-RJJ Federal Trade Commission v. Grant Connect, LLC et al, No. 2:2009cv01349 - Document 343 (D. Nev. 2011)

Court Description: ORDER Denying 155 Defendant Kyle Kimoto's Motion for Summary Judgment; Denying 266 Defendant Global Fulfillment, Inc.'s Motion for Summary Judgment; Denying 267 Defendant Dragon Group, Inc's Motion for Summary Judgment; Denying 268 Defendant MSC Online, Inc.'s Motion for Summary Judgment; Denying 269 Defendant Global Gold Limited's Motion for Summary Judgment; Denying 270 Defendants Acai, Inc., Healthy Allure, Inc., and Total Health, Inc.'s Motion for S ummary Judgment; Denying 272 Defendants Allclear Communications, Inc., Elite Benefits Group, Inc., Global Gold, Inc, Steven R. Henriksen, Premier Plus Member, Inc., and Vcomm, Inc.'s Motion for Summary Judgment; Denying 273 DefendantPaid to Process, Inc.'s Motion for Summary Judgment; and Denying 314 Motion Under Rule 201. IT IS FURTHER ORDERED that 275 Plaintiff Federal Trade Commission's Motion for Summary Judgment is GRANTED in Part and DENIED in part. Plaitiff Federal Trade Commission shall provide a proposed for of judgment reflecting monetary damages within 20 days. Signed by Judge Philip M. Pro on 10/25/11. (Copies have been distributed pursuant to the NEF - EDS)

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-RJJ Federal Trade Commission v. Grant Connect, LLC et al Doc. 343 1 2 UNITED STATES DISTRICT COURT 3 DISTRICT OF NEVADA 4 5 FEDERAL TRADE COMMISSION, 6 Plaintiff, 7 v. 8 GRANT CONNECT, LLC, et al., 9 Defendants. 10 *** ) ) ) ) ) ) ) ) ) ) ) 2:09-CV-01349-PMP-RJJ ORDER 11 Presently before the Court are the following motions: 12 • Motion for Summary Judgment and/or to Dismiss by Defendant Kyle Kimoto 13 (Doc. #155) 14 • Motion for Summary Judgment by Defendant Global Fulfillment, Inc. (Doc. 15 #266) 16 • Motion for Summary Judgment by Defendant Dragon Group, Inc. (Doc. #267) 17 • Motion for Summary Judgment by Defendant MSC Online, Inc. (Doc. #268) 18 • Motion for Summary Judgment by Defendant Global Gold Limited (Doc. #269) 19 • Motion for Summary Judgment by Defendants Acai, Inc.; Healthy Allure, Inc.; 20 and Total Health, Inc. (Doc. #270) 21 • Motion for Summary Judgment by Defendants Allclear Communications, Inc.; 22 Elite Benefits Group, Inc.; Global Gold, Inc.; Steven R. Henriksen; Premier Plus 23 Member, Inc.; and Vcomm, Inc. (Doc. #272) 24 • Motion for Summary Judgment by Defendant Paid to Process, Inc. (Doc. #273) 25 • Motion for Summary Judgment by Plaintiff Federal Trade Commission (Doc. 26 #275) Dockets.Justia.com • Motion Under Rule 201 by Defendant Kyle Kimoto (Doc. #314). 1 2 The Court held a hearing on these motions on April 11, 2011. (Mins. of Proceedings (Doc. 3 #323).) 4 I. BACKGROUND 5 Defendant Horizon Holdings, LLC is a limited liability company located in Reno, 6 NV, doing business as Grant Connect and MemberLegalNet. (Pl.’s Mot. for Prelim. Inj. 7 (Doc. #6) [“Pl.’s Mot.”], Exs. 66-67, 70-71, 81-82.) Horizon Holdings, LLC’s members are 8 Defendants James Gray (“Gray”) and Randy O’Connell (“O’Connell”). (Id., Exs. 66-67.) 9 Defendant Global Gold, Inc. (“Global Gold”) is a Nevada corporation located in Las Vegas, 10 Nevada, which is owned by Defendant Steven Henriksen (“S. Henriksen”). (Id., Exs. 110, 11 112-113.) Defendant Vantex Group, LLC (“Vantex”) is a limited liability company located 12 in Las Vegas, Nevada. (Id., Ex. 117.) Vantex’s sole member is the Juliette Kimoto Asset 13 Protection Trust, for which Defendant Juliette Kimoto is the investment trustee. (Opp’n to 14 FTC’s Mot. for Prelim. Inj. (Doc. #62) [“J. Kimoto Opp’n”], Ex. A.) Defendant Vertek 15 Group, LLC (“Vertek”) is a limited liability company located in Las Vegas, Nevada. (Pl.’s 16 Mot., Ex. 119.) Vertek’s sole member is Defendant Pink LP. (J. Kimoto Opp’n, Ex. A.) 17 Pink’s general partner is Juliette Kimoto. (Id.; Pl.’s Mot., Ex. 328.) Defendant Rachael 18 Cook (“Cook”), Defendant S. Henriksen’s sister, manages both Vertek and Vantex. (Pl.’s 19 Mot., Exs. 329-30, 366, 430; Report of Receiver’s Activities (Doc. #64) [“Receiver’s 20 Report”].) Michael Henriksen (“M. Henriksen”), Defendant S. Henriksen’s brother, was 21 the accountant for Vertek and Vantex. (Pl.’s Mot., Exs. 189, 430; Receiver’s Report.) 22 In late 2006 or early 2007, Defendant Kyle Kimoto (“Kimoto”) contacted 23 O’Connell and Gray on behalf of Global Gold to express Global Gold’s interest in creating 24 an online store through which members could purchase merchandise by applying a portion 25 of the price to a credit line. (Pl.’s Mot., Exs. 565-66.) Global Gold needed software to 26 accept transactions over the Internet. (Id.) O’Connell and Gray agreed to provide services 2 1 2 to Global Gold through use of their program, AWARE. (Id.) In June 2007, Gray and O’Connell’s company, OS Marketing, LLC, entered into 3 a contract with Global Gold to provide the requested services. (Id.) OS Marketing, LLC 4 had no employees, and thus Gray and O’Connell provided the services through Defendant 5 O’Connell Gray, LLC, of which Gray and O’Connell are both members. (Id.) In mid 2007 6 or early 2008, O’Connell and Gray attended a meeting at the Global Gold offices regarding 7 the project. (Id.) The meeting took place at the Vertek offices in Las Vegas, Nevada. (Id.) 8 At the time, Global Gold and Vertek shared an office suite at this location, although Global 9 Gold later moved to a nearby location. (Id., Ex. 565.) 10 Some time thereafter, Kimoto introduced O’Connell and Gray to a “grant 11 opportunity.” (Id., Exs. 565-66.) Kimoto, O’Connell, and Gray “agreed to work together 12 on a project, which became known as Grant Connect, to advertise grants.” (Id., Ex. 566.) 13 Under the parties’ arrangement, O’Connell and Gray were to find and secure content for a 14 website and arrange for intake and processing of customer information. (Id., Exs. 565-66.) 15 Vertek was to create and design marketing, and to secure affiliate marketing relationships. 16 (Id.) Global Gold was to sell Grant Connect as an “upsell” on Global Gold’s own offers of 17 credit lines. (Id.) The parties agreed to split profits, with Vertek receiving 55%, and Grant 18 Connect receiving 45%. (Id.) Additionally, Global Gold received 50% of revenue 19 generated from the sale of Grant Connect through upsales off of Global Gold’s sites. (Id.) 20 O’Connell and Gray purchased the Grant Connect content from Quantum Particle 21 and Khaled Azar based on content already on the Internet at a website called 22 www.grantsearchlink.com. (Id., Exs. 566, 568-69.) The website material included 23 testimonials from individuals claiming they received hundreds of thousands of dollars in 24 government grant funds quickly and easily through the website. (Id., Exs. 1, 2, 11, 16, 30- 25 32, 566, 570.) The testimonials “were from individuals Khaled Azar claimed to have 26 helped to get grants through the use of www.grantsearchlink.com. None of the individuals 3 1 used in the testimonials used www.grantconnect.com to secure a grant.” (Id., Ex. 566; see 2 also id. Ex. 570.) Even though none of the individuals giving testimonials ever used the 3 websites related to Grant Connect, Vertek used the testimonials in designing the inaugural 4 Grant Connect website, www.grantconnectoffer.com, and Vertek and/or Vantex1 used the 5 testimonials in later iterations of the same content at other web addresses, including 6 grantsourceamericaoffer.com, and grantsourceamerica.com. (Id., Exs. 1, 2, 5, 11, 30-32, 7 443, 447, 565-66.) The Grant Connect websites’ landing pages typically used pictures of President 8 9 Barack Obama and Vice President Joe Biden or pictures of a woman holding cash. (Id., 10 Exs. 1, 2; Compl. (Doc. #1), Ex. 2.) The websites touted the availability of billions of 11 dollars in government grants, and included quotes from news sources such as Fox, NBC, 12 and CBS. (Pl.’s Mot., Exs. 1, 2, 16.) The websites advertised an easy-to-use program to 13 “[i]nstantly find the Grant that’s right for you!” (Id., Ex. 1.) The websites suggested 14 individual consumers could obtain grants for their personal financial needs by stating things 15 such as: “Grants are FREE MONEY given by foundations or the government to help you 16 with your financial situation.” (Id., Exs. 1, 2.) The website indicated the consumer could 17 get money for: 18 /// 19 20 21 22 23 24 25 26 1 Vertek and Vantex operated out of the same office, with the same employees who used both Vantex and Vertek email addresses. (Pl.’s Mot., Exs. 401, 430, 529-32, 535.) Vertek initially performed the internet marketing services at issue in this case. (Id., Exs. 565-66, 569.) According to Juliette Kimoto, she created Vantex in March 2008 “for the purpose of conducting all Internet marketing activities. After Vantex’s formation, all of Vertek’s customers, employees, and business operations relating to Internet marketing activities were transferred to Vantex.” (J. Kimoto Opp’n, Ex. A.) Since then, Vertek ceased engaging in the internet marketing business, and primarily engages only in real estate investment. (Id.) O’Connell states that some time in April 2008, he asked M. Henriksen why Vertek was changing its name to Vantex, and M. Henriksen replied that Vertek “was for real estate and should not have been used for the online business.” (Pl.’s Mot., Ex. 565.) Vantex and Vertek continued to have identical websites as of at least April 13, 2009. (Id., Ex. 12.) 4 1 2 T Home Purchase T Child Care T Debt Consolidation T Small Businesses T Medical Expenses T Personal Grants 3 (Id., Ex. 11.) The landing pages also had testimonials from individuals who never actually 4 used the websites. (Id., Exs. 1, 2, 11, 16.) 5 On the websites’ landing page, the consumer was directed to enter information 6 including their name, address, email address, and phone number. (Id.) The consumer had 7 to click on a box to indicate the consumer had read and agreed with the privacy policy. (Id., 8 Exs. 1, 2.) The consumer then would click on the “Get Access Now!” or “Find My 9 Money!” button. (Id., Exs. 1, 16.) 10 Clicking on the button took consumers to the second page of the website, which 11 contained the same information as the first page, but added data fields for the consumer to 12 enter their credit or debit card information. (Id., Exs. 5, 17.) The websites required the 13 consumer to click in a box to indicate the consumer had read and agreed to “the Terms and 14 Conditions, Privacy Policy and Offer Details below.” (Id.) The terms and conditions and 15 privacy policy were underlined to indicate a link the consumer would have to click on to 16 read the terms and conditions and privacy policy. (Id.) Beneath the checkbox was the 17 button “Get Access Now!” or “Find My Money!” (Id.) 18 Beneath that button, in smaller, more compact type, were the “offer details.” 19 (Id.) The offer details stated that by clicking the “submit” button, the consumer agreed that 20 Grant Connect would charge the credit or debit card a certain amount, usually $2.78, as a 21 processing fee for the consumer’s seven day trial membership. (Id.) Following the trial 22 period, the consumer’s credit or debit card would be charged $39.95 per month. (Id.) 23 Additionally, the offer details included “upsells” through negative options, 24 meaning the consumer would be charged for additional products or services if they agreed 25 to purchase Grant Connect and did not cancel the upsell offers within the trial membership 26 period. (Id., Ex. 5.) The upsells consisted of offers for other programs, usually owned by 5 1 O’Connell and Gray (such as MemberLegalNet, described as a legal support program) or 2 offers by S. Henriksen and Global Gold (such as ID Pro Alert, described as an identity theft 3 protection program; SmartHealth Gold, described as a medical discount program; and 4 VComm, described as a long distance calling service). (Id., Exs. 5, 17, 42.) The upsell 5 offers contained text similar to the following: 6 7 8 9 10 11 12 13 As an additional bonus, you will also receive a 14 day trial of SmartHealth Gold medical and lifestyle benefits for a processing fee of $1.95. Unless you cancel, SmartHealth Gold will bill your account $19.95 for the services each month thereafter. You have the right to cancel by calling the number listed at smarthealthgold.com. As an additional bonus, I agree to receive a 14 day trial to MemberLegalNet. After the trial period, unless I cancel, MemberLegalNet will charge my account $12.95 a month thereafter. I may cancel by calling the toll free number located at memberlegalnet.com. (Id., Ex. 5.) By clicking on the appropriate link, consumers were taken to the site’s terms and 14 conditions page. The terms and conditions state the consumer has agreed to a seven day 15 free trial, which the consumer could cancel at any time by calling the Grant Connect 16 customer service center at the provided number. (Id., Ex. 4.) If the consumer did not 17 cancel within the seven day trial period, Grant Connect would charge a monthly 18 membership fee, usually $30 plus a $9.95 monthly maintenance fee, which would be billed 19 automatically each month to the consumer’s credit card or checking account, unless the 20 consumer canceled the agreement thirty days in advance. (Id.) The monthly maintenance 21 fee was non-refundable. (Id.) The Grant Connect terms and conditions page also listed 22 terms and conditions for the various upsell offers, although it did not always include the 23 price of those programs, particularly for SmartHealth Gold. (Id., Exs. 4, 21.) 24 Upon purchasing Grant Connect, the consumer was directed to navigate to the 25 Grant Connect website, www.grantconnect.com. (Id., Ex. 22.) There, the consumer would 26 enter a provided password to access the Grant Connect database, where they could search 6 1 2 for grants. (Id.) Global Gold provided telephone and internet chat customer service for the Grant 3 Connect products. (Id., Exs. 29, 41, 521.) During the online chats, Global Gold 4 representatives indicated, in response to consumer inquiries, that consumers could use the 5 Grant Connect website to locate grants for things such as expansion of an auto salvage 6 business, college, buying a home, home renovation, personal financial needs, 7 hospitalization costs, utilities bills for a personal residence, rent assistance, paying off past 8 personal debts, medical bills, and obtaining a personal loan. (Id., Exs. 298, 522, 525-26.) 