Court Opinion

ID: 3037962
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:57:35.001286+00
Date Added: 2024-06-11T09:55:10.372625
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

FEDERAL TRADE COMMISSION,              
                 Plaintiff-Appellee,
                v.
CYBERSPACE.COM LLC; FRENCH
DREAMS N.V.; ELECTRONIC                      No. 04-35428
PUBLISHING VENTURES LLC;
OLYMPIC TELECOMMUNICATIONS INC;               D.C. No.
                                           CV-00-01806-RSL
IAN EISENBERG,
                       Defendants,
               and
COTO SETTLEMENT; CHRIS HEBARD,
            Defendants-Appellants.
                                       

FEDERAL TRADE COMMISSION,              
                 Plaintiff-Appellee,
                v.
CYBERSPACE.COM LLC; COTO
SETTLEMENT; ELECTRONIC                       No. 04-35431
PUBLISHING VENTURES LLC; CHRIS
HEBARD,                                       D.C. No.
                                           CV-00-01806-RSL
                       Defendants,
                                              OPINION
               and
FRENCH DREAMS N.V.; OLYMPIC
TELECOMMUNICATIONS INC; IAN
EISENBERG,
            Defendants-Appellants.
                                       

                            7759
7760              FTC v. CYBERSPACE.COM
       Appeal from the United States District Court
         for the Western District of Washington
        Robert S. Lasnik, District Judge, Presiding

                 Argued and Submitted
           March 7, 2006—Seattle, Washington

                   Filed July 13, 2006

   Before: Diarmuid F. O’Scannlain, Barry G. Silverman,
           and Ronald M. Gould, Circuit Judges.

              Opinion by Judge O’Scannlain
                   FTC v. CYBERSPACE.COM                7763

                        COUNSEL

Roger M. Townsend, Newman & Newman, LLP, Seattle,
Washington, argued the cause for appellants Ian Eisenberg,
French Dreams, N.V., and Olympic Telecommunications, Inc.
Derek A. Newman, Newman & Newman, LLP, Seattle,
Washington, was on the briefs.

Ernest Leonard, Friedman & Feiger, LLP, Dallas, Texas,
argued the cause for appellants Coto Settlement and Christo-
pher L. Hebard. Lawrence J. Friedman, Friedman & Feiger,
LLP, Dallas, Texas, and Sarah K. Johnson and Stacy A. Con-
nole, Foster, Pepper & Shefelman, Seattle, Washington, were
on the briefs.

Marilyn E. Kerst, Federal Trade Commission, Washington,
D.C. argued the cause for appellees. Willian E. Kovacic, Gen-
7764                FTC v. CYBERSPACE.COM
eral Counsel, John F. Daly, Deputy General Counsel for Liti-
gation, Collot Guerard, and Michael Goodman, Federal Trade
Commission, Washington, D.C., were on the brief.

                          OPINION

O’SCANNLAIN, Circuit Judge:

   We must decide whether a mail solicitation for internet ser-
vice is deceptive as a matter of law within the meaning of the
Federal Trade Commission Act.

                               I

   In the late nineties, Ian Eisenberg and Chris Hebard formed
Electronic Publishing Ventures, LLC (“EPV”) and its four
subsidiaries: Cyberspace.com, LLC, Essex Enterprises, LLC,
Surfnet Services, LLC, and Splashnet.net, LLC. Two offshore
entities, French Dreams Investments, N.V. (owned by Eisen-
berg) and Coto Settlement (controlled by Hebard) owned EPV
in equal parts.

   Between January 1999 and mid-2000, EPV’s four subsidia-
ries mailed approximately 4.4 million solicitations offering
internet access to individuals and small businesses. The solici-
tations included a check, usually for $3.50, attached to a form
resembling an invoice designed to be detached from the check
by tearing at the perforated line. The check was addressed to
the recipient and the recipient’s phone number appeared on
the “re” line. The attached invoice-type form included col-
umns labeled “invoice number,” “account number,” and “dis-
count taken.” The back of the check and invoice contained
small-print disclosures revealing that cashing or depositing
the check would constitute agreement to pay a monthly fee for
internet access, but the front of the check and the invoice con-
tained no such disclosures. Along with the check/invoice doc-
                    FTC v. CYBERSPACE.COM                  7765
ument, most of the solicitations also included an advertising
insert touting the importance of good internet access. The
back of the insert explained in small print that a monthly fee
would be billed to the customer’s local phone bill after the
check was cashed or deposited.

