Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—DColo: FTC Attorneys Sanctioned, Summary Judgment Denied to Both Parties in Action Alleging Deceptive Money-Making Scheme , (Mar 13, 2013)

By Tobias J. Gillett, J.D., LLM.

In two separate orders in an FTC and State of Colorado civil action against parties responsible for an alleged scheme to deceive consumers into buying information related to a money-making method, the federal district court in Denver has denied summary judgment to both parties, has denied a defense motion to exclude two of the FTC’s expert witnesses, and has sanctioned FTC attorneys for acts of professional misconduct (FTC v. Dalbey, March 11, 2013; Sanctions Decision, March 11, 2013, Jackson, R.).

The FTC alleged that Russell and Catherine Dalbey, and several corporate entities through which they operated, deceived consumers into paying for seminars and other programs and materials on making money through brokering promissory notes. The materials and seminars allegedly had little or no value. The FTC and the State of Colorado asserted that the defendants’ actions violated the FTC Act; the FTC’s Telemarketing Sales Rule, issued pursuant to the Telemarketing and Consumer Fraud and Abuse Act; and the Colorado Consumer Protection Act.

Summary Judgment. The court denied motions for summary judgment by the defendants, the FTC, and the State of Colorado, concluding that genuinely disputed issues of material fact precluded summary judgment. The court listed a variety of these issues, including the question whether “some customers ma[d]e money quickly and easily using the program’s methods.” The court found testimonials incorporated into the defendants’ infomercials and presented as evidence to be “hearsay to the extent that they are offered to prove the truth of what they assert.” Moreover, trial would assist in evaluating their credibility.

The question whether the defendants “claimed that customers were likely to make money” was also disputed, because the infomercials could have conveyed that message even if it was not stated expressly. So was the truth of the assertion that “only 296 of more than 900,000 customers made any money, and most of those who did made very little.” The question whether the challenged claims were “mere puffery” would depend on the context, and would benefit from “actual testimony and other evidence presented under oath.”

The “net impression” consumers would receive from the defendants’ advertising was also disputed, and neither side had provided a survey of consumer reactions. The presence, visibility or audibility, and prominence of disclaimers also presented disputed issues, and the court “wishe[d] to hear testimony about the disclaimers from defendants and from consumers.” The amount of appropriate relief also presented concerns that the court would prefer to resolve through testimony in court.

Expert Testimony. The court also denied the defendants’ motion under Federal Rule of Evidence 702 to exclude two survey experts the FTC and the State of Colorado sought to use as witnesses. The experts had conducted a survey to determine the earnings and profits obtained by consumers of the defendants’ products and services.

The defendants contended that the surveys were not independent and unbiased because “a significant part” of one experts’ compensation came from the FTC, and the surveys were sent in envelopes that “implicitly” indicated that consumers’ responses could be shared with other federal agencies such as the Internal Revenue Service. The court concluded that such arguments went to the weight to be given to the experts’ testimony, not its admissibility.

The court reached the same conclusion with respect to criticisms leveled at the methods employed by the experts. Although the court had stated in a previous hearing that some of the criticisms sounded “pretty legitimate,” the court noted that a judge in a previous decision had accepted that the methods complied “with generally accepted standards in the field,” and that the experts had “substantial and appropriate qualifications.” The court chose to permit the testimony, subject to appropriate foundation as to the nature and reliability of the methods used.

Sanctions. In their motion for sanctions based on three alleged incidents of professional misconduct by the FTC, the defendants requested dismissal of the FTC’s claims as the appropriate sanction. The court disagreed, but found that certain actions by FTC attorneys did warrant sanction.

The first incident involved 24 phone calls made by an FTC investigator posing as a potential customer to employees of the defendants and surreptitiously recorded by the FTC, with the approval of the FTC’s lead counsel in the case. The defendants claimed that this conduct was contrary to a Colorado Bar Association Ethics Committee opinion finding that “it is generally improper for an attorney to engage in surreptitious recording even if the recording is legal under state law,” and that directing or authorizing another to do so was also improper.