9 Global Gold customer service representatives further represented that a consumer could use 10 the Grant Connect database to find a grant to pay off a home mortgage, and that 85-90% of 11 their customers qualified for such grants. (Id., Ex. 298.) Horizon Holdings initially paid for 12 the Grant Connect customer service number, but as of February 6, 2009, Global Gold paid 13 the telephone bill for this number. (Id., Exs. 4, 63-64.) 14 Although advertised as a quick and easy means to obtain individual grants for 15 personal financial needs, the website was neither quick and easy, nor a source to find grants 16 for personal financial needs. According to David G. Bauer (“Bauer”), who has worked in 17 grant seeking and related consulting since 1977, the www.grantconnectoffer.com website 18 was misleading because it referred to assisting individuals’ financial situation, yet most 19 grants in the Grant Connect database related to grants aimed at achieving a public purpose. 20 (Id., Ex. 298.) Additionally, Bauer concluded the database was not easy to use, misled 21 consumers to believe they were likely to obtain a grant, and contained outdated data. (Id.) 22 Grant Connect was advertised on its own websites and also offered for a period 23 of time on Global Gold’s various websites as an upsell to Global Gold’s credit line offers. 24 (Id., Ex. 331.) Global Gold’s offers included www.firstplusplatinumoffer.com (“First Plus 25 Platinum”) and www.firstuniversalplatinumoffer.com (“First Universal Platinum”). (Id., 26 Exs. 6, 44.) For the credit line offers, the initial ad would consist of a banner or email 7 1 2 3 4 which would state things like “$7,500 unsecured credit line,” and No credit checks! No Employment verifications! No Security Deposits! Bankruptcy? No problem! APPROVAL GUARANTEED! 5 (See, e.g., Exs. Vol. 18 (Doc. #234-3) at 6, 7, 10, 11, & 14.) The banner ads also stated the 6 consumer would receive “0% interest for 12 months and 7.9% thereafter.” (Id.) There was 7 no mention that this was not a traditional line of credit or that the credit line could be used 8 only at the merchant’s online store. Clicking on the “activate now,” “get credit now,” or 9 similar buttons on the banner ad would take the consumer to a line of credit (“LOC”) 10 11 landing page. The First Plus Platinum website’s landing page featured in large font “$7,500 12 credit line.” (Pl.’s Mot., Ex. 6.) The landing page offered 0% interest for the first twelve 13 months, and guaranteed approval. (Id.) The page also contained quotes from various news 14 sources about the necessity for credit, and a quote from Forbes stating, “The easiest way to 15 improve your credit.” (Id.) The landing page provided data fields for the consumer to enter 16 a name and address, and a box to click to indicate the consumer had read the privacy policy. 17 (Id.) Additionally, sometimes the LOC landing pages showed an image of what appeared to 18 be a traditional credit card. (Id., Ex. 44, Exs. Vol. 21 (Doc. #238-2).) 19 By filling out the above information and clicking on the “submit” button, the 20 consumer was taken to a second page in the website. There, consumers were told they are 21 one step away from their $7,500 credit line, and if they activate today, they will receive a 22 bonus $1,500 unsecured cash advance. (Pl.’s Mot., Ex. 42.) The second page indicated the 23 consumer would receive a $7,500 credit line, the application fee was waived, but there was 24 a $2.78 rush activation fee. (Id.) Below this information were data fields for the consumer 25 to enter their credit or debit card information. (Id.) Similar to the Grant Connect site, the 26 page contained a box in which the consumer must click to indicate the consumer read the 8 1 terms and conditions, the privacy policy, and the offer details below. (Id.) The terms and 2 conditions and privacy policy were underlined, indicating a link which the consumer could 3 click on to read the related web pages, beneath which is the submit button. (Id.) Beneath 4 the submit button were some icons regarding internet security, and below those icons were 5 the offer details. (Id.) Like the Grant Connect site, the First Plus Platinum site offered various upsells 6 7 with negative options resulting in the consumer incurring monthly charges for each offer if 8 the consumer did not cancel within the trial period. (Id.) The offer details also stated that 9 the line of credit “is for use towards thousands of our merchandise items only.” (Id.) The 10 terms and conditions web page stated that the First Plus Platinum was not a credit card. 11 (Id., Ex. 7.) Rather, as set forth in paragraph 3 of the terms and conditions, entitled 12 “Disclaimers,” the First Plus Platinum “is a line of credit that can be used by an Account 13 holder to purchase merchandise exclusively at the First Plus Platinum Web site.” (Id.) 14 Paragraph 23 of the terms and conditions stated that the consumer accepts “enrollment for 15 up to 2 additional promotional product offers using the relevant data” entered for the First 16 Plus Platinum card. (Id.) The terms and conditions contained links to the various offers’ 17 websites for further details. (Id.) If the consumer attempted to navigate away from the 18 website, a chat box would appear offering the consumer a “$7,500 line of credit with 0% 19 interest rate for one-year and a 99¢ activation fee.” (Id., Ex. 43.) Global Gold made a similar offer through www.firstuniversalplatinumoffer.com. 20 21 (Id., Ex. 44.) The First Universal Platinum landing page offered in large type a “guaranteed 22 $7,500 unsecured line of credit.” (Id.) Below that language, and in smaller type, it stated 23 “towards thousands of our merchandise items.”2 (Id.) As with the other websites, the initial 24 page provided fields for the consumer to enter a name and address and to indicate the 25 2 26 The LOC offers did not always mention they were not a general line of credit on the landing page. (Pl.’s Mot., Ex. 6, Exs. Vol 21 (Doc. #238-2) at 21.) 9 1 consumer had read and agreed with the privacy policy. (Id.) Similar to the First Plus 2 Platinum website, the second page indicated a $7,500 credit line, a waived application fee, 3 and a rush activation fee of $2.78, beneath which the consumer would enter credit or debit 4 card information. (Id., Ex. 45.) The second page also included the checkbox to indicate the 5 consumer had read the terms and conditions, privacy policy, and offer details; and the offer 6 details for the negative option upsell offers in smaller, more compact text beneath the 7 submit button. (Id.) Occasionally, the credit line offers placed a countdown timer on the 8 second page, indicating the consumer would receive an increased credit line if they 9 submitted their credit or debit card information within a certain period of time. (Id., Exs. 10 391, 395.) At no point was the consumer permitted to view the online store prior to 11 submitting payment information. (Exs. Vol. 37 (Doc. #254) at 70.) 12 The First Universal Platinum member agreement indicated the First Universal 13 Platinum cards were “not major credit cards such as Visa or Mastercard, or American 14 Express.” (Pl.’s Mot., Ex. 46.) The First Universal Platinum membership fee was a 15 recurring monthly charge of $39.95, which would apply to the current outstanding card 16 balance. (Id.) In paragraph 3 of the membership terms, entitled “Disclaimers,” the terms 17 indicated the line of credit “can be used by an Account holder to purchase merchandise 18 exclusively at the FIRST UNIVERSAL PLATINUM website.” (Id.) Paragraph 22 19 contained similar language as the First Plus Platinum terms that the consumer agreed to 20 enrollment in up to two additional promotional offers, with links to the affiliated 21 promotional offers’ websites. (Id.) The terms and conditions sometimes did not tell the 22 consumer what the upsells cost, and/or referred them to the upsell offer’s website to get 23 information on the upsells. (Pl.’s Mot., Exs. 4, 7; S. Henriksen’s Opp’n to Mot. Prelim. 24 Inj., Ex. E.) 25 26 As of April 13, 2009, Vantex and Vertek maintained their own company websites which were essentially identical, and both included reference to grant offers. (Pl.’s Mot., 10 1 Ex. 12.) The Vantex and Vertek websites were registered in a single account which listed 2 Juliette Kimoto as the contact person, but provided the contact email address 3 steve50678@aol.com. (Id., Exs. 53-55.) S. Henriksen used the email address 4 steve50678@aol.com as the contact email address on business account applications for 5 Global Gold. (Id., Exs. 178, 180, 181.) Vantex also registered the websites 6 www.grantconnectoffer.com, www.grantsourceamerica.com, 7 www.firstplusplatinumoffer.com, and firstuniversalplatinumoffer.com. (Id., Exs. 56, 59- 8 61.) O’Connell Gray, LLC registered the websites www.grantconnect.com and 9 memberlegalnet.com. (Id., Ex. 57-58.) Grant Connect and Global Gold accumulated numerous customer complaints in 10 11 the form of complaints to the Better Business Bureau, customer service calls, customer 12 service live chats, letters, emails, and customers having their credit cards charge back the 13 fees to Grant Connect and Global Gold. (Id., Exs. 374-75; Receiver’s Report.) Typical of 14 the consumers’ complaints were that they had been charged for services they had never 15 agreed to, most often related to the negative option upsell offers. (Id., Exs. 374-75.) 16 Customers also complained that they were unable to find any grants using Grant Connect, 17 and that they thought they were receiving a credit card through Global Gold’s various credit 18 line offers. (Id., Exs. 374-76.) When consumers called to cancel the various offers, Global 19 Gold customer service representatives required the consumers to call different numbers for 20 each upsell program, even though calls for all the programs were answered out of the same 21 call center. (Receiver’s Report.) As of July 29, 2009, Grant Connect had total sales of $4.3 million from August 22 23 2008 to June 2009, but consumers charged back and/or received refunds totaling 20% of 24 sales. (Id.) Of the over 52,000 grant memberships sold, 91% canceled by August 2, 2009. 25 (Pl.’s Mot., Ex. 527.) 26 /// 11 Global Gold and the other Henriksen entities had total sales of $29.1 million from 1 2 January 2008 to June 2009. (Receiver’s Report.) These entities had a chargeback and 3 refund rate of 15% of total sales, and up to a 23% chargeback rate by June 2009. (Id.) 4 Additionally, Global Gold entities were fined over $380,000 by the credit card networks, 5 indicating chargeback rates substantially above the amount credit card companies approved. 6 (Id.) Moreover, of the over 500,000 line of credit customers enrolled, 94% had canceled by 7 August 2, 2009. (Pl.’s Mot., Ex. 527.) Accounting and banking records for the Defendant entities show a variety of 8 9 transfers amongst Defendants and include various undocumented loans and accounts 10 receivable amongst Defendants. (Id., Exs. 86-88, 134-58, 210-211; Receiver’s Report.) 11 Global Gold’s profit and loss statements and 1099 summaries were located in the Vantex 12 offices. (Pl.’s Mot., Exs. 453-54.) Additionally, Global Gold’s computerized accounting 13 records were located on Vantex’s computers. (Id., Ex. 528.) 14 FTC brought this action on July 27, 2009, alleging Defendants Grant Connect; 15 Global Gold; Horizon Holdings; O’Connell Gray, LLC,; Pink LP; Vantex; Vertek; Cook; 16 Gray; S. Henriksen; Juliette Kimoto; and O’Connell deceptively marketed Grant Connect 17 and the credit line offers, failed to adequately disclose the upsells and the related monthly 18 charges, and debited consumers’ bank accounts on a recurring basis without obtaining 19 written authorization. FTC alleges Defendants engaged in a common enterprise while 20 participating in these acts, and thus are jointly and severally liable. FTC sought injunctive 21 relief against these Defendants, which this Court granted on September 22, 2009. (Prelim. 22 Inj. (Doc. #83).) The Court also appointed a Receiver over the corporate entity Defendants. 23 (Id.) 24 In April 2010, FTC amended the Complaint to add factual allegations regarding 25 other allegedly fraudulent internet website offers, including offers related to work from 26 home and the acai berry. The Amended Complaint (Doc. #112) added four new individual 12 1 Defendants: M. Henriksen, Tasha Jn Paul, Kimoto, and Johnnie Smith. The Amended 2 Complaint also added fifteen new corporate Defendants: Acai, Inc.; AllClear 3 Communications, Inc.; Consolidated Merchant Solutions, LLC; Dragon Group, Inc.; Elite 4 Benefits, Inc.; Global Fulfillment Inc.; Global Gold Limited; Healthy Allure, Inc.; Juliette 5 M. Kimoto Asset Protection Trust; MSC Online, Inc.; OS Marketing Group, LLC; Paid to 6 Process, Inc.; Premier Plus Member, Inc.; Total Health, Inc.; and Vcomm, Inc. The Court 7 granted a second Preliminary Injunction (Doc. #165) against these Defendants in June 2010. The parties now cross-move for summary judgment. Since the filing of the 8 9 summary judgment briefing, FTC has entered into consent judgments with Defendants 10 Johnnie Smith (Doc. #330) and Vantex Group, LLC; Vertek Group, LLC; Pink LP; Juliette 11 Kimoto Asset Protection Trust; and Juliette Kimoto (Doc. #338). This Order therefore has 12 no application to these Defendants. 13 II. LEGAL STANDARD Summary judgment is appropriate if the pleadings, the discovery and disclosure 14 15 materials on file, and any affidavits show that “there is no genuine dispute as to any 16 material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 17 56(a), (c). A fact is “material” if it might affect the outcome of a suit, as determined by the 18 governing substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). An 19 issue is “genuine” if sufficient evidence exists such that a reasonable fact finder could find 20 for the non-moving party. Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th 21 Cir. 2002). Initially, the moving party bears the burden of proving there is no genuine issue 22 of material fact. Leisek v. Brightwood Corp., 278 F.3d 895, 898 (9th Cir. 2002). After the 23 moving party meets its burden, the burden shifts to the non-moving party to produce 24 evidence that a genuine issue of material fact remains for trial. Id. The Court views all 25 evidence in the light most favorable to the non-moving party. Id. 26 /// 13 1 III. KYLE KIMOTO’S MOTION FOR SUMMARY JUDGMENT (Doc. #155); KYLE KIMOTO’S MOTION UNDER RULE 201 (Doc. #314) 2 Kimoto moves for summary judgment, arguing FTC cannot show he participated 3 4 in any violations, and even if he did, he obtained advice from a lawyer and he therefore 5 lacks the requisite scienter. FTC responds by pointing to the declarations of Defendants 6 O’Connell and Gray, who both identified Kimoto as the mastermind behind the Grant 7 Connect offering. FTC also points to its evidence, as set forth in the Preliminary Injunction 8 (Doc. #83) and the Second Preliminary Injunction (Doc. #165), upon which this Court 9 found FTC was likely to prevail on the merits that Grant Connect was deceptive and that it 10 was likely to prevail in showing Kimoto participated in and/or controlled the acts of Vertek 11 and Vantex employees. Kimoto has presented no evidence or argument why the evidence supporting the 12 13 Second Preliminary Injunction does not raise issues of fact regarding his liability. The 14 Court therefore will deny Kimoto’s motion. The Court also will deny Kimoto’s Motion Under Rule 201 (Doc. #314). Kimoto 15 16 requests the Court take judicial notice that a scienter requirement is necessary for FTC to 17 prevail and that an interpretation that intent is not necessary raises constitutional concerns. 18 The scienter that is required is as set forth in the Preliminary Injunction: (1) participation 19 directly in the acts or practices or authority to control the acts; and (2) actual knowledge of 20 material misrepresentations, reckless indifference to the truth or falsity of a 21 misrepresentation, or awareness of a high probability of fraud along with an intentional 22 avoidance of the truth. F.T.C. v. Cyberspace.Com LLC, 453 F.3d 1196, 1202 (9th Cir. 23 2006). To the extent Kimoto is suggesting some other proof of intent is required, his 24 motion is denied. 25 /// 26 /// 14 1 2 3 IV. S. HENRIKSEN AND HIS ENTITIES’ MOTIONS FOR SUMMARY JUDGMENT (Doc. #266 (GLOBAL FULFILLMENT), #267 (DRAGON), #268 (MSC), #269 (GLOBAL GOLD LIMITED), #270 (ACAI, INC.; TOTAL HEALTH; HEALTHY ALLURE), #273 (PAID TO PROCESS), & #272 (GLOBAL GOLD, INC.; ELITE BENEFITS, INC.; PREMIER MEMBER PLUS, INC.; VCOMM, INC.; ALLCLEAR COMMUNICATIONS, INC.; & S. HENRIKSEN)) 4 S. Henriksen and his various entities (“Moving Defendants”) move for summary 5 6 judgment in several separately-filed motions. Generally, Moving Defendants argue FTC 7 did not make particularized allegations against most of the Moving Defendants in the 8 Amended Complaint, and FTC cannot lump all Defendants in all allegations. Moving 9 Defendants also contend they did not engage in any of the alleged misconduct, and they 10 were not part of a common enterprise with the other Defendants. Moving Defendants argue 11 they were separately owned and operated; had their own mailing addresses, phone and fax 12 numbers, toll free customer service phone numbers, bank accounts, merchant accounts, and 13 email and web servicers; entered into their own contracts; and paid their own bills. Moving 14 Defendants contend these facts demonstrate they were not a common enterprise. Moving 15 Defendants also argue the LOC, work-from-home, and acai offers were not deceptive. FTC responds that it set forth allegations against each Defendant, and to the 16 17 extent it made allegations referring to all Defendants, it meant all Defendants engaged in 18 the alleged conduct. FTC also argues that most of the Moving Defendants do not present 19 any evidence that any of the schemes did not violate the FTC Act and Moving Defendants 20 directly participated in and/or benefitted from the schemes. FTC contends its own motion 21 for summary judgment raises sufficient questions of fact to preclude summary judgment for 22 any Defendant on any claim. FTC further notes that Moving Defendants do not move for 23 summary judgment on the grant offer, and therefore at best they are seeking partial 24 summary judgment on the LOC offers. FTC also argues Moving Defendants were part of a 25 common enterprise, and thus are jointly and severally liable on all counts. 26 /// 15 1 With respect to the argument that FTC did not make particularized allegations as 2 to each Defendant in the Amended Complaint, that type of challenge is appropriate at the 3 dismissal stage. This case is at the summary judgment stage, and FTC set forth what it 4 contends each Defendant did and supported those contentions with literally hundreds of 5 exhibits. Defendants may not agree with FTC’s characterization of their activities, but there 6 is no confusion about the behavior FTC accuses each Defendant of having engaged in at 7 this point in the proceedings. 8 9 As to Moving Defendants being separate entities and not part of a common enterprise, Defendants make various representations about their corporate separateness in 10 their motions. However, Defendants do not support most of these statements with 11 admissible evidence, and in some instances the evidence Defendants rely upon raises issues 12 of fact regarding common enterprise. For example, Defendant Global Fulfillment, Inc. 13 (“Global Fulfillment”) was founded by S. Henriksen as a fulfillment company to provide 14 the products customers purchased through the LOC offers. S. Henriksen testified at his 15 deposition that he is the sole owner, president, and director of Global Fulfillment. He also 16 testified that Global Fulfillment shared a physical address with Global Gold and “[i]t was 17 basically just Global Gold’s fulfillment company. Really the same company, as well.” 18 (Mot. Summ. J. (Doc. #266), Ex. 1 at 52-53.) S. Henriksen also testified Global Fulfillment 19 did not have its own employees, it shared Global Gold’s employees. (Id. at 53.) 20 The same is true of all of the corporate Moving Defendants. They are all owned 21 by S. Henriksen, and operated out of the same physical address using the same employees. 22 Although Moving Defendants represent in their papers, without citation to record evidence, 23 that they had separate mailing addresses, these Defendants shared a physical address with S. 24 Henriksen’s entity, Global Gold. Even if Defendants had their own phone numbers, bank 25 accounts, and paid their own bills, that would not preclude a common enterprise finding. 26 As discussed more fully below with respect to FTC’s Motion for Summary Judgment, 16 1 2 common enterprise is not the same thing as the corporate alter ego doctrine. Moreover, the arguments and evidence presented in support of FTC’s Motion for 3 Summary Judgment raise genuine issues of material fact as to each scheme’s deceptive 4 nature, each Defendant’s participation in the various schemes, and all Defendants’ 5 participation in a common enterprise. Although Moving Defendants attempt to defend the 6 LOC, work-from-home, and acai offers, their defense is a rehashing of the same arguments 7 made at the preliminary injunction stage. Based on the same evidence and argument, this 8 Court found FTC was likely to prevail on the merits, and the Court entered the Preliminary 9 Injunction. Issues of fact therefore remain and the Court will deny Moving Defendants’ 10 Motions for Summary Judgment. 11 V. PLAINTIFF FTC’S MOTION FOR SUMMARY JUDGMENT (Doc. #275) 12 Plaintiff FTC moves for summary judgment against all remaining Defendants on 13 all of the various offers. Specifically, FTC contends the Grant Connect, LOC, 14 work-from-home, and Acai Total Burn offers were deceptive, failed to disclose material 15 terms, and used phony testimonials. FTC also argues Defendants engaged in the 16 unauthorized debiting of consumers’ bank accounts. FTC thus contends it is entitled to 17 summary judgment on all of its claims that Defendants violated Section 5(a) of the FTC Act 18 in relation to each of the offers and that Defendants violated the Electronic Funds Transfer 19 Act (“EFTA”) and Regulation E. FTC further contends the corporate Defendants are jointly 20 and severally liable because they were a common enterprise, and the individual defendants 21 are personally liable because they had authority to control the corporate Defendants and/or 22 they had actual knowledge of or were recklessly indifferent to the deception. FTC therefore 23 seeks injunctive and equitable monetary relief. 24 Defendants oppose on various grounds, including that the LOC offers disclosed 25 all material terms, the work-at-home offers were not deceptive because they only projected 26 potential income, and the acai offer was not deceptive because Defendants never advertised 17 1 celebrity endorsements for the acai offer. Defendants do not defend the Grant Connect 2 offer on its merits, although O’Connell and Gray attempt to defend the advertising of Grant 3 Connect as disclosing all material terms regarding the associated upsells. 4 A practice is deceptive under the Federal Trade Commission Act “if it is likely to 5 mislead consumers acting reasonably under the circumstances . . . in a way that is material.” 6 Cyberspace.Com LLC, 453 F.3d at 1199. “A solicitation may be likely to mislead by virtue 7 of the net impression it creates even though the solicitation also contains truthful 8 disclosures.” Id. at 1200. Making disclosures in fine print may not overcome an 9 advertisement’s deceptive net impression. Id. at 1200-01 (holding fine print notices on 10 reverse side of check did not overcome net impression that check was a refund or rebate 11 when the fine print stated that cashing the check would result in a monthly fee for internet 12 access); F.T.C. v. Brown & Williamson Tobacco Corp., 778 F.2d 35, 42-43 (D.C. Cir. 13 1985) (holding advertisement’s description of cigarette tar content was deceptive even 14 though fine print in the corner of the advertisement truthfully explained how the tar content 15 was measured). A defendant violates the Act if its advertisement “induces the first contact 16 through deception, even if the buyer later becomes fully informed before entering the 17 contract.” Resort Car Rental Sys., Inc. v. F.T.C., 518 F.2d 962, 964 (9th Cir. 1975). 18 Examples of deceptive conduct violative of the Act include unsubstantiated 19 claims that consumers can make a lot of money using the defendant’s product, 20 unsubstantiated claims relating to the therapeutic value of the defendant’s product, or 21 providing false testimonials regarding the defendant’s product. See F.T.C. v. 22 Colgate-Palmolive Co., 380 U.S. 374, 389 (1965) (“It is generally accepted that it is a 23 deceptive practice to state falsely that a product has received a testimonial from a respected 24 source.”); F.T.C. v. Stefanchik, 559 F.3d 924, 929 (9th Cir. 2009) (finding program that 25 asserted consumers would make lots of money in a small amount of time by brokering 26 privately held mortgages was deceptively advertised where it was advertised as the “easiest 18 1 way to make $10,000 every 30 days . . . guaranteed,” yet the owner had no substantiation 2 for the earnings claim and evidence showed consumers made little to nothing); Sterling 3 Drug, Inc. v. F.T.C., 741 F.2d 1146, 1152 (9th Cir. 1984) (holding that an advertisement 4 claiming scientifically established therapeutic superiority of pain relief medicine had to be 5 substantiated); F.T.C. v. Bronson Partners, LLC, 564 F. Supp. 2d 119, 125 (D. Conn. 2008) 6 (“[W]hen an advertisement contains a testimonial reflecting the experience of an individual 7 with a product, there is an implicit representation that such experience reflects the typical or 8 ordinary results anyone may anticipate from use of the product.” (quotation omitted)). 9 While proof that consumers actually were deceived is not required, such evidence is “highly 10 probative to show that a practice is likely to mislead consumers acting reasonably under the 11 circumstances.” Cyberspace.Com LLC, 453 F.3d at 1201. 12 A. M. Henriksen’s Objections 13 Defendant M. Henriksen objects to FTC’s purported failure to preserve evidence. 14 M. Henriksen argues he is hampered in responding to FTC’s motion due to this loss of 15 evidence. There are three categories of evidence which M. Henriksen claims FTC failed to 16 preserve: (1) emails hosted by rackspace.com; (2) website pages advertising the various 17 offers at Virgin Offers Media; and (3) a computer error resulting in the loss of sales data for 18 Vcomm and Allclear. 19 As to the failure to preserve the rackspace.com emails, M. Henriksen requested 20 the emails from the Receiver. The Receiver responded that none of Defendants advised the 21 Receiver about the emails at rackspace.com, and rackspace.com deleted the accounts when 22 no payment was made. Defendants do not deny that none of them advised the Receiver 23 about the existence of the emails at rackspace.com. Thus, M. Henriksen’s attempt to blame 24 the Receiver for failing to preserve the evidence is disingenuous. 25 26 As to the Virgin Offers Media data, that information was lost when Virgin Offers Media suffered a burglary in which it lost equipment and shut down. Virgin Offers Media 19 1 thereafter did not pay for and maintain any electronic data. FTC is not responsible for this 2 loss of evidence. Nothing required FTC or the Receiver to preserve evidence at an 3 unrelated, non-receiver entity. 4 Finally, as to the lost sales data related to Vcomm and Allclear, the Receiver’s 5 Report contained data related to these sales. To the extent M. Henriksen contends the loss 6 of this data renders any damages award speculative, the Court will address that argument 7 below in the discussion regarding damages. 8 As to all of these objections, Defendants had subpoena power and could have 9 obtained the identified materials. Moreover, M. Henriksen does not identify what in the 10 lost emails, Virgin Offers Media data, or lost sales data would support his defense. 11 M. Henriksen has not shown FTC failed to preserve evidence or that if it did, 12 such lost evidence was material to any remaining issue in this case. The Court therefore 13 will overrule M. Henriksen’s objections. 14 B. Common Enterprise 15 FTC seeks joint and several liability as to all Defendants as a common enterprise. 16 FTC points to the common ownership, movement of employees, joint work across the 17 various offers without regard to written contracts or corporate formalities, the set up of 18 interdependent economic relationships such that everyone’s profits were jointly tied to how 19 many consumers purchased and continued to pay for the various offers and upsells, and the 20 use of the same strategies for all offers. Defendants contend they were separate entities 21 with separate personnel, addresses, ownership, and they entered into contracts with third 22 parties not alleged to be part of the common enterprise. Defendants argue that the fact that 23 Defendants did business with each other does not make them a common enterprise. 