Source: https://law.justia.com/cases/federal/appellate-courts/F2/875/564/179043/
Timestamp: 2019-12-09 23:50:37
Document Index: 491516711

Matched Legal Cases: ['§ 1291', '§ 1331', '§ 53', '§ 53', '§ 45', '§ 53']

Federal Trade Commission, Plaintiff-appellee, v. Amy Travel Service, Inc., Resort Performance, Inc., Resorttelemarketing, Inc., Thomas P. Mccann, Ii, Andjames F. Weiland, Defendants-appellants, 875 F.2d 564 (7th Cir. 1989) :: Justia
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Federal Trade Commission, Plaintiff-appellee, v. Amy Travel Service, Inc., Resort Performance, Inc., Resorttelemarketing, Inc., Thomas P. Mccann, Ii, Andjames F. Weiland, Defendants-appellants, 875 F.2d 564 (7th Cir. 1989)
US Court of Appeals for the Seventh Circuit - 875 F.2d 564 (7th Cir. 1989) Argued Nov. 9, 1988. Decided April 19, 1989. Opinion on Dismissal of AppealMay 5, 1989
This is an appeal from a final judgment and this court has jurisdiction under 28 U.S.C. § 1291. The district court had jurisdiction pursuant to 28 U.S.C. §§ 1331, 1337(a), 1345 and 15 U.S.C. § 53(b). We will detail the findings of fact made by the district court to present the necessary backdrop for this appeal.
The main consumer complaint about the defendants' pitch was a misunderstanding about the true cost of the vacation package. The vacation passport itself was sold for $289 to $329. Printed on the passport was an explanation of the passport's worth--the bearer was entitled to two round trip airplane tickets and lodging for eight days and seven nights for a price "not to exceed one unrestricted round-trip, standard, all-year, full-economy (Y-class) airfare." Defendants could therefore charge consumers any amount up to the cost of a Y-class airfare in addition to the cost of the passport itself. The magistrate determined that "the use of the word 'economy' suggested a low cost fare." FTC v. Amy Travel, No. 87 C 6776, slip op. at 27 (N.D. Ill. Feb. 10, 1987). The Y-class airfare, although described as a "full-economy" fare, is actually the highest-priced coach fare available. This was never disclosed to the purchasers of the vacation passports and the magistrate found this was deceptive. Only after a prospective traveler had booked a vacation was the true price disclosed.
FTC v. Amy Travel, No. 87 C 6776, slip op. at 26 (N.D. Ill. Feb. 10, 1987).
In response to numerous consumer complaints about the defendants' operations, the attorneys general of a number of states, as well as the FTC, acted against the defendants.4 On August 3, 1987 the FTC filed its complaint, pursuant to section 13(b) of the Federal Trade Commission Act ("FTCA"), 15 U.S.C. § 53(b), claiming the defendants violated section 5 of the FTCA, 15 U.S.C. § 45. The FTC sought preliminary and permanent injunctive relief, an asset freeze, rescission, restitution, and other equitable relief. In its complaint, the FTC alleged that the defendants had engaged in unfair and deceptive marketing practices by misrepresenting and deceptively failing to disclose the true cost of the vacations they sold and misrepresenting their billing practices, including billing customers without authorization.
Section 13(b) of the FTCA, 15 U.S.C. § 53(b), provides " [t]hat in proper cases the Commission may seek and after proper proof, the court may issue, a permanent injunction." Section 13(b) is often used by the FTC to pursue violations of section 5 of the FTCA or other violations of statutes. Defendants assert that the district court has no authority to grant monetary equitable relief, such as rescission and restitution, in a section 13(b) permanent injunction action.
In making this claim, defendants point to the language of the statute itself and argue that since the statute only specifies that the court shall have authority to grant a permanent injunction, the court's authority goes no farther than that. The magistrate, in determining that she had authority to use ancillary equitable relief such as rescission and restitution, relied on the Ninth Circuit case of FTC v. H.N. Singer, 668 F.2d 1107 (9th Cir. 1982). In Singer, the Ninth Circuit found that because section 13(b) gives a court authority to grant a permanent injunction, the statute by implication gives authority "to grant any ancillary relief necessary to accomplish complete justice because it did not limit that traditional equitable power explicitly or by necessary and inescapable inference." Singer, 668 F.2d at 1113. Defendants argue that Singer should not be adopted by this court, claiming that the clear language of the statute should point the way to refusing to give the district court ancillary equitable powers.
