Opinion
Case No. CV-98-9260-MMM (CWx)
January 18, 1999
ORDER GRANTING PLAINTIFF'S APPLICATION FOR PRELIMINARY INJUNCTION
The Federal Trade Commission brings this action under § 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b), against Arlington Press, Inc., and that company's principals, David Umholtz and Wendy Foster. It seeks preliminary injunctive relief, under Rule 65 of the Federal Rules of Civil Procedure, prohibiting defendants from engaging in unfair or deceptive acts and practices in violation of § 5(a) of the FTCA, 15 U.S.C. § 45(a). The Commission also alleges violations of the Telemarketing Sales Rule, 16 C.F.R. § 310.3. The court having considered the pleadings, declarations, exhibits, and memoranda filed in support thereof, finds that a preliminary injunction should issue in this case, extending the terms of the temporary restraining order issued by this court on November 18, 1998.
I. INTRODUCTION
This matter first came before the court on plaintiff Federal Trade Commission's ("FTC") Emergency Motion for a Temporary Restraining Order and Preliminary Injunction filed on November 18, 1998. The FTC's application and complaint alleged that defendants were engaged in deceptive telemarketing practices in violation of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. § 45(a). The court granted plaintiff's Motion for a Temporary Restraining Order, and scheduled a December 3, 1998 hearing on an Order to Cause re Preliminary Injunction. The hearing was subsequently continued by stipulation to December 10, 1998, then to December 21, 1998, and finally to January 11, 1999. At the hearing on January 11, the court heard live testimony from two witnesses who had provided declarations. In order to consider this testimony and the arguments of counsel, the court continued the temporary restraining order in effect until January 18, 1999 and indicated that it would issue its order regarding the application for preliminary injunction on that date.
II. FACTUAL BACKGROUND
Defendant Arlington Press, Inc. ("Arlington") is a California corporation that conducts business under name "Consumer Data Service." (Pl.'s Ex. 33 at 792-93, 796.) Arlington's principal place of business is in Santa Barbara, California. Defendants David T. Umholtz and Wendy Foster are owners, officers and directors of Arlington. (Id. at 802.) Since about May 1996, defendants have advertised and marketed "how to" guides and lists concerning auctions of government seized cars, home foreclosure sales, and at-home and government employment, to consumers throughout the United States. (Complaint, ¶ 9.) Since it commenced business, Arlington has disseminated over five hundred million flyers through direct mailings sent to consumers by coupon companies, and placed advertisements in newspapers. (Def.'s Exs. 2-4.)
Defendants did not file a memorandum of points and authorities opposing the FTC's application. Instead, their opposition consists of exhibits and declarations purporting to refute certain of the FTC's claims. Much of the FTC's proof and many of its allegations, however, are uncontested. Where disputed facts and characterizations of defendants' conduct exist, they are noted.
A. Arlington's Advertisements
1. Government Seized Car Auction Guides And Lists
The Arlington advertisement entitled "SEIZED CARS FROM $200" and prominently depicts a photographs of a late-model Ford Mustang and the following text:
"For Current Local Listings, Call Toll Free 7 Days 1-800-883-0819 ext. A-7228
• DEA • FBI • SHERIFF • U.S. MARSHAL • IRS • U.S. CUSTOMS • STEREOS • VCR'S • CARS • BOATS • TRUCKS • 4X4'S • JEWELRY • COMPUTERS • LIVE STOCK • FARM EQUIPMENT • OVER 1 MILLION CARS SOLD EVERY MONTH! •" (Def.'s Ex. 22, at 113; Receiver's Report, Ex. "C.")
2. Home Foreclosure Sale Guides And Lists
One Arlington advertisement entitled "GOV'T FORECLOSED HOMES" depicts a house with a white picket fence with the words "YOUR AREA" written diagonally across it. (Plaintiff's Ex. 1 at 11; Parsons Decl., Att. "A.") The advertisement reads:
"For Current Local Listings Call: 1-800-883-0819 ext. H9034
NO MONEY DOWN • MUST BE SOLD • BUY FOR PENNIES ON THE DOLLAR • 100% GOV'T FINANCING FROM VA • HUD • FDIC • RECD • SBA • IRS • GSA THOUSANDS OF HOMES SOLD EACH MONTH
TOLL FREE 7 DAYS • CALL NOW"
(Id.; see also Def.'s Ex. 22 at 113; Receiver's Report, Ex. "C.")
Arlington also ran ads in the classified section of newspapers that stated:
"GOVERNMENT FORECLOSED HOMES for pennies on $1. Delinquent Tax, Repo's, REO's. Your area. Toll free 1-800-218-9000 Ext. H-5139 for current listings." (Def.'s Ex. 13 at 61.)
3. Employment Guides Lists
Arlington ran ads in the employment classified sections of newspapers, that stated:
"ATTENTION! TYPIST/PC USERS. Steady work. Full-time/Part-time $45,000 per year earnings potential. Call toll free 1 800 883 0819 ext T-400" (Def.'s Ex. 17 at 88.)
Other ads read:
"$1000 POSSIBLE TYPING Part-time. At Home. Toll Free 1-800-218-9000 Ext. T-5139 for listings." (Id.)