24 “[I]n situations where corporations are so entwined that a judgment absolving 25 one of them of liability would provide the other defendants with a clear mechanism for 26 avoiding the terms of the order, courts have been willing to find the existence of a common 20 1 enterprise.” F.T.C. v. Nat’l Urological Grp., Inc., 645 F. Supp. 2d 1167, 1182 (N.D. Ga. 2 2008) (quotation omitted). “When corporations act as a common enterprise, each may be 3 held liable for the deceptive acts and practices of the other.” Id. 4 “[E]ntities constitute a common enterprise when they exhibit either vertical or 5 horizontal commonality-qualities that may be demonstrated by a showing of strongly 6 interdependent economic interests or the pooling of assets and revenues.” F.T.C. v. 7 Network Servs. Depot, Inc., 617 F.3d 1127, 1142-43 (9th Cir. 2010). To determine whether 8 a common enterprise exists, the Court considers factors such as: 9 10 11 common control; the sharing of office space and officers; whether business is transacted through a maze of interrelated companies; the commingling of corporate funds and failure to maintain separation of companies; unified advertising; and evidence that reveals that no real distinction exists between the corporate defendants. 12 Nat’l Urological Group, Inc., 645 F. Supp. 2d at 1182; see also Delaware Watch Co. v. 13 F.T.C., 332 F.2d 745, 746 (2d Cir. 1964) (finding common enterprise where “the same 14 individuals were transacting an integrated business through a maze of interrelated 15 companies”). The Court evaluates “the pattern and frame-work of the whole enterprise.” 16 Nat’l Urological Group, Inc., 645 F. Supp. 2d at 1182 (quotation omitted). 17 For example, the United States Court of Appeals for the Ninth Circuit found a 18 common enterprise existed where companies were commonly owned; pooled resources, 19 staff, and funds; and participated to some extent in a common venture to sell the same 20 products. Network Servs. Depot, Inc., 617 F.3d at 1143. Because the defendants 21 participated in and benefitted from a “shared business scheme,” the “common revenue 22 generated in the course of that scheme was the proper subject of the court’s equitable 23 powers under the FTC Act.” Id. 24 No genuine issue of material fact remains that Defendants operated as a common 25 enterprise. All the various offers were run by the same individuals using different company 26 names. Defendants changed entity names and swapped and shared personnel. For example, 21 1 Vertek, a Juliette Kimoto entity, changed its name to Vantex in a transition so seamless 2 neither inside employees nor outsiders like O’Connell and Gray noticed a difference. They 3 both operated out of the same address using the same employees performing the same work. 4 Vantex’s employees were in the process of being rolled into Dragon, an S. Henriksen entity, 5 when FTC obtained the temporary restraining order in this case. S. Henriksen’s entities, 6 although purporting to have different mailing addresses, all operated out of the same 7 physical location using the same employees. S. Henriksen’s entities sometimes shared 8 office space with Vantex, and an office map at Vantex shows office space set aside within 9 the Vantex offices for Dragon employees. Vantex, in turn, initially operated out of S. 10 Henriksen’s home. S. Henriksen listed M. Henriksen as Global Gold’s Director of 11 Accounting on an immigration form in New Zealand, even though M. Henriksen was a 12 Vantex employee. O’Connell and Gray likewise created different entities, but all operated 13 out of the same physical address using the same employees in Reno. 14 Defendants also blurred the lines of corporate separateness in their activities. 15 S. Henriksen’s email address was used as the point of contact for Vantex’s and Vertek’s 16 corporate web addresses, even though he was not an owner or employee of either company, 17 but purportedly was their client. Vertek and Vantex were the registrars for domains for 18 most of the offers, including the grant, LOC, work-from-home, and nutraceutical offers, 19 even though the content of those websites was owned by S. Henriksen or O’Connell and 20 Gray. (Pl.’s Mot., Ex. 12 at ¶ 61, Ex. 62 (showing over 100 websites registered by Vantex 21 with variations on the offer names).) Vantex also advertised the other Defendants’ various 22 offers, including Grant Connect, One Hour Wealth Builder, and First Universal Platinum, 23 on Vantex’s own website. (Id., Ex. 13.) 24 Email traffic shows coordinated activity amongst all Defendants across the 25 spectrum of offer campaigns. For example, O’Connell and Gray were involved in 26 discussions regarding chargebacks and what credit card statement descriptors ought to be 22 1 used for Global Gold’s campaigns, even though chargebacks usually would be considered 2 Global Gold’s confidential business information. (Receiver’s Report; Exs. Vol. 14 (Doc. 3 #74-1), Exs. 558, 560; Exs. Vol. 28 (Doc. #245), Ex. 803 at 5511-12.) Gray stated that 4 upon Global Gold’s account being canceled due to high chargebacks, O’Connell would 5 “recommend that a new company be created (with different ownership) and we go right 6 back to” the same processor. (Exs. Vol. 22 (Doc. #239-1), Ex. 768.) Defendants Johnnie 7 Smith and M. Henriksen, who worked for Vantex/Vertek, not Global Gold, were copied on 8 this email chain. (Id.) O’Connell and Gray also were involved in answering questions 9 relating to merchant accounts set up for Paid to Process. (Receiver’s Report.) M. 10 Henriksen and Kyle Kimoto of Vantex/Vertek met with a potential funder of Global Gold 11 without S. Henriksen, the owner of Global Gold. (Exs. Vol. 29a & 29b (Doc. #246-1), Ex. 12 804 at 5783-85.) O’Connell and Gray and their entities permitted the Las Vegas 13 Defendants to use the AWARE program for new offers without any contractual 14 understanding as to what O’Connell and Gray would be paid in return. Global Gold’s profit 15 and loss statements and 1099 summaries were located in the Vantex offices. (Exs. Vol. 8 16 (Doc. #66), Exs. 453-54.) Additionally, Global Gold computerized accounting records 17 were located on Vantex’s computers. (Exs. Vol. 14 (Doc. #74), Ex. 528.) 18 Defendants engaged in concerted and coordinated action across campaigns, and 19 made their profits interdependent. S. Henriksen provided the substantive content for the 20 Acai, Domain Processing/One Hour Wealth Builder (procured by O’Connell and Gray for 21 Global Gold at Kyle Kimoto’s urging), and LOC offers, while O’Connell and Gray 22 provided the content for the Grant Connect offer. Vantex/Vertek provided the creative web 23 design. O’Connell and Gray provided the AWARE software, and O’Connell and Gray did 24 not require new contracts for the use of AWARE on new offers. The same two-step 25 ordering process with the inadequately disclosed negative option upsells were used for all 26 offers. Defendants used Global Gold and/or Dragon to perform customer service for all 23 1 offers, yet made customers call separate numbers to cancel each offer and upsell even 2 though all calls were being answered out of the same call center. Defendants jointly and 3 collectively discussed the chargeback issue across product lines. 4 Defendants also repeatedly used different company, offer, and credit card 5 descriptor names for the various offers and upsells. Doing so allowed Defendants to make 6 it appear that Defendants were different companies, and to attempt to lower their 7 chargeback ratios for the various campaigns. (See Exs. Vol. 14, Ex. 558 at 2640 8 (discussing plan to avoid chargebacks by “spreading amount [sic] multiple accounts”).) 9 O’Connell and Gray were paid for use of the AWARE software not as a license 10 for each offer, but as a percentage of profits from the various offers. Defendants thus made 11 their potential profits interdependent on the success of the various offers and upsells. 12 Accounting and banking records for Defendant entities show a variety of transfers amongst 13 Defendants, and include various undocumented loans and accounts receivable. (Pl.’s Mot., 14 Exs. 86-88, 134-58, 210-211; Receiver’s Report.) 15 Defendants contend they are separate entities and not a common enterprise 16 because they have separate bank accounts, obey corporate formalities, enter separate 17 contracts, and file separate tax returns. For example, Defendant OS Marketing provides 18 some contracts it entered into with third parties other than the other Defendants in this case. 19 (O’Connell’s & Gray’s Opp’n to FTC’s Mot. Summ. J. (Doc. #306) at 75-90; Opp’n to 20 Mot. Summ. J. (Doc. #306-1).) Other than these third party contracts, Defendants provide 21 no evidence of corporate separateness. Moreover, the common enterprise is not an alter ego 22 analysis. The entities formally may be separate corporations, but operate as a common 23 enterprise. 24 As outlined above, no genuine issue of material fact remains that Defendants 25 engaged in a common enterprise for the various offers involved in this case. The Court 26 therefore will grant FTC’s Motion for Summary Judgment on the question of common 24 1 enterprise. 2 C. Count One 3 Count one alleges Defendants made misrepresentations regarding the grant 4 offers. FTC moves for summary judgment, arguing no genuine issue of material fact 5 remains that Grant Connect was a fraudulent scheme. Defendants do not attempt to defend 6 the grant offers in and of themselves, instead arguing the upsells on Grant Connect were not 7 deceptively advertised. 8 9 As set forth in the Preliminary Injunction, Grant Connect and its other iterations, such as Grant Source America, were deceptively advertised. Defendants claimed that 10 consumers could obtain grants quickly and easily, and for a variety of personal uses such as 11 home mortgages, personal debts, and medical expenses. However, grants were not 12 available for individual needs as advertised, finding any grant was neither quick nor easy, 13 and much of the material in the database was outdated, further reducing the likelihood of 14 obtaining a grant. 15 Moreover, customer service representatives made numerous misrepresentations 16 to consumers who called the customer service line or initiated customer service chats 17 regarding their likelihood to obtain a grant or the availability of grants for personal 18 individual needs, and the overall success rate of Grant Connect customers. No Defendant 19 attempts to defend Grant Connect on the merits as not deceptively advertised. O’Connell 20 and Gray attempt to defend on the concept that the upsells were not deceptively advertised, 21 but count one is directed at Grant Connect, not the related upsells. 22 Defendants M. Henriksen, O’Connell, and Gray argue some of the customer 23 affidavits are false regarding the details of their orders and therefore FTC has failed to 24 support its motion. Some of Defendants’ arguments are merely a disagreement with the 25 customer’s statement. For example, some of the customers aver they never saw anything 26 advising them of the upsells or other charges. Defendants contend the consumers must 25 1 have seen the terms for the upsells because they had to click on the button indicating they 2 read the terms and conditions. The consumers’ statements that they did not see anything 3 about other charges are not demonstrably false. The fact that they had to click in the box 4 indicating they had read the terms and conditions does not mean they actually read the terms 5 and conditions. Further, to the extent Defendants identify inaccuracies in some of the 6 consumer affidavits, none of those purported inaccuracies raises an issue of fact regarding 7 the deceptive marketing. Most of the alleged inaccuracies relate to how much a customer 8 paid or how many times they were billed. That would not alter the fact that these were in 9 fact consumers who purchased the product and were deceived. Even if the upsells were 10 fully disclosed, that does not alter the inquiry under count one that Grant Connect, rather 11 than the upsells sold with Grant Connect, was deceptively marketed. Further, Defendants 12 do not provide evidence documenting every alleged inaccuracy and do not identify 13 inaccuracies in every consumer affidavit. Thus, even if the Court excluded the affidavits to 14 which Defendants object, other consumer affidavits support FTC’s motion. 15 Defendants point to no evidence raising a genuine issue of material fact that 16 Grant Connect was a legitimate product, that finding a grant was quick and easy as 17 advertised, or that any grant could be obtained for the types of personal needs set forth in 18 the offer or as represented by customer service representatives. FTC is entitled to summary 19 judgment on count one. 20 D. Count Two - LOC Misrepresentations 21 Count two alleges Defendants deceptively led consumers to believe they were 22 receiving a general purpose LOC like a traditional credit card. FTC argues the initial 23 advertisements suggest a traditional line of credit, and the disclosures regarding the fact that 24 it is not a traditional line of credit came later, in smaller print, after the net impression of a 25 credit card already existed in the consumer’s mind. FTC notes that the misleading nature of 26 the offers is bolstered by the high cancellation rate, the high refund and chargeback rate, the 26 1 comparatively low number of actual orders from the online store, and the complaints to the 2 Better Business Bureau. 3 Defendants respond that all material terms were disclosed, as demonstrated by 4 the fact that beneath the words “$7500 credit line” the offer said “towards thousands of our 5 merchandise items.” Defendants further argue that consumers could not enter payment 6 information without clicking in a box to indicate they had read the terms and conditions, 7 which disclosed the nature of the offer. Defendants also note the offer details were located 8 on the same page beneath the button the consumer would click to submit their payment 9 information. On the issue of scienter for the individual Defendants, Defendants rely on a 10 letter from Global Gold’s attorney stating that the offer was not deceptive and on the fact 11 that Vantex employed a compliance officer, Rachel McKinnon, to ensure the offers 12 complied with applicable rules and regulations. 