Filed: Jun. 15, 2010
Latest Update: Feb. 21, 2020
Summary: FOR PUBLICATION UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. No. 09-55093 NEOVI, INC., DBA Neovi Data D.C. No. Corporation, DBA Qchex.com; G7 3:06-cv-01952-JLS- JMA PRODUCTIVITY SYSTEMS, INC., DBA Qchex.com; JAMES M. DANFORTH, ORDER individually, and as an officer of AMENDING Neovi, Inc. and G7 Productivity OPINION AND Systems, Inc.; THOMAS VILLWOCK AMENDED individually, and as an officer of OPINION Neovi, Inc., Defendants-Appellants.
Summary: FOR PUBLICATION UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. No. 09-55093 NEOVI, INC., DBA Neovi Data D.C. No. Corporation, DBA Qchex.com; G7 3:06-cv-01952-JLS- JMA PRODUCTIVITY SYSTEMS, INC., DBA Qchex.com; JAMES M. DANFORTH, ORDER individually, and as an officer of AMENDING Neovi, Inc. and G7 Productivity OPINION AND Systems, Inc.; THOMAS VILLWOCK AMENDED individually, and as an officer of OPINION Neovi, Inc., Defendants-Appellants. ..
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FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FEDERAL TRADE COMMISSION,
Plaintiff-Appellee,
v. No. 09-55093
NEOVI, INC., DBA Neovi Data D.C. No.
Corporation, DBA Qchex.com; G7 3:06-cv-01952-JLS-
JMA
PRODUCTIVITY SYSTEMS, INC., DBA
Qchex.com; JAMES M. DANFORTH, ORDER
individually, and as an officer of AMENDING
Neovi, Inc. and G7 Productivity OPINION AND
Systems, Inc.; THOMAS VILLWOCK AMENDED
individually, and as an officer of OPINION
Neovi, Inc.,
Defendants-Appellants.
Appeal from the United States District Court
for the Southern District of California
Janis L. Sammartino, District Judge, Presiding
Argued and Submitted
March 4, 2010—San Diego, California
Filed May 14, 2010
Amended June 15, 2010
Before: Michael Daly Hawkins, Sidney R. Thomas, and
M. Margaret McKeown, Circuit Judges.
Opinion by Judge McKeown
8737
8740 FTC v. NEOVI, INC.
COUNSEL
Michael L. Mallow (argued), Los Angeles, California, for the
appellants.
Lawrence DeMille-Wagman (argued), Washington, DC, for
the appellee.
ORDER
The court’s opinion, filed May 14, 2010, is amended as fol-
lows:
At page 6989 of the slip opinion, replace with .
OPINION
McKEOWN, Circuit Judge:
The Federal Trade Commission (“FTC”) has broad powers
under the FTC Act to prevent businesses from engaging in
unfair or deceptive practices. 15 U.S.C. §§ 41-58. This case
arises from a website—managed by Neovi Data Corporation
(DBA Qchex.com), G7 Productivity Systems (DBA
Qchex.com), James Danforth, and Thomas Villwock (together
“Qchex”)—that created and delivered unverified checks at the
direction of registered users. During its six-year run, fraud-
sters and con artists extensively abused the website.
We examine here the reach of § 5 of the Act, which
empowers the FTC to prevent the use of “unfair methods of
competition in or affecting commerce, and unfair or deceptive
acts or practices in or affecting commerce . . . .” 15 U.S.C.
§ 45(a)(1). The key issue on appeal is whether Qchex is liable
for causing substantial injury to consumers that is not reason-
ably avoidable or outweighed by countervailing benefits. 15
U.S.C. § 45(n). The district court granted summary judgment
in favor of the FTC, finding that Qchex’s profound lack of
diligence, coupled with the affirmative acts of creating and
delivering hundreds of thousands of unverified checks—over
150,000 of which were from accounts later frozen for fraud—
warranted liability under the Act. Qchex was ordered to dis-
gorge $535,358 in revenue and permanently enjoined from
operating any similar business without taking appropriate,
specified measures to protect consumers. We affirm.
