The opinion of the court was delivered by: Honorable Janis L. Sammartino United States District Judge
ORDER: DENYING DEFENDANTS' MOTION TO LIMIT THE SCOPE OF THE SHOW CAUSE HEARING (Doc. No. 187)
Presently before the Court is Defendants' motion to limit the scope of the show cause hearing regarding contempt. (Doc. No. 187.) For the following reasons, the Court DENIES Defendants' motion.
The parties in this case are well aware of the background of this matter. Moreover, this Court and the Ninth Circuit have both provided a full description of the underlying facts. (See Doc. No. 105 (MSJ Order), at 2--8; FTC v. Neovi, Inc., - F.3d -, 2010 WL 2362956, at *1--3 (9th Cir. June 15, 2010).) Those factual summaries are incorporated by reference here. However, this Order will describe the procedural history relevant to the instant motion.
On September 16, 2008, the Court granted Plaintiff's motion for summary judgment, finding that Defendants' Qchex system violated section 5 of the FTC Act, 15 U.S.C. § 45(n). (Doc. No. 105.) On January 7, 2009, the Court denied Defendants' motion for reconsideration (Doc. No. 117) and entered a permanent injunction enjoining Defendants from "creating*fn1 or delivering*fn2 any check for a customer" without performing identity verification of prospective customers and account control verification (Doc. No. 118 (Final Order), at 4--5.) Defendants timely appealed. (Doc. No. 119.)
While Defendants' appeal was pending before the Ninth Circuit, Plaintiff moved for an order to show cause why Defendants should not be held in contempt. (Doc. No. 156 (Contempt Motion).) Plaintiff based its Contempt Motion on Defendants' "continuing operation of FreeQuickWire.com..., an electronic check creation and delivery service nearly identical to the Qchex and GoChex services that the Court found violated Section 5 of the FTC Act...." (Mem. ISO Contempt Mot. 1.) On November 13, 2009, the Court granted Plaintiff's motion and ordered Defendants to appear and show cause why they should not be held in civil contempt for failing to comply with the terms of the Final Order. (Doc. No. 170.) On December 22, 2009, the Ninth Circuit granted Defendants' request to expedite their appeal, and the Court vacated all dates associated with the show cause hearing pending resolution of Defendants' appeal. (Doc. No. 177.) On May 14, 2010, the Ninth Circuit affirmed in full the Court's Order denying Defendants' motion for reconsideration and the Final Order. See Neovi, - F.3d -, 2010 WL 2362956, at *3--8. On the same day, the Court reset the show cause hearing for July 15, 2010. (Doc. No. 179.)
On July 2, 2010, Plaintiff filed supplemental briefing in support of its Contempt Motion. (Doc. No. 182.) Plaintiff's supplemental briefing cites two additional products Plaintiff believes violate the Final Order: "VersaCheck(r) 2010 software and newly-released Qchex check creation templates." (Supplemental Mem. ISO Contempt Mot. 1.)
At the July 15, 2010 show cause hearing, Defendants for the first time contended that the VersaCheck(r) 2010 software (VersaCheck) was not a proper subject of the contempt proceeding. (Show Cause Hr'g Tr. 10--12.) The Court invited briefing on the proper scope of the contempt proceeding. (Id. 13.) On September 23, 2010, the Court heard argument on the instant motion.*fn3 (Doc. No. 194.)
Defendants raise two arguments in support of their position that the show cause hearing should be limited to whether the operation of FreeQuickWire.com (FQW) violates the Final Order.*fn4 The Court addresses each in turn.*fn5
I. Defendants Had Adequate Notice That VersaCheck Might Violate the Final Order
Defendants first contend that they did not have notice that VersaCheck might violate the Final Order because the FTC never challenged Defendants' marketing of VersaCheck, even though VersaCheck predated the FTC's enforcement action and the Final Order. (See Mem. ISO Mot. Re: Scope 5--6; Reply 2--3.) Plaintiff responds that Defendants' contention is without merit because the Final Order's "specific and definite language squarely applies to" VersaCheck. (Opp'n 3.) Plaintiff also argues that the Final Order properly incorporates "fencing-in" provisions that apply beyond Qchex. (Id. 4--6.)
A court may frame an injunction based on violation of the FTC Act broadly enough to prevent the defendant from engaging in similar illegal conduct in the future. FTC v. Colgate-Palmolive Co., 380 U.S. 374, 395 (1965); see also NLRB v. Express Publ'g Co., 312 U.S. 426, 435 (1941) ("A federal court has broad power to restrain acts which are of the same type or class as unlawful acts which the court has found to have been committed or whose commission in the future unless enjoined, may fairly be anticipated from the defendant's conduct in the past."). "[C]courts have often upheld FTC orders encompassing all products or all products in a broad category, based on violations involving only a single product or group of products...." Sears, Roebuck & Co. v. FTC, 676 F.2d 385, 391 (9th Cir. 1982) (quoting ITT Cont'l Baking Co. v. FTC, 532 F.2d 207, 223 (2d Cir. 1976)) (alterations in original); cf. Int'l Rectifier Corp. v. IXYS Corp., 383 F.3d 1312, 1318 (9th Cir. 2004) (declining to hold that contempt proceeding should be unavailable with respect to pre-judgment devices not accused of infringement in the underlying action). Thus, "those caught violating the [FTC] Act must expect some fencing in." FTC v. Nat'l Lead Co., 352 U.S. 419, 431 (1957).
Here, the Court's Order granting Plaintiff's proposed injunctive relief explicitly contemplated that the Final Order would apply beyond Qchex. (See Doc. No. 117, at 13 ("Defendants' pattern of conduct demonstrates a significant disregard for check fraud and a significant likelihood of future violation.... [F]ollowing the bankruptcy of Qchex, Defendants opened two more businesses offering the same basic functionality. Given the seriousness and deliberateness of Defendants' past record of violations, injunctive relief is appropriate." (citation omitted)).) And although Defendants purport to interpret the Final Order as narrowly applying to "a discrete line of G7's products," (Reply 4) the Final Order is clearly broader-it enjoins Defendants "from creating or delivering any check for a customer" (Final Order 4). Thus, to the extent that VersaCheck incorporates check creation and delivery functions, Defendants were on notice that Plaintiff might ...