Federal Trade Commission v. Adept Management, Inc. et al

Filing 469

Opinion and Order re Motion for Summary Judgment 325 , Motion for Summary Judgment on FTC's Monetary Relief 336 , Motion for Summary Judgment 329 , Motion for Summary Judgment 348 , Motion for Partial Summary Judgment 327 , Motion for Summary Judgment 341 , Motion for Summary Judgment 333 , Motion for Summary Judgment 320 , Motion to Strike Testimony of Michael Motley 449 , Motion for Summary Judgment Dismissal of Claims Aga inst Lori Hoyal 342 , Motion for Summary Judgment 321 , Motion for Summary Judgment 339 , Motion for Summary Judgment 323 , Motion to Strike Testimony Introduced by Hoyal Defendants in Support of Their Motions for Summary Judgmen t 416 . Plaintiff FTC's motion for summary judgment (#348) is GRANTED in part and DENIED in part. The defendants' motions (#320, 321, 323, 325, 327, 329, 333, 336, 339, 341, 342) areDENIED. Plaintiffs motions to strike (#416, 449) are DENIED. The Hoyal defendants' motion to strike (#410) is DENIED. The case will proceed to trial on the issues of common scheme, individual liability, and remedy. Signed on 09/25/2018 by Magistrate Judge Mark D. Clarke. (Attachments: # 1 Exhibit) (rsm)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
MEDFORD DIVISION

FEDERAL TRADE COMMISSION,

Civ. No. 1:16-cv-00720-CL

Plaintiff,
OPINION AND ORDER
V.

ADEPT MANAGEMENT INC., et al,

Defendants.

CLARKE, Magistrate Judge.
This case comes before the Court on Plaintiff FTC's motion for summary judgment
(#348), as well as the motions for summary judgment filed by the defendants (##320, 321, 323,
325, 327, 329, 333, 339, 341, 342). As discussed below, the FTC's motion is GRANTED in part
and DENIED in part.

The defendants' motions are DENIED.

Plaintiffs motions to strike

(##416, 449) and Hoyal defendants' motion to strike (#410) are all DENIED. The case will
proceed to trial on the issues of common scheme, individual liability, and remedy.
DISCUSSION
I.

Plaintiff FTC is entitled to summary judgment on the issue of facial
deceptiveness.

Section 5 of the Federal Trade Commission Act prohibits "deceptive acts or practices in
or affecting commerce." FTCA § 5(a)(l), 15 U.S.C. § 45(a). As the Ninth Circuit Court of

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Appeals has explained, a practice falls within this prohibition: (1) if it is likely to mislead
consumers acting reasonably under the circumstances (2) in a way that is material. FTC v. Gill,
265 F.3d 944, 950 (9th Cir.2001) (citing FTC v. Pantron I Corp., 33 F.3d 1088, 1095 (9th
Cir.1994) ). Deception may be found based on the "net impression" created by a representation,
and a solicitation may be likely to mislead by virtue of the net impression it creates even though
the solicitation also contains truthful disclosures. F. T. C. v. Cyberspace. Com LLC, 453 F.3d
1196, 1199-200 (9th Cir. 2006). A misleading impression created by a solicitation is material if
it "involves information that is important to consumers and, hence, likely to affect their choice
of, or conduct regarding, a product." Cliffdale Associates, Inc., 103 F.T.C. 110, 165 (1984).
Courts, including the Supreme Court, have uniformly rejected imposing a requirement on
the FTC to provide extrinsic evidence to show deceptiveness. Kraft, Inc. v. F. T. C., 970 F.2d
311, 319 (7th Cir. 1992) (citing Colgate-Palmolive, 380 U.S. at 391-92) (FTC not required to
conduct consumer surveys before determining that a commercial has a tendency to mislead); see
also F.T.C. v. Bronson Partners, LLC, 564 F. Supp. 2d 119, 126 (D. Conn. 2008) ("Even if an
advertisement makes a claim by implication, extrinsic evidence is not always necessary.")
When evaluating the net impression of an advertisement, it is necessary "to consider the
advertisement in its entirety and not to engage in disputatious dissection. The entire mosaic
should be viewed rather than each tile separately." Bronson Partners, LLC, 564 F. Supp. 2d at
125 (citing FTC v. Sterling Drug, Inc., 317 F.2d 669, 675 (2d Cir.1963)). The consumer "does
not ordinarily carefully study or weigh each word in an advertisement. The ultimate impression
upon the mind of the reader arises from the sum total of not only what is said but also of all that
is reasonably implied." Id.
a.

