FTC v. Netforce Seminars, et al

Filing 136

ORDER: IT IS ORDERED that the Contempt Defendants' motion to dismiss and to supplement briefing (Doc. 127 ) is denied [see attached Order for details]. Signed by Judge Dominic W Lanza on 5/18/22. (MAW)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Federal Trade Commission,
Plaintiff,

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v.

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Netforce Seminars, et al.,

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Defendants.

No. CV 00-02260-PHX-DWL
ORDER

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Pending before the Court is a motion by Jay Noland, Scott Harris, and Thomas Sacca

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(together, “the Contempt Defendants”) to dismiss the FTC’s contempt claims in this action

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under Rule 12(b)(1) of the Federal Rules of Civil Procedure or, in the alternative, to allow

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the Contempt Defendants to assert an unclean hands defense and/or to rely on certain

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evidence. (Doc. 127.) For the following reasons, the motion is denied.

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RELEVANT BACKGROUND

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In 2000, the FTC initiated this action, which will be referred to as the “First Action,”

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by filing a complaint that charged Noland with violating the FTC Act by operating a multi-

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level marketing business as an illegal pyramid scheme. (First Action, Doc. 1.)

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On July 2, 2002, Noland and the FTC resolved the First Action by entering into a

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settlement agreement that included a stipulated permanent injunction. (First Action, Doc.

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66.) As described in more detail in other orders, the injunction restrains Noland’s future

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conduct in various ways, including by prohibiting him from participating “in any prohibited

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marketing scheme,” from making any “false or misleading statement or misrepresentation

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of material fact” “in connection with . . . any multi-level marketing program,” and from

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“providing to others the means and instrumentalities with which to make” such prohibited

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statements. (See, e.g., First Action, Doc. 130 at 1-2.)

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On January 8, 2020, the FTC initiated another action against Noland. (FTC v.

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Noland et al., CV-20-47-PHX-DWL.) The operative complaint in that action, which will

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be referred to as the “Second Action,” alleges that Noland, Harris, Sacca, and Lina Noland

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(together, “the Individual Defendants”) operated a pair of multi-level marketing businesses

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called Success By Health (“SBH”) and VOZ Travel as illegal pyramid schemes, made false

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statements in the course of operating those businesses, and violated various FTC rules in

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the course of operating those businesses. (Second Action, Doc. 205.)

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On January 17, 2020, the FTC filed a motion for an order to show cause (“OSC”)

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why Noland should not be held in civil contempt in the First Action. (First Action, Docs.

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74, 78.) In a nutshell, the FTC’s theory was that Noland’s challenged conduct in the

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Second Action also amounted to a violation of the permanent injunction issued in the First

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Action. (Id.) After Noland filed a response to the motion for an OSC (First Action, Doc.

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82), the FTC expanded the scope of its OSC request to include Harris and Sacca. (First

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Action, Doc. 91.) Harris and Sacca then filed a response. (First Action, Doc. 98.)

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On July 6, 2020, the Court issued an order granting the FTC’s request for an OSC

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in relevant part. (First Action, Doc. 101.) Among other things, the Court held that the FTC

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properly filed its OSC request in the same action in which the underlying injunction was

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issued and, thus, “the Court will not require the FTC to file a new action or amend its

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complaint in the [Second Action].” (Id. at 3.)

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In April 2021, the legal landscape underlying some of the FTC’s claims shifted by

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virtue of the Supreme Court’s decision in AMG Capital Management, LLC v. FTC, 141 S.

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Ct. 1341 (2021). There, the Supreme Court held—contrary to the rule that had previously

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been in place in the Ninth Circuit—that the FTC may not obtain “equitable monetary relief

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such as restitution or disgorgement” pursuant to its authority under § 13(b) of the FTC Act.

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Id. at 1344. Following this development, the FTC clarified that it is only seeking monetary

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remedies in the Second Action pursuant to its rules-based claims, which are claims under

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§ 19 of the FTC Act, and is not seeking monetary remedies in the Second Action pursuant

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to its pyramid-scheme and false-statement claims, which are claims under § 13(b) of the

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FTC Act. (Second Action, Docs. 351, 365.)

