United States of America v. The Zaken Corp et al

Filing 64

ORDER GRANTING PLAINTIFFS MOTION FOR SUMMARY JUDGMENT 52 by Judge Dean D. Pregerson : Plaintiffs Motion for Summary Judgment is GRANTED, on all counts. The court awards restitution of $25,406,781 and finds injunctive relief warranted in the form proposed by Plaintiff. Plaintiff is ordered to file a proposed judgment and injunction in accordance with this Order within ten days of the issuance of this Order. (lc). Modified on 9/18/2014. (lc).

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UNITED STATES DISTRICT COURT

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CENTRAL DISTRICT OF CALIFORNIA

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UNITED STATES OF AMERICA,

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Plaintiff,

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v.
THE ZAKEN CORP., a
California corporation also
d/b/a The Zaken Corproation,
QuickSell and QuickSell and
TIRAN ZAKEN, individually
and as an officer of The
Zaken Corp.,

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Defendants.
___________________________

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Case No. CV 12-09631 DDP (MANx)

ORDER GRANTING PLAINTIFF’S MOTION
FOR SUMMARY JUDGMENT

[Dkt. No. 52]

Presently before the court is Plaintiff’s Motion for Summary

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Judgment.

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court is inclined to grant the motion and adopt the following

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order.

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I.

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Having considered the submissions of the parties, the

Background
Defendants (collectively, “Zaken”) offer a “Wealth Building

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Home Business Plan” to consumers.1

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D at 44.)

(Declaration of Dani Stagg, Ex.

For $148.00, plus shipping, purchasers become Associates

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1

This order uses the term “consumer” and “purchaser”
interchangeably.

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of QuikSell Liquidations and receive a “kit” including instructions

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on how to locate excess inventories, “‘[i]nsider’ secret

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techniques,” “powerful and proven strategies,” “a simple seven-word

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phrase that instantly pays [purchasers] cash profits,” and other

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information.

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additional “tools” for an additional charge.

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at 85-86.)

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9

(Id. at 57-58, 97.)

Zaken also offers purchasers
(Stagg Dec., Ex. E.

Under Zaken’s plan, consumers identify businesses seeking to
liquidate excess inventory.

Consumers then notify Zaken, which may

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proceed to negotiate an acquisition of the excess merchandise.

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Zaken is successful in 1) buying the products identified by the

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consumer and 2) reselling the products at a profit, then Zaken pays

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purchasers fifty percent of the net proceeds.

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Zaken advertises a “realistic ballpark figure” estimate that “2 to

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4 hours a week working this business will earn [participants] an

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average of $3,000 to $6,0000.”

If

(Id. at 52-53.)

(Stagg Dec. Ex. D. at 61.)

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Effective March 1, 2012, the Federal Trade Commission

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broadened the scope of its “Business Opportunity Rule,” 16 CFR §

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437.0 et seq., the earliest form of which was first promulgated in

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1978.

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imposed certain disclosure requirements upon the sale of business

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opportunities, but only those costing over $500.

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2012 revision eliminated this monetary threshold.

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The 2012 changes also seek “to address the sale of deceptive work-

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at home schemes, where unfair and deceptive practices have been

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both prevalent and persistent.”

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that “[s]ellers of fraudulent work-at-home opportunities deceive

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their victims with promises of an ongoing relationship in which the

76 FR 76816.

Prior versions of the rule regulated and

76 FR 76826.

2

76 FR 76818.

The

76 FR 76821.

The FTC elaborated

1

seller will buy the output that business opportunity purchasers

2

produce, often misrepresenting to purchasers that there is a market

3

for the purchasers’ goods and services,” and that these schemes

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“frequently dupe consumers with false earnings claims.”

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Id.

On November 9, 2012, Plaintiff filed a complaint against

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Defendants for violations of the FTC’s Business Opportunity Rule

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and Section 5 of the Federal Trade Commission Act, 15 U.S.C. §

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45(a).

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II.

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Legal Standard
Summary judgment is appropriate where the pleadings,

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depositions, answers to interrogatories, and admissions on file,

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together with the affidavits, if any, show “that there is no

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genuine dispute as to any material fact and the movant is entitled

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to judgment as a matter of law.”

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seeking summary judgment bears the initial burden of informing the

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court of the basis for its motion and of identifying those portions

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of the pleadings and discovery responses that demonstrate the

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absence of a genuine issue of material fact.

