Federal Trade Commission v. Construct Data Publishers, et al
Filing
88
MEMORANDUM Opinion and Order signed by the Honorable Andrea R. Wood on 12/11/2014. Mailed notice (ac, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FEDERAL TRADE COMMISSION,
Plaintiff,
v.
CONSTRUCT DATA PUBLISHERS a.s.,
a foreign corporation, also doing business as
FAIR GUIDE,
WOLFGANG VALVODA, individually and
as an owner, officer, or director of
CONSTRUCT DATA PUBLISHERS a.s.,
and
SUSANNE ANHORN, individually and as
an owner, officer, or director of
CONSTRUCT DATA PUBLISHERS a.s.,
Defendants.
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No. 13-cv-01999
Judge Andrea R. Wood
MEMORANDUM OPINION AND ORDER
Plaintiff Federal Trade Commission (“FTC”) has sued Defendants Construct Data
Publishers (“Construct Data”), Wolfgang Valvoda (“Valvoda”), and Susanne Anhorn
(“Anhorn”) under the FTC Act (“FTCA”), 15 U.S.C. § 41 et seq., alleging that they engaged in a
plan fraudulently to induce businesses and nonprofit organizations in the United States and other
countries to pay for unordered listings in an Internet directory. The defendants initially appeared
in this case through counsel, but subsequently directed that counsel to withdraw and then
defaulted. Thereafter, the Court entered a default judgment in the amount of $9.1 million and
imposed a permanent injunction that, inter alia, froze the defendants’ assets. Now appearing
through new counsel, the defendants have filed the Motion to Vacate Default Judgment and
Order for Permanent Injunction (“Motion to Vacate”) (Dkt. No. 57) and the Motion to Modify
the Asset Freeze Order (“Motion to Modify”) (Dkt. No. 68). For the reasons discussed below, the
Motion to Vacate is granted and the Motion to Modify is denied without prejudice.
BACKGROUND
On March 14, 2013, the FTC filed a Complaint for Permanent Injunction and Other
Equitable Relief (“Complaint”) against Valvoda and Anhorn (together, the “Individual
Defendants”), as well as Construct Data (together with the Individual Defendants,
“Defendants”). The Complaint alleges that Defendants have violated Section 5(a) of the FTC
Act, 15 U.S.C. § 45(a), by engaging in deceptive practices in the marketing and selling of
Internet directory listings to small businesses and organizations that participate in trade shows
and exhibitions. Specifically, the Complaint alleges that Defendants targeted consumers in the
United States and other countries with mailings falsely representing (1) that the consumers had a
preexisting business relationship with Defendants; and (2) that Defendants were affiliated or
otherwise connected with a particular trade show or exhibition, or the organizer of that event.
Along with the Complaint, the FTC filed a motion for an ex parte temporary restraining order
supported by witness declarations, consumer complaints, court orders, and other evidence that
Defendants engaged in practices that violated Section 5(a).
The Court issued an ex parte temporary restraining order on March 15, 2013 (the
“TRO”), which, among other things, enjoined Defendants from engaging in the activities that the
FTC alleged violated Section 5(a) and froze Defendants’ assets. The asset freeze allowed the
Individual Defendants to “pay from their individual personal funds reasonable, usual, ordinary,
and necessary living expenses,” subject to the prior written agreement of the FTC. (TRO at 8-9,
Dkt. No. 14.) The FTC subsequently provided each Defendant with copies of the Complaint, the
TRO, and other court filings, as well as notice of the preliminary injunction hearing.
2
At the preliminary injunction hearing on April 17, 2013, defense counsel stated that
Defendants, “after making a considered decision,” would not present evidence, but would instead
“focus efforts and resources towards either litigating this matter on the merits or attempting to
settle.” (Apr. 17, 2013 Tr. at 5, PX 13, Dkt. No. 71-4.) Defendants’ counsel further represented
that the decision was based on the “success rate of challenging a preliminary injunction in the
wake of an ex parte TRO” and “resources.” (Id.) The Court then granted the preliminary
injunction, which continued the asset freeze and other relief that had been granted previously in
the TRO. The preliminary injunction order allowed the Individual Defendants to continue to pay
their reasonable living expenses from their personal funds, after providing financial statements
and an accounting as required by that order and subject to the prior written agreement of the
FTC.