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On June 23, 2021, the FTC formally moved for contempt sanctions against the

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Contempt Defendants in the First Action. (First Action, Doc. 106.) The motion later

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became fully briefed. (First Action, Docs. 112, 114.)

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On March 15, 2022, the Contempt Defendants filed the pending motion. (First
Action, Doc. 127.)1

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On March 22, 2022, the Court issued an order denying, without prejudice, the FTC’s

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motion for civil contempt sanctions in the First Action. (First Action, Doc. 130.) Although

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the Court acknowledged that “[t]he FTC has established that the Contempt Defendants

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violated some provisions of the permanent injunction,” the Court also found that “the FTC

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has not established, at least at this stage of the proceedings, that the Contempt Defendants

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committed certain other alleged violations of the permanent injunction.” (Id. at 7-9.) The

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Court continued that, “[b]ecause the FTC has not established all of the violations alleged

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in its motion, it follows that the FTC has not established an entitlement to the $7,012,913.25

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compensatory contempt award sought in its motion. To calculate that sum, the FTC added

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together the net revenues earned from both SBH and VOZ Travel. But because the SBH-

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related violations have not been established, the FTC’s requested sum is necessarily

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overstated.” (Id. at 9.) Given this determination, the Court found it “unnecessary at this

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juncture to decide whether the FTC’s approach to calculating financial remedies is flawed

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for other reasons,” including (1) the failure to “account for the inherent value of the

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products that consumers actually received and consumed” and (2) the “unresolved

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questions” arising from AMG Capital “about the FTC’s authority to pursue a compensatory

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civil sanction based on new § 13(b) violations that also violate an injunction issued in a

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previous § 13(b) enforcement action (such as the permanent injunction issued in the First

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The Contempt Defendants’ request for oral argument is denied because the issues
are fully briefed and argument would not assist the decisional process. See LRCiv 7.2(f).
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Action),” and simply noted that those issues “will benefit from further briefing.” (Id. at 9-

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11.)
On March 28, 2022, the FTC filed a response to the Contempt Defendants’ pending

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motion. (First Action, Doc. 132.)

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On April 4, 2022, the Contempt Defendants filed a reply. (First Action, Doc. 135.)

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DISCUSSION
I.

Subject-Matter Jurisdiction
The Parties’ Arguments

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A.

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The Contempt Defendants’ primary argument is that because the Supreme Court

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held in AMG Capital that the FTC cannot recover monetary damages pursuant to § 13(b)

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of the FTC Act, and because the injunction in the First Action was predicated on claims

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under § 13(b) of the FTC Act, “[t]he FTC’s attempt to indirectly seek monetary redress

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through its contempt claims must be dismissed for lack of subject matter jurisdiction.”

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(Doc. 127 at 2.) The Contempt Defendants elaborate: “The losses claimed by the FTC are

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derived from the 2002 Stipulated Order, which is based solely on Section 13(b), which

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does not allow courts to impose monetary redress. The AMG ruling bars any . . . monetary

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recovery based on Section 13(b) either directly through lawsuits, or indirectly through a

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contempt action. The FTC can put lipstick on this pig, but it is still a pig.” (Id. at 16.)

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The FTC opposes the Contempt Defendants’ request for dismissal. (Doc. 132 at 2-

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7.) The FTC argues that the Court “plainly has jurisdiction” to enforce the permanent

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injunction issued in the First Action via the exercise of its civil contempt power, that AMG

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Capital does not undermine the Court’s authority to impose monetary sanctions based on

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violations of the permanent injunction (a conclusion that two other district courts have

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already reached), and that net revenues remain a permissible compensatory contempt

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sanction under Ninth Circuit law. (Id.)

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In reply, the Contempt Defendants argue that “[t]he Court should dismiss the Order

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to Show Cause . . . because the Court lacks the subject matter jurisdiction necessary to

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make such a ruling.” (Doc. 135 at 1.) The Contempt Defendants assert in a footnote that

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“[w]hether Rule 12 is a correct vehicle for the Court to dismiss this action is irrelevant . . .