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Catrett, 477 U.S. 317, 323 (1986).

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the evidence must be drawn in favor of the nonmoving party.

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Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 242 (1986).

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If the moving party does not bear the burden of proof at trial, it

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is entitled to summary judgment if it can demonstrate that “there

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is an absence of evidence to support the nonmoving party’s case.”

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Celotex, 477 U.S. at 323.

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Fed. R. Civ. P. 56(a).

A party

See Celotex Corp. v.

All reasonable inferences from
See

Once the moving party meets its burden, the burden shifts to

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the nonmoving party opposing the motion, who must “set forth

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specific facts showing that there is a genuine issue for trial.”
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Anderson, 477 U.S. at 256.

Summary judgment is warranted if a

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party “fails to make a showing sufficient to establish the

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existence of an element essential to that party’s case, and on

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which that party will bear the burden of proof at trial.”

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477 U.S. at 322.

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that a reasonable jury could return a verdict for the nonmoving

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party,” and material facts are those “that might affect the outcome

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of the suit under the governing law.”

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There is no genuine issue of fact “[w]here the record taken as a

Celotex,

A genuine issue exists if “the evidence is such

Anderson, 477 U.S. at 248.

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whole could not lead a rational trier of fact to find for the non-

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moving party.”

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475 U.S. 574, 587 (1986).

13

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

It is not the court’s task “to scour the record in search of a

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genuine issue of triable fact.”

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1278 (9th Cir. 1996). Counsel has an obligation to lay out their

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support clearly.

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1026, 1031 (9th Cir. 2001).

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file for evidence establishing a genuine issue of fact, where the

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evidence is not set forth in the opposition papers with adequate

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references so that it could conveniently be found."

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III. Discussion

Keenan v. Allan, 91 F.3d 1275,

Carmen v. San Francisco Sch. Dist., 237 F.3d
The court “need not examine the entire

Id.

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A.

Section 5(a) of the FTC Act

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Section 5(a) of the FTC Act prohibits unfair or deceptive acts

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or practices in or affecting commerce, and provides for injunctive

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and equitable relief against violators.

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v. Network Servs. Depot, Inc., 617 F.3d 1127, 1138 (9th Cir. 2010).

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A practice or representation is deceptive if it is likely to

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mislead consumers acting reasonably under the circumstances, and is
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15 U.S.C. § 45(a); F.T.C.

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material.

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Courts look to the overall impression conveyed by a representation,

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and not merely to literal truth.

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F.3d 1196, 1200 (9th Cir. 2006).

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F.T.C. v. Stefanchik, 559 F.3d 924, 928 (9th Cir. 2009).

F.T.C. v. Cyberspace.Com LLC, 453

While Zaken disputes that it violated Section 5(a) of the FTC

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Act, it provides no argument, authority, or evidence to support

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that position.

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in which Zaken directly or indirectly represented that purchasers

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of Defendants’ business opportunity would earn substantial income.

Plaintiff, in contrast, cites to numerous instances

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Defendants, for example, explicitly guaranteed that the “entire

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good-faith deposit of $148 will be sent right back” if consumers

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“haven’t made at least $4,000" and they “return the kit” in the

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first thirty days of purchase. (Pl.’s Ex. 11, Attach. F.)

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Defendants suggested that such an outcome was unlikely,

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representing, for example, that “the average commission check

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[associates] get . . . will be approximately $4,280!” and

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presenting a “realistic ballpark figure” estimate that “2 to 4

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hours a week working this business will earn [participants] an

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average of $3,000 to $6,0000”

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Stagg Decl., Ex. D. at 61.)

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(Pl.’s Ex. 12 at 67:15-15;)

In truth, purchasers of Defendants’ business opportunity have

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not earned a substantial income. (Pl.’s Ex. 29, Attach. A.)

Over

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the

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basic QuikSell kit for $148.

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earned any income at all.

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approximately $260,000 in sales commission payments, based on

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available records and testimonials. (Pl.’s Ex. 29, Attach. A.)

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2011 and 2013, not a single consumer made any income using

business’s ten-year history, over 100,000 consumers bought the
Fewer than 1% of consumers ever

Consumers collectively earned

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In

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QuikSell. (Id.)

