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Financial Services Law Insights and Observations

Ninth Circuit Rejects Use of California UCL to Interpret FTC Act

State Issues

On May 14, the U.S. Court of Appeals for the Ninth Circuit held that the California Unfair Competition Law (UCL) was not necessary to interpret a claim brought by the Federal Trade Commission (FTC) under the FTC Act. F.T.C. v. Neovi, Inc., No. 09-55093, 2010 WL 1930229 (9th Cir. May 14, 2010). In this case, the FTC brought an action under section 5(a) of the FTC Act against defendants that managed a website that created and delivered unverified checks at the direction of registered users. On appeal, the court considered whether the FTC had made the requisite showing of harm, i.e., that the website caused consumers a substantial injury that was not avoidable or outweighed by countervailing benefits. Agreeing with the district court, the Ninth Circuit found that the FTC met its burden and that the website was responsible for the injury at issue, reasoning that it "created and controlled a system that facilitated fraud and that the company was on notice as to the high fraud rate." In reaching this decision, the court refused to consider case law interpreting the California UCL (Cal. Business & Professions Code § 17200) to determine whether the FTC’s showing of causation was sufficient. Although it acknowledged that the “common practice for states with consumer protection statutes modeled on the FTC Act [is] to rely on federal authority when interpreting those statutes,” it found that “the reverse is not the case[,]” because doing so would "create a sea of inconsistent rulings." Thus, the court found that the FTC Act permits a finding of direct harm based on the theory that the harm was a “predictable consequence of those actions.”