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The mailer is deceptive as a matter of law.

In this case, the newspaper subscription mailer' is deceptive as a matter of law, based on
the net impression that the mailer is either from or authorized by the newspaper publication in
question, that any current subscription would be "renewed" automatically, and that the consumer
was being offered the lowest price available. The mailers create this impression by including a
single newspaper's name in several prominent positions in bold and capital letters, by suggesting
a connection with consumers' existing subscriptions, and by using a similar format to a routine
invoice or renewal service.
In contrast to the visibility and repetition of the newspaper's title, the full name of the
defendants' dbas typically appears only once in the mailers. The dba name itself is genericsounding and implies that the dba is a service or a department within the named newspaper's
organization, such as "Reader's Payment Service" or "Publisher's Payment." The paymentreturn envelope defendants included with the mailer contributes to this impression and disguises
the true payment recipient by bearing only the words: "ATTN: Mail Processing Department."
The net impression that the mailer is either from or authorized by the newspaper is also
created by the suggestion that it is connected to a consumer's existing subscription. The word
"Renewal" is featured prominently, more than once, and the mailer refers to the consumer's
"regular subscription" and a purported deadline to return payment. It offers an "installment"
option, implying that the consumer can arrange to pay the full subscription cost in more than one
payment during the subscription period. Additionally, the formatting of the mailer implies that
it is an invoice or renewal service. It includes a payment stub with framed boxes showing a
"Control Number," and a "Total Amount," along with the due date and installment payment
amount. Nothing on the mailer indicates that it is an advertisement.
1

A copy of the representative mailer, as provided in the FTC's Complaint as Exhibit A, is attached to this opinion
and order. The Court notes for the record that the representation has been enlarged for reviewing purposes, and the
actual mailers sent to consumers are smaller than the one attached.

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Finally, the mailer makes other statements that are confusing at best, and wholly false at
worst. "Your subscription to [THE NEWSPAPER] is automatic with receipt of your payment
when you choose to renew or order a new subscription." Undisputed evidence submitted by the
FTC demonstrates that the defendants would attempt to fill a subscription after receiving full
payment from the consumer. Thus, rather than being "automatic,'' subscriptions were actually
not even guaranteed to be filled. The mailer also states,
Fortunately, by acting now, you can lock in one of our lowest
rates! You're receiving one of the lowest available rates we can
offer for your regular subscription.
(Emphasis in original.) While the defendants point out that this is technically true, due to the
qualifying words, "one of,'' and, "we can offer,'' the statements undeniably imply that the
consumer is getting the best deal available, when in fact the price is significantly higher than it
would be if ordering through the newspaper itself. The fact that the mailer gives the impression
that the consumer is ordering through the newspaper itself compounds the misleading nature of
this representation.
b.

The disclaimers are not adequate to cure the mailer's deceptiveness.

If an advertisement's net impression is deceptive, "disclaimers or qualifications in any

particular ad are not adequate to avoid liability unless they are sufficiently prominent and
unambiguous to change the apparent meaning of the claims and to leave an accurate impression."

