Federal Trade Commission v. Noland, Jr. ( 2020 )

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Federal Trade Commission, No. CV-20-00047-PHX-DWL 10 Plaintiff, ORDER 11 v. 12 James D. Noland, Jr., et al., 13 Defendants. 14 15 Pending before the Court is a “Rule 19 Motion to Dismiss or Compel Joinder of 16 Parties” filed by Defendants Jay Noland, Lina Noland, Thomas Sacca, and Scott Harris 17 (together, the “Individual Defendants”). (Doc. 167.) For the following reasons, the motion 18 will be denied. 19 BACKGROUND 20 The parties are familiar with the facts and history of this case, which are set out in 21 earlier orders. In a nutshell, this case concerns the business activities of Success By Health 22 (“SBH”), which is “an affiliate-marketing program that sells coffee products and other 23 nutraceuticals through its online platform and network of affiliates.” (Doc. 106 at 1-2.) 24 The Individual Defendants are affiliated with SBH in various capacities. 25 On January 8, 2020, the FTC initiated this action by filing a complaint. (Doc. 3.) 26 The complaint alleges, among other things, that SBH is an illegal pyramid scheme and that 27 the Individual Defendants have made false statements to SBH’s affiliates. (Id.) 28 That same day, the FTC moved for an ex parte temporary restraining order (“TRO”). 1 (Docs. 7, 8.) 2 On January 13, 2020, the Court substantially granted the FTC’s motion for a TRO. 3 (Docs. 19, 38.)1 In the TRO, the Court appointed Kimberly Friday (the “Receiver”) to 4 serve as the receiver of SBH and affiliated entities. (Id.) 5 On January 17, 2020, the FTC filed an amended complaint. (Doc. 35.) 6 On January 24, 2020, the parties stipulated to keep the TRO in place pending a 7 ruling on the FTC’s request for a preliminary injunction. (Doc. 43.) The preliminary 8 injunction hearing was rescheduled for February 12, 2020. (Doc. 52.) 9 On February 6, 2020, the Individual Defendants filed their answer to the FTC’s 10 amended complaint. (Doc. 70.) 11 On February 10, 2020, the Receiver issued an initial report concluding that she 12 “does not believe that the business can be operated without violating the TRO. The 13 inaccurate marketing statements, the organization of the commission system, and the 14 movement of large amounts of cash to the insiders strongly suggests that the business is 15 structured in such a fashion that prevents Affiliates from realizing the promoted business 16 opportunities.” (Doc. 82-1 at 19.) 17 On February 12, 2020, the preliminary injunction hearing took place. (Doc. 86.) 18 After the hearing, the Court took the matter under advisement. (Id.) 19 On February 18, 2020, the Individual Defendants filed an amended answer to the 20 FTC’s amended complaint. (Doc. 93-1.) 21 On February 27, 2020, the Court issued an order granting the FTC’s motion for a 22 preliminary injunction. (Doc. 106.) Among other things, this order authorized the 23 Receiver to resume selling SBH’s existing inventory of products. (Id. at 28.) 24 On May 1, 2020, the parties filed the Rule 26(f) report. (Doc. 137.) Although the 25 Individual Defendants’ counsel identified an array of motions he intended to file “within 26 the next couple of months,” there was no mention of a motion to dismiss under Rule 19. 27 28 1 The TRO was later amended. (Docs. 20, 21.) The final, unsealed version of the TRO was filed on January 17, 2020. (Doc. 38.) 1 (Id. at 6-7.) 2 On May 12, 2020, the Receiver issued her second report. (Doc. 139-1.) Among 3 other things, she reported that her efforts to resume selling SBH’s existing inventory had 4 been delayed by the COVID-19 pandemic and by her discovery that SBH had been 5 operating without liability insurance, had been neglecting to collect sales tax, and had been 6 using an ingredient that is illegal in the United States. (Id. at 4-6.) She further reported 7 that product sales finally resumed during the week of May 11, 2020, that she had 8 “terminated the multi-level marketing program and the commission structure” that had 9 previously been in place, and that she had informed SBH’s affiliates “that they will not 10 earn commission or otherwise benefit from their purchases or purchases by individuals 11 formerly in their downline.” (Id. at 7-8.) 