing the call to Madagascar for completion, AT & T U.K./Viatel carried the call to a designated internet server in the United Kingdom, a practice known as “short-stopping” the call. That internet server finalized the connection between the user‘s computer and the website providing the desired adult entertainment.
Charges for accessing the adult entertainment appeared on bills sent to the consumers whose telephone lines were used. AT & T and Sprint identified the telephone-line subscribers by the Automatic Number Identification (“ANI“) system, the standard means by which telephone companies bill for phone calls. These bills, at first telephone bills from AT & T and later separate bills designed by Verity and sent using information provided by Sprint, charged line subscribers for long-distance phone calls to Madagascar.
Notably, this billing system did not have a mechanism to ensure that a telephone-line subscriber authorized the computer user to access a given adult-entertainment service. The absence of such a mechanism allowed line subscribers to receive bills for adult-entertainment access about which they had no knowledge, which prompted the FTC to bring this lawsuit.
In May 1997, defendant-appellant ACL contracted with Telecom Malagasy, the national telecommunications carrier for Madagascar, for (1) the right to carry calls placed to certain international telephone numbers assigned to Madagascar, (2) the right to collect charges for these calls, and (3) the right to terminate these calls at any location of ACL‘s choice, including locations outside Madagascar. The right to carry calls to these numbers was valuable because of the calls’ high per-minute tariffed rate under U.S. telecommunications law. Revenue generated from these calls would ultimately be divided between ACL, Telecom Malagasy, various phone-call carriers, ACL‘s billing agents, a company that distributed the dialer program mentioned above, and various adult-website operators.
To exploit ACL‘s right to carry calls to these Madagascar phone numbers, ACL contracted with Global Internet Billing, Inc. (“GIB“) for GIB to market the dialer program to adult-website operators and to use its best efforts to generate a minimum usage volume. ACL agreed to provide GIB with the Madagascar telephone numbers for inclusion in GIB‘s dialer program. ACL paid a portion of call revenues to GIB, which in turn paid the adult-website operators, effectively making GIB a paid intermediary between ACL and the website operators.
ACL also needed to arrange for the carriage of calls from a computer‘s modem to the U.K. internet servers that would connect the calling computer to an adult website in the United States. Accordingly, in January 1999, ACL contracted with two companies, AT & T and AT & T U.K., to carry the calls. AT & T agreed to carry calls placed to ACL‘s Madagascar phone numbers to the London facilities of AT & T U.K. AT & T U.K. would then carry the calls to the designated U.K. internet servers. AT & T was responsible for billing and collection for these calls, and using ANI information, AT & T billed phone-line subscribers for the ACL calls on their regular monthly telephone statements.
The content of the telephone statements received by the subscribers is relevant here. AT & T charged subscribers only the tariffed rates for phone calls to Madagascar. It listed the charges in the “Long Distance” section of the bills, with Madagascar as the “Place Called.” Under the “Important Information” header, the bills stated that “nonpayment of toll charges may result in disconnection of local service, and other services may be restricted if not paid.”
In the roughly-seven-month period beginning in January 2000, when adult-website operators started using ACL‘s system to provide adult-entertainment services to computer users, AT & T‘s billings for traffic to ACL‘s Madagascar numbers totaled $29 million, as compared to $1.6 million in total billings during the previous twelve months. At the same time, the percentage of total billings refunded to subscribers who contested their bills spiked from 8% in the previous year to 38% during this period.
ACL‘s contract with AT & T, together with ACL‘s other agreements, established a multitiered cascading-payment structure: AT & T sent to AT & T U.K. the amounts due both AT & T U.K. and ACL; AT & T U.K. then paid ACL from those funds. ACL then paid GIB, who in turn paid the adult-website operators. Each entity kept some of the money along the way. (Telecom Malagasy was compensated separately by both AT & T and ACL for providing the phone numbers.) This arrangement was in effect from January 2000 until July 2000, when AT & T terminated the contract and stopped carrying calls for ACL. The district court deemed this the “AT & T Period.” After AT & T terminated the agreement, ACL turned to Sprint as a replacement. ACL reached an agreement with Sprint which contemplated Sprint performing billing and collection functions, as AT & T did, but Sprint then quickly entered into a new agreement that released it from these duties. Under the new agreement, Sprint agreed to carry calls to the London facilities of AT & T U.K. (now renamed Viatel), but it would leave billing and collection to ACL by providing ACL with the ANI information identifying the subscribers whose telephone lines were used to call ACL‘s Madagascar numbers. As it did in the AT & T agreement, ACL warranted that it would receive the calls and terminate them in Madagascar. ACL agreed to pay a per-minute fee to Sprint and AT & T U.K./Viatel for serving as carriers of the phone calls. This “Sprint Period” lasted from July 2000 through September 2000, when Sprint stopped carrying calls to ACL‘s Madagascar phone numbers.
