Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_06-cv-01952/USCOURTS-casd-3_06-cv-01952-10/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 15:0045 Federal Trade Commission Act

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

FEDERAL TRADE COMMISSION,

Plaintiff,

CASE NO. 06-CV-1952 JLS (JMA)

ORDER HOLDING DEFENDANTS

IN CONTEMPT OF JANUARY 7,

2009 FINAL ORDER AND

ORDERING SANCTIONS

vs.

NEOVI, INC., d/b/a NEOVI DATA

CORPORATION and QCHEX.COM, et al.,

Defendants.

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

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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. 

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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, nontraditional 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

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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

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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

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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 not entered an

appearance in these contempt proceedings. (See OSC, ECF No. 170; Pl.’s Mem. ISO Contempt 2

n.1.) 

3. Contempt Proceedings

A. Evidence Presented 

At the contempt hearing, the parties presented evidence through live testimony, deposition

testimony, declarations, and other exhibits. The evidence presented without objection included:

• Declarations in Support of Contempt of Leslie Lewis (Ex. 528), Ronald Lewis (including

excerpts from Supplemental Declarations) (Exs. 553, 642-43), William Burton (Ex. 596),

Bernadette Harding (Ex. 635), Denise Owens (Ex. 583), and Janet Wright (Ex. 634);

• Deposition testimony of James Danforth, Thomas Villwock, G7, and iProlog (subject to

supplementation) (Exs. 581-82, 645-51); 

• In-court Testimony of Ronald Lewis, James Danforth, Thomas Villwock, and Diana

Villwock; and

• Other documents, including website printouts, receipts, checks, reports, emails and letters,

catalogs and instructions, and corporate documents such as employee lists, sales

summaries, tax returns and other records and filings (Exs. 1, 2, 5, 6, 7 (page 1 only), 9, 10,

13 (pages 2 and 3 only), 14-16, 20-22, 25, 26, 44, 45, 501-15, 517-22, 525, 529-52, 554-95,

597-633, 636-41, 644, 652-57, 738, 740-42, 744-49, 751-58).

//

//

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Other evidence was presented with objection, as follows:

• Third-party consumer complaints (Exs. 526, 527);

• Depositions and associated exhibits from six third-party consumers, Christina

Keheley, Audrey O’Neil, Kristy Smith, Melva Talley, Joseph Cassidy, and

Christine Andrews (Exs. 658-737);

• Qchex website printouts from January 2010 (Exs. 739, 743) and June 2010 (Exs.

514, 515);

• Plaintiff’s Dec. 4, 2009 requests for production to iProlog (Ex. 516);

• VersaCheck® 2012 and VersaCheck® for Quickbooks (Exs. 523, 524); and 

• In-court Testimony of Dan Fisher.

B. Evidentiary Rulings

(i) Objections to Plaintiff’s Evidence

(a) Third-Party Consumer Complaints

At the contempt hearing, the parties disputed the admissibility of exhibits detailing various

documented consumer complaints. (4/27 Hr’g Tr. 181-85; 4/28 Hr’g Tr. 193-99; 8/31 Hr’g Tr. 13-

17). These consisted of two distinct types: (1) those found through an Internet search (Ex. 526),

and (2) those made directly to the FTC (Ex. 527). (4/27 Hr’g Tr. 182:4-183:7.) Of the latter

category, some of the complaints pertained generally to fraudulent or suspicious activity in

connection with VersaCheck software or other related products (Ex. 527 at 1-52), while others

more specifically mentioned a “mystery shopper” scheme in conjunction with one or more of

Contempt Defendants’ products (Ex. 527 at 53-507). Contempt Defendants objected to these

exhibits as hearsay and as irrelevant to the Court’s determination of contempt. (4/27 Hr’g Tr.

177:15-20, 182:10-17.) In particular, they argued that the “mystery shopper” scheme complaints

that did not even reference VersaCheck or contain any link to Contempt Defendants should be

excluded as highly prejudicial. (4/28 Hr’g Tr. 195:9-196:6.) 

