Argued and Submitted April 7, 2014, Pasadena, California
[Copyrighted Material Omitted]
Appeal from the United States District Court for the District of Nevada. D.C. No. 2:09-cv-01349-PMP-RJJ. Philip M. Pro, Senior District Judge, Presiding.
Federal Trade Commission
The panel affirmed in part and vacated in part the district court's summary judgment in favor of the Federal Trade Commission, and its order permanently enjoining Kyle Kimoto from engaging in a variety of marketing tactics and ordering him to pay restitution.
The district court found that Vertek, Kimoto's wholly controlled company, had committed multiple violations of the Federal Trade Commission Act, through its misleading advertising and various marketing schemes.
The panel held that the district court properly held Kimoto personally liable for both injunctive relief and the requirement to pay restitution with respect to Vertek's Line of Credit Scheme, Grant Connect Scheme, and Work From Home Scheme. The panel also held that Kimoto could not be held liable for either injunctive relief or restitution with respect to the Acai Total Burn Scheme. The panel vacated that part of the district court's grant of summary judgment and permanent injunction based on Vertek's violations of the FTC Act in connection with the Acai Total Burn Scheme.
The panel held that individual liability for corporate malfeasance was available for violations of the Electronic Fund Transfer Act because such violations are also deemed to be violations of the FTC Act, and that Kimoto was liable for Vertek's violations of the Electronic Fund Transfer Act because of his personal involvement in concocting and carrying out the several schemes that violated the Act.
The panel held that the scope of the district court's permanent injunction was not overbroad. The panel remanded so that the district court could modify the permanent injunction and the amount of restitution as required by this decision.
Peter Borenstein (argued) and Michael Dirscoll (argued), Law Students, University of Loyola Law School, Los Angeles, California; (argued); Erica L. Reilley, Jones Day, Los Angeles, California; Daniel Patrick Selmi, Los Angeles, California, for Defendant-Appellant.
Theodore P. Metzler (argued), Burke W. Kappler, and Dotan Weinman, Attorneys; Roberto Anguizola, Assistant Director; John F. Daly, Deputy General Counsel for Litigation; Federal Trade Commission, Washington, D.C.; Blaine T. Welsh, Assistant United States Attorney, Las Vegas, Nevada, for Plaintiffs-Appellees.
M. SMITH, Circuit Judge. Before: Sidney R. Thomas, Milan D. Smith, Jr., and Morgan Christen, Circuit Judges.
M. SMITH, Circuit Judge.
Kyle Kimoto (Kimoto) appeals from the district court's grant of summary judgment to the Federal Trade Commission (FTC), and its order permanently enjoining Kimoto from engaging in a variety of marketing tactics, and ordering him to pay restitution. The district court found that Vertek--Kimoto's wholly controlled company--had committed multiple violations of the FTC Act, 15 U.S.C. § § 41-58, through its misleading advertising, and further found that Kimoto was both personally involved in the practices and knew that the advertising was misleading or was recklessly indifferent as to that possibility. On this basis the district court permanently enjoined Kimoto personally from engaging in a variety of advertising practices and ordered him to pay restitution.
On appeal, Kimoto argues that the FTC presented insufficient evidence of his involvement in Vertek's violations of the FTC Act to personally enjoin him or require him to pay restitution. Specifically, Kimoto argues that he cannot be held liable for Vertek's schemes related to the marketing of what are styled the Line of Credit scheme, the Grant Connect scheme, the Work From Home scheme, and the Acai Total Burn scheme, because the campaigns were not launched until after Kimoto was imprisoned as a result of prior violations of the FTC Act committed through a different company. Kimoto further argues that he cannot be individually liable for Vertek's misdeeds under the Electronic Fund Transfer Act (EFTA), codified in part at 15 U.S.C. § 1693. Finally, Kimoto claims that the district court's injunction--barring him from engaging in what are described as negative-option marketing, continuity programs, preauthorized electronic fund transfers, the use of testimonials, and marketing or selling products related to grants, credit, business opportunities, diet supplements, or nutraceuticals--is overly broad.
We affirm the district court's grant of summary judgment to the FTC in part, and vacate the district court's grant of summary judgment to the FTC solely with respect to the Acai Total Burn scheme.
FACTUAL AND PROCEDURAL BACKGROUND
Kimoto's fraudulent business practices have drawn FTC scrutiny for over a decade, and have resulted in three distinct enforcement actions against him. Kimoto's various schemes have employed several unifying features: in each, Kimoto lured consumers with a deceptively advertised headline product, and then enrolled them in " upsells," or negativeoption " free trials" that required consumers to undergo a burdensome cancellation process in order to avoid inadequately disclosed recurring monthly fees.
Two such schemes provide the relevant background for this appeal. In 2003, the FTC brought an enforcement action against Kimoto and one of his companies, Assail, Inc. FTC v. Assail, Inc., 410 F.3d 256, 259 n.1 (5th Cir. 2005). The FTC alleged that Kimoto enticed customers with an offer to purchase a preapproved MasterCard through Assail, but that when they tried to do so Assail provided them either with applications for cash-secured debit cards, or with unusable plastic cards bearing an unauthorized reproduction of the MasterCard logo. Id. When customers accepted the offer for the ostensible credit cards, Assail also enrolled them in additional negative-option " free trials" that ceased to be free after an introductory period. Id. Assail then charged consumers recurring fees both for the " credit cards" and for the " free trials," and erected a variety of barriers to effective cancellation. Id. On appeal, the Fifth Circuit held that Kimoto, through Assail, " committed multiple, egregious violations of the [FTC Act]." Id. at 264. The district court in Assail imposed a permanent injunction barring Kimoto from engaging in telemarketing and also ordered Kimoto to pay $106 million in restitution. Subsequently, the FTC initiated criminal charges against Kimoto for his role in the Assail scheme. United States v. Kimoto, 588 F.3d 464, 470 (7th Cir. 2009).
Apparently undeterred by the injunction, Kimoto moved to Las Vegas and formed a corporate entity to engage in Internet marketing schemes, which eventually became the Vertek Group, LLC. To avoid regulatory scrutiny, Kimoto entrusted his then-wife, Juliette Kimoto, with legal ownership of the entity. According to Kimoto's ex-wife, this structure had the added--and intended--benefit of permitting her to profit from the company in the event that Kimoto was incarcerated.
Although Mrs. Kimoto was the titular owner of Vertek, Kimoto organized and ran the company. Kimoto hired many of the employees who had been involved in the Assail scheme, including Michael Henriksen and Tasha Jn Paul. Kimoto also arranged for Michael Henriksen's brother's business, Global Gold, to be the first " product provider" for the scheme and recruited two more Assail veterans, Randy O'Connell and James Gray--through their business consulting and staffing company O'Connell Gray, LLP--to help " with the logistics of accepting transactions on the [Internet] ...