The bills also contained a “1-800” number provided for line subscribers to call with questions about their bills. That number was widely used. During the Sprint period, 91,683 bills were sent to line subscribers and at least 24,986 subscribers contacted Verity about the bills. Calling the customer-service center was not a positive experience for many invoice recipients. The center was so understaffed that 72% of the calls placed to it were abandoned by callers. While waiting on hold for a customer-service representative, callers were played a recording warning that “[f]ailure to pay a Verity International bill may result in the blocking of your phone line to services of this nature from a variety of content providers and further collection activity of past due amounts.” Once connected to a customer-service representative, callers had to weather a “hard sustain” approach that involved the representative advising callers that the charges were valid, that the charges must be paid, and that nonpayment would subject the line subscriber to further collection activity. Robert Green and Marilyn Shein instructed the call center to maintain this hard-sustain approach, which did not change until the FTC brought the present lawsuit. During the Sprint Period, the Verity bills resulted in $1.6 million in collected billings and over 500 consumer complaints to the FTC. The billing system has not been resurrected after Sprint stopped carrying its calls.
III. Procedural History
A. The FTC‘s complaint
The FTC‘s complaint alleged that certain aspects of the defendants-appellants’ billing system were deceptive or unfair trade practices in violation of
B. Parties
ACL is a Bahamian corporation that operated the billing system in dispute. It was founded and controlled by Robert Green and Marilyn Shein, each of whom owned 40% of ACL‘s shares until September 20, 2000, when an Australian corporation, Oriel Communications, Ltd., acquired half of ACL‘s shares. The acquisition left Green and Shein each holding 20% of ACL‘s shares and approximately 11% of Oriel‘s shares. Green and Shein also founded and controlled Verity, a short-lived operation that was part of the billing system and was used for accounting purposes.
On December 13, 2000, the district court entered a preliminary injunction that imposed an asset freeze on Verity, Green, and Shein to preserve funds for a possible monetary remedy. The preliminary injunction also required each of them to complete and return to the FTC a financial-disclosure form. The FTC proposed the financial-disclosure requirement as a way to evaluate the reasonableness of Green‘s and Shein‘s requests to unfreeze assets for living expenses, so Green and Shein did not contest the requirement at the time. Green and Shein contend that upon seeing the enormous amount of information requested by the disclosure form, they decided not to seek a release of their frozen assets and not to complete the disclosure form. But the court‘s order to do so stood. Accordingly, the district court ordered Green and Shein held in contempt of court for their failure to comply with the preliminary injunction‘s financial-disclosure requirement, an order from which Green and Shein appeal. The district court imposed a coercive per-day fine for their noncompliance and ordered their civil confinement, should they be found within the United States, until they complied with the financial-disclosure requirement. Soon thereafter, the district court denied their motion to lift the financial-disclosure requirement and held that disclosure was necessary “to assure enforcement of an asset freeze or to recover proceeds of wrongdoing that are the subject of an equitable claim for disgorgement.” To date, neither Green nor Shein has completed the financial-disclosure form. As of October 7, 2005, the date on which this appeal was argued, the coercive monetary fines totaled $16.1 million per contemnor.
D. Motion practice and bench trial
The defendants-appellants filed a motion for judgment on the pleadings, contending that the district court lacked subject-matter jurisdiction because (1) ACL was a common carrier outside of the FTC‘s jurisdiction, (2) the filed-rate doctrine negated standing by precluding the FTC from contending that line subscribers could avoid the charges in question, and (3) the primary-jurisdiction doctrine required the FCC to first decide the case. The district court asked the FCC to brief, as amicus curiae, the merits of the defendants-appellants’ contentions, and the United States Attorney for the Southern District of New York submitted a letter brief on behalf of the FCC answering the district court‘s questions. He concluded that ACL was not a common carrier under the Communications Act and that the primary-jurisdiction and filed-rate doctrines therefore did not apply. With the benefit of the FCC‘s views, the district court denied the defendants-appellants’ motion for judgment on the pleadings and found that it had subject-matter jurisdiction to hear the case.