12 On July 28, 2020, the Individual Defendants filed the Rule 19 motion. (Doc. 167.) 13 On July 31, 2020, the FTC filed a response. (Doc. 175.) 14 On August 7, 2020, the Individual Defendants filed a reply. (Doc. 178.) 15 ANALYSIS 16 The Individual Defendants argue that approximately 4,500 SBH affiliates constitute 17 “required parties” under Rule 19(a) because those affiliates have two cognizable interests 18 in this action—first, an interest in obtaining commission payments for previous SBH 19 product sales, and second, an interest in earning future commissions by selling SBH 20 products—and because litigating this action in their absence may, “as a practical matter,” 21 impair their ability to protect those interests. (Doc. 167 at 3-4.) Thus, the Individual 22 Defendants argue that, under Rule 19, those affiliates must either be joined as parties or 23 this action must be dismissed. (Id.) The FTC responds that (1) the Individual Defendants 24 waived their ability to raise a Rule 19 objection by failing to assert it in a pre-answer 25 motion; (2) Rule 19(a) can’t be invoked to force an administrative agency to sue a particular 26 party in an enforcement action; and (3) joinder isn’t required on the merits because, inter 27 alia, there is no “right to participate in a pyramid scheme.” (Doc. 175.) 28 On the issue of waiver, the rule in the Ninth Circuit is that “failure to join necessary 1 parties is waived if objection is not made in defendant’s first responsive pleading; it is only 2 the absence of an indispensable party which may (possibly) be raised later.” Citibank, N.A. 3 v. Oxford Properties & Finance Ltd., 688 F.2d 1259, 1262 n.4 (9th Cir. 1982) (emphases 4 added). Thus, the Court must begin by assessing whether the Individual Defendants’ 5 motion is a challenge based on the failure to join “necessary” parties or a challenge based 6 on the failure to join “indispensable” parties. 7 This assessment is complicated by the fact that, although the terms “necessary” and 8 “indispensable” appeared in the text of Rule 19 at the time Citibank was decided, both 9 terms were deleted in 2007 as part of a purely “stylistic” amendment to Rule 19. Republic 10 of Philippines v. Pimentel, 553 U.S. 851, 855-56 (2008). Pursuant to this amendment, “the 11 word ‘required’ replaced the word ‘necessary’ in subparagraph (a)” and “the word 12 ‘indispensable’ . . . [was] altogether deleted” from subparagraph (b). Id. Nevertheless, 13 “the substance and operation of the Rule both pre- and post–2007 are unchanged.” Id. at 14 856. 15 Given this backdrop, the Ninth Circuit’s pre-2007 caselaw addressing the distinction 16 between “necessary” and “indispensable” parties remains relevant. In EEOC v. Peabody 17 W. Coal Co., 400 F.3d 774 (9th Cir. 2005), the court explained the “two parts of Rule 19”— 18 that is, Rule 19(a) and Rule 19(b)—create “three successive inquiries.” Id. at 779. The 19 first inquiry, which is governed by Rule 19(a), is whether the absent party should be 20 considered “necessary” in light of the nature of its interest in the action. Id.2 The second 21 inquiry, also governed by Rule 19(a), is “whether it is feasible to order that the absentee be 22 joined.” Id. The “three circumstances in which joinder is not feasible [are] when venue is 23 improper, when the absentee is not subject to personal jurisdiction, and when joinder would 24 2 See generally Salt River Project Agric. Improvement & Power Dist. v. Lee, 672 F.3d 25 1176, 1179 (9th Cir. 2012) (explaining that, under the first inquiry, “[a] party may be necessary under Rule 19(a) in three different ways. First, a person is necessary if, in his 26 absence, the court cannot accord complete relief among existing parties. Second, a person is necessary if he has an interest in the action and resolving the action in his absence may 27 as a practical matter impair or impeder his ability to protect that interest. Third, a person is necessary if he has an interest in the action and resolving the action in his absence may 28 leave an existing party subject to inconsistent obligations because of that interest.”) (citations omitted). 