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Federal Trade Commission v. Neovi

July 11, 2012

FEDERAL TRADE COMMISSION,
PLAINTIFF,
v.
NEOVI, INC., D/B/A NEOVI DATA CORPORATION AND QCHEX.COM, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Honorable Janis L. SammartinoUnited States District Judge

ORDER HOLDING DEFENDANTS IN CONTEMPT OF JANUARY 7, 2009 FINAL ORDER AND ORDERING SANCTIONS

On September 16, 2008, the Court granted summary judgment in favor of Plaintiff, Federal Trade Commission ("FTC") against Defendants Neovi, G7 Productivity Systems, Thomas Villwock, and James M. Danforth ("Defendants"). (SJ Order, ECF No. 105.) In that Order, the Court held that security failures in Defendants' Internet banking services constituted violations of the FTC Act. Subsequently, the Court ordered Defendants to disgorge $535,358 in revenue and permanently enjoined them from "creating or delivering any check for a consumer" without undertaking measures to protect consumers, which were specifically detailed in that Order. (Final Order, ECF No. 117.) Defendants appealed these Orders.

On October 15, 2009, the FTC filed an application for an order to show cause why Thomas Villwock, James M. Danforth, G7 Productivity Systems, iProlog Corporation, and FreeQuick Wire Corporation (collectively, "Contempt Defendants") should not be held in contempt of the Final Order. (App. for Order to Show Cause ("OSC"), ECF No. 156.) The Court issued an OSC, but stayed the hearing pending the Ninth Circuit's decision on Defendants' appeal. (ECF Nos. 170, 177.) The Ninth Circuit affirmed the Court's rulings. FTC v. Neovi, 604 F.3d 1150 (9th Cir. 2010). On April 27, 28, August 31, and September 1, 2011, the Court held a contempt hearing. The parties then filed a joint designation of the record with evidentiary objections (Joint Designation of Record ("JDR"), ECF No. 252), proposed findings of fact (Defs.' Proposed Findings of Fact ("DFF"), ECF No. 253; Pl.'s Proposed Findings of Fact ("PFF"), ECF No. 264), "closing" memoranda of points and authorities (Defs.' Opp'n to Contempt, ECF No. 253; Pl.'s Mem. ISO Contempt, ECF No. 258) and replies (Defs.' Reply, ECF No. 269; Pl.'s Reply, ECF No. 268). The matter was fully briefed and deemed submitted on December 12, 2011. The Court has carefully considered the arguments and evidence proffered. For the following reasons, the Court finds by clear and convincing evidence that the Contempt Defendants are in civil contempt of the Court's January 7, 2009 Final Order, and awards appropriate sanctions.

LEGAL STANDARD

A district court has inherent power to enforce compliance with its orders through civil contempt. Spallone v. United States, 493 U.S. 265, 276 (1990); 18 U.S.C. § 401(3). In determining whether civil contempt is warranted, the focus of the inquiry is whether "defendants have performed all reasonable steps within their power to insure compliance with the court's orders." Stone v. City of San Francisco, 968 F.2d 850, 856 (9th Cir. 1992), cert. denied, 506 U.S. 1081 (1993) (internal quotations omitted). Thus, "[o]ne need not commit an unlawful act in order to be liable for" contempt-one need only disobey a court order. NLRB v. Laborer's Int'l Union of N. Am., 882 F.2d 949, 954 (5th Cir. 1989).

The party moving for contempt bears the burden of establishing by clear and convincing evidence that the contemnors violated a specific and definite order of the Court. See Balla v. Idaho State Bd. of Corrections, 869 F.2d 461, 466 (9th Cir. 1989). "The burden then shifts to the contemnors to demonstrate why they were unable to comply." FTC v. Affordable Media, LLC, 179 F.3d 1228, 1239 (9th Cir. 1999). The contemnors' good faith or intent in attempting to comply with the order is immaterial. See Stone, 968 F.2d at 856-57.

The district court has wide latitude and a broad range of civil contempt sanctions at its disposal, such as "fine[s], imprisonment, receivership, and a broader category of creative, non-traditional sanctions." United States v. States of Tenn., 925 F. Supp. (W.D. Tenn. 1995); see also Hook v. Arizona, 907 F. Supp. 1326, 1339 (D. Az. 1995). "The Supreme Court has repeatedly emphasized the broad equitable remedies to the necessities of the particular cases, especially where a federal agency seeks enforcement in the public interest." SEC v. Wencke, 622 F.2d 1363, 1371 (9th Cir. 1980); see also SEC v. Hickey, 322 F.3d 1123, 1131 (9th Cir. 2003) (authorizing asset freeze of third party to effectuate relief). Sanctions may be imposed to coerce Defendants into compliance with the Court's Order, 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).

DISCUSSION

The facts pertaining to relevant prior proceedings in this action are thoroughly summarized in the Court's previous orders and the Ninth Circuit's opinion affirming the Court's rulings. FTC v. Neovi, 604 F.3d at 1153-1160. Because those facts and procedural history are familiar to the parties, the Court recites them here only as necessary to explain its reasoning.