Still others read:
"GOVERNMENT JOBS
Now Hiring in your area. $16,000 — $68,000. Call toll free 1-800-883-0819, ext. J-124" (Def.'s Ex. 20, at 101.)
B. Arlington's Products And Services
1. Auction Guides And Lists
Defendants have lodged with the court sample copies of the Guides and Listings that Arlington sold. Each set contains two books, a "how to" "Guide" and a directory of "Listings." The soft bound book entitled "Consumer's Guide to Government Auctions" ("Auction Guide") has cover photographs of a house with a white picket fence, an antique automobile, a yacht, an airplane, cash, a convertible Jaguar XKE, jewelry, a sport utility vehicle, and a motorboat. Some of the information and advice contained in the book is obvious ("Never overbid" or "Remember to buy low!"). By far the greater part of the information, however, is detailed instruction on how different types of auctions are conducted, descriptions of how the auctions conducted by various organizations differ, the types of property that are typically sold, definitions of auction terminology, etc. The Auction Guide also contains various checklists.
The book entitled "Consumer's Listings of Government Auctions" ("Auction Listings") has the same nine photographs on the cover. It is arranged by state, and identifies, for listed cities, the auctioneers or agencies holding auctions, their telephone numbers, and a brief description of the type of property they typically sell (e.g., "vehicles" or "real estate") or a cross-reference to the Auction Guide, where a longer list of typical items can be found.
2. Home Foreclosure Sale Guides And Lists
The publication entitled "Home Buyer's Guide to Foreclosed Real Estate" ("Foreclosure Guide") has a cover photograph of a tree-lined residential street. Like the Auction Guide, the Foreclosure Guide contains both obvious and non-obvious information that might be useful to persons seeking to purchase homes at foreclosure sales. It also contains checklists and forms.
The publication entitled "Home Buyer's Listings of Foreclosed Real Estate" is organized by state. It lists foreclosed properties purportedly available for sale by street address and city. For each property, the Guide lists an asking price, a brief description (such as "single family residence" or "3 bedroom"), a "contact" (which in most instances is nothing more informative than "property management"), the selling agency (such as "HUD" or "Freddie Mac"), and a telephone number for the agency.
3. Employment Guides And Lists
The publication entitled "Careers 2000 Guide" ("Career Guide") has a cover photograph of six one hundred dollar bills. Like the Auction and Foreclosure Guides, the Career Guide contains both obvious and non-obvious information that could be useful to persons seeking jobs. It contains general information and advice regarding different types of careers and entrepreneurial opportunities. It also contains sample ads and resume terms.
The publication entitled "Careers 2000 Listings" ("Career Listings") is organized by state, and lists employment offices, providing the agency name, address and phone number. The book also lists the U.S. Department of Labor and Veterans Administration offices, Fortune 500 companies, franchisors, trade organizations, trade schools, and alternative distribution firms (e.g., Mary Kay Cosmetics, Amway, etc.).
C. Telemarketing Sales Scripts
When the Receiver assumed control of Arlington, he obtained copies of a series of telemarketing scripts that were attached to the walls of the cubicles where the Arlington telemarketers had worked. (Chris Sweeney Decl., ¶ 4.) Copies of these scripts have been filed with the court. (Id.)
They include a Billing Script, a Bank Draft script, separate scripts for each of Arlington Press' products, and scripts to assist the telemarketers in overcoming customer objections.
1. Auction Script
This script directs the telemarketer to inform callers, before telling them they will be charged, that they will "be receiving listings of all the government public and private auctions that are available in your area. Auctions are held up to 6 times per month. You'll get catalogues in the mail telling you where and when the auctions are taking place and what items are available at them." The script does not inform callers that they will have to contact the government agencies in order to receive the referenced mailings. At the conclusion of the conversation, the telemarketer is direct to tell the caller to "[b]e sure to put the effort into using this for at least 90 days." (Id.)
If the telemarketer encounters resistance, they are to use a script entitled "Auction Objection Responses." Among the statements that this script suggests the telemarketers make are the following: "Oh, they just sold a `93 Toyota Camry for a thousand dollars, they do that all the time . . ." and "Oh, they just sold a `95 F150 pickup with 7,300 miles on it for only $2,700." that These statements strongly suggest that it is possible to purchase good quality vehicles for a fraction of their fair market value price.
Another portion of the "Objection Responses" script suggests the following response to questions concerning refunds or money-back guarantees: "We realize you didn't call here to get your money back. You called to get a car/home. The beauty of the program is that you'll continue to get free updates from the agencies listed in the guide until you find the car/home you're looking for." (Id., Att. "K.")
2. Home Foreclosure Script
This script directs the telemarketer to inform callers that the "listings [provided in the Guide] will have the physical street address, negotiable asking price and the contact name and number of the agent who is taking care of the property." Callers are also told that "[m]any of these homes have an asking price of 40-60% below the market value." They are advised that they will receive an additional guide: "Along with the foreclosures you'll receive information on the government sales and auctions where you'll find additional real estate for even less. . . . It's the other half of the package. You'll get a discount, so your total is $117.90. Write that down." Arlington also provided its telemarketers with a script for overcoming common objections made by those calling about the Foreclosure Guide, entitled "Home Objection Responses."