1 destroy subject matter jurisdiction.” Id. Finally, the third inquiry—which, again, is 2 triggered only when the party is necessary and joinder is infeasible—is “whether the case 3 can proceed without the absentee, or whether the absentee is an ‘indispensable party’ such 4 that the action must be dismissed.” Id. This inquiry is governed by Rule 19(b). Id. at 779- 5 80. 6 With these principles in mind, the Individual Defendants’ motion can only be 7 characterized as a challenge based on the failure to join “necessary” parties, not a challenge 8 based on the failure to join “indispensable” parties. The only portion of Rule 19 cited in 9 the Individual Defendants’ motion papers is Rule 19(a). (Doc. 167 at 2; Doc. 178 at 1.) 10 There is no mention of Rule 19(b). The Individual Defendants’ briefing also focuses solely 11 on the first inquiry under Peabody, which is whether the nature of the affiliates’ interest 12 renders them “required” or “necessary” parties under Rule 19(a). There is no discussion 13 of the second inquiry (whether joinder would be infeasible due to venue or jurisdictional 14 hurdles) or the third inquiry (whether, given the infeasibility of joinder, dismissal is 15 required under Rule 19(b)). Indeed, the final sentence of the Individual Defendants’ 16 reply—“[T]he court should grant defendant’s Rule 19 motion and add non-party affiliates 17 lest their interests be forever lost” (Doc. 178 at 4)—appears to be an implicit concession 18 that joinder of the affiliates would be feasible. 19 Because the Individual Defendants’ motion is properly understood as a challenge 20 based on the failure to join “necessary” parties, rather than as a challenge based on the 21 failure to join “indispensable” parties, it is barred by Citibank.3 As noted, Citibank holds 22 23 3 It should be noted that Citibank’s distinction between Rule 19(a) and 19(b) challenges is rooted in Rule 12. Under Rule 12(b), a “motion asserting” various 24 enumerated defenses, including “failure to join a party under Rule 19,” “must be made before pleading if a responsive pleading is allowed.” However, Rule 12(h)(2) goes on to 25 exempt a handful of specific defenses, including the failure “to join a person required by Rule 19(b),” from the forfeiture rules applicable to other defenses. See also Baykeeper v. 26 Union Pac. R. Co., 2009 WL 1517868, *2 (N.D. Cal. 2009) (“Rule 12(h)(2) merely exempts the failure to join a person required under Rule 19(b) from waiver, not necessary 27 parties under Rule 19(a). Courts have clearly found that although the absence of an indispensable party may be raised at any time, the failure to join necessary parties may be 28 waived if objections are not made in the defendant’s first responsive pleading.”) (citations omitted). 1 that “failure to join necessary parties is waived if objection is not made in defendant’s first 2 responsive pleading.” 688 F.2d at 1262 n.4. Here, the Individual Defendants’ first 3 responsive pleading was the answer they filed in February 2020. (Doc. 70.) It was not 4 preceded by a motion to dismiss under Rule 12(b)(7), which is one manner in which Rule 5 19 objections may be raised, and it did not raise any Rule 19 objections in its list of 6 affirmative defenses. Nor did the amended answer that the Individual Defendants filed a 7 few weeks later. (Doc. 93-1.) The Individual Defendants have therefore forfeited4 their 8 ability to seek relief under Rule 19(a) based on the FTC’s alleged failure to join necessary 9 parties. See also Fed. Home Loan Mortg. Corp. v. Donel, 2017 WL 2692403, *3 n.2 (D. 10 Nev. 2017) (“Donel waived this Rule 12(b)(7) defense by failing to assert it in a motion 11 before filing his answer.”); Smith v. Levine Leichtman Capital Partners, Inc., 2011 WL 12 13152867, *3 (N.D. Cal. 2011) (“[Defendants] waived their ability to bring a motion to 13 dismiss pursuant Rule 12(b)(7) for failure to join a party under Rule 19(a) by failing to 14 assert this ground for dismissal when they brought their prior motions to dismiss under 15 Rule 12.”); Church Mut. Ins. Co. v. Save-a-Buck Car Rental Co., Inc., 201 F.R.D. 440, 16 440-41 (W.D. Mich. 2000) (because “Save–a–Buck’s answer to the complaint . . . contains 17 no mention of its [Rule] 19 joinder defense,” “Save–a–Buck has waived the defense of 18 failure to join a necessary party under Rule 19, even if it could not be deemed to have 19 waived the defense of failure to join an indispensable party”). 