Court Opinion

ID: 2658154
Source: CourtListenerOpinion
Date Created: 2014-03-28 00:01:54.221527+00
Date Added: 2024-06-11T13:00:46.543758
License: Public Domain

Case: 12-16265         Date Filed: 03/27/2014   Page: 1 of 15

                                                                                 [PUBLISH]

                    IN THE UNITED STATES COURT OF APPEALS

                               FOR THE ELEVENTH CIRCUIT
                                 ________________________

                                        No. 12-16265
                                  ________________________

                             D.C. Docket No. 0:12-cv-61830-RNS

FEDERAL TRADE COMMISSION,

llllllllllllllllllllllllllllllllllllllllPlaintiff - Appellee,

versus

IAB MARKETING ASSOCIATES, LP, et al.,

llllllllllllllllllllllllllllllllllllllllDefendants - Appellants.
                                       ________________________

                         Appeal from the United States District Court
                             for the Southern District of Florida
                               ________________________

                                         (March 27, 2014)
               Case: 12-16265         Date Filed: 03/27/2014    Page: 2 of 15

Before ANDERSON and GILMAN ∗, Circuit Judges, and JOHNSON ∗ ∗, District
Judge.

GILMAN, Circuit Judge:

       The sole question on appeal is whether the district court erred in entering a

preliminary injunction, which includes an asset freeze, in a case where the

defendants are accused of deceiving consumers in the sale of trade-association

memberships. Because we conclude that the court did not err, the entry of the

preliminary injunction is AFFIRMED.

                                 I.      BACKGROUND

       In September 2012, the Federal Trade Commission (FTC) filed suit against

IAB Marketing Associates, LP (IAB), James C. Wood, James J. (Joshua) Wood,

Michael J. (Jacob) Wood, Gary D. Wood, and other related defendants. The FTC

alleged in its complaint that the defendants had violated the Federal Trade

Commission Act (the FTC Act), 15 U.S.C. § 45(a), and the Telemarketing and

Consumer Fraud and Abuse Prevention Act (the Telemarketing Act), 15

U.S.C. § 6102, by deceiving consumers in the sale of trade-association

∗
 Honorable Ronald Lee Gilman, United States Circuit Judge for the Sixth Circuit, sitting by
designation.

∗∗
 Honorable Inge Prytz Johnson, United States District Judge for the Northern District of
Alabama, sitting by designation.

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memberships. According to the FTC, consumers were led to believe that they were

purchasing major medical insurance, but what they actually received were

memberships in a trade association that offered only limited discounts for certain

medical care.

      IAB purports to be a nonprofit organization dedicated to advancing the

interests of small-business owners and self-employed persons across America. The

organization, which was founded by James Wood, has existed in some form since

1982. Today, IAB is part of a constellation of organizations controlled by James

Wood and his immediate family. Revenue from the nonprofit organization flows

to for-profit entities controlled by James and his sons, Jacob and Joshua.

      Much of IAB’s actual business involves the sale of trade-association

memberships to consumers through telemarketing efforts by IAB and various

independent contractors. These memberships offer discounts in a hodgepodge of

areas, including medical care, dental care, golf, hotels, legal services, prescription

eyewear, rental cars, tax-preparation services, and travel. But none of the

medical-discount plans sold by IAB are the equivalent of major medical insurance.

Instead, consumers typically receive upfront discounts from participating providers

or modest reimbursements after submitting claim forms. Some of the plans mimic

traditional insurance coverage, but even under those plans IAB rather than the

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individual consumer is the policyholder of a group health-insurance policy. All of

the plans are subject to numerous exclusions and limitations.

      IAB relies on third parties for much of the telemarketing component of its

business. Its most important telemarketer is Health Service Providers, Inc. (HSP),

an entity controlled by Roy and Judy Hamilton. HSP and the Hamiltons are named

as codefendants, but are not parties to this appeal.

      State regulators took notice of IAB several years ago. In particular, the

Attorneys General of Illinois and Texas sued IAB in 2005 for deceptive trade

practices. Both cases resulted in the entry of consent decrees in the respective state

courts.

      Before filing suit in September 2012, the FTC conducted an undercover

investigation of IAB and its practices. Pursuant to this investigation, which was

undertaken in 2011 and 2012, FTC investigators made telephone contact with IAB

representatives and expressed interest in obtaining health insurance. The

representatives assured the investigators that IAB’s medical-discount plans were

functionally equivalent to major medical insurance. Numerous consumers were

similarly misled by IAB and its third-party telemarketers. And IAB’s customers

were apparently an unhappy lot because the number of cancellations exceeded the

number of new memberships between January 2009 and September 2012.