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because a Court must have subject matter jurisdiction to preside over a lawsuit.” (Id. at 1

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n.1.) The Contempt Defendants also argue that one of the cases cited by the FTC is

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distinguishable. (Id. at 2.) Finally, the Contempt Defendants disagree with the FTC’s

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arguments concerning the permissibility of net-revenue sanctions. (Id. at 7-10.)

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B.

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There is a disconnect between the substantive argument raised in the Contempt

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Defendants’ motion (i.e., the FTC’s request for monetary contempt sanctions in the First

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Action is barred by AMG Capital) and the relief they seek (i.e., a dismissal based on the

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absence of subject-matter jurisdiction). The Court unquestionably has subject-matter

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jurisdiction to entertain a claim for civil contempt sanctions based on the violation of a

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permanent injunction it previously issued. Shillitani v. United States, 384 U.S. 364, 370

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(1966) (“There can be no question that courts have inherent power to enforce compliance

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with their lawful orders through civil contempt.”). Although the parties debate whether the

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FTC’s theory of damages in the First Action is foreclosed by AMG Capital, this debate

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does not implicate the Court’s subject-matter jurisdiction. The FTC’s arguments on this

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point are not insubstantial, implausible, or otherwise so completely devoid of merit as not

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to involve a federal controversy. Thus, even assuming the Contempt Defendants are

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correct about the meaning of AMG Capital, this would simply mean the FTC’s request for

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relief in the First Action should be denied on the merits (as opposed to being dismissed for

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want of subject-matter jurisdiction). Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83,

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89 (1998) (“It is firmly established in our cases that the absence of a valid (as opposed to

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arguable) cause of action does not implicate subject-matter jurisdiction, i.e., the courts’

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statutory or constitutional power to adjudicate the case. . . . Jurisdiction is not defeated by

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the possibility that the averments might fail to state a cause of action on which petitioners

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could actually recover. . . . Dismissal for lack of subject-matter jurisdiction because of the

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inadequacy of the federal claim is proper only when the claim is so insubstantial,

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implausible, foreclosed by prior decisions of this Court, or otherwise completely devoid of

Analysis

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merit as not to involve a federal controversy.”) (cleaned up).

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The Court acknowledges that, at some point in the near future, it may be necessary

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to decide whether the FTC’s request for monetary sanctions in the First Action is foreclosed

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by AMG Capital. But the only request now properly before the Court is the Contempt

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Defendants’ request for dismissal for lack of subject-matter jurisdiction. As explained

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above, that request lacks merit.

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II.

Unclean Hands
The Parties’ Arguments

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A.

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One of the Contempt Defendants’ alternative requests is to “allow them to add

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additional defenses asserting the unclean hands doctrine.” (Doc. 127 at 1.) The Contempt

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Defendants contend that the unclean hands doctrine is applicable here for three reasons:

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first, because the FTC “knew full well” that it lacked authority to pursue monetary redress

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under § 13(b) of the FTC Act but persuaded the appellate courts to adopt a contrary,

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incorrect interpretation for “almost four decades” until the Supreme Court finally decided

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AMG Capital (id. at 2-4); second, because the FTC breached the settlement agreement in

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the First Action by issuing a press release that characterized Noland as a “pyramid

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promoter” (id. at 5-13); and third, because the FTC failed to cite a controlling authority—

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the Ninth Circuit’s decision in FTC v. Figgie Int’l, Inc., 994 F.2d 595 (9th Cir. 1993)—

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when disclosing its damages computations or briefing the issue of damages in its summary

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judgment motion (id. at 13-15).

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The FTC opposes the Contempt Defendants’ request to add an unclean hands

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defense. (Doc. 132 at 7-11.) As for its litigation history, the FTC argues that the

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“Contempt Defendants cite no authority establishing that legal advocacy urging courts to

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adopt a particular statutory interpretation can be an ‘unconscionable act’ demonstrating

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unclean hands” and note that “every court of appeals that examined the issue for nearly 40

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years agreed with the FTC’s reading of Section 13(b).” (Id. at 9.) Next, the FTC argues

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that the press release did not contain any false statements or violate the settlement

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agreement. (Id. at 9-10.) Finally, the FTC notes that it did cite Figgie in its damages

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disclosures and summary judgment briefing and argues that the parties’ disagreement over

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Figgie’s applicability does not amount to unclean hands. (Id. at 10-11.)