   At least 225,000 small businesses and individuals cashed or
deposited the solicitation checks. The EPV subsidiaries used
a billing aggregation service to place charges for $19.95 or
$29.95 a month on the small businesses’ and individuals’
ordinary telephone bills. Internet usage records show, how-
ever, that less than one percent of the 225,000 individuals and
businesses billed for internet service actually logged on to the
service.

   Eisenberg and Hebard were aware that the solicitation had
misled some consumers. The companies received complaints
from recipients of the solicitations which indicated that some
customers had deposited the solicitation check without realiz-
ing that they had contracted for internet services. Materials
that Eisenberg and Hebard prepared in an attempt to sell one
of the subsidiaries in 1999 informed prospective buyers that
“the Company believes that a number of customers sign up
for the [sic] without realizing that when they deposit the
check that they have ordered Internet service.” In June 2000,
after the companies had ceased mailing solicitations to con-
sumers, Cyperspace.com, the largest of the four subsidiaries,
commissioned a consumer research study which found that
87.9 percent of 256 participants who actually read the lan-
guage on the back of the solicitation understood that the act
of cashing or depositing the check would constitute agreement
to purchase internet service.

   Based on its belief that the solicitations were deceptive in
violation of Section 5 of the Federal Trade Commission Act
(“FTCA”), the Federal Trade Commission (“FTC”) sought an
injunction and consumer redress in the district court pursuant
to FTCA § 13(b). The district court entered two stipulated
7766                   FTC v. CYBERSPACE.COM
permanent injunctions in which the defendants agreed to
cease the practices at issue without admitting to a FTCA § 5
violation. The parties then filed cross-motions for summary
judgment on the issues of liability and consumer redress.

   After denying the defendants’ motions for summary judg-
ment, the district court granted the FTC’s motion in part. The
court concluded that the solicitation violated FTCA § 5 as a
matter of law. The district court further concluded that Ian
Eisenberg was liable for the § 5 violation in his individual
capacity as a matter of law. The district court then held a one-
day bench trial on consumer redress in which it concluded
that the proper amount of consumer redress was $17,676,897.

   The Eisenberg defendants—Ian Eisenberg, French Dreams
Investments, N.V., and Olympic Telecommunications, Inc., a
billing aggregator owned by Eisenberg (collectively, “EFO”)
—and the Hebard defendants—Chris Hebard and Coto Settle-
ment (collectively, “Hebard”)—filed timely separate appeals,
which we consolidated for review.1

                                   II

   [1] Section 5 of the Federal Trade Commission Act prohib-
its “deceptive acts or practices in or affecting commerce.”
FTCA § 5(a)(1), 15 U.S.C. § 45(a). As we have previously
explained, a practice falls within this prohibition (1) if it is
likely to mislead consumers acting reasonably under the cir-
cumstances (2) in a way that is material.2 FTC v. Gill, 265
F.3d 944, 950 (9th Cir. 2001) (citing FTC v. Pantron I Corp.,
33 F.3d 1088, 1095 (9th Cir. 1994)).
  1
     We review the district court’s order granting summary judgment de
novo. Balint v. Carson City, Nevada, 180 F.3d 1047, 1050 (9th Cir. 1999).
   2
     Hebard and EFO would have us add an additional requirement: that the
FTC must prove that consumers could not reasonably have avoided injury.
However, the plain language of the provision that Hebard and EFO cite
for this contention, FTCA § 5(n), defeats this argument.
                       FTC v. CYBERSPACE.COM                       7767
                                   A

   [2] In this case, Hebard and EFO contend that the fine print
notices they placed on the reverse side of the check, invoice,
and marketing insert preclude liability under FTCA § 5. We
disagree. A solicitation may be likely to mislead by virtue of
the net impression it creates even though the solicitation also
contains truthful disclosures. In Floersheim v. FTC, 411 F.2d
874 (9th Cir. 1969), we found that substantial evidence sup-
ported the FTC’s determination that the appearance and prom-
inent repetition of the words “Washington D.C.” on debt-
collecting forms from a private collections company created
the deceptive impression that the forms were a demand from
the government even though the forms contained a small print
disclaimer informing recipients that such was not the case. Id.
at 876-78. Similarly, in Independent Directory Corp. v. FTC,
188 F.2d 468 (2d Cir. 1951), the Second Circuit held that sub-
stantial evidence supported the FTC’s determination that a
solicitation for advertising orders that appeared to be a
renewal notice for an existing advertisement was deceptive
even though the fine print disclosed that the advertisement
clipping attached to the form was an advertisement the recipi-
ent had taken out in a different publication.3 Id. at 470.