The Court admitted the consumer complaints that pertained explicitly to the Contempt

Defendants, Exhibit 526 and pages 1-52 of Exhibit 527, under Federal Rule of Evidence 807, the

residual exception to hearsay. (4/28 Hr’g Tr. 197:23-199:5.) The Court found the documents

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relevant to the issue of the FTC’s requested remedy of equitable disgorgement, and possessing

sufficient circumstantial guarantees of trustworthiness here, as explained in FTC v. Figgie, 994

F.2d 595, 608-09 (9th Cir. 1993) (finding consumer complaints in the form of letters written to the

FTC admissible under the residual hearsay exception, then Federal Rule of Evidence 803(24), as

relevant to the requested remedy—there, consumer redress). However, the Court reserved ruling

on the issue of the admissibility of the complaints to the FTC from consumers regarding “mystery

shopper” scheme at the hearing. (4/28 Hr’g Tr. 199:6-12.)

The FTC conceded at the contempt hearing that the disputed complaints are not tied

directly to Contempt Defendants through VersaCheck or any other product, admitting that the FTC

could not prove that the checks referenced in those complaints were created with VersaCheck. 

(4/28 Hr’g Tr. 197:16-17.) Indeed, such linkage would be impossible given Contempt Defendants

failed to print identifying information anywhere on the face of the checks themselves as required

by the Court’s Order. (4/28 Hr’g Tr. 194:17-23, 196:8-197:3.) Thus, the FTC would only be able

to determine what types of checks were used in these “mystery shopper” schemes by tracking

down the person who initially sent the check. (Id.) In a few cases, the FTC was able to do just

that, and offered those individuals’ depositions as evidence as well. (See Part B(i)(b), infra.) 

The Court understands the FTC’s frustration at being stymied from narrowing the “mystery

shopper” scheme complaints to those specifically using Contempt Defendants’ products by the

very fact of Contempt Defendants’ failure to comply with the Final Order. However, that

frustration cannot justify the Court finding all of these complaints relevant merely because they

pertain to a certain type of fraud scheme. As the Court has reiterated throughout these contempt

proceedings, the narrow issue currently before the Court is whether Contempt Defendants violated

the Final Order. The Court has repeatedly excluded evidence relating to competitor products and

“the check creation industry” that does not bear on this narrow issue. Further, the FTC has

provided some evidence of the mystery shopper scheme being used in conjunction with Contempt

Defendants’ products (see, e.g., Third-Party Depositions and Exhibits, infra Part B(i)(b)), and so

the exclusion of these numerous untethered complaints will cause little prejudice to the FTC. For

these reasons, the Court finds pages 53-507 of Exhibit 527 are properly excluded. 

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(b) Third-Party Consumer Depositions and Exhibits

The FTC also offered into evidence portions of depositions of six “consumers,” Christina

Keheley, Audrey O’Neil, Kristy Smith, Melva Talley, Christina Andrews, and Joseph Cassidy

(Exs. 658, 674, 703, 710, 732, 734), as well as the associated deposition exhibits (Exs. 659-73,

675-702, 704-09, 711-31, 733, 735-37). These individuals explained their experiences as victims

at different stages of “mystery shopper” fraud schemes, which were perpetrated using VersaCheck

products. The FTC argues the testimony illustrates the type and severity of consumer harm

created by Contempt Defendants’ products. Contempt Defendants objected on several bases. 

First, they argued that admission of only the FTC’s selected excerpts is improper because “they

don’t tell the full story of how the scams actually happened.” (4/27 Hr’g Tr. 14:2-13.) Further,

they objected that the FTC had not shown the witnesses were unavailable to testify at the hearing,

and that the transcripts are irrelevant to the contempt issue before the Court. (8/31 Hr’g Tr. 16:16-

18.) The FTC agreed to provide the Court with the full transcripts, and suggested Contempt

Defendants supply counter-designations. (4/27 Hr’g Tr. 14:15-25.) The Court provisionally

admitted the FTC’s consumer deposition excerpts and exhibits, and also received the full

transcripts. (8/21 Hr’g Tr. 17:11-18.)

Unlike the consumer complaints, supra Part B(i)(a), this evidence pertains directly to the

use of Contempt Defendants’ products. The Court finds that the deposition testimony of the six

consumers is relevant, and further that it is admissible under Federal Rule of Civil Procedure 32. 

