Date Filed: 11/18/2024
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Case: 24-20234
Document: 36
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Date Filed: 11/18/2024
No. 24-20234
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
–––––––––––––––––––––––––––––––––––––––––––––
FEDERAL TRADE COMMISSION,
Plaintiff-Appellee,
v.
ZAAPPAAZ, L.L.C., agent of WBpromotion.com, agent of WB
Promotions, Inc., doing business as Wrist-Band.com, doing business as
Customlanyard.net; Azim Makanojiya,
Defendants-Appellants.
–––––––––––––––––––––––––––––––––––––––––––––
On Appeal from the United States District Court
for the Southern District of Texas
No. 4:20-cv-02717 (Hon. Keith P. Ellison)
–––––––––––––––––––––––––––––––––––––––––––––
BRIEF OF THE FEDERAL TRADE COMMISSION
–––––––––––––––––––––––––––––––––––––––––––––
ANISHA S. DASGUPTA
General Counsel
Of Counsel:
ANNE COLLESANO
MICHELLE SCHAEFER
Attorneys
FEDERAL TRADE COMMISSION
Washington, D.C. 20580
MICHAEL D. BERGMAN
MATTHEW M. HOFFMAN
Attorneys
FEDERAL TRADE COMMISSION
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
(202) 326-3097
mhoffman@ftc.gov
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STATEMENT REGARDING ORAL ARGUMENT
The Federal Trade Commission believes oral argument would
assist the Court in resolving the issues raised by this appeal.
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TABLE OF CONTENTS
STATEMENT REGARDING ORAL ARGUMENT .................................... i
TABLE OF AUTHORITIES ...................................................................... iv
INTRODUCTION ....................................................................................... 1
JURISDICTIONAL STATEMENT ............................................................ 4
ISSUES PRESENTED ............................................................................... 4
STATEMENT OF THE CASE ................................................................... 5
A. The FTC Act and the Merchandise Rule ..................................... 5
B. Zaappaaz’s Merchandise Rule and FTC Act Violations .............. 6
C. Proceedings Below ...................................................................... 12
1.
The Complaint and Preliminary Injunction ....................... 12
2.
The Magistrate Judge Report and Recommendation ........ 13
3.
The District Court’s Pretrial Orders ................................... 16
4.
Findings of Fact and Conclusions of Law ........................... 17
SUMMARY OF ARGUMENT .................................................................. 20
STANDARDS OF REVIEW ..................................................................... 22
ARGUMENT ............................................................................................. 24
I.
The District Court Properly Held That Zaappaaz’s Rule
Violations Caused Injury To Consumers. ......................................... 24
A. Consumers Were Injured by Zaappaaz’s Failure
To Provide Refunds They Were Entitled To Receive Under
the Merchandise Rule. ................................................................ 26
B. In Any Event, the FTC Properly Established Consumer
Reliance on Zaappaaz’s False Shipping Promises. ................... 28
ii
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1.
The FTC presented substantial undisputed evidence
that consumers relied on Zaappaaz’s false shipping
promises. .............................................................................. 29
2.
The district court properly applied a presumption of
reliance. ................................................................................ 33
II. The District Court Properly Gave Customers Who
Received Late-Shipped Merchandise the Opportunity To
Obtain Full Refunds........................................................................... 47
A. Full Refunds Are a Proper Remedy Because the
Merchandise Rule Requires Refunds. ........................................ 48
B. Full Refunds Are a Proper Remedy Where a Sale Is
Induced By Misrepresentations. ................................................ 55
III. The District Court Properly Deemed It Established For
Trial That Zaappaaz Received $12.2 Million in Net
Revenue for Undelivered Products. ................................................... 59
CONCLUSION ......................................................................................... 66
CERTIFICATE OF COMPLIANCE ........................................................ 68
ADDENDUM OF RELEVANT STATUTES AND REGULATIONS
iii
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TABLE OF AUTHORITIES
CASES
AMG Cap. Mgmt., LLC v. FTC,
593 U.S. 67 (2021) ................................................................................. 44
Basic Inc. v. Levinson,
485 U.S. 224 (1988) ............................................................. 38, 39, 40, 46
Campos v. Steves & Sons, Inc.,
10 F.4th 515 (5th Cir. 2021) ................................................................. 22
Chicago Bridge & Iron, N.V. v. FTC,
534 F.3d 410 (5th Cir. 2008) ................................................................. 41
FTC v. Am. Screening, LLC,
105 F.4th 1098 (8th Cir. 2024) ................... 23, 34, 37, 44, 45, 49, 50, 55
FTC v. BlueHippo Funding, LLC,
762 F.3d 238 (2d Cir. 2014) .......................................... 34, 35, 36, 45, 55
FTC v. Commerce Planet,
815 F.3d 593 (9th Cir. 2016) ........................................................... 34, 44
FTC v. E.M.A. Nationwide, Inc.,
767 F.3d 611 (6th Cir. 2014) ........................................................... 34, 45
FTC v. Figgie Int’l,
994 F.2d 595 (9th Cir. 1993) ................................... 33, 34, 35, 44, 55, 56
FTC v. Freecom Commc’ns, Inc.,
401 F.3d 1192 (10th Cir. 2005) ........................................... 34, 35, 44, 55
FTC v. IAB Mktg. Assocs. LP,
746 F.3d 1228 (11th Cir. 2014) ............................................................. 55
FTC v. Kuykendall,
371 F.3d 745 (10th Cir. 2004) ................................................... 34, 45, 55
FTC v. Moses,
913 F.3d 297 (2d Cir. 2019) ...................................................... 31, 34, 44
FTC v. QYK Brands LLC,
No. 22-55446, 2024 WL 1526741 (9th Cir. Apr.
9, 2024) ...................................................................................... 23, 34, 49
iv
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FTC v. Sec. Rare Coin & Bullion Corp.,
931 F.2d 1312 (8th Cir. 1991) ................................................... 34, 36, 44
FTC v. Trudeau,
579 F.3d 754 (7th Cir. 2009) ............................................... 34, 35, 45, 55
Halliburton Co. v. Erica P. John Fund, Inc.,
573 U.S. 258 (2014) ................................................................... 39, 40, 46
Herman & Maclean v. Huddleston,
459 U.S. 375 (1983) ............................................................................... 35
Katherine P. v. Humana Health Plan, Inc.,
959 F.3d 206 (5th Cir. 2020) ................................................................. 23
Kreg Therapeutics, Inc., v. VitalGo, Inc.¸
919 F.3d 405 (7th Cir. 2019) ..................................................... 23, 61, 64
McGregor v. Chierico,
206 F.3d 1378 (11th Cir. 2000) ........................................... 34, 36, 45, 55
Michael H. v. Gerald D.,
491 U.S. 110 (1989) ............................................................................... 43
SAS Inst., Inc. v. Iancu,
584 U.S. 357 (2018) ............................................................................... 38
Texas Dep’t of Cmty. Affairs v. Burdine,
450 U.S. 248 (1981) ......................................................................... 40, 41
Torres v. S.G.E. Mgmt., L.L.C.,
838 F.3d 629 (5th Cir. 2016) ..................................................... 29, 30, 33
U.S. Bank, N.A. v Verizon Comm’ns, Inc.,
761 F.3d 409 (5th Cir. 2014) ........................................................... 59, 64
United States v. Ayers,
795 F.3d 168 (D.C. Cir. 2015) ............................................................... 42
United States v. Philadelphia Nat’l Bank,
374 U.S. 321 (1963) ............................................................................... 41
Watchous Enters., LLC v. Mournes,
87 F.4th 1170 (10th Cir. 2023) ............................................................. 23
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STATUTES
15 U.S.C. § 45 ............................................................................................. 5
15 U.S.C. § 45f .......................................................................................... 43
15 U.S.C. § 53 ........................................................................................... 12
15 U.S.C. § 54 ........................................................................................... 42
15 U.S.C. § 57a............................................................................................ 5
15 U.S.C. § 57b........................................................ 3, 12, 13, 23, 24, 26, 52
28 U.S.C. § 1291.......................................................................................... 4
28 U.S.C. § 1331.......................................................................................... 4
28 U.S.C. § 1337.......................................................................................... 4
28 U.S.C. § 1345.......................................................................................... 4
39 U.S.C. § 3009........................................................................................ 50
Pub. L. No. 117-328, div. BB, § 301 ......................................................... 43
RULES AND REGULATIONS
16 C.F.R. § 435.2 ................................................. 5, 6, 26, 27, 28, 48, 53, 64
16 C.F.R. Pt. 435 ......................................................................................... 5
Fed. R. Civ. P. 23 ...................................................................................... 29
Fed. R. Civ. P. 56 .................................................................... 16, 22, 23, 60
Fed. R. Evid. 301....................................................................................... 36
Fed. R. Evid. 803....................................................................................... 64
Mail Order Merchandise Rule,
40 Fed. Reg. 51582 (Nov. 5, 1975) ............................................ 27, 53, 54
OTHER AUTHORITIES
McCormick on Evidence (8th ed. 2022).................................. 38, 39, 42, 43
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INTRODUCTION
The FTC’s Merchandise Rule (also known as “MITOR”) generally
requires merchants who solicit orders over the Internet to ship
merchandise within the time frame they advertise. Sellers that cannot
timely ship merchandise must contact the buyer and offer the option to
either (1) consent to delayed shipping or (2) cancel the order and receive
a prompt refund. Sellers that do not make this offer and fail to timely
ship must deem the order canceled and provide a prompt refund.
Appellants Zaappaaz, L.L.C., and Azim Makanojiya (collectively,
“Zaappaaz”) flagrantly violated these requirements, cheating consumers
out of as much as $37.5 million during a national emergency. In the
early days of the COVID-19 pandemic, many Americans were desperate
to obtain personal protective equipment (“PPE”) like face masks, gloves,
and hand sanitizer. Zaappaaz sought to capitalize on that demand by
selling PPE on its websites with claims like “GUARANTEED TO SHIP
TODAY” and “IN STOCK—SHIPS SAME DAY.” Consumers bought
PPE in reliance on these representations, often paying extra for rush
shipping. But Zaappaaz knew that it could not meet its shipping
promises due to logistical and supply chain problems. Almost 60% of
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PPE orders were shipped late. Many orders arrived weeks after the
promised delivery date, by which time some buyers had already
purchased PPE elsewhere. Others were never delivered at all. Zaappaaz
never offered customers the refund-or-consent option required by the
Merchandise Rule. Nor did Zaappaaz cancel orders and provide refunds
when orders did not ship on time—in fact it routinely refused customer
requests for cancellation and refunds.
The FTC sued Zaappaaz for violations of the Merchandise Rule
and the FTC Act’s prohibition against deceptive acts or practices. The
district court found Zaappaaz liable on both counts, entered an
injunction, and ordered Zaappaaz to pay approximately $37.5 million to
redress consumer injury under Section 19 of the FTC Act.
Approximately $12.2 million of that sum will be refunded to the
consumers whose orders were never delivered. The rest will be paid to
consumers who received late-shipped products and who affirmatively
request refunds. Any unclaimed funds will be returned to Zaappaaz.