On September 17, 2004, following a bench trial on a record of stipulated facts, declarations, exhibits, and other evidence, the district court filed a memorandum opinion. The court incorporated the factual findings and legal holdings of its earlier opinion denying defendants-appellants’ motion for judgment on the pleadings, held that the FTC proved Counts I, II, and III of its second amended complaint, and held that individual as well as corporate liability was appropriate. Finding the restitutionary remedy of disgorgement to be available and proper, the district court entered two money judgments against the defendants-appellants for a total of $17.9 million. The court also replaced the preliminary injunction with a permanent injunction, which did not contain a financial-disclosure requirement. The defendants-appellants timely appealed from the district court‘s judgment.
DISCUSSION
Our review proceeds in multiple parts. In Parts I-III, we consider and find meritless the defendants-appellants’ arguments that the district court lacked subject-matter jurisdiction. Next, in Part IV, we consider a challenge to the district court‘s determination that the trade practices at issue violated
The FTC Act limits the FTC‘s enforcement power. Pertinent here is the FTC‘s inability to enforce
This contention raises the question whether the term “common carrier” under the FTC Act has the same meaning as the term “common carrier” under the Communications Act. As explained below, we determine that “common carrier” under the FTC Act is properly defined by reference to the common law of carriers and not to the Communications Act, even though the common law definition does not meaningfully differ from the Communications Act definition for the purposes of this appeal. Under both definitions, ACL is not a common carrier. A brief history of the two acts is helpful in explaining our conclusion.
The first federal regulation to impose duties on common carriers was the Interstate Commerce Act of 1887 (“ICA“), ch. 104, 24 Stat. 379 (1887), which applied to “any common carrier or carriers” engaged in the railroad transportation of people or property interstate. The ICA imposed on railroad common carriers traditional common-carrier requirements such as nondiscrimination, tariff-filing, and charging just and reasonable rates, id. §§ 1-7, and it created the Interstate Commerce Commission (“ICC“) to administer the provisions of the act, id. §§ 11-12. In 1910, Congress passed the Mann-Elkins Act, ch. 309, 36 Stat. 539 (1910), which amended the ICA to apply to interstate telephone companies and to deem such companies common carriers, id. § 7(1). Neither the ICA nor the Mann-Elkins Act contained a definition of “common carrier.”
In 1914, in the thick of the antitrust movement, Congress passed the Federal Trade Commission Act (the “FTC Act“), ch. 311, 38 Stat. 717 (1914), which created the Federal Trade Commission (“FTC“) as an enforcement agency. Congress did not intend the FTC to enforce unfair-competition law2 against common carriers because the ICC already regulated common carriers under the Interstate Commerce Act. Thus, for the purpose of preventing interagency conflict, the FTC Act common-carrier exception was created. See generally Marc Winerman, The Origins of the FTC, 71 Antitrust L.J. 1, 69 n.413 (2003) (mentioning the genesis of the common-carrier exception). Just as Congress had not provided a definition of “common carrier” in the Interstate Commerce Act, it did not provide a definition for that term in the FTC Act.
Regulation of telephone common carriers continued to rest with the ICC until 1934, when Congress passed the Communications Act of 1934, ch. 652, 48 Stat. 1064 (1934).3 That act created the Federal Communications Commission (“FCC“) and transferred to the FCC regulatory authority over telephone common carriers. Id. The Communications Act defined “common carrier” circularly, as “any person engaged as a common carrier for hire, in interstate or foreign communications by wire or radio....”
The concept of a common carrier dates from the English common law and can be traced back to at least 1670 and the writings of Lord Chief Justice Hale. See Munn v. Illinois, 94 U.S. 113, 126 (1876) (referencing Lord Hale‘s treatise). Early common-carrier law applied to “almost all workers and tradesmen,” requiring them to “serve the public generally and to do so on just and reasonable terms,” but over time, the common law of common carriers narrowed its focus to enterprises considered “public” in some way, such as by the government grant of a legal monopoly or their use of public funds. James B. Speta, A Common Carrier Approach to Internet Interconnection, 54 Fed. Comm. L.J. 225, 255-57 (2002); see also Nichols, supra, at 506-07 (describing Lord Hale‘s concept of public interest in privately held business).