3. Employment Scripts
Two different telemarketing scripts address Arlington's Job Guides for at-home typing and government jobs. Callers are told that Arlington will "send out information for all Federal, State, City and County positions that are currently available" (emphasis added). Arlington also provided its telemarketers with a script for overcoming common objections made by those calling about the Career Guide. That script is entitled "Job Objection Responses."
D. Returns And Refunds
Defendants have filed a 449-page compendium listing all refunds made to customers between August 13, 1996 and August 19, 1998. (Def.'s Ex. 30.) While, as noted above, Arlington's script directed its telemarketers to deflect questions concerning its refund policy, the evidence suggests that in practice, the telemarketers told callers they could get a refund at any time. (See Nickerson Decl. at 890:6-7.) When customers sought to return items, however, they were told that they could not get a refund until after they had worked with the program for ninety days. Even after the ninety days had passed, they were told that they had to meet other conditions and secure the consent of a consumer research assistant before they could return the guides and recover their money. (See, e.g., Elrod Decl., ¶ 18; Center Decl., ¶ 18; Coomes Decl., ¶ 11; Dobbins Decl., ¶ 26; Fern Decl., ¶ 30; Figueiredo Decl., ¶ 12; Garza Decl., ¶ 14; Heck Decl., ¶ 21.)
This document should have been filed under seal because it contains the names and credit card numbers of Arlington customers.
E. FTC's Investigation and Complaint
FTC investigator Eric Nickerson placed two calls to Arlington in October 1998. (Nickerson Decl., ¶¶ 3 and 11; Pl.'s Ex. 34.) Nickerson recorded both of the calls, and had transcriptions prepared. (Id. at 879.) In the first call, Nickerson spoke with an operator who identified himself as "Aaron." (Id. at 885:19.) Aaron informed Nickerson that at the government auctions, "vehicles two to four years of age are auctioned off, on average, for $1,500 [and that v]ehicles that are five years of age and older start at about $200 and go up." (Id. at 881:10-13.) Aaron represented that the cars were "actually about 80 percent off their market value." (Id. at 881:15-16.) He told Nickerson there would be "between four and six auctions per month in Denver" and that Nickerson would receive directly from the auction agencies "a listing in the mail about a week before each auction starts" that "tells the time and location of the auction, also what is selling." (Id. at 882:9-17.) Describing the Foreclosure Listings, Aaron informed Nickerson that it includes "the name and number of the government agent that shows it to you." (Id. at 883:11-12.) At one point, Aaron represented that Arlington offered a one-year guarantee, and that if Nickerson "use[d] the program for 90 days and he wasn't successful "after 90 days, [Arlington would] issue a refund." (Id. at 884:11-16.) Later in the conversation, however, he stated that Nickerson could "get a refund any time up to the year from the day you ordered." (Id. at 890:6-7.) While Aaron informed Nickerson that the program cost was $59, he did not mention shipping and handling and, after Nickerson inquired about another program and Aaron said he would send both, he did not indicate what additional amount would be charged.
The second call Nickerson placed to Arlington was handled by "Dorian." On this occasion, Nickerson inquired about the at-home typing program, and asked whether "these are companies that currently need some typing done." (Id. at 899:5-7.) Dorian answered, "Yeah." (Id.) Dorian told Nickerson "there is plenty of work; especially in a city the size of Denver, you're going to have a lot to choose from." (Id. at 898:22-24.) Dorian also described the auction program to Nickerson, who expressed interest in it. Dorian told him he would "go ahead and send that out to you," and told Nickerson, "we sold four — just to give you an example — don't expect to get a purchase like this off the bat, but this is one of our best examples. Okay? We sold four laptop computers for $100." (Id. at 906:12-19.) Dorian informed Nickerson of the $59 registration fee, but not advise him that the price of two programs would be $117.90, or that he would be charged for shipping and handling. Rather, Dorian told Nickerson "Go ahead and write down my name and right below that write down 11790 . . . 11790, and my agent number below that, is 1127." (Id. at 907:11-15.) Dorian assured Nickerson that Arlington "guarantee[d] [its] service, of course," and did not indicate that there were any limitations on the guarantee. (Id. at 901:19.) The FTC has also filed the declarations of nineteen consumers who describe their conversations with Arlington telemarketers. Like Nickerson's, each of these declarations details various statements made by an Arlington representative concerning the likelihood that the consumer could acquire a good quality car or home below market value, that he or she would receive information about specific at-home typing positions or government jobs then available, and that his or her money would be refunded if he or she were not satisfied. The declarations also describe charges made to credit cards or bank accounts for programs that were not discussed during the telephone call or for programs that the telemarketer offered to send without disclosing that there would be an additional fee. (See Pl.'s Exs. 1-19.)