1. The Underlying Action and Final Order

By way of brief summary, in the underlying action the Court found that Defendants Neovi, G7, Danforth, and Villwock (together, "Qchex") created and delivered unverified, and in many cases fraudulent, checks for consumers using the website qchex.com with an extreme lack of diligence and causing substantial injury to consumers in violation of the FTC Act, 15 U.S.C. § 45. On January 7, 2009, the Court ordered Qchex to disgorge $535,358 in revenue and permanently enjoined "Defendants, their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of this Order" from engaging in any similar unfair business practices without taking specified measures to protect consumers.

Specifically, Defendants were prohibited from "creating or delivering any check for a customer" without: (1) performing the account and identity verification procedures identified in the Order, (2) disclosing certain information on each check directly or indirectly created or delivered, and (3) adequately providing for and responding to consumer complaints as stated in the Order. (Final Order 4-8.) In so ruling, the Court explicitly contemplated that the Final Order would apply beyond Qchex. (See Final Order 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 up 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)).) Indeed, those who are found to have violated the FTC Act "must expect some fencing in." FTC v. Nat'l Lead Co., 352 U.S. 419, 431 (1957); see also FTC v. Colgate-Palmolive Co., 380 U.S. 374, 395 (1965) (holding that courts may frame an injunction based on a violation of the FTC Act broadly enough to prevent the defendant from engaging in similar illegal conduct in the future); Int'l Rectifier Corp. v. IXYS Corp., 383 F.3d 1312, 1318 (9th Cir. 2004) (rejecting argument that contempt proceedings are unavailable with respect to pre-judgment devices not accused of infringement in the underlying action).

Thus, the question currently before the Court is whether the Contempt Defendants have continued to engage in check creation and delivery services without complying with the requirements of the Final Order, in violation of the clear provisions of the Court's Final Order. Before turning to that discussion, the Court reviews the relevant parties and evidence before the Court, including making the necessary evidentiary rulings.

2. The Contempt Defendants

A. Defendants Named in Underlying Action

(i) Thomas Villwock

Contempt Defendant Thomas Villwock ("Villwock") was the owner, President, and Chief Executive Officer ("CEO") of Neovi, the Defendant corporation that marketed and operated a series of software programs on the website www.qchex.com ("Qchex") from 2000 through 2006. (SJ Order 2.) Villwock designed the Qchex business model of check creation and delivery. (SJ Order 2, 3-5.) He is also the owner and CEO of Contempt Defendant iProlog, a corporation that was essentially built from the rubble of Neovi's bankruptcy in October 2007. (PFF ¶¶ 2, 48-49; SJ Order 3.) Additionally, Villwock describes himself as a "business consultant" for Contempt Defendant G7 Productivity Systems ("G7"), but he exerts considerable control over the operations of G7 and is considered by its employees to be the de facto President. (PFF ¶¶ 3, 33-47; SJ Order 3; 604 F.3d at 1154 n.4.) Along with Defendant Danforth, Villwock helped launch another check creation and delivery website known as "freequickwire.com," and served as the President of the FreeQuick Wire Corporation ("FQW"). (PFF ¶¶ 5, 97; SJ Order 3.)

(ii) James Danforth

Contempt Defendant James Danforth ("Danforth") was Neovi's Chief Operating Officer,

("COO"), Treasurer, Secretary, and registered service agent. (SJ Order 2; PFF ¶ 9.) Among other things at Neovi, he managed Qchex. (SJ Order 2.) Danforth is also the President of iProlog, having served previously as its COO, and has been an officer of G7 since 2000, serving in many roles as Executive Vice President ("EVP"), Chief Financial Officer ("CFO"), Secretary, and registered service agent. (PFF ¶¶ 10-12); 604 F.3d at 1154 n.4. As mentioned above, Danforth helped launch the FQW website and was COO of the FQW corporation. (PFF ¶ 14.)

(iii) G7 Productivity Systems

Contempt Defendant G7 is a California corporation that produces check software, ink, and paper-including VersaCheck® 2010 and 2012 software, VersaCheck® paper, VersaInkTM, and Validation Codes-for sale to U.S. retailers and consumers through its website, www.g7ps.com. (SJ Order 2; PFF ¶¶ 15, 19-21.) At least through March 2011, G7 also controlled the Qchex website as well as the website www.versacheck.com. (PFF ¶¶ 22-23, 26-29.)

B. Post--Final Order Defendants

(i) iProlog Corporation

Neovi declared bankruptcy in October 2007 and subsequently went out of business;

Villwock and Danforth established iProlog Corporation the very next day, hiring the same employees, using the same equipment and office location, conducting Neovi's former business activities, and paying for many expenses using G7 funds. (SJ Order 3; PFF ¶¶ 49, 52-56); 604 F.3d at 1153 n.2. Although not a named Defendant in the underlying action, the Court and parties were aware of iProlog's involvement in Defendant's check creation and delivery scheme at the time of the Summary Judgment Order and Final Order. (See SJ Order 3); 604 F.3d at 1153 n.2.

(ii) FreeQuick Wire Corporation

On November 8, 2007, Defendants Villwock and Danforth formed FreeQuick Wire Corporation ("FQW"), with Danforth as the COO, Villwock as President, and Villwock's daughter, Diana Villwock, as the corporation's sole director. (PFF ¶¶ 95-96, 105.) The purpose of FQW was to hold the FQW website. (PFF ¶ 97.) Although FQW was directed to appear and show cause why it should not be held in contempt by the Court's OSC, FQW has ...


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