Eventually, the definition of a common carrier coalesced into two requirements: (1) the entity holds itself out as undertaking to carry for all people indifferently; and (2) the entity carries its cargo without modification. See NARUC I, 525 F.2d at 640-42 (describing how the common law imposed common-carrier regulation on entities that undertook to carry for all shippers or travelers indifferently); NARUC II, 533 F.2d at 608-09 (describing the “without modification” requirement); Nichols, supra, at 508-09 (quoting the formulation of an 1857 carriers treatise that “[t]o render a person liable as a common carrier, he must exercise the business of carrying as a ‘public employment,’ and must undertake to carry goods for all persons indiscriminately“). This definition does not differ meaningfully for our purposes from the definition of “common carrier” under the Communications Act—both require that an entity provides carriage to the public. See
Applying these definitions, we conclude that defendant-appellant ACL is not a common carrier subject to the Communications Act and therefore does not fit within the FTC Act common-carrier exemption. The carriage of the telephone calls in this case involved three carriers in concept and two carriers in fact. Conceptually, the calls were carried by an originating carrier, a transit carrier, and a destination carrier. AT & T, and later Sprint, served as the originating carrier, routing the calls from the United States to the United Kingdom. The transit carrier was AT & T U.K./Viatel, whose role as transit carrier was, in concept, “to route traffic [from an originating carrier] to a carrier in another country, the destination carrier.” In re AT & T Corp., 14 F.C.C.R. 19140, 19176 n. 168 (1999). Conceptually, Telecom Malagasy was the destination carrier, with ACL standing in its shoes by virtue of the agreement assigning ACL the right to terminate calls placed to Telecom Malagasy‘s numbers. Even at this conceptual level, ACL is not exempt from the FTC Act because foreign terminating carriers are not carriers subject to the Communications Act, as contemplated by the FTC Act‘s common-carrier exemption.
On appeal, ACL presses the argument that the § 5(a)(2) common-carrier exemption applies to an entity with the “status of a common carrier” under the Communications Act,4 even if its activities relevant to a pending lawsuit are not common carriage. Assuming arguendo that common carrier “status” can exist and is determinative, this argument would aid ACL only if it had the status of a common carrier. ACL contends that it holds such status because the FCC granted it a license pursuant to
II. The Primary-Jurisdiction Doctrine
The doctrine of primary jurisdiction allows a federal court to refer issues “extending beyond the ‘conventional expertise of judges’ or ‘falling within the realm of administrative discretion‘” to the appropriate administrative agency for resolution in the first instance. Nat‘l Commc‘ns Ass‘n, Inc. v. AT & T Co., 46 F.3d 220, 222-23 (2d Cir. 1995) (quoting Far East Conference v. United States, 342 U.S. 570, 574 (1952)). “Specifically, courts apply primary jurisdiction to cases involving technical and intricate questions of fact and policy that Congress has assigned to a specific agency.” Id. at 223. Although there is “[n]o fixed formula ... for determining whether an agency has primary jurisdiction,” courts typically consider four factors in this analysis:
- whether the question at issue is within the conventional experience of judges or whether it involves technical or policy considerations within the agency‘s particular field of expertise;
- whether the question at issue is particularly within the agency‘s discretion;
- whether there exists a substantial danger of inconsistent rulings; and
- whether a prior application to the agency has been made.
The four primary-jurisdiction factors do not favor finding FCC primary jurisdiction over the characterization of the services provided by ACL. First, there are many precedents, including those of the FCC, on the meaning of the Communications Act terms “information service” and “telecommunications service.” See, e.g., Nat‘l Cable & Telecommc‘ns Ass‘n v. Brand X Internet Servs., 545 U.S. 967, 125 S. Ct. 2688, 2702-10 (2005); In re Federal-State Joint Bd. on Universal Serv. (”Universal Service Report“), 13 F.C.C.R. 11501, 11531 (1998); see generally Peter W. Huber et al., Federal Telecommunications Law § 12.2, at 1077-86 (1999). The job of applying these reasonably settled definitions to the facts of this case is within the court‘s competence. See Nat‘l Commc‘ns Ass‘n, 46 F.3d at 223 (“This record does not present any issues involving intricate interpretations ... that might need the FCC‘s technical or policy expertise.“). Second, while the classification issue is within the FCC‘s discretion in the sense that the FCC is charged with administering the Communications Act, nothing about the terms invokes the FCC‘s discretion in the same way that more abstract statutory terms such as “reasonable” or “public interest” do. See id. (“This case, however, does not involve the statutory reasonableness of the tariff or other abstract concepts. Instead, it focuses on ... a rather simple factual question ....“). Third, the defendants-appellants have pointed to no danger of inconsistent rulings on the classification of their service. Fourth, to the extent that the defendants-appellants contend that LO/AD Communications, B.V.I., Ltd. v. MCI WorldCom, No. 00 Civ. 3594, 2001 WL 64741 (S.D.N.Y. Jan. 24, 2001), was a prior application to the FCC on the classification issue, they are incorrect. That case concerned the abstract “reasonableness” standard of
The remaining issues in this case go to deceptiveness, unfairness, and common-carrier status under the FTC Act. Congress did not place the interpretation of these terms within the realm of FCC discretion, nor does the FCC have special expertise in interpreting these FTC Act terms. Although the defendants-appellants contend that “[e]very other court presented with these issues has referred them to the FCC,” in each of the cited cases, the claimed violation was of the Communications Act, not the FTC Act. GTE.Net LLC v. Cox Commc‘ns, Inc., 185 F. Supp. 2d 1141, 1144 (S.D. Cal. 2002); Audiotext Int‘l, Ltd. v. MCI WorldCom Commc‘ns, Inc., No. Civ. A. 00-3982, 2001 WL 1580316, at *2-*3 (E.D. Pa. Dec. 11, 2001); LO/AD Commc‘ns, 2001 WL 64741, at *1. We note that the FCC filed an amicus submission stating that it had no particular interest in or expertise over the case so as to warrant declining jurisdiction. For the reasons given above, we conclude that the primary-jurisdiction doctrine does not require referring this case to the FCC.