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QuikSell purchasers, and those commissions were a fraction of the

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amounts Zaken claimed consumers would earn. (Pl.’s Ex. 29, Attach.

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A.)

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In 2012, Zaken paid commissions to only five

Consumers spent an additional $10,130,433 total on other

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QuikSell “upsell” tools. (Pl.’s Ex. 30, Attach. A.)

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were encouraged to “spend [an additional] $2,300" to purchase one

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such tool if they were “serious about this business and . . .

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really want[ed] to make the kind of money others have made.”(Yee

Some consumers

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Dep., Pl.’s Ex. 14 at 105:21-23) .

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consisted of largely outdated telephone numbers of companies who

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were out of business. (Yee Dep., Pl.’s Ex. 14 at 108:15-21.)

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It was reasonable for consumers to rely on Zaken’s

This particular tool, however,

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representations. The Government need not prove that each individual

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consumer relied on the deceptive acts or practices. FTC. v.

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Commerce Planet, Inc., 878 F.Supp.2d 1048, 1072 (C.D. Cal. 2012).

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Here, reliance is shown by the undisputed fact that more than

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110,000 consumers bought Zaken’s products.

FTC v. Figgie Int’l,

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Inc., 994 F.2d 595, 605-6 (9th Cir. 1993).

Further, it was

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reasonable for consumers to believe that Defendants’ statements of

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earnings potential represented typical or average earnings. FTC v.

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Medicor LLC, 217 F. Supp. 2d 1048, 1053-54 (C.D. Cal. 2002); FTC v.

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Data Med. Capital, Inc., No. SA CV 99-1266 AHS, 2010 WL 1049977 at

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* 27 (C.D. Cal. Jan. 15, 2010).

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Defendants’ misrepresentations were material. A misleading

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impression is material if it “involves information that is

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important to consumers and, hence, likely to affect their choice

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of, or conduct regarding, a product.” Commerce Planet, Inc., 878
6

1

F.Supp.2d at 1063 (citing FTC v. Cyberspace.com, LLC, 453 F.3d

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1196, 1201 (9th Cir.2006)). Express claims concerning the earnings

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potential of business opportunities are presumed to be material, as

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the potential to earn a profit is an essential consideration for

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anyone considering purchasing a business opportunity. FTC v. Febre,

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1996 WL 396117 at *2 (N.D. Cal. 1996.) Defendants’

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misrepresentations of potentially large earnings in exchange for

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very little work were explicitly presented to consumers in

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advertisements, with titles like “Start Locating lots of deals and

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Make BIG MONEY mailing out this Postcard.”(Pl.’s Ex. 24, Attach.

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B.)

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QuikSell associates, an essential consideration for anyone

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considering purchasing this program. As such, these

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misrepresentations were material.

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Defendants violated Section 5.

These express claims concerned the earnings potential of

Plaintiffs have established that

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B.

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As described in this court’s earlier order, effective March 1,

Business Opportunity Rule

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2012, the Federal Trade Commission broadened the scope of its

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“Business Opportunity Rule,” 16 CFR § 437.0 et seq., the earliest

20

form of which was first promulgated in 1978.

21

versions of the rule regulated and imposed certain disclosure

22

requirements upon the sale of business opportunities, but only

23

those costing over $500.

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eliminated this monetary threshold.

25

also seek “to address the sale of deceptive work-at home schemes,

26

where unfair and deceptive practices have been both prevalent and

27

persistent.”

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fraudulent work-at-home opportunities deceive their victims with

76 FR 76818.

76 FR 76826.

76 FR 76816.

Prior

The 2012 revision

76 FR 76821.

The 2012 changes

The FTC elaborated that “[s]ellers of

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1

promises of an ongoing relationship in which the seller will buy

2

the output that business opportunity purchasers produce, often

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misrepresenting to purchasers that there is a market for the

4

purchasers’ goods and services,” and that these schemes “frequently

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dupe consumers with false earnings claims.”

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7

Id.

