JACQUELINE H. NGUYEN, District Judge.
The matter is before the Court on Plaintiff Federal Trade Commission's ("FTC") motion for summary judgment or, alternatively, for partial summary adjudication ("Motion"). (Docket No. 350.) The Court will also consider and rule on Defendants'
This case involves the advertising, marketing, and sale of three wealth-creation products: (1) John Beck's Free and Clear Real Estate System (the "John Beck System"); (2) John Alexander's Real Estate Riches in 14 Days (the "John Alexander System"); and (3) Jeff Paul's Shortcuts to Internet Millions (the "Jeff Paul System"). These products were marketed through Defendants' infomercials, which the FTC contends were deceptive.
Hewitt and Gravink, the founders and sole members of FP, directly or indirectly owned and controlled the corporate defendants in this lawsuit.
Defendant Beck is the "originator" or developer of the John Beck System that was advertised in the 2005 and 2007 John Beck infomercials (hereinafter, the 2005 John Beck infomercial and the 2007 John Beck infomercial, respectively).
Defendant Alexander is the "originator" or developer of the John Alexander System that was advertised in an infomercial that aired from approximately November 2005 until approximately mid-2007.
Defendant Paul is the co-creator and primary spokesman for the Jeff Paul System that was advertised in the 2007 and 2008 Jeff Paul infomercials (hereinafter, "the 2007 Jeff Paul infomercial" and "the 2008 Jeff Paul infomercial," respectively).
Defendants marketed the products using infomercials aired nationwide and on the Internet.
Since at least 2004, Defendants have aired at least two versions of the John Beck System infomercial.
Similarly, Defendants also aired the "John Alexander's Real Estate Riches in 14 days" infomercial.
Since at least January 2006, Defendants have also aired at least two versions of the "Jeff Paul's Shortcuts to Internet Millions" infomercial.
On June 30, 2009, the FTC brought this suit against Defendants, alleging violation of the Federal Trade Commission Act ("FTCA"), 15 U.S.C. § 45(a) (hereinafter, "Section 5") based on Defendants' representations in connection with the advertising, marketing, promoting, offering for sale, or sale of the John Beck System (Claim 1), the John Alexander System (Claim 3), and the Jeff Paul System (Claim 5). The FTC also alleges Section 5 violations based on Defendants' representations in connection with the "continuity membership plans" (Claims 2, 4, and 6) and the sale of coaching programs (Claim 7). In addition, the FTC claims that Defendants violated the Telemarketing Sales Rule ("TSR"), 16 C.F.R. §§ 310.3(a)(1)(vii), 310.4(a)(6), and 310.4(b)(1)(iii)(A), by failing
The FTC now moves for summary judgment.
Rule 56 of the Federal Rules of Civil Procedure allows a party to move for summary judgment of a claim or defense. Fed.R.Civ.P. 56(a). Summary judgment is proper if there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Id.; see also, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The movant bears the initial burden of informing the court of the basis of its motion, and identifying those portions of "`pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.P. 56(c)). Once the moving party has met this initial burden, the burden shifts to the nonmoving party to present evidence showing that a genuine issue of fact remains. Anderson, 477 U.S. at 248, 106 S.Ct. 2505. The nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). If the nonmoving party "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial," then summary judgment is proper. Celotex, 477 U.S. at 322, 106 S.Ct. 2548. Where the opposing party is able to identify specific, relevant facts evidencing a genuine issue of material fact, the court must draw all inferences in favor of the opposing party and accordingly deny summary judgment. T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 631 (9th Cir. 1987).