III. The Filed-Rate Doctrine
The defendants-appellants also contend that the filed-rate doctrine, also known as the filed-tariff doctrine, deprives the FTC of standing and requires dismissal of its complaint. That doctrine is grounded statutorily in the Communications Act‘s requirement that all common carriers file a schedule of their rates, i.e., a tariff, for FCC approval.
We hold that the filed-rate doctrine does not apply in this case because the defendants-appellants point to no tariff that covers the actual service rendered to users of their billing system. The defendants-appellants’ contend that the tariffs filed by AT & T and Sprint apply, but those tariffs cover only telecommunications services, not the information services provided here. The Communications Act defines these two categories of service. A “telecommunications service” (for example, the carriage of a basic voice telephone call) is the offering of “the transmission, between or among points specified by the user, of information of the user‘s choosing, without change in the form or content of the information as sent and received.”
In applying these definitions, the defendants-appellants would have us focus on only part of their billing system. They contend, and it is certainly true, that the carriers handling transmission of computer users’ phone calls—AT & T, Sprint, and AT & T U.K./Viatel—did not change the form or content of the information transmitted. But examining only the service provided by these carriers misses the fundamental question in the filed-rate-doctrine analysis: the nature of the service for which consumers were billed. In this case, while the pure transmission of information—provided by AT & T, Sprint, and AT & T U.K./Viatel—was part of the service rendered to computer users, those users received more as part of their purchase, namely, adult content. It can hardly be denied that access to adult websites motivated computer users to run the GIB dialer program and incur charges via the defendants-appellants’ billing system. Indeed, the funds collected from paying line subscribers compensated both telecommunications carriers and adult-website operators. As explained above, and as undisputed by the parties, online adult entertainment is an information service and is therefore not covered by the AT & T or Sprint tariffs upon which the defendants-appellants rely. Because the defendants-appellants point to no other tariff covering the information service rendered to users of their billing system, the filed-rate doctrine does not apply. Accordingly, the FTC has standing to bring this action.
IV. Violation of the FTC Act
Section 5(a)(1) of the FTC Act declares unlawful “[u]nfair or deceptive acts or practices in or affecting commerce.”
In Count I, the FTC alleged that the defendants-appellants engaged in a deceptive act or practice by falsely representing that a consumer could not successfully avoid charges for adult-website content accessed over the consumer‘s telephone line, even if the consumer did not access the content or authorize others to do so. To prove a deceptive act or practice under
The FTC contends that the first element is satisfied by proof that the defendants-appellants’ caused telephone-line subscribers to receive explicit and implicit representations that they could not successfully avoid paying charges for adult entertainment that had been accessed over their phone lines—what we call a “representation of uncontestability.” The district court found that during the AT & T period, the defendants-appellants caused charges for adult entertainment to appear on AT & T phone bills as telephone calls, thereby “capitaliz[ing] on the common and well-founded perception held by consumers that they must pay their telephone bills, irrespective of whether they made or authorized the calls.” The district court found that this representation was also made during the Sprint Period by the format of the Verity bills and the call-center messages delivered to bill recipients. Upon reviewing the bills and call-center practices, we find that it was not clearly erroneous for the district court to find that they conveyed a representation of uncontestability. See, e.g., Kemp v. AT & T Co., 393 F.3d 1354, 1360 (11th Cir. 2004) (“It was clearly foreseeable that this [phone-bill] formatting[, which listed information-service purchases as long-distance-telephone-call charges,] would cause some customers to think that ... the charges had to be paid in order to maintain phone service.“).
The second requirement for
Under common law agency principles, a person is liable to pay for services that she does not herself contract for if another person has actual, apparent, or implied authority to consent on her behalf to pay for the services. Merrill Lynch Interfunding, Inc. v. Argenti, 155 F.3d 113, 122 (2d Cir. 1998); Restatement (Second) of Agency § 140 (1958). The defendants-appellants rely on apparent authority, contending that all calls made over a subscriber‘s telephone line were necessarily made with the subscriber‘s apparent authority because any user of a computer connected to that telephone line must have been given authority by the line subscriber to use the computer.