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In reply, the Contempt Defendants argue that the FTC’s litigation history before

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AMG Capital amounted to “decid[ing] to mislead the courts and hope that they got a good

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ruling” and that “[i]t falls on this Court to protect the public because the FTC has shown

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no remorse or regret for its manifest infidelity to the statutes it is sworn to enforce” (Doc.

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135 at 2-6); that the press release was misleading (id. at 7 n.7); and that although the FTC

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may have cited Figgie in its disclosures and summary judgment briefing, the FTC still

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displayed a “lack of candor about the standard of proof for damages” (id. at 6-7).

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B.

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As a threshold matter, the Contempt Defendants’ request for permission to “add” an

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unclean hands defense is procedurally confusing.

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proceeding premised on alleged violations of a permanent injunction previously issued in

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this case, the FTC did not file a formal complaint accusing the Contempt Defendants of the

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alleged violations and the Contempt Defendants did not file an answer. Instead, the Court

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simply granted the FTC’s request to issue an OSC. (Doc. 101.) The next step will be to

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hold an evidentiary hearing to resolve the FTC’s contempt allegations in the First Action

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(as well as its claims in the Second Action) on the merits. (Doc. 134 at 3 [“This case has

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been pending for over two years, discovery is closed, and a consolidated evidentiary

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hearing in the First and Second Actions will need to take place regardless of how the

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reconsideration motion is resolved.”].)

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Defendants are asking for permission to do—there is no answer in the First Action to which

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an unclean hands defense might be formally added.

Because this is a civil contempt

It is therefore unclear what the Contempt

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At any rate, the Contempt Defendants’ arguments fail on the merits. The FTC did

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not engage in conduct remotely implicating the unclean hands doctrine by successfully

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persuading an array of federal courts over a four-decade span to adopt a particular

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interpretation of the FTC Act. Although that interpretation turned out to be wrong, being

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wrong about a debatable issue of statutory interpretation that dozens of federal judges

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found persuasive does not come close to qualifying as “wrongfulness, willfulness, bad

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faith, or gross negligence.” Pinkette Clothing, Inc. v. Cosmetic Warriors Ltd., 894 F.3d

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1015, 1029 (9th Cir. 2018). As for the press release, the Court has already determined that

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it “was not issued in violation of the 2002 stipulated judgment.” (Doc. 133 at 9-10.)

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Finally, as for Figgie, the Contempt Defendants have established, at most, that the FTC

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took one side of a good-faith debate about a disputed legal issue, which again does not

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come close to qualifying as conduct that might support an unclean hands defense.

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III.

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New Evidence
A.

The Parties’ Arguments

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The Contempt Defendants’ final alternative request is for the Court to “consider the

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Declarations of Tevis Sherfield and J. Noland in support of their defense to the contempt

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charges.” (Doc. 127 at 1.) According to the Contempt Defendants, these declarations

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“establish that affiliates were not misled on issues involving income potential but were

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provided hypothetical examples based on SBH’s compensation plan.” (Id. at 15.)

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In response, the FTC argues that although the Contempt Defendants “do not explain

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in what context they want the Court to consider the declarations,” it appears “they want the

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Court to consider them when ruling on the FTC’s Motion for Contempt Sanctions.” (Doc.

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132 at 11.) The FTC argues that, because that motion has now been denied, the Contempt

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Defendants’ request is moot. (Id.)

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In reply, the Contempt Defendants do not discuss the declarations. (Doc. 135.)

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B.

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The Court agrees with the FTC that the Contempt Defendants’ request related to the

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Sherfield and Noland declarations is moot. Other than the motion being addressed in this

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order, there are no other pending motions in the First Action.

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…

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…

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…

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…

Analysis

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Accordingly,

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IT IS ORDERED that the Contempt Defendants’ motion to dismiss and to

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supplement briefing (Doc. 127) is denied.
Dated this 18th day of May, 2022.

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