On June 10, 2013, the FTC served Construct Data and Anhorn with process in Slovakia
pursuant to the Hague Convention. At the next status hearing on July 11, 2013, defense counsel
acknowledged service of process as to those Defendants and requested that the Court grant them
an additional 14 days to answer the Complaint. The Court granted the extension and set July 25,
2013 as the deadline for their answer. No answer was ever filed, however.
On August 19, 2013, defense counsel moved to withdraw from its representation of
Valvoda, citing his failure to respond to communications. The Court granted that motion at a
hearing on August 22, 2013. At the same hearing, defense counsel informed the Court that his
remaining clients, Construct Data and Anhorn, would not be filing an answer or responsive
pleading. On October 30, 2013, defense counsel moved to withdraw from representing Construct
Data and Anhorn because “they no longer wish[ed] to continue to be represented by counsel in
this proceeding” and had requested that defense counsel withdraw. (Mot. to Withdraw at ¶ 3,
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Dkt. No. 37.) On November 6, 2013, the FTC moved for entry of default against Construct Data
and Anhorn, serving notice on all parties. At a motion hearing on November 13, 2013, defense
counsel stated with regard to his withdrawal motion: “Essentially, we concede. It’s not so much
that defendants want to switch counsel, want new counsel, they are opting to no longer have
counsel at all.” (Nov. 13, 2013 Tr. at 2, PX 16, Dkt. No. 71-4.) The Court granted the motion to
withdraw and entered orders of default against Construct Data and Anhorn.
The FTC served Valvoda with process on November 15, 2013. When he failed to
respond, the FTC moved for entry of default against him on December 20, 2013, again serving
notice on all parties. Valvoda again failed to respond, and the Court entered the requested default
order on January 7, 2014. On January 30, 2014, the FTC filed its motion for a default judgment
against all Defendants, along with a declaration from its investigator addressing the appropriate
amount of monetary relief—approximately $9.1 million, which represented the FTC’s “estimate
of Construct Data’s sales revenue during the years 2005 through 2013.” (Supp. Menjivar Decl. at
¶ 3, Dkt. No. 52-1.) The FTC served its motion, supporting declaration, and proposed default
judgment on all Defendants. None responded. The hearing on the FTC’s motion was held on
February 11, 2014. Defendants did not appear, and the Court entered an order granting a default
judgment and permanent injunction. The permanent injunction did not independently detail any
asset freeze order. Instead, it incorporated by reference the asset freezes imposed by the TRO
and preliminary injunction.
The FTC served copies of the order granting the default judgment and the permanent
injunction on Defendants on February 11, 2014. On March 11, 2014, current defense counsel
entered an appearance on behalf of all Defendants and filed the Motion to Vacate. This was
followed on April 1, 2014 by the Motion to Modify.
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DISCUSSION
I.
The Motion to Vacate
Defendants argue that the default judgment and permanent injunction should be vacated
with respect to the Individual Defendants because the Court lacks personal jurisdiction over
them, and with respect to all Defendants because there is good cause to do so. As discussed
below, in light of the current record, the Court concludes that it may exercise personal
jurisdiction over the Individual Defendants. However, the Court nonetheless finds that good
cause exists to vacate the default judgment and permanent injunction.
A.
Personal Jurisdiction
Defendants first argue that the default judgment should be vacated as to the Individual
Defendants because the Court lacks personal jurisdiction over them. “When a district court enters
a default judgment without personal jurisdiction over the defendant, ‘the judgment is void, and it
is a per se abuse of discretion to deny a motion to vacate that default judgment.’” be2 LLC v.
Ivanov, 642 F.3d 555, 557 (7th Cir. 2011) (citing Relational, LLC v. Hodges, 627 F.3d 668, 671
(7th Cir. 2010)). Because they had notice of this lawsuit and still defaulted, the Individual
Defendants have the burden of proving the absence of personal jurisdiction. Id. They have failed
to meet this burden.