All six deponents live more than 100 miles from San Diego, California.1

 (See 8/31 Hr’g Tr. 13:5-

17.) Contrary to Contempt Defendants’ assertion at the hearing, the definition of an unavailable

witness under Rule 32(a)(4)2 does not contain a requirement that the witness be unwilling to testify

at the hearing. (See 8/31 Hr’g Tr. 17:6-8.) Contempt Defendants had a full and fair opportunity to

cross examine these witnesses at their depositions, and—as the FTC points out—these cross1

 At the time of the depositions and contempt hearing, the consumer witnesses lived in

Georgia, Florida, Texas, and Pennsylvania. 

2

 Fed. R. Civ. P. 32(a)(4) provides, in pertinent part: “A party may use for any purpose the

deposition of a witness, whether or not a party, if the court finds: . . . (B) that the witness is more than

100 miles from the place of hearing or trial or is outside the United States, unless it appears that the

witness’s absence was procured by the party offering the deposition.” 

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examinations were quite lengthy. (Pl.’s Mem. ISO Contempt 29 n.18.) In addition, Contempt

Defendants have been repeatedly given the opportunity to counter-designate portions of the

transcripts not included in the FTC’s excerpts. (4/27 Hr’g Tr. 15:24-16:3; 8/31 Hr’g Tr. 15:15-

16:13.) They have apparently now done so in their post-hearing briefs. For these reasons, the

Third-Party Consumer Depositions and Exhibits are admitted. 

(c) Other Exhibits

Finally, Contempt Defendants objected to the admission of seven other exhibits at the

contempt hearing on the basis of relevance. (See 4/27 Hr’g Tr. 152:18-22; 4/28 Hr’g Tr. 360:22-

361:14.) These consist of: (1) printouts from the Qchex website, including the Homepage, the

“How it Works” page, the “Bank Compliant” page (with FQW ad), the “Supplies” page (selling

VersaCheck, VersaInk, and VersaToner products), and the “Create Checks” page (Ex. 514); (2) a

press release published on Forbes.com about Qchex.com, entitled “Qchex.com Publishes FREE

Check Creation Solutions for Microsoft(R) Word and Adobe(R) Acrobat(R),” explaining the

services offered by Qchex, including safety issues (Ex. 515); (3) a list of the FTC’s first requests

for production to iProlog (Ex. 516); (4) a series of screen-shots taken from a computer installing

VersaCheck® 2012, including prompts to register the software using the Internet, and prompts to

print, write, send, or receive checks (Ex. 523); (5) a list of G7 products, including VersaCheck for

Quickbooks, as well as VersaInk, VersaToner, and VersaScan, sold on http://g7ps.com (Ex. 534);

(6) a copy of a notice from Qchex.com regarding suspended third-party validation (Ex. 739); and

(7) a copy from http://g7ps.com of G7’s description of VersaInk (Ex. 743). Because these

Exhibits pertain to the operation, use, and/or sale of Contempt Defendants’ products, the Court

finds they are all relevant and properly admitted. 

(ii) Objections to Contempt Defendants’ Evidence

(a) Expert Testimony of Dan Fisher 

Prior to the contempt hearing, the FTC moved to exclude the testimony of Contempt

Defendants’ expert witness, Dan Fisher. (ECF No. 208.) The Court reserved its ruling on the

motion, noting that in the context of a bench trial, the importance of the trial judge’s gatekeeping

role with regard to expert testimony is limited, because “the judge is the trier of fact and has an

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ongoing opportunity to evaluate the admissibility and weight of expert testimony.” (MIL Ruling

3, ECF No. 223) (citation omitted); see also Deal v. Hamilton Cnty. Bd. of Educ., 392 F.3d 840,

852 (6th Cir. 2004) (“The ‘gatekeeper’ doctrine was designed to protect juries and is largely

irrelevant in the context of a bench trial.”); FTC v. Connelly, 2007 WL 6492913, at *2 n.2 (C.D.

Cal. Aug. 10, 2007) (“Because this is a bench trial, the Court need not preclude the experts’

testimony because of potential problems with the sufficiency of facts or data relied on or the

reliability of the methods used to formulate their opinions. Rather, the Court can evaluate the

experts’ testimony against the Rule 702 standard as they testify.”) 