On appeal, Zaappaaz challenges only the award of monetary
relief. Zaappaaz’s main argument is based on the incorrect premise that
Section 19 requires the FTC to show that consumers relied on
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Zaappaaz’s shipping promises. In fact, Section 19 requires the FTC to
establish “injury to consumers … resulting from the rule violation.” 15
U.S.C. § 57b(b) (emphasis added). Here, the Merchandise Rule required
Zaappaaz to offer refunds to customers and Zaappaaz’s failure to do so
caused customers injury regardless of whether they relied on
Zaappaaz’s misrepresentations. In any event, undisputed evidence
shows that customers did rely on Zaappaaz’s false promises about
shipping times, and the district court properly held that proof that a
statement was widely disseminated and materially misleading
establishes a rebuttable presumption of reliance. Seven other circuits
have adopted this presumption, and this Court should as well.
Zaappaaz’s other arguments also lack merit. The district court
had discretion to order full refunds, which are expressly authorized by
Section 19, to customers who request them. This remedy restores the
parties as nearly as possible to the positions they would have occupied if
Zaappaaz had complied with the Merchandise Rule. And because
Zaappaaz did not dispute on summary judgment that it received $12.2
million for undelivered PPE orders, the court properly deemed that fact
established for trial. The judgment should be affirmed.
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JURISDICTIONAL STATEMENT
The district court had jurisdiction over the FTC’s claims under 28
U.S.C. §§ 1331, 1337(a), and 1345. The district court entered final
judgment on March 29, 2024. Zaappaaz timely appealed on May 24,
2024. This Court has jurisdiction under 28 U.S.C. § 1291.
ISSUES PRESENTED
1.
Did the district court correctly conclude that Zaappaaz’s
Merchandise Rule violations caused injury to consumers?
2.
Did the district court properly exercise its discretion in
determining that consumers who received late-shipped products should
have the option to obtain a full refund?
3.
Did the district court properly exercise its discretion to deem
it established for trial that Zaappaaz’s net revenue from undelivered
merchandise was $12,241,035.69, where the FTC submitted evidence on
summary judgment supporting that figure and Zaappaaz did not
challenge it?
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STATEMENT OF THE CASE
A.
The FTC Act and the Merchandise Rule
The FTC Act prohibits “unfair or deceptive acts or practices in or
affecting commerce.” 15 U.S.C. § 45(a)(1). It also authorizes the
Commission to prescribe rules specifically defining unfair or deceptive
acts or practices. Id. § 57a(a)(1)(B). The Commission originally issued
the Merchandise Rule in 1975 to cover mail-order solicitations,
amended it in 1993 to cover telephone solicitations, and revised it in
2014 to cover solicitations made over the Internet. See Mail, Internet, or
Telephone Order Merchandise Rule (“MITOR”), 16 C.F.R. Pt. 435.
Three of the Rule’s prohibitions are at issue here. First, the Rule
bars sellers from soliciting orders for the sale of merchandise through
the mail, via the Internet, or by telephone unless “at the time of the
solicitation, the seller has a reasonable basis to expect that it will be
able to ship any ordered merchandise to the buyer … [w]ithin that time
clearly and conspicuously stated in any such solicitation.” 16 C.F.R.
§ 435.2(a)(1)(i). In other words, merchants must have a reasonable basis
for the claims they make about when a product will ship.
Second, the Rule provides that where a seller is unable to timely
ship merchandise, it must “offer to the buyer, clearly and conspicuously
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and without prior demand, an option either to consent to a delay in
shipping or to cancel the buyer’s order and receive a prompt refund.” Id.
§ 435.2(b)(1). The offer must be made within a reasonable time after the
seller becomes aware of its inability to ship on time and in no event
later than the advertised shipping date. Id.
Third, the Rule provides that if a seller fails to offer the refund-orconsent option and the merchandise is not timely shipped, the seller
must “deem [the] order cancelled and … make a prompt refund to the
buyer.” Id. § 435.2(c)(5).
Additionally, the Rule requires a seller to maintain “records or
other documentary proof establishing its use of systems and procedures
which assure” compliance with these requirements. Id. § 435.2(a)(4).
Failure to do so creates a rebuttable presumption of noncompliance in
any FTC enforcement action. Id.
B.
Zaappaaz’s Merchandise Rule and FTC Act Violations
Prior to March 2020, Zaappaaz sold customized merchandise such
as wristbands, lanyards, and keychains through various websites.
ROA.6715. It utilized a drop-shipping model, whereby Zaappaaz did not
actually maintain products in inventory. Instead, Zaappaaz took orders
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and collected payment from customers, but orders were filled and
shipped by a third party, most commonly a China-based vendor.
ROA.6715-16.
After the COVID-19 pandemic hit the United States in March
2020, Zaappaaz transitioned to selling PPE, initially utilizing the same
drop-shipping model. ROA.6716. Zaappaaz advertised its PPE as instock and provided rush and same-day shipment options. ROA.6718.
For example, Zaappaaz’s website contained the following claims:
“GUARANTEED TO SHIP TODAY,” “IN STOCK – SHIPS SAME
DAY,” and “ALL PRODUCTS IN STOCK READY TO SHIP.” Id.
Zaappaaz also sent mass promotional emails claiming that “ALL OF
THESE PRODUCTS ARE FULLY IN STOCK, READY TO SHIP SAME
DAY AND DELIVER IN 24 HOURS.” Id. And it represented that
consumers who were dissatisfied could receive a refund. Id.
By April 2020, Zaappaaz did not have a reasonable basis to expect
that it could ship products within the time frames it was promising.
ROA.6239, 6252-55, 6716. As a result of new legal restrictions in China
and new FedEx shipping policies, the company changed its dropshipping model and began shipping inventory to a warehouse in Texas,
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but it still struggled to fill PPE orders in a timely manner. ROA.671617. From March to December 2020, over 50,000 PPE orders—59.5% of
the total—were shipped late. ROA.6718. Sometimes Zaappaaz shipped
different products than what customers had ordered. ROA.6719. And
many orders were never delivered at all; Zaappaaz’s records show no
delivery or shipment information for 4.6% of its PPE orders. ROA.6721.
Zaappaaz did not contact customers to offer the refund-or-consent
option required by the Merchandise Rule. ROA.6718 When dissatisfied
customers contacted the company seeking to cancel their orders and get
a refund, Zaappaaz typically denied those requests. Id.
Many consumers were harmed by Zaappaaz’s failure to meet its
shipping promises and refusal to cancel orders and provide refunds. For
example, Amy Russell, who works at St. Louis University, was tasked
with buying face shields and gowns for university police officers.
ROA.2446. Because it was “crucial that we get PPE quickly to protect
our officers,” and there were “no local sources with available PPE,” Ms.
Russell searched the Internet and came across a Zaappaaz website
advertising that products were in stock and would ship within 24 hours.
Id. She confirmed these details via chat with a company representative.
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Id. “Based on these representations and the fact that PPE would be
shipped within 24 hours,” Ms. Russell purchased 500 face shields and
250 gowns for $6103.13, including $360.63 for one-day shipping, with
delivery guaranteed by April 3, 2020. Id. When the product did not
arrive on time, she repeatedly complained and asked Zaappaaz to
cancel the order and issue a refund. ROA.2447-48. After Ms. Russell
complained to the Missouri Attorney General, Zaappaaz promised to
refund the expedited shipping charges but never did. ROA.2448.
Carol and Larry Faber sought to order PPE for their daughter, an
immunocompromised nurse, and her hospital co-workers. ROA.2567,
2572. They ordered from Zaappaaz “because it had PPE in stock, offered
same day shipping, and guaranteed delivery dates.” ROA.2567. Other
companies “either did not have PPE in stock or could not deliver them
quickly.” Id. They called Zaappaaz and spoke to a company
representative who assured them that the products were in stock and
could be delivered as promised. Id.; ROA.2572. The Fabers ordered 500
KN95 masks, 10 pairs of goggles, and 10 face shields for $4,776.73,
including $431.93 in rush shipping fees; Zaappaaz guaranteed delivery
by April 3, 2020. ROA.2568, 2572. When the products did not arrive, the
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Fabers repeatedly contacted Zaappaaz, asking to cancel the order and
requesting a refund. ROA.2573. Zaappaaz refused to provide a refund,
though the Fabers ultimately received a refund from PayPal.
ROA.2573-74.
Susan Alimonti worked for a moving company that needed face
masks to protect workers from COVID-19. ROA.2307. She ordered 10
face shields from Zaappaaz “because their website stated that it had
face shields in stock, that the masks would ship the same day, and that
they guaranteed delivery dates.” Id. She paid $52.91 for expedited
shipping and asked for delivery by April 7, 2020. Id. When the product
failed to arrive, she repeatedly tried to cancel her order, but was told
that she could not cancel or receive a refund. ROA.2308. The products
arrived three weeks late, by which point Ms. Alimonti had already
purchased face shields from another vendor. ROA.2309. Zaappaaz
promised to refund the rush shipping fees, but never did. Id.
Mechelle Braswell works for a peanut shelling plant, which
needed disposable gloves and no-touch thermometers “as soon as
possible to check employee temperatures as they entered the plant.”
ROA.2417. She ordered from Zaappaaz because its website “stated that
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it had the products in stock and offered expedited shipping, including
shipping within 24 hours.” Id. She bought three thermometers and two
boxes of disposable gloves for $334.94, including $28.99 for expedited
one-day shipping for one thermometer. Id. When the products did not
arrive as scheduled, Ms. Braswell repeatedly complained and asked for
a refund, which Zaappaaz refused to provide. ROA.2418-19. The
shipment arrived nearly five weeks late, by which time Ms. Braswell
had ordered thermometers from another company. ROA.2419. The
shipment was also incomplete, containing only one of the three
thermometers she had ordered. Id. Ms. Braswell never received a
refund for the undelivered products. Id.
Other consumers had similar experiences. 1 Many complained to
0F
Zaappaaz. Customer complaints to the company increased from zero in
January 2020 to 820 in April 2020. See ROA.6716. Other consumers
complained to law enforcement agencies and the Better Business
Bureau of Greater Houston and South Texas. The FTC’s review of these
complaints showed a spike beginning in April 2020: only 2 complaints
See ROA.2370-72 (Rhiannon Guevin); ROA.2395-97 (Andrew Li); ROA.2504-07
(Gary Hendricks); ROA.2555-2556 (Jason Pierson).
1
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in March, but 38 in April, 23 in May, and 15 in June, with the largest
numbers relating to failure to ship or deliver PPE as promised and
failure to cancel orders and provide refunds. ROA.2166-67.
C.
Proceedings Below
1.
The Complaint and Preliminary Injunction
The FTC sued Zaappaaz in August 2020, alleging violations of the
FTC Act and the Merchandise Rule and seeking relief under Sections
13(b) and 19 of the FTC Act. ROA.24, 40-41. Section 13(b) authorizes
district courts to issue permanent injunctions against violations of any
laws within the FTC’s purview, 15 U.S.C. § 53(b),while Section 19
authorizes courts to award monetary relief, including “the refund of
money,” to redress consumer injury resulting from violation of FTC
consumer protection rules, id. § 57b(a)(1), (b). 2 Zaappaaz stipulated to
1F
entry of a preliminary injunction that barred Merchandise Rule
violations and misrepresentations. ROA.787-800.
Section 19 also authorizes redress following entry of an administrative ceaseand-desist order by the Commission. 15 U.S.C. § 57b(a)(2). That provision is not at
issue here.