The FTC contended that the Colorado Rules of Professional Conduct provided that the rules of the jurisdiction in which the lead attorney’s conduct had occurred would apply “unless the predominant effect of the conduct is in a different jurisdiction, in which case that jurisdiction’s rules apply”; that the lead attorney was licensed in jurisdictions that permitted surreptitious telephone calls; that he had a good faith belief that the predominant effect of the calls would be in Washington, D.C., and that the Colorado Attorney General did not believe that undercover recordings during a law enforcement investigation were impermissible.

The court found that the recordings were made in the good faith belief that they were not proscribed, and that the FTC did not use the calls in its summary judgment papers and would not use them at trial. The court noted that any ethical concerns could be reported to Colorado’s Office of Attorney Regulation Counsel. Therefore, the court declined to sanction the FTC on that basis.

The second alleged incident involved three errata sheets prepared to correct the deposition testimony of one of the FTC’s expert witnesses. The court found that one incident in which an FTC attorney talked to the witness about an issue before the first errata sheet was prepared was “not particularly troublesome.” The FTC attorney did acknowledge that talking to the witness prior to preparation of the third errata sheet “was a mistake on her part.”

More disturbing to the court, however, were the defendants’ allegations that an FTC attorney had proposed to have the expert withdraw his third errata sheet and substitute the substance of the first sheet, conditioned on the defendants’ agreement not to refer to the latest errata sheet in the litigation. The FTC stipulated that the proposed changes to the third errata sheet were improper under the standard of Federal Rule of Civil Procedure 30 (e).

The court expressed its concern about the notions “that errata sheets are negotiable,” and that “it is ok to condition the modification or withdrawal of an errata sheet on the defendants’ agreement not to refer to it in the case.” However, the court found dismissal of the case to be inappropriate, opting instead to strike the first and third errata sheets, and permitting the defendants to re-depose the expert at the FTC’s expense, including about how the versions of the errata sheets were developed.

The third alleged incident involved a telephone call made by the FTC’s lead attorney to a witness’s attorney in which the lead attorney accused the witness of lying during a deposition, and informed the witness’s attorney that he should review the deposition testimony and “correct or even change his testimony, using the errata sheet.” The lead attorney suggested that “depending on what he did, they might or might not refer him to the Department of Justice.”

The witness’s attorney stated that he interpreted the lead attorney’s call to be a threat, although the FTC claimed that was not the attorney’s intent. Rather, the lead attorney claimed he intended to give the witness a chance to fix his testimony if he had testified falsely, but that he now regretted that decision.

The court agreed with the defendants that the statement “was reasonably perceived as a threat.” However, although the court found had “exercised poor judgment” and “set a poor example,” it found his intent was probably not to threaten the witness. Moreover, the lead attorney claimed to have learned from the experience, and had apologized to the court.

The court observed that the call could still have prejudiced the defendants, in that the witness’s testimony may have favored the defendants, and the witness had withdrawn from further involvement in the case following the perceived threat. Therefore, the court ordered that if the witness agreed to testify at trial, all costs would be borne by the FTC; that his deposition testimony would be admitted if the defendants requested; that the defendants could take another deposition of him, if desired, with costs borne by the FTC; that the FTC would have to provide reimbursement for his testimony at a hearing; and that the lead attorney would have to make an apology to both the witness and his attorney.

The case is Civil Action No. 11-cv-1396-RBJ-KLM.

Attorneys: David P. Frankel for Federal Trade Commission. Jay Beebe Simonson (Colorado Attorney General's Office) for State of Colorado. Edward Francis Glynn, Jr. (Manatt, Phelps & Phillips, LLP) for Russell T. Dalbey.

Companies: DEI, LLLP; Dalbey Education Institute, LLC; IPME, LLLP

Cases: ConsumerProtection StateUnfairTradePractices ColoradoNews