Insights

You incorporated your finance company in order to protect the individual assets of you and your employees, right? Isn't that one of the principal advantages of operating a business in corporate form? If the corporation gets sued, you and management aren't individually liable for its actions.

But is that true? Under some circumstances, business owners and executives can find themselves exposed to the dreaded risk of individual liability. Here's an example.

Kristy Ross, an executive at Innovative Marketing, Inc., participated in the development of an online marketing campaign that displayed pop-up advertisements stating that a scan of the consumer's computer had been performed and had detected a variety of dangerous files. In reality, no such scan was ever performed.

The Federal Trade Commission sued Innovative Marketing, Inc., and several of its high-level executives and founders, including Ross, for engaging in deceptive Internet advertising practices. The trial court entered summary judgment for the FTC on the issue of whether the advertising was deceptive, but it set the issue of whether Ross could be held individually liable for trial. The trial court found that Ross satisfied the standard for individual liability because she had actual knowledge of the deceptive advertising scheme. Ross appealed, and the U.S. Court of Appeals for the Fourth Circuit affirmed.

On appeal, Ross argued that the trial court lacked the authority to award consumer redress under the Federal Trade Commission Act. The appellate court rejected Ross's argument, concluding that - even though the FTC Act does not expressly authorize courts to exercise their equitable jurisdiction - by authorizing courts to exercise their injunctive power, Congress intended that courts be able to exercise the full measure of their equitable jurisdiction.

Ross further argued that the trial court applied the wrong standard in finding her individually liable under the FTC Act. The appellate court rejected the standard proposed by Ross and reiterated that a person can be individually liable under the FTC Act if she participated directly in the deceptive practices or had authority to control those practices and had or should have had knowledge of the deceptive practices.

Finally, Ross challenged the trial court's evidentiary findings that she had control of the company, that she participated in the deceptive acts, and that she had knowledge of the deceptive advertisements. But the appellate court again rejected Ross's arguments, finding that the trial court did not clearly err in making its findings.

The appellate court's discussion in this case should give you pause. Do you participate in activity that the federal regulators might deem to be deceptive? Do you have knowledge of those deceptive acts? If so, there just might be room for the FTC or the Consumer Financial Protection Bureau to argue that you, along with the corporation, are liable for the deceptive acts.

Maybe it's time to rethink those early retirement plans.

Federal Trade Commission v. Ross, 2014 U.S. App. LEXIS 3476 (4th Cir. (D. Md.) February 25, 2014).

Thomas B. Hudson is a partner in the Maryland office of Hudson Cook, LLP. Tom can be reached at 410-865-5411 or by email at thudson@hudco.com.