8742 FTC v. NEOVI, INC.
BACKGROUND
I. QCHEX.COM
From 2000 to 2006, Qchex marketed a series of software
programs on a website called “Qchex.com.” The software
allowed registered users to create and send checks by post or
email. In October 2006, the website was shut down. The gov-
erning corporation, Neovi,1 filed for Chapter 11 bankruptcy a
year later in October 2007.2
To register for a Qchex account, users were prompted to
enter a name and email address, and then to create a pass-
word. The account could be activated simply by clicking on
a link that Qchex sent to the email address provided. Setup
was completed after Qchex received pertinent information
about the user’s bank account, such as the routing and account
numbers. Registered users could submit a request on the web-
site that a check drawn from their account be created and
delivered to a third party. To achieve this end, users needed
only to enter the name of a payee, the check amount, and the
payee’s email or mailing address, depending on the preferred
method of delivery. Qchex.com then converted the informa-
tion into a negotiable instrument that, when printed, con-
formed to U.S. banking regulations. The instrument was
designed to be negotiable without the user’s signature, but
users could choose to upload their signatures if they so
desired.
1
James Danforth was the Vice President, Chief Operating Officer, Trea-
surer, Secretary, and registered service agent of Neovi. Thomas Villwock
was the owner, Chief Executive Officer, and President of Neovi.
2
After Qchex was shut down, but before filing for bankruptcy, Neovi
offered a similar check creation and delivery service called “Gochex.”
After filing for bankruptcy, Villwock and Danforth established iProlog
Corporation and launched a third check delivery service called “Free-
Quickwire.com.” iProlog hired all Neovi employees and conducted the
same business activities.
FTC v. NEOVI, INC. 8743
If the user chose to send the check electronically, the payee
would receive email instructions to sign up for an account on
Qchex.com. Once registered, the payee could print the check,
and a confirmation email would be sent to the “payor.”3 If the
user chose to send the check by post, it would be printed at
a “print service center” operated in the main by employees of
G7 Productivity Systems, a California corporation that pro-
duced the check software, ink, and paper that was marketed
by Neovi on the Qchex website.4 G7 employees mailed the
checks to the payees.
II. FRAUD
The Qchex system was highly vulnerable to con artists and
fraudsters. Because the information necessary to set up an
account was relatively public and easy to come by, it was a
simple matter for unscrupulous opportunists to obtain identity
information and draw checks from accounts that were not
their own. Indeed, over a six-year period, Qchex froze over
13,750 accounts for fraud. Those accounts spawned nearly
155,000 checks, supplied over 37,350 bank account numbers,
and were the source of checks totaling more than
$402,750,000—an amount more than half of the total drawn
during that time.
As one would expect, Qchex received hundreds of letters
and thousands of telephone calls from consumers, banks, and
law enforcement agencies complaining about funds drawn
from accounts without authorization. Victims included not
only individuals and businesses, but also large institutions and
agencies like the University of Chicago, Goldman Sachs, the
3
Electronically delivered checks could only be printed using special ink
and paper; these items were advertised and offered to the payee in the
notification email.
4
Danforth is G7’s Executive Vice President, Chief Financial Officer,
Secretary, and registered service agent. Villwock is a business consultant
at G7 but considered by its employees to be the de facto President.
8744 FTC v. NEOVI, INC.
Federal Communications Commission, and, ironically, the
FTC itself.
Qchex contends that it was attuned to the risk of fraud from
the outset and acted responsibly to curtail it. Before 2005,
Qchex argues that it took multiple fraud reduction measures,
pointing specifically to the “Qchex Monitor” system that
enabled employees to spot irregular activity like the presence
of large volumes of high-denomination checks. Internet Proto-
col addresses associated with fraudulent transactions were
blacklisted and Qchex placed warnings on the checks alerting
the payees that it could not verify whether the check was duly
authorized by the payors. On a case-by-case basis, Qchex
froze suspicious accounts. Finally, Qchex encrypted the check
data it transmitted over the Internet and used barcoding to
obscure account data on the face of the checks it issued.