2
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The Magistrate Judge Report and Recommendation
Following discovery, the FTC moved for summary judgment and
Zaappaaz cross-moved for partial summary judgment as to the FTC’s
claim for monetary consumer redress (which Zaappaaz incorrectly
referred to as a “damages” claim). 3 The FTC submitted a detailed
2F
statement of uncontested material facts with its motion (ROA.20812143) with 118 supporting exhibits. Among those exhibits were
declarations from FTC data analyst Elizabeth Ann Miles, who
summarized shipping and delivery information obtained from Zaappaaz
and third-party carriers, and FTC forensic accountant Rufus Jenkins,
who used that information to calculate Zaappaaz’s net revenue from
late-shipped and undelivered PPE orders. ROA.3511-30.
Based on Mr. Jenkins’s calculations, the FTC’s statement assessed
the net amount consumers paid for orders that were not shipped on
time (including merchandise that was never delivered) at
$37,549,472.12, and Zaappaaz’s net revenue from undelivered and
unrefunded orders at $12,241,035.069. ROA.2139. The FTC sought
As discussed in more detail below, “damages” and “refund of money” are distinct
remedies under Section 19. See 15 U.S.C. § 57b(b).
3
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refunds to consumers of the full $37.5 million. In its opposition,
Zaappaaz sought to exclude the Miles and Jenkins declarations but did
not introduce any evidence to rebut them.
The motions were referred to a magistrate judge, who denied
Zaappaaz’s motion to exclude the Miles and Jenkins declarations.
ROA.6241-44. As the magistrate judge noted, Zaappaaz “d[id] not
challenge the contents of Mr. Jenkins’s summary.” ROA.6243. The
magistrate judge recommended that the FTC’s motion for summary
judgment be granted as to both the FTC Act and Merchandise Rule
violations. ROA.6244-66.
The magistrate judge agreed with the FTC that Zaappaaz violated
all three provisions of the Merchandise Rule. First, Zaappaaz lacked a
reasonable basis for its shipping claims. ROA.6252-57. Second,
Zaappaaz failed to offer customers a refund-or-consent option.
ROA.6257-58. Third, Zaappaaz did not deem orders canceled and
provide prompt refunds once it failed to timely ship products.
ROA.6258-60. Zaappaaz did not offer any argument as to the latter two
violations. ROA.6257, 6258.
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As to the FTC Act violations, the magistrate judge concluded that
Zaappaaz engaged in deceptive conduct by making material
misrepresentations (1) regarding shipping and delivery times, (2) that
customers would receive refunds if they were dissatisfied, and (3) that
the product shipped would be what customers ordered and not a
substitute product. ROA.6260-64. Again, Zaappaaz offered no argument
on these points. ROA.6260-61.
With respect to relief, the magistrate judge held that the FTC was
not required to prove individualized reliance by each consumer.
ROA.6267-69. The magistrate judge applied a rule recognized by seven
circuits (see infra at 33) that the FTC is entitled to a presumption of
reliance where a defendant makes material representations that are
widely disseminated. Id. The magistrate judge held that the FTC had
made that showing and that Zaappaaz offered “no argument or evidence
to rebut the presumption of reliance.” ROA.6268.
Nonetheless, the magistrate judge recommended denial of
summary judgment as to the FTC’s request for full refunds, holding
that the FTC had not shown such relief was necessary to redress
consumer injuries and had made no showing as to a lesser amount,
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including for those customers who never received any product at all.
ROA.6272. The magistrate judge also recommended denial of
Zaappaaz’s motion for partial summary judgment on the grounds that
there were factual disputes as to the appropriate monetary relief,
though it noted that Zaappaaz had not proposed any alternative to the
FTC’s figures. ROA.6272, 6275. Finally, despite finding that Zaappaaz’s
violations were not isolated and that the company acted with a high
degree of scienter, the magistrate judge recommended against entry of
an injunction. ROA.6272-74.
3.
The District Court’s Pretrial Orders
The district court adopted the magistrate judge’s report,
ROA.6398-99, and thereafter, granted the FTC’s motion under Fed. R.
Civ. P. 56(g) to deem the facts set forth in the report as established for
trial. ROA.6469-71. Based on the undisputed facts set forth in the
Jenkins and Miles declarations, the court also deemed it established
that Zaappaaz’s net revenue from late and/or undelivered and
unrefunded PPE shipments was $37,549,472.14 and that its net
revenue from undelivered and unrefunded shipments was
$12,241,035.69. ROA.6470.
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In a later order, the court clarified that its prior order rejecting a
“full refund” remedy did not apply to customers who never received
their orders at all, and that these consumers were entitled to a full
refund. ROA 6656-57. It held that the remaining issues for trial were
whether injunctive relief was appropriate and what remedy “less than
full refunds” was necessary to redress injury to consumers who received
late-delivered orders. ROA.6657.
4.
Findings of Fact and Conclusions of Law
Following a brief trial, the district court issued findings of fact and
conclusions of law. ROA.6713-34. The court concluded that an
injunction was warranted, citing the “egregious” nature of the
violations. ROA.6724-28. The court found that Zaappaaz “took
advantage of consumers’ desperation to quickly obtain scarce PPE at
the onset of a global pandemic with false promises of fast, risk-free PPE
deliveries when speed of delivery was of the essence to consumers.”
ROA.6725. Zaappaaz “knowingly disseminated false advertising about
shipping times and then failed to ship most PPE orders on time, if at
all.” Id. It also failed to provide the refund-or-consent option required by
the Merchandise Rule and routinely denied refunds to customers who
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requested them. Id. This conduct continued even past the entry of the
stipulated preliminary injunction. Id. The court further held that an
injunction was warranted because the violations were not isolated,
Zaappaaz acted with a high degree of scienter, it offered no assurances
against future wrongdoing, it failed to recognize the wrongful nature of
its actions, and its business was ongoing and presented ample
opportunities for future violations. ROA.6726-27. Accordingly, the court
permanently enjoined Zaappaaz from advertising or selling PPE,
“misrepresentations involving the sale of any product,” and further
Merchandise Rule violations. ROA.6228-29.
With respect to the monetary relief, the court held that “upon
further review of the facts and applicable law,” it was reconsidering its
conclusion that full refunds were not necessary to afford redress to
consumers who received late shipments. ROA.6730. It applied a rule
recognized by numerous courts of appeals (see infra at 555555) that
where a sale is induced by a material pre-purchase misrepresentation,
customers are entitled to a refund. ROA.6730-31. As the court
explained, “customers who purchased PPE from Zaappaaz expecting
same-day shipping but who received their orders late are entitled to full
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refunds because Zaappaaz’s false statements tainted their purchasing
decisions. Particularly given the widespread need for immediate
delivery of PPE in March through December 2020, if customers had
been told the truth about Zaappaaz’s shipping timelines, they may not
have purchased PPE from Zaappaaz.” ROA.6731. Furthermore, when
orders did not arrive on time, “customers may have purchased PPE
from a different supplier, such that their order from Zaappaaz had little
value to them once it finally arrived.” Id. The Court also concluded that
the Merchandise Rule itself “requires refunds of these purchases.”
ROA.6732.
Because “some customers who received late orders may have been
satisfied,” ROA.6733, the court adopted a redress plan whereby
customers who received late-shipped products must affirmatively
request refunds from the FTC, while customers who never received
products at all are entitled to full refunds without making such a
request. ROA.6733. The final judgment thus requires Zaappaaz to pay
the FTC a total of $37,549,472.14. ROA.6767. Of that amount,
$12,241.035.69 will be refunded to customers whose PPE orders were
never delivered. The remaining $25,308,436.45 will be paid to
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customers who received late-shipped product and request a refund.
ROA.6767-68. Any unclaimed funds will be returned to Zaappaaz.
ROA.6769.
SUMMARY OF ARGUMENT
1.
The district court properly held that Zaappaaz’s
Merchandise Rule violations caused consumer injury. That decision
should be affirmed on either (or both) of two alternative grounds. First,
given the nature of the Merchandise Rule violations here, the FTC was
not required to show reliance on Zaappaaz’s false shipping promises.
Two of Zaappaaz’s three violations do not involve misrepresentations
but rather the failure to provide refunds required by the Rule.
Consumers were entitled to refunds under the Rule whether or not they
relied on Zaappaaz’s false shipping promises, and Zaappaaz’s failure to
provide those refunds necessarily caused consumer injury. The Court
thus need not address whether consumers relied on Zaappaaz’s quick
shipping promises. Second, and in any event, the FTC’s evidence
established that consumers did rely on those promises. The FTC
produced direct evidence sufficient to support a classwide inference of
reliance under this Court’s precedent. The FTC also produced evidence
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sufficient to establish a presumption of individual reliance by showing
that Zaappaaz’s misrepresentations were widely disseminated and of a
type consumers reasonably rely upon. Seven other circuits have adopted
this presumption, and this Court should as well. Zaappaaz’s argument
that an evidentiary presumption can only be created by express
statutory language is wrong. The Supreme Court and this Court have
recognized several similar evidentiary presumptions based on
considerations of probability, fairness, judicial economy, and public
policy, all of which support the presumption here.
2.
Section 19 explicitly gives the district court discretion to
order refunds as it deems necessary to redress consumer injury. The
district court properly gave consumers who received late-shipped
merchandise the option to receive a full refund. That ruling should also
be sustained on either of two grounds. First, the Merchandise Rule
required Zaappaaz to give consumers a refund option. The district
court’s remedy effectively restores that option, putting consumers as
nearly as possible in the position they would have occupied if Zaappaaz
had complied with the Rule. Second, at least six circuits have
recognized that where a purchase is tainted by a misrepresentation, full
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refunds are an appropriate remedy. Those decisions are correct, and
this Court should adopt the same rule.
3.
The district court did not abuse its discretion under Rule
56(g) by deeming it established for trial that Zaappaaz’s net revenue
from undelivered and unrefunded PPE orders was $12,241,035.69. The
FTC asserted this fact in its summary judgment papers and supported
it with evidence, which Zaappaaz failed to controvert. The district court
was not required to give Zaappaaz a second chance to produce evidence
on this point, and the evidence it now belatedly cites does not raise a
genuine dispute of fact anyway.
STANDARDS OF REVIEW
Zaappaaz’s first argument challenges the district court’s
determination that its Rule violations caused consumer injury. Because
the district court decided that issue on summary judgment, this Court’s
review is de novo. E.g., Campos v. Steves & Sons, Inc., 10 F.4th 515, 520
(5th Cir. 2021). The Court may affirm on any ground supported by the
record, id., so long as “there is no genuine dispute as to any material
fact.” Fed. R. Civ. P. 56(a).
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Zaappaaz’s second argument relates to the relief the district court
ordered. Because Section 19 gives district courts broad discretion “to
grant such relief as the court finds necessary to redress injury to
consumers,” 15 U.S.C. § 57b(b), appellate courts review the district
court’s choice of remedy for abuse of discretion. See FTC v. Am.
Screening, LLC, 105 F.4th 1098, 1102 (8th Cir. 2024); FTC v. QYK
Brands LLC, No. 22-55446, 2024 WL 1526741, at *2 (9th Cir. Apr. 9,
2024).
Zaappaaz’s third argument challenges the district court’s decision
to deem facts established under Fed. R. Civ. P. 56(g). Because that rule
“speaks of what a court ‘may’ do,” appellate courts review for abuse of
discretion. Kreg Therapeutics, Inc., v. VitalGo, Inc.¸ 919 F.3d 405, 415
(7th Cir. 2019); accord Watchous Enters., LLC v. Mournes, 87 F.4th
1170, 1178 (10th Cir. 2023); see also Katherine P. v. Humana Health
Plan, Inc., 959 F.3d 206, 209 (5th Cir. 2020) (district court had
discretion to treat facts as established under Rule 56(g)).