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      When the FTC filed its complaint against IAB and the other defendants, it

simultaneously sought a temporary restraining order to freeze a portion of the

defendants’ assets and to appoint a receiver for the purpose of accounting for all

the defendants’ assets and preserving the status quo. The district court granted the

FTC’s motion and entered a temporary restraining order in September 2012. A

preliminary injunction hearing was held the following month. Before the hearing,

many of the defendants, including HSP and the Hamiltons, stipulated to the entry

of a preliminary injunction. IAB and certain other defendants, however, chose not

to enter the stipulation.

      Following a one-day hearing, the district court entered a preliminary

injunction against IAB, the individual Wood defendants, and IAB-affiliated

entities. In its findings of fact, the district court determined that the defendants had

made material misrepresentations to consumers regarding the nature of the

trade-association memberships. The district court enjoined IAB from making any

further sales, maintained the asset freeze, and appointed a receiver to take control

of IAB’s assets. This timely appeal by IAB followed.

                               II.   JURISDICTION

      For the sake of completeness, we note that the district court transferred this

case to the Northern District of Texas following the entry of the preliminary

injunction and the filing of the notice of appeal by IAB. The transfer order,
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however, does not affect our jurisdiction over this appeal. See Jones v. InfoCure

Corp., 310 F.3d 529, 533 (7th Cir. 2002) (explaining that “[m]ost cases have

implicitly held that appeals from orders granting or denying preliminary

injunctions properly go to the court of appeals encompassing the transferor court’s

district”); see also Roofing & Sheet Metal Servs., Inc. v. La Quinta Motor Inns,

Inc., 689 F.2d 982, 986 (11th Cir. 1982) (explaining that circuit courts lack

appellate jurisdiction to review the decisions of out-of-circuit district courts).

                                  III.   ANALYSIS

A.    Standard of review

      We review the grant of a preliminary injunction under the

abuse-of-discretion standard. CFTC v. Wilshire Inv. Mgmt. Corp., 531 F.3d 1339,

1343 (11th Cir. 2008). The same standard applies to our review of an asset freeze.

CFTC v. Levy, 541 F.3d 1102, 1110 (11th Cir. 2008). A district court’s findings of

fact will not be disturbed unless those findings are clearly erroneous. Wilshire

Inv. Mgmt., 531 F.3d at 1343. Legal conclusions are reviewed de novo. Id.

      For the FTC to obtain injunctive relief, it must show that (1) it is likely to

succeed on the merits, and (2) injunctive relief is in the public interest. FTC

v. Univ. Health, Inc., 938 F.2d 1206, 1217–18 (11th Cir. 1991). Unlike private

litigants, the FTC need not demonstrate irreparable injury in order to obtain

injunctive relief. Id. at 1218.
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B.    Issues presented

      IAB first argues that the FTC failed to carry its burden of proving that

injunctive relief was warranted. IAB’s second argument is that the district court

erred in ordering the asset freeze. Finally, IAB contends that the district court

lacked jurisdiction to enter any injunctive relief at all.

C.    The FTC met its burden of proof for injunctive relief

      IAB first argues that the FTC failed to satisfy its burden of proof for

obtaining injunctive relief. Much of IAB’s argument on this point consists of

unsupported and unhelpful rhetoric, with such statements as “[t]his case involves

one of the most dramatic and complete deprivations of property rights ever

occurring in any federal court.” IAB, however, does offer a few substantive

arguments. For example, IAB contends that rogue third-party telemarketers, and

not IAB, are to blame for any misrepresentations. IAB more broadly contends that

it cannot be held liable for the misrepresentations, if any, made by the various

independent contractors it engaged to sell its products.

      We find no merit in IAB’s argument. Individuals may be liable for FTC Act

violations committed by a corporate entity if the individual “participated directly in

the [deceptive] practices or acts or had authority to control them.” FTC v. Amy

Travel Serv., Inc., 875 F.2d 564, 573 (7th Cir. 1989); see also FTC v. Gem

Merch. Corp., 87 F.3d 466, 467–68 (11th Cir. 1996) (holding an individual liable
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under the FTC Act where he “was aware that salespeople made material

representations to consumers to induce sales, and he was in a position to control

the salespeople’s behavior”). Authority to control, in turn, may be established by

“active involvement in business affairs and the making of corporate policy” and by

evidence that “the individual had some knowledge of the practices.” Amy Travel

Serv., 875 F.2d at 573. Finally, the FTC must establish that “the individual had

some knowledge of the [deceptive] practices.” Id.

