Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—S.D.N.Y.: Unfair trade practices claims against tax enterprise may proceed, (Jan 21, 2014)

By Edward L. Puzzo, J.D.

Allegations of unfair trade practices by a tax and small business enterprise adequately pleaded individual liability of corporate officers and causation, the federal district court in New York has ruled (Federal Trade Commission v. The Tax Club, Inc., January 17, 2014, Furman, J.).

The Federal Trade Commission (FTC) and the states of Florida and New York brought an action against The Tax Club and associated individuals and corporations, alleging deceptive trade practices in violation of the FTC Act, the Telemarketing Sales Rule (TSR), the Florida Deceptive and Unfair Trade Practices Act (FDUTPA), and the New York Executive Law and General Business Law.

Practices alleged. The Tax Club and related enterprises were engaged in the business of helping their customers to develop small businesses by selling tax advice and business planning services. It was alleged that Tax Club purchased sales leads and contacted potential customers by telephone, selling services such as “unlimited, year round consulting”; “comprehensive business plans”; and “personal business advisors.” They also offered financing for the purchase of these services.

It was alleged that the representations made by sales representatives in their phone calls were misleading in several ways: Customers are not able to recoup the purchase price of products and services they bought from defendants out of future business income as promised; they were unable to access a live tax or business advisor as promised; they did not receive individualized business plans as promised; and calls made for the purpose of selling additional services were misrepresented as calls proving previously paid for services. These practices resulted in numerous consumer complaints.

Based upon these allegations, a temporary restraining order and a preliminary injunction were entered defendants, prohibiting them from making false or misleading statements, or failing to disclose certain information to people receiving calls from the them, and establishing a monitoring program to record sales, billing, and fulfillment calls.

FTC Act and TSR. Defendants alleged that the complaint failed to allege the elements required for individual liability under the FTC Act and the TSR. In order to state a claim for individual liability for deceptive telemarketing practices, the court explained, plaintiffs must allege “(1) that the individuals participated directly in the wrongful acts or practices or that the individual defendants had the authority to control the corporate defendants; and (2) that the individuals had some knowledge of the acts or practices.” Plaintiff Johnson’s argument that the complaint failed to allege authority to control, direct participation in the wrongful acts, and knowledge of the wrongful acts, was not persuasive, the court stated. Authority to control the company can be evidenced by active involvement in business affairs, assumption of the role of president, and authority to sign documents on behalf of the corporation.

Not only did the complaint allege sufficient factual content to support the authority-to-control prong, but it also alleged sufficient facts supporting the direct participation prong, the court ruled. It also sufficiently alleged the knowledge requirement by showing the individual had actual knowledge of material misrepresentations, reckless indifference to the truth or falsity of such misrepresentations, or an awareness of a high probability of fraud along with an intentional avoidance of the truth. Thus defendants’ motion to dismiss on this basis was denied.

FDUPTA claim. Defendants also alleged that Florida’s FDUPTA claim for injunctive relief failed to adequately plead causation. The Florida Attorney General is not required to plead that the allegedly deceptive conduct caused harm to individual consumers, nor name the consumers affected by the allegedly fraudulent conduct, the court explained. Instead, the pleading must simply allege that the defendants had violated or is violating or is likely to violate FDUPTA. Since the pleadings did meet these requirements, defendants’ motion to dismiss the FDUPTA claim was denied, the court ruled.

The case is No. 13 Civ. 210 (JMF).

Attorneys: Ann F. Weintraub, Darren H. Lubetzky, and Savvas Socrates Diacosavvas for the Federal Trade Commission. Judith A. Archer (Fulbright & Jaworski LLP) for The Tax Club, Inc., Manhattan Professional Group, Inc., 5410, Inc., Marble Base, Inc., and 6015, LLC. Derek Robert Young (Young Law) for 1800 Accountant, LLC. Jeffrey D. Knowles and Michael Colbert Hartmere (Venable, Baetjer, Howard & Civiletti) for Edward B. Johnson.

Companies: The Tax Club, Inc.; Manhattan Professional Group, Inc.; 5410, Inc.; Marble Base, Inc.; 6015, LLC; 1800Accountant, LLC

Cases: StateUnfairTradePractices ConsumerProtection NewYorkNews FloridaNews FederalTradeCommissionNews