In connection with its claims relating to the John Beck System, the FTC has filed, inter alia, 14 consumer declarations consisting of approximately 200 paragraphs. (Docket No. 369.) In connection with its claims pertaining to the John Alexander System, the FTC has filed, inter alia, 16 consumer declarations consisting of over 100 paragraphs. (Docket No. 370.) Defendants object to almost every paragraph on various grounds, including best evidence, relevance, lacks foundation, hearsay, argumentative, and lack of opportunity to cross-examine the declarants. (Docket Nos. 408, 409.) The FTC filed a response addressing each objection. (Docket Nos. 484, 502.) These objections are
Defendants object to almost every paragraph of the declarations made by the
Defendants object to portions of the Gordon Declaration and Attachment 1 to that declaration. (Docket Nos. 333, 414, 487, 543.) Attachment 1 is an Excel spreadsheet summarizing consumer complaints relating to the John Beck System, John Alexander System, and Jeff Paul System. Defendants also object to portions of the (1) Fifth Stahl Declaration
Defendants object to portions of the declaration made by Charles McClellan, a consumer who purchased an introductory Jeff Paul Kit. (Docket Nos. 371, 419, 505.) To the extent that the Court relied on paragraph 7 of the McClellan Declaration, Defendants' objection is
Defendants object to portions of the Rose Declaration. (Docket Nos. 342, 420, 506.) The Court
Defendants object to almost every paragraph of the declaration made by Jennifer Brennan. (Docket Nos. 421, 490, 537.) Defendants also object to portions of the declaration made by John Jacobs. (Docket
Defendants object to Paragraph 1 of the first declaration made by Dr. Frederica Conrey ("Dr. Conrey") on the grounds of best evidence rule and mischaracterization of the evidence. (Docket Nos. 376, 424, 507.) Mischaracterization of evidence is not a cognizable evidentiary objection. Further, the best evidence objection has no merit as the survey referenced in the First Conrey Declaration is attached to said declaration. Accordingly, this objection is
The FTC filed evidentiary objections to portions of the declarations filed by Defendants in support of their opposition to the motion for summary judgment. The FTC objects to the declarations made by the following: (1) Jason Han
While couched as a "motion in limine", this motion, docket no. 426, is essentially an evidentiary objection to the FTC's use of a survey conducted by Dr. Conrey, who was designated by the FTC as an expert.
Dr. Conrey is a Survey Methodologist at ICF Macro, a firm retained by the FTC to conduct the telephone survey at issue.
(Emphasis in the original.)
Defendants move to exclude evidence relating to the Conrey Survey, including the First Conrey Declaration (docket no. 376), on the ground that the survey's Prenotification Letter, "poisoned the well in such a way as to invalidate whatever survey finding the FTC obtained." (Mot. in Limine 1.) Defendants contend that the entire structure of the Prenotification Letter, which positions the FTC as the "good guy" fighting "to protect" "American consumers", is deeply prejudicial and preconditions responders to respond favorably for the FTC. Further, Defendants challenge the manner in which Dr. Conrey conducted her survey, which renders the results unreliable.
Fed.R.Evid. 702.
"The proponent of the survey bears the burden of establishing its admissibility." Keith v. Volpe, 858 F.2d 467, 480 (9th Cir.1988). In the Ninth Circuit, a party seeking to admit survey evidence must show that the survey was "conducted according to accepted principles." Clicks Billiards, Inc. v. Sixshooters Inc., 251 F.3d 1252, 1262 (9th Cir.2001); see also, Fortune Dynamic, Inc. v. Victoria's Secret Stores Brand Mgmt., 618 F.3d 1025, 1036 (9th Cir.2010) ("We have long held that survey evidence should be admitted `as long as [it is] conducted according to accepted principles and [is] relevant.'") (alterations in the original). Criticisms related to "the format of the questions or the manner in which [the survey] was taken" go to the weight of the evidence, not its admissibility. Fortune Dynamic, 618 F.3d at 1036 ("`[T]echnical inadequacies' in a survey, `including the format of the questions or the manner in which it was taken, bear on the weight of the evidence, not its admissibility.'"); Wendt v. Host Int'l, 125 F.3d 806, 814 (9th Cir.1997) ("Challenges to survey methodology go to the weight given the survey, not its admissibility.").
In Keith, the party challenging the admission of a survey had contested, inter alia, the objectivity of the survey. However, the survey director had testified that the methods used were "accepted social science techniques in accord with generally accepted standards in the field." Keith, 858 F.2d at 481. Based on this testimony, the Ninth Circuit held that district court did not err in admitting the survey.
In Fortune Dynamic, the trial court excluded a survey on various grounds including the fact that the survey may have been "highly suggestive." 618 F.3d at 1037. The Ninth Circuit reversed, holding that a survey should be admitted as long as it is based on accepted principles and is relevant. Id.