20 In an effort to avoid this outcome, the Individual Defendants argue that Rule 19 21 objections are “sufficiently important that [they] can be raised at any stage of the 22 proceedings.” (Doc. 178 at 2.) However, the case the Individual Defendants cite in support 23 of this principle, McCowen v. Jamieson, 724 F.2d 1984 (9th Cir. 1984),5 merely recognizes 24 that courts possess the power to raise joinder issues sua sponte. Such recognition says 25 4 Although Citibank characterizes this loss as a waiver, it is more properly 26 characterized as a forfeiture. United States v. Olano, 507 U.S. 725, 733 (1993) (“Waiver is different from forfeiture. Whereas forfeiture is the failure to make the timely assertion 27 of a right, waiver is the intentional relinquishment or abandonment of a known right.”). 28 5 The Individual Defendants’ reply attributes the quoted language to Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102 (1968). 1 nothing about whether parties may forfeit their ability to raise Rule 19-based joinder 2 challenges, and Citibank holds that they may. See also Baykeeper, 2009 WL 1517868 at 3 *3 (“The court . . . simply provide[d] that courts may raise the absence of necessary parties 4 sua sponte and may do so at any stage in the proceeding. The court did not consider 5 whether a party could raise the issue at any stage in the proceeding or whether this defense 6 could be waived, and did not address the requirements of Rule 12.”) (citation omitted). 7 Finally, the Individual Defendants also argue that the FTC “acknowledge[d],” in 8 footnote three of its response, that their motion is timely. (Doc. 178 at 2.) But in footnote 9 three, the FTC merely observed that motions seeking relief under Rule 19(b)—that is, 10 motions premised on the failure to join indispensable parties—are not subject to the same 11 forfeiture rules as motions seeking relief under Rule 19(a). As discussed above, that 12 observation is correct and does not assist Defendants here because they did not seek relief 13 under Rule 19(b). 14 Because the Individual Defendants have forfeited their ability to seek relief under 15 Rule 19(a), there is no need to address the parties’ other arguments. Resolving those 16 arguments would be particularly inappropriate here because the Individual Defendants 17 appear to be seeking an unprecedented outcome. The FTC has cited an unbroken line of 18 cases holding that Rule 19(a) can’t be invoked by a defendant in an enforcement proceeding 19 brought by an administrative agency. See, e.g., SEC v. Laura, 2020 WL 1434114, *4 20 (E.D.N.Y. 2020) (“Although there is no binding precedent that speaks directly to whether 21 Rule 19 can be invoked in an enforcement proceeding, there is a long and consistent line 22 of persuasive authority holding that Rule 19 generally cannot be invoked in SEC 23 enforcement proceedings and, as far as the court is aware, no court to have examined the 24 issue has concluded otherwise.”); FTC v. Commerce Planet, Inc., 2010 WL 11673795, *3 25 (C.D. Cal. 2010) (“[Defendant] alleges that the FTC failed to join required parties in 26 violation of Federal Rule of Civil Procedure 19(a) . . . [by failing] to sue a variety of other 27 companies and individuals that were responsible for the Website. This defense is 28 insufficient as a matter of law because the FTC is not required to bring enforcement actions against all entities involved with an allegedly unfair or deceptive practice.”). The 2|| Individual Defendants, in turn, have not pointed to a single decision ordering such relief— 3|| they simply note that the decisions cited by the FTC don’t conclusively foreclose their position. (Doc. 178 at 2-3.) There is no need to consider breaking new ground here in 5 || light of the forfeiture finding. 6 Accordingly, IT IS ORDERED that the Individual Defendants’ Rule 19 motion || (Doc. 167) is denied. 8 Dated this 21st day of September, 2020. 9 10 Lom ee” ll f t _o——— Dominic W. Lanza 12 United States District Judge 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -8-