What happens when a company president ignores in-house counsel’s warnings by putting his hands over his ears (la, la, la!) and refuses to discuss the legality of a matter further? That president and other individuals were sued by the Federal Trade Commission. Recently the Ninth Circuit upheld a district court’s decision in favor of the FTC, finding the now-former president, Charles Gugliuzza, personally liable for the company’s unlawful conduct of defrauding over half a million customers over two years. He was ordered to pay a whopping $18.2 million in restitution.
Case details: Commerce Planet, Inc. sold a product called OnlineSupplier on its website. When consumers went to visit the product’s landing page, however, they were offered a free “Online Auction Starter Kit” to sell products on eBay instead. Consumers could gain the free starter kit by submitting a credit card payment for shipping for $1.95. Deceptively deep in the fine print was the statement that when consumers ordered this kit, they were also agreeing to purchase OnlineSupplier, which is known as a “negative option.” If consumers did not cancel within the 14-day trial period, their credit card was automatically charged a recurring monthly membership fee. Consumers did not know until the charge appeared on their credit card statements, signaling back when they ordered the kit, they had also agreed to purchase OnlineSupplier.
As Troutman Sanders points out, the most interesting part of this case was when Gugliuzza refused to listen to company’s in-house counsel, Paul Huff. Huff testified that he had advised Gugliuzza that the web pages were likely problematic, but his client ignored counsel’s warning. As a result, the district court found and the Ninth Circuit upheld that Gugliuzza acted as Commerce Planet’s de facto legal counsel. Gugliuzza’s no-response response was the basis for his personal — and costly — liability. In short: A company and individual executives should follow in-house counsel’s expert advice.