Due process requires that a nonresident defendant have “certain minimum contacts with
[the forum] such that the maintenance of the suit does not offend ‘traditional notions of fair play
and substantial justice.’” Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (quoting
Milliken v. Meyer, 311 U.S. 457, 463 (1940)). The contacts between the defendant and the forum
state may not be “random, isolated, or fortuitous.” Keeton v. Hustler Magazine, Inc., 465 U.S.
770, 774 (1984). Instead, “the sufficiency of the contacts is measured by the defendant’s
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purposeful acts.” NUCOR Corp. v. Aceros y Maquilas de Occidente, S.A. de C.V., 28 F.3d 572,
580 (7th Cir. 1994). Parties establish minimum contacts when they “purposefully avail”
themselves of “the privilege of conducting activities within the forum . . . thus invoking the
benefits and protections of its laws.” Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985)
(citation omitted). Because modern business often is transacted solely by mail and wire
communications, physical presence is not required to create such minimum contacts. Id. at 476.
Depending on the nature of the contacts, a court may exercise general or specific jurisdiction
over defendants. Here, the FTC does not argue for the exercise of general jurisdiction over the
Individual Defendants; rather, it contends that the Court may exercise specific personal
jurisdiction. Specific personal jurisdiction exists if the contacts with a forum “arise out of or
relate to” the plaintiff’s claims. Id. at 472-73 (citation omitted).
The FTCA provides that “[i]n any suit under this section, process may be served on any
person, partnership, or corporation wherever it may be found.” 15 U.S.C. § 53(b). This language
permits nationwide service of process. FTC v. Cleverlink Trading Ltd., No. 05 C 2889, 2006 WL
1735276, at *3 (N.D. Ill. June 19, 2006) (citing FTC v. Bay Area Bus. Council, Inc., No. 02 C
5762, 2003 WL 21003711, at *2 (N.D. Ill. May 1, 2003)). When nationwide service is authorized
by federal law, the relevant question for purposes of personal jurisdiction becomes whether the
defendant has minimum contacts with the United States. See Fitzsimmons v. Barton, 589 F.2d
330, 332 (7th Cir. 1979); Zurich Capital Mkts. v. Conlianese, 388 F.Supp.2d 847, 857 (N.D. Ill.
2004).
Here, it is clear from the record that both Individual Defendants purposefully availed
themselves of the privilege of conducting business activities within the United States and that
those activities relate to the claims brought by the FTC. For example, in connection with the
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Motion to Vacate, each of the Individual Defendants submitted a declaration. Anhorn’s
declaration states that:
•
she has served as the CEO of Construct Data since January 1, 2011, and in this position
she is responsible for the day-to-day operations of the company (Anhorn Decl. at ¶¶ 2, 5,
Dkt. No. 62);
•
in her capacity as CEO, Anhorn communicated with the U.S. company MicroDynamics
to instruct it to print Construct Data’s customer mailings and collect responses to
Construct Data’s mailings (id. at ¶¶ 15, 16);
•
Construct Data had over 22,500 contracts with U.S. customers over the span of 20092013 (id. at ¶ 21); and
•
55% of Construct Data’s revenues came from U.S. customers (id. at ¶ 22).
Meanwhile, Valvoda’s declaration represents that:
•
he was the CEO of Construct Data until December 31, 2010 1 (Valvoda Decl. at ¶ 2, Dkt.
No. 61);
•
while acting as CEO, Valvoda was responsible for day to day operations of the company
(id. at ¶ 4); and
•
in his capacity as CEO, Valvoda communicated with MicroDynamics, which he
describes as “Construct Data’s U.S.-based business partner” (id. at ¶ 13).
The FTC also obtained documents from MicroDynamics pursuant to a Civil Investigative
Demand that show that both Individual Defendants had extensive personal communications with
MicroDynamics, directing that company to print and disseminate direct mail campaigns on
behalf of Construct Data. To take just a few illustrative examples, the FTC’s documents show
that Anhorn e-mailed MicroDynamics personnel to provide them with the content and timing of
mailings that MicroDynamics was supposed to send on behalf of Construct Data. (Dkt. No. 71-2
at 44-48, 52-56). She also personally approved a 50,000-piece mailing (Dkt. No. 71-3 at 13), and
approved proofs and mailing dates. (Dkt. No. 71-2 at 50). This evidence also indicates that
1
Valvoda does not specify when he began his tenure as Construct Data’s CEO.
