Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—11th Cir.: Preliminary injunction, asset freeze upheld in FTC action against health insurance operation, (Mar 28, 2014)

By Linda O’Brien, J.D., LL.M.

In an FTC action against a purported health insurance operation for deceptive trade practices, the federal district court did not err in entering a preliminary injunction and freezing the assets of the operation, the U.S. Court of Appeals in Atlanta has ruled (Federal Trade Commission v. IAB Marketing Associates, LP, March 27, 2014, Per Curiam.).

IAB Marketing Associates, LP and various other entities and individuals sold healthcare plans by getting consumers to join a trade association purporting to offer members major or traditional health insurance, or its equivalent. The FTC filed a complaint for deceptive trade practices in the federal district court in Miami, asserting that the IAB entities and individuals had misrepresented that the products they offered were major or traditional health insurance or its equivalent, in violation of Section 5 of the FTC Act and the Telemarketing Sales Rule.

In September 2012, the court entered a temporary restraining order that included an asset freeze. Following a hearing in October 2012, the court entered a preliminary injunction barring the defendants from making any further sales, continuing the asset freeze, and appointing a permanent receiver, concluding that the FTC had shown it was likely to succeed on the merits of its case. In June 2013, the court denied the defendants’ motion for relief from the asset freeze to pay attorneys’ fees. The defendants’ motion to stay the proceedings pending appeal and relief from the asset freeze to pay living expenses was denied in September 2013. The defendants appealed the entry of the preliminary injunction.

Preliminary injunction. The district court did not err in entering the preliminary injunction, including an asset freeze, according to the appellate court. To obtain a preliminary injunction, the FTC must show that it is likely to succeed on the merits and injunctive relief is in the public interest. IAB’s arguments that the misrepresentations were made by rogue third-party telemarketers and that customer failed to read disclosures sent to them after their purchases were rejected. Individuals may be liable for FTC Act violations committed by a corporate entity if the individual participated directly in the deceptive practices or had authority to control them. The court noted that (1) the FTC presented ample evidence that IAB and the individual defendants knew that the telemarketers were making material misrepresentations to consumers; (2) the disclosures sent to customers after their purchases did not cure the misrepresentations during the initial sales; and (3) although the products sold offered value to customers, liability for deceptive sales practices did not require that the products be worthless.

Asset freeze. The district court also did not abuse its discretion in freezing the defendants’ assets. An asset freeze was within the district court’s equitable powers. It was not required to first calculate the amount by which the defendants had unlawfully enriched themselves before freezing the assets, according to the court. Although the products sold may have had some residual value, the salient issue in the case was whether the seller’s misrepresentations tainted the customer’s purchasing decisions and not to the value of the products sold.

Preemption. Finally, the McCarran-Ferguson Act (MFA) did not reverse-preempt the FTC’s enforcement claims. The MFA exempts the business of insurance from most federal regulation. To determine whether an activity constitutes the business of insurance, the activity must (1) have the effect of spreading a policyholder’s risk; (2) be an integral part of the policy relationship between the insurer and insured; and (3) be limited to entities within the insurance industry. In this case, the activities of IAB did not constitute the business of insurance, according to the court. IAB sold trade association memberships offering medical discounts which is not insurance; had no insurance relationship with its customers; and its practice of selling trade association memberships with medical discount plans was not limited to entities in the insurance industry. Thus, reverse-preemption under the MFA did not apply, the court concluded.

The case is No. 12-16265.

Attorneys: Theodore Paul Metzler, Jr., Office of General Counsel for the FTC. Armando Rosquete (Coffey Burlington, PL) for IAB Marketing Associates, LP, d/b/a IAB and Independent Association Of Businesses.

Companies: IAB Marketing Associates, LP

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