Contempt Defendants called Dan Fisher to testify at the contempt hearing on September 1,

2011. (8/1 Hr’g Tr. 120:21-210:2.) As the Court indicated at the hearing, his testimony about the

industry of check creation, validation, and fraud was of minimal relevance to the sole issue

presently before the Court—whether Contempt Defendants have violated the Final Order. 

Consequently, the Court admits Mr. Fisher’s testimony, and may rely on his expert opinion where

appropriate, but notes that it finds his opinions of limited utility here.

4. Violations of the Final Order

Based on all of the evidence before the Court, The FTC alleges that Contempt Defendants

violated the Final Order through FQW, VersaCheck software, and the Qchex.com Templates, and

continue to violate it through VersaCheck software and gValidate.com. (See generally Pl.’s Mem.

ISO Contempt.) The FTC argues these violations cause substantial consumer harm, and that

Contempt Defendants should pay compensatory and coercive sanctions. 

In order to establish Contempt Defendants’ liability for civil contempt, the FTC must show

by clear and convincing evidence that the Contempt Defendants are bound by and have violated a

specific and definite Order of the Court. See Whittaker Corp. v. Execuair Corp., 953 F.2d 510,

517 (9th Cir. 1992). As discussed below, the Court finds that the FTC has met this burden.

A. Contempt Defendants are Bound by the Final Order

The Final Order binds “Defendants, their officers, agents, servants, employees, attorneys,

and those persons in active concert or participation with them who receive actual notice of this

Order by personal service or otherwise.” (Final Order 4.) Further, Federal Rule of Civil

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Procedure 65(d) provides that a permanent injunction is binding on a party with actual notice,

including those individuals related to a party, as described by the Court in the Final Order. 

Through the individual Defendants Villwock and Danforth, all of the Contempt Defendants

had actual notice of the Final Order. As already discussed, supra Part 2, Contempt Defendants

Villwock and Danforth operated and controlled all three corporate Defendant businesses. Further,

the Court agrees with the FTC that the corporate Contempt Defendants G7, iProlog, and FQW

operate as a “maze of interrelated companies” forming a “common enterprise,” see FTC v. J.K.

Publ’ns, Inc., 99 F. Supp. 2d 1176, 1202 (C.D. Cal. 2000), such that all Defendants are “in active

concert or participation” with each other under the terms of the Final Order. Contempt Defendants

Villwock and Danforth exercise a common control over these corporate entities, illustrated by the

commingling of funds and operations, including control of websites, accounts, and employees; the

routine performance of work by an employee of one corporation for the other corporation; and the

integration of technology between the corporations, including software. (See Pl.’s Mem. ISO

Contempt 4 n.2.) Contempt Defendants’ attempts to obfuscate these interdependent relationships,

largely by shifting blame onto Defendant Villwock’s daughter or brother, were simply not credible

or convincing. 

Contempt Defendants also attempt to escape the scope of the Court’s Final Order by

asserting that the Qchex.com and FQW websites are no longer in operation as check creation or

delivery services. (8/31 Hr’g Tr. 144:22-145:4; 9/1 Hr’g Tr. 110:19-22.) Both of these websites

now redirect to the VersaCheck website, which, they claim, they have no control over. It is

undisputed that the VersaCheck line of software remains on the market and available for use by

consumers, including VersaCheck® 2010 and 2012, and that new versions of the software,

including VersaCheck® X1, continue to be developed and sold at versacheck.com, a website

nearly identical to the former g7ps.com website. (9/1 Hr’g Tr. 109:23-110:1, 111:3-24; Exs. 504,

755, 756.) Although Contempt Defendants argue again and again that they no longer have any

control over VersaCheck products, the Court rejects these unsupported and incredible assertions. 

The “new” corporate face of the operation, Global BizForce, has hired exclusively former

employees of iProlog or G7, and even uses the same ink supplier as G7—Diversified Nano

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Corporation, owned by Villwock’s brother. (PFF ¶¶ 120, 125-139, 140, 142-46.) Indeed,

Contempt Defendants Villwock, Danforth, and iProlog continue to “work actively” with the new

company, including consulting on software architectures and website technologies. (PFF ¶¶ 122-

23, 559-60.) Global BizForce and iProlog even share office space. (PFF ¶¶ 561-62.) The Court

finds that all Contempt Defendants had notice of and are bound by the Final Order with regard to

their activities creating and delivering checks for consumers using this interrelated web of

companies. As the scheme currently in operation, this Order focuses on the VersaCheck line of

software products. 