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Valvoda personally communicated with MicroDynamics to arrange for the printing and
dissemination of a direct-mail campaign of approximately 200,000 pieces. (Dkt. No. 71-1 at 5255.) After some time working with MicroDynamics, Valvoda wrote to a MicroDynamics
employee that, “[t]he previous mailing campaigns were successful and therefore I would like to
increase our profit in the US-market.” (Dkt. No. 71-2 at 8-9.)
Based on these facts, it is apparent that both Valvoda and Anhorn purposefully availed
themselves of the privilege of conducting business activities in the United States. The Individual
Defendants purposefully directed MicroDynamics to prepare and disseminate marketing
materials. They determined the text of these materials, to whom they were disseminated, and the
manner in which they were sent. Thus, the actions of the Individual Defendants are sufficient to
create minimum contacts in the United States. Furthermore, the Individual Defendants’
purposeful contacts with the United States—orchestrating the dissemination of direct mail
communications—is the same activity that the FTC challenges as fraudulent. Thus, the Court
may exercise specific personal jurisdiction over the Individual Defendants. See, e.g., Travelers
Health Ass’n v. Commonwealth of Va. ex rel. State Corp. Comm’n, 339 U.S. 643 (1950)
(solicitation of business in a forum can support an exercise of personal jurisdiction in that
forum); Metro Life Ins. Co. v. Robertson–Ceco Corp., 84 F.3d 560, 572–73 (2d Cir. 1996) (direct
mail campaign within forum supported finding of specific jurisdiction over defendant in suit that
arose out of that campaign).
That the Individual Defendants were working on behalf of Construct Data does not shield
them from the Court’s exercise of personal jurisdiction. Although jurisdiction over a corporation
does not automatically extend to its officers, the Supreme Court has rejected the theory “that
employees who act in their official capacity are somehow shielded from suit in their individual
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capacity.” Keeton, 465 U.S. at 781 n.13. Rather, each defendant’s contacts “must be assessed
individually.” Id. Here, the extent of the Individual Defendants’ personal involvement in
directing Construct Data’s activities in the United States makes them susceptible to suit before
this Court. See, e.g., FTC v. 1492828 Ontario, Inc., No. 02 C 7456, 2003 WL 21038578, at *4
(N.D. Ill. May 7, 2003) (court had personal jurisdiction over “passive investor” and president of
Canadian corporation where that president “no doubt knew that his corporation was soliciting
American customers, and could have anticipated litigation in an American court.”); Sullivan v.
Rilling, No. 94 C 539, 1994 WL 684767, *6 (N.D. Ill. Dec. 6, 1994) (corporate officers who
direct corporate activities toward a forum are subject to personal jurisdiction there).
None of the Individual Defendants’ arguments to the contrary are persuasive. For
instance, the Individual Defendants argue that the printing contracts with MicroDynamics cannot
form the basis for personal jurisdiction because “MicroDynamics is a non-victim business that
entered into a contractual relationship with Construct Data,” and because “this is not a breach of
contract action between MicroDynamics and the Individual Defendants . . . [,] [t]he Individual
Defendants’ contacts with MicroDynamics are too attenuated from the FTC’s claims to establish
personal jurisdiction.” (Defs.’ Reply in Supp. of Mot. to Vacate at 12, Dkt. No. 74.) As described
above, however, the gravamen of the Complaint is that the Individual Defendants sent fraudulent
mailings to targeted consumers in the United States. The FTC has marshaled evidence that the
Individual Defendants directed MicroDynamics to produce and disseminate the mailings at issue.
Furthermore, the Individual Defendants cite no case law supporting their contention that
MicroDynamics’s status as a “non-victim business” affects the personal jurisdiction analysis.