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ARGUMENT
Zaappaaz does not challenge the district court’s determination
that it violated the Merchandise Rule and engaged in deceptive conduct
in violation of the FTC Act. Nor does it challenge the district court’s
injunction. Instead, Zaappaaz raises three arguments about the award
of monetary relief. None has merit.
THE DISTRICT COURT PROPERLY HELD THAT ZAAPPAAZ’S RULE
VIOLATIONS CAUSED INJURY TO CONSUMERS.
I.
Where the FTC sues under Section 19 based on the violation of a
consumer protection rule, the district court may award “such relief as
the court finds necessary to redress injury to consumers … resulting
from the rule violation.” 15 U.S.C. § 57b(b). 4 The district court correctly
3F
determined that Zaappaaz’s rule violations caused consumer injury,
such that monetary relief under Section 19 was appropriate. That
determination should be affirmed for two reasons, each of which
independently supports the judgment.
First, although Zaappaaz attacks the district court’s use of a
presumption to establish that consumers relied on the company’s false
Section 19 also permits relief necessary to redress injury to persons other than
consumers, but that is not at issue here.
4
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statements, the Court need not reach this issue because two of the three
Rule violations at issue here do not involve false statements. Rather,
Zaappaaz failed to provide refunds as required by the plain terms of the
Merchandise Rule. Consumers suffered a financial injury when
Zaappaaz failed to provide these refunds regardless of whether they
relied on the company’s false shipping promises. The consumer injury
determination can and should be affirmed on that basis.
Second, if the Court deems it necessary to address reliance, the
consumer injury determination should be affirmed because the
undisputed evidence, including consumer declarations and complaints,
establishes that Zaappaaz’s customers did rely on the company’s false
shipping promises. Furthermore, the district court properly applied a
presumption of reliance based on the FTC’s showing that Zaappaaz’s
representations were widely disseminated and of a kind usually relied
on by reasonable prudent persons. That presumption has been adopted
by seven different circuits, and Zaappaaz has not shown any reason
why this Court should chart a different course.
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A.
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Consumers Were Injured by Zaappaaz’s Failure
To Provide Refunds They Were Entitled To Receive
Under the Merchandise Rule.
Although it is undisputed that Zaappaaz lied to its customers
about shipping times, to obtain monetary relief the FTC was not
required to show that customers relied on those false representations. 5
4F
Zaappaaz is wrong when it asserts (Br. 1, 24) that Section 19 requires a
showing of injury resulting from a defendant’s misrepresentations. The
requirement is that consumer injury must “result[] from the rule
violation.” 15 U.S.C. § 57b(b) (emphasis added).
In this case, two of Zaappaaz’s rule violations do not involve
misrepresentations, so no showing of reliance on misrepresentations
was required. First, Zaappaaz violated the Merchandise Rule by failing
to offer buyers the option of either consenting to delayed shipping or
canceling their orders and obtaining a prompt refund. See 16 C.F.R.
§ 435.2(b)(1). Second, having failed to offer that option, Zaappaaz
violated the Rule by not automatically deeming the orders canceled and
The FTC’s summary judgment motion argued that consumer injury was
established by the fact that Zaappaaz failed to provide required refunds. ROA.205758. Zaappaaz’s assertion that the FTC acknowledged it was required to establish
reliance (Br. 24) is incorrect—the FTC merely responded to Zaappaaz’s argument.
See ROA.4182-83.
5
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providing a prompt refund once it failed to make a timely shipment. See
id. § 435.2(c)(5). Under both provisions, Zaappaaz’s customers had a
right to receive full refunds regardless of whether they relied on the
company’s false shipping promises.
Put another way, the text and structure of these Merchandise
Rule requirements makes it unnecessary for courts to address consumer
reliance. The Rule reflects a determination that a seller’s
representations about shipping times are presumptively material to a
consumer’s purchase decision. As the Commission explained when the
Rule was originally adopted in 1975, “where a seller solicits orders and
states a time for shipment, many buyers will quite reasonably expect
shipment within that time.” Mail Order Merchandise Rule, 40 Fed. Reg.
51582, 51589 (Nov. 5, 1975). If the seller cannot ship within that time,
it is effectively altering or breaching the terms of its contract. Id. But
the Rule also recognizes that in some circumstances, even a wellintentioned seller may be unable to meet its shipping promises. In such
cases, the Rule specifies a clear course of action: the seller must offer
the buyer the refund-or-consent option. That way, buyers who in fact
relied on the shipping promise can get their money back, while any
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buyers for whom prompt shipping is not as important can agree to wait
longer. But the Rule does not permit sellers to ignore these
requirements, ship products late, and keep the money they have
collected. Consumers have a right to get their money back under these
circumstances.
B.
In Any Event, the FTC Properly Established
Consumer Reliance on Zaappaaz’s False Shipping
Promises.
Zaappaaz further violated the Merchandise Rule by soliciting
orders for PPE without any reasonable basis to believe that products
would ship within the time frames Zaappaaz was advertising (e.g.,
same-day shipping). See 16 C.F.R. § 435.2(a)(1)(i). Because Zaappaaz
also violated two other provisions of the Rule, as discussed in I.A, supra,
the Court need not address whether consumers relied on Zaappaaz’s
misrepresentations about shipping times. But to the extent the Court
concludes the FTC was required to demonstrate consumer reliance, the
FTC made that showing in two different ways. First, the FTC produced
undisputed direct evidence that many consumers relied on Zaappaaz’s
false shipping promises. Under this Court’s precedent, the FTC was not
required to prove reliance on an individualized basis. Second, the FTC
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presented evidence sufficient to establish the presumption of reliance
that has been recognized by seven other circuits. Zaappaaz failed to
rebut that presumption.
1.
The FTC presented substantial undisputed
evidence that consumers relied on Zaappaaz’s
false shipping promises.
This Court has recognized that reliance need not be proven on an
individualized basis. In Torres v. S.G.E. Management, L.L.C., 838 F.3d
629 (5th Cir. 2016) (en banc), plaintiffs asserted class action claims
under the Racketeer Influenced and Corrupt Organizations Act
(“RICO”) based on the defendant’s alleged operation of a pyramid
scheme. The question before the Court was whether reliance could be
proven on a classwide basis, such that class certification was proper
under Fed. R. Civ. P. 23(b)(3). As relevant here, the Court held that
individualized proof of reliance was not required. Rather, plaintiffs may
employ a “common inference of reliance” when it “follows logically from
the nature of the scheme, and there is common, circumstantial evidence
that class members relied on the fraud.” Torres, 838 F.3d at 641. The
Court held such an inference appropriate because “it is reasonable to
infer that individuals do not knowingly join pyramid schemes” and
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there was no evidence in the record that any putative class member
joined the challenged program despite knowledge of the fraud. Id.
The facts here likewise support a common inference of reliance.
The FTC submitted several declarations showing that consumers relied
on Zaappaaz’s false promises. For example, Amy Russell turned to
Zaappaaz, paying $360.63 for one-day shipping, because “there were no
local sources with available PPE” and Zaappaaz “represented that PPE
would be shipped within 24 hours.” ROA.2446. Carol and Larry Faber
likewise bought PPE from Zaappaaz, paying $431.93 in rush shipping
fees, because Zaappaaz’s website claimed it “had PPE in stock, offered
same day shipping, and guaranteed delivery dates,” whereas other
companies “either did not have PPE in stock or could not deliver them
quickly.” ROA.2567. Susan Alimonti bought face shields from Zaappaaz,
paying $52.91 for expedited shipping, “because [Zaappaaz’s] website
stated that it had face shields in stock, that the masks would ship the
same day, and that they guaranteed delivery dates.” ROA.2307. All
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these consumers (and many others) vigorously complained and tried to
cancel their orders when the products did not ship as promised. 6
5F
These consumer declarations were bolstered by evidence of
numerous consumer complaints about Zaappaaz’s failure to comply with
its quick-shipping promises. See FTC v. Moses, 913 F.3d 297, 310 (2d
Cir. 2019) (consumer complaints properly considered on summary
judgment). An FTC case investigator documented a sharp rise in
complaints about Zaappaaz beginning in April 2020. ROA.2166-68. By
far the most common categories of complaints were about failure to ship
or deliver PPE within the promised time frames. ROA.2167.
As the district court noted, there was also a spike in complaints
made directly to Zaappaaz that occurred exactly when the company
transitioned to selling PPE. Zaappaaz received zero complaints in
January 2020, but 820 in April 2020. ROA.6716. The FTC submitted
See also ROA.2395 (Andrew Li “decided to order from [Zaappaaz] because it had
the items in stock and because of the quick delivery.”); ROA.2417 (Mechelle
Braswell’s company needed thermometers “as soon as possible” so she bought from
Zaappaaz because its website “stated that it had the products in stock and offered
expedited shipping, including shipping within 24 hours.”); ROA.2370 (Rhiannon
Guevin bought PPE from Zaappaaz because “the products were described as instock” and were unavailable at other retailers); ROA.2555 (Jason Pierson bought
from Zaappaaz because he “saw that the company had thermometers in stock that
shipped the same day.”).
6
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emails documenting many of these complaints, which plainly show that
customers relied on Zaappaaz’s shipping promises. For example, one
customer complaint states: “I specifically ordered from [Zaappaaz]
because the website says that the antibacterial wipes are ‘IN STOCK—
READY TO SHIP.” ROA.3390. It continues: “I ONLY placed the order
from [Zaappaaz] because the wipes were ‘in stock’—these days, most
other companies don’t have this product in stock, nor do they imply that
they do. I would never have placed the order in the first place, now I am
hostage to your company’s delay in delivering on a product that you[]
said was available.” Id. Another complaint states: “Our hospital needs
this ASAP. We were told that you did have them in stock and would
ship April 3rd…. This is a matter than needs resolution NOW.”
ROA.3476. Yet another states that a shipping delay is “unacceptable
because when I log into your website it tells me that these
thermometers are in ‘stock and that they will ship within 24 hours’.
These need to be shipped out immediately.” ROA.3489.
In sum, the record contains substantial undisputed evidence that
consumers expressly relied on Zaappaaz’s representations that it would
ship product quickly and were angry when the company failed to live up
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to those promises. Zaappaaz did not show that anyone would have
bought PPE from its websites absent the quick-shipping claims. Based
on this record, the Court may reasonably infer that customers bought
PPE from Zaappaaz precisely because of the company’s claims that it
had PPE products in stock and could ship them immediately. Torres,
838 F.3d at 641; see also FTC v. Figgie Int’l, 994 F.2d 595, 605 (9th Cir.
1993) (reasonable to conclude that consumers relied on
misrepresentations, even without presumption, where record evidence
showed that consumer purchases matched recommendations in sales
material).
2.
The district court properly applied a
presumption of reliance.
The district court properly held that the FTC was entitled to a
presumption of reliance based on the undisputed evidence that
Zaappaaz’s false shipping representations were widely disseminated
and materially misleading. ROA.6267-69, 6730. Zaappaaz “offered no
argument or evidence to rebut the presumption of reliance.” ROA.6268.
Seven different circuits (the Second, Sixth, Seventh, Eighth,
Ninth, Tenth, and Eleventh) have held that the FTC is entitled to a
rebuttable presumption of reliance “upon showing that (1) the
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defendant made material misrepresentations or omissions that were of
a kind usually relied upon by reasonable prudent persons; (2) the
misrepresentations or omissions were widely disseminated; and
(3) consumers actually purchased the defendants’ products.” FTC v.
