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Unfair and Deceptive Acts and Practices: 13.6.2.4 Size of Penalty for Violations

Where a UDAP statute establishes a specific dollar penalty for violations of cease and desist orders, an important issue is whether the penalty should be assessed for each separate violation, and, if so, what is a separate violation.488 Courts have assessed $5000 penalties for each sales meeting in violation of an order,489 $200 for each of 600 different violations,490 $1000 for each of 500 violations,491

Unfair and Deceptive Acts and Practices: 13.6.3.2 Constitutional Challenges to Civil Penalties

Courts have rejected challenges that multiple civil penalties violate the Eighth Amendment’s excessive fines prohibition.518 In BMW v. Gore,519 the Supreme Court held that punitive damages could be so excessive as to violate due process standards, and it set out a series of factors for courts to consider when evaluating the constitutionality of punitive damages. A California decision holds that BMW v.

Unfair and Deceptive Acts and Practices: 13.6.3.4 Few Preconditions to Award of Civil Penalties

In order to obtain a civil penalty, the state need not show that the defendant acted in bad faith524 or, unless the statute so specifies,525 engaged in intentional wrongdoing.526 Where a statute requires “willful violations,” civil penalties may be awarded where the seller knew or should have known that its actions were a UDAP violation (due diligence could have ascertained that the actions were illegal).527

Unfair and Deceptive Acts and Practices: 13.6.3.9 Indemnification and Insurance Not Available to Pay Civil Penalties

Since civil penalties serve the purposes of punishing the wrongdoer and deterring the wrongdoer from similar acts, a UDAP defendant does not have the right to seek indemnification for civil penalties from other participants.596 Responsibility for payment of civil penalties cannot be shifted to the defendant’s insurer, because insurance coverage of civil penalties is against public policy.597

Unfair and Deceptive Acts and Practices: 13.6.3.10 Civil Penalties in Bankruptcy

Section 523(a)(7) of the Bankruptcy Code exempts from discharge in a chapter 7 case a “fine, penalty, or forfeiture payable to and for the benefit of a governmental unit”.598 To be excepted from discharge, the fine, penalty, or forfeiture must not be “compensation for actual pecuniary loss” to the government.599 If a penalty meets all elements of this definition, it is nondischargeable in a chapter 7 case, even if it was imposed in a civil proceeding.600

Unfair and Deceptive Acts and Practices: 13.6.4.4 Who Is Liable for a Restitution Order?

A number of courts, including the Wisconsin and Nebraska Supreme Courts, have held that inclusion of the language required by the FTC Holder Rule in a seller’s contracts is grounds to obtain restitution against the assignee creditor, even when the assignee was not involved in the wrongdoing.652 Since individual consumers can bring claims against the assignee, the state should have the same right.

Unfair and Deceptive Acts and Practices: 13.6.4.5 Determining the Restitution Amount

Calculating a restitution award is relatively straightforward where the seller never delivers goods or services for which the consumer has paid,657 or where those goods or services are worthless. The state need only establish that the product was never delivered or was worthless, that the UDAP statute was violated, and that a certain class of individuals paid for the product. The restitution order then requires the seller to return the money paid.

Unfair and Deceptive Acts and Practices: 13.6.4.7 Types of Restitution Relief Available

When seeking far-reaching or innovative forms of restitution, enforcement agencies should stress not only the necessity of the remedy to adequately compensate victimized consumers, but also its necessity to ensure adequate deterrence by not allowing the seller to retain its ill-gotten gains. For example, restitution payments should not be based on whether consumers respond to notification that they have a right to restitution.

Unfair and Deceptive Acts and Practices: 13.6.4.8.2 Procedural vehicles for protecting a restitution award

Where a restitution order requires the seller to pay certain consumers, and the company has filed bankruptcy, there are practical problems for individual consumers in collecting from the bankrupt debtor. It would be useful for the attorney general to intervene before the bankruptcy court on behalf of the individuals owed restitution and argue that the restitution obligation is nondischargeable.702

Unfair and Deceptive Acts and Practices: 13.6.4.9 Ensuring Payment of Restitution Obligation

Where there is a danger that the merchant will skip town before it can be held in contempt for failing to pay restitution, the court can order that the restitution amount be placed in escrow immediately, and that the seller not engage in any further business until full restitution is made.709 Where the state cannot trust the seller to make the proper refunds, the money can be paid to the state enforcement agency, which can take the responsibility of distributing the restitution money.710