Equally unavailing is the Individual Defendants’ argument that there is no evidence that either
Individual Defendant personally communicated with a potential customer. Even accepting,
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arguendo, the truth of this statement, it is of no legal significance given that they both
orchestrated (with a great deal of exactitude) a direct mailing campaign to reach hundreds of
thousands of U.S. consumers.
In short, given the record before the Court, the Individual Defendants have not met their
burden of showing that the default judgment should be vacated for lack of personal jurisdiction.
B.
Motion to Vacate Default Judgment Pursuant to Rule 60(b)
The Seventh Circuit favors trial on the merits over default judgment. Cracco v. Vitran
Express, Inc., 559 F.3d 625, 631 (7th Cir. 2009) (citations omitted). Rule 60(b) of the Federal
Rules of Civil Procedure allows a court to vacate a default judgment. Pretzel & Stouffer,
Chartered v. Imperial Adjusters, Inc., 28 F.3d 42, 44-45 (7th Cir. 1994). But for a court to do so,
the movant must demonstrate (1) good cause for the default; (2) quick action to correct it; and (3)
a meritorious defense to the complaint. Zuelzke Tool & Eng. Co., Inc. v. Anderson Die Castings,
Inc., 925 F.2d 226, 229 (7th Cir. 1991) (citing U.S. v. DiMucci, 879 F.2d 1488 (7th Cir. 1989)).
Failure to make any one of these showings warrants denial of a motion to vacate. See Sun v. Bd.
of Trs. of the Univ. of Ill., 473 F.3d 799, 811 (7th Cir. 2007). Because Defendants satisfy all
three, the Court finds that the default judgment should be vacated.
1.
Good Cause
A party establishes good cause to vacate a default judgment by showing that “it did not
willfully ignore the pending litigation, but, rather, failed to respond to the summons and
complaint through inadvertence.” Cracco, 559 F.3d at 631. The good cause standard does not
mean that a defaulting party needs to demonstrate a good reason for the failure that led to the
default in order to have that default set aside. Sims v. EGA Prods., Inc., 475 F.3d 865, 868 (7th
Cir. 2007). Vacating a default judgment “requires ‘good cause’ for the judicial action, not ‘good
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cause’ for the defendant’s error; as used in this Rule, the phrase is not a synonym for ‘excusable
neglect.’” Id. Put simply, the Court must find a good reason to vacate the judgment.
In this case, the disproportionate size of the default judgment—$9.1 million—in
comparison with the minimal prejudice suffered by the FTC represents good cause to vacate the
default judgment and permanent injunction. “A default judgment is a sanction for misconduct
during the litigation.” Sims, 475 F.3d at 868. Thus, “[d]amages disproportionate to the wrong
afford good cause for judicial action, even though there is no good excuse for the defendant's
inattention to the case.” Id. (emphasis in original); see also Sun, 473 F.3d at 811 (“a default
judgment should be used only in extreme situations, or when other less drastic sanctions have
proven unavailing.”). Thus, in Sims, the Seventh Circuit affirmed vacatur of a $31 million
default judgment where the default caused the plaintiffs minimal prejudice—essentially only
“extend[ing] th[e] suit by a few months.” 475 F.3d at 869. Other Seventh Circuit decisions have
similarly indicated that a high-value default judgment warrants a high level of scrutiny by a
district court. See, e.g., Bieganek v. Taylor, 801 F.2d 879, 881 (7th Cir. 1986) (noting that “[t]he
size of the judgment is not controlling, but it deserves to be considered” and holding that the
district court abused its discretion by not vacating a $250,000 default judgment).
The present case presents a situation similar to that in Sims. A default judgment in the
amount of $9.1 million has been entered in a case where the Court discerns little actual prejudice
to the FTC. The asset freezes imposed by the TRO, the preliminary injunction, and the
permanent injunction have maintained the status quo. The only apparent prejudice to the FTC is
a delay in the resolution of the case, and the costs of briefing the default judgment motion and its
opposition to the Motion to Vacate. The Court will allow the FTC to submit a brief suggesting an
appropriate sanction against Defendants—such as having to pay attorneys’ fees and costs
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associated with the additional briefing necessitated by the abortive default—but the $9.1 million
judgment is a grossly excessive penalty.