For the last five months Arlington was in operation, Jessica Lovett worked full time randomly monitoring telemarketing calls. (Lovett Decl., ¶ 4.) Lovett made a note on a form "whenever a telemarketer provided information to a consumer that was inconsistent with the scripts the telemarketers were to use in describing each of Arlington's four programs." (Id., ¶ 8.) Lovett estimates that "[o]f the approximately 100 calls [she] monitored on a daily basis, [she] . . . noted some type of misrepresentation in approximately 20 to 30 of the calls." (Id.) Lovett describes "Arlington's policy with respect to these misrepresentations as follows: the first time a misrepresentation was noted, the telemarketer was to be verbally counseled; the second time a misrepresentation was noted, the telemarketer was to receive a written warning; and the third time a misrepresentation was noted, the telemarketer was to be terminated." (Id., ¶ 9.) According to Lovett, however, this policy was not strictly followed. (Id., ¶ 10.) She asserts that "[e]ven after three or more reported misrepresentations, Arlington supervisors would continue to warn telemarketers rather than terminate their employment, depending upon the volume of their sales." (Id.)
Based on this information, the FTC filed a complaint seeking preliminary and permanent injunctive relief, and such other equitable relief as is necessary to "avert the likelihood of consumer injury during the pendency of this action and to preserve the possibility of effective final relief." Among the forms of relief prayed for are rescission, restitution, and disgorgement of profits.
F. First Report of Receiver
Temporary Receiver Frank Sweeney filed a First Report of Receiver on December 18, 1998. ("Receiver's Report"). Aided by law enforcement, on November 20, 1998 Sweeney took control of Arlington. (Id. at 2:4-7.) Sweeney spoke with 39 employees who were present on his first visit, and informed them that he would contact them when, and if, the business resumed operations. (Id. at 2:14-18.) He then caused the locks to be changed, and conducted an inventory of the business (see id., Ex. "B"), including an inventory of an off-site storage facility where Arlington's publications are stored. (Id. at 3:7-13.) Sweeney also contacted the California Attorney General's office and learned that Arlington does not have a telemarketing license, and that a $100,000 bond must be posted to obtain one.
In Sweeney's view, such a license may be required if the houses or cars presented in Arlington's publications are deemed to be investment opportunities. (Id. at 3:21-22 and n. 1, 4.)
Sweeney's review of Arlington's sales records disclosed that it began operations in April 1996, and recorded approximately $11,000,000 in sales revenue from approximately 127,000 customers before its closure. (Id. at 4:20-21.) The company's price list shows that publications sold for $59.95, plus $8.95 shipping and handling. (Id., Ex. "C.") During the same period, the records show that refunds of approximately $1,400,000 were paid to approximately 15,000 customers. (Id. at 4:23-25.) After bringing the accounting records current, Sweeney determined that Arlington has liabilities of $371,000 and liquid assets of $125,268.41, only about $30,000 of which is unencumbered and available to operate the business. (Id. at 4:3-5:23.)
Sweeney reports that the FTC takes the position that flyers Arlington currently has in circulation violate the telemarketing law. (Id. at 3:28.) Consequently, he reports, "[n]either George Umholtz [father of both David Umholtz and Wendy Foster] nor [he] could come up with a method by which we could cure the apparent problem caused by the use of the flyers to generate sales. (Id. at 4:1-2.) Given this fact, the assets/liabilities picture, and the fact that a telemarketing license may be required, Sweeney reports that if he is appointed permanent receiver, he will close the premises, terminate telephone service, return leased equipment, sell the furniture and equipment, and abandon the premises. Thereafter, he proposes to distribute any remaining funds to creditors. (Id. at 3:24-4:17, 7:17-24.)
G. Arlington's Response To The Order To Show Cause And Report Of Receiver
Defendants Arlington, Umholtz and Foster have filed declarations and exhibits in response to the court's Order to Show Cause, but have not submitted a Memorandum of Points and Authorities synthesizing their legal position. Defendants also filed a Response to First Report of Receiver, which contests certain of Frank Sweeney's findings. (Def.'s Response to First Report of Receiver.) Defendants contend, for example, that Arlington does not need a telemarketing license because the publications are not presented as investment opportunities. (Id. at 4:1-2.) They also contest Sweeney's statement that neither he nor George Umholtz could come up with a method by which to cure the problem that sales were being generated by flyers that the FTC believes violate the law. (Id. at 2:6-9.) Defendants argue that changes in the sales scripts could cure any deficiencies in the ads. They suggest, for example, that the phrases "pennies on the dollar" and "cars from $200" could be clarified. (Id. at 2:18-3:16.) Finally, defendants have supplied a 1998 profit and loss statement for Arlington, and fault Sweeney for failing to provide one to the court. (Id., Ex. "1.")
1. Declaration of Defendant David Umholtz
In his declaration, David Umholtz details some of his purportedly successful efforts to have advertisers and the Santa Barbara Better Business Bureau review and approve of Arlington's advertisements and sales methods. (Umholtz Decl., ¶¶ 7-9, 11-13.) He explains that Arlington's "ads were always submitted to potential advertisers for pre-approval" and that it was Arlington's "understanding that the advertisers were reviewing [the] ads to insure that they met Truth in Advertising Guidelines." (Id., ¶ 17.) Umholtz contends that the phrases "Pennies on the dollar" and "Seized cars from $200" were "never brought up as an issue [by the advertisers] because the term `pennies on the dollar' simply means bargain or some percentage of 100." (Id.) He notes that Arlington does "not say `Seized cars for $200' [and that] `Seized cars from $200' . . . is designed to show a range which says you can get cars from $200 and up." (Id.)