The Rule defines a business opportunity as a commercial
arrangement in which:

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(1) A seller solicits a prospective purchaser to enter into
a new business; and

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(2) The prospective purchaser makes a required payment; and
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(3) The seller, expressly or by implication, orally or in
writing, represents that the seller or one or more
designated persons will:

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(i) Provide locations for the use or operation of
equipment, displays, vending machines, or similar devices,
owned, leased, controlled, or paid for by the purchaser; or

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(ii) Provide outlets, accounts, or customers, including,
but not limited to, Internet outlets, accounts, or
customers, for the purchaser’s goods or services; or

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(iii) Buy back any or all of the goods or services that the
purchaser makes, produces, fabricates, grows, breeds,
modifies, or provides, including but not limited to
providing payment for such services as, for example,
stuffing envelopes from the purchaser’s home.

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16 C.F.R. § 437.1(c).

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The first two elements of the Rule’s inquiry are clearly met
here.
As to third prong, Plaintiff contends that sub-prongs (ii) and

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(iii), the “outlet” and “buy back” provisions, apply to Zaken’s

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QuikSell program.

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“Providing outlets, accounts, or customers means furnishing
the prospective purchaser with existing or potential locations,
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outlets, accounts, or customers . . . or otherwise assisting the

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prospective purchaser in obtaining his or her own locations,

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outlets, accounts or customers . . . .”

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16 C.F.R. § 437.1(m).

At the preliminary injunction stage, it was unclear from the

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record presented whether Zaken represented to consumers that it

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would take certain actions, or, alternatively, only that it might

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take those actions.

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court is satisfied that Zaken represented that it would act.

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mailing, for example, claimed that Zaken’s product and method would

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yield “deals that WILL sell fast and WILL produce commission checks

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for [consumers]!”

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guarantee[d]” consumers’ “success.”

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these statements is the representation that Zaken would take the

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steps necessary for consumers to earn commissions.

Now, after the completion of discovery, the

(Ex. 11G.)

One

Indeed, Zaken “absolutely
(Ex. 1 at 4.)

Implicit in

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The question remains whether those steps constitute the

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furnishing of “customers” or “outlets” to consumers, or assistance

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in finding customers or outlets.

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term, a court should construe that term in accordance with its

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‘ordinary, contemporary, common meaning.’”

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Los Angeles, 420 F.3d 981, 988 (9th Cir. 2005) (quoting San Jose

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Christian College v. City of Morgan Hill, 360 F.3d 1024, 1034 (9th

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Cir. 2004).).

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determine the “plain meaning” of a term.

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is “one that purchases a commodity or service.”

25

Online Dictionary, Merriam-Webster, Inc.,

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www.merriam-webster.com (June 2014).

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commodity.”

“When a statute does not define a

Cleveland v. City of

Courts may look to dictionary definitions to

Id.

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9

Id. at 1034.

A customer

Merriam-Webster

http://

An outlet is “a market for a

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Plaintiff’s argument is slightly inconsistent.

Plaintiff

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argues that “Zaken was the sole customer who bought the service

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offered by [consumers],” but also that Zaken “would provide outlets

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for [consumers’] services – i.e., third-party buyers of liquidated

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merchandise.”

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however, did not comprise the market for consumers’ services.

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Rather, as suggested by Plaintiff, Zaken itself made up the

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entirety of that market.

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(Mot. at 17.)

Third-party buyers of merchandise,

At the preliminary injunction phase, this court noted that it

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was unclear whether consumers could or did provide information to

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entities other than Zaken.

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and Zaken does not dispute, that consumers “could only earn money

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from Zaken.”

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promise to pay consumers a portion of any realized profits

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constituted a “purchase” of information, Zaken was consumers’

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customer.

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appears that Zaken was also the sole outlet for consumers’

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services.

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provide “lead finding” information to anyone other than Zaken

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itself.

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(Mot. at 16.)

On summary judgment, Plaintiff asserts,

To the extent that Zaken’s conditional

Even putting aside that question aside, however, it

There is no evidence that consumers did, or could,

To summarize, Zaken was the only market for consumers’

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services.

Consumers could only receive commissions if Zaken made

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use of those services.

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receive commission checks.

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implicitly represented to consumers that it would provide them with

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an outlet for their services, namely, Zaken itself.

Zaken guaranteed that consumers would
Thus, at the very least, Zaken

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Zaken’s

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QuikSell program therefore falls within the ambit of the Business

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Opportunity Rule.2

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C.

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Almost the entirety of Zaken’s opposition to the instant

Scope of Relief

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motion is directed at the relief sought by Plaintiff.

