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Federal Trade Commission v. Edebitpay

February 3, 2011

FEDERAL TRADE COMMISSION, PLAINTIFF,
v.
EDEBITPAY, LLC, ET AL., DEFENDANTS.



The opinion of the court was delivered by: United States District Judge Hon. Otis D. Wright, II

ORDER HOLDING DEFENDANTS IN CONTEMPT OF JANUARY 22, 2008 FINAL ORDER AND ORDERING SANCTIONS

I. INTRODUCTION

Pursuant to the parties' stipulation, the Court issued a Final Order for Permanent Injunction and Monetary Relief ("Final Order") on January 22, 2008. (Dkt. # 35.) Plaintiff, Federal Trade Commission ("FTC") brings the instant contempt action, alleging that Defendants, EDebitPay, LLC ("EDP"), Dale Paul Cleveland ("Cleveland"), and William Richard Wilson ("Wilson") (collectively, "Defendants") violated the Final Order with respect to their marketing of two products on various websites. The Court has carefully considered the arguments and evidence proffered in connection with the contempt hearing conducted on November 19, 2010, December 2, 2010, and December 3, 2010, including exhibits, deposition testimony, hearing testimony, the parties' memoranda, and the proposed findings of fact and conclusions of law. For the following reasons, the Court finds by clear and convincing evidence that Defendants are in contempt of the Final Order.

II. PROCEDURAL HISTORY AND FACTUAL BACKGROUND

A. THE PARTIES

Defendant EDebitPay, LLC, is a California-based limited liability company that Defendants Cleveland and Wilson founded in 2002. (Joint Ex. 171 ¶ 3, Att. A; Hr'g Tr. (Cleveland) 41:18-24.) EDP is "in the business of online marketing and advertising." (Joint Ex. 529 (Compliance Report) 4:13-14.)

Defendant Cleveland is EDP's Chief Executive Officer and one of its two managing members. (Hr'g Tr. (Cleveland) 41:11-19.) Cleveland is responsible for EDP's "day-to-day operations as well as its general management." (Joint Ex. 529 (Compliance Report) 4:9-10.) As CEO, Cleveland has participated in all aspects of EDP's operations, including revising the content of its website offers, (Hr'g Tr. (Cleveland) 153:21-154:17), reviewing consumer complaints, (id. at 104:18-109:21), and communicating with the Better Business Bureau (id. at 109:22-110:9).

Defendant Wilson is President of EDP and the other of its two managing members. (Hr'g Tr. (Cleveland) 41:18-24.) Wilson is responsible for the company's "day-to-day sales andmanagement of its advertising program." (Joint Ex. 529 (Compliance Report) 4:14-15.) In this capacity, one of Wilson's responsibilities is to supervise website designers regarding disclosures on EDP websites that market the Netspend prepaid debit card. (Hr'g Tr. (Desa) 305:10-18.)

B. THE PRIOR PROCEEDING

On July 30, 2007, the FTC filed a Complaint against Defendants, alleging that Defendants' marketing of certain prepaid debit cards violated the Federal Trade Commission Act, 15 U.S.C. § 45(a). (Dkt. # 1.) Specifically, the FTC alleged that, in conjunction with the prepaid debit cards, Defendants debited consumer accounts without first obtaining express, informed consent; failed to clearly and conspicuously disclose material facts; and misrepresented that consumers were obligated to pay a fee when consumers either had not completed an application or had applied for the card without knowing that there was a fee. (Id. ¶¶ 49-60.) Concurrently with the Complaint, the FTC filed an Ex Parte Application for a Temporary Restraining Order ("TRO") freezing Defendants' assets and appointing a receiver. (Dkt. ## 2, 12.) The Court issued the TRO on July 30, 2007. (Id.) Pursuant to the TRO, the FTC and the Receiver accessed EDP's business premises, served copies of the TRO on Defendants, and the Receiver took control of the business. (Dkt. # 28 at 3.) EDP temporarily discontinued operations; however, pursuant to the Court's entry of a stipulation signed by the Receiver and Defendants, Defendants resumed certain business operations during the pendency of the TRO. (Dkt. # 16.) During the receivership, the parties continued negotiations to resolve the Complaint and ultimately agreed upon and signed the Final Order, which the Court entered on January 22, 2008. (Dkt. # 35.) On January 23, 2008, Defendants Cleveland and Wilson executed declarations acknowledging receipt of the Final Order, both in their individual capacities and on behalf of EDP. (Joint Exs. 150-51.)