Apparent authority, “[u]nlike express or implied authority, ... exists entirely apart from the principal‘s manifestations of consent to the agent.” Towers World Airways, Inc. v. PHH Aviation Sys., Inc., 933 F.2d 174, 177 (2d Cir. 1991). Rather, it would derive here either from manifestations of the principal (the line subscriber) to a third party (an entity involved in the billing system) or from the putative agent‘s (the computer user‘s) position, when justified by ordinary expectations and habits. Restatement (Second) of Agency § 49 cmts. a, b (1958). The defendants-appellants’ analogize the present case to Towers World Airways, supra, in which we held that purchases by a company‘s employee made with a properly issued company credit card are made with the apparent authority of the company. 933 F.2d at 177-79. Notably, that case concerned a principal‘s entrustment of a payment mechanism to its agent and relied upon specific customs of the aviation industry in finding apparent authority. Id. at 178. Here, in contrast, the computer is a multipurpose tool that is not primarily understood as a payment mechanism, and in the ordinary habits of human behavior, one does not reasonably infer that because a person is authorized to use a computer, the subscriber to the telephone line connected to that computer has authorized the computer user to purchase online content on the subscriber‘s account. Apparent authority does not exist on these facts.
Finally, to establish a deceptive act or practice under
In sum, because the FTC proved all three elements of its
B. Count II
The district court held the defendants-appellants’ liable under Count II of the FTC‘s complaint, which alleged that “billing line subscribers who did not use or authorize use of the Internet services offered by the defendants’ clients” was an unfair trade practice. We hold that the defendants-appellants’ waived their right to contest this unfair-practices determination by not raising it as an issue on appeal. The defendants-appellants’ presented several issues for review in their opening brief, and in the paragraph concerning FTC Act liability, they mention only the district court‘s deceptiveness determination; indeed, in the four pages of their opening brief in which they discuss FTC Act liability, they focus only on deceptive-practice liability. Because the defendants-appellants’ did not contest the district court‘s unfair-practices determination until their reply brief, and then only cursorily, we deem it waived on appeal. Tischmann v. ITT/Sheraton Corp., 145 F.3d 561, 568 n. 4 (2d Cir. 1998) (holding an argument waived because the appellant did not raise it until his reply brief); United States v. Gabriel, 125 F.3d 89, 100 n. 6 (2d Cir. 1997) (same). For this reason, we affirm the district court‘s determination that the act of “billing line subscribers who did not use or authorize use of the internet services offered by the defendants’ clients” is an unfair trade practice within the meaning of
C. Count III
In Count III, the FTC alleged that it was a deceptive practice for the defendants-appellants’ to cause consumers to be billed for calls to Madagascar when the calls actually terminated in the United Kingdom. Because liability under this count is not necessary to support the district court‘s order of relief, we express no opinion on the district court‘s determination that the FTC proved this claim for relief.
* * * * * *
We affirm the injunctive components of the district court‘s October 26, 2004 final order for relief because they are supported by the defendants-appellants’ liability under Counts I and II of the FTC‘s complaint.
Two issues determine whether the district court‘s award of disgorgement relief to the FTC should be affirmed. First, is restitution an available remedy under § 13(b) of the FTC Act, the provision under which the FTC seeks relief? Second, if so, did the district court correctly administer the restitution remedy?
A. Restitution under § 13(b) of the FTC Act
The FTC brought this action under the second proviso of § 13(b) of the FTC Act, which states that “in proper cases the [FTC] may seek, and after proper proof, the court may issue, a permanent injunction.”
The defendants-appellants’ do not contest on appeal the district court‘s holding that restitution is available as ancillary equitable relief under § 13(b) of the FTC Act, so we assume without deciding that the district court‘s holding is correct. See, e.g., United States v. Georgia, 546 U.S. 151, 126 S. Ct. 877, 880 (2006) (applying this type of assumption).