B. The Final Order is Specific and Definite

As described by the Ninth Circuit, the Final Order required Qchex to “disgorge $535,358

in revenue and permanently enjoined [Qchex] from operating any similar business without taking

appropriate, specified measures to protect consumers.” FTC v. Neovi, 604 F.3d at 1153. 

Specifically, Defendants are prohibited from “creating or delivering any check for a customer,

unless they perform the verification procedures identified” in the Final Order. See id. at 1160. 

These procedures include identity and account verification, as well as disclosure of contact

information on checks created. 

Although Contempt Defendants argue that they are not “sophisticated” and thus cannot be

expected to have understood the provisions of the Final Order, they do not specifically argue that

any of the required procedures are unclear. Instead, Contempt Defendants argue that they cannot

violate the Final Order through the VersaCheck software because it is not a web-based check

creation and delivery system, like Qchex. (Def.’s Opp’n to Contempt 13.) VersaCheck, in their

estimation, is not a service but a product, outside the scope of the Final Order. (Id.) However, as

indicated by the clear provisions of the Final Order, this is a distinction without a difference. The

Final Order is not limited to the drafting and printing of checks for customers. Instead, by

defining “create a check” and “deliver a check,” the Final Order specifically applies to “any

involvement in the creating, designing, composing, drawing, or writing on paper or electronic

media a check drawn on a specific financial institution” or “any involvement in the . . . e-mailing,

sending, or transmitting by any other method a check drawn on a specific financial institution.” 

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(Final Order 3.) The Court agrees with the FTC that the Final Order, which does not apply merely

to “web-based systems,” but rather to “check creation,” by its plain language reaches beyond

schemes exactly like Qchex. Contempt Defendants have failed to offer any convincing arguments

that they are not engaged in the provision of a good or service in connection with check creation,

or a “check delivery service.” Thus, the specific and definite terms of the Final Order apply to

Contempt Defendants’ activities relating to their VersaCheck software, which takes information

from a user and transforms it into a negotiable instrument that the user may deliver electronically

or print. 

C. Conduct Constituting Violations

(i) Identity and Account Verification Procedures

Bound by the terms of the Final Order, Contempt Defendants are required to perform

identity verification of prospective customers by: “engaging a person not related to, controlled by,

or owned by any of the Defendants, either in whole or part, to obtain information from and about

each prospective customer and having that person use the information to verify the prospective

customer’s identity,” and to perform account control verification for each financial account, either

by: 

A. engaging a person not related to, controlled by, or owned by any of the

Defendants, either in whole or in part, that provides account control

verification services for its clients to verify a customer’s authority to draw

funds on a financial account by obtaining from a customer the customer’s

online banking user name and password information and transferring the

information to the financial institution identified by the customer, and only

permitting the customer to create an account with any of the Defendants

when the online banking user name and password are confirmed by the

person engaged. The Defendants shall enter into a written contract with the

person that provides account control verification services prohibiting that

person from using the customer’s online banking user name or password for

any purpose other than providing account control verification services

pursuant to this Order; or by

B. using deposits for account control verification by depositing at least two

random deposits between $.01 and $.99 into the customer’s financial account

without disclosing the amounts to the customer, requiring the customer to

confirm the amount of each deposit, and only permitting the customer to

create an account with any of the Defendants when the customer is able to

correctly state the amount of each deposit after no more than three attempts.

(Final Order 4-5.) In the alternative, Contempt Defendants may forego these identity and account

verification procedures and instead 

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[e]ngage a monitor that has been agreed to by both Defendants and Plaintiff, and

establish and utilize procedures that the monitor has approved as effective to

verify:

a. the identity of each prospective customer; and

b. the authority of each such customer to draw funds on a financial

account before creating an account for that customer with any of

the Defendants. 