Regarding the company's practices, Umholtz states:
"All of our operators are trained and monitored to ensure that our products are not misrepresented to the consumer. They are required to read the scripts verbatim. It is corporate policy that if an operator is caught misleading a customer in any way, they are warned verbally, in writing, and/or terminated on the spot." (Umholtz Decl., ¶ 21.)
According to Umholtz, telemarketer Dorian Aquino was "terminated on the spot in October 1998 when one of our monitors observed him not quoting the total price clearly and sending out a second program without the customer's authorization." (Id.)
In his supplemental declaration, Umholtz proffers numerous exhibits constituting Arlington's customer files for the nineteen FTC consumer declarants. These printouts reflect the dates that the customers called Arlington telemarketers, describe the complaints made, and when refunds were issued. (Def.'s Exs. 31-49.) Umholtz characterizes some of the complaints made by these customers as "communication problems," "misunderstandings," or "miscommunications" between telemarketers and sometimes "confused" consumers. (Umholtz Supp. Decl., ¶¶ 4, 5, 6, 7, 9, 12, 15, 20, 22.) In other instances, he blames the telemarketers, who he states were disciplined or terminated.
2. Other Declarations
Wendy Foster's initial and supplemental declarations explain the efforts she undertook to research and verify the information contained in Arlington's publications. Foster contends, with citations to exhibits such as government publications, that the information contained in Arlington's Guides and advertising statements such as "pennies on the dollar" and "cars from $200" are not misleading. Foster also states that the impact of the court's temporary restraining order has been "both tragic and profound." (Foster Decl., ¶ 22.) Foster recounts that she is a single mother of four, and that her income has been cut off, her bank accounts frozen, and her ability to use her credit cards impaired. (Id., ¶¶ 1-2.)
Leah Hughes, a telemarketer who worked at Arlington during Lovett's tenure, has filed a declaration stating:
"[Floor Manager] Stacey Padilla always ran a very clean operation. It was my understanding three strikes and you are out. She would first give you a verbal warning. If you committed the same offense again, you were then given a written warning that you signed. If it continued for a third time, then your employment with the company was terminated." (Hughes Decl. at 1:10-15.)
Julie Irvine, also an Arlington employee, declares that one of her responsibilities is "to oversee the monitoring of every sales agent." Irvine states that she does not tolerate misrepresentation, and that "[a]ny employee caught using dirty sales tactics is immediately dismissed." (Irvine Decl., 1:10-13.) She also indicates that "a large part of [her] duties [as sales supervisor] are the constant monitoring of each employee." In this respect, she says, "[e]ach operator is to strictly follow a script and any wavering from that is reprimanded and corrected immediately." (Id. at 1:14-18.)
In her declaration, floor manager Stacy Padilla asserts that Arlington "address[es] every customer complaint immediately and none [is] ever avoided." (Padilla Decl., 1:21-22.) Padilla also represents that "[n]inety percent of our customers are successful in using our programs. That is a fact." (Id. at 1:23-24.)
3. Testimony At Evidentiary Hearing
At the hearing on the order to show cause, the court heard live testimony from Jessica Lovett and Julie Irvine. This testimony amplified on and clarified the statements contained in their respective declarations respecting Arlington's monitoring of telemarketers' calls and disciplining of employees for misrepresentations. It did not raise new matters of substance.
III. DISCUSSION
A. Legal Standard for Preliminary Injunction
Under § 13(b) of the FTC Act, the court is authorized to issue a preliminary injunction to restrain violations of the FTC Act. 15 U.S.C. § 53(b)(2). "Upon a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest, and after notice to the defendant, a temporary restraining order or a preliminary injunction may be granted without bond." Id. "Harm to the public interest is presumed." Id.; United States v. Odessa Union Warehouse Co-op, 833 F.2d 172, 175-76 (9th Cir. 1987). See also Miller v. California Pacific Medical Ctr., 19 F.3d 449, 459 (9th Cir. 1994) ("In statutory enforcement cases where the government has met the `probability of success' prong of the preliminary injunction test, we presume it has met the `possibility of irreparable injury' prong because the passage of the statute is itself an implied finding by Congress that violations will harm the public").
"[I]n statutory enforcement cases where the government can make only a `colorable evidentiary showing' of a violation, the court must consider the possibility of irreparable injury. [Citation.] This is in keeping with our normal sliding scale standard of injunctive relief." Miller, supra.
Section 13(b) gives federal courts broad authority to fashion appropriate equitable remedies for violations of the FTC Act. FTC v. Pantron I Corporation, 33 F.3d 1088, 1102 (9th Cir. 1994). See FTC v. HN Singer, Inc., 668 F.2d 1107, 1113 (9th Cir. 1982) (the authority granted under 13(b) is not limited to the power to issue an injunction, but includes the "authority to grant any ancillary relief necessary to accomplish complete justice").