13 The LOC offers were marketed in a multi-step process, and in such a way that the 14 disclosures come out a little at a time. The disclosures were often in dense compact text or 15 text which is difficult to see, or the consumer had to scroll down on the screen or navigate 16 to another page to read the disclosures. The initial ad would consist of a banner or email 17 which would advertise an unsecured credit line, and the ad did not mention the offer was 18 not for a traditional line of credit or that the credit line could be used only at the merchant’s 19 online store. 20 The landing pages, although different in minor details such as graphics and the 21 name of the LOC, generally consisted of step one of the ordering process. The landing page 22 would have in large and easy to read type “$7,500 credit line,” and “0% interest.” The 23 landing page also often would have quotes from news sources such as Fox, CBS, and 24 Forbes, about the importance of having credit. Sometimes the landing page also included 25 the language “towards thousands of our merchandise items” under the larger, more 26 prominent “$7,500 credit line.” Other times, however, there was no mention of the fact that 27 1 the offer was not a general line of credit on the landing page. Additionally, the landing 2 pages sometimes showed an image of what appeared to be a traditional credit card. 3 After submitting this information, the consumer would be taken to step two of the 4 ordering process. This page looked almost exactly like the first page except the fields for 5 entering personal contact information were changed to data entry fields to enter payment 6 information for a nominal fee to activate the offer. Additionally, there was another box 7 which the customer had to click in to indicate the customer read and agreed to the terms and 8 conditions, privacy policy, and offer details. In small compact type beneath the submit 9 button were the offer details, including the additional upsells. At no point was the 10 11 consumer permitted to view the online store prior to submitting payment information. Clicking on the link to the terms and conditions took the consumer to a separate 12 terms and conditions web page. The terms and conditions page made certain disclosures, 13 including that the line of credit was not a major credit card like Visa or Mastercard, the 14 amount of the membership per month, and that it was a line of credit that could be used only 15 at the LOC offer website. However, the consumer must click to a separate page to get these 16 details, and they are contained in what appears at first glance to be similar to a traditional 17 credit card’s terms and conditions, including a table which is required of credit cards 18 pursuant to 12 C.F.R. § 226.5a and Appendix G, indicating the interest rate, annual fee, and 19 late charges. 20 Even though the offer contains some truthful statements, the key inquiry is 21 whether the net impression is deceptive. No genuine issue of material fact remains that the 22 LOC offers are deceptive. Defendants’ fine print disclosures do not overcome their 23 advertisements’ deceptive net impression, including their inducement of initial contact 24 through deception, even if consumers later could become fully informed. First, the LOC 25 offers never disclosed that the line of credit was good only at Defendants’ store on the 26 banner ads and initial contact emails. Additionally, Defendants did not always make the 28 1 disclosure that the line of credit was good only at Defendants’ online store on the landing 2 page. For those ads, the customer would learn about the offer details only by reading 3 through the small type in the terms and conditions on a separate page after being lured in 4 with promises of an unsecured credit line. 5 Even the offers that include the language “towards thousands of our merchandise 6 items” are deceptive. The net impression from the initial banner ad and the first landing 7 page is that this is a traditional credit card. The banner ads say nothing about an online 8 shopping store. The landing page does so only in smaller, often hard to see type that is 9 buried by the larger, sensationalized text regarding the amount of credit, the zero percent 10 interest, and the images of a traditional credit card. It is not until step two that the consumer 11 gets the offer details, and these are placed in small, compact type at the bottom of the page, 12 where the consumer has to scroll down to see them. Because the second web page is almost 13 identical to the first page, the consumer likely is not looking for newly added terms and 14 conditions on this page. Additionally, the consumer is not permitted to view the online 15 store before submitting payment information. The high number of cancellations, refunds, 16 and chargebacks suggest that in fact consumers were deceived about what they were 17 ordering, and FTC offers the affidavits of several customers who aver they actually were 18 deceived, as they thought they were getting a traditional line of credit. 19 Courts have found similar LOC offer schemes were deceptive as a matter of law. 20 For example, in F.T.C. v. People’s Credit First, LCC, the United States Court of Appeals 21 for the Eleventh Circuit affirmed the district court’s holding the defendant’s ads were 22 deceptive as a matter of law. 244 Fed. Appx. 942, 2007 WL 2071712 (11th Cir. July 19, 23 2007) (unpublished). There, the defendants mailed out fliers to consumers telling them that 24 for a $45 or $49 advance fee, they were guaranteed approval for a “First Platinum card with 25 a credit line of $5,000.00.” Id. at 943. Instead of a credit card, consumers received a 26 membership to a shopping club. Id. The scheme resulted in hundreds of complaints to the 29 1 defendant and to the Better Business Bureau. Id. at 943-44. Consumers stated they thought 2 they were receiving a traditional credit card like a Visa or Mastercard. Id. The Eleventh 3 Circuit noted that the fact that the ads’ words literally were true was not determinative, and 4 the “material implication” of the ads was that the consumer would receive a credit card with 5 a $5,000 credit line upon paying the advance fee. Id. 6 The district court in the People’s Credit case noted that the terms and conditions 7 on the website indicated buyers would get a membership card, not a Visa or Mastercard. 8 F.T.C. v. People’s Credit First, LLC, No. 8:03-CV-2353-T, 2005 WL 3468588 (M.D. Fla. 9 Dec. 18, 2005) (unpublished). Additionally, the defendants made “at least a passing effort 10 to operate as a buyer’s club,” resulting in some sales over a four month period. Id. at *3. 11 The court nonetheless ruled the mailers were deceptive as a matter of law. Id.; see also 12 F.T.C. v. Capital Choice Consumer Credit, Inc., No. 02-24050-CIV-UNGARO-GENAGES 13 (S.D. Fla. Feb. 19, 2004) (unpublished) (Doc. #145-1) (holding direct mail ads to 14 consumers with an approval certificate approving them for a credit line very similar to the 15 scheme in People’s Credit was deceptive as a matter of law). 16 Here, Defendants argue they never referred to the offer as a credit “card” as the 17 defendants in People’s Credit and Capital Choice did. Nevertheless, the net impression 18 remains the same, even if Defendants, some of whom were involved in the schemes in 19 People’s Credit and Capital Choice, learned a lesson from those cases and did not refer to a 20 credit card but instead depicted an image of a credit card and called it a line of credit. 21 Pictures can make an offer deceptive even if other terms are disclosed in words. 22 The conclusion that Defendants’ LOC offers were deceptive as a matter of law is 23 further bolstered by the high cancellation, refund, and chargeback rates, as well as the 24 exceptionally low orders from the store in comparison to the number of people signed up 25 for the offer. By the time the Receiver took over, 94% of those who signed up for the 26 LOCs had cancelled. Chargeback rates were around 15%, well above the 1% that will 30 1 trigger penalties under the Visa and Mastercard merchant chargeback monitoring 2 programs.3 (Exs. Vol. 46 (Doc. #263-3) at 28-38; Exs. Vol. 45 (Doc. #262) at 227-33.) The 3 various LOC offers were on the Visa and Mastercard merchant chargeback monitoring 4 programs, received fines after several successive months of excessive chargebacks, and 5 Visa ultimately closed Global Gold’s account for excessive chargebacks. (Exs. Vol. 28 6 (Doc. #245), Ex. 803 at 5520.) Visa and Mastercard took these actions despite the fact that Defendants used 7 8 several different methods to avoid coming under scrutiny, including using many different 9 company names, merchant accounts, and descriptors to avoid having all chargebacks tied to 10 one company, and separating out the charges for the small up front activation fee and then 11 charging higher monthly fees. By separating the charges into multiple transactions, 12 Defendants were able to affect the percent of chargebacks-to-transactions ratio, as 13 customers are more likely to seek refunds on only the larger amounts. 14 Defendant M. Henriksen argues there is evidence that a 1% or even 2% 15 chargeback rate is not that high, and he relies on the testimony of Whitney Guiffra 16 (“Guiffra”), from ePayData, an independent sales organization which acts as a liaison 17 between a merchant, the processor, and the settlement bank to accept electronic 18 transactions. (Exs. Vol. 27 (Doc. #244) at 135, 20.) Guiffra’s testimony does not raise a 19 genuine issue of material fact. There is no dispute that Visa and Mastercard have in place 20 1% chargeback thresholds for their monitoring programs, which in part are designed to 21 detect fraud. There also is no dispute that every one of Defendants’ offers exceeded that 22 rate. Many of the LOC offers were over 3%, and one reached as high 10.87%. (Exs. Vol. 45, Ex. 23 3 24 25 26 Basically, the merchant chargeback monitoring programs run by Visa and Mastercard identify merchants who exceed a chargeback rate of about 1% in any given month. The merchant is given an opportunity to correct the issue, but for each successive month, Visa and Mastercard progressively escalate their response, from increasing monetary penalties to eventually closing the merchant’s account. 31 1 830 at FTC-9051-52; Exs. Vol. 46, Ex. 910 at FTC-9209.) Further, the high number of refunds 2 and cancellations further bolsters the chargeback rates as evidence of customer confusion. The lack of orders from the online store also shows consumers thought they were 3 4 receiving a traditional credit card. Customers placed only about 400 orders per month 5 despite the fact that Defendants claim to have signed up over 400,000 members. Global 6 Gold’s profit and loss statements show it spent approximately $252,000 in fulfillment costs 7 from April 2008 through March 2009. (Exs. Vol. 19 (Doc. #236-3) at 98.) During this 8 same period, Global Gold reports over $12.5 million in membership sales. (Id.) In the face 9 of giving out over 400,000 lines of credit in amounts of $5,000 or $7,500, S. Henriksen did 10 not have a line of credit to support the extension of so much credit to others, thus 11 suggesting he knew very few people who signed up actually would purchase anything from 12 the store. (Exs. Vol. 33 (Doc. #250) at 4039-40.) The fact that there were some satisfied customers and only a few customers 13 14 contacted the Better Business Bureau rather than just cancelling or getting a refund or a 15 chargeback do not raise genuine issues of material fact. It is irrelevant if there are satisfied 16 customers. The test is whether the ad is likely to deceive a reasonable consumer. That 17 there may have been some satisfied customers (a dubious proposition as the only support 18 Defendants provide are hearsay comments with no supporting proof of actual customer 19 satisfaction) does not undermine the other facts of deception and overwhelming customer 20 dissatisfaction as shown by the high cancellation, refund, and chargeback rates. Moreover, 21 FTC has presented evidence that the so-called satisfied customers who offered testimonials4 22 canceled within one or two billing periods. (Opp’n to Mot. Summ. J. (Doc. #296), Ex. 23 913.) By the time the Receiver stepped in, 94% of LOC customers had cancelled their 24 memberships. (Exs. Vol. 14 (Doc. #74) at 14.) 25 26 4 Defendants have presented no evidence the testimonials were genuine. 32 Defendants contend the chargeback rates are explained by the phenomenon of 1 2 “friendly fraud,” which generally refers to the concept that consumers are now aware they 3 can do chargebacks, and they do so even when they ordered the product in question and 4 received what they ordered. But Defendants present no evidence that a single chargeback 5 was the result of friendly fraud. Moreover, the high refund and cancellation rates support 6 the conclusion that the high chargeback rates were not the product of friendly fraud. Defendants also argue that genuine issues of material fact remain regarding the 7 8 individual Defendants’ scienter because Defendants obtained an opinion letter from an 9 attorney advising that the LOC offers were not deceptive and they employed a compliance 10 officer to ensure compliance with federal law. As set forth in the Preliminary Injunction 11 and Second Preliminary Injunction, FTC has presented evidence supporting a finding of the 12 requisite level of scienter for each of the individual Defendants. (Prelim. Inj. (Doc. #83) at 13 15-18; Second Prelim. Inj. (Doc. #165) at 4-13.) The attorney opinion letter does not raise a 14 genuine issue of material fact as to the individual Defendants’ scienter. It is not clear from 15 the record what the attorney was shown or was told about the offer for which he was 16 providing his opinion. (See Opp’n to Mot. Summ. J. (Doc. #305), Ex. I.) Thus, it is not 17 clear from the record that Defendants relied on the opinion letter for any specific web page 18 that appeared on the Internet. To the extent the attorney approved the LOC offers as they 19 actually were marketed, he was incorrect in his opinion regarding the offers’ deceptiveness. 20 Given the way the LOCs were marketed, combined with the high cancellation, refund, and 21 chargeback rates, Defendants were at least recklessly indifferent as to the deceptive nature 22 of the offers even if they previously had obtained an attorney opinion letter. Defendants 23 could not continue to rely on the attorney opinion letter in the face of compelling evidence 24 of consumer confusion without being recklessly indifferent to the misleading nature of their 25 ads, or being aware of a high probability of fraud but intentionally avoiding the truth. 