None of these measures proved successful. The Qchex
Monitor was underutilized and does not appear to have been
employed in any focused way to target or unearth fraud. The
rest of the measures were either reactive—taking place after
fraud had already occurred—or unresponsive to the chief con-
cern that checks were being drawn against unauthorized
accounts.
In 2005, after meeting with the American Banking Associa-
tion and the Federal Deposit Insurance Corporation, Qchex
implemented a “micro-deposit” program called the “Qchex
Validation System” (“QVS”). To verify that a user’s account
was legitimate, Qchex made a single, nominal deposit of
somewhere between three and twenty cents in the account the
user provided. The user was required to check the account to
determine the deposit’s value. Qchex declined to deliver
checks from a provided account unless the user was first able
to accurately report the value of the micro-deposit. After three
failed attempts, the Qchex account would be frozen.
Although it was a step in the right direction, QVS had a
number of loopholes that rendered it ineffective. For example,
FTC v. NEOVI, INC. 8745
it only applied to accounts that were newly activated. Users
who had balances established before the new security system
was adopted were still able to send checks by mail. Even for
new users the system was easy to game. Because QVS vali-
dated just one bank account per registered user, as long as a
user had legitimate access to one bank account, other accounts
—possibly unauthorized—could be used without verification
through QVS. Significantly, the new system did not apply to
emailed checks at all. Whatever its failings, the QVS system
was short lived. For reasons that are unclear, the payment pro-
cessor that enabled Qchex to run the system terminated its
contract in April 2006.
ANALYSIS
I. UNFAIR PRACTICES UNDER § 5 OF THE FTC ACT
[1] Under § 5 of the FTC Act, an unfair practice or act is
one that “causes or is likely to cause substantial injury to con-
sumers which is not reasonably avoidable by consumers
themselves and not outweighed by countervailing benefits to
consumers or to competition.” 15 U.S.C. § 45(n).
A. Causation
The district court found that Qchex is liable for the
“[u]nfair creation and delivery of unverified checks.” Qchex
urges that this charge is both “legally” and “literally” impossi-
ble. It claims that only users can create checks because “with-
out user input nothing, and certainly not a check, . . . could
be created or delivered.” This semantic argument is meant to
encompass not only the causation requirement, but also
Qchex’s claim that it was not given adequate notice of the
charges.
[2] Qchex’s challenge to causation is best captured in its
statement that it did not “obtain, input or direct” the delivery
of consumer information nor facilitate the theft. This spin
8746 FTC v. NEOVI, INC.
ignores the fact that Qchex created and controlled a system
that facilitated fraud and that the company was on notice as
to the high fraud rate. Qchex’s approach would immunize a
website operator that turned a blind eye to fraudulent business
made possible only through the operator’s software. Even if
the creation of the checks was impossible without user input,
that does not mean Qchex did not create the checks that it
later delivered.
By Qchex’s logic, a publishing house cannot be said to
create and distribute books, because it is impossible to print
books without content provided by an author. Indeed, the cre-
ation and distribution of most any good is subject to a host of
sequential steps. Some of those steps involve the contribution
of independent causal agents, but those contributions do not
magically erase the role of the aggregator and distributor of
the goods. This reality becomes obvious if we flip the coun-
terfactual. Without the Qchex software and the G7 workforce,
users would not be able to create and deliver checks. There-
fore, by Qchex’s lights, users cannot be said to create and
deliver checks either. This circular logic leads to the absurd
result that although checks have been created and delivered,
no one is doing the creating or the delivering.
[3] At most, Qchex’s argument shows that Qchex and the
users each contributed to the creation and delivery of the
checks. But, even granting this characterization, Qchex is not
discharged from liability under the FTC Act—a single viola-
tion of the Act may have more than one perpetrator. See, e.g.,
FTC v. Bay Area Bus. Council, Inc.,
423 F.3d 627, 630 (7th
Cir. 2005) (holding multiple defendants liable under § 5 of
FTC Act).
