Federal Trade Commission v. John Beck Amazing Profits, LLC

Citations: 888 F. Supp. 2d 1006; 2012 WL 3705048; 2012 U.S. Dist. LEXIS 122210Docket: Case No. 2:09-cv-04719-JHN-CW

Court: District Court, C.D. California; August 21, 2012; Federal District Court

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The Court, led by Circuit Judge Jacqueline H. Nguyen, has addressed the scope of injunctive and monetary relief following the FTC's successful Motion for Summary Judgment against multiple defendants involved in misleading wealth-creation products, including Family Products, LLC (FP) and its founders, Gary Hewitt and Douglas Gravink, along with associated individuals and companies. The Court deferred final judgment due to inadequate briefings on the relief needed and ordered supplemental briefs from both parties.

The FTC seeks a permanent injunction against Gravink, Hewitt, FP, and Mentoring of America, LLC (MOA) from producing or disseminating infomercials and from participating in telemarketing activities. The FTC argues that a lifetime ban is warranted due to the defendants' significant involvement in misleading advertisements, the substantial consumer harm caused, their history of prior lawsuits by the FTC, and violations of a previous Preliminary Injunction Order. Factors supporting the requested telemarketing ban include their past violations, issues raised by the Utah Attorney General's Department of Consumer Protection, the extensive period of their unlawful conduct, and their level of intent and involvement in the deceptive practices.

Gravink and Hewitt submitted an Alternative Proposed Injunction that seeks to narrow the FTC’s suggested permanent injunctions. They propose that instead of a complete ban on infomercials, they should only be restricted from participating in those that promote wealth-creation through specific methods, such as turnkey Internet businesses or government tax sales. They agree to a two-year injunction against employment by others in infomercials related to wealth-creation and do not oppose a similar two-year ban on owning or producing any infomercial. They are also agreeable to a two-year prohibition on serving as officers or directors of any infomercial company. Regarding telemarketing, they accept a permanent ban on involvement with non-public telemarketing companies but oppose restrictions on business-to-business telemarketing activities.

The Court is tasked with determining the appropriate scope and duration of the injunction, acknowledging its broad discretion but noting that any injunction must be narrowly tailored to avoid overreach. Under the FTC Act, comprehensive prophylactic relief is permissible, and courts often implement fencing-in measures to avert future violations, which should reasonably relate to past unlawful actions. The scope of the intended injunction will be shaped by the specific circumstances of the case, aiming to prevent similar future violations.

Courts evaluate the reasonableness of a fencing-in order related to a violation by considering three factors: (1) the seriousness and intentionality of the violation, (2) the potential for the violation to affect other products, and (3) the respondent's prior violation history. The overall circumstances are considered rather than focusing on any single factor. The FTC is empowered to impose relief to prevent future violations, even if the illegal practice has ceased, provided there is more than a mere possibility of recurrence. 

In the case against Gravink, Hewitt, FP, and MOA, a permanent injunction is justified due to their extensive history of legal infractions, particularly in telemarketing and consumer fraud. Previous citations against MOA from the Utah Division of Consumer Protection include violations such as operating without the necessary licenses and failing to inform consumers of their cancellation rights, resulting in significant fines. A lawsuit filed by the Utah Attorney General's Office in 2006 further alleges that MOA did not reform its business practices despite these issues. These factors indicate a clear need for stringent injunctive relief to prevent future violations.

In June 2009, the Division cited MOA for telemarketing violations related to the Beck coaching product, resulting in a $5,000 fine and adherence to a preliminary injunction. MOA, along with Gravink and Hewitt, has a history of deceptive marketing practices, including multiple lawsuits for misleading infomercials. Notably, Gravink was involved in an FTC administrative action against Twin Star Productions, which settled for $500,000 and included a consent order prohibiting deceptive marketing practices. Despite this, Gravink and Hewitt continued to face legal challenges, including a 2005 FTC case regarding the Ab Energizer infomercial that resulted in a $120,000 settlement.

Given their extensive history of violations, the Court finds that a less-restrictive permanent injunction would not deter future misconduct. The deceptive tactics employed by Gravink and Hewitt could easily be transferred to different products, and their violations of the Federal Trade Commission Act (FTCA) and Telemarketing Sales Rule (TSR) have caused significant consumer harm, estimated at nearly $500 million across almost one million customers. Their deliberate involvement in the violations included authoring and approving misleading claims, even when facing consent decrees.

Consequently, the Court has issued a permanent injunction prohibiting Gravink, Hewitt, FP, and MOA from engaging in telemarketing or producing infomercials. Although Gravink and Hewitt argue that the injunction is overly broad and restricts their employment opportunities, the Court believes it is appropriately tailored to address the severity of their violations and necessary to prevent future infractions.

