Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—S.D. Fla.: Stay, relief from asset freeze denied in FTC action against purported health insurance operation, (Sep 19, 2013)

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

The federal district court in Miami has denied requests by the defendants in an FTC action against a purported health insurance operation to stay the proceedings pending an appeal of the court’s preliminary injunction against the operation and to unfreeze certain assets in order to pay the defendants’ living expenses (FTC v. IAB Marketing Associates, LP, September 18, 2013, Scola, R.).

IAB Marketing Associates, LP and various other entities and individuals sold healthcare plans by getting consumers to join an association purporting to offer members major or traditional health insurance, or its equivalent. The FTC filed a complaint 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 the equivalent of such insurance,” in violation of Section 5 of the FTC Act, and that they had committed various violations of the Commission’s Telemarketing Sales Rule.

On September 18, 2012, the court entered a temporary restraining order that included an asset freeze. Following a hearing, the court entered a preliminary injunction 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. On June 4, 2013, the court denied a motion for a relief from the asset freeze to pay attorneys’ fees (2013-1 Trade Cases ¶78,411). In the present motion, the defendants sought a stay of the proceedings while their appeal of the preliminary injunction was pending, and relief from the asset freeze to pay their living expenses.

Stay of proceedings. The court denied the motion for a stay pending the appeal. The court explained that a court evaluating a motion for a stay pending an appeal must consider four factors: “(1) whether the stay applicant has made a strong showing that it is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies.”

The court found that none of the factors supported staying the case. The court noted that the defendants did not “even argue that they are likely to succeed on the merits of their appeal” in their opening brief. Although the defendants did advance such arguments in their reply brief, those arguments were waived, and were not persuasive even if the court were to consider them. The court had specifically found that the FTC had established the requisite likelihood of success in showing that the defendants had made “serious misrepresentations,” and that it would be able to show that the individual defendants either knew of the misrepresentations, were recklessly indifferent to them, or were aware of a high probability that they were made but intentionally avoided the truth. Therefore, the defendants’ arguments that there was no evidence that they made misrepresentations, were recklessly indifferent to them, or approved of them, and that there was insufficient evidence that consumers were confused about what they were buying, were meritless. The defendants’ argument that the FTC had not sufficiently supported the amounts it claimed as restitution was also meritless, because the defendants’ own records showed that their revenue, the proper measure of ill-gotten gains, was not less than $125 million.

Moreover, the three remaining equitable factors also did not favor a stay. Litigation expenses were not an irreparable injury, and therefore the defendants could not assert the injury they would allegedly suffer from having to simultaneously litigate in the district and appellate courts as support for a stay. Moreover, the court had previously found in declining to unfreeze funds that the public interest was best served by maintaining the asset freeze. Issuing a stay “would also likely prolong the receivership and, by stopping the underlying litigation’s progress, increase the likelihood that funds that are not yet part of the Receivership but should be are dissipated before they can be frozen.” The court found that “[e]quity favors the injured consumers over the Defendants who did the injuring and are now suffering the consequences of their conduct.”

Asset freeze. The court also denied the defendants’ request to lift the asset freeze in order to pay living expenses. The court explained that district courts have the discretion to deny a request to lift a stay to pay living expenses when the frozen assets are less than the amount needed to compensate consumers for their losses. The amount of ill-gotten gains, as measured by revenue, was at least $125 million, while the highest amount that could be ascribed to the frozen assets was approximately $2.812 million. Therefore, the amount of money that would be required to adequately redress consumers vastly exceeded the amount of frozen assets, and the equities favored preserving the assets to protect consumers.

Moreover, the three individual defendants requested a total of $34,650 for monthly living expenses, or over $415,800 annually, an amount the court found “unreasonable.” The annual living expenses exceeded the $329,210.54 of cash-on-hand possessed by the receivership, “would continue to fund a lifestyle unavailable to nearly all Americans,” and included sums for items that the receiver was already required to pay. Further, nothing in the preliminary injunction prevented the defendants from working to support themselves. None of the defendants stated that they had sought work. Although one of the defendants claimed that the injunction would make finding work in his licensed fields “difficult to impossible,” he provided no support for that statement, and even if it was true he did not state that he was unable to find work in other fields. Without other evidence, the court concluded that the defendants were capable of working to pay for their basic necessities.

The court rejected the defendants’ argument that assets obtained before the alleged wrongdoing should be excluded from the asset freeze. The amount of assets that should be frozen was to be determined “by showing a reasonable approximation of the amount, with interest, that the defendant was unjustly enriched,” not by whether the assets were traceable to the fraudulent activity.

The court also rejected the defendants’ contention that the FTC had incorrectly measured the amount of ill-gotten gains by ignoring “(1) refunds that were made; (2) instances where the consumer actually got the benefit they bargained for; (3) amounts spent towards satisfying operating costs and overhead; and (4) payments to the providers of the products that IAB sold through its membership plans.” The $125 million was calculated based on sales less chargebacks and refunds, and the costs identified in (3) and (4) did not count against revenue, which was “a measure of the money taken in excluding costs.” Even if the costs were considered, the ill-gotten gains would still vastly exceed the amount of frozen assets. Finally, the court had already found that the FTC would likely succeed in showing that consumers did not get what they were bargaining for, and “even if some allowance were made for the other ‘benefits’ of becoming a member in the Defendants’ association, the resulting figure” would still far exceed the amount of the frozen assets.

The case is No. 12-61830-Civ-SCOLA.

Attorneys: Dotan Weinman and Patricia B. Hsue for FTC. David P. Reiner, II (Reiner & Reiner PA) and Jeffrey Bruce Crockett (Coffey Burlington, P.L.) for IAB Marketing Associates, LP.

Companies: IAB Marketing Associates, LP

Cases: ConsumerProtection FederalTradeCommissionNews