Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—N.D. Ill.: Default vacated in FTC action against marketer charged with Internet directory scheme, (Dec 12, 2014)

By Linda O’Brien, J.D., LL.M.

The federal district court in Chicago has vacated a default judgment and permanent injunction entered against a Slovakian company charged in an FTC action with fraudulently inducing businesses and non-profit organizations to pay for unordered listings in an online directory. A preliminary injunction was reinstated and the defendants’ motion to modify the asset freeze was denied (FTC v. Construct Data Publishers, December 11, 2014, Wood, A.).

In March 2013, the FTC filed a complaint against Slovakian company Construct Data Publishers, doing business as Fair Guide, and its two nonresident principals, Wolfgang Valvoda and Susanne Anhorn, for violations of the FTC Act. The FTC charged that the defendants deceived small businesses and non-profit organizations in the United States into paying millions of dollars for unordered and unwanted listings in an online directory. The court granted the FTC’s motion for a temporary restraining order with an asset freeze and a preliminary injunction. The defendants initially appeared through counsel, but subsequently directed their counsel to withdraw and defaulted. In February 2014, the court entered a default judgment in the amount of $9.1 million and imposed a permanent injunction. Through new counsel, the defendants filed a motion to vacate the default judgment and order for permanent injunction and a motion to modify the asset freeze.

Personal jurisdiction. The court determined that it had personal jurisdiction over the two individual defendants. Due process requires that a nonresident defendant have certain minimum contacts with the forum as to not offend “traditional notions of fair play and substantial justice.” Both individual defendants purposefully availed themselves of the privilege of conducting business activities within the United States, and those activities related to the claims brought by the FTC. The FTC presented evidence that the defendants had extensive personal communications with a U.S. company, directing that company to print and disseminate direct mail campaigns on behalf of Construct Data. The orchestration of the dissemination of direct mail communications—the same activity that the FTC challenged as fraudulent—was sufficient to create minimum contacts in the United States.

Default judgment. The court found that the default judgment should be vacated. Federal Rule of Civil Procedure Rule 60(b) allows a default judgment to be vacated if the movant demonstrates (1) good cause for the default, (2) timely action to correct it, and (3) a meritorious defense to the complaint.

According to the court, the disproportionate size of the default judgment in comparison with the minimal prejudice caused to the FTC represented good cause to vacate the default judgment and permanent injunction. However, the FTC was allowed to request an appropriate sanction against the defendants for having incurred additional attorneys’ fees and costs associated with the vacated default. Second, the defendants took prompt action to correct the default and filed their motion to vacate 28 days after entry of the judgment. Third, the defendants presented potentially meritorious defenses to the complaint. Their assertions that there were disclosures on the direct mail forms regarding the charges for the listings and the two principals were unaware that the practices were misrepresentations was a sufficient showing that there were genuine disputes of material facts with respect to the defendants’ liability.

Asset freeze order. The defendants’ motion to modify the asset freeze to pay their attorney fees and reasonable living expenses was denied. The court noted that the defendants should not be permitted to spend otherwise frozen assets with first providing an accounting of those assets. Furthermore, the defendants provided no information to the court regarding the nature and value of the defendants’ assets or the extent to which allowing them to use those assets would diminish funds available to pay a future judgment requiring restitution to victims or disgorgement of ill-gotten gains.

The case is No. 13-cv-01999.

Attorneys: Guy G. Ward for Federal Trade Commission. Daniel T. Fahner (Greenberg Traurig, LLP) and Lori E. Lightfoot (Mayer Brown LLP) for Construct Data Publishers a.s.

Companies: Construct Data Publishers a.s.

Cases: ConsumerProtection IllinoisNews FederalTradeCommissionNews