      In the present case, IAB and the Wood defendants attempt to absolve

themselves by blaming HSP and other allegedly rogue telemarketers for any

misrepresentations made to consumers. They argue that liability cannot attach for

misrepresentations made by third-party telemarketers absent direct participation in,

knowledge of, and the ability to control the telemarketers’ behavior. Even

assuming without deciding that the standard is as demanding as IAB and the Wood

defendants suggest, we find that the FTC has met that standard here.

      For one thing, the FTC offered evidence that IAB and the Woods (all of

whom were active in IAB’s affairs) knew that the telemarketers were making

material misrepresentations. James Wood, for example, received a report from

IAB’s chief compliance officer that sales representatives had misrepresented the

nature of IAB’s products to consumers. The evidence also showed that Jacob,

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Joshua, and Gary Wood possessed similar knowledge. In short, IAB and the Wood

defendants cannot plausibly claim ignorance regarding the misrepresentations.

      IAB next attempts to shift the blame to its customers. It argues that

consumers incorrectly assumed that what they were purchasing would be the

equivalent of major medical insurance. According to IAB, if these consumers had

read the disclosures sent to them following their purchases, they would have

known that what they bought was not major medical insurance, but memberships

in a trade association offering medical-discount plans.

      This argument fails for two reasons. First, IAB offers no authority for the

proposition that disclosures sent to consumers after their purchases somehow cure

the misrepresentations occurring during the initial sales. The second reason is

simpler: Caveat emptor is not the law in this circuit. See FTC v. Tashman, 318

F.3d 1273, 1277 (11th Cir. 2003) (holding that caveat emptor is not a valid defense

to liability arising from misrepresentations).

      IAB argues, alternatively, that its products did offer significant value to

consumers. Perhaps this is so, but liability for deceptive sales practices does not

require that the underlying product be worthless. See id. (“[N]o one doubts the

utility of phone cards or claims that the product is a scam; all that is at issue are the

statements made by the defendants.”). In sum, the FTC offered substantial

evidence of consumer harm, as well as knowledge and participation by IAB and
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the Wood defendants. And the FTC satisfied its burden of proof by demonstrating

that it is likely to succeed on the merits and that an injunction would serve the

public interest. The district court therefore did not abuse its discretion by entering

the preliminary injunction.

D.    The district court did not err in freezing the defendants’ assets

      IAB next challenges the asset freeze. Specifically, IAB contends that the

district court abused its discretion by freezing a portion of the defendants’ assets

without first attempting to calculate the amount by which IAB and the Wood

defendants had unlawfully enriched themselves.

      An asset freeze is within the district court’s equitable powers. FTC v. Gem

Merch. Corp., 87 F.3d 466, 469 (11th Cir. 1996) (“[A] district court may order

preliminary relief, including an asset freeze, that may be needed to make

permanent relief possible.”). The FTC’s burden of proof in the asset-freeze

context is relatively light. SEC v. ETS Payphones, Inc., 408 F.3d 727, 735

(11th Cir. 2005) (per curiam) (explaining that only a “reasonable approximation of

a defendant’s ill-gotten gains” is required for an asset freeze and that “[e]xactitude

is not a requirement”).

      Here, the court-appointed receiver retained an accounting firm to untangle

the Wood defendants’ many assets and to estimate IAB’s revenues. The report

from the receiver disclosed that IAB and its affiliates earned over $70 million
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between 2009 and 2012, with virtually all of the income (95%) attributable to the

sale of trade-association memberships. James Wood alone earned over $6 million

during the same period. By contrast, the value of the assets frozen by the district

court totaled only $2.3 million, or approximately 3% of IAB’s gross income

between 2009 and 2012.

      IAB nevertheless argues that the district court should have calculated the

amount of IAB’s ill-gotten gains before freezing any assets. In support of this

argument, IAB relies on two cases. The first case is an unpublished opinion from

this court, FTC v. Bishop, 425 F. App’x 796 (11th Cir. 2011). According to IAB,

Bishop held that it is an “abuse of discretion to freeze assets without making a

reasonable approximation of restitution.” Bishop, however, contains almost no

analysis (in large part because it is a two-page, unpublished disposition), which

makes IAB’s reliance on it misplaced. See 11th Cir. R. 36-2 (explaining that

unpublished opinions are “not considered binding precedent”); see also Bravo

v. United States, 532 F.3d 1154, 1163 n.5 (11th Cir. 2008) (noting that unpublished

opinions necessarily contain abbreviated discussion and analysis).

      The second case relied on by IAB for its asset-freeze argument is the

out-of-circuit decision in FTC v. Verity Int’l, Ltd., 443 F.3d 48 (2d Cir. 2006).