Much like in Keith and Fortune Dynamic, here, Defendants challenge the admissibility of the survey and testimony relating to that survey on the ground that it lacked objectivity and was highly suggestive. In response, much like the expert in Keith, Dr. Conrey testified that the survey methods she used were in accord with generally accepted standards in the field.
Section 5 of the FTCA prohibits "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). An act is deceptive if (1) there is a representation, omission, or practice that, (2) is likely to mislead consumers acting reasonably under the circumstances, and (3) the representation, omission, or practice is material. FTC v. Pantron I Corp., 33 F.3d 1088, 1095 (9th Cir.1994) (adopting standard in Cliffdale Assocs., Inc., 103 F.T.C. 110, 164-65 (1984)).
An advertisement can make both express claims and implied claims. Express claims "are ones that directly state the representation at issue." In re Thompson Med. Co., Inc., 1984 FTC LEXIS 6, *311 (1984), aff'd, Thompson Med. Co. v. FTC, 791 F.2d 189, 197 (D.C.Cir. 1986), cert. denied, Thompson Med. Co. v. FTC, 479 U.S. 1086, 107 S.Ct. 1289, 94 L.Ed.2d 146 (1987). Implied claims "are any claims that are not express. They range from claims that would be virtually synonymous with an express claim through language that literally says one thing but strongly suggests another, to language which relatively few consumers would interpret as making a particular representation." Id. at *312. The law does not recognize any distinction between express and implied misleading claims. FTC v. Figgie Int'l, 994 F.2d 595, 604 (9th Cir. 1993) ("Figgie frequently argues that some of the representations that the Commission found false or misleading were implied, not express. This is a distinction without a difference. Figgie can point to nothing in statute or case law which protects from liability those who merely imply their deceptive claims; there is no such loophole.").
"Advertisements as a whole may be completely misleading although every sentence separately considered is literally true." Donaldson v. Read Magazine, Inc., 333 U.S. 178, 188, 68 S.Ct. 591, 92 L.Ed. 628 (1948). In assessing whether a representation or practice is likely to mislead consumers, a court may consider the overall net impression conveyed by the representation. FTC v. Cyberspace.Com, LLC, 453 F.3d 1196, 1200 (9th Cir.2006) ("A solicitation may be likely to mislead by virtue of the net impression it creates even though the solicitation also contains truthful disclosures."); FTC v. Stefanchik, 559 F.3d 924, 928 (9th Cir.2009) ("Deception may be found based on the `net impression'
In demonstrating that a representation is likely to mislead, the FTC must establish that (1) such representation was false or (2) the advertiser lacked a reasonable basis for its claims. See In re Thompson, 1984 FTC LEXIS 6, at *379 (stating that to make a case that advertising is deceptive, the FTC has the burden of showing that the material claims communicated to reasonable consumers by the advertising are false in some manner); FTC v. U.S. Sales Corp., 785 F.Supp. 737, 748 (N.D.Ill.1992) ("Apart from challenging the truthfulness of an advertiser's representations, the FTC may challenge the representation as unsubstantiated if the advertiser lacked a reasonable basis for its claims.").
"For an advertiser to have had a `reasonable basis' for a representation, it must have had some recognizable substantiation for the representation prior to making it in an advertisement." FTC v. Direct Mktg. Concepts, Inc., 569 F.Supp.2d 285, 298 (D.Mass.2008) (citations omitted). "Defendants have the burden of establishing what substantiation they relied on for their product claims." FTC v. QT, Inc., 448 F.Supp.2d 908, 959 (N.D.Ill.2006). "The FTC has the burden of proving that Defendants' purported substantiation is inadequate...." Id. "In determining whether an advertiser has satisfied the reasonable basis requirement, the Commission or court must first determine what level of substantiation the advertiser is required to have for his advertising claims. Then, the adjudicator must determine whether the advertiser possessed that level of substantiation." Pantron I Corp., 33 F.3d at 1096.
A claim is material if it "involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product." Cyberspace.Com, 453 F.3d at 1201. A representation or practice is material if it "is likely to affect a consumer's choice of or conduct regarding a product or service." In re Southwest Sunsites, Inc., 1980 FTC LEXIS 86, at *328 (F.T.C.1980) (citing FTC v. Colgate-Palmolive Co., 380 U.S. 374, 387, 85 S.Ct. 1035, 13 L.Ed.2d 904 (1965)).
