-JMA Federal Trade Commission v. Neovi Inc et al, No. 3:2006cv01952 - Document 195 (S.D. Cal. 2010)
Court Description: ORDER denying 187 Defendants' Motion to Limit the Scope of the Show Cause Hearing: At the show cause hearing, Plaintiff may present its case as to why Defendants' marketing of VersaCheck violates the Final Order. No later than 10/18/10: ( 1) Defendants shall serve Plaintiff with a disclosure for their expert witness, Mr. Fisher, consistent with the requirements of Federal Rule of Civil Procedure 26(a)(2); and (2) The parties shall exchange lists of exhibits and witnesses to be offered at the show cause hearing. Signed by Judge Janis L. Sammartino on 9/27/10. (lmt)
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-JMA Federal Trade Commission v. Neovi Inc et al Doc. 195 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 FEDERAL TRADE COMMISSION, CASE NO. 06-CV-1952 JLS (JMA) Plaintiff, 12 ORDER: DENYING DEFENDANTS’ MOTION TO LIMIT THE SCOPE OF THE SHOW CAUSE HEARING vs. 13 14 NEOVI, INC., et al., (Doc. No. 187) Defendant. 15 16 17 Presently before the Court is Defendants’ motion to limit the scope of the show cause hearing 18 regarding contempt. (Doc. No. 187.) For the following reasons, the Court DENIES Defendants’ 19 motion. 20 BACKGROUND 21 The parties in this case are well aware of the background of this matter. Moreover, this Court 22 and the Ninth Circuit have both provided a full description of the underlying facts. (See Doc. No. 105 23 (MSJ Order), at 2–8; FTC v. Neovi, Inc., — F.3d —, 2010 WL 2362956, at *1–3 (9th Cir. June 15, 24 2010).) Those factual summaries are incorporated by reference here. However, this Order will 25 describe the procedural history relevant to the instant motion. 26 On September 16, 2008, the Court granted Plaintiff’s motion for summary judgment, finding 27 that Defendants’ Qchex system violated section 5 of the FTC Act, 15 U.S.C. § 45(n). (Doc. No. 105.) 28 On January 7, 2009, the Court denied Defendants’ motion for reconsideration (Doc. No. 117) and -1- 06cv1952 Dockets.Justia.com 1 entered a permanent injunction enjoining Defendants from “creating1 or delivering2 any check for a 2 customer” without performing identity verification of prospective customers and account control 3 verification (Doc. No. 118 (Final Order), at 4–5.) Defendants timely appealed. (Doc. No. 119.) 4 While Defendants’ appeal was pending before the Ninth Circuit, Plaintiff moved for an order 5 to show cause why Defendants should not be held in contempt. (Doc. No. 156 (Contempt Motion).) 6 Plaintiff 7 FreeQuickWire.com . . . , an electronic check creation and delivery service nearly identical to the 8 Qchex and GoChex services that the Court found violated Section 5 of the FTC Act . . . .” (Mem. ISO 9 Contempt Mot. 1.) On November 13, 2009, the Court granted Plaintiff’s motion and ordered 10 Defendants to appear and show cause why they should not be held in civil contempt for failing to 11 comply with the terms of the Final Order. (Doc. No. 170.) On December 22, 2009, the Ninth Circuit 12 granted Defendants’ request to expedite their appeal, and the Court vacated all dates associated with 13 the show cause hearing pending resolution of Defendants’ appeal. (Doc. No. 177.) On May 14, 2010, 14 the Ninth Circuit affirmed in full the Court’s Order denying Defendants’ motion for reconsideration 15 and the Final Order. See Neovi, — F.3d —, 2010 WL 2362956, at *3–8. On the same day, the Court 16 reset the show cause hearing for July 15, 2010. (Doc. No. 179.) based its Contempt Motion on Defendants’ “continuing operation of 17 On July 2, 2010, Plaintiff filed supplemental briefing in support of its Contempt Motion. (Doc. 18 No. 182.) Plaintiff’s supplemental briefing cites two additional products Plaintiff believes violate the 19 Final Order: “VersaCheck® 2010 software and newly-released Qchex check creation templates.” 20 (Supplemental Mem. ISO Contempt Mot. 1.) 21 At the July 15, 2010 show cause hearing, Defendants for the first time contended that the 22 VersaCheck® 2010 software (VersaCheck) was not a proper subject of the contempt proceeding. 23 (Show Cause Hr’g Tr. 10–12.) The Court invited briefing on the proper scope of the contempt 24 25 1 26 27 The Final Order defines creating as “any involvement in the creating, designing, composing, drawing, or writing on paper or electronic media a check drawn on a specific financial institution.” (Final Order 3.) 