Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—DNev: Sanctions Issued Against Alleged Money-Making Scheme in FTC Action, (Jun 10, 2013)

By Tobias J. Gillett, J.D., LL.M.

The federal district court in Reno, Nevada, has imposed sanctions on two groups of defendants in an FTC action against a government grant and money-making opportunity operation for failure to respond to court orders (FTC v. Johnson, June 6, 2013, Du, M.). The court also denied one group of defendants’ motion to dismiss, concluding that the FTC adequately pled its claims; denied a motion to dismiss filed by various relief defendants, finding that the court could exercise personal jurisdiction over them and that the FTC adequately pled their nominal defendant status; and struck certain affirmative defenses.

On December 21, 2010, the FTC filed suit against a range of individuals and entities, including I Works, Inc. and Elite Debit, Inc., engaged in offering allegedly fraudulent government grant and money-making opportunities. The court entered a preliminary injunction against the defendants and appointed a receiver. The court later found that certain third-party-owned assets constituted receivership assets, and the FTC filed an amended complaint naming relief defendants.

Motion for sanctions. The court approved a report and recommendations by the magistrate judge advising that two groups of defendants should face sanctions for failing to respond to a court order that they should retain local counsel, and against one group for failing to comply with an order compelling responses to the FTC’s interrogatories. Failing to comply with a court order was “a serious violation,” compounded by the complexity of the case and the amount of judicial resources it demanded. Although the defendants claimed to have been without representation during the relevant period, the court noted that one group was still represented by outside counsel, and had representatives who could communicate with the FTC, while the principal of the other group had retained local counsel for himself with “plenty of time within which to respond to the Court’s orders” regarding representation for the corporate entity.

However, the magistrate’s recommended sanction of default was “too severe.” Therefore, the court granted an award of attorney fees and costs to the FTC.

I Works motion for judgment on the pleadings. The court also concluded that the FTC sufficiently alleged its claims against defendants associated with I Works. The FTC alleged the identities of the individuals behind the allegedly fraudulent scheme and how they related to each other, described the nature of the allegedly fraudulent activity, stated when and where the scheme operated, and pled “in detail how consumers were allegedly tricked into purchasing fraudulent products, how Defendants propped up the reputation of these services online, and how they evaded consumer-initiated chargebacks from banks, among other allegations.”

Since the FTC’s allegations concerning the primary corporate defendants met the federal pleading standards, and the FTC made “plausible and particular allegations of a common enterprise of conspiracy,” its failure to allege with particularity the involvement of every shell company did not defeat its claims. The complaint sufficiently identified the nominal owner of each entity and its relationship with I Works.

Relief defendants’ motion to dismiss. The court denied a motion to dismiss filed by various relief defendants challenging their designation as nominal defendants. The court concluded that FTC Act Section 12(b) extended to relief defendants who had not themselves violated the Act, citing courts’ treatment of similar language in the context of securities fraud. Therefore, the court could exercise personal jurisdiction over the relief defendants.

Moreover, the FTC “adequately pled the nominal defendant status” of the relief defendants, in the court’s view. The complaint provided numerous, specific examples of transfers made to the relief defendants, and identified who was involved in the transfers, what the nature of the assets transferred was, the relative timing of the transfers, and how the “transfers fit into a larger scheme of allegedly unlawful conduct.”

Motion to strike affirmative defenses. Finally, the court addressed the FTC’s motion to strike certain affirmative defenses raised by two groups of defendants. The court struck as improper the defendants’ attempts to assert failure to state a claim and blanket denials of the FTC’s allegations, noting that they are not affirmative defenses. The court also struck as improper two affirmative defenses purporting to reserve future affirmative defenses as not compliant with Federal Rule of Civil Procedure 15. “In the abundance of caution,” the court declined to strike one defendant group’s defenses based on its “ability to modify or alter any other Defendants’ marketing practices” and its lack of approval of the other defendants’ misrepresentations, “since the precise theories raised by these defenses to escape liability is unclear without additional briefing.”

The court also denied motions by various non-parties to lift a stay on certain counterclaims and cross-claims filed in a Utah state court case and to order the receiver to segregate certain assets, because the non-parties did not allege any legitimate basis for their motions. The court granted the receiver’s motion to seal confidential and personal information contained in the deposition of an individual. The court denied a motion by the I Works defendants for leave to file an opposition to the FTC’s motion to amend its complaint, since the court had already granted the motion to amend, and hence the motion for leave was moot.

The case is No. 2:10-cv-02203-MMD-GWF.

Attorneys: Collot Guerard for FTC. Jared Green (McCormick, Barstow, Sheppard, Wayte & Carruth LLP) for Duane Fielding. D. Neal Tomlinson (Snell & Wilmer L.L.P.) for Scott Muir. Edward D. Boyack (Boyack Beck & Taylor) for Terrason Spinks. Gregory A. Miles (Royal & Miles LLP) for I Works, Inc. Scott T. Evans (Christensen & Jensen) for Cloud Nine Marketing, Inc. Karra J. Porter (Christensen & Jensen) for CPA Upsell, Inc. Joseph S. Kistler (Hutchison & Steffen LLC) for Todd Vowell.

Companies: I Works, Inc.; Cloud Nine Marketing, Inc.; CPA Upsell, Inc.; Elite Debit, Inc.

Cases: ConsumerProtection FederalTradeCommissionNews NevadaNews