1. Likelihood of Ultimate Success on the Merits
(a) Federal Trade Commission Act
Section 5 of the FTCA, 15 U.S.C. § 45(a)(1), forbids "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce." To establish that an act or practice is deceptive, the FTC must establish that: (1) a reasonably prudent person would rely on the deceptive advertisements, practices or representations; (2) the advertisements, practices or representations were widely disseminated; and (3) consumers purchased the product. See Southwest Sunsites, Inc. v. FTC, 785 F.2d 1431, 1435 (9th Cir.), cert. denied, 479 U.S. 828 (1986); Thompson Medical Co., Inc. v. FTC, 104 F.T.C. 648 (1984), aff'd, 791 F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086 (1987); FTC v. Patriot Alcohol Testers, Inc., 798 F. Supp. 851, 855 (D.Mass. 1992); FTC v. Kitco of Nevada, Inc., 612 F. Supp. 1282, 1293 (D.Minn. 1985). Once the FTC has satisfied this burden, defendants must prove that consumers did not rely on the representations to avoid liability. FTC v. World Travel Vacation Brokers, 861 F.2d 1020, 1029 (7th Cir. 1988).
Defendants do not contend that Arlington's advertisements, practices or representations were not widely disseminated. Nor do they allege that consumers did not purchase their products. Accordingly, the only issues that must be addressed are whether defendants engaged in unfair or deceptive acts or practices, including deceptive advertisements, sales practices, or representations, and whether a reasonably prudent person would have relied upon those advertisements or representations.
The FTC must show that defendants' claims are deceptive, i.e., that they "likely would mislead consumers, acting reasonably, to their detriment." Id. See also FTC v. U.S. Sales Corp., 785 F. Supp. 737, 744 (N.D.Ill. 1992). Even if even literally true, a representation will be found to be deceptive and in violation of Section 5 of the FTCA if its net impression is likely to mislead consumers. See Sterling Drug, Inc. v. FTC, 741 F.2d 1146, 1154 (9th Cir. 1984), cert. denied, 470 U.S. 1084 (1985); Pantron, supra, 33 F.3d at 1095 ("The test for a violation of Section 5 of the FTCA is whether the representations are likely to deceive consumers"), cert. denied, 115 S.Ct. 1794 (1995). Moreover, even if an advertisement does not contain falsehoods, the omission of material information may violate section 5. See Sterling Drug, supra, 741 F.2d at 1154; Katharine Gibbs School (Inc.) v. FTC, 612 F.2d 658, 665 (2d Cir. 1979).
The FTC must show probable, not merely possible, deception to prove a violation of section 5 of the FTC Act. See Southwest Sunsites, supra, 785 F.2d at 1436. Here, the FTC contends that the combination of Arlington's advertisements and the sales message delivered by its telemarketers (both scripted and unscripted) misled reasonable consumers to their detriment. To evaluate this contention, the court must consider the advertisements, sales scripts, and deviations from the script, and compare the net effect of these with the products that Arlington sold.
Even when delivered verbatim, each of the sales scripts contains misrepresentations and statement that are likely to mislead consumers. According to the script, consumers interested in the Auction Guide are to be told that they will gain access to items "discounted up to 90% below the market value. Cars and trucks that are three years old can sell below $900, vehicles over five years old can sell as low as $50." Coupled with Arlington's flyer, which depicts an attractive vehicle in good condition, these representations are likely to mislead a reasonable consumer to believe that relatively new, good quality cars can be purchased for extremely small sums of money. In reality, this is not the case.
Moreover, consumers are told that they will "get catalogues in the mail telling [them] where and when the auctions are taking place and what items are available at them." In contrast to this representation, those who order the Guide receive a list of entities that conduct auctions, and information concerning the types of items those entities typically sell.
Similarly, consumers seeking the Foreclosure Guide are to be told that "[m]any of these homes have an asking price of 40-60% below the market value," and that the listing will have "the contact name and number of the agent who is taking care of the property." The term "many" suggests that buyers will typically be able to purchase real estate at foreclosure sales for half market value. The FTC has presented evidence that this is not the case, and defendants do not contest the validity of this evidence. Furthermore, purchasers discover that the information in the Guide concerning the "agent . . . taking care of the property" is usually no more specific than "HUD" or "Fannie Mae." No individual names or phone numbers are provided.
The script for selling the Career Guides states that the purchaser will receive information for "positions that are currently available" or businesses currently seeking help. Instead, they receive listings of employment agencies or general information concerning the type of businesses that may have a need for home typists. Moreover, while the telemarketers promise that consumers will receive the names of contact persons for the relevant businesses, the Guides direct them to local telephone directories for current telephone numbers and addresses.
As delivered, the message frequently includes additional misrepresentations. (Lovett Decl., ¶ 8.) Particularly as respects Arlington's refund policy, telemarketers embellish the scripts to give the impression that consumers can return the Guides and receive a refund within ninety days after purchase. This is not true. Moreover, the telemarketers do not disclose the conditions that Arlington places on refunding their money. They do not tell consumers, for example, that they will have to secure the consent of a consumer research assistant to the refund, or that they will have to provide proof that they have contacted the listed government agencies or attended auctions.