2 28 The Final Order defines delivering as “any involvement in the mailing, faxing, e-mailing, sending, or transmitting by any other method a check drawn on a specific financial institution.” (Final Order 3.) -2- 06cv1952 1 proceeding. (Id. 13.) On September 23, 2010, the Court heard argument on the instant motion.3 (Doc. 2 No. 194.) 3 ANALYSIS 4 Defendants raise two arguments in support of their position that the show cause hearing should 5 be limited to whether the operation of FreeQuickWire.com (FQW) violates the Final Order.4 The 6 Court addresses each in turn.5 7 I. Defendants Had Adequate Notice That VersaCheck Might Violate the Final Order 8 Defendants first contend that they did not have notice that VersaCheck might violate the Final 9 Order because the FTC never challenged Defendants’ marketing of VersaCheck, even though 10 VersaCheck predated the FTC’s enforcement action and the Final Order. (See Mem. ISO Mot. Re: 11 Scope 5–6; Reply 2–3.) Plaintiff responds that Defendants’ contention is without merit because the 12 Final Order’s “specific and definite language squarely applies to” VersaCheck. (Opp’n 3.) Plaintiff 13 also argues that the Final Order properly incorporates “fencing-in” provisions that apply beyond 14 Qchex. (Id. 4–6.) 15 A court may frame an injunction based on violation of the FTC Act broadly enough to prevent 16 the defendant from engaging in similar illegal conduct in the future. FTC v. Colgate-Palmolive Co., 17 380 U.S. 374, 395 (1965); see also NLRB v. Express Publ’g Co., 312 U.S. 426, 435 (1941) (“A federal 18 3 19 20 21 On September 10, 2010, Magistrate Judge Adler ordered Defendants to serve a disclosure for their expert witness, Dan M. Fisher, consistent with Federal Rule of Civil Procedure 26(a)(2), by September 17, 2010. (Id. at 2.) At the Court’s direction, Magistrate Judge Adler subsequently vacated the deadline for Mr. Fisher’s disclosure pending the September 23, 2010 hearing on the instant order. (Doc. No. 193.) The Court resets the deadline for Mr. Fisher’s disclosure infra. 4 22 23 To be clear, the instant Order only decides the narrow issue of the scope of the contempt hearing—not the broader issue of whether Defendants’ marketing of VersaCheck violates the Final Order. 5 24 25 26 27 28 As an initial matter, Defendants argue that “[the] Final Order at issue . . . [is] ambiguous,” and therefore, Defendants’ marketing of VersaCheck should not be considered in the contempt proceeding. (Mem. ISO Mot. Re: Scope 6.) It is well established, however, that “a contempt proceeding does not open to reconsideration the legal or factual basis of the order alleged to have been disobeyed . . . .” United States v. Rylander, 460 U.S. 752, 756 (1983) (quoting Maggio v. Zeitz, 333 U.S. 56, 69 (1948)); cf. In re Establishment Inspection of Hern Iron Works, Inc., 881 F.2d 722, 725–26 (9th Cir. 1989) (“[T]he collateral bar rule permits a judicial order to be enforced through criminal contempt even though the underlying decision may be incorrect and even unconstitutional. The contemnor cannot ordinarily raise the invalidity of the judicial order as a defense to a contempt charge.” (citations omitted)). Accordingly, Defendants may not challenge the validity of the Final Order in these contempt proceedings. -3- 06cv1952 1 court has broad power to restrain acts which are of the same type or class as unlawful acts which the 2 court has found to have been committed or whose commission in the future unless enjoined, may fairly 3 be anticipated from the defendant’s conduct in the past.”). “[C]ourts have often upheld FTC orders 4 encompassing all products or all products in a broad category, based on violations involving only a 5 single product or group of products . . . .” Sears, Roebuck & Co. v. FTC, 676 F.2d 385, 391 (9th Cir. 6 1982) (quoting ITT Cont’l Baking Co. v. FTC, 532 F.2d 207, 223 (2d Cir. 1976)) (alterations in 7 original); cf. Int’l Rectifier Corp. v. IXYS Corp., 383 F.3d 1312, 1318 (9th Cir. 2004) (declining to 8 hold that contempt proceeding should be unavailable with respect to pre-judgment devices not accused 9 of infringement in the underlying action). Thus, “those caught violating the [FTC] Act must expect 10 some fencing in.” FTC v. Nat’l Lead Co., 352 U.S. 419, 431 (1957). 