The FTC alleges that in connection with the John Beck system, Defendant Beck, the "guru" of the system, and Defendants JBAP, MOA, FP, Hewitt, and Gravink have expressly or implicitly represented that consumers who purchase and use the John Beck System are likely to be able to: (1) purchase homes, at government tax sales in their area, "free and clear" of all mortgages or liens, for just "pennies on the dollar"; (2) earn substantial amounts of money renting or selling homes they purchase at government tax sales; and (3) quickly and easily earn substantial amounts of money with little financial investment. (Compl. ¶ 89.) The FTC claims that these representations were material and were either false or unsubstantiated at the time they were made. Because John Alexander, LLC and Jeff Paul, LLC are part of a "common enterprise," the FTC also claims that these corporate entities should be held liable for their co-defendants'
As a preliminary matter, the Court rejects the FTC's suggestion that the Court is bound by Judge Cooper's findings in the preliminary injunction order.
Preliminary findings at injunction proceedings are not law of the case. Sierra On-Line, Inc. v. Phoenix Software, Inc., 739 F.2d 1415, 1422 (9th Cir.1984) ("A preliminary injunction, of course, is not a preliminary adjudication on the merits but rather a device for preserving the status quo and preventing the irreparable loss of rights before judgment"). Therefore, the Court cannot grant the FTC's motion merely because the Court has previously issued a preliminary injunction. The FTC must establish a negative net impression anew based on the more rigorous standards courts employ in summary judgment proceedings.
The Court finds that the FTC has met its burden in showing that it is entitled to summary judgment as to Claim 1 because Defendants have made material misrepresentations that are either false or unsubstantiated.
The FTC has established that Defendants falsely represented that consumers could "purchase" homes and other real estates for "pennies on the dollar"
The falsity of these representations is confirmed by the kit materials. Specifically, the materials teach consumers how to purchase tax liens and certificates, but the purchaser of a tax lien or certificate does not walk out of the tax sale with a deed or the right to turn around and sell the property.
Further, Beck himself confirms the falsity of his infomercials' representations. Contrary to his express claims in the infomercials that he has bought "thousands" of properties by using his system, Beck
The falsity of the infomercials' representations is also confirmed by dozens of consumer witnesses, who testified that it is difficult or impossible to find government tax sales in their area, and it is difficult or impossible to earn substantial money by purchasing homes or land using the John Beck System.
The declarations of these consumers are corroborated by the Conrey Survey. According to the survey results, less than 2% of all consumers made any revenues whatsoever.
In addition to the falsity of Defendants' claims in the infomercials, at the time these infomercials were produced and
First, Defendants argue that the representations made in the infomercials are not false. For example, the houses featured in its commercials did in fact sell for the displayed prices.
For purposes of this motion, the Court has reviewed the Beck infomercials. The Court agrees with Judge Cooper's conclusion in the preliminary injunction order that "[b]ased upon the statements and visual representations made in the infomercials, the overall net impression communicates to the viewer that a typical consumer can easily purchase high-valued properties for pennies on the dollar and therefore quickly earn tens of thousands of dollars, if not hundreds of thousands of dollars." (11/17/2009 Order at 11-12.) It is immaterial that the kit also encourages purchasing raw land and house sites, because the visual representations of the infomercials themselves focus heavily on large homes and vacation properties. Further, even if it were true that houses featured in its commercials did in fact sell for the displayed price and consumers from non-tax lien state can buy properties in tax-lien states via the Internet, these facts are immaterial because an advertisement could be misleading or deceptive by virtue of the net impression it creates even though it also contains truthful disclosures. Cyberspace.Com, 453 F.3d at 1200. Here, the infomercials' net impression communicates to the viewer that nice homes, such as those prominently displayed in these advertisements, are easily available in all 50 states with or without the use of the Internet and one can a obtain a deed to these properties easily for pennies on the dollar. What the John Beck infomercials fail to disclose is that in most states, a government tax foreclosure sale transfers a tax lien instead of a tax deed. A tax lien permits the purchaser to collect the delinquent taxes owed on the property, but does not transfer title to the property. In the remaining states where tax deeds are sold, an auction process makes it very difficult to purchase high-value properties for "pennies on the dollar." (11/17/2009 Order at 12.)