The Individual Defendants have also filed supplemental declarations in which they
represent that the default judgment was the result of inadvertence and ignorance, which also
represents good cause to vacate the default judgment. Anhorn testified in her affidavit that she is
unfamiliar with U.S. litigation and did not understand the effect of not participating in the case
until after default judgment was entered, and that although she was represented by counsel prior
to default, she had suffered from “a fundamental communication breakdown” with prior counsel.
(Defs.’ Reply Br. in Supp. of Mot. to Vacate, Ex. B at ¶¶ 4-6, Dkt. No. 74.) Valvoda similarly
testifies in his affidavit that he is unfamiliar with U.S. litigation, did not understand the effect of
not participating in the case until after default judgment was entered, and was never represented
by counsel. (Defs.’ Reply Br. in Supp. of Mot. to Vacate, Ex. C at ¶¶ 4-6, Dkt. No. 74.) The facts
establish good cause to vacate the default judgment by showing that Defendants failed to respond
to various filings due to inadvertence and incomprehension. See, e.g., Dismissed Relator v.
Murchison, No. 11-3279, 2012 WL 1135651, at *2 (C.D. Ill. Apr. 4, 2012) (vacating $1.2
million default judgment where the defendant was “an elderly person” who claimed “she did not
understand the documents with which she was served,” and where court found the default
judgment “disproportionate to Defendants’ inattention to the case”); Christiansen v. Adams, 251
F.R.D. 358, 360 (S.D. Ill. 2008) (“ignorance and misinterpretation” of the law “constitutes good
cause” to set aside default); E. & J. Gallo Winery v. Cantine Rallo, S.p.A., 430 F. Supp. 2d 1064,
1089 (E.D. Cal. 2005) (vacating default judgment where “nothing in the record indicates that
Rallo, an Italian Company with limited business in the United States was familiar with legal
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processes in the United States or, apart from this case, that Rallo was or ever has been involved
in litigation in the federal courts”). 2
In light of the large amount of the default judgment, as well as the Individual Defendants’
declarations supporting the position that their default was inadvertent and the product of a lack of
comprehension of the U.S. civil litigation process, the Court finds good cause to vacate the
default judgment and permanent injunction.
2.
Quick Action to Correct Default
The Court also finds that Defendants have taken quick action to correct the default. The
default judgment was entered on February 11, 2014. Defendants filed their motion to vacate 28
days later on March 11, 2014. “When there has been good cause for delay, and there has been no
prejudice to the other party, the Seventh Circuit has upheld a ten week delay as sufficiently quick
to warrant vacating a default judgment.” Bluegrass Marine, Inc. v. Galena Rd. Gravel, Inc., 211
F.R.D. 356, 359 (S.D. Ill. 2002) (citing Smith v. Widman Trucking & Excavating, Inc., 627 F.2d
792 (7th Cir. 1980)). Moreover, as noted above, the status quo has been maintained in the
interim and the FTC has suffered minimal prejudice.
3.
A Meritorious Defense to the Complaint
Defendants have also presented potentially meritorious defenses to the complaint. In this
context, “meritorious defense” means that a movant should ground its case in “facts which would
support a meritorious defense of the action” and offer more than general denials and bare
2
The abrupt withdrawal of Defendants’ previous counsel, at Defendants’ request, could support a finding
that Defendants engaged in a willful default, which would be fatal to their Motion to Vacate. See Cracco,
559 F.3d at 631. In addition, the FTC has presented evidence that Defendants are not the neophytes to
U.S. litigation that they make themselves out to be. (See, e.g., Zappe Decl., PX 20, Dkt. No. 76-2; Costa
Decl. at ¶¶ 1-2, PX 21, Dkt. No. 76-3.) Given the troubling history, the Court cautions Defendants that the
Court will not hesitate to impose sanctions of escalating severity if it sees any further evidence of
contumacious behavior.
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conclusions. Pretzel & Stouffer, 28 F.3d at 46. The defense must also be “good at law” in order
to “give the factfinder some determination to make.” Bieganek, 801 F.2d at 882. When it appears
“that there is a genuine dispute concerning material facts, it weighs in favor of a trial to decide
those factual disputes in preference to judgment by default in which facts cannot be disputed and
decided.” Id.