PROVIDED, however, that, in addition to the record keeping provisions

described in section VI, paragraph F of this Order, Defendants, for a period of

eight (8) years from the date of entry of this Order, shall create and maintain

documents (either in paper or electronic format) that demonstrate that Defendants

have performed the verification procedures set forth in both paragraphs 1 and 2

together, or those in paragraph 3 alone. Defendants shall be responsible for any

and all fees and expenses incurred to comply with this order, including, without

limitation, any and all fees and expenses related to engaging third parties and a

monitor.

(Final Order 6.) It is undisputed that Contempt Defendants have not engaged a third party or

monitor to provide identity and account control verification services as specified. (See Ex. 646,

Danforth Dep. 43:23-44:5.) Nor do Contempt Defendants use the alternative method of account

control verification allowed under the Final Order—random deposits with consumer confirmation. 

Accordingly, as discussed below, Contempt Defendants are in direct violation of the identity

and account verification provisions of the Final Order.

At the contempt hearing, Mr. Danforth testified that the VersaCheck software does not 

contain any process for the validation of a person’s identity or that person’s authority to use the

account over which they are writing a check before allowing check creation. (8/31 Hr’g Tr.

172:25-173:17.) In order to use Contempt Defendants’ products to create checks, individuals

purchase the VersaCheck software and install it on their computers. Individual users must input a

valid activation code to use the software, which the software delivers to the server, where it is

verified against G7’s list of valid codes. During that process, users have the option, but are not

required, to register the software with G7. But neither through code verification, registration, nor

any other process does the VersaCheck software implement any identity or account control

procedures. This failure was further substantiated by Mr. Villwock’s testimony at the contempt

hearing, which revealed that neither he nor iProlog had taken any steps to validate that users of

any VersaCheck software are authorized to use the financial accounts they use with the software,

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nor to confirm their identities. (9/1 Hr’g Tr. 75:21-77:25.) And the deposition testimony of the

third-party consumers Ms. Keheley and Ms. O’Neil confirm that individuals were able to create

checks using VersaCheck software without ever verifying their identities or their account

authorizations. (See PFF ¶¶ 659, 667-68, 728, 734, 741, 744, 748, 752, 755.)

In an attempt to excuse this admitted failure, Contempt Defendants argue that it would be

impossible for them to implement the Final Order’s identity and account verification requirements. 

(Def.’s Reply 10-11.) The theory goes that “VersaCheck is a stand alone software product that is

loaded onto and used locally on a user’s personal computer. VersaCheck is not an online product,

and does not require any network connectivity or capability to create checks. This means that

Defendants have no way of identifying VersaCheck users, and consequently cannot verify their

identities or bank accounts as a requirement for product use.” (Id.) Contempt Defendants are

further powerless to comply because the offending software has already been released, and so

would “remain in contempt of the Final Order until the very last VersaCheck user stops using the

software to create checks.” (Id. at 10.) Finally, Contempt Defendants argue that application of the

Final Order’s requirements to their software would be so burdensome as to render VersaCheck

“entirely unmarketable in the industry.” (Id. at 13.) 

The Court finds these justifications lack credibility and support, and entirely fail to excuse

Contempt Defendants’ noncompliance. Contempt Defendants’ own evidence reveals that its

VersaCheck software has the capability to access and integrate information from the Internet. At

the very least, the software is able to verify software codes and to allow customer registration of

the software. Contempt Defendants cannot seriously contend that it is impossible to upgrade or

patch already existing software (or, at worst, to recall it) such that, once software is “out there”

nothing can be done. And the Court rejects Contempt Defendants’ contention that the

implementation of these procedures would put VersaCheck out of business because of consumers’

belief that providing the ordered information renders them prone to identity theft. Most strikingly,

this contention is belied by Contempt Defendants’ own testimony that their new software,

VersaCheck X1—in conjunction with gValidate, a system created by Mr. Villwock—does provide

superior account (admittedly not identity) protection, albeit not by methods authorized by the Final

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Order. (9/1 Hr’g Tr. 69:6-10.) Contempt Defendants do not even attempt to explain this gaping

hole in their united theory of impossibility. Additionally, the Court notes that the Final Order’s

verification methods were adapted from methods well-accepted and widely used in the industry,

which undermines the proposition that these methods would render VersaCheck unmarketable. 