Injunctions preventing defendants from aiding others in similar businesses are commonly issued. Allowing Gravink and Hewitt to work in telemarketing or infomercial dissemination would likely lead to further violations of consumer protection laws. Their reference to J.K. Publications is inappropriate, as that case involved a broader employment ban that would have severely restricted the defendant's job opportunities. In contrast, the current injunctions would only bar Gravink and Hewitt from specific roles related to telemarketing and infomercials, making the situations distinguishable. The defendants argue against a two-year ban versus a lifetime ban proposed by the FTC, but their history of violations justifies the longer duration.

Regarding compliance, the FTC's Proposed Final Judgment requires the defendants to acknowledge receipt of the judgment, submit compliance reports for twenty years, and maintain specified business records. Although the defendants do not contest these requirements, they seek to reduce the duration for themselves to five years and for the gurus to two years, which they failed to substantiate as burdensome. The court supports the FTC's twenty-year requirement for Gravink and Hewitt due to their extensive violation history, while a ten-year period is deemed sufficient for the gurus.

Additionally, the FTC seeks to permanently bar the defendants from using or disclosing customer information obtained prior to the final judgment and to destroy such records within thirty days. This is a standard measure in FTC cases to prevent future misconduct. The defendants wish to limit the destruction to information from the specific infomercials at issue, but they have not provided evidence of involvement in other business ventures. Given the context of their activities, the court finds no valid reason for the defendants to retain any customer records and rejects their proposed modifications.

The FTC is requesting a monetary award of $478,919,765, representing the total net revenue from kit sales, coaching sales, and continuity sales over two years, without accounting for any benefits received by customers. The breakdown of the requested amount includes specific liabilities for various defendants tied to sales of different products and services, totaling the net revenue sought. The FTC asserts that it has the authority to seek equitable monetary relief, including restitution, based on the amounts consumers paid in cases of improper acts, even in the absence of actual damages. 

Defendants acknowledge the data used by the FTC to calculate damages but request a $5.6 million offset for benefits received by consumers and services rendered, which the FTC contests, arguing that no offset is justified. The FTC maintains that the corporate defendants should return all gross revenues minus refunds, emphasizing that unjust enrichment should not be reduced based on consumer benefits derived from misleading representations. The Court supports the FTC's position, stating that the nature of consumers’ benefits does not diminish the deceptive nature of Defendants’ actions. The Defendants did not provide sufficient legal support for their claims regarding offsets in their brief, referencing a previous case to argue against the FTC's approach to calculating unjust enrichment.

The FTC has deducted refunds, chargebacks, and tuition reimbursements from the total amount claimed of $478,919,765, aligning with the precedent set in Zamani. In contrast to Zamani, where defendants provided services leading to positive results, the defendants in this case made unsubstantiated promises of outcomes, with any consumer success attributed to their own efforts. The court considers the FTC's request for a judgment payment within ten days unreasonable and instead establishes a thirty-day payment period. Defendants’ request for a stay of the permanent ban on infomercial and telemarketing activities pending appeal is denied, as the court finds no justification for such a stay. The court adopts the FTC’s Proposed Final Judgment with modifications, issuing a formal judgment. The defendants, including Gravink and Hewitt, are permanently banned from participating in any form of telephone premium promotions. The court acknowledges clear evidence of violations of a prior preliminary injunction by the defendants, allowing them to submit supplemental briefings while also permitting the FTC to respond. The ownership and control of the involved companies, FP and MOA, by Gravink and Hewitt are undisputed, further emphasizing their responsibility in the operations linked to the alleged fraudulent activities.

Gravink asserts his role as a minority shareholder of Twin Star Productions without management control over the infomercial production. Despite this claim, his involvement is pertinent to the analysis of previous violations. Occupational bans, like the one in question, have been upheld in the Ninth Circuit, as demonstrated in FTC v. Gill, where the court affirmed an injunction against the defendant in the credit repair business due to systematic misrepresentations and violations of a preliminary injunction. The court deemed further opportunities for the defendant unwise based on their disregard for the injunction.

The FTC's request for restitutionary damages references exhibits authenticated by John D. Jacobs, the FTC's counsel, in support of their supplemental briefing. The total net revenue from the sale of kits was calculated by deducting refunds and chargebacks from gross revenues, and a similar approach was taken for coaching services. Defendants indicated that records for continuity program refunds and chargebacks were not maintained separately, complicating the generation of distinct net revenue figures for those sales. The FTC's total claim of $478,919,765 is derived from applying its formula to the data provided by the Defendants during discovery.