Defendants have made a showing that there are genuine disputes concerning material
facts with respect to their liability in this case. The FTCA forbids “unfair or deceptive acts or
practices.” 15 U.S.C. § 45(a). “[T]o establish that an act or practice is deceptive, the FTC must
establish that the representations, omissions, or practices likely would mislead consumers, acting
reasonably, to their detriment.” FTC v. World Travel Vacation Brokers, 861 F.2d 1020, 1029
(7th Cir. 1988). Defendants assert as a defense that there are disclosures on the direct mail forms
that inform potential customers that they will be charged for the listing. In light of these
disclosures and the general wording of these direct mail pieces, it appears that there is a genuine
dispute of material fact that represents a meritorious defense.
The Individual Defendants have an additional meritorious defense to their liability. “An
individual may be held liable under the FTCA for corporate practices if the FTC first can prove
the corporate practices were misrepresentations or omissions of a kind usually relied on by
reasonably prudent persons and that consumer injury resulted.” FTC v. Amy Travel Svc., Inc.,
875 F.2d 564, 573 (7th Cir. 1989). “Once corporate liability is established, the FTC must show
that the individual defendants participated directly in the practices or acts or had authority to
control them.” Id. Although the complaint alleges that each of the Individual Defendants
“formulated, directed, controlled, had the authority to control, or participated in the acts and
practices set forth in [the] Complaint,” (Compl. at ¶¶ 7-8, Dkt. No. 2.), there is an issue of
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material fact as to the extent of the Individual Defendants’ knowledge of whether these practices
were misrepresentations. See Amy Travel Svc., Inc., 875 F.2d at 573 (“The FTC is required to
establish the [individual] defendants had or should have had knowledge or awareness of the
misrepresentations.”).
Finally, Defendants also have identified meritorious defenses with respect to the damages
award in this case. The $9.1 million default judgment was based on the FTC’s estimate of
Construct Data’s total sales revenue from January 1, 2005 through March 14, 2013. (Sec. Supp.
Menjivar Decl., PX 10 ¶ 3, Dkt. No. 52-1.) As discussed in Anhorn’s declaration, however, 45%
of Construct Data’s revenues came from outside of the United States. (Anhorn Decl. at ¶ 62, Dkt.
No. 62.) Defendants dispute whether the FTC may collect restitution based on revenues earned
from non-U.S. sources. The FTC argues that the FTCA expressly prohibits deceptive acts and
practices “involving foreign commerce that (i) cause or are likely to cause reasonably
foreseeable injury within the United States; or (ii) involve material conduct occurring within the
United States,” and the available remedies include “restitution to domestic or foreign victims.”
15 U.S.C. § 45(a)(4)(A)-(B). But this provision “shall not apply to unfair methods of competition
involving commerce with foreign nations” unless that conduct has a “direct, substantial, and
reasonably foreseeable” domestic effect. 15 U.S.C. § 45(a)(3). Moreover, in interpreting U.S.
legislation there is a presumption that it is meant to apply only within the territorial jurisdiction
of the United States. Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 255 (2010). This
“‘presumption is not defeated just because [a statute] specifically addresses [an] issue of
extraterritorial application’; it remains instructive in determining the extent of the statutory
exception.” Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 455-56 (2007) (emphasis in original)
(internal citation omitted). Given the statutory language and the presumption against
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extraterritoriality, Defendants have raised a meritorious defense as to the FTC’s damage
calculation.
Because the Defendants have made the showing required under Rule 60(b), the Court
vacates the default judgment and permanent injunction. However, the preliminary injunction will
remain in place.
II.
Motion to Modify the Asset Freeze
In the Motion to Modify, Defendants ask the Court to modify the asset freeze order to
allow (1) Defendants to pay their attorneys’ fees, and (2) the Individual Defendants to pay their
reasonable living expenses without having to obtain prior written consent from the FTC. Because
the Court is vacating the default judgment and permanent injunction, and reinstating the
preliminary injunction, the Motion to Modify is construed as directed toward the asset freeze
imposed by the preliminary injunction.