11 Here, the Court’s Order granting Plaintiff’s proposed injunctive relief explicitly contemplated 12 that the Final Order would apply beyond Qchex. (See Doc. No. 117, at 13 (“Defendants’ pattern of 13 conduct demonstrates a significant disregard for check fraud and a significant likelihood of future 14 violation. . . . [F]ollowing the bankruptcy of Qchex, Defendants opened two more businesses offering 15 the same basic functionality. Given the seriousness and deliberateness of Defendants’ past record of 16 violations, injunctive relief is appropriate.” (citation omitted)).) And although Defendants purport to 17 interpret the Final Order as narrowly applying to “a discrete line of G7's products,” (Reply 4) the Final 18 Order is clearly broader—it enjoins Defendants “from creating or delivering any check for a 19 customer” (Final Order 4). Thus, to the extent that VersaCheck incorporates check creation and 20 delivery functions, Defendants were on notice that Plaintiff might take the position that Defendants’ 21 continued marketing of VersaCheck violates the Final Order. Defendants cannot now seek to limit 22 the scope of the show cause hearing because they failed to “expect some fencing in.” Nat’l Lead, 352 23 U.S. at 431. 24 II. Plaintiff Should Not Be Estopped from Presenting Evidence of Contempt Based on 25 Defendants’ Marketing of VersaCheck 26 Defendants next contend that Plaintiff should be estopped from presenting evidence of 27 Defendants’ marketing of VersaCheck in support of Plaintiff’s contempt allegations. (See Reply 5–7.) 28 Plaintiff responds that Defendants cannot establish the requisite elements for estoppel against the -4- 06cv1952 1 government. (Opp’n 6–9.) 2 A party seeking to establish estoppel against the government must first demonstrate that the 3 four requirements of equitable estoppel are met. United States v. Gamboa-Cardenas, 508 F.3d 491, 4 502 (9th Cir. 2007). “Those elements are ‘(1) the party to be estopped knows the facts, (2) he or she 5 intends that his or her conduct will be acted on or must so act that the party invoking estoppel has a 6 right to believe it is so intended, (3) the party invoking estoppel must be ignorant of the true facts, and 7 (4) he or she must detrimentally rely on the former’s conduct.’” Id. (quoting United States v. Hemmen, 8 51 F.3d 883, 892 (9th Cir. 1995)). In addition, a party seeking to estop the government must establish 9 that (1) “the government has engaged in affirmative misconduct going beyond mere negligence” and 10 (2) “the government’s act will cause a serious injustice and the imposition of estoppel will not unduly 11 harm the public interest.” Gamboa-Cardenas, 508 F.3d at 502 (quoting Pauly v. USDA, 348 F.3d 12 1143, 1149 (9th Cir. 2003)) (internal quotation marks omitted). 13 “Affirmative misconduct requires an affirmative misrepresentation or affirmative concealment 14 of a material fact by the government.” Carrillo v. United States, 5 F.3d 1302, 1306 (9th Cir. 1993). 15 “[M]ere unexplained delay” does not amount to affirmative misconduct. Jaa v. INS, 779 F.2d 569, 16 572 (9th Cir. 1986); see also Santamaria-Ames v. INS, 104 F.3d 104 F.3d 1127, 1133 (9th Cir. 1996) 17 (citing INS v. Miranda, 459 U.S. 14, 18–19 (1982)). 18 Here, Defendants’ estoppel claim must fail. Defendants have given the Court no reason to 19 believe that Plaintiff’s delay in identifying VersaCheck as illegal resulted from “affirmative 20 misconduct going beyond mere negligence . . . .” Gamboa-Cardenas, 508 F.3d at 502. Plaintiff’s 21 “mere unexplained delay” in asserting that Defendants’ marketing of Qchex violates the Final Order 22 is insufficient to establish the affirmative misconduct required for estoppel against the government. 23 Jaa, 779 F.2d at 572. And the Court’s order granting Plaintiff’s proposed injunctive relief, which 24 explicitly contemplated that the Final Order would apply beyond Qchex, undermines Defendants’ 25 claim that Plaintiff affirmatively misrepresented the scope of its investigation as limited to Qchex. 26 (See Doc. No. 117, at 13.) 27 28 CONCLUSION For the reasons stated, Defendants’ motion to limit the scope of the show cause hearing is -5- 06cv1952 1 DENIED. At the show cause hearing, Plaintiff may present its case as to why Defendants’ marketing 2 of VersaCheck violates the Final Order. No later than October 18, 2010: 3 (1) Defendants SHALL SERVE Plaintiff with a disclosure for their expert witness, Mr. 4 Fisher, consistent with the requirements of Federal Rule of Civil Procedure 26(a)(2); 5 and 6 7 8 (2) The parties SHALL EXCHANGE lists of exhibits and witnesses to be offered at the show cause hearing. IT IS SO ORDERED. 9 10 11 12 DATED: September 27, 2010 Honorable Janis L. Sammartino United States District Judge 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -6- 06cv1952
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