The court finds that the net combined effect of these communications is to mislead reasonable consumers, who are likely to rely to their detriment on the misrepresentations, omissions and exaggerated claims Arlington makes. For this reason, the court finds that the FTC is likely to prevail on its claim that Arlington's sales practices violate the Act. See FTC v. Febre, 1996 WL 396117, * 2 (N.D.Ill. 1996) ("Even though the advertisements did not guarantee the stated level of earnings, they made express claims regarding the earnings potential of the programs. Such express claims are presumed to be material, i.e., likely to affect a consumer's choice or conduct regarding a product, and, within reason, to mean what they say."); In re Amway, 93 FTC 618, 729-32 (1979) (statement that a participant could "develop an income of as much as $1,000 per month" and use of $200 income per month for discussion violated § 5(a) despite disclaimer that some would earn more and some would earn less because neither a substantial nor appreciable number of consumers regularly achieved those earnings); National Dynamics Corp. v. FTC, 82 FTC 488, 563-65 (1973), denied in part and remanded in part, 492 F.2d 1333 (2d Cir. 1974), on remand, 85 FTC 1052 (1975) (claim that one can earn $12,000 per year found deceptive).
(b) Telemarketing Sales Rule
The Telemarketing Sales Rule ("Sales Rule"), promulgated by the FTC pursuant to 15 U.S.C. § 6102(a)(1), proscribes "deceptive telemarketing acts or practices" and requires that telemarketers disclose certain material information "in a clear and conspicuous manner" before a customer pays for goods or services offered. See 16 C.F.R. § 310.3(a)(1). The Sales Rule requires clear and conspicuous disclosure, inter alia, of:
The Sales Rule defines as a telemarketer as "any person who, in connection with telemarketing, initiates or receives telephone calls to or from a customer." Telemarketing is "a plan, program, or campaign which is conducted to induce the purchase of goods or services by use of one or more telephones and which involves more than one interstate telephone call. . . ." 16 C.F.R. § 310.2(t)-(u).
"(i) The total costs to purchase, receive, or use, and the quantity of, any goods or services that are the subject of the sales offer;
(ii) All material restrictions, limitations, or conditions to purchase, receive, or use the goods or services that are the subject of the sales offer;
(iii) If the seller has a policy of not making refunds, cancellations, exchanges, or repurchases, a statement informing the customer that this is the seller's policy; or, if the seller or telemarketer makes a representation about a refund, cancellation, exchange, or repurchase policy, a statement of all material terms and conditions of such policy." 16 C.F.R. § 310.3(a)(1)(i)-(iii).
In addition, under the Sales Rule, telemarketers are proscribed from "[m]aking a false or misleading statement to induce any person to pay for goods or services." 16 C.F.R. § 310.3(a)(4).
The FTC does not allege violations of 16 C.F.R. § 310.3(a)(2)(i)-(iv), under which telemarketers are proscribed from misrepresenting, directly or by implication, the same information they are required to disclose under § 310.3(a)(1)(i)-(iii).
The court has "jurisdiction to grant such relief as [it] finds necessary to redress injury to consumers or other persons, partnerships, and corporations resulting from the rule violation or the unfair or deceptive act or practice, as the case may be." 15 U.S.C. § 57b(b). "Such relief may include, but shall not be limited to, rescission or reformation of contracts, the refund of money or return of property, the payment of damages, and public notification respecting the rule violation or the unfair or deceptive act or practice." Id.
For the reasons detailed above, the court finds that the FTC is likely to prove that Arlington's telemarketers made false and misleading statements to consumers in order to induce them to purchase its products. The FTC also argues that defendants violated 16 C.F.R. § 310.3(a)(1) by failing to disclose in a clear and conspicuous manner the total costs of goods and services actually being charged, and the terms of the refund policy. Many of the FTC's declarants assert that they were charged amounts different than what they were quoted. Nickerson was quoted prices for a single item without shipping and handling, but charged for two. While there was a cryptic reference to the total amount of the sale, it was never stated in a clear and conspicuous manner. Moreover, a review of the sales scripts reveals that customers were not informed of Arlington's refund policy until after they made their purchase, in violation of the Sales Rule. For all these reasons, the court finds that the FTC is likely to prevail on the merits of this claim as well.
(c) Liability of Umholtz And Foster
Under § 5 of the FTCA, liability for the acts of a corporation can be imposed on an individual who either (1) directly participated in the conduct violating the statute; (2) played a part in controlling, directing or formulating the relevant policies and practices of the company; or (3) had the authority to control the actions of other individuals combined with actual or constructive knowledge that those individuals were committing misrepresentations. See FTC v. Publishing Clearing House, Inc., 104 F.3d 1168, 1170, as amended, 1997 U.S.App.LEXIS 6698 (9th Cir. 1997); In re National Credit Management Group, L.L.C., 21 F. Supp.2d 424, ___, 1998 WL 241768, * 34 (D.N.J. 1998). Here, Umholtz and Foster are Arlington's owners, officers and directors. This is a sufficient basis upon which to conclude that the FTC will be able to demonstrate that they are personally liable for Arlington's violations of the relevant Acts. See FTC v. Amy Travel Services, Inc., 875 F.2d 564, 573 (7th Cir.), cert. denied, 493 U.S. 954 (1989).
2. Weighing of the Equities
"When the Commission demonstrates a likelihood of ultimate success, a countershowing of private equities alone does not justify denial of a preliminary injunction." FTC v. Warner Communications, Inc., 742 F.2d 1156, 1165 (9th Cir. 1984). Indeed, while private equities may be considered, public equities receive far greater weight. FTC v. Weyerhaeuser Co., 665 F.2d 1072, 1083 (D.C. Cir. 1981). "Public equities may include `beneficial economic effects and pro-competitive advantages for consumers.'" Warner Communications, supra.
