Opinion ID: 173386
Heading Depth: 2
Heading Rank: 1

Heading: Summary Judgment Against Individual Appellants

Text: Appellants first argue that the district court improperly granted summary judgment on the issue of whether Castro and High were personally liable for equitable monetary relief. [9] We review the district court's grant of summary judgment de novo to determine whether, viewing the evidence in the light most favorable to the non-moving party, there are genuine issues of material fact and whether the lower court correctly applied the relevant substantive law. Olsen v. Idaho State Bd. of Med., 363 F.3d 916, 922 (9th Cir.2004). For the reasons explained below, we affirm.
Section 5 of the FTC Act prohibits deceptive acts or practices in or affecting commerce and imposes injunctive and equitable liability upon the perpetrators of such acts. 15 U.S.C. § 45(a). Businesses and individuals may cause consumer harm as contemplated by the FTC Act in a variety of ways. See FTC v. Neovi, Inc., ___ F.3d ___, ___, 2010 WL 2365956, at , 4-5 (9th Cir.2010) (affirming summary judgment against a software marketer that had shown a profound lack of diligence in response to a prodigious number of [consumer] complaints regarding fraudulent use of its software). In order to establish individual liability to make equitable restitution under the FTC Act, the FTC must prove that an individual had knowledge that the corporation or one of its agents engaged in dishonest or fraudulent conduct, that the misrepresentations were the type upon which a reasonable and prudent person would rely, and that consumer injury resulted. FTC v. Pub'l Clearing House, Inc., 104 F.3d 1168, 1170 (9th cir.1997) (internal quotation marks omitted) (emphasis added). Only the first elementknowledgeis disputed here. The FTC may establish knowledge by showing that the individual defendant had actual knowledge of material misrepresentations, [was] recklessly indifferent to the truth or falsity of a misrepresentation, or had an awareness of a high probability of fraud along with an intentional avoidance of the truth. Id. (quoting FTC v. Am. Standard Credit Syst., Inc., 874 F.Supp. 1080, 1089 (C.D.Cal.1994)). The FTC is not required to show that the defendant actually intended to defraud consumers. Id. As this court has previously observed: Questions involving a person's state of mind, e.g., whether a party knew or should have known of a particular condition, are generally factual issues inappropriate for resolution by summary judgment. However, where the palpable facts are substantially undisputed, such issues can become questions of law which may be properly decided by summary judgment. But summary judgment should not be granted where contradictory inferences may be drawn from such facts, even if undisputed. Braxton-Secret v. A.H. Robins Co., 769 F.2d 528, 531(9th Cir.1985) (internal citations omitted). Thus, the question we address here is whether the undisputed facts of this case admit of some reasonable inference other than the conclusion that Castro and High acted with either (1) actual knowledge, (2) reckless indifference to truth or falsity, or (3) an awareness of a high probability of fraud and an intentional avoidance of the truth with respect to any of the admitted misrepresentations. We concur with the district court that the undisputed facts admit of no other inference.