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Specifically, Zaken argues that (1) the proposed lifetime ban on

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Tiran Zaken’s involvement in marketing work-at-home business

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opportunities is overbroad and punitive and (2) the proposed $25

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million judgment lacks evidentiary support, particularly with

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respect to Tiran Zaken’s scienter.

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12

1.

(Opp. at 2.)

Injunctive Relief

In “proper cases,” the FTC may seek a permanent injunction.

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15 U.S.C. § 53(b).

14

facts of the particular case, and should be tailored to prevent

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future violations.

16

888 F.Supp.2d 1006, 1012 (C.D. Cal. 2012).

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act “must expect some ‘fencing in.’” Sears, Roebuck and Co. v.

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F.T.C., 676 F.2d 385, 391 (9th Cir. 1982).

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include the degree of scienter, frequency of violative acts, the

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defendant's ability to commit future violations, the degree of harm

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consumers suffered, and the defendant's recognition of his own

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culpability.

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1086 (C.D. Cal. 2012).

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25

The scope of injunctive relief depends on the

See F.T.C. v. John Beck Amazing Profits LLC,
Violators of the FTC

Relevant factors

FTC v. Commerce Planet, Inc., 878 F.Supp.2d 1048,

A lifetime ban is appropriate here.

As president of The Zaken

Corp., Tiran Zaken oversaw most Zaken departments, including

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2

Having so concluded, the court need not address whether the
QuikSell program also constitutes a “buy back” under 16 C.F.R. §
437.1(c)(3)(iii).
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QuikSell. (Id. at 52, 53, 56.) He approved the advertising of

2

QuikSell and reviewed all of the Zaken Corp.’s marketing materials

3

prior to their disbursement. (Zaken Dep., Pl.’s Ex. 12 at 54-55.)

4

Though it is somewhat unclear from the record when Zaken’s

5

misrepresentations began, Plaintiff has submitted a plethora of

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examples of misrepresentations made in direct mailings,

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advertisements, and product materials.

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sold the QuikSell program to over 110,000 consumers.

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evidence submitted indicates that over 99.8% never earned any

Over a ten year span, Zaken
Of those, the

10

commissions whatsoever.

11

refunds of the $148 purchase price.

12

were taken in by Zaken’s exhortations to “invest” additional money,

13

sometimes thousands of dollars, in additional QuikSell “tools.”

14

(E.g., Ex. 14 at 105:21-23.)

15

Fewer than 9,000 consumers received
Furthermore, many consumers

Nor does Zaken appear contrite about his decade of deceptive

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conduct.

To the contrary, Zaken firmly stands behind the marketing

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tactics of his “legitimate” business opportunity, and has insisted

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that at no time did he ever believe consumers were misled by

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QuikSell's advertisements. (Zaken Dep., Pl.’s Ex. 12 at 65:21-22.)

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The risk of future misconduct is high.

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“is out of the distressed merchandise business for good,” (Zaken

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Decl. 2 ¶¶ 2, 4), he appears to intend to, if permitted, continue

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marketing work-at-home business opportunities.

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misrepresentations had less to do with “the distressed merchandise

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business” than with the illusory benefits of a work-at-home

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business “opportunity” of precisely the type Zaken intends to keep

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marketing.

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replace the lifetime ban with essentially a “follow the law”

Though Zaken claims that he

Here, his

Zaken’s proposed alternative injunction, which would

12

1

injunction forbidding him from violating the Business Opportunity

2

Rule, would be wholly inadequate to protect consumers in the

3

future.3

4

2.

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6

Restitution
i.

Individual Liability

Courts may award equitable monetary relief in the form of

7

restitution or disgorgement.

8

1088-89.

9

however, “if (1) he participated directly in the deceptive acts or

Commerce Planet, 878 F.Supp.2d at

Tiran Zaken may only be held individually liable,

10

had the authority to control them and (2) he had knowledge of the

11

misrepresentations, was recklessly indifferent to the truth or

12

falsity of the misrepresentation, or was aware of a high

13

probability of fraud along with an intentional avoidance of the

14

truth.”

15

Stefanchik, 559 F.3d at 931.

Tiran Zaken does not dispute that, as president of the Zaken

16

Corp., he had authority to control the misrepresentations about the

17

QuikSell program.

18

did not intentionally or recklessly deceive consumers.