26 /// 33 Although Defendants, through Vantex, hired a purported compliance officer, 1 2 Rachel McKinnon (“McKinnon”), this does not raise a genuine issue of material fact 3 regarding scienter. McKinnon testified she had no prior regulatory compliance experience, 4 and there is evidence that some of her suggestions to management to take down misleading 5 web pages were ignored. (Exs. Vol. 42 (Doc. #259) at 99.) At any rate, as with the attorney 6 opinion letter, to the extent McKinnon opined these offers were not deceptive, she was 7 incorrect and Defendants had other indicators that their marketing was deceptive. 8 Defendants therefore do not raise a genuine issue of material fact regarding scienter based 9 on their purported reliance on an inexperienced compliance officer whose advice was 10 rejected, and in the face of other indicators of deceptiveness. No genuine issue of material fact remains that the LOC offers were deceptive and 11 12 that the individual Defendants acted with the requisite scienter.5 The Court therefore will 13 grant summary judgment in favor of FTC on count two. 14 E. Count Three - Failure to Disclose Terms of LOC 15 Count three alleges Defendants failed to disclose material terms of the LOC 16 offers. Specifically, FTC contends Defendants failed to disclose consumers would be 17 joining an online shopping club, the LOC could be used only at Defendants’ online 18 shopping club, the LOC could not be used to purchase all items at the shopping club 19 because some items require a substantial deposit, and other fees and charges would apply. 20 Defendants respond that all terms were disclosed in the offer details and terms and 21 conditions. The failure to disclose that consumers would be joining an online shopping club 22 23 and that the LOC could be used only at Defendants’ online shopping club are duplicative of 24 count two. As to the unique claims in count three, FTC is entitled to summary judgment 25 5 26 Although Defendants explicitly challenge scienter only with respect to count two, the Court’s prior findings in support of the Preliminary Injunctions support a finding of scienter for all offers. 34 1 based on Defendants’ failure to disclose that a down payment would be required for most 2 items. Most items at the online store required a deposit by the consumer, and thus the 3 consumer could not buy the item entirely on credit. (Exs. Vol. 45 at 156 (“Most products 4 have a down payment, and then we will, you know, extend credit for the other ones.”); see 5 also Exs. Vol. 21 (Doc. #238-1) (list of orders which shows nearly every order required at 6 least some down payment).) Not until item 20 on the terms and conditions page is there a 7 statement that a “deposit of the total merchandise purchased is required for some items and 8 actual and shipping and processing charges. . . . Many items are $0.00 down items.” (Exs. 9 Vol. 21 (Doc. #238-2) at 4.) This did not disclose that most items will require a deposit. 10 FTC also is entitled to summary judgment that the LOC offers fail to disclose that 11 there are additional fees associated with the membership. A recurring $39.95 per month 12 membership fee was not adequately disclosed because it was buried in the terms and 13 conditions and in the fine print on the step two order page. Similar to the negative option 14 upsells discussed below, the customer initially was told that all they had to pay was a small 15 activation fee, usually $2.78. Only in small compact print under the submit payment 16 information button was it revealed that the customer would have to pay a recurring $39.95 17 per month fee if they did not cancel. The terms and conditions web page revealed this 18 recurring charge, but the customer had to navigate to the terms and conditions page to find 19 that information. As discussed more fully below with respect to the negative option upsells 20 in count seven, Defendants did not adequately disclose this term by burying it in fine print 21 where the customer would have to scroll down to see it or navigate to another page 22 containing the terms and conditions to find it, particularly where neither the banner nor the 23 landing page suggested there would be any additional cost. 24 No genuine issue of material fact remains that the LOC offers failed to disclose a 25 deposit would be required for most items and that additional fees applied to the 26 membership. The Court therefore will grant summary judgment in favor of FTC on count 35 1 three. 2 F. Count Four - Misrepresentations in Work-From-Home Schemes 3 Count four alleges Defendants misrepresented the earnings potential in relation to 4 work-at-home business opportunities. FTC argues no genuine issue of fact remains that 5 Defendants had no evidence to substantiate the projected earnings they advertised to 6 consumers. Defendants contend the statements were just examples or projections of what a 7 person could make, but Defendants did not promise or guarantee any such returns. 8 9 1. One Hour Wealth Builder/Domain Processing Paid to Process (“PTP”), a S. Henriksen-owned company, owned the offers One 10 Hour Wealth Builder and Domain Processing. (PTP’s Mot. Summ. J. (Doc. #273), Ex. A at 11 75.) One Hour Wealth Builder and Domain Processing are two work-from-home 12 opportunities that purport to teach consumers how to buy and sell domain names on the 13 Internet for a profit. The two programs are substantively the same, just sold under different 14 names. One Hour Wealth Builder’s website offer stated it would provide users access to 15 tutorials and articles on how to make “1,000’s per month on the Internet flipping domain 16 names.” (Pl.’s Mot., Ex. 13.) Key language suggested that consumers will make at least 17 $45 per domain name: 18 19 20 21 With our method, processing a single domain takes only 15 minutes out of your day. Making at least $45 per domain, you can process four or more domains in an hour and make more than $180! That means in just a few hours a day you can make a week’s salary, and in a full work-week you can earn more than what most people make in a month! Follow our earnings chart to see examples of how much you can make: 22 (Am. Compl., Ex. 578.) A chart was then set forth showing how much money consumers 23 could make at $45 per domain name for each day, week, month, and year if they processed 24 6, 8, 10, 12, or 15 domains per day at $45 each. 25 26 No evidence in the record raises a genuine issue of material fact that Defendants had any basis for suggesting consumers could sell domain names for $45 each or that any 36 1 consumer using the service made anything close to the numbers in the chart. While 2 Defendants argue the chart is mere puffery as to what someone theoretically could make, 3 the offer was phrased to suggest a consumer would “[m]ak[e] at least $45 per domain.” 4 Contrary to this representation, the evidence before the Court shows consumers made little 5 to no money before cancelling, requesting refunds, or getting chargebacks on these offers. 6 Defendants argue they would not have documents establishing what customers 7 made with their products, as only the customers would have that kind of documentation, 8 and Defendants have no right to possess that information. Defendants contend the only 9 substantiation required is the use of testimonials by the customers. Even if Defendants 10 were correct as a matter of principle, Defendants have not presented any evidence that a 11 single testimonial is genuine (an actual customer gave the testimonial), much less truthful in 12 its representations (the customer actually made money flipping domain names). The 13 Receiver found no such evidence. In PTP’s joint reply (Doc. #319), Defendants present 14 another testimonial and the tax return of PTP’s original owner as purported substantiation 15 of the earnings chart. These items do not raise an issue of fact even if the Court overlooked 16 Defendants’ failure to produce these exhibits in opposition to FTC’s motion. The new 17 testimonial is hearsay with no evidence, such as an affidavit from the individual, that the 18 testimonial is genuine. As to the tax return, it does not indicate how the prior owner made 19 his income, and thus there is no way to determine how much of his income came from 20 selling domain names. Even if both of these pieces of evidence were admissible and 21 showed what Defendants claim they show, the fact that two people were able to make 22 money selling domain names does not provide a basis for the earnings chart’s claim that 23 consumers could expect to make at least $45 per domain name. 24 Defendants must have some basis for making the earnings claim, and if they have 25 no such basis, they cannot fabricate a number and then fall back on the defense that they 26 would not have access to documentation to support the claim. FTC is entitled to summary 37 1 judgment on count four as to the unsubstantiated earnings claims in the One Hour Wealth 2 Builder and Domain Processing offers. 2. My Search Cash 3 4 My Search Cash (“MSC”) was an educational tool to learn how to sell items on 5 eBay and Google. The advertising contained language such as “big money waiting” or 6 “make big money through Google and eBay.” While the Court agrees this language is 7 non-actionable puffery, a more problematic representation is that “Riches range from a few 8 hundred dollars a month to $50,000 or more a year!” There is no evidence in the record that 9 MSC had any basis on which to make such a claim, and the Receiver located nothing in 10 MSC’s records to substantiate the potential earnings claim. (Exs. Vol. 45, Ex. 831.) The 11 evidence available suggests that consumers made little to no money before cancelling, 12 requesting refunds, or getting chargebacks on MSC. MSC also advertised testimonials from 13 an individual who claimed to make thousands of dollars using the program, and another 14 who claimed to make over $500 a day. Defendants present no evidence the testimonials 15 were genuine. 16 Defendants must have some basis for making the potential earnings claim, but 17 Defendants point to no admissible evidence in the record raising a genuine issue of fact that 18 they had a basis for making the claim. FTC is entitled to summary judgment on count four 19 as to the unsubstantiated potential earnings claim for MSC. 20 G. Count Five - Misrepresentations in Acai Total Burn 21 Count five alleges Defendants made misrepresentations concerning Acai Total 22 Burn’s health benefits, as well as misrepresenting that Oprah and Rachel Ray endorsed the 23 product. FTC argues that its exhibit 579 is an example of Defendants’ web page offering 24 Acai Total Burn, and that Defendants advertised phony celebrity endorsements and 25 unsubstantiated medical claims for the product as shown in exhibit 579. Defendants argue 26 FTC’s claim is based entirely on exhibit 579, which Defendants contend never was a live 38 1 2 web page on the Internet, and thus consumers never saw the alleged misrepresentations. Acai, Inc., owned by S. Henriksen, sold a product called Acai Total Burn, a 3 supplement that contained acai as well as other substances. (Acai, Inc.’s Mot. Summ. J. 4 (Doc. #270), Ex. A at 286.) Carol Jones, an FTC investigator, states in her affidavit that she 5 viewed the website at www.acaitotalburnoffer.com and exhibit 579 fairly and accurately 6 depicts the site as she viewed it. (Exs. Vol. 46, Ex. 906.) 7 Exhibit 579 appears to be a web page marketing Acai Total Burn, although it is 8 unclear from the exhibit whether it was ever live on the Internet. The offer makes the 9 following representations: 10 11 12 13 Why Use Acai Total Burn? Highest Antioxidants of any Food! #1 Weight Loss Supplement of 2008! Oprah and Rachel Ray Approved Helps Increase Your Metabolism Fight Fatigue & Increase Energy Slows down the aging process 14 (Exs. Vol. 16 (Doc. #144) at 6.) There is no evidence that Acai Total Burn has the highest 15 antioxidants of any food, was the number one weight loss supplement of 2008, increases 16 metabolism, fights fatigue, increases energy, or slows down the aging process. FTC 17 presented evidence from a doctor that none of the health benefit claims have any basis in 18 scientific fact. (Exs. Vol. 23 (Doc. #240-1), Ex. 796.) Oprah’s company and Rachel Ray 19 have submitted affidavits that they did not endorse any acai product. (Id., Exs. 787-88.) 20 The S. Henriksen Defendants admitted in their Answer that “certain marketing 21 material for Acai Total Burn include language set forth in . . . paragraph 64 [of Plaintiff’s 22 Amended Complaint].” (Ans. (Doc. #163 at ¶ 64).) Paragraph 64 of Plaintiff’s Amended 23 Complaint sets out the above representations. However, at his deposition, S. Henriksen 24 denied that Acai Total Burn marketing referred to approval by Oprah or Rachel Ray or 25 claimed that it was the number one weight loss supplement of 2008. (Opp’n to Mot. Summ. 26 J. (Doc. #305), S. Henriksen Dep. at 305.) S. Henriksen identified FTC exhibit 579 as a 39 1 marketing page for Acai Total Burn created by Vantex, but he testified that Vantex did not 2 market Acai Total Burn. (Id. at 286-87.) According to S. Henriksen, Acai Total Burn was 3 marketed exclusively by Virgin Offers Media, and therefore exhibit 579 “would not have 4 been used.” (Id. at 287.) Vantex/Dragon employee Jason Soto also testified that he did not 5 think exhibit 579 ever went live on the Internet. (Exs. Vol. 41 (Doc. #258), Ex. 823 at 6 239-40.) On an application for third party funding, S. Henriksen identified Virgin Offers 7 Media as the entity providing campaign services for Acai Total Burn. (Exs. Vol. 22 (Doc. 8 #239), Ex. 755.) However, FTC’s exhibit 644 shows an acai ad on www.vantexgroup.com. 9 (Exs. Vol. 19 (Doc. #236), Ex. 644.) Given the conflicting evidence on whether exhibit 579 10 or an ad making similar claims ever was offered to consumers on the Internet, a genuine 11 issue of material fact remains as to whether Defendants marketed Acai Total Burn 12 deceptively with respect to claims related to being Oprah or Rachel Ray approved, or 13 whether it was the number one weight loss supplement of 2008. However, in their Answer, Defendants admitted to making the other health 14 15 benefits claims about Acai Total Burn and Defendants have not presented any evidence 16 raising an issue of fact that they did not make these other health benefit claims regarding the 17 product. There is no evidence Defendants had any scientific basis to claim that Acai Total 18 Burn had the highest antioxidants of any food, helped to increase metabolism, fought 19 fatigue, increased energy, or slowed down the aging process. As to the health benefits 20 claims for Acai Total Burn, FTC is entitled to summary judgment on count five. 21 H. Count Six - Fake Testimonials & Endorsements 22 Count six alleges Defendants used phony testimonials and endorsements from 23 both members of the public and celebrities. FTC argues there is no evidence any of the 24 testimonials on the various offers were legitimate. Defendants respond that the testimonials 25 are genuine. 