   Likewise, in FTC v. Brown & Williamson Tobacco Corp.,
778 F.2d 35, 42-43 (D.C. Cir. 1985), the D.C. Circuit
affirmed a district court’s finding that an advertisement’s
description of cigarette tar content was deceptive even though
fine print in the corner of the advertisement truthfully
explained how the tar content was measured. The court rea-
soned that, under the circumstances, consumers were unlikely
  3
    We acknowledge that in Floersheim and Independent Directory Corp.,
we and the Second Circuit were applying the more deferential “substantial
evidence” standard because these cases involved review not of a district
court’s summary judgment determination, but instead a completed agency
proceeding. However, owing to the paucity of cases involving de novo dis-
trict court proceedings under FTCA § 5, we look to these cases for guid-
ance as to the standard for deception.
7768                 FTC v. CYBERSPACE.COM
to read the fine print in the corner of the ad. Id. at 43; see also
Standard Oil Co. of California v. FTC, 577 F.2d 653, 659
(9th Cir. 1978) (affirming for substantial evidence the FTC’s
finding that the predominant visual message of an advertise-
ment was misleading, and that it was not corrected by the
accompanying verbal message in the advertisements); cf. FTC
v. Figgie Int’l., Inc., 994 F.2d 595, 604 (9th Cir. 1993)
(“Figgie can point to nothing in statute or case law which pro-
tects from liability those who merely imply their deceptive
claims; there is no such loophole.”); Sterling Drug, Inc. v.
FTC, 741 F.2d 1146, 1152, 1154 (9th Cir. 1984) (“A determi-
nation of false advertising can be based upon deceptive visual
representations.”); Am. Home Prods. Corp. v. FTC, 695 F.2d
681, 687 (3d Cir. 1982) (“ ‘[T]he tendency of the advertising
to deceive must be judged by viewing it as a whole’ . . . . The
impression created by the advertising, not its literal truth or
falsity, is the desideratum.”) (quoting Beneficial Corp. v.
FTC, 542 F.2d 611, 617 (3d Cir. 1976)).

   [3] Here, Hebard and EFO’s mailing created the deceptive
impression that the $3.50 check was simply a refund or rebate
rather than an offer for services. The check was made out to
the individual or small business to whom it was sent, with the
consumer’s phone number in the “re” line. The portion of the
document that resembled an invoice included columns labeled
“invoice number,” “account number,” and “discount taken,”
implying a preexisting business relationship for which a
refund check was being offered. The front of the check and
invoice lacked any indication that by cashing the check, the
consumer was contracting to pay a monthly fee. As the dis-
trict court reasoned, “[t]he receipt of a check, the perusal of
which would reveal no obvious mention of an offer for ser-
vices, no product information, and no indication that a con-
tract is in the offing, coupled with an invoice that has no
advertising or solicitation purpose, creates an overall impres-
sion that the check resolves some small, outstanding debt.”
FTC v. Cyberspace.com, LLC, No. C00-1806L, 2002 WL
32060289, *2 (W.D. Wash. 2002). Based on the foregoing,
                    FTC v. CYBERSPACE.COM                   7769
we agree with the district court that no reasonable factfinder
could conclude that the solicitation was not likely to deceive
consumers acting reasonably under the circumstances.

   [4] Our conclusion is bolstered by undisputed evidence
indicating that Hebard and EFO’s solicitation actually
deceived nearly 225,000 individuals and small businesses.
Hebard and EFO billed each of these consumers for a service
that less than one percent of them ever attempted to use. It is
reasonable to infer that most of the remaining 99 percent did
not realize they had contracted for internet service when they
cashed or deposited the solicitation check. Although “[p]roof
of actual deception is unnecessary to establish a violation of
Section 5,” Trans World Accounts, Inc. v. FTC, 594 F.2d 212,
214 (9th Cir. 1979), such proof is highly probative to show
that a practice is likely to mislead consumers acting reason-
ably under the circumstances. We cannot accept Hebard’s and
EFO’s contention that the nearly 225,000 consumers billed
for unwanted internet service acted unreasonably when they
cashed or deposited the solicitation check.

   [5] We further conclude that the solicitation was likely to
mislead in a way that is material. A misleading impression
created by a solicitation is material if it “involves information
that is important to consumers and, hence, likely to affect
their choice of, or conduct regarding, a product.” Cliffdale
Associates, Inc., 103 F.T.C. 110, 165 (1984). Here, the mis-
leading impression the solicitation created — that the check
was merely a refund or rebate — clearly made it more likely
that consumers would deposit the check and thereby obligate
themselves to pay a monthly charge for internet service.