The Court may modify an injunction whenever the principles of equity require it to do so.
In re Hendrix, 986 F.2d 195, 198 (7th Cir. 1993). Generally speaking, asset freezes imposed
pursuant to preliminary injunctions in FTC actions allow defendants to pay their reasonable
attorneys’ fees and costs. See, e.g., Amy Travel Svc., Inc., 875 F.2d at 575-76; FTC v.
Windermere Big Win Int’l, Inc., No. 98 C 8066, 1999 WL 608715, at *6 (N.D. Ill. Aug. 5, 1999);
see also FTC v. QT, Inc., 467 F. Supp. 2d 863, 866 (N.D. Ill. 2006) (noting that it is “routine[]”
for courts to allow a defendant facing an FTC civil suit to pay their attorneys because this is
“necessary to enable defendants to obtain representation” and ensure a defendant may “defend
against the FTC’s charges.”). The FTC’s only argument against allowing a modification to the
asset freeze that would permit such payments in this case is that it is not appropriate to allow
payment of attorneys’ fees from otherwise frozen assets when there is a final order in place. But
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for the reasons discussed above, the final order imposed by default is now vacated and the parties
are instead subject to the terms of the preliminary injunction.
Nonetheless, it would be imprudent to permit Defendants to begin spending otherwise
frozen assets—whether for attorneys’ fees and costs or living expenses—without first requiring
them to provide an accounting of those assets. Indeed, courts frequently condition release of
frozen assets to pay attorneys’ fees upon compliance with a court order requiring the defendant
to disclose its financial information. See, e.g., Windermere, 1999 WL 608715, at *6 n.5 (citing
CFTC v. Am. Metals Exch. Corp., 991 F.2d 71, 79–80 (3rd Cir.1993); FTC v. World Travel
Vacation Brokers, Inc., 861 F.2d 1020, 1032 & n.10 (7th Cir. 1988)); QT, Inc., 467 F. Supp. 2d
at 866. The same principle applies with respect to the Individual Defendants’ request to use
frozen assets to pay their living expenses. As it stands, this Court has no information regarding
the nature and value of Defendants’ assets or, more importantly, the extent to which permitting
Defendants to use those assets to pay attorneys’ fees and living expenses would diminish the
funds available to pay a future judgment in this matter requiring restitution to victims or
disgorgement of ill-gotten gains.
For this reason, the Motion to Modify is denied without prejudice. Defendants may renew
their request after they have complied with Section VIII of the preliminary injunction order,
which requires each Defendant to serve FTC counsel with (1) a completed financial statement;
(2) a statement of all payments, transfers, or assignments of funds, assets, or property worth
$5,000 or more since January 1, 2011, and (3) a detailed accounting of all gross and net profits
obtained from, derived from, or related in any way to the offering for sale or sale of Internet
listings. In addition to the requirement in the preliminary injunction order that Defendants serve
these materials on counsel for the FTC, Defendants also will be required to provide this
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information to the Court. Once Defendants have demonstrated compliance with Section VIII, the
Court will be receptive to a petition for the release of funds to pay reasonable attorneys’ fees and
costs, as well as reasonable living expenses.
CONCLUSION
For the foregoing reasons, Defendants’ Motion to Vacate Default Judgment and Order for
Permanent Injunction and Other Relief (Dkt. No. 57) is granted. The Court vacates the default
judgment and order of permanent injunction (Dkt. No. 55), and reinstates the preliminary
injunction order (Dkt. No. 20). The FTC is granted leave to file a motion requesting that
alternative sanctions be levied upon Defendants as a result of their abortive default. The Court
denies, without prejudice, Defendants’ Motion to Modify the Asset Freeze Order (Dkt. No. 68).
Defendants may renew their motion for modification of the asset freeze order to request the
release of funds to pay Defendants’ reasonable attorneys’ fees and expenses and to pay the
Individual Defendants’ reasonable living expenses, after demonstrating compliance with Section
VIII of the preliminary injunction order.
ENTERED:
Dated: December 11, 2014
__________________________
Andrea R. Wood
United States District Judge
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