Instead, it seems much more likely that these procedures are not only quite possible to

implement, but also preferred by most reasonable consumers, who would view them as protections

from identity theft and check fraud. And by using a method identified in the Final Order,

Contempt Defendants need not force consumers to divulge more information than is already

included on the checks they create—a name and a bank account number. Under the terms of the

Final Order, Contempt Defendants are in no way required to anticompetitively needle consumers

into divulging more information; instead, they must simply make the effort (or hire someone else)

to verify information already necessary for check creation with the appropriate financial

institution, or directly with the consumer. For these reasons, the Court rejects Contempt

Defendants’ excuses for noncompliance, and finds Contempt Defendants in violation of the Final

Order’s identity and account verification requirements. 

(ii) Disclosure of Contact Information 

In the Final Order, Contempt Defendants were further enjoined from 

Failing to clearly and conspicuously disclose contact information for

Defendants, including, but not limited to, a U.S. postal address, telephone

number, and website or e-mail address, in Defendants’ advertising or marketing

materials, on their Internet website(s), and on any check that they, directly or

indirectly, create or deliver.

(Final Order 7.) Aside from pointing to a line of text that reads “G7 Productivity Systems” in

“microprint” on some of their blank check products, illegible to the naked eye, Contempt

Defendants have not argued that they complied with the Final Order’s requirement to disclose

contact information on any check they create or deliver. (See 8/31 Hr’g Tr. 177:13-179:19.) 

Indeed, they admit that their checks do not disclose (whether clearly and conspicuously or not) any

contact information. And copies of the checks entered into evidence confirm that the face of

printed VersaCheck checks do not include Contempt Defendants’ U.S. postal addresses, telephone

numbers, websites, email addresses, or any other form of contact information. (Exs. 513 at 47,

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523 at 38.) The demonstrative check apparently created using VersaCheck X1, proffered by

Contempt Defendants, indicates only “gvalidate.com” as a potential source, and so continues to

fall far short of providing the required information. (Ex. 21.) As above, the Court finds Contempt

Defendants are in violation of the Final Order’s contact information disclosure requirements. 

ORDER AND AWARD OF SANCTIONS

For the foregoing reasons, based on clear and convincing evidence, the Court HOLDS

Contempt Defendants in civil contempt of its January 7, 2009 Final Order permanently enjoining

Defendants, their officers, agents, servants, employees, attorneys, and those persons in active

concert or participation with them with notice of the Final Order from engaging in check creating

or delivery for a customer without satisfying the restrictions imposed by that Order. The Court

must now turn to the task of setting the appropriate sanctions for these violations.

Civil contempt sanctions may be imposed for two purposes: to coerce Contempt

Defendants into compliance with the Court’s Final Order, and to require compensation for losses

suffered. United States v. United Mine Workers of America, 330 U.S. 258, 303-04 (1947);

Whittaker Corp. v. Execuair Corp., 953 F.2d 510, 517 (9th Cir. 1992). “Generally, the minimum

sanction necessary to obtain compliance is to be imposed.” Whittaker Corp., 953 F.2d at 517

(citing Spallone v. United States, 493 U.S. 265, 280 (1990)). Here, the Court agrees with the FTC

that a coercive sanction should issue until Contempt Defendants demonstrate their compliance

with the Final Order. In determining the amount and duration of a coercive fine, the Court

considers “the character and magnitude of the harm threatened by continued contumacy, and the

probable effectiveness of any suggested sanction in bringing about the result desired.” United

Mine Workers, 330 U.S. at 304; Whittaker Corp., 953 F.2d at 516. 

With regard to compensatory sanctions, in the context of civil contempt under the FTC Act

it is clear that the Court has broad authority to “grant ancillary relief as necessary to accomplish

complete justice, including the power to order restitution.” FTC v. Stefanchik, 559 F.3d 924, 931

(9th Cir. 2009) (internal quotation marks omitted). Specifically, the Ninth Circuit has stated that

“because the FTC Act is designed to protect consumers from economic injuries, courts have often

awarded the full amount lost by consumers rather than limiting damages to a defendant’s profits.” 