The defendants-appellants’ do argue, however, that such restitution must be limited to so-called equitable restitution. We agree. This contention is based on the fact that two types of restitution are distinguishable: As Justice Scalia explained in Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002), “In the days of the divided bench, restitution was available in certain cases at law, and in certain others in equity.” Id. at 212. Equitable restitution allowed the plaintiff to recover money or property in the defendant‘s possession that could “clearly be traced” to money or property “identified as belonging in good conscience to the plaintiff.” Id. Legal restitution, on the other hand, was awarded when the plaintiff could not assert title to or the right to possession of particular property but nevertheless had some basis for recovering for some benefit that the defendant wrongly received from the plaintiff. Id. Here, because the availability of restitution under § 13(b) of the FTC Act, to the extent it exists, derives from the district court‘s equitable jurisdiction, it follows that the district court may award only equitable restitution.10 The fact that only an equitable remedy is available eviscerates the defendants-appellants’ contention that the Seventh Amendment confers a right to a jury trial in this case. See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41 (1989).
The district court strayed off course in its application of the two-step burden-shifting framework for calculating the size of disgorgement relief. This framework requires the FTC to first “show that its calculations reasonably approximated” the amount of the defendant‘s unjust gains, after which “the burden shifts to the defendants to show that those figures were inaccurate.” FTC v. Febre, 128 F.3d 530, 535 (7th Cir. 1997) (citing SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996) (per curiam)). Two errors pervade the district court‘s administration of this framework: (1) misidentifying the baseline for restitutionary relief and (2) prematurely shifting the burden of proof to the defendants-appellants.
1. Misidentifying the restitutionary baseline
The district court measured the appropriate amount of restitution as “the full amount lost by consumers.” This was error. The appropriate measure for restitution is the benefit unjustly received by the defendants. See Pereira v. Farace, 413 F.3d 330, 340 (2d Cir. 2005) (stating that “restitution is measured by a defendant‘s unjust gain, rather than by a plaintiff‘s loss” (internal quotation and alteration marks omitted)) (citing Great-West Life & Annuity Ins. Co., 534 U.S. at 229 (Ginsburg, J., dissenting)); Restatement (Third) of Restitution § 2 (Discussion Draft 2000) (“Liability in restitution is based on and measured by the receipt of a benefit....“); Douglas Laycock, The Scope and Significance of Restitution, 67 Tex. L. Rev. 1277, 1279 (1989) (“[R]estitution measures recovery by defendant‘s gain rather than plaintiff‘s loss“). Labeling the remedy “consumer redress” or “disgorgement,” each a restitutionary remedy, does not alter the basic principle that restitution is measured by the defendant‘s gain.
Undeniably, in many cases in which the FTC seeks restitution, the defendant‘s gain will be equal to the consumer‘s loss because the consumer buys goods or services directly from the defendant. Thus, in these cases it is not inaccurate to say that restitution is measured by the consumer‘s loss. But it is incorrect to generalize this shorthand and apply it as a principle in cases where the two amounts differ—for example, when some middleman not party to the lawsuit takes some of the consumer‘s money before it reaches a defendant‘s hands. Both the district court and the FTC in its brief adopt this fallacy, relying on shorthand from cases in which only one who sold directly to consumers was sued. See FTC v. Febre, 128 F.3d 530, 536-37 (7th Cir. 1997) (direct seller sued); FTC v. Gem Merch. Corp., 87 F.3d 466, 469-70 (11th Cir. 1996) (direct seller sued; court held that “disgorgement, the purpose of which ‘is not to compensate the victims of fraud, but to deprive the wrongdoer of his ill-gotten gain,’ is appropriate“); FTC v. Sec. Rare Coin & Bullion Corp., 931 F.2d 1312, 1316 (8th Cir. 1991) (direct sellers sued); FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 573-75 (7th Cir. 1989) (direct sellers sued); FTC v. Medicor, LLC, 217 F. Supp. 2d 1048, 1058 (C.D. Cal. 2002) (direct sellers sued); FTC v. Five-Star Auto Club, Inc., 97 F. Supp. 2d 502, 534 (S.D.N.Y. 2000) (measuring the “full amount lost by consumers” by the amount taken in by the defendant).11
For the Sprint Period, the cascading payment structure flowed differently. The defendants-appellants’ received consumers’ money through eBillit, and they paid Sprint, AT & T U.K./Viatel, Telecom Malagasy, and GIB from those unjustly received consumer funds. Thus, for the Sprint Period, the district court should determine the amount of the $1.6 million in total billings that the defendants-appellants’ received from eBillit, without deducting monies paid by the defendants-appellants’ to other parties. For both periods, the focus of the district court‘s restitution calculation should be on the defendants-appellants’ unjust gains.
2. Prematurely shifting the burden of proof to the defendants-appellants
The two-step burden-shifting framework for establishing the size of disgorgement relief requires the plaintiff to first “show that its calculations reasonably approximated” the amount of the defendant‘s unjust gains. Febre, 128 F.3d at 535 (citing Lorin, 76 F.3d at 462). Here, because some fraction of consumers who paid the bills incurred through the defendants-appellants’ billing system actually used or authorized others to use the services at issue, the amount of the defendants-appellants’ unjust gains is only a fraction of the amount of their overall gains from the billing system. A reasonable approximation of the defendants-appellants’ unjust gains must take this into account.