BlueHippo Funding, LLC, 762 F.3d 238, 244 (2d Cir. 2014) (cleaned
up). 7 Both the Eighth and Ninth Circuits have recently applied the
6F
presumption in cases very similar to this one, involving defendants who
violated the Merchandise Rule in connection with sales of PPE during
the COVID-19 pandemic. See Am. Screening, 105 F.4th at 1102-03;
QYK, 2024 WL 1526741, at *2. No court has ever rejected this
presumption.
This Court should follow this overwhelming and uniform body of
law from other circuits and apply a rebuttable presumption of reliance
in FTC deception cases. The presumption makes sense as a simple
evidentiary matter. Under the preponderance of the evidence standard
Accord Moses, 913 F.3d at 310; FTC v. Commerce Planet, 815 F.3d 593, 604 (9th
Cir. 2016); FTC v. E.M.A. Nationwide, Inc., 767 F.3d 611, 631 n.12 (6th Cir. 2014);
FTC v. Trudeau, 579 F.3d 754, 773 n.15 (7th Cir. 2009); FTC v. Freecom Commc’ns,
Inc., 401 F.3d 1192, 1205-06 (10th Cir. 2005); FTC v. Kuykendall, 371 F.3d 745,
765-66 (10th Cir. 2004); McGregor v. Chierico, 206 F.3d 1378, 1388-89 (11th Cir.
2000); Figgie, 994 F.2d at 605-06; FTC v. Sec. Rare Coin & Bullion Corp., 931 F.2d
1312, 1316 (8th Cir. 1991).
7
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that is “generally applicable in civil actions,” the FTC need only show
that consumers “more likely than not” relied on defendants’
misrepresentations. Herman & Maclean v. Huddleston, 459 U.S. 375,
390 (1983). Where the FTC has shown that a defendant’s
misrepresentations were of a kind usually relied upon by reasonable
prudent persons, that they were widely disseminated, and that
consumers actually purchased the defendants’ products, then absent
any contrary evidence, it is “more likely than not” that consumers relied
on the representations. Id.
Furthermore, as the Second Circuit has explained, “[t]o require
proof of each individual consumer’s reliance on a defendant’s
misrepresentations would be an onerous task with the potential to
frustrate the purpose of the FTC’s statutory mandate.” BlueHippo, 762
F.3d at 244. Other circuits likewise have recognized that “[r]equiring
proof of subjective reliance by each individual consumer would thwart
effective prosecutions of large consumer redress actions and frustrate
the statutory goals of the section.” FTC v. Freecom Commc’ns., Inc., 401
F.3d 1192, 1205-06 (10th Cir. 2005) (quoting Figgie, 994 F.2d at 605);
see also FTC v. Trudeau, 579 F.3d 754, 773 n.15 (7th Cir. 2009);
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McGregor v. Chierico, 206 F.3d 1378, 1388 (11th Cir. 2000); FTC v. Sec.
Rare Coin & Bullion Corp., 931 F.2d 1312, 1316 (8th Cir. 1991).
Demonstrating individualized reliance would require a massive
commitment of resources not just by the agency but also by the district
courts, which would potentially need to review declarations or hear
testimony from thousands or tens of thousands of injured consumers
even in the most straightforward cases. Where such declarations or
testimony were unavailable, the harm to those consumers would go
unredressed, allowing defendants to keep money they obtained under
false pretenses and incentivizing further misconduct.
Zaappaaz is incorrect that the presumption “relieve[s] the FTC of
its burden” to come forward with evidence in the first instance. Br. 28.
The FTC must still produce evidence to establish the facts underlying
the presumption. See, e.g., BlueHippo, 762 F.3d at 244 (FTC must
“make[] a showing sufficient to trigger this presumption”). The
presumption simply shifts the burden of producing evidence to the
defendants; it does not shift the burden of persuasion, which remains on
the FTC. See Fed. R. Evid. 301.
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Application of the presumption is particularly appropriate in this
case. The record plainly shows that Zaappaaz began selling PPE in the
early days of the COVID-19 pandemic to take advantage of the huge
surge in customer demand for these products. At that time, many
Americans were desperate to obtain PPE to protect themselves and
their loved ones from a potentially fatal disease, but these lifesaving
products were in short supply and often unavailable through ordinary
retail channels. Quick shipping was an essential part of what Zaappaaz
promised. Zaappaaz advertised PPE on its websites with claims like “IN
STOCK—SHIPS SAME DAY” and “GUARANTEED TO SHIP TODAY.”
ROA.6718. It also sent promotional emails saying “ALL OF THESE
PRODUCTS ARE FULLY IN STOCK, READY TO SHIP SAME DAY
AND DELIVER IN 24 HOURS.” Id. Against this background, it is more
likely than not that the main reason customers purchased PPE from
Zaappaaz’s website—and not from a better-known internet retailer or a
local brick-and-mortar store—is that they were relying on the
company’s promises that it had PPE in stock and ready to ship that
same day. See Am. Screening, 105 F.4th at 1103 (“Suppliers presumably
count on consumers to believe and act on promises of prompt
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shipping.”). The district court could properly conclude that the
presumption applied and that absent any contrary evidence, the FTC
had sufficiently proven consumer reliance on Zaappaaz’s shipping
promises. ROA.6267-68.
a.
Zaappaaz cites no authority for its claim that a rebuttable
evidentiary presumption in civil cases can only be created by express
statutory language, and the FTC is aware of none. 8 Judicially7F
established evidentiary presumptions are commonplace. Presumptions
“[a]ris[e] out of considerations of fairness, public policy, and probability,
as well as judicial economy,” and “serve to assist courts in managing
circumstances in which direct proof, for one reason or another, is
rendered difficult.” Basic Inc. v. Levinson, 485 U.S. 224, 245 (1988). As
a leading evidence treatise explains, “the most important consideration
in the creation of presumptions is probability.” McCormick on Evidence
§ 343 (8th ed. 2022). Most presumptions reflect a judicial determination
“that proof of fact B renders the inference of the existence of fact A so
Zaappaaz’s argument rests on isolated snippets of language quoted out of
context and misleadingly strung together. For example, Zaappaaz quotes from SAS
Institute, Inc. v. Iancu, 584 U.S. 357 (2018) (Br. 26), but that case has nothing to do
with evidentiary presumptions in civil cases; it concerns inter partes review of
patents by the Patent Trial and Appeal Board.
8
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probable that it is sensible and timesaving to assume the truth of fact A
until the adversary disproves it.” Id. In addition to this “judicial
estimate of the probabilities,” courts also base presumptions on the
“difficulties inherent in proving that the more probable event in fact
occurred.” Id.
Both the Supreme Court and this Court have long recognized a
variety of judicially-created evidentiary presumptions similar to the one
at issue here. For example, the Supreme Court recognizes a rebuttable
“fraud-on-the-market” presumption of reliance in securities fraud cases.
See Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 268-69
(2014); Basic, 485 U.S. at 241-47. Investors are presumed to have relied
on a defendant’s misrepresentations about a company if they can
establish that the “misrepresentations were publicly known” and
material, the company “stock traded in an efficient market,” and “the
plaintiff traded the stock between when the misrepresentations were
made and when the truth was revealed.” Halliburton, 573 U.S. at 27778. Although the plaintiff’s claims in a securities fraud case are based
on federal statutes and rules, Congress did not set forth the fraud-onthe-market presumption in statutory text. The Supreme Court created
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the presumption because requiring proof of individualized reliance
“would place an unnecessarily unrealistic evidentiary burden” on
plaintiffs and effectively “prevent[] [them] from proceeding with a class
action,” and because such a presumption is “also supported by common
sense and probability.” Basic, 485 U.S. at 242, 245-46. The Court
declined to revisit those conclusions in Halliburton, instead reaffirming
the fraud-on-the-market presumption of reliance. Halliburton, 573 U.S.
at 267-68, 283-84.
Courts have recognized several other rebuttable presumptions
that were not specifically authorized by Congress. For example, in
employment discrimination actions under Title VII of the Civil Rights
Act of 1964, once a plaintiff proves a prima facie case, a task which is
“not onerous,” a rebuttable presumption of unlawful discrimination is
established. Texas Dep’t of Cmty. Affairs v. Burdine, 450 U.S. 248, 25354 (1981). The presumption shifts the burden to the employer to
produce evidence of “a legitimate, nondiscriminatory reason” for the
employment action. Id. at 254. The presumption and burden-shifting
framework were not established by Congress, but rather reflect a
judicial determination that acts like refusing to hire a qualified member
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of a protected class “if otherwise unexplained, are more likely than not
based on the consideration of impermissible factors.” Id.
Similarly, in merger cases under the Clayton Act, this Court has
held that the government may “establish[] a prima facie case by
showing that the transaction in question will significantly increase
market concentration, thereby creating a presumption that the
transaction is likely to substantially lessen competition.” Chicago
Bridge & Iron, N.V. v. FTC, 534 F.3d 410, 423 (5th Cir. 2008). The
presumption shifts the burden back to the merging parties to produce
evidence casting doubt on “the Government's evidence as predictive of
future anti-competitive effects.” Id. Again, the presumption is not based
on statutory text, but rather a judicial assessment of probabilities. A
merger that substantially increases market concentration is “so
inherently likely to lessen competition substantially” that it must be
enjoined absent contrary evidence. United States v. Philadelphia Nat’l
Bank, 374 U.S. 321, 363 (1963).
In short, courts regularly create rebuttable evidentiary
presumptions without an express statutory mandate based on judicial
assessments of probability, fairness, judicial economy, and the
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difficulties of presenting direct proof, among other considerations. All
those considerations support use of the rebuttable presumption of
reliance here.
b.
Contrary to Zaappaaz’s suggestion (Br. 26), even if Congress
had established some rebuttable evidentiary presumptions in the FTC
Act itself, that would not preclude courts from adopting other
presumptions. 9 In any event, Zaappaaz’s assertion that Congress has
8F
established such presumptions “elsewhere in the FTC Act” (Br. 26) is
misleading at best. Zaappaaz first points to Section 14(a) of the FTC
Act, which establishes criminal penalties for false advertisements of
certain commodities that are injurious to health. 15 U.S.C. § 54(a).
Specifically, Section 14(a) provides that meat and meat products that
that are properly inspected, marked, and labeled under federal law
“shall be conclusively presumed not injurious to health at the time the
same leave official ‘establishments.’” Id. (emphasis added). A conclusive
presumption, unlike a rebuttable evidentiary presumption, is a
Zaappaaz relies on a criminal case, United States v. Ayers, 795 F.3d 168 (D.C.
Cir. 2015), which held that a criminal statute did not establish a “presumption” in
favor of consecutive sentencing. Id. at 173-74. Principles from criminal cases have
no bearing on the separate question of when rebuttable evidentiary presumptions
may be recognized in civil cases. See generally McCormick, supra, § 342.
9
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substantive rule of law rather than a mere tool for allocating burdens of
evidentiary production. See Michael H. v. Gerald D., 491 U.S. 110, 11920 (1989); McCormick, supra, § 342. The fact that Congress established
a conclusive presumption in certain criminal cases to protect those who
comply with federal law says nothing about whether a rebuttable
presumption of reliance may be recognized in civil cases like this.