Defendants' efforts to curtail the power of the district court in this case have been thwarted by some recent decisions of this court that make clear the breadth of the equitable authority granted by section 13(b). In FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020 (7th Cir. 1988), this court adopted the Ninth Circuit's position in Singer that the granting of permanent injunctive power "also gave the district court authority to grant any ancillary relief necessary to accomplish complete justice because it did not limit that traditional equitable power explicitly or by necessary and inescapable inference." World Travel, 861 F.2d at 1026 (quoting Singer, 668 F.2d at 1113). In World Travel, this court held that the district court had the authority under section 13(b) to grant interlocutory relief as well as permanent injunctive relief. Id. In FTC v. Elders Grain, Inc., 868 F.2d 901 (7th Cir. 1989), this court specifically found that a district court could order rescission in a section 13(b) proceeding. In Elders, we dealt with whether the section 13(b) grant of preliminary injunctive authority carried with it a grant of other equitable powers. We found that such a granting of power "carries with it the power to issue whatever ancillary equitable relief is necessary to the effective exercise of the granted power." Id. at 907.
This reasoning applies with equal force to the issue of whether the granting of permanent injunctive powers also carries with it the power to invoke ancillary equitable relief. Rescission and restitution are proper forms of ancillary relief. All other circuits that have dealt with this issue have found that section 13(b) grants the authority to issue other necessary equitable relief. See, e.g., FTC v. United States Oil & Gas Corp., 748 F.2d 1431 (11th Cir. 1984) (district court has full equitable powers incident to express authority to issue permanent injunction under section 13); FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1113 (9th Cir. 1982) (permanent injunctive power also gives authority for ancillary equitable relief); FTC v. Southwest Sunsites, Inc., 665 F.2d 711, 718 (5th Cir.), cert. denied, 456 U.S. 973, 102 S. Ct. 2236, 72 L. Ed. 2d 846 (1982) (grant of jurisdiction in section 13(b) includes authorization for district court to exercise full range of equitable remedies traditionally available). Defendants' reliance on this court's opinion in JS & A Group, Inc., 716 F.2d 451 (7th Cir. 1983), is misplaced. JS & A Group did not address the question of whether the provision allowing the district court to enter a permanent injunction also permitted ancillary equitable relief--that case only dealt with whether the FTC must begin cease-and-desist proceedings prior to obtaining a section 13(b) permanent injunction. World Travel, 861 F.2d at 1026. We hold that in a proceeding under section 13(b), the statutory grant of authority to the district court to issue permanent injunctions includes the power to order any ancillary equitable relief necessary to effectuate the exercise of the granted powers.
Defendants next claim that the magistrate erred in excluding certain evidence during the trial for lack of relevancy and other reasons. The trial court excluded some testimony by "satisfied customers" of Amy, excluded certain expert witness testimony, and excluded testimony concerning advice given by counsel to defendants concerning their operation. The trial court has substantial discretion in making these types of evidentiary rulings and we must give the magistrate great deference. This court will not overturn these evidentiary decisions in the absence of a clear abuse of discretion. Charles v. Daley, 749 F.2d 452, 463 (7th Cir. 1984), appeal dismissed sub nom. Diamond v. Charles, 476 U.S. 54, 106 S. Ct. 1697, 90 L. Ed. 2d 48 (1986).
Similar reasoning was used by the magistrate to exclude postcards and letters sent to Amy by customers while on their vacations. Defendants argue that unsolicited postcards from satisfied customers show that customers were not deceived. Defendants misunderstand the proof that must be offered by the FTC. Contrary to defendants' claims, the FTC need not prove that every consumer was injured. The existence of some satisfied customers does not constitute a defense under the FTCA. Basic Books, Inc. v. FTC, 276 F.2d 718, 721 (7th Cir. 1960); Erickson v. FTC, 272 F.2d 318, 322 (7th Cir.), cert. denied, 362 U.S. 940, 80 S. Ct. 805, 4 L. Ed. 2d 769 (1960). The magistrate correctly acknowledged the existence of satisfied customers in computing the amount of defendants' liability--customers who actually took vacation trips were excluded when the magistrate computed the amount of restitution awarded.7 However, the existence of those customers is not relevant to determining whether consumers were deceived and the magistrate was correct to exclude the postcards and letters.