19

his contention, Zaken cites testimonials from “high earner”

20

QuikSell consumers, Mr. Zaken’s own success “using the principles

21

of the QuikSell program,” and substantial earnings consumers made

22

“on their own after learning the QuickSell program.”

23
24

(Opp. at 17.)

Zaken contends, however, that he
To support

(Id.)

As an initial matter, Zaken points to no evidence to support
the assertion that some people went on to make money after learning

25
26
27
28

3

Nor is the court persuaded that a lifetime ban would
inordinately burden Zaken or prevent him from earning a livelihood.
As Zaken himself states, he earned between $100,000 and $200,000
per year in the distressed merchandise industry before ever
entering the work-at-home marketing industry.
13

1

QuikSell.

Second, Zaken’s own personal experience making $100,000

2

to $200,000 in the distressed merchandise industry has little

3

bearing on the experiences of over 110,000 consumers, whose paltry

4

earnings figures were readily available to Zaken.

5

supposed reliance on testimonials from “high earners” appears to be

6

based on one of his own advertisements, which includes 14 short

7

quotes from supposed QuikSell associates.

8

the quotes are attributed to named individuals, all are unsworn,

9

and some are as short as four words.

Lastly, Zaken’s

(Ex 11 at 42.)

While

Even crediting each of these

10

14 testimonials as true, Zaken’s reliance on them, in the face of

11

dozens of consumer complaints and the fact that the overwhelming

12

majority of QuikSell associates never saw a dime from the program,

13

constitutes intentional avoidance of the truth, at best.

14
15

iii.

Amount of Restitution

“Consumer loss is calculated by ‘the amount of money paid by

16

the consumers, less any refunds made.”

17

F.Supp.2d. at 1088.

18

reasonable estimate of the appropriate monetary relief.

19

burden then shifts to Defendant to show that the FTC’s calculations

20

are inaccurate.

21

Commerce Planet, 878

The FTC bears the burden of providing a
Id.

The

Id.

The FTC calculates consumer losses of $25,666,437.

Zaken sold

22

Quiksell to 113,596 consumers at $148 per kit, and issued 8,623

23

refunds, for a net total of $15,536,004.

24

$10,130,433 of upsell tools, for a grand total of $25,666,437.

Zaken sold another

25

Zaken first argues that the FTC’s figure is not a reasonable

26

approximation because it is based on all of Zaken’s sales between

27

2003 and 2013, even though the record only contains evidence of

28

misrepresentations from 2010-2013.
14

The FTC replies that Zaken

1

represented that it produced all documents relating to its

2

marketing of QuikSell, from 2003 to the present.

3

testified at his deposition that he could not identify the year in

4

which advertisements were used because, “I mean, like, they’re all

5

similar.”

6

approximation of consumers’ losses resulting from Zaken’s

7

misrepresentations.

8
9

(Ex. 36.)

Tiran Zaken

The FTC’s estimate is a reasonable

Zaken next posits that amounts paid to consumers as
commissions, and chargebacks, should be deducted from the FTC’s

10

estimate.

11

occurred, let alone the amount of such chargebacks, and has thus

12

failed to carry its burden with respect to those amounts.

13

has, however, provided evidence that it paid out $259,656 in

14

commissions.

15

different in nature, consumer losses were mitigated, to some small

16

degree, by these payments.

17

of commissions paid is warranted.

18

restitution of $25,406,781 for consumer redress.4

19

IV.

20

Zaken points to no evidence that any chargebacks

(Ex. 29A.)

Zaken

Though commissions and refunds are

Accordingly, a reduction in the amount
The court therefore awards

Conclusion
For the reasons stated above, Plaintiff’s Motion for Summary

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Judgment is GRANTED, on all counts.

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of $25,406,781 and finds injunctive relief warranted in the form

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proposed by Plaintiff.

The court awards restitution

Plaintiff is ordered to file a proposed

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Defendants’ opposition focuses almost entirely on the
argument that the FTC has not met its initial burden to reasonably
approximate the appropriate amount of monetary relief. (Opp. at
21-23.) The commissions figure, discussed above, is the only
quantified inaccuracy identified by Defendants.
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judgment and injunction in accordance with this Order within ten

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days of the issuance of this Order.

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IT IS SO ORDERED.

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Dated: September 18, 2014
DEAN D. PREGERSON

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United States District Judge

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