Next, Defendants argue that the phrase "quick and easy" is never spoken and never appears in either of the John Beck commercials.
The FTC alleges that in connection with the John Alexander System infomercials, Defendants Alexander, FP, MOA, Hewitt and Gravink violated Section 5 by making numerous material misrepresentations. (Compl.¶ 95.) Further, because John Alexander, LLC, Jeff Paul, LLC, and JBAP are part of a "common enterprise," the FTC claims that these corporate entities should also be held liable for their co-defendants' actions.
The FTC has submitted evidence showing that Defendants represented that consumers would be able to earn substantial amounts of money quickly using the John Alexander system.
Defendants' representations were false. While the John Alexander materials contained disclosures, such as "[t]o become successful, time, persistence, knowledge, capitalization, and common sense are necessary,"
Further, the Conrey Survey reveals that the representations in the infomercial are unsubstantiated. The survey shows that consumers were unable to make any money using the John Alexander system. Specifically, less than one percent (0.8% of all consumers who purchased the John Alexander kit) made any revenues whatsoever and less than one percent of all consumers who purchased the kit materials have made any profit using the system.
Defendants counter that the representations made in the infomercial were true and there were satisfied customers.
As stated previously, representations made in advertisements may be deceptive even if it also contains truthful disclosures. See Donaldson, 333 U.S. at 188, 68 S.Ct. 591 ("Advertisements as a whole may be completely misleading although every sentence separately considered is literally true. This may be because things are omitted that should be said, or because advertisements are composed ... in such way as to mislead."). Accordingly, even if Defendants' claim — that there were satisfied customers who used Alexander's product and strategies — were true, this alone does not shield Defendants from Section 5 liability. Likewise, the small print disclaimers in the Alexander infomercial do not preclude liability. The prints are so tiny that, under the circumstances, consumers are unlikely to read them while watching and listening to the testimonials of the endorsers.
Having viewed the infomercial and considered all admissible evidence, the Court finds that the infomercials' net impression — that a typical consumer can earn fast cash with no financial investment by purchasing and using the John Alexander system — is false. Defendants also lack a reasonable basis to assert that such a claim is true.
The Court finds that the misrepresentations in the John Alexander infomercial are material, and no reasonable trier of fact could conclude that the misrepresentations were not likely to mislead consumers acting reasonably under the circumstances. Accordingly, summary adjudication of Claim 3 is
The two Jeff Paul infomercials at issue are "Jeff Paul's Shortcuts to Internet Millions." Each infomercial includes numerous
The falsity of the representations made in the infomercials is confirmed by the kit materials. For example, while it is technically possible for a consumer to create and use the free websites described in the infomercials, each "website" is a single, unattractive webpage with a basic white background and boilerplate text. (11/17/2009 Order at 16-17.)
Further, the falsity of the infomercials is confirmed by testimony from consumer witnesses who purchased the Jeff Paul materials. Consumers attest that they were unable to earn any money using the Jeff Paul System.
Moreover, the falsity of the representations is also confirmed by the Conrey Survey, which states that less than one percent (0.7%) of all consumers who purchased the Jeff Paul kit materials made any revenues.
The FTC has also established that during the time these infomercials were aired, Defendants did not have evidence or documentation to substantiate their representations. Indeed, Defendants concede that during the time period in which the 2007 Jeff Paul infomercial was aired, they did not have any evidence to show that there were more than 5 people who made $50,000 or more using the Jeff Paul System.
Defendants counter that the front-end materials make it clear that it is up to the individual to go out and market the products and to do the things outlined in the detailed step-by-step program. (Opp'n 18.) This argument is unavailing because the infomercials do not disclose these additional steps. Instead, these infomercials gave the overall impression that a typical consumer can easily, quickly, and "magically" earn thousands of dollars per week simply by purchasing and using the Jeff Paul System.