Defendants also criticized the trial court's exclusion of certain expert testimony. The trial court "has wide discretion in its determination to admit and exclude evidence, and this is particularly true in the case of expert testimony." Hamling v. United States, 418 U.S. 87, 108, 94 S. Ct. 2887, 2903, 41 L. Ed. 2d 590 (1974); see also Spesco v. General Elec. Co., 719 F.2d 233, 238 (7th Cir. 1983); Grindstaff v. Coleman, 681 F.2d 740, 743 (11th Cir. 1982). Steve Frenzl was offered by defendants as an expert in travel marketing. During Frenzl's testimony, defense counsel asked whether defendants' sales practices were "deceptive or misleading." The magistrate properly prevented Frenzl from answering since the question called for Frenzl to render a legal opinion. Mr. Frenzl was also prevented from commenting on consumer perception of the sales pitch. The magistrate determined that Frenzl did not possess the necessary expertise to give his opinion on this issue. See Fed.R.Evid. 104(a), 702. The court found that testimony on how consumers would react to sales material should be given by an expert in consumer psychology or consumer behavior. The magistrate did not abuse her discretion in making this determination. The magistrate also correctly excluded testimony from a travel law expert on other advertising methods used by travel companies and refused to allow one of defendants' employees to give his opinion on whether the defendants' methods were deceptive or unfair. The issue of the magistrate's exclusion of certain evidence relating to advice of counsel is premised on the individual liability of the defendants and will be dealt with separately.
An individual may be held liable under the FTCA for corporate practices if the FTC first can prove the corporate practices were misrepresentations or omissions of a kind usually relied on by reasonably prudent persons and that consumer injury resulted. FTC v. Kitco of Nevada, Inc., 612 F. Supp. 1282 (D. Minn. 1985). Once corporate liability is established, the FTC must show that the individual defendants participated directly in the practices or acts or had authority to control them. Kitco, 612 F. Supp. at 1292; FTC v. H.N. Singer, Inc., 1982-83 Trade Cas. (CCH) p 65,011 at 70,618-19, 1982 WL 1907 (N.D. Cal. 1982). Authority to control the company can be evidenced by active involvement in business affairs and the making of corporate policy, including assuming the duties of a corporate officer. Kitco, 612 F. Supp. at 1292; see e.g., Consumer Sales Corp. v. FTC, 198 F.2d 404, 408 (2d Cir. 1952), cert. denied, 344 U.S. 912, 73 S. Ct. 335, 97 L. Ed. 703 (1953). The FTC must then demonstrate that the individual had some knowledge of the practices. The knowledge requirement is the key issue in this case.
While acknowledging that intent per se is not a necessary element in an FTC violation, see United States v. Johnson, 541 F.2d 710, 712 (8th Cir. 1976), cert. denied, 429 U.S. 1093, 97 S. Ct. 1106, 51 L. Ed. 2d 539 (1977) (When unfair trade practices occur, "liability for civil penalties arises without a need for any showing that the practices were intentional or malicious."); Porter & Dietsch, Inc. v. FTC, 605 F.2d 294, 308-09 (7th Cir. 1979), cert. denied, 445 U.S. 950, 100 S. Ct. 1597, 63 L. Ed. 2d 784 (1980); Regina Corp. v. FTC, 322 F.2d 765, 768 (3d Cir. 1963), the defendants are asking this court to apply a higher standard of knowledge in cases where individuals could be held liable for monetary restitution. Defendants correctly point out that the cases cited for the proposition that intent to deceive is not a necessary element of an FTC violation all dealt with cease-and-desist orders or injunctions. In such cases, corporations and individuals are being directed to refrain from certain conduct. This case involves holding an individual liable for monetary restitution and defendants argue that it would be better to find bad faith before imposing such a sanction. See Porter & Dietsch, 605 F.2d at 309 (extent of party's culpability should affect nature of relief granted). Some district courts in other circuits have held that to find an individual liable for restitution under section 13(b), the FTC must prove that the defendant knew or should have known that the conduct was dishonest or fraudulent. See FTC v. International Diamond Corp., 1983-2 Trade Cas. (CCH) p 65,725 at 69,706-07, 1983 WL 1911 (N.D. Cal. 1983) (to hold defendant liable for redress under section 13(b), defendant's activity must rise to the level of fraud or dishonesty); FTC v. Kitco of Nevada, Inc., 612 F. Supp. 1282, 1292 (D. Minn. 1985) (to obtain monetary equivalent of rescission, FTC must prove defendant had knowledge that corporation or its agents "engaged in dishonest or fraudulent conduct"); FTC v. Atlantex Assoc., 1987-2 Trade Cas. (CCH) p 67,788 at 59,255, 1987 WL 20384 (S.D. Fla. 1987).