C. THE INSTANT CONTEMPT PROCEEDING

On May 27, 2010, the FTC submitted an Application for Order to Show Cause Why Defendants Should Not be Held in Contempt. (Dkt. # 43.) After considering Defendants' Opposition to the Application and the FTC's Reply, the Court granted the Application and set the contempt hearing for October 15, 2010. (Dkt. # 62.) The hearing was subsequently continued to November 19, 2010. (Dkt. # 68.) The hearing was conducted over three days -- November 19, 2010, December 2, 2010, and December 3, 2010 -- during which the Court heard the testimony of various witnesses, discerned their credibility, and received several exhibits into evidence. In making its determination in this matter, the Court has carefully considered the aforementioned evidence presented at the hearing, along with the papers filed in conjunction therewith.

III. LEGAL STANDARD

District courts have the inherent power to enforce their orders through civil contempt. Shillitani v. United States, 384 U.S. 364, 370 (1966); Cal. Dep't. of Soc. Servs.

v. Leavitt, 523 F.3d 1025, 1033 (9th Cir. 2008); see also Stone v. City and Cnty. of San Francisco, 968 F.2d 850, 856 (9th Cir. 1992) ("The district court has 'wide latitude in determining whether there has been a contemptuous defense of its order.'" ). As a party to the original action, the FTC may invoke the Court's power by initiating a proceeding for civil contempt. Gompers v. Buck's Stove & Range Co., 221 U.S. 418, 444-45 (1911).

To establish Defendants' liability for civil contempt, the FTC must show by clear and convincing evidence that Defendants have violated a specific and definite order of the Court. FTC v. Affordable Media, LLC, 179 F.3d 1228, 1239 (9th Cir. 1999); Whittaker Corp. v. Execuair Corp., 953 F.2d 510, 517 (9th Cir. 1992). Upon such a showing, the burden then shifts to Defendants to demonstrate why they were unable to comply. Affordable Media, LLC, 179 F.3d at 1239. While substantial compliance with a court order is a defense to civil contempt and is not vitiated by "a few technical violations," In re Dual-Deck Video Cassette Recorder Antitrust Litigation, 10 F.3d 693, 695 (9th Cir. 1993), both good faith and intent in attempting to comply with a court order are irrelevant to the finding of civil contempt. Stone, 968 F.2d at 856-57. Rather, "[the Ninth] Circuit's rule with regard to contempt has long been whether the defendants have performed 'all reasonable steps within their power to [e]nsure compliance'" with the court order. Stone, 968 F.2d at 856; In re Dual-Deck Video Cassette Recorder Antitrust Litig., 10 F.3d at 695.

Upon a finding that Defendants are in contempt, sanctions may be imposed to coerce Defendants into compliance with the Court's Order, or to compensate the party pursuing the contempt action for losses sustained as a result of the contemptuous behavior, or both. United States v. United Mine Workers, 330 U.S. 258, 303-04 (1947); United States. v. Bright,596 F.3d 683, 696-97 (9th Cir. 2010); Whittaker Corp., 953 F.2d at 517. When determining the proper amount of compensatory sanctions, the Court should consider evidence of the actual loss sustained by the harmed party. Id.

IV. DISCUSSION

The FTC alleges that Defendants violated the Final Order with respect to their marketing of two products: the Century Platinum shopping club and the NetSpend "No Cost" prepaid debit card. The Court will begin its discussion with the Century Platinum shopping club and the FTC's allegations that Defendants' marketing of this product violates subsections I.B, I.E.5, I.A, and I.F ofthe Final Order. (See infra Parts IV.A.1-3.) Then, the Court will address the NetSpend "No Cost" prepaid debit card and the FTC's allegations that Defendants' marketing of this product violates subsection I.D. (See infra Part IV.B.) Next, the Court will examine Defendants' affirmative defenses. (See infra Parts IV.C.1-2.) Finally, the Court will discuss the appropriate sanctions. (See infra Part IV.D.)

A. VIOLATIONS OF THE FINAL ORDER --THE CENTURY PLATINUM SHOPPING CLUB

With respect to the Century Platinum shopping club, the FTC contends that Defendants' marketing of this product on nine versions of www.startercreditdirect.com ("Starter Credit website" or "Starter Credit marketing") and eight versions of www.supereliteoffer.com ("Super Elite Offer website"), violates the Final Order.*fn1 (See Joint Exs. 137, 152.) Specifically, the FTC claims that Defendants violate the Final Order by: (1) misrepresenting that they were offering a general line of credit in violation of subsection I.B; (2) failing to clearly and conspicuously disclose that they were actually offering a shopping club membership and that the line of credit could be used only to purchase items from the shopping club in violation of subsection I.E.5; and (3) failing to obtain consumers' express informed consent to be charged for the shopping club membership in violation of subsections I.A. and I.F. (Pl.'s Trial Brief, Dkt. # 90 at 3.) The FTC also ...

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