Federal Trade Commission v. Inc21.com Corp. ( 2012 )

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS FILED
FOR THE NINTH CIRCUIT MAR 30 2012
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FEDERAL TRADE COMMISSION, No. 11-15330
Plaintiff - Appellee, D.C. No. 3:10-cv-00022-WHA
v.
MEMORANDUM*
INC21.COM CORPORATION, DBA
FaxFaster.com, DBA GlobalYP, DBA
GoFaxer.com, DBA INC21, DBA Inc21
Communications, DBA Inc21.net, DBA
Jumpage Solutions, DBA Metro YP, DBA
NetOpus; JUMPAGE SOLUTIONS
INCORPORATED; GST U.S.A., INC.;
ROY YU LIN, individually and as and
officer and director of the corporate
defendants; JOHN YU LIN, individually
and as an officer and director of the
corporate defendants,
Defendants - Appellants.
Appeal from the United States District Court
for the Northern District of California
William Alsup, District Judge, Presiding
Argued and Submitted February 17, 2012
San Francisco, California
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
Before: FISHER and IKUTA, Circuit Judges, and SEABRIGHT, District Judge.**
Defendants Inc21.com Corporation, Jumpage Solutions, Inc., GST U.S.A.,
Inc., Roy Yu Lin and John Yu Lin appeal the judgment of the district court in this
civil enforcement action by the Federal Trade Commission (FTC) arising from the
defendants’ practice of charging consumers through local phone bills for online
services they never agreed to purchase. On cross motions for summary judgment,
the district court concluded that the defendants engaged in deceptive and unfair
billing practices in violation of § 5 of the Federal Trade Commission Act (FTC
Act), 15 U.S.C. § 45, and the Telemarketing Sales Rule, 16 C.F.R. part 310. The
district court imposed remedies under § 13(b) of the FTC Act, 15 U.S.C. § 53(b),
including ordering the defendants to pay restitution to injured consumers in the
amount of $38 million. We have jurisdiction under 28 U.S.C. § 1291, and we
affirm.
1. We reject the FTC’s argument that the defendants failed to timely
appeal from the summary judgment order and the order on pending motions. The
FTC filed a timely motion to amend the judgment. See Fed. R. Civ. P. 59(e). That
motion tolled the time for filing a notice of appeal until entry of an order disposing
**
The Honorable J. Michael Seabright, United States District Judge for the
District of Hawaii, sitting by designation.
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of the motion. See Fed. R. App. P. 4(a)(4)(A)(iv). The district court disposed of
the FTC’s motion on January 25, 2011, when it filed the order implementing the
distribution plan. See Campbell Indus., Inc. v. Offshore Logistics Int’l, Inc., 816
F.2d 1401, 1404 (9th Cir. 1987) (“Only when a judge acts in a manner which
clearly indicates an intention that the act be final, and a notation of that act has
been entered on the docket, does the time for appeal begin to run.”). The
defendants filed a timely notice of appeal within 60 days thereafter. See Fed. R.
App. P. 4(a)(1)(B)(ii).
2. We reject each of the defendants’ challenges to the monetary relief
ordered by the district court. Contrary to the defendants’ arguments, § 13(b)
authorizes monetary relief, see FTC v. Stefanchik, 559 F.3d 924, 931-32 (9th Cir.
2009) (restitution); FTC v. Neovi, Inc., 604 F.3d 1150, 1159-60 (9th Cir. 2010)
(disgorgement), as amended; FTC v. Gill, 265 F.3d 944, 954, 958 (9th Cir. 2001)
(restitution and disgorgement); FTC v. Pantron I Corp., 33 F.3d 1088, 1102-03 &
n.34 (9th Cir. 1994) (restitution and disgorgement), including consumer redress
remedies, see, e.g., FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1113 (9th Cir. 1982).
The defendants have identified no intervening authority that would permit us to
disregard these binding decisions. See Miller v. Gammie, 335 F.3d 889, 893, 899
(9th Cir. 2003) (en banc).
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3. Circuit precedent also forecloses the defendants’ argument that
§ 13(b) is limited to equitable restitution, measured by the gain to the defendants,
rather than legal restitution, measured by the loss to consumers. See Stefanchik,
559 F.3d at 931-32 (holding “the district court did not abuse its discretion by
holding the defendants liable for the full amount of loss incurred by consumers”);
see also Singer, 668 F.2d at 1112-13 (holding that, because § 13(b) vests a court
with equitable jurisdiction, it empowers the court to provide complete relief,
including “any ancillary relief necessary to accomplish complete justice”).1
4. The district court did not abuse its discretion by directing the FTC to
provide restitution through a pro rata distribution plan rather than a notice-and-
claim procedure. See United States v. Alisal Water Corp., 431 F.3d 643, 654 (9th
Cir. 2005) (reviewing a district court’s choice of remedies for an abuse of
discretion). The court’s approach was reasonable in light of the relative
advantages of each option, including the costs of administering relief and problems
of proof. The defendants have made no showing that the pro rata distribution plan
will overcompensate some consumers. See Stefanchik, 559 F.3d at 931. Even if
1
The underlying district court order in Stefanchik makes clear that relief was
awarded under § 13(b) of the FTC Act, not § 19. See FTC v. Stefanchik, No. C04-
1852RSM (W.D. Wash. Apr. 3, 2007) (final judgment and order for permanent
injunction and other equitable relief), at p. 4, ¶ 23.
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they could make that showing, the district court’s choice of remedy remains
reasonable under the circumstances.
5. The defendants have not shown that the restitution ordered by the
district court constitutes a “punitive” remedy. Even if they could make that
showing, § 13(b) would not preclude the remedy. It is true that punitive damages
are not permitted under § 19 of the FTC Act. See 15 U.S.C. § 57b(b); FTC v.