[4] To support its argument that the FTC’s showing of cau-
sation was insufficient, Qchex urges us to seek interpretive
guidance from several California state cases that were decided
under California Business & Professions Code § 17200—the
so-called “Little FTC Act.” We decline the invitation. While
FTC v. NEOVI, INC. 8747
it is common practice for states with consumer protection stat-
utes modeled on the FTC Act to rely on federal authority
when interpreting those statutes, the reverse is not the case.
As the FTC points out, given the abundance of state laws on
which such interpretations could be based, this practice would
likely result in a sea of inconsistent rulings. See Orkin Exter-
minating Co., Inc. v. FTC,
849 F.2d 1354, 1363 (11th Cir.
1988) (noting that there is nothing constraining the FTC “to
follow judicial interpretations of state statutes in construing
the agency’s section 5 authority”).
Qchex also criticizes the district court’s reliance on two
unpublished district court cases. Although not precedential,
these cases are instructive insofar as they illustrate the role of
a facilitator under the FTC Act.
In FTC v. Windward Marketing, Ltd., the court found mul-
tiple defendants liable for a magazine telemarketing scheme
in which defendants obtained victims’ banking information
over the phone and illegitimately debited their accounts for
magazine subscriptions they did not realize they were pur-
chasing. Defendant Wholesale Capital Corporation
(“Wholesale”) maintained several bank accounts used to col-
lect on victims’ invoices. See No. Civ.A. 1:96-CV-615F,
1997
WL 33642380, at *11-*12 (N.D. Ga. Sept. 30, 1997). The
court noted that 40% of the drafts were returned unauthorized
and that, at the very least, Wholesale was “on notice of a high
probability of fraud and/or unfairness . . . .”
Id. at *13.
Although Wholesale did not itself make any misrepresenta-
tions or initiate the fraudulent scheme, the court found Whole-
sale liable under the FTC Act because it “facilitated and
provided substantial assistance to [a] . . . deceptive scheme,”
resulting in substantial injury to consumers.
Id. at *12-*13.
This conduct was enough to find Wholesale primarily liable—
as opposed to liable as an accomplice—under the Act.
Id.
Similarly, in FTC v. Accusearch, Inc., Accusearch was held
liable for maintaining a website that sold the GPS locations of
8748 FTC v. NEOVI, INC.
individual cell phones and other confidential, personal infor-
mation, even though it did not itself illegally obtain the infor-
mation. No. 06-CV-105-D,
2007 WL 4356786, at *6 (D.
Wyo. Sept. 28, 2007) (noting that “[e]ach time the Defendants
placed an order for phone records, they caused others to use
false pretenses and other fraudulent means to obtain confiden-
tial consumer phone records”).
[5] These cases illustrate that businesses can cause direct
consumer harm as contemplated by the FTC Act in a variety
of ways. In assessing that harm, we look of course to the
deceptive nature of the practice, but the absence of deceit is
not dispositive. Nor is actual knowledge of the harm a
requirement under the Act. Courts have long held that con-
sumers are injured for purposes of the Act not solely through
the machinations of those with ill intentions, but also through
the actions of those whose practices facilitate, or contribute
to, ill intentioned schemes if the injury was a predictable con-
sequence of those actions. See FTC v. Winsted Hosiery Co.,
258 U.S. 483, 494 (1922) (holding that “[t]he honest manu-
facturer’s business may suffer, not merely through a competi-
tor’s deceiving his direct customer, the retailer, but also
through the competitor’s putting into the hands of the retailer
an unlawful instrument . . .”); FTC v. R.F. Keppel & Bro.,
Inc.,
291 U.S. 304, 314 (1934) (holding candy retailer liable
for unfair practices although manufacturer was responsible for
the element of chance that made the practices unfair); Regina
Corp. v. FTC,
322 F.2d 765, 768 (3d Cir. 1963) (explaining
that “[w]ith respect to those instances where petitioner did not
contribute to the [misleading act], it is settled that [o]ne who
places in the hands of another a means of consummating a
fraud or competing unfairly in violation of the Federal Trade
Commission Act is himself guilty of a violation of the Act”)
(quotation marks and citations omitted).