In connection with each wealth-creation products, Defendants represented that consumers who purchase these products will receive a free 30-day membership to the "John Beck Property Vault" (Claim 2), "John's Club" (Claim 4), and "Jeff Paul's Big League" (Claim 6), respectively. The FTC alleges that Defendants failed to disclose, or failed to disclose adequately, that after the trial period ends, consumers who purchase these systems are still enrolled in a continuity membership plan that costs $39.95 per month, and the consumers are charged $39.95 each month unless consumers take affirmative action to cancel their memberships.
The evidence relied upon by the FTC in support of Claims 2, 4, and 6 is the same evidence it cited in support of the TSR claims, Claims 8, 10, and 12. As such, the FTC conflates its analysis of these six claims. (Mot. 42, Reply 26.) As explained more thoroughly below, information that purchasers would be automatically enrolled in continuity programs upon their purchase of the front-end kits is material, and Defendants' failure to disclose this information to consumers is likely to mislead the consumers acting reasonably under the circumstances. Accordingly, summary judgment is
The FTC alleges that in connection with the coaching programs, Defendants have expressly or implicitly represented that consumers who purchase and complete the coaching program will quickly earn back the cost or substantially more than the cost of the coaching program. (Compl. ¶ 107.) The FTC argues that Defendants' representations are likely to mislead because such representations were both false and unsubstantiated. (Mot. 10-13.) The Court agrees.
For example, FTC has submitted evidence showing that through their telemarketers,
The Conrey Survey shows that almost all who purchased coaching programs lost money, and more than 17 percent lost at least $10,000.
Defendants counter that the FTC failed to take into account FP's generous refund policies; its recording program; its Quality Assurance ("QA") program; and its fining policies.
Defendants' argument misses the mark. Viewing the facts in the light most favorable to the Defendants, they have failed to controvert the fact that their telemarketers made false and unsubstantiated misrepresentations. Regardless of the existence
Further, the Court finds that Defendants' representations in connection with the coaching programs were material. All express representations are material, and implied representations are material "when they pertain to the central characteristics of the products or services being marketed." In re Southwest Sunsites, 1980 FTC LEXIS 86, at *329. Defendants have made both express and implied false representations, and no reasonable finder of fact would conclude otherwise.
Accordingly, summary adjudication of Claim 7 is
The FTC alleges that the continuity charges imposed in the systems violate section 310.3(a)(1)(vii) of the TSR. The continuity charges are monthly recurring charges to the purchasers after the 30-day trial period ended unless the purchasers take affirmative steps to cancel the charges.
Section 310.3(a)(1)(vii) provides:
16 C.F.R. § 310.3(a)(1)(vii) (emphasis added).
Here, there is no reasonable dispute that Defendants failed to adequately disclose to purchasers of the three systems that they would be automatically enrolled in continuity programs. The FTC's evidence shows that, following the placement of the order for the front-end kits, consumers were automatically charged $39.95 per month after the 30-day free trial period expired, and they had to contact Defendants to avoid future charges.
As the Court previously found in its preliminary injunction order, by enrolling consumers in the continuity service programs and obtaining consumers' payment information without first disclosing all material terms of the negative option, Defendants have violated the TSR. (11/17/2009 Order at 20-21.)
Defendants cite to the transcripts of the initial voice recording (IVR) for the three systems to support their argument that sufficient disclosures were made in accordance with § 310.3(a)(1)(vii).
The critical issue is when disclosures must be made. (Reply 27; 11/28/2011 Hearing Tr. at 6:16.) Section 310.3(a)(1)(vii) requires that disclosures be made before the consumer divulges his credit-card or bank account information.
For these reasons, summary adjudication of Claims 8, 10, and 12 is
The FTC alleges in Claims 9, 11, and 13 that Defendants violated Section 310.4(a)(6) of the TSR by representing that consumers who purchased one of the systems would receive a free 30-day membership to a special service, and then causing consumers' billing information to be submitted for payment without the express informed consent of the consumer after the trial period ended.
Here, there is no reasonable dispute that Defendants automatically charged consumers $39.95 per month after a 30-day free trial period without the expressed informed consent of the consumers.