We find that imposing a requirement that the FTC prove subjective intent to defraud on the part of the defendants would be inconsistent with the policies behind the FTCA and place too great a burden on the FTC. The FTC is required to establish the defendants had or should have had knowledge or awareness of the misrepresentations, Kitco, 612 F. Supp. at 1292, but that knowledge requirement may be fulfilled by showing that the individual had "actual knowledge of material misrepresentations, reckless indifference to the truth or falsity of such misrepresentations, or an awareness of a high probability of fraud along with an intentional avoidance of the truth." Kitco, 612 F. Supp. at 1292; see also International Diamond, 1983-2 Trade Cas. (CCH) at 69,707. Also, the degree of participation in business affairs is probative of knowledge. International Diamond, 1983-2 Trade Cas. (CCH) at 69,707-08.
In analyzing the facts of this case under this standard, the magistrate noted that behind the power to hold individuals liable for corporate actions is a belief that "one may not enjoy the benefits of fraudulent activity and then insulate one's self from liability by contending that one did not participate directly in the fraudulent practices." FTC v. Amy Travel, No. 87 C 6776, slip op. at 32 (N.D. Ill. Feb. 10, 1987). With this policy in mind, the magistrate determined that the FTC had met its burden. The magistrate found that
These factual findings made by the trial court must be analyzed under the clearly erroneous standard. Fed. R. Civ. P. 52(a). See In re Muller, 851 F.2d 916, 920 (7th Cir. 1988) ("Only if we are 'left with the definite and firm conviction that a mistake has been committed,' may we disturb the court's findings.") (citing Anderson v. Bessemer, 470 U.S. 564, 573, 105 S. Ct. 1504, 1511, 84 L. Ed. 2d 518 (1985). It is clear that McCann and Weiland were the ones behind the vacation passport scheme. They were the principal shareholders and officers of the corporations. They created the businesses, opened new ones, wrote telemarketing scripts, and hired personnel. They controlled the financial affairs of the companies and reviewed the sales reports and other information. McCann oversaw the daily sales operation and consulted with Weiland regularly. As authors of the sales scripts, they were certainly aware of the misrepresentations contained in them. If they were unable to see trouble coming by looking at the scripts, it is unlikely they missed the signals sent by the high volume of consumer complaints and the excessive credit card chargebacks.
Defendants now contend that the freeze on assets by the TRO and the subsequent permanent injunction prevented them from paying attorneys' fees. They argue that such a freeze violates defendants' constitutional rights by restricting their choices in obtaining representation. See United States v. Moya-Gomez, 860 F.2d 706 (7th Cir. 1988); see also Caplin & Drysdale v. United States, 837 F.2d 637 (4th Cir.) (en banc), cert. granted, --- U.S. ----, 109 S. Ct. 363, 102 L. Ed. 2d 352 (1988); but see United States v. Monsanto, 852 F.2d 1400 (2d Cir.), cert. granted, --- U.S. ----, 109 S. Ct. 363, 102 L. Ed. 2d 353 (1988). While the issue of whether an asset freeze violates constitutional rights to counsel or due process is interesting, it is unnecessary for this court to reach the question. The trial court modified the asset freeze to allow for reasonable attorneys' fees and expenses. Counsel received between $50,000 and $70,000 for his time and effort.10 The defendants have given us insufficient reason to alter the amount of fees awarded. The magistrate was in the best position to determine what constituted a reasonable fee in this case and we will not disturb her decision. See FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020, 1031-32 (7th Cir. 1988).
