Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—C.D. Cal.: Lifetime ban, $25 million restitution award imposed on biz opp marketer, (Sep 22, 2014)

By Jeffrey May, J.D.

Marketers of the “Wealth Building Home Business Plan” have been ordered by the federal district court in Los Angeles to pay more than $25 million to provide consumer redress to victims of their deceptive work-at-home scheme. In addition, an individual defendant was banned for life from involvement in marketing work-at-home business opportunities. In granting the government’s motion for summary judgment, the court asked that the government file a proposed judgment and injunction against the defendants within 10 days (U.S. v. Zaken Corp., September 18, 2014, Pregerson, D.).

In 2012, the Department of Justice, on behalf of the FTC, filed a complaint against Zaken Corporation and its president, Tiran Zaken, for violations of the FTC Act and the Commission’s Business Opportunity Rule. According to the FTC, the defending marketers claimed that consumers could earn substantial income by finding businesses with excess inventory that the defendants could sell to interested buyers.

The defendants disputed the allegations that their conduct violated the FTC Act. However, they provided no argument, authority, or evidence to support that position, according to the court.

On the other hand, the government, cited to numerous instances in which the defending marketers directly or indirectly represented that purchasers of the business opportunity would earn substantial income. It was also established that fewer than one percent of consumers ever earned any income at all. Moreover, it was reasonable for consumers to rely on the misrepresentations and the misrepresentations were material.

Business Opportunity Rule. The court ruled that the defendants' program fell within the ambit of the Business Opportunity Rule. The Rule prohibits marketers of work-at-home opportunities from deceiving their victims with promises of an ongoing relationship in which the seller will furnish “customers” or “outlets” to the consumers or buy the output that the business opportunity purchasers produce. The defendants represented that they would take steps necessary for consumers to earn commissions. The defendants implicitly represented to consumers that an outlet for their services would be provided, the court explained. Thus, the conduct involved representations regarding the furnishing of “customers” or “outlets” to consumers under the Rule.

Relief. Almost the entirety of the defendants’ opposition to the government’s summary judgment motion was directed at the relief sought, the court noted. The defendants took issue with: (1) the proposed lifetime ban on Tiran Zaken’s involvement in marketing work-at-home business opportunities and (2) the proposed $25 million judgment.

The court concluded that a lifetime ban on Tiran Zaken was more appropriate than the defendants' proposed “follow the law” injunction forbidding him from violating the Business Opportunity Rule. As the defending company's president, Tiran Zaken oversaw most its departments, approved advertising, and reviewed marketing materials. The court also noted that Zaken did not “appear contrite about his decade of deceptive conduct.” Moreover, the defendants' proposed remedy would be wholly inadequate to protect consumers in the future, in the court's view.

Restitution. The defendants failed to convince the court that the FTC’s restitution figure was not a reasonable approximation of consumers’ losses resulting from the misrepresentations. The FTC calculated consumer losses of $25,666,437. The defendants provided evidence that they paid out $259,656 in commissions that mitigated consumer losses. Thus, the court awarded restitution of $25,406,781 for consumer redress.

The case is No. CV 12-09631 DDP (MANx).

Attorneys: Lisa K. Hsiao, U.S. Department of Justice, for United States. William I. Rothbard (Law Office of William I. Rothbard) for Zaken Corp.

Companies: Zaken Corp.

Cases: ConsumerProtection FranchisingDistribution FederalTradeCommissionNews CaliforniaNews