   [6] In sum, the district court properly granted summary
judgment to the FTC on the FTCA § 5 violation because no
reasonable factfinder could conclude that the solicitation was
not likely to mislead consumers acting reasonably under the
circumstances in a way that is material. Gill, 265 F.3d at 950.
7770                 FTC v. CYBERSPACE.COM
                                B

   [7] The results of the consumer research study Cyber-
space.com commissioned do not undermine our conclusion.
As EFO’s counsel conceded at oral argument, the survey
results stand only for the proposition that most consumers can
understand the fine print on the back of the solicitation when
that language is specifically brought to their attention. Impor-
tantly, the survey did not probe whether the notices were suf-
ficiently conspicuous to draw the survey subjects’ attention in
the first place.

   Similarly, the fact that the companies provided consumers
a toll free number to call for refunds does not affect our con-
clusion that the solicitation violated FTCA § 5. See Pantron,
33 F.3d at 1103 (“the existence of a money-back guarantee is
insufficient reason as a matter of law to preclude a monetary
remedy [for a § 5 violation]”).

                                III

   [8] We next address Eisenberg’s contention that the district
court erred by finding, as a matter of law, that he is liable in
his individual capacity. An individual is personally liable for
a corporation’s FTCA § 5 violations if he “participated
directly in the acts or practices or had authority to control
them” and “ ‘had actual knowledge of material misrepresenta-
tions, was recklessly indifferent to the truth or falsity of a mis-
representation, or had an awareness of a high probability of
fraud along with an intentional avoidance of the truth.’ ” FTC
v. Publishing Clearing House, Inc., 104 F.3d 1168, 1170-71
(9th Cir. 1997) (quoting FTC v. Am. Standard Credit Sys.,
874 F. Supp. 1080, 1089 (C.D. Cal. 1994)).

   [9] Eisenberg admits that the district court correctly found
that he “had and exercised control over all of the corporate
entities except Coto Settlement.” Cyberspace.com, No. C00-
1806L, 2002 WL 32060289, at *5. He contends, however,
                        FTC v. CYBERSPACE.COM                         7771
that the district court erred by concluding that he had suffi-
cient knowledge to be personally liable. We disagree. The
undisputed evidence demonstrates that Eisenberg reviewed at
least some of the solicitation checks before they were mailed,
and that Don Reese, the billing manager for defendant-
appellant Olympic Telecommunications, Inc., had numerous
conversations with Eisenberg about consumer complaints in
which Reese told Eisenberg that “there were a lot of custom-
ers who didn’t know they were customers [because] AR
[accounts receivable] did not know what that check represent-
ed.” This undisputed evidence is sufficient, as a matter of law,
to demonstrate that Eisenberg knew the facts constituting the
§ 5 violation or at the very least was recklessly indifferent to
the truth. See Publishing Clearing House, 104 F.3d at 1171.

   Eisenberg’s attempt to avoid liability based on his conten-
tion that he had a “reasonable basis” to believe that the solici-
tation checks did not violate the FTCA is unavailing.4
“[R]eliance on advice of counsel [is] not a valid defense on
the question of knowledge” required for individual liability.
FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 575 (7th Cir.
1989); see also Feil v. FTC, 285 F.2d 879, 896 (9th Cir. 1960)
(whether an individual acts in good or bad faith is immaterial
to liability under FTCA § 5).

   AFFIRMED.5
  4
     Relying solely on his own affidavit, Eisenberg claims that he relied on
the consumer research study to support his view that the mailings were not
deceptive. This argument is implausible because Cyberspace.com did not
commission the study until June 2000, after the companies sent out their
final mailing on March 15, 2000. Eisenberg also relies solely on his own
affidavit to claim that Hebard assured him that the solicitation checks had
been approved by an attorney retained by Cyberspace.com.
   5
     We address Hebard and EFO’s remaining claims in a memorandum
disposition filed currently with this opinion. We decline to reach Hebard’s
claim that the district court used an improper measure to calculate con-
sumer redress because Hebard raised this claim for the first time in his
28(j) letter to this court. See Pawlyk v. Wood, 248 F.3d 815, 822 n.5 (9th
Cir. 2001) (holding that an attempt to raise an issue “by submitting a sup-
plemental citation, pursuant to Federal Rule of Appellate Procedure 28(j)
. . . is too late; the issue is waived”).