26 /// 40 1 As discussed previously, an issue of fact remains as to whether Defendants used 2 Oprah and Rachel Ray testimonials to market Acai Total Burn. The Court therefore denies 3 summary judgment to FTC on this count as to the use of celebrity endorsements for Acai 4 Total Burn. As to non-celebrity endorsements, however, FTC is entitled to summary 5 6 judgment. The Receiver has not found evidence supporting the non-celebrity testimonials 7 for the other products. (Exs. Vol. 45, Ex. 831 at ¶ 7.) The same testimonials were used no 8 matter which website Defendants were using for a particular offer. For example, 9 Defendants used testimonials for Grant Connect before Grant Connect had its first 10 customer. In another example, one individual gave the same testimonial for two different 11 credit amounts on the LOC offers. In one testimonial, A. Harris claimed he or she received 12 a $7500 credit line, but in another A. Harris claimed he or she received a $9500 credit line. 13 (Compare Pl.’s Mot., Ex. 6 at 18, with S. Henriksen Opp’n to Prelim. Inj., Ex. E at slide 8.) 14 Nadia Mikhail, FTC paralegal specialist, avers in her affidavit that she could find only one 15 individual whose testimonial was presented on the work-from-home landing pages who was 16 even a customer of Defendants as reflected by Defendants’ own records. (Exs. Vol. 46 at 17 26.) 18 Defendants have not presented any evidence that any of the testimonials are 19 genuine. Defendants present some testimonials but do so in hearsay form, with no 20 admissible supporting documentation such as an affidavit from the identified individual 21 indicating that he or she gave the testimonial presented and that it was accurate. (See S. 22 Henriksen Entities’ Opp’n to FTC’s Mot. Summ. J. (Doc. #305).) Defendants O’Connell 23 and Gray rely on release forms where certain individuals in relation to the grant offer agreed 24 to the use of their testimonial and expressed that the statements in the testimonial were true. 25 (O’Connell’s & Gray’s Opp’n to FTC’s Mot. Summ. J. (Doc. #306), Ex. 2.) However, 26 Defendants present no evidence these releases are genuine. Several Defendants admitted 41 1 they did nothing to verify any of the testimonials, and Vantex’s compliance officer, 2 McKinnon, also testified she did not contact any customers to verify the testimonials. 3 Defendants fail to present any admissible evidence raising a genuine issue of 4 material fact that any of the non-celebrity testimonials are genuine or accurate. FTC 5 therefore is entitled to summary judgment on count six. 6 I. Count Seven - Failure to Disclose Upsells 7 Count seven alleges Defendants failed to disclose the negative option upsells. 8 FTC argues the upsells were not adequately disclosed because they were in small print and 9 consumers had to scroll down on the web page to see the disclosures, or the disclosures 10 otherwise were buried in the terms and conditions on a separate web page. Defendants 11 respond that the upsells were fully disclosed and consumers were required to indicate they 12 had read the terms and conditions prior to being charged. 13 Each of the primary offers were bundled with upsells. When a consumer 14 purchased one of the LOC offers, they automatically were enrolled in two or three other 15 offers, usually Vcomm, Smarthealth Gold, or Premier (an office software suite). Likewise, 16 when a consumer purchased Grant Connect, he or she automatically was enrolled in upsells, 17 including MemberLegalNet. When a consumer purchased Acai Total Burn, he or she also 18 received upsells for Total Health and Healthy Allure. The upsells were not disclosed in the 19 banner or on the landing page. Rather, they were disclosed in two places: under the button 20 the consumer would click on to submit payment information in step two of the ordering 21 process, and on the terms and conditions page. The text on step two of the ordering process 22 was in small compact type under the submit button, and the consumer would have to scroll 23 down to see it. Because it was hidden from view and because the step two page looked 24 almost identical to the step one page, consumers were unlikely to see it. 25 26 Although the terms and conditions page typically, though not always, fully disclosed the upsells’ terms, a consumer should not have to view the terms and conditions 42 1 on a separate web page to learn they are being charged for two or three recurring monthly 2 membership charges unrelated to the product they actually ordered and which they did not 3 request. Moreover, the disclosure relating to the upsells does not appear until paragraph 23 4 of dense small text in the terms and conditions. The terms and conditions sometimes did 5 not tell the consumer what the upsells cost, and/or referred them to the upsell offer’s 6 website to get information on the upsells. 7 Consumers have averred they did not see the upsell offer details and were 8 surprised to discover their enrollment in membership programs they had never heard of 9 until they noticed the charges on their credit card statements. The high number of refunds, 10 cancellations, and chargebacks on the upsell offers suggest these offers were inadequately 11 disclosed. Vcomm, for example, was a long distance calling service that was sold only as 12 an upsell on S. Henriksen’s other offers. Vcomm had a chargeback ratio of 4.09% and was 13 in Visa’s merchant chargeback monitoring program for eight consecutive months using four 14 different descriptors. (Exs. Vol. 46, Ex. 910 at FTC-9211.) Vcomm also was in 15 Mastercard’s merchant chargeback monitoring program for seven months with an average 16 chargeback ratio of 1.69% for one merchant identification number, for five months with a 17 chargeback ratio of 1.81% for another merchant identification number, and for four months 18 with a ratio of 1.63% for a third merchant identification number. (Exs. Vol. 45, Ex. 833 at 19 FTC-9053-54.) 20 From January through December 2008, Vcomm made over $5 million dollars, yet 21 it expended only $2,000 in fulfillment costs. (Exs. Vol. 36 (Doc. #253), Ex. 813 at 22 7341-48.) Vcomm’s other expenses consisted entirely of commissions to Global Gold for 23 marketing Vcomm, fees to operate the merchant account, fees to the credit card processors, 24 customer service expense, and fees to Defendant OS Marketing for use of AWARE. (Id.) 25 M. Henriksen contends Vcomm also spent $55,667.25 in “telephone & related” expenses 26 and $25,500 for “web programming and hosting.” (Exs. Vol. 20 (Doc. #237), Ex. 656.) It 43 1 is unclear whether the web programming was payment to Vantex for advertising or whether 2 it was actual service to consumers for use of the product, although it is listed as a research 3 and development expense. It also is unclear whether the telephone expenses were actual 4 customer fulfillment costs or the cost to Vcomm for its own business telephone system. 5 Nevertheless, even including these amounts, the fulfillment costs are grossly 6 disproportionate to the memberships. Although M. Henriksen contends the over $240,000 7 spent on customer service should count as fulfillment costs, it is telling that Vcomm spent 8 approximately three times more money on customer service than it did on the actual product 9 for the customer, even including the approximately $75,000 in telephone and web 10 programming expenses. Premier was an office software suite which also was sold only as an upsell. 11 12 Premier was in Mastercard’s merchant chargeback monitoring program for three months 13 with an average chargeback ratio of 4.36%. (Exs. Vol. 45, Ex. 833 at FTC-9053.) Grant 14 Connect was offered as an upsell on the LOCs for a while, and it had even higher 15 chargeback ratios, despite being spread out over several descriptors and merchant 16 identification numbers. (Id. at FTC-9054-55 (showing different iterations of the grant offer 17 through Horizon Holdings were on Mastercard’s monitoring program for 4 months with 18 4.70% chargeback; 4 months with 5.66% chargeback; 4 months with 5.76% chargeback; 4 19 months with 5.32% chargeback, and four months with 5.06% chargeback).) Some of these 20 chargebacks likely were the result of Grant Connect being a primary offer as well as an 21 upsell. But the chargeback rates associated with the other upsells, along with the customer 22 complaints, cancellations, and refunds demonstrate consumer confusion associated with the 23 upsells. 24 Defendants argue the upsells complied with FTC’s own five principles of 25 negative option marketing: (1) disclose material terms in an understandable manner, 26 (2) make the appearance of disclosures clear and conspicuous, (3) disclose material terms 44 1 before the consumer incurs a financial obligation, (4) obtain consumers’ affirmative consent 2 to the offer, and (5) do not impede cancellation. However, the upsells were not clear and 3 conspicuous. Because they were not clear and conspicuous, Defendants did not obtain 4 consumers’ affirmative consent. Further, Defendants impeded cancellation by making 5 consumers call separately to cancel each offer, even though all calls were answered out of 6 the same customer service center. The primary offer websites also referred consumers to 7 the upsell websites to learn how to cancel those offers instead of providing cancellation 8 information at the primary offer’s website. 9 10 Defendants deceptively marketed the upsells as a matter of law. The Court therefore will grant FTC’s motion for summary judgment on count seven. 11 J. Count Eight - Unauthorized Debiting of Consumers’ Bank Accounts 12 Count eight alleges Defendants debited consumers’ bank accounts without 13 written authorization or its equivalent. FTC relies upon the affidavits of several consumers 14 who state that they did not become aware of their membership in certain upsells until they 15 saw the charges on their credit card statements, and they did not agree to be charged for 16 these items. Defendants respond that they had written authorization for all charges as 17 demonstrated by the fact that consumers had to click in the box that they had read all terms 18 and conditions, which included acceptance of the upsells. Defendants also contend they 19 sent emails to consumers confirming their enrollment. 20 The EFTA provides that a “preauthorized electronic fund transfer from a 21 consumer’s account may be authorized by the consumer only in writing, and a copy of such 22 authorization shall be provided to the consumer when made.” 15 U.S.C. § 1693e(a). An 23 electronic fund transfer is unauthorized if it is a “transfer from a consumer’s account 24 initiated by a person other than the consumer without actual authority to initiate such 25 transfer and from which the consumer receives no benefit.” Id. § 1693a(11). Pursuant to its 26 regulatory authority, the Board of Governors of the Federal Reserve System issued 45 1 Regulation E to carry out the purposes of the EFTA. 12 C.F.R. § 250.1 et seq. Pursuant to 2 Regulation E, preauthorized electronic fund transfers from a consumer’s account “may be 3 authorized only by a writing signed or similarly authenticated by the consumer. The person 4 that obtains the authorization shall provide a copy to the consumer.” 12 C.F.R. § 205.10(b). 5 A preauthorized electronic fund transfer is “an electronic fund transfer authorized in 6 advance to recur at substantially regular intervals.” Id. § 205.2(k). 7 In his declaration, consumer James Zvolensky (“Zvolensky”) states that he 8 thought he was getting a Visa card through Defendants LOC offer, but once he learned it 9 was for an online store, he called to cancel. (Pl.’s Mot., Ex. 382.) Zvolensky avers that he 10 never noticed any information about additional fees or charges when he applied for the 11 LOC, and did not become aware of the upsell charges until he noticed charges on his credit 12 card bill for an identification protection service and Vcomm. Doris Loiseau (“Loiseau”) 13 makes similar averments regarding Grant Connect. (Id., Ex. 383.) Loiseau states she 14 thought she would be charged only $2.29 for shipping a CD to her, but she was enrolled in 15 SmartHealth Gold, MemberLegalNet, and IDPro Alert. She called to cancel these services, 16 and was surprised to be charged $39.95 for the Grant Connect membership. 17 Consumer William Fields states that he signed up for Grant Connect and did not 18 notice anything advising him that he would be signed up for additional memberships. (Ex. 19 385 (Pl.’s Mot., Ex. 385.) He was charged for ID Lock and MemberLegalNet, but he avers 20 he did not agree to join these programs. Finally, Ronald Rauscher made similar claims 21 regarding Grant Connect. (Id., Ex. 386.) He stated he did not see anything about any fees 22 other than $1.99 for shipping the Grant Connect CD. He avers he did not realize Grant 23 Connect would continue to charge his card, and he was signed up for ID Pro Alert without 24 his knowledge. 25 26 In response to this evidence, Defendants rely on their common practice of requiring consumers to click on the box indicating they read the terms and conditions prior 46 1 to submitting financial data. Defendants also rely on their regular practice of sending 2 confirmation emails to the customer showing that they agreed to be enrolled in these 3 programs. Defendants do not point to evidence that they actually sent such emails to any of 4 the identified individuals, although there is evidence in the record that at least some 5 consumers received confirmation emails. (Pl.’s Mot., Exs. 379, 383, 392, 393.) 