Qchex had reason to believe that a vast number of checks
were being drawn on unauthorized accounts—checks that it
legitimized in the eyes of consumers. Aside from the prodi-
FTC v. NEOVI, INC. 8749
gious number of complaints Qchex received, its president tes-
tified that Qchex expected the site would be used for
fraudulent purposes from the beginning. Qchex nonetheless
continued to create and deliver checks without proper verifi-
cation. By doing so it engaged in a practice that facilitated and
provided substantial assistance to a multitude of deceptive
schemes.
[6] To be clear, none of this is to say that Qchex is liable
under a theory of aiding and abetting. Qchex engaged in
behavior that was, itself, injurious to consumers. Qchex’s
business practices might have served to assist others in illicit
or deceptive schemes, but the liability under the FTC Act that
attaches to Qchex is not mediated by the actions of those third
parties. Qchex caused harm through its own deeds—in this
case creating and delivering unverified checks—and thus § 5
of the FTC Act easily extends to its conduct.5
[7] Finally, as to its notice argument, Qchex contends that
the FTC’s complaint must be read as alleging that Qchex
“originated” checks in the sense that it, not the users, directed
the unauthorized withdrawal of funds out of consumer
accounts. This allegation does not square with a plain reading
of the complaint. As the district court points out, Qchex cre-
ated the checks in the sense that it physically brought them
into being—or provided the means to do so—and made them
appear legitimate and credible in the eyes of consumers.
5
Although we grant Qchex’s motion to take judicial notice of various
congressional documents that support in some measure Qchex’s claim that
aiding and abetting liability is not cognizable under the FTC Act, the doc-
uments have little bearing on the outcome of this appeal. Qchex’s actions
caused consumer harm; it did not merely aid or abet others who caused
consumer harm. We take no position on aiding and abetting liability under
the Act.
8750 FTC v. NEOVI, INC.
B. Substantial Injury
[8] The FTC met its burden of establishing substantial
injury; there is no triable issue of fact with respect to this
issue. The district court based its findings on record facts that
it pulled from various sources, including Qchex’s database,
Qchex’s declarations, and consumer complaints. Qchex’s
claim that the district court based its findings on “speculation,
not evidence,” is without support.
The district court acknowledged that the number of fraudu-
lent items created could not be definitively quantified, but it
also said that more than half the total value of all the checks
drawn with the help of Qchex came from accounts later fro-
zen for fraud. That concrete and quantifiable finding is suffi-
cient to show substantial harm because it establishes that
consumers “were injured by a practice for which they did not
bargain.” See Windward Marketing, 1997 WL at *11 (citing
Orkin Exterminating
Co., 849 F.2d at 1364-65). An act or
practice can cause “substantial injury” by doing a “small harm
to a large number of people, or if it raises a significant risk
of concrete harm.” Am. Fin. Servs. Ass’n v. FTC,
767 F.2d
957, 972 (D.C. Cir. 1985) (quotation marks and citations
omitted) cert. denied,
475 U.S. 1011 (1986).
Finally, in an effort to skirt liability, Qchex observes that
because the victims of fraud already had their banking infor-
mation compromised, they would have had to spend time pro-
tecting their accounts whether or not the Qchex system was
instrumental in their loss. If Qchex caused or helped to cause
substantial injury to consumers, it is no defense to say that
consumers nonetheless would have been harmed by someone
else. In any case, it is not clear that the fraudsters would have
had the means to take advantage of the victims’ information
without the aid of the Qchex software. Indeed, some of the
FTC v. NEOVI, INC. 8751
frauds stemming from the Qchex system involved victims
whose account information was not compromised.6
C. Reasonable Avoidability
[9] In determining whether consumers’ injuries were rea-
sonably avoidable, courts look to whether the consumers had
a free and informed choice. See Am. Fin. Servs.