The other statutory provision Zaappaaz points to is not part of the
FTC Act at all. The Consolidated Appropriations Act of 2023 created a
new requirement that online marketplaces collect certain information
from high-volume sellers and further provides that information in a
valid government-issued tax document “shall be presumed to be verified
as of the date” the document was issued. Pub. L. No. 117-328, div. BB,
§ 301(a)(2)(B) (codified at 15 U.S.C. § 45f(a)(2)(B)). Although this
statute grants enforcement authority to the FTC, Congress did not
designate it as an amendment to the FTC Act—unelected Congressional
staff simply chose to codify it with the FTC Act for convenience. 10
9F
The codification of federal statutes into sections of the United States Code is
performed by the Office of Law Revision Counsel of the House of Representatives,
not by Congress itself (except in those cases where a title of the Code has been
enacted into positive law). See https://uscode.house.gov/about_office.xhtml.
10
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Congress’s enactment of this legislation in 2022 thus sheds no light on
what Congress intended when enacting Section 19 nearly 50 years
earlier.
c.
Zaappaaz extensively criticizes the Ninth Circuit’s Figgie
decision, one of the early appellate cases to recognize the presumption
of reliance. But Figgie does not stand alone: as discussed above, seven
different circuits have recognized the presumption in a variety of
contexts over four decades. Figgie and the recent decisions of the Eighth
Circuit in American Screening and the Ninth Circuit in QYK involved
claims for monetary relief under Section 19. 11 Courts also recognized
10F
and applied the presumption where the FTC sought monetary relief
ancillary to an injunction under Section 13(b) prior to the Supreme
Court’s decision in AMG Capital Management, LLC v. FTC, 593 U.S. 67
(2021). 12 The Sixth Circuit recognized the presumption in a case where
11F
the FTC sought consumer redress under both Section 13(b) and Section
19. FTC v. E.M.A. Nationwide, Inc., 767 F.3d 611, 631 n.12 (6th Cir.
Am. Screening, 105 F.4th at 1102-03; QYK, 2024 WL 1526741, at *2; Figgie, 994
F.2d at 598, 605-06.
11
See Moses, 913 F.3d at 309-10; Commerce Planet, 815 F.3d at 603-05; Freecom,
401 F.3d at 1206; Sec. Rare Coin, 931 F.2d at 1316.
12
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2014). Courts have likewise applied the presumption where the FTC
has sought monetary relief as a compensatory civil contempt sanction. 13
12F
Courts have applied the same presumption in each of these
contexts because they all involve the same question: what the FTC
must prove to establish that consumers relied on a defendant’s
misrepresentation. For example, in American Screening, the court found
it immaterial that it had originally recognized the presumption in
Security Rare Coin, a Section 13(b) case. Am. Screening, 105 F.4th at
1103. Even though AMG held that courts may not award monetary
relief under Section 13(b), that ruling “did not call into question” the
part of Security Rare Coin that “shines light on how courts might shape
equitable monetary relief (assuming the relevant law makes it
available) in cases … where the FTC is seeking a remedy on behalf of a
large class of consumers because of a company's widespread deceptive
trade practices.” Id. Courts’ application of the same presumption in
different statutory contexts further confirms that the presumption is
not and need not be based on specific statutory language, but rather is
See BlueHippo, 762 F.3d at 243-45; Trudeau, 579 F.3d at 773 n.15; Kuykendall,
371 F.3d at 765-66; McGregor, 206 F.3d at 1388-89.
13
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grounded in basic principles of probability, fairness, efficiency, and
judicial economy.
d.
Finally, Zaappaaz erroneously argues that the Court cannot
consider the practical consequences of requiring the FTC to prove
individualized reliance in every case. Br. 29. As discussed above, the
Supreme Court relied on exactly these types of practical considerations
in Basic and Halliburton when it established and reaffirmed the
analogous presumption of reliance in securities fraud cases. See
Halliburton, 573 U.S. at 267-68, 283-84; Basic, 485 U.S. at 242, 245.
Zaappaaz’s fallback assertion (Br. 31) that an individualized
reliance requirement would not actually thwart the agency’s ability to
bring large consumer redress actions is wrong. For example, in this
case, an individualized reliance requirement would have required the
FTC to obtain declarations or other evidence of reliance from over
50,000 consumers. That would impose a huge practical burden on the
agency and the district court. It would be an enormous waste of time,
money, and resources in a case like this, where all the available
evidence shows that the primary reason consumers bought PPE from
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Zaappaaz was because of the company’s prominent—but false—claims
that it would ship product quickly.
For all these reasons, if the Court reaches the reliance issue, it
should follow the overwhelming and uniform body of precedent from
other circuits and recognize a presumption of reliance in FTC cases
where the defendant has made material misstatements that were
widely disseminated.
II.
THE DISTRICT COURT PROPERLY GAVE CUSTOMERS WHO
RECEIVED LATE-SHIPPED MERCHANDISE THE OPPORTUNITY TO
OBTAIN FULL REFUNDS.
Zaappaaz received some $25.3 million in net revenue from PPE
orders that were shipped late but ultimately delivered, though often
weeks after the promised date. The district court properly held that
customers who received late-shipped merchandise should be entitled to
receive full refunds if they affirmatively request them. That relief was
appropriate for two reasons, each of which is independently sufficient.
First, consumers were entitled to receive full refunds under the
Merchandise Rule. Second, it is well settled in FTC Act cases that a full
refund is a proper remedy where a sale has been induced by
misrepresentations.
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A.
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Full Refunds Are a Proper Remedy Because the
Merchandise Rule Requires Refunds.
The district court properly held that the Merchandise Rule
“requires refunds of [consumers’] purchases.” ROA.6732. As the court
explained, the Rule required Zaappaaz either to “seek consumers’
consent to late shipment or to offer a refund.” Id. If it did not offer this
option, Zaappaaz was required to “consider the order cancelled and
make a ‘prompt refund.’’’ Id. (quoting 16 C.F.R. § 435.2(c)(5)). Because
Zaappaaz “never offered” the refund-or-consent option, all late-shipped
orders were “cancelled by operation of law, entitling customers to full
refunds.” Id. In short, refunds were the proper remedy because the
Merchandise Rule provisions that Zaappaaz violated expressly entitled
customers to refunds.
Given the nature of the violations, the district court would have
been justified in ordering automatic refunds to all consumers who
received late-shipped merchandise, as the FTC requested. But it did not
do so. Instead, the court held that because “some customers who
received late orders may have been satisfied with their PPE orders,”
customers would be required to affirmatively request refunds from the
FTC. ROA.6733, 6768. Any unclaimed funds will be returned to
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Zaappaaz. ROA.6733, 6769. This remedy is consistent with the relief
plans that courts have approved in other cases involving the same kind
of Merchandise Rule violations. See Am. Screening, 105 F.4th at 1103;
QYK, 2024 WL 1526741, at *2. As the Eighth Circuit explained, this
remedy is “tailored to ensure that dissatisfied consumers are made
whole while also ensuring that [the defendant] does not have to pay
unharmed customers as punishment.” Am. Screening, 105 F.4th at
1103-04. If Zaappaaz had complied with the Merchandise Rule,
customers would have had the option to receive a refund if they wanted
one. The district court’s remedy effectively restores that option to them.
The district court was not required to make customers return any
product they received as a condition of receiving a refund. First,
Zaappaaz did not expressly ask for return of products in the district
court. See Am. Screening, 105 F.4th at 1104 (“[W]e could hardly fault
the district court [for not requiring returns] since [defendant] did not
ask it to order consumers to return their purchases.”). Second, it is
“doubt[ful] that [return] is even feasible for PPE products that were
ordered four years ago.” Id. Indeed, in some cases, the cost of shipping
unused PPE product back to Zaappaaz might well exceed the current
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value of the products. 14 Third, requiring return of products would
13F
“reward [Zaappaaz] for shipping items late rather than complying with
MITOR’s refund-or-consent obligation.” See id. The Rule makes clear
that where a seller does not provide the refund-or-consent option, it
cannot simply ship the product late and keep the money. Finally, as the
district court properly held, since Zaappaaz was legally required to
deem late-shipped orders cancelled, any such goods that were
eventually shipped were “gifts under the law that customers had no
obligation to pay for or return.” ROA.6733; see 39 U.S.C. § 3009(b)
(unordered merchandise “may be treated as a gift by the recipient, who
shall have the right to retain, use, discard, or dispose of it in any
manner he sees fit without any obligation whatsoever to the sender.”).
Zaappaaz’s arguments to the contrary are unavailing.
a.
Zaappaaz offers a misleading hypothetical involving sale of a
“top-of-the line flat-screen TV” that is delivered one day late. Br. 32. A
better analogy would be the following. Suppose that the week before the
Super Bowl, a large retailer advertises on its website: “BIG-SCREEN
TVS IN STOCK AND READY TO SHIP TODAY. GET YOURS
14
Some PPE products, like hand sanitizer, also have a limited shelf life.
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BEFORE THE BIG GAME.” In fact, the retailer does not have sufficient
stock to ship all orders on a same-day basis. The Merchandise Rule
provides a simple procedure to follow. The retailer needs to contact
consumers and give them a choice between agreeing to delayed shipping
or cancelling and receiving a refund. If the retailer does not do so, and
ships the products late so that they arrive after the Super Bowl (weeks
afterwards in some cases), customers are entitled to the refund they
would have received if the retailer had complied with the Rule—though,
of course, the district court would have discretion to order return of the
TVs as a condition of receiving a refund if the retailer requests that
relief.
So too here. The key distinction is that Zaappaaz did not
specifically ask for return of PPE products, and there is a huge practical
difference between an expensive durable product like a big-screen TV
and low-priced consumable products like face masks and handsanitizer. The district court did not abuse its discretion by not requiring
returns in this case.
b.
Zaappaaz’s assertion that relief under Section 19 must be
“limited to compensatory damages” (Br. 40) ignores the text of the
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statute. Section 19 gives courts discretion to award any relief “necessary
to redress injury to consumers,” including but not limited to “rescission
or reformation of contracts, the refund of money or return of property,
[and] the payment of damages.” 15 U.S.C. § 57b(b). A court may choose
between these remedies or other forms of redress as appropriate in a
particular case. Moreover, Section 19 explicitly authorizes courts to
order a “refund of money,” which is a distinct remedy from the
“payment of damages.” Id. The district court here did not abuse its
discretion in determining that the opportunity to receive a refund was
necessary to redress consumer injury resulting from the specific
Merchandise Rule violations at issue in this case.
Notably, consumers who received late-shipped product also may
have suffered consequential damages as a result of Zaappaaz’s rule
violations. For example, a business like the peanut-shelling plant where
Ms. Braswell works (see supra at 10) might have needed to slow down
or stop operations if it did not have the PPE necessary to protect its
workers. Businesses and individuals might also have incurred
additional expense buying PPE elsewhere when the products they
ordered from Zaappaaz failed to arrive. Although Section 19 permits
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district courts to award damages for these types of injuries, the FTC did
not seek such relief here. The FTC limited its request to the refunds
that customers were entitled to receive under the Merchandise Rule.
c.
Zaappaaz’s assertion that the Merchandise Rule requires
refunds only “when no delivery has yet occurred” (Br. 40-41) is contrary
to the plain text of the Rule. As discussed above, the Rule requires a
seller to cancel the order and provide a prompt refund whenever it fails
to offer the refund-or-consent option and fails to ship on time. 16 C.F.R.