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Id. However, here the Court does not agree with the FTC’s calculations as to compensatory

sanctions, finding the appropriate sanction for restitution or other ancillary relief to be far from

clear based on the record. The extent of Contempt Defendants’ noncompliance with the Final

Order and the amount of harm caused by their refusal to implement the Final Order’s required

verifications are difficult to quantify in large part because Contempt Defendants continue to

conceal their involvement by creating a shifting maze of corporations to mask their violations, and

by failing to comply with the disclosure of contact information requirements. To be sure, the

existence of harm itself is evident. Indeed, by continuing to create and operate check creation

services in direct violation of the Final Order, Contempt Defendants’ actions cause the exact same

harm caused by Qchex. As explained by the Ninth Circuit, Contempt Defendants “created the

checks in the sense that [they] physically brought them into being—or provided the means to do

so—and made them appear legitimate and credible in the eyes of consumers,” and in so doing,

Contempt Defendants “caused harm through [their] own deeds.” FTC v. Neovi, 604 F.3d at 1157. 

Notwithstanding the clear existence of harm caused by Contempt Defendants’ actions,

based on the evidence currently before it the Court cannot make an exact or even approximate

determination of the consumer harm caused by Contempt Defendants’ products and ongoing

violations.3

 Instead, the Court has attempted to take into account Contempt Defendants’ complete

disregard for the Court’s Final Order, coupled with their troubling attempts to mislead the Court

and cover up their web of deceit, in calculating the appropriate coercive sanctions to award here. 

Accordingly, the Court HEREBY IMPOSES sanctions as follows:

Sanctions for Violating Identity and Account Verification Procedures

If Contempt Defendants fail to demonstrate to the Court that they have purged their

noncompliance with the Final Order’s identity and account verification procedures within 30 days

3

 The FTC argues that Contempt Defendants should be ordered to disgorge all revenues

generated since entry of the Final Order, which apparently total $9,484,463.96, because their failure

to provide their contact information on the checks they create makes it impossible to calculate the

harm they have caused. (Pl.’s Mem. ISO Contempt 35-40.) However, the Court cannot establish a

reasonable level of certainty in these calculations, nor can it conclude based on the evidence before

it that total disgorgement of revenue is a proper method of awarding compensatory sanctions in these

circumstances. Accordingly, the Court declines to award the full amount requested by the FTC, and 

focuses instead on the award of substantial coercive sanctions intended to motivate Contempt

Defendants’ complete and prompt compliance, as explained below. 

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after entry of this Order, Contempt Defendants shall be required to pay a fine in the amount of

$10,000 per day until such time as they demonstrate compliance.

Sanctions for Violating Contact Information Disclosure Requirements

If Contempt Defendants fail to demonstrate to the Court that they have purged their failure

to comply with the Final Order’s contact information disclosure requirements within 30 days after

entry of this Order, Contempt Defendants shall be required to pay a fine in the amount of $5,000

per day until such time as they demonstrate compliance.

In addition, to attempt restitution for consumer losses suffered as a result of Contempt

Defendants’ utter disregard of this core and relatively non-burdensome provision of the Final

Order, Contempt Defendants shall pay forthwith a fine of $100,000.

CONCLUSION

All Contempt Defendants shall be held jointly and severally liable for the entire amount of

these sanctions. Contempt Defendants are directed to make all payments required by this Order to

the FTC, in accordance with instructions to be provided by counsel for the Commission. The FTC

is directed to use the funds paid by Contempt Defendants for equitable relief, including but not

limited to, consumer redress and any attendant expenses for the administration of such redress. In

the event that equitable relief is wholly or partially impracticable or that funds remain after the

appropriate equitable relief is completed, such funds shall be deposited to the United States

Treasury. 

Finally, the Court notes that FTC’s Motion to Modify the Final Order (ECF No. 210) was

denied without prejudice at the contempt hearing, pending the Court’s decision on whether to hold

Contempt Defendants in civil contempt of the Final Order and award sanctions. (Hr’g Tr. 151:16-

18.) If it wishes, the FTC may renew its motion within 21 days of the date this Order is

electronically docketed.

IT IS SO ORDERED.

DATED: July 11, 2012

Honorable Janis L. Sammartino

United States District Judge

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