The FTC alleges that Defendants violated section 310.4(b)(1)(iii)(A) of the TSR. Section 310.4(b)(1)(iii)(A) prohibits "a telemarketer to ... [initiate] any outbound telephone call to a person when ... that person previously has stated that he or she does not wish to receive an outbound telephone call made by or on behalf of the seller whose goods or services are being offered."
Defendants argue that the violations were isolated incidents that should not be the basis for liability under § 310.4(b)(1)(iii)(A). (Opp'n 40.) Further, Defendants claim that the FTC has failed to show that these violations fell outside the 30-day grace period that Defendants had to place those customers on the company's internal "do not call" list.
However, there is no dispute that Defendants have no written policies and procedures with regard to handling "do not call" complaints. Indeed, the Chief Operating Officer of MOA, Michael O'Connell, admits that MOA had no written policy with regard to the TSR's "do not call" provision.
The FTC asks for both injunctive and monetary relief of over $300 million dollars. (Mot. 1.)
The FTC may seek a permanent injunction "in proper cases." 15 U.S.C. § 53(b)(1), (2). A routine deception case such as the case at bar qualifies as a "proper case." FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1111 (9th Cir.1982) (holding that § 13(b) of the FTCA authorizes courts to grant permanent injunctions "in proper cases" and "a routine fraud case is
Upon finding that a business or an individual has engaged in deceptive conduct in violation of the FTCA, the court may issue a permanent injunction under Section 13(b). Gill, 71 F.Supp.2d at 1046. Individuals may be held liable for injunctive relief not only for their own deceptive conduct, but also in certain circumstances, for a corporation's deceptive conduct. "An officer of a corporation may be held individually liable for injunctive relief under the FTCA for corporate practices if the FTC can prove (1) that the corporation committed misrepresentations or omissions of a kind usually relied on by a reasonably prudent person, resulting in consumer injury, and (2) that the individual defendants participated directly in the acts or practices or had authority to control them." FTC v. American Standard Credit Sys., 874 F.Supp. 1080, 1087 (C.D.Cal.1994) (citing FTC v. Amy Travel Service, Inc., 875 F.2d 564, 573 (7th Cir. 1989), cert. denied, 493 U.S. 954, 110 S.Ct. 366, 107 L.Ed.2d 352 (1989); FTC v. Kitco of Nevada, Inc., 612 F.Supp. 1282, 1292 (D.Minn.1985)).
Here, the FTC seeks injunctive relief against Hewitt, Gravink, and the companies they control. (Reply 7-8, 27-28.) Status as a corporate officer is sufficient to establish individual liability. Amy Travel Service, 875 F.2d at 573 ("Authority to control the company can be evidenced by active involvement in business affairs and the making of corporate policy, including assuming the duties of a corporate officer."); FTC v. Nat'l Urological Group, Inc., 645 F.Supp.2d 1167, 1207 (N.D.Ga.2008) ("If a defendant was a corporate officer of a small, closely-held corporation, that individual's status gives rise to a presumption of ability to control the corporation."). Because the Court finds that liability has been established, and it is undisputed that Hewitt and Gravink own and control FP, which, in turn, is the sole member of MOA, JBAP, LLC, Jeff Paul, LLC d/b/a Shortcuts to Internet Millions, LLC, and John Alexander, LLC, Hewitt and Gravink are liable for injunctive relief.
The FTC also seeks to enjoin Beck, Alexander, and Paul. (Reply 14, 18-19, 21-22, respectively.) In FTC cases, individual defendants are directly liable for their own violations of Section 5. FTC v. Windward Mktg., 1997 WL 33642380, at *13, 1997 U.S. Dist. LEXIS 17114, at *38 (N.D.Ga. Sept. 30, 1997). Further, they are also liable for the corporate defendant's violations if the FTC demonstrates that: (1) the corporate defendant violated the FTCA; (2) the individual defendants participated directly in the wrongful acts or practices; and (3) the individual defendants had some knowledge of the wrongful acts or practices. Id. (emphasis added) (citing FTC v. GEM Merchandising Corp., 87 F.3d 466, 470 (11th Cir.1996)).
Here, Beck, Alexander, and Paul are personally liable for the false and unsubstantiated claims they made in their respective infomercials. Unlike a paid spokesperson, there is no dispute that Beck, Paul, and Alexander were the developers of the systems that bear their names and gave the impression in the infomercials that they were experts in using the system.