6 There is no evidence that Defendants provided a copy of the authorization to the 7 consumer. Although Defendants claim they sent confirmation emails, the evidence shows 8 only that Defendants provided an email welcoming the consumer to the membership 9 program and indicated through what IP address the membership was purchased. (Pl.’s 10 Mot., Attachs. to Exs. 379, 383, 392, 393.) The confirmation emails did not set forth the 11 terms of the authorization for recurring charges, such as the amount the consumer would be 12 charged and at what interval. See 12 C.F.R. Part 250, Supp. I, 10(b) cmt. 5 (“The person 13 that obtains the authorization must provide a copy of the terms of the authorization to the 14 consumer either electronically or in paper form.”). Additionally, because Defendants 15 deceptively marketed the upsells, as discussed above, the fact that the consumer was about 16 to be enrolled in several memberships with recurring monthly charges was not adequately 17 disclosed. See 12 C.F.R. Part 250, Supp. I, 10(b) cmt. 6 (“An authorization is valid if it is 18 readily identifiable as such and the terms of the preauthorized transfer are clear and readily 19 understandable.”). Defendants’ failure to adequately disclose is shown by consumer 20 affidavits indicating consumers did not realize they had been enrolled in the upsell offers 21 until they noticed the charges on their credit card statements. Defendants have failed to present evidence raising a genuine issue of material 22 23 fact that the preauthorization transfer terms were clear and readily understandable, or that 24 they provided the consumer with a copy of the authorization for the recurring charges. The 25 Court therefore will grant FTC’s motion for summary judgment on count eight. 26 /// 47 1 K. Relief Requested 2 FTC requests permanent injunctive relief in the form of enjoining Defendants 3 from engaging in negative option marketing, continuity programs, preauthorized electronic 4 fund transfers, or the use of testimonials. FTC also seeks a permanent ban on Defendants 5 marketing and selling products related to grants, credit, business opportunities, and diet 6 supplements or nutraceuticals. FTC also seeks equitable monetary relief in a total amount 7 across all offers of $29,784,770.52, plus pre-judgement interest. 8 9 1. Injunctive Relief FTC may seek a permanent injunction as a remedy for violations of the Act. 15 10 U.S.C. § 53(b) (stating that “in proper cases the Commission may seek, and after proper 11 proof, the court may issue, a permanent injunction”). The Court may deem a defendant’s 12 “ready willingness to flout the law” as “sufficient cause for concern regarding further, 13 additional violations” for which injunctive relief may be appropriate. Sears, Roebuck & 14 Co. v. F.T.C., 676 F.2d 385, 392 (9th Cir. 1982). In assessing the relief to be fashioned, the 15 Court may consider such factors as “the deliberateness and seriousness of the present 16 violation, and the violator’s past record with respect to unfair advertising practices,” as well 17 as “the adaptability or transferability of the unfair practice to other products.” Id. The 18 Court should evaluate “the circumstances as a whole” to determine the appropriate relief. 19 Id. A permanent ban on engaging in certain activities is an option open to the Court. 15 20 U.S.C. § 53(b); F.T.C. v. Gill, 265 F.3d 944, 954, 957-58 (9th Cir. 2001) (affirming the 21 district court’s permanent ban on the defendant engaging in the credit repair business). 22 The Court concludes FTC has presented evidence supporting injunctive relief in 23 the form of a permanent ban barring Defendants from (1) engaging in negative option 24 marketing, continuity programs, preauthorized electronic fund transfers, or the use of 25 testimonials, and (2) marketing and selling products related to grants, credit, business 26 opportunities, and diet supplements or nutraceuticals. Repeat offender Kyle Kimoto 48 1 previously was involved in a similar credit card scheme in Assail,6 conduct for which he 2 currently is incarcerated and for which he was under investigation and faced criminal 3 charges during part of the time he engaged in the conduct at issue in this case.7 Defendants S. Henriksen and M. Henriksen technically are not repeat offenders 4 5 in the same way as Kyle Kimoto. S. Henriksen’s prior contact with FTC involved his 6 violation of the preliminary injunction in the Assail case moving money for Kyle Kimoto, 7 not for false advertising. M. Henriksen entered into a stipulated ban on telemarketing, but 8 did not admit to any wrongdoing in Assail. Nevertheless, their prior contact with FTC put 9 them on greater notice than someone who had no prior contact with FTC. Defendant Tasha 10 Jn Paul also is in the midst of several cases involving FTC. Likewise, Defendant Rachael 11 Cook (“Cook”) had no prior contact with FTC. However, she was aware of the allegations 12 in the Assail case and yet associated herself with the same individuals in an internet 13 marketing scheme bearing a resemblance to the allegations in Assail. Cook makes no 14 arguments on her behalf in opposition to the permanent ban. Defendants’ readiness to flout the law, the extensive nature of the activity, and 15 16 the adaptability of Defendants’ methods to other products counsel in favor of permanent 17 injunctive relief as to the individual Defendants. Defendants created numerous offers, all 18 using the same deceptive strategies resulting in millions of dollars in consumer injury. All 19 Defendants were willing to flout the law to offer the deceptive grant product which no 20 Defendant attempts to defend as a legitimate product. All Defendants also participated in 21 the deceptively marketed negative option upsells, including products of dubious value or 22 23 24 25 26 6 F.T.C. v. Assail, Inc., No. W03CA007 (W.D. Tex. 2003); F.T.C. v. Assail, Inc., No. 2:04-CV-00895-JCM-RJJ (D. Nev. 2003). 7 Kyle Kimoto opposes the lifetime ban from engaging in certain activities as a violation of the Thirteenth Amendment. Prohibiting Kyle Kimoto from engaging in certain activities does not constitute involuntary servitude. 49 1 legitimacy.8 Defendants were willing participants in the efforts to take measures to avoid 2 detection under the merchant chargeback programs. Given Defendants’ recidivism, extensive misconduct, willingness to flout the 3 4 law, and highly adaptable scheme, the Court concludes permanent injunctive relief is 5 appropriate. The Court therefore will grant FTC’s Motion for Summary Judgment seeking 6 a permanent ban on the individual Defendants’ conduct as set forth more completely in a 7 separate Order filed concurrently with this Order. 2. Damages 8 9 “To determine the appropriate amount of damages in deceptive advertising cases, 10 courts apply a burden-shifting scheme.” F.T.C. v. Direct Mktg. Concepts, Inc., 624 F.3d 1, 11 15 (1st Cir. 2010). FTC bears the initial burden of providing “a reasonable approximation 12 of damages,” which may be established by gross receipts, net customer loss, or other 13 comparable evidence. Id. If FTC meets this burden, “the defendant has an opportunity to 14 demonstrate that the figures are inaccurate.” Id.; F.T.C. v. QT, Inc., 512 F.3d 858, 864 (7th 15 Cir. 2008) (stating that “if defendants thought that their profits for these years were below 16 $16 million, they should have produced their own figures-for once the FTC produces a 17 reasonable estimate, the defendants bear the burden of showing that the estimate is 18 inaccurate”). FTC has presented evidence of consumer injury totaling $29,784,770.52. 19 20 Defendant M. Henriksen challenges FTC’s showing, arguing that two FTC employees and 21 the Receiver arrived at three different calculations of net sales for the LOC offers, and thus 22 as a matter of law there is no reliable evidence on which to award damages. Pursuant to FTC data analyst Andrew Dale’s (“Dale”) extraction of data from the 23 24 AWARE database, the LOC offers made a net profit of $18,794,478.92 (total sales less 25 8 26 For example, Defendants O’Connell and Gray owned MemberLegalNet, a purported provider of discount legal services. Neither O’Connell nor Gray were licensed attorneys. 50 1 chargebacks and refunds), the work-from-home offers made $1,492,098.59, Grant Connect 2 made $2,263,597.11, and Acai Total Burn made $8,333.48. (Exs. Vol. 45, Ex. 830 at 3 9030.) Because a computer error wiped out the AWARE data for Vcomm and Allclear, 4 Dale used the Receiver’s Report to estimate Vcomm’s net sales at $7,226,262.42. (Id. at 5 ¶ 6 & 9030.) Dale calculated numbers through July 30, 2009, as that is when the Receiver 6 took over. (Id. at ¶ 8.) Kenneth Kelly (“Kelly”), another FTC employee, calculated net 7 sales for the various offers and generated the same numbers. (Exs. Vol. 46, Ex. 911.) However, Radu Pisano (“Pisano”), another FTC employee, calculated a slightly 8 9 higher amount of sales for the LOC offers. (Exs. Vol. 14, Ex. 527, Attach. C.) Pisano 10 calculated the numbers through August 2, 2009. (Id., Ex. 527 at ¶ 32.) Both Dale and 11 Pisano used the AWARE system to extract the data. The Receiver reports a substantially 12 lower amount in sales, around $15 million. (Receiver’s Report (Doc. #82).) However, the 13 Receiver reported only through June 2009, and used the merchant accounts as the data 14 source, not AWARE. The difference in net sales which M. Henriksen notes is attributable to the 15 16 difference in time frames analyzed and the source from which the data was culled. To the 17 extent there is a discrepancy between these numbers, FTC relies on Dale’s calculation 18 because Dale used Defendants’ own records and capped the calculation at the time the 19 Receiver took over. As to the missing data for Vcomm, FTC provides a backup source of 20 data in the form of the Receiver’s Report. The Receiver used the merchant account data, a 21 reliable source for information regarding the sales. FTC has presented a reasonable 22 approximation of damages. Defendants have presented nothing to suggest the figures are 23 inaccurate or unreliable. FTC therefore is entitled to equitable monetary relief in the 24 amount of $29,784,770.52. 25 /// 26 /// 51 1 2 3. Prejudgment Interest The Court may award prejudgment interest as part of the relief. See QT, Inc., 3 512 F.3d at 864; F.T.C. v. Atlantex Assocs., 872 F.2d 966, 969 (11th Cir. 1989) (awarding 4 pre-judgment interest lies within district court’s discretion). “[A]n award of prejudgment 5 interest under the FTC Act furthers the purposes of the statute by encouraging businesses 6 who are found to have participated in unfair or deceptive acts or practices to settle with its 7 consumers (through the FTC) quickly and fairly, thereby avoiding lengthy litigation.” 8 F.T.C. v. Nat’l Bus. Consultants, Inc., 781 F. Supp. 1136, 1144 (E.D. La. 1991). Generally, 9 interest on a money judgment in a federal court is “calculated from the date of the entry of 10 the judgment, at a rate equal to the weekly average 1-year constant maturity Treasury yield, 11 as published by the Board of Governors of the Federal Reserve System, for the calendar 12 week preceding[] the date of the judgment,” and is compounded annually. 28 U.S.C. 13 § 1961(a) (footnote omitted), id. § 1961(b); U.S. v. Gordon, 393 F.3d 1044, 1058 n.12 (9th 14 Cir. 2004) (“Under federal law the rate of prejudgment interest is the Treasury Bill rate as 15 defined in 28 U.S.C. § 1961 unless the district court finds on substantial evidence that a 16 different prejudgment interest rate is appropriate.”). 17 FTC employee Kelly presents a table with prejudgment interest calculations. 18 (Exs. Vol. 46, Ex. 911.) Kelly determined a 4.4% interest was “appropriate.” Kelly 19 calculated the amounts using both simple interest and, alternatively, compounding monthly 20 for each month through the end of December 2011. 21 Defendants have presented no law or argument as to why the Court should not 22 award pre-judgment interest other than M. Henriksen’s argument that FTC seeks excessive 23 pre-judgment interest. The Court, in its discretion, will award pre-judgment interest. 24 However, the Court rejects FTC’s proposed 4.4% pre-judgment interest rate. Kelly gives 25 no basis for choosing this number, and FTC has presented no argument as to why the Court 26 should deviate from the usual statutory rule regarding the prejudgment interest rate. The 52 1 Court therefore will award pre-judgment interest, but only at the usual statutory rate, 2 compounded annually. The Court will direct FTC to provide a proposed form of judgment 3 on damages within twenty (20) days from the date of this Order. 4 V. CONCLUSION IT IS THEREFORE ORDERED that the Motion for Summary Judgment and/or 5 6 to Dismiss by Defendant Kyle Kimoto (Doc. #155) is hereby DENIED. IT IS FURTHER ORDERED that the Motion for Summary Judgment by 7 8 Defendant Global Fulfillment, Inc. (Doc. #266) is hereby DENIED. IT IS FURTHER ORDERED that the Motion for Summary Judgment by 9 10 Defendant Dragon Group, Inc. (Doc. #267) is hereby DENIED. IT IS FURTHER ORDERED that the Motion for Summary Judgment by 11 12 Defendant MSC Online, Inc. (Doc. #268) is hereby DENIED. IT IS FURTHER ORDERED that the Motion for Summary Judgment by 13 14 Defendant Global Gold Limited (Doc. #269) is hereby DENIED. IT IS FURTHER ORDERED that the Motion for Summary Judgment by 15 16 Defendants Acai, Inc.; Healthy Allure, Inc.; and Total Health, Inc. (Doc. #270) is hereby 17 DENIED. IT IS FURTHER ORDERED that the Motion for Summary Judgment by 18 19 Defendants Allclear Communications, Inc.; Elite Benefits Group, Inc.; Global Gold, Inc.; 20 Steven R. Henriksen; Premier Plus Member, Inc.; and Vcomm, Inc. (Doc. #272) is hereby 21 DENIED. IT IS FURTHER ORDERED that the Motion for Summary Judgment by 22 23 Defendant Paid to Process, Inc. (Doc. #273) is hereby DENIED. IT IS FURTHER ORDERED that the Motion Under Rule 201 (Doc. #314) is 24 25 hereby DENIED. 26 /// 53 1 IT IS FURTHER ORDERED that the Motion for Summary Judgment by Plaintiff 2 Federal Trade Commission (Doc. #275) is hereby GRANTED in part and DENIED in part 3 as set forth in this Order. 4 IT IS FURTHER ORDERED that Plaintiff Federal Trade Commission shall 5 provide a proposed form of judgment reflecting monetary damages within twenty (20) days 6 from the date of this Order. 7 8 9 10 DATED: October 25, 2011 _______________________________ PHILIP M. PRO United States District Judge 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 54

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