Defendants have invested over two years and substantial funds in Arlington. The individual defendants rely upon the business for income. They argue that, if the court concludes there is a likelihood the FTC will prove violations of the FTCA and Telemarketing Sales Rule, it should nonetheless refuse to enter the injunctive order the FTC proposes because it is too broad and is unnecessary to remedy harm to consumers.
As for third parties, Arlington has had as many as one hundred employees, but the turnover rate appears to be high and the length of tenure short. It is unlikely that any employees, especially the college students, had or have long term plans to stay.
The FTC's proposed order not only enjoins defendants from making misrepresentations concerning the products they sell and from violating the Telemarketing Sales Rule, but also freezes defendants' assets for all uses except the payment of reasonable, usual and necessary living expenses. Additionally, the order proposes the permanent appointment of a receiver who will assume full control of Arlington's business. This scope of relief, defendants contend, amounts to a pre-judgment attachment, and inappropriately presumes they will ultimately be found liable of the acts alleged in the FTC's complaint.
Both an asset freeze and appointment of a receiver are recognized forms of relief. See FSLIC v. Sahni, 868 F.2d 1096, 1097 (9th Cir. 1989) (freezing assets to prevent dissipation); FTC v. American National Cellular, 810 F.2d 1511, 1512-14 (9th Cir. 1987) (appointment of receiver); World Travel, supra, 861 F.2d at 1031 (asset freeze).
This latter argument overlooks the fact that injunctive relief is premised upon a finding that the FTC is likely to prevail on the merits of its claim. Indeed, in statutory enforcement actions, all that is necessary to support an injunctive order is a finding of "some chance of probable success." See FTC v. World Wide Factors, 882 F.2d 344, 347 (9th Cir. 1989) (quoting Odessa, supra, 833 F.2d at 176). Here, the court has concluded that the FTC is likely to prove its claim that defendants violated the FTCA and the Telemarketing Sales Rule. Thus, injunctive relief is appropriate under section 13(b) of the FTC Act.
This section authorizes the FTC to "bring an immediate halt to unfair or deceptive acts or practices when to do so would be in the public interest." Singer, supra, 668 F.2d at 1111. While defendants argue that a change in their advertisements and scripts would achieve the same result, the court cannot conclude that this is so on the record presently before it. First, it is unclear that defendants have the assets necessary to effect such a change and ensure compliance by their telemarketers. Given the evidence of probable misrepresentations by defendants in the past, and the evidence concerning the difficulties inherent in policing individual telemarketers' conversations, any such arrangement would require direct and constant oversight by a court-appointed receiver. This would be an expensive proposition, and the receiver's report to the court indicates that the business has minimal unencumbered assets available. The receiver's report also casts doubt on defendants' ability to purge existing advertising from the marketplace. For all these reasons, the court finds that enjoining ongoing business by Arlington is necessary to protect the consuming public and ensure that it is not subjected to unfair or deceptive practices.
As respects defendants' contention that the form of injunctive relief sought amounts to an attachment, this argument has previously been rejected by the courts. See Singer, supra, 668 F.2d at 1112. The Singer court stated:
"Rescission is an old equitable remedy and the district court has power to issue a preliminary injunction to preserve the status quo in order to protect the possibility of the equitable remedy. While it is true that the asset freeze has an effect comparable to that of an attachment, it is not an attachment. . . . Because the authority to issue a preliminary injunction rests upon the authority to give final relief, the authority to freeze assets by a preliminary injunction must rest upon the authority to give a form of final relief to which the asset freeze is an appropriate provisional remedy. The Commission says that the preliminary injunction is necessary to preserve the possibility of rescission of contracts and restitution of money obtained by fraud. . . . Hence, there is a basis for the order freezing assets." Id.
The FTC's argument is the same in the present case. It asserts that a freeze is necessary to preserve assets and provide redress to consumers in the event it succeeds in proving its claims. In fact, the need to preserve assets in this case is great, since it appears that there may not be sufficient funds to make restitution should the FTC prevail. The receiver's report estimates that approximately 127,000 consumers purchased product from Arlington. Of these, 15,000 have received refunds. Thus, there may be as many as 112,000 consumers entitled to approximately $60 each, or a total of some $6.7 million. At the hearing, defendants represented that the business had been operating at a loss. Thus, there is a risk that further business operations will serve only to dissipate additional assets. Defendants contend that the injunction, including the asset freeze, will destroy their business. It appears, however, that the business is not healthy in any event. The prospect of further deterioration must be weighed against the need to preserve such assets as there are so that they will be available, if needed, to compensate consumers. Under the circumstances, the court finds that the proper balancing of these interests requires that an injunction issue in the form requested by the FTC. See Singer, supra, 668 F.2d at 1113.
In short, the benefit in protecting consumers against potentially fraudulent activity, and securing for those who may have already been injured some form of redress, outweighs the harm that may be suffered by individuals associated with the business. The equities, therefore, favor the FTC and the public interest it represents.
IV. CONCLUSION
For the foregoing reasons, the court concludes that a preliminary injunction should issue in this case, extending the terms of the temporary restraining order issued by the court on November 18, 1998.