Figgie Int’l, Inc., 994 F.2d 595, 607-08 (9th Cir. 1993) (per curiam). Section
13(b), however, contains no such limitation, and § 19 expressly provides that
“[n]othing in this section shall be construed to affect any authority of the
Commission under any other provision of law.” 15 U.S.C. § 57b(e).
6. The exclusionary rule does not apply to the evidence obtained
pursuant to the search and seizure warrants authorized through Postal Inspector
Andrew Wong’s affidavits. Grimes v. Commissioner, 82 F.3d 286, 288-90 (9th
Cir. 1996), held that the exclusionary rule did not apply in federal civil tax
proceedings to evidence illegally seized by the Federal Bureau of Investigation
(FBI) because there was no preexisting agreement between the FBI and the Internal
Revenue Service (IRS) under which the FBI agreed to share investigatory
information with the IRS. That reasoning applies here. Wong’s investigation was
conducted jointly by the Postal Inspection Service and the IRS, not the FTC. The
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investigation involved criminal allegations of mail fraud, wire fraud, conspiracy,
money laundering and tax fraud under 18 U.S.C. §§ 371, 1341, 1343, 1956, and
1957, and 26 U.S.C. §§ 7201, 7203 and 7206(1), not the § 5 and Telemarketing
Sales Rule civil violations at issue here. The defendants do not assert that the
Postal Inspection Service had a preexisting agreement to share investigatory
information with the FTC. The exclusionary rule therefore does not apply.
The defendants, moreover, have made no showing that any evidence was
seized unlawfully. Wong misspoke when he stated in his affidavits that Inc21 did
not have a single customer that knowingly authorized being billed for the
defendants’ products. His misstatements, however, were not material to the
existence of probable cause because, even if a few customers knowingly agreed to
purchase the services, customers overwhelmingly did not do so. See United States
v. Hammett, 236 F.3d 1054, 1058 (9th Cir. 2001) (misstatements “will not
invalidate the entire warrant provided ‘there remains sufficient content in the
warrant affidavit to support a finding of probable cause’” (quoting Franks v.
Delaware, 438 U.S. 154, 172 (1978))).
7. The district court did not abuse its discretion by admitting the report
of the FTC’s expert, Dr. Howard Marylander. Marylander’s survey of 1,087
consumers asked, “Did you or your company agree to purchase any Internet
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services from (PRODUCT NAME)?” Almost 97 percent responded that they had
not agreed to purchase services, a finding that the district court relied on to
conclude that the defendants’ billing practices were deceptive. The defendants
contend Marylander’s question was misleading because consumers would have
understood him to be asking whether they purchased internet access services,
rather than the online business services. The district court rejected this argument,
stating that “the survey questions presented to interviewees also stated the name of
the specific product supposedly purchased by each customer,” which “disarms any
criticisms directed at the phrase ‘Internet services.’” FTC v. Inc21.com Corp., 745
F. Supp. 2d 975, 1002-03 (N.D. Cal. 2010). We agree.
8. To establish that the defendants’ billing practices were likely to
mislead consumers, the district court relied on Marylander’s finding that “only five
percent of these ‘customers’ were even aware that charges for defendants’ products
had been placed on their telephone bills.” Id. at 1001. The defendants challenge
that finding, arguing that 70 percent of those surveyed had canceled the service and
received a refund, showing that they were in fact aware of the charges. The
defendants’ 70 percent claim, however, is unsupported by the record. When we
asked defense counsel to substantiate the 70 percent claim at oral argument,
counsel pointed us to a document that fails to do so. The district court did not err.
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9. The district court properly calculated the amount of restitution. The
court awarded “restitution in the full amount of funds lost by consumers.” Id. at
1011. The court calculated this amount by starting with the defendants’ gross
collections through local exchange carrier (LEC) billing, subtracting refunds paid
by LECs and billing aggregators and subtracting payments by 56 customers who
actually purchased the defendants’ services. See id. at 1011-12. This yielded a
reasonable approximation of consumer losses of $37,970,929.57. See id. The
defendants offered no evidence to rebut the FTC’s approximation of loss. See id.
at 1012-13.
The defendants’ challenges to the district court’s loss calculation are without
merit. The FTC’s approximations of loss were supported by properly
authenticated billing records from aggregators. The defendants offered no
evidence to substantiate their claims that the FTC’s approximations included
consumers who received refunds or were satisfied with the defendants’ products.
See Stefanchik, 559 F.3d at 931. The defendants’ reliance on FTC v. Verity
International, Ltd., 443 F.3d 48, 66-68 (2d Cir. 2006), is misplaced; whereas the
Second Circuit limits § 13(b) relief to equitable restitution, the Ninth Circuit
permits restitution measured by the loss to consumers. See Stefanchik, 559 F.3d at
931-32. Finally, the defendants were not prejudiced by the FTC’s reply-brief
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revisions to its approximations of consumer loss because, as the district court
explained, they had ample opportunity to challenge the FTC’s estimates and failed
to do so.
10. The district court did not abuse its discretion by imposing limits on
the defendants’ access to frozen assets to pay attorney’s fees. The court permitted
the defendants to withdraw reasonable sums from frozen assets for attorney’s fees,
even though available funds were insufficient to compensate injured consumers.
The court acted within its discretion by declining to release additional funds. See
FTC v. World Wide Factors, Ltd., 882 F.2d 344, 347-48 (9th Cir. 1989); see also
Commodity Futures Trading Comm’n v. Noble Metals Int’l, Inc., 67 F.3d 766, 768,
775 (9th Cir. 1995); FSLIC v. Ferm, 909 F.2d 372, 375 (9th Cir. 1990).
AFFIRMED.
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