Ass’n, 767
F.2d at 976. Qchex argues that there are triable issues of fact
as to whether consumers could reasonably have avoided their
alleged injuries. Although the district court addressed con-
sumers’ ability to avoid injury before it occurred, Qchex
argues that the court did not address the consumers’ ability to
mitigate damage after it occurred. See Orkin Exterminating
Co., 849 F.2d at 1365 (discussing both anticipatory and subse-
quent mitigation). Qchex maintains that even if consumers
were substantially injured, they were able to take “reasonable
steps to avoid loss” by communicating with their banks after
the unauthorized payments were discovered.
[10] The district court sufficiently addressed both avenues
of mitigation. In denying Qchex’s reconsideration motion, the
court wrote:
It is likely that some consumers never noticed the
unauthorized withdrawals. Even if the consumer did
notice, obtaining reimbursement required a substan-
6
Consider the following example found in the record: A confidence man
made contact with a woman over the Internet and gained her trust. He rep-
resented himself as a wealthy individual and told the woman that he had
asked an acquaintance who owed him money to make a check out directly
to her as a gift. The woman subsequently received a (Qchex) check in the
mail from an unrecognized name in the amount of $4,000. She protested
to the con man that the gift was too generous and he suggested that she
therefore keep $1,000 and wire the other $3,000 to a friend traveling in
Nigeria who had lost his luggage. She did so. The check, of course, was
illegitimate and the woman was on the hook for the $3,000 sent to Nigeria
and the bank fees incurred for an overdrawn account.
8752 FTC v. NEOVI, INC.
tial investment of time, trouble, aggravation, and
money. Further, Defendants’ uncooperativeness only
increased this outlay. Neither could consumers miti-
gate the period of time during which they lost access
to and use of the funds taken using Defendants’
fraudulent checks. Regardless of whether a bank
eventually restored consumers’ money, the consumer
suffered unavoidable injuries that could not be fully
mitigated.
Qchex has not shown that there is a material issue of fact as
to whether consumer injuries were reasonably avoidable on
either end of the fraudulent transactions.
D. No Substantial Consumer Benefit
[11] The FTC also met its burden of showing that con-
sumer injury was not outweighed by countervailing benefits
to consumers or to competition. The FTC offered the declara-
tion of a law professor who has written extensively about
electronic commerce, credit cards, and payment systems in
support of its claim. The FTC’s expert explained that the
Qchex website is of limited use to an ordinary consumer
because “all large banks,” offer the same services at a cheaper
price and with greater security. He also noted the presence of
other third parties in the marketplace—like PayPal—that pro-
vide similar services. Even though Qchex’s email service was
relatively unique, it was considerably less convenient given
that many commercial payees do not accept emailed checks.
There is also a disincentive to use the email method because
it is more costly to the recipient who must buy special ink,
paper, and a suitable printer to accept emailed checks.
The district court found that Qchex failed to counter the
FTC expert’s testimony. Qchex put forward a short declara-
tion from one of its executives purporting to do so, but the
district court found that the declaration was “the epitome of
uncorroborated and self-serving testimony,” and declined to
FTC v. NEOVI, INC. 8753
rely on it to find a genuine issue of fact. As a result, Qchex
accuses the district court of improperly weighing evidence
and making findings of fact.
Specific testimony by a single declarant can create a triable
issue of fact, but the district court was correct that it need not
find a genuine issue of fact if, in its determination, the partic-
ular declaration was “uncorroborated and self-serving.” See
Villiarimo v. Aloha Island Air, Inc.,
281 F.3d 1054, 1061 (9th
Cir. 2002). The district court was on sound footing conclud-
ing that Qchex put forward nothing more than a few bald,
uncorroborated, and conclusory assertions rather than evi-
dence.