Because the record is clear that these "gurus" participated directly in the advertising of the deceptive produces, knew that the infomercials made material misrepresentations regarding the products, or at least were recklessly indifferent to the truth or falsity of the infomercials, the Court finds that they are liable for injunctive relief with respect to the system they developed. Nat'l Urological Group, 645 F.Supp.2d at 1207-1208 (holding a medical doctor who promoted and endorsed the deceptive products individually liable because he helped develop the products; reviewed the substantiation regarding the ingredients in the products; reviewed and edited the advertisements before they were disseminated; allowed himself to be called "Chief of Staff" and "Medical Director" in the advertisements; and did not contest his individual liability for the corporate defendants' wrongs; instead, he simply joins the corporate defendants in arguing that no violations occurred).
With regard to the scope of the injunction, the FTC submits that the type of injunctive relief it seeks includes standard provisions obtained in other FTC cases. (Reply 44.)
The FTC argues that given Hewitt and Gravink's history, particularly the prior lawsuits that have been filed by the FTC against them, and the amount of the consumer injury involved, a lifetime ban is warranted.
In addition to injunctive relief, the FTC seeks equitable monetary relief in the
As with injunctive relief, individuals may be held liable for monetary relief in their own right for their own deceptive conduct. Gill, 71 F.Supp.2d at 1046; Kitco of Nevada, 612 F.Supp. at 1292-1293 (finding liability of individuals for their roles as principals). An individual is liable for corporate violations of the FTCA if "(1) he participated directly in the deceptive acts or had the authority to control them and (2) he had knowledge of the misrepresentations, was recklessly indifferent to the truth or falsity of the misrepresentation, or was aware of a high probability of fraud along with an intentional avoidance of the truth." Stefanchik, 559 F.3d at 931.
Here, the FTC argues that Hewitt and Gravink should be held monetarily liable as owners of the corporate defendants. In addition, the FTC seeks the hold the developers of the three systems, Beck, Alexander, and Paul, personally liable for their roles as the "gurus" in the infomercials.
For the reasons discussed above, Hewitt and Gravink are liable for equitable monetary relief for their roles as principals of FP and their control of the other corporate defendants.
As stated previously, the gurus should be held liable for injunctive relief. For the same reasons cited above, the Court finds that the individual gurus should be monetarily liable with respect to their products.
There is no dispute that FP developed the deceptive infomercials; JBAP, LLC, Jeff Paul, LLC, and John Alexander LLC marketed the systems, and MOA telemarketed and sold personalized coaching programs for the systems. There is also no dispute that FP is the controlling member of the other corporate defendants. "Where one or more corporate entities operate in common enterprise, each may be held liable for the deceptive acts and practices of the others." Think Achievement, 144 F.Supp.2d at 1011 (citing Sunshine Art Studios, 481 F.2d at 1175; Delaware Watch, 332 F.2d at 746-47). Factors in determining common enterprise include: (1) common control; (2) sharing office space and offices; (3) whether business is transacted through a "maze of interrelated companies"; and (4) commingling of funds. Think Achievement, 144 F.Supp.2d at 1011 (citations omitted). Here, there is no dispute that these corporate defendants are controlled by Hewitt and Gravink and they share the same business address and office space. Accordingly, the Court finds that the corporate defendants operate as a common enterprise, and each of them are jointly and severally liable for any corporate defendant's violations.
Again, the Court believes that because the parties' briefing focused primarily on
However, Defendants counter that summary adjudication of the measure of damages is improper because the FTC made no effort to exclude the consumers who benefitted from the programs or to subtract the benefit of actual services rendered. (Opp'n 43.) Defendants also argue that the FTC should subtract the amounts actually earned by consumers using the educational products to avoid providing consumer windfalls. (Opp'n 43.) As the Conrey Survey shows, a small number of purchasers of the kits have benefitted from the program. Because the relief sought by FTC is grounded on equity, the FTC should, at a minimum, address why Defendants' arguments are not meritorious. In its Reply, the FTC failed to do so.
For the foregoing reasons, (1) Defendants' Motion in Limine is