Verity, however, is distinguishable because the key issue in that case was the

appropriate amount of restitution where multiple nonparty middlemen retained a
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significant portion of the total revenues. See id. at 68 (“The defendants-appellants

received consumers’ money through eBillit, and they paid Sprint, AT&T

U.K./Viatel, Telecom Malagasy, and GIB from those unjustly received consumer

funds.”). The Second Circuit remanded the case so that the district court could

“consider how much of this sum was in fact received by the defendants-appellants

and is therefore subject to an order of restitution.” Id.

      No equivalent facts exist in the case before us. First, the third-party

middlemen here—namely, the independent contractors who did telemarketing

work for IAB—were parties to the suit below, although they eventually stipulated

to the entry of a preliminary injunction. Moreover, the Second Circuit’s decision

to remand in Verity did not turn on the alleged value of the goods or services

provided by the defendants, contrary to IAB’s argument in this appeal.

      IAB nevertheless contends that the district court should have ascertained

how much money consumers saved on golf, medical care, prescription eyewear,

and travel, and deducted those savings from the total amount of assets frozen. In

essence, IAB argues that the district court failed to allow for the possibility that the

products it sold had some residual value despite the misrepresentations. But, as the

FTC correctly notes, the salient issue in fraudulent-misrepresentation cases “is

whether the seller’s misrepresentations tainted the customer’s purchasing

decisions,” not the value (if any) of the items sold. McGregor v. Chierico, 206
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F.3d 1378, 1388 (11th Cir. 2000); see also FTC v. Figgie Int’l, Inc., 994 F.2d 595,

606 (9th Cir. 1993) (“The fraud in the selling, not the value of the thing sold, is

what entitles consumers in this case to full refunds or to refunds for each [product]

that is not useful to them.”). We therefore discern no abuse of discretion by the

district court in ordering the asset freeze.

E.    The McCarran-Ferguson Act does not preempt the FTC’s claims

      IAB’s final contention is that the FTC’s enforcement action is preempted by

federal law. In particular, IAB argues that the reverse-preemption provision of the

McCarran-Ferguson Act, 15 U.S.C. § 1012, operates to deprive the district court of

jurisdiction. The McCarran-Ferguson Act provides that “no Act of Congress shall

be construed to invalid, impair, or supersede any law enacted by any State for the

purpose of regulating the business of insurance . . . unless such Act specifically

relates to the business of insurance.” Humana Inc. v. Forsyth, 525 U.S. 299, 304

(1999) (citing 15 U.S.C. § 1012(b)). Moreover, the FTC Act applies to the

business of insurance only to the extent that such business is not regulated by state

law. Id. at 309.

      IAB argues that because state insurance commissioners and state

departments of insurance oversee portions of its business, the FTC cannot take

enforcement action against IAB for violations of the FTC Act or the Telemarketing

Act. But this argument ignores the three-part test for which activities constitute the
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business of insurance, a test set forth by the Supreme Court in Union Labor Life

Insurance Co. v. Pireno, 458 U.S. 119 (1982). Under the Pireno test, an activity

constitutes the business of insurance if:

                [T]he practice has the effect of transferring or spreading a
                policyholder’s risk; second, whether the practice is an
                integral part of the policy relationship between the
                insurer and the insured; and third, whether the practice is
                limited to entities within the insurance industry.

Id. at 129 (emphasis omitted).

        IAB’s activities meet none of the above prongs. First, IAB sold

trade-association memberships offering limited medical discounts, not insurance.

For this reason, no transfer or spreading of risk occurred because IAB, unlike an

insurance company, incurred no risk when a new member decided to enroll.

See Blackfeet Nat’l Bank v. Nelson, 171 F.3d 1237, 1247 (11th Cir. 1999)

(explaining that an insurer “assumes [the] risk for the policyholder in return for the

fees it collects” and “uses standard actuarial tables in order to limit its exposure

to . . . risks”).

        IAB’s preemption argument also fails under the second prong of the Pireno

test because no relationship of an insurer to an insured exists between IAB and its

customers. And its argument fares no better under the third prong because the sale

of trade-association memberships, and more particularly medical-discount plans, is

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not limited to entities within the insurance industry. Reverse preemption under the

McCarran-Ferguson Act is therefore inapplicable.

      Nor is our decision altered by the fact that IAB is the policyholder under a

group health-insurance policy. Although some consumers might receive coverage

resembling that offered by traditional insurance, IAB’s activities in this regard still

do not satisfy the Pireno test for the reasons just discussed. Chief among these

reasons is the fact that the practice of a trade association in allowing its members to

become insureds under a group health-insurance policy is not limited to entities

within the insurance industry. Non-insurance company associations frequently

provide their members with benefits that include access to group insurance.

                               IV.    CONCLUSION

      For all of the reasons set forth above, the entry of the preliminary injunction

by the district court is AFFIRMED.

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