II. EQUITABLE RELIEF7
[12] Analogizing to securities law, the district court con-
cluded that the appropriate measure of equitable disgorgement
was Neovi’s total revenue. See SEC v. JT Wallenbrock &
Assocs.,
440 F.3d 1109, 1113 (9th Cir. 2006) (explaining that
“the district court has broad equity powers to order the disgor-
gement of ‘ill-gotten gains’ obtained through the violation of
federal securities laws”) (internal citations omitted).8 An evi-
dentiary hearing was unnecessary because there were no
“genuine issues of material fact remaining in the case.” Qchex
argues that this conclusion was error in that “the FTC did not
7
We decline to consider Qchex’s argument, based on FTC v. Verity
Int’l, Ltd.,
443 F.3d 48, 67 (2d Cir. 2006), that the district court lacked
jurisdiction or authority to award damages or disgorgement under § 13(b)
of the FTC Act. Qchex did not properly raise this issue in the district
court, and thus the argument is waived on appeal. See In re E.R. Fegert,
Inc.,
887 F.2d 955, 957 (9th Cir. 1989) (explaining that appellate courts
will not consider an argument unless it has been “raised sufficiently for the
trial court to rule on it”).
8
In Wallenbrock we stressed that in making this calculation, the court
has ‘broad discretion,’ and needs only a ‘reasonable approximation of
profits causally connected to the violation . . . . [D]isgorgement should
include all gains flowing from the illegal
activities.” 440 F.3d at 1113-14.
8754 FTC v. NEOVI, INC.
put forth admissible evidence demonstrating that Neovi real-
ized $535,358 in ‘ill gotten gains.’ ” The district court derived
this specific figure from the gross receipts on Neovi’s tax
return, the details of which were not disputed.9 Qchex argues
that the figure is invalid because Qchex’s revenues were
exceeded by developing, maintenance, and operating costs for
the software and website.
Qchex’s argument is puzzling. The court explicitly declined
to reduce the disgorgement by the cost of developing and
maintaining the Qchex system because those activities “facili-
tated and contributed to the check fraud,” and because Qchex
did “not offer evidence showing exact costs or expenses
which the Court could reasonably use in its calculations.” It
is unclear what facts could be uncovered at an evidentiary
hearing that Qchex did not have the opportunity to present to
the district court. In any case, as the FTC points out, the dis-
puted points appear to be questions of law, not of fact.
III. THE INJUNCTION
[13] Under the injunction order, Qchex is prohibited from
“creating or delivering any check for a customer, unless [it]
perform[s] the verification procedures identified” in the rest
of the order. Qchex characterizes the order as a mandatory
injunction, claiming that § 13(b) of the FTC Act does not
expressly authorize mandatory injunctions.10
9
The district court found that the tax returns were properly authenticated
based on an executive’s declaration submitted in a supplemental brief.
Before the district court, Qchex did not contest the authenticity of the tax
returns or the veracity of the declaration. Instead, Qchex argued that the
manner of authentication (as an exhibit to a supplemental reply brief) was
improper. The district court did not abuse its discretion on this evidentiary
point and resolution of this issue would not be aided by an evidentiary
hearing. To the extent Qchex now challenges the authenticity of the tax
returns, that issue is not properly before us on appeal. See In re E.R.
Fegert,
Inc., 887 F.2d at 957.
10
We need not address the availability of mandatory injunctions under
§ 13(b) of the FTC Act.
FTC v. NEOVI, INC. 8755
[14] According to the most general understanding of the
distinction between mandatory and prohibitive injunctions,
the district court’s order is prohibitory, not mandatory. See
Black’s Law Dictionary 855 (9th ed. 2009) (defining “prohib-
itory injunction” as an injunction that “forbids or restrains an
act,” and “mandatory injunction” as an injunction that “orders
an affirmative act or mandates a specified course of con-
duct”). The prohibition contains an exception, but this lan-
guage does not convert it from a prohibitory to a mandatory
injunction; Qchex is not ordered to undertake any affirmative
action.
AFFIRMED.