In determining the correctness of the trial court's admission of evidence under the residual exception, we must give the trial court "a considerable measure of discretion." Huff v. White Motor Corp., 609 F.2d 286, 291 (7th Cir. 1979). Hearsay offered under Rule 803(24) must satisfy five criteria to be admissible: the statement must be sufficiently trustworthy, material, probative, in the interests of justice, and given to opposing parties with the proper notice. Id. at 292-95. Turning to these requirements, it is clear that these affidavits will fall within the residual exception and the trial court did not abuse its discretion by admitting them. The affidavits possess sufficient guarantees of trustworthiness; each was made under oath subject to perjury penalties and the affiants describe facts about which they have personal knowledge--their contacts with defendants. The evidence is important to the issue of whether there was actual consumer injury from defendant's action and the affidavits would be probative of that fact. The interests of justice are served by allowing the affiants to submit affidavits instead of requiring their appearance in court. The defendants ran a nation-wide telemarketing operation and it would be cumbersome and unnecessarily expensive to bring all the consumers in for live testimony. See Kitco, 612 F. Supp. at 1294 (too expensive and time consuming to get witnesses from all over country; affidavits serve interests of justice). Defendants were also given proper notice of the affidavits--they even had the chance to question the affiants themselves, but they chose not to avail themselves of the opportunities. The trial court's decision to admit these affidavits was not an abuse of discretion.13 However, even if this evidence did not fall within the residual exception, we would also find that the admission of this evidence was not prejudicial to the defendants. Other evidence in the record adequately established that there was actual harm to consumers. The evidence presented in the affidavits was cumulative and had little effect on the determination of actual harm.
Our decision in Rogers v. National Union Fire Ins. Co., 864 F.2d 557 (7th Cir. 1988), establishes that the attorney is the real party in interest when sanctioned by the district court. Rogers, 864 F.2d at 559-60. The Supreme Court has held that failing to name a party in the notice of appeal "constitutes a failure of that party to appeal." Torres v. Oakland Scavenger Co., --- U.S. ----, 108 S. Ct. 2405, 101 L. Ed. 2d 285 (1988). In Rogers, we held that in a Rule 11 sanctions appeal, "the attorneys must appeal in their own names. A notice of appeal naming the party ... as the appellant, not the attorneys, does not create jurisdiction over the attorneys' appeal." Rogers, 864 F.2d at 560 (citing Hayes v. Sony Corp. of America, 847 F.2d 412, 420 (7th Cir. 1988)).
Bennett argues that this court should exercise discretion and disregard the omission of his name from the notice of appeal. Bennett claims that our decision in Hays v. Sony Corp. of America, 847 F.2d 412 (7th Cir. 1988), stands for the proposition that the object of the notice of appeal is merely to give opposing parties notice that an appeal has been taken. Bennett states that all parties were aware of the appeal and who the parties in interest were. Bennett argues that no purpose would be served by dismissing his appeal for what amounts to a harmless error.
Bennett's reliance on Hays is mistaken in light of the Supreme Court's decision in Torres, 108 S. Ct. 2405 (1988). In Torres, the Supreme Court healed a split in the circuits by enunciating an unyielding interpretation of Federal Rule of Appellate Procedure 3(c) that took away this court's discretion to waive technical requirements. Bennett is correct that before Torres, "failure to name each appellant forfeited that party's right to appeal only if there was a danger that the appellee might have been misled by the omission ..." Allen Archery, Inc. v. Precision Shooting Equip., Inc., 857 F.2d 1176, 1176 (7th Cir. 1988) (citing Hayes, 847 F.2d at 414). However, "Torres changed the law in this circuit. It requires us to insist on punctilious, literal, and exact compliance ..." with Rule 3(c)'s naming requirements. Allen Archery, 857 F.2d at 1177.
Counsel for defense was sanctioned by the trial court under Fed. R. Civ. P. 11 and this sanction has also been appealed, FTC v. Amy Travel, No. 88-2328. That appeal was consolidated with this one for oral argument, but it will be addressed separately by this court
Defendants claim the trial court excluded important evidence relating to advice of counsel. An examination of the record and the trial court's opinion shows that the magistrate was sufficiently aware of defendants' efforts to get counsel's approval of corporate practices. The magistrate's exclusion of certain testimony relating to advice of counsel on the basis of relevancy was not clearly erroneous. Charles v. Daley, 749 F.2d 452, 463 (7th Cir. 1984)
Defendants also claimed that the trial court exhibited sufficient bias and prejudice to require reversal. We find no merit to this argument. Friction between court and counsel does not constitute bias. Hamm v. Board of Regents, 708 F.2d 647, 651 (11th Cir. 1983)
A separate Notice of Appeal was filed on May 25, 1988, giving notice that the defendants were appealing the district court's decision in FTC v. Amy Travel, No. 87 C 6776, slip op. at 27 (N.D. Ill. Feb. 10, 1987). That appeal, No. 88-1997, dealt with the merits of the case and does not concern the Rule 11 issue. Although this appeal, No. 88-2328, and the merits appeal, No. 88-1997, were consolidated for purposes of oral argument, they will be decided separately by this court