§ 435.2(c)(5). If the seller ignores its obligations under the Rule and
ships a product late, the consumer’s entitlement to a refund does not
disappear simply because the product is eventually delivered, possibly
weeks after the promised date.
Zaappaaz is also off-base when it cites the preamble to the original
1975 version of the Merchandise Rule, which stated that in most cases,
a substantial majority of consumers who are offered the refund-orconsent option will consent to the delay. Br. 41 (citing 40 Fed. Reg. at
51590). That may be true as a general matter, but not here, where
consumers were desperate to receive scarce supplies of PPE, Zaappaaz
prominently advertised same-day shipping, consumers paid extra for
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rush shipping, and many customers who did not receive their orders
promptly expressly sought to cancel the orders and receive a refund. In
any event, Zaappaaz did not offer the refund-or-consent option, and in
those circumstances the Rule leaves sellers no discretion: if they ship
late, they must cancel and provide a refund. As the Commission
explained in 1975, “[t]he Rule obviously cannot permit a seller who
(1) fails to ship as required and (2) in addition violates the Rule’s
requirement of an offer to the buyer to cancel the order to retain any
benefits from the transaction.” 40 Fed. Reg. at 51592.
Zaappaaz is flatly wrong in arguing (Br. 41-42) that its violations
did not “vitiate[] a consumer’s consent to ship.” That is exactly what the
Merchandise Rule provides. Under the Rule, if a company knows it will
not be able to ship on time, it must obtain the customer’s express
consent to delayed shipment or offer a refund. If it fails to do so, it is
required to deem the order canceled and provide a prompt refund. The
district court thus properly held that late shipments in violation of
these requirements constituted unordered merchandise under § 3009.
ROA.6732-33.
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Full Refunds Are a Proper Remedy Where a Sale Is
Induced By Misrepresentations.
The district court also properly held that where a consumer’s
purchase was tainted by the defendant’s misrepresentations, the
consumer is entitled to a full refund, and not simply the difference in
value between what was advertised and what was received (i.e., a
damages remedy). ROA.6730-31. Six circuits (the Second, Seventh,
Eighth, Ninth, Tenth, and Eleventh) have adopted this rule. 15 None has
14F
reached a contrary result. To the extent the Court deems it necessary to
reach this issue, it should again follow this overwhelming and uniform
body of precedent from other circuits.
Several courts have used a hypothetical originally posed by the
Ninth Circuit to explain why a full refund is a proper remedy for sales
induced by misrepresentations. See Figgie, 994 F.2d at 604, 606; Am.
Screening, 105 F.4th at 1104; Kuykendahl, 371 F.3d at 766. As these
courts have explained, it is not unlawful to sell rhinestones, but if a
dishonest merchant claims to be selling diamonds but actually sells
See Am. Screening, 105 F.4th at 1104; BlueHippo, 762 F.3d at 244-45; FTC v.
IAB Mktg. Assocs. LP, 746 F.3d 1228, 1235 (11th Cir. 2014); Trudeau, 579 F.3d at
773 n.16; Freecom, 401 F.3d at 1192; Kuykendall, 371 F.3d at 766; McGregor, 206
F.3d at 1388-89; Figgie, 994 F.2d at 606.
15
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rhinestones, “[t]he seller’s misrepresentations tainted the customers’
purchasing decisions. If they had been told the truth, perhaps they
would not have bought rhinestones at all or only some.” Figgie, 994 F.2d
at 606. In these circumstances, customers “should have the opportunity
to get all of their money back,” not merely “the difference between what
they paid and a fair price for rhinestones.” Id. “The fraud in the selling,
not the value of the thing sold is what entitles consumers … to full
refunds.” Id.
The district court properly applied this reasoning to conclude that
consumers here should have the opportunity to receive a refund. As the
court explained, “customers who purchased PPE from Zaappaaz
expecting same-day shipping, but who received their orders late, are
entitled to full refunds because Zaappaaz’s false statements tainted
their purchasing decisions.” ROA.6731. “Particularly given the
widespread need for immediate delivery of PPE in March through
December of 2020, if customers had been told the truth about
Zaappaaz’s shipping timelines, they may not have purchased PPE from
Zaappaaz” or might have purchased from a different supplier “such that
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their order from Zaappaaz had little value to them once it finally
arrived.” Id. The only way to address this harm is to offer full refunds.
The fact that consumers ultimately received a product does not
change the analysis. Consumers wanted what Zaappaaz advertised:
shipment of PPE products now. What they got was PPE shipped far
later—often weeks afterwards, and in some cases, after they had
secured PPE elsewhere and therefore no longer needed or wanted what
they ordered from Zaappaaz. Because Zaappaaz’s misrepresentation
tainted the purchasing decision from the get-go, the proper remedy is
an opportunity to receive full refunds.
a.
Zaappaaz attempts to distinguish Figgie’s diamond-
rhinestone discussion as involving “an extreme example in which the
seller lied about the fundamental nature of the product being sold.” Br.
38. But here, Zaappaaz’s “GUARANTEED TO SHIP TODAY” and
similar promises of immediate shipment were fundamental to what the
company was selling and were the main reason for customers’
purchases. ROA.6718, 6731. Zaappaaz may be correct that other forms
of relief are sometimes appropriate (Br. 38), but the district court did
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not abuse its discretion by giving consumers the opportunity to obtain
full refunds in this case.
b.
Zaappaaz misplaces its reliance on various cases and
authorities involving remedies for common law fraud and
misrepresentation (Br. 35-37) because this is not a common-law fraud
case. Congress has specified that a district court’s authority under
Section 19 is not limited to damages but may include any relief
necessary to redress injury to consumers, including refunds of money or
rescission of contracts. Moreover, Zaappaaz acknowledges that even at
common law, rescission—i.e., a refund coupled with return of the
property—was an appropriate remedy. As discussed above, in this case
Zaappaaz did not ask for return of PPE, and it was not an abuse of
discretion for the court to order refunds without requiring return of
property. Contrary to Zaappaaz’s assertion (Br. 36-37), the district court
did not say a refund remedy was necessary “in all cases”—just that it
was necessary to afford consumer redress in this case.
c.
Zaappaaz also misses the mark in emphasizing the district
court’s pretrial rulings initially rejecting the full-refund remedy for lateshipped products. As the district court correctly observed, it had
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“considerable discretion” to revisit and correct earlier nonfinal rulings
based on further review of the facts and the law. ROA.6730 (quoting
U.S. Bank, N.A. v Verizon Comm’ns, Inc., 761 F.3d 409, 428 (5th Cir.
2014)). This Court reviews the district court’s final ruling.
d.
Finally, Zaappaaz is wrong in contending (Br. 42-43) that
the FTC failed to present evidence of actual harm that would justify full
refunds. As shown above, the FTC presented evidence that customers
were entitled to refunds both under the terms of the Merchandise Rule
and because they bought PPE in reliance on Zaappaaz’s false shipping
promises.
III. THE DISTRICT COURT PROPERLY DEEMED IT ESTABLISHED FOR
TRIAL THAT ZAAPPAAZ RECEIVED $12.2 MILLION IN NET
REVENUE FOR UNDELIVERED PRODUCTS.
Based on the parties’ summary judgment filings, the district court
properly deemed it established for trial that Zaappaaz’s net revenue
from undelivered and unrefunded PPE orders was $12,241,035.69.
ROA.6470. Zaappaaz does not dispute that customers whose orders
were never delivered are entitled to full refunds, but it argues that the
district court erred by deeming the $12.2 million figure established. Br.
46-56. The argument is baseless. Rule 56(g) provides that “[i]f the court
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does not grant all the relief requested by [a summary judgment] motion,
it may enter an order stating any material fact—including an item of
damages or other relief—that is not genuinely in dispute and treating
the fact as established in the case.” Fed. R. Civ. P. 56(g). The district
court properly exercised its discretion to deem the $12.2 million figure
established for trial because the summary judgment papers established
that there was no genuine dispute as to this figure. As the court
explained, relitigating these issues “would be duplicative and would
contravene the purpose of Rule 56(g).” ROA.6470.
In support of its summary judgment motion, the FTC submitted a
statement of undisputed material facts which asserted that
“[Zaappaaz’s] net revenue from undelivered and unrefunded orders was
$12,241,035.69.” ROA.2139. In support, the FTC cited the declaration of
Mr. Jenkins, who calculated the $12.2 million figure using data
obtained from Zaappaaz and third-party carriers, as set forth in the
declaration of Ms. Miles. ROA.3512-17, 3523, 3528-29.
Zaappaaz did not present evidence to rebut Mr. Jenkins’s
calculations or offer a calculation of its own. Instead, Zaappaaz simply
moved to exclude the Jenkins and Miles declarations. The magistrate
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judge denied that motion and noted that Zaappaaz “d[id] not challenge
the contents of Mr. Jenkins’s summary.” ROA.6243-44. In its Rule 56(g)
order, the district court explained that by adopting the magistrate
judge’s report, it had denied the motion to exclude the Jenkins and
Miles declarations and “established that there is no factual dispute as
to the content of these declarations.” ROA.6470; see also ROA.6656
(reiterating that the Court “rejected [Zaappaaz’s] attempts to
undermine the calculations that generated this figure” when it adopted
the magistrate judge’s report and issued the Rule 56(g) order).
Because Zaappaaz failed to challenge the substance of Mr.
Jenkins’s calculations in its summary judgment opposition, the district
court did not abuse its discretion by deeming the $12.2 million figure
established. Cf. Kreg Therapeutics, 919 F.3d at 411-12, 415 (no abuse of
discretion in deeming issues of breach and performance established in
breach-of-contract action where defendant failed to respond to plaintiff’s
statement of undisputed material facts).
Zaappaaz does not even acknowledge the abuse-of-discretion
standard, much less show that the district court abused its discretion.
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a.
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Zaappaaz misleadingly asserts that the FTC’s summary
judgment papers did not specifically reference the $12.2 million figure
and that it therefore did not have sufficient notice of that figure. Br. 4849. Zaappaaz claims that if it had known about the $12.2 million figure,
it would have introduced rebuttal evidence to show that amount was in
dispute. Br. 51.
In fact, the FTC’s summary judgment motion argued that some
consumers never received products “at all,” and the FTC provided the
$12.2 million figure in its statement of uncontested material facts and
supported that assertion with evidence. ROA.2036, 2139, 3529.
Moreover, Zaappaaz’s summary judgment opposition shows that it was
fully on notice of the $12.2 million figure. Zaappaaz expressly noted
that Mr. Jenkins’s declaration “purported to show what products were
delivered, on time, late, and not at all”, specifically cited the $12 million
figure, and attached Mr. Jenkins’s deposition transcript explaining his
calculations in detail. ROA.4287, 4302-03, 5318-5481. But Zaappaaz did
not controvert Mr. Jenkins’s declaration—i.e., offer evidence to show
that the $12.2 million figure was inaccurate. ROA.6243, 6470. Instead,
Zaappaaz put all of its efforts into trying to exclude the declaration.
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Because Zaappaaz was on notice of the argument and failed to produce
rebuttal evidence, the court did not abuse its discretion in treating the
unchallenged $12.2 million figure as an established fact.
b.