Appellants attest to numerous efforts that, they claim, Bevilacqua undertook to conceal the full scope of BVC's malfeasance from NSD. They also point to Castro's cooperation with law enforcement as evidence that Castro and High were merely unwitting participants in Bevilacqua's fraud. Appellants contend that the district court improperly disbelieved or ignored this evidence when it granted the FTC's summary judgment motion. To the contrary, we conclude that the district judge drew all reasonable inferences in the Appellants' favor and assumed that both Castro and Gregory High were, as they claimed, not privy to every detail or contour of the fraud committed by Bevilacqua and BVC. That assumption does not, however, preclude a finding that both men were awareas they in fact admitted that many of NSD's representations regarding kiosk operation, installation, and profitability were false or misleading. For example, Castro testified that NSD's repeated predictions of dramatic growth made him want to choke. He acknowledged Bevilacqua's private confession that the achievement of his installation projections was all but impossible, as BVC was already far behind in meeting its installation obligations and had only limited cash reserves. High also admitted that he knew of substantial problems and delays in BVC's installation of kiosks. High was responsible for assigning kiosk locations to consumers, and in that position, regularly received reports from BVC acknowledging that kiosks were not being timely installed in assigned sites. Castro also implicitly acknowledged that Appellants knew the revenue projections disseminated by NSD were unsupported and misleading. Appellants do not dispute that they distributed promotional materials that promised a rate of return, on average, of some $1,100 per month from kiosk machines, and predicted that well-placed machines would ultimately generate more than $1,000 per day. [10] Appellants also acknowledge that they promoted and disseminated BVC's management agreement, which promised minimum revenue payments based, in part, on these projections. In his deposition, Castro conceded that it was not reasonable for customers to expect that any given machine was going to do $1,000 a month. He admitted that he knew of no machine, no matter how well-placed, that was capable of generating over $400 per month. [11] This admission demonstrates that the $1,000 per day claim was not only overstated or reflective of atypical results; it was plainly unreasonable, given the state of NSD's kiosk deployment and revenue reports. See FTC v. Transnet Wireless Corp., 506 F.Supp.2d 1247, 1267-68 (S.D.Fla.2007) (holding that nearly identical revenue projections for internet kiosks were material misrepresentations under the FTC Act). Yet NSD repeatedly disseminated these material misrepresentations, and Castro himself approved advertising materials that set forth these claims. This undisputed evidence supports only one conclusion: that Appellants had actual knowledge that at least some of NSD's representations were false and potentially misleading. Moreover, throughout the relevant period, Castro and High also received numerous agent and customer complaints exposing that kiosks were not, in fact, located at the sites where BVC had represented them to be. Appellants have never disputed the authenticity of the voluminous customer complaint record compiled by the FTC in this case. Castro warned Bevilacqua that the recurring complaints were becoming a huge issue and acknowledged that some of the complaints echoed his own concerns and suspicions about BVC's capabilities. For his part, High was actively complicit in concealing the non-installation of kiosks from NSD's customers. He admitted to assigning customers to kiosk locations that were far from where they lived (and, hence, more difficult for customers to visit and discover as fraudulent). Despite awareness of this huge issue, neither High nor Castro ever made any effort to restrain NSD's sales efforts or to disclose to the public that NSD was having difficulty meeting its installation obligations. Nor did they seek to independently confirm whether the units that NSD promised to provide for its customers did, in fact, exist at all. Even assuming that Castro and High believed Bevilacqua's repeated excuses and deceptions as they now claim, Appellants are not relieved of personal liability. The FTC Act also imposes liability upon individuals who act with reckless indifference to truth or falsity. [12] In its sales agreements, NSD assumed an affirmative contractual obligation to locate and obtain sites for its customers' kiosk business opportunities. The company also assumed an obligation to ensure that those kiosks ultimately became operational in a timely manner. Though it delegated the work of manufacturing and installing kiosks to BVC, NSD remained solely responsible for fulfilling its contractual duties. In this light, Appellants' failure to investigate numerous consumer complaints and their deliberate construction of a Chinese wall between NSD and BVC rises to the level of reckless indifference. In the face of numerous warning signs multiple customer complaints, admitted delays, BVC's suspicious financial practices, and Bevilacqua's false statementsCastro and High failed to undertake even modest due diligence on behalf of their customers. They never sought to independently verify any of Bevilacqua's fraudulent claims about kiosk sites or revenue. They did not require written confirmation from BVC that kiosks were in fact installed as reported. They did not request an independent audit of BVC's financial records. They failed to review or confirm the existence of contracts that Bevilacqua claimed to have with desirable kiosk locations, and they did not visit specific sites in order to confirm BVC's representations that kiosks were operational. There were myriad red flags that would have led a reasonable person to suspect that something was amiss at BVC, such that the company's ability to provide for the timely installation of functional kiosks was seriously undermined. Despite their contractual obligations to provide operational kiosks for their customers, Castro, High, and NSD continued to turn a blind eye toward the problems at BVC and sold the fraudulent business opportunities to new investors faster than ever. We agree with the district court that by not crossing[the Chinese wall they perpetuated] when, in fact, NSD had promised to provide customers with a functioning kiosk, Castro, High, and NSD, as a matter of law, were recklessly indifferent to the truth or falsity of the representations it was making to consumers. (Summ. J. Order, Sept. 29, 2006, at 11.) The district court properly entered summary judgment in favor of the FTC on this issue.