Although the district court recognized that restitution is based on unjust payments, not just overall payments, it never explained its basis for concluding that the overall sum collected through the billing system reasonably approximated the amount of unjustly obtained funds. Indeed, for the AT & T Period, the consumer declarations offered by the FTC (although not all considered by the district court because it found them unnecessary) indicate that AT & T gave a one-time credit to any caller who complained to AT & T about the charges. See Pl.‘s Exs. 1, 82-92. No consumer declaration indicates that AT & T refused to provide a credit or refund. Therefore, unlike during the Sprint Period, there is little basis to conclude that unjust gains were obtained from complaining customers during the AT & T Period (although this does not necessarily mean that every charge collected by AT & T was from a person who themselves accessed or authorized others to access an adult website). Accordingly, we do not think it reasonable to assume that total AT & T Period collections approximates the total amount paid by consumers who did not authorize use of the adult entertainment provided.12
Thus, because the district court did not first assess the reasonableness of the FTC‘s approximation of unjust gain, the district court was premature in shifting the burden of proof to the defendants-appellants‘, which in turn allowed the district court to invoke the principle that “‘[t]he risk of uncertainty should fall on the wrongdoer whose illegal conduct created the uncertainty.‘” Febre, 128 F.3d at 535 (quoting SEC v. First City Fin. Corp., 890 F.2d 1215, 1232 (D.C. Cir. 1989)). This presumption against the wrongdoer should not have been invoked without first establishing a reasonable approximation of unjust gain because this presumption applies only in the second stage of the burden-shifting framework. See id. (invoking the presumption to hold that the defendants could not satisfy their burden of proving the inaccuracy of the FTC‘s calculations); First City Fin., 890 F.2d at 1232 (holding that the government satisfied its burden of providing a reasonable approximation of unjust enrichment and that defendants could not meet their burden of rebutting the government‘s calculations). If the law were otherwise, the FTC would be relieved at the first stage from submitting a reasonable approximation of unjust gain and could recover any amount that it chose to submit, however unreasonable, that fit within the presumption against the wrongdoer.
Of course, the reasonableness of an approximation varies with the degree of precision possible. But here, the district court required no precision in the FTC‘s approximation even though precision could be had. The FTC‘s investigatory power gives it the capacity to estimate with some degree of precision how many telephone-line subscribers who paid the bills for adult entertainment did so despite not using or authorizing others to use such services.
* * * * * *
VI. Contempt Sanctions
The district court held defendants-appellants’ Green and Shein in contempt of court for failing to comply with a financial-disclosure requirement of the preliminary injunction and sanctioned them for the contempt by order filed May 2, 2001. The contempt sanctions imposed were coercive, intended to induce compliance with the financial-disclosure obligation by imposing per-day fines for noncompliance and ordering Green‘s and Shein‘s civil confinement until they completed the forms. See generally United States v. United Mine Workers of Am., 330 U.S. 258, 303 (1947) (“Judicial sanctions in civil contempt proceedings may, in a proper case, be employed for either or both of two purposes; to coerce the defendant into compliance with the court‘s order, and to compensate the complainant for losses sustained.“).
Green and Shein appeal from the contempt order, which we now vacate. Our reasoning is straightforward. The permanent injunction that dissolved and replaced the preliminary injunction does not itself contain a financial-disclosure requirement. The district court therefore no longer requires Green and Shein to do the act that the contempt sanctions coerce them do to. Thus, the sanctions must be vacated. See Consol. Rail Corp. v. Yashinsky, 170 F.3d 591, 596 (6th Cir. 1999) (holding that the expiration of a judgment mooted the coercive per-day fines of a contempt sanction imposed for not satisfying the judgment); see also Shillitani v. United States, 384 U.S. 364, 372 (1966) (ordering a contempt sanction vacated as moot on appeal from the sanction). Green and Shein are relieved of all fines imposed by the order and are no longer subject to civil confinement under its terms. Of course, nothing here prevents the FTC from moving in the district court on remand for an appropriate order to obtain the financial disclosure desired and from seeking a new set of sanctions if the district court‘s orders are subsequently disobeyed.
CONCLUSION
We affirm all components of the district court‘s October 26, 2004 final order of relief except for the monetary judgment contained therein, which we vacate. We also vacate the district court‘s May 2, 2001 contempt order. The case is remanded to the district court for further proceedings consistent with this opinion.