Zaappaaz errs in several respects in arguing (Br. 49) that
the FTC’s summary judgment reply “disavowed” the $12.2 million
figure. First, because Zaappaaz did not make this argument in opposing
the FTC’s Rule 56(g) motion, the district court’s failure to address it
cannot be an abuse of discretion. Second, the FTC’s reply came after
Zaappaaz had filed its opposition, and thus could not have affected
Zaappaaz’s decision not to challenge the substance of Mr. Jenkins’s
calculations. Third, the FTC did not in fact “disavow” anything. The
FTC simply clarified, in response to Zaappaaz’s arguments, that the
total consumer harm from late- or never-shipped PPE orders was $37.5
million and was not limited to the $12.2 million for undelivered product.
Nor does Zaappaaz show any abuse of discretion by emphasizing
(Br. 49) the magistrate judge’s statement that the FTC “made no
showing as to any lesser amount” than the $37.5 million. ROA.6272.
The district court agreed with and adopted the magistrate judge’s
findings that Zaappaaz did not challenge the substance of Mr. Jenkins’s
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calculations. And the court had discretion to reconsider the magistrate
judge’s assertion that the FTC did not show an entitlement to a lesser
amount. See Verizon, 761 F.3d at 428.
c.
Zaappaaz also argues that a Rule 56(g) determination was
improper because the 2010 advisory committee note permits a
nonmovant to “accept a fact for purposes of the motion only.” Br. 55-56.
But as the Seventh Circuit explained in Kreg Therapeutics, a litigant
must tell the district court if it is accepting certain facts solely for
purposes of a summary judgment motion. 919 F.3d at 415. Here,
Zaappaaz made no such statement—it simply failed to produce rebuttal
evidence.
d.
Zaappaaz is not aided by its argument (Br. 51) that Mr.
Jenkins’s declaration merely addressed merchandise not “known to
have been delivered.” Mr. Jenkins relied on Zaappaaz’s own business
records, supplemented with information from carriers. To the extent
that those records did not affirmatively show delivery, Mr. Jenkins
could properly treat them as undelivered. See Fed. R. Evid. 803(7)
(absence of record of regularly conducted business activity admissible to
show matter did not occur or exist); 16 C.F.R. § 435.2(d) (absence of
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records or documentary proof establishing use of systems to ensure
compliance with the Merchandise Rule creates rebuttable presumption
that seller failed to comply).
e.
Finally, the district court also did not abuse its discretion by
declining to consider the declaration from Mr. Makanojiya that
Zaappaaz submitted with its Rule 56(g) opposition. By that time,
discovery was closed and the summary judgment record was complete.
It would have been highly prejudicial to the FTC to allow the
introduction of new exhibits and analysis that Zaappaaz never disclosed
in discovery. In any event, even if considered, the declaration would not
establish a dispute of material fact as to the $12.2 million figure. First,
the declaration was not based on personal knowledge. Mr. Makanojiya
purports to describe a review of customer orders identified by the FTC
as undelivered, but the review was done by someone else, and no
declaration was submitted from the person who actually conducted it.
ROA.6436. Second, although Mr. Makanojiya stated that Zaappaaz
“believes” the orders were shipped, he did not attach shipment records;
he merely says Zaappaaz did not have records of complaints about these
orders. Id. Third, although Mr. Makanojiya attached a spreadsheet
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(created by someone else) purportedly “confirm[ing]” that 307 of the
orders were delivered, id., the spreadsheet shows no such thing. It
contains vague notes, apparently entered by Zaappaaz or its agents,
which do not clearly show that any of these orders were shipped or
delivered. ROA.6438-56. Even if the district court were required to
consider this untimely declaration, the error would be harmless because
the declaration does not create a genuine factual dispute.
CONCLUSION
The district court’s judgment should be affirmed.
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Respectfully submitted,
ANISHA S. DASGUPTA
General Counsel
November 18, 2024
/s/ Matthew M. Hoffman
MICHAEL D. BERGMAN
MATTHEW M. HOFFMAN
Attorneys
FEDERAL TRADE COMMISSION
600 Pennsylvania Ave., N.W.
Washington, D.C. 20580
Of Counsel:
ANNE COLLESANO
MICHELLE SCHAEFER
Attorneys
FEDERAL TRADE COMMISSION
Washington, D.C. 20580
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CERTIFICATE OF COMPLIANCE
I certify that the foregoing brief complies with the typevolume
limitation of Fed. R. App. P. 32(a)(7)(B) because it contains 12,550
words, excluding the parts of the Brief exempted by Fed. R. App. P.
32((f). I further certify that the Brief complies with the typeface
requirements of Fed. R. App. P. 32(a)(5) and 5th Cir. Rule 32.1, and the
type-style requirements of Fed. R. App. P. 32(a)(6), because it was
prepared in a proportionally spaced typeface using Microsoft Word for
Microsoft 365 in 14-point Century Schoolbook in text and 12-point
Century Schoolbook in footnotes.
/s/ Matthew M. Hoffman
Matthew M. Hoffman
November 18, 2024
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ADDENDUM OF RELEVANT STATUTES
AND REGULATIONS
Federal Trade Commission Act
Section 5, 15 U.S.C. § 45 ................................................................ A1
Section 19, 15 U.S.C. § 57b ............................................................ A2
Mail, Internet, or Telephone Order Merchandise Rule
16 C.F.R. § 435.2 ............................................................................ A4
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United States Code, 2023 Edition
Title 15 - COMMERCE AND TRADE
CHAPTER 2 - FEDERAL TRADE COMMISSION; PROMOTION OF EXPORT TRADE AND
PREVENTION OF UNFAIR METHODS OF COMPETITION
SUBCHAPTER I - FEDERAL TRADE COMMISSION
Sec. 45 - Unfair methods of competition unlawful; prevention by Commission
From the U.S. Government Publishing Office, www.gpo.gov
§45. Unfair methods of competition unlawful; prevention by
Commission
(a) Declaration of unlawfulness; power to prohibit unfair
practices; inapplicability to foreign trade
(1) Unfair methods of competition in or affecting commerce, and
unfair or deceptive acts or practices in or affecting commerce, are
hereby declared unlawful.
(2) The Commission is hereby empowered and directed to prevent
persons, partnerships, or corporations, except banks, savings and loan
institutions described in section 57a(f)(3) of this title, Federal credit
unions described in section 57a(f)(4) of this title, common carriers
subject to the Acts to regulate commerce, air carriers and foreign air
carriers subject to part A of subtitle VII of title 49, and persons,
partnerships, or corporations insofar as they are subject to the Packers
and Stockyards Act, 1921, as amended [7 U.S.C. 181 et seq.], except as
provided in section 406(b) of said Act [7 U.S.C. 227(b)], from using
unfair methods of competition in or affecting commerce and unfair or
deceptive acts or practices in or affecting commerce.
***
A1
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United States Code, 2023 Edition
Title 15 - COMMERCE AND TRADE
CHAPTER 2 - FEDERAL TRADE COMMISSION; PROMOTION OF EXPORT TRADE AND
PREVENTION OF UNFAIR METHODS OF COMPETITION
SUBCHAPTER I - FEDERAL TRADE COMMISSION
Sec. 57b - Civil actions for violations of rules and cease and desist orders respecting unfair or
deceptive acts or practices
From the U.S. Government Publishing Office, www.gpo.gov
§57b. Civil actions for violations of rules and cease and desist
orders respecting unfair or deceptive acts or practices
(a) Suits by Commission against persons, partnerships, or
corporations; jurisdiction; relief for dishonest or fraudulent
acts
(1) If any person, partnership, or corporation violates any rule under
this subchapter respecting unfair or deceptive acts or practices (other
than an interpretive rule, or a rule violation of which the Commission
has provided is not an unfair or deceptive act or practice in violation of
section 45(a) of this title), then the Commission may commence a civil
action against such person, partnership, or corporation for relief under
subsection (b) in a United States district court or in any court of
competent jurisdiction of a State.
(2) If any person, partnership, or corporation engages in any unfair
or deceptive act or practice (within the meaning of section 45(a)(1) of
this title) with respect to which the Commission has issued a final cease
and desist order which is applicable to such person, partnership, or
corporation, then the Commission may commence a civil action against
such person, partnership, or corporation in a United States district
court or in any court of competent jurisdiction of a State. If the
Commission satisfies the court that the act or practice to which the
cease and desist order relates is one which a reasonable man would
have known under the circumstances was dishonest or fraudulent, the
court may grant relief under subsection (b).
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(b) Nature of relief available
The court in an action under subsection (a) shall have jurisdiction to
grant such relief as the court finds necessary to redress injury to
consumers or other persons, partnerships, and corporations resulting
from the rule violation or the unfair or deceptive act or practice, as the
case may be. Such relief may include, but shall not be limited to,
rescission or reformation of contracts, the refund of money or return of
property, the payment of damages, and public notification respecting
the rule violation or the unfair or deceptive act or practice, as the case
may be; except that nothing in this subsection is intended to authorize
the imposition of any exemplary or punitive damages.
***
A3
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Code of Federal Regulations
Title 16 - Commercial Practices
Volume: 1
Date: 2024-01-01
Original Date: 2024-01-01
Title: Section 435.2 - Mail, Internet, or telephone order sales.
Context: Title 16 - Commercial Practices. CHAPTER I - FEDERAL TRADE COMMISSION.
SUBCHAPTER D - TRADE REGULATION RULES. PART 435 - MAIL, INTERNET, OR
TELEPHONE ORDER MERCHANDISE.
§ 435.2 Mail, Internet, or telephone order sales.
In connection with mail, Internet, or telephone order sales in or
affecting commerce, as “commerce” is defined in the Federal Trade
Commission Act, it constitutes an unfair method of competition, and an
unfair or deceptive act or practice for a seller:
(a)(1) To solicit any order for the sale of merchandise to be ordered by
the buyer through the mail, via the Internet, or by telephone unless, at
the time of the solicitation, the seller has a reasonable basis to expect
that it will be able to ship any ordered merchandise to the buyer:
(i) Within that time clearly and conspicuously stated in any such
solicitation; or
(ii) If no time is clearly and conspicuously stated, within thirty (30)
days after receipt of a properly completed order from the buyer. * * *
***
(4) In any action brought by the Federal Trade Commission, alleging
a violation of this part, the failure of a respondent-seller to have records
or other documentary proof establishing its use of systems and
procedures which assure the shipment of merchandise in the ordinary
course of business within any applicable time set forth in this part will
create a rebuttable presumption that the seller lacked a reasonable
basis for any expectation of shipment within said applicable time.
(b)(1) Where a seller is unable to ship merchandise within the
applicable time set forth in paragraph (a)(1) of this section, to fail to
offer to the buyer, clearly and conspicuously and without prior demand,
an option either to consent to a delay in shipping or to cancel the
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buyer`s order and receive a prompt refund. Said offer shall be made
within a reasonable time after the seller first becomes aware of its
inability to ship within the applicable time set forth in paragraph (a)(1)
of this section, but in no event later than said applicable time.
***
(c) To fail to deem an order cancelled and to make a prompt refund
to the buyer whenever:
***
(5) The seller fails to offer the option prescribed in paragraph (b)(1) of
this section and has not shipped the merchandise within the applicable
time set forth in paragraph (a)(1) of this section.
(d) In any action brought by the Federal Trade Commission, alleging
a violation of this part, the failure of a respondent-seller to have records
or other documentary proof establishing its use of systems and
procedures which assure compliance, in the ordinary course of business,
with any requirement of paragraph (b) or (c) of this section will create a
rebuttable presumption that the seller failed to comply with said
requirement.
A5
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.