Removatron Int'! Corp. v. FTC., 884 F.2d 1489, 1497 (1st Cir. 1989). "Anything less is only
likely to cause confusion by creating contradictory double meanings." Id. (citing Giant Food,

Inc. v. FTC, 322 F.2d 977, 986 (D.C.Cir.1963), cert. dismissed, 376 U.S. 967 (1964)).
In this case, the purported disclaimers included on the mailer are confusing and
inadequate to cure the deception. First, small words on the bottom of the mailer state "Renewal

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Offer - Not a Bill." This statement continues to imply that the offer is a renewal, and thus
connected to their regular subscription and sent from the newspaper publisher. The helpful part
of the statement, "Not a Bill," does nothing to clarify this issue.
Second, the block of text on the reverse side of the mailer is confusing and unlikely to be
read by the consumer. The text refers to magazine subscriptions, not newspapers, and a
reasonable consumer would likely believe it to be inapplicable to their particular newspaper
subscription. The language states that the defendants "do not necessarily have a direct
relationship with the publishers or publications" offered. This leaves open the possibility that the
defendants actually do have a relationship with the newspaper, when in fact they do not. 2
Finally, the text states, "This is a magazine subscription offer, not a bill or an invoice.
You are under no obligation to either buy a magazine or renew at this time." This language once
again is confusing because it relates to magazines, not newspapers. Even if it were not
confusing, it would be ineffective because it is buried in the middle of a block of text, with no
prominent placement or distinguishing features.

c.

Consumer complaints confirm the mailers were likely to, and did,
mislead reasonable consumers.

As discussed above, the FTC is not required to produce extrinsic evidence of actual
deception, but "such proof is highly probative to show that a practice is likely to mislead
consumers acting reasonably under the circumstances." Cyberspace.com, 453 F.3d at 1201.
Here, the FTC has produced numerous consumer complaints showing that the mailers actually
deceived consumers. Thousands of consumers complained about defendants' mailers to law

2

Defendants attempt to raise an issue of fact regarding whether they have "authority" to submit subscriptions either
to the newspapers in question or to clearing houses in order to fill the orders they receive, after the consumer sends
the defendants the payment. Regardless of this issue, however, the defendants have not raised a question as to
whether or not they have an on-going, direct relationship, as implied by the mailers. It is undisputed in the record
that they do not have such a relationship.

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enforcement, the Better Business Bureau, publishers, and to the defendants themselves.
Newspapers also received thousands of complaints, and Dow Jones, the publisher of the Wall
Street Journal, issued a fraud alert.
The Hoyal defendants have filed a motion to strike these consumer complaints as hearsay
(#410). This motion is denied. Federal Rule of Evidence 807 states:
Under the following circumstances, a hearsay statement is not excluded by
the rule against hearsay even if the statement is not specifically covered by
a hearsay exception in Rule 803 or 804 if:
a)
1. the statement has equivalent circumstantial guarantees of
trustworthiness;
2. it is offered as evidence of a material fact;
3. it is more probative on the point for which it is offered than any
other evidence that the proponent can obtain through
reasonable efforts; and
4. admitting it will best serve the purposes of these rules and the
interests of justice.
b) Notice. The statement is admissible only if, before the trial or hearing,
the proponent gives an adverse party reasonable notice of the intent to
offer the statement and its particulars, including the declarant's name
and address, so that the party has a fair opportunity to meet it.
The defendants dispute only the first requirement. The Court has reviewed the complaints and
find that they meet the circumstantial guarantees of trustworthiness, including 1) the fact that
they all reported roughly similar experiences, 2) that they were submitted by unrelated members
of the public in different cities and states, 3) that they were made proximate to the time the
mailers were received, and 4) that there is a low risk that the complaints are the product of faulty
perception, memory or meaning, the dangers against which the hearsay rule seeks to guard. See,
e.g., FTC v. Figgie Int 'l, Inc., 994 F.2d 595, 608 (9th Cir. 1993); FTC v. AMG Servs., Inc., No.
2: 12-cv-00536-GMN-VCF, 2014 WL 317781, at* 16 (D. Nev. Jan. 28, 2014). In addition, even
though not raised by the defendants, the Court finds all other requirements of Rule 807 are met.

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While the Court does not find that the consumer complaints are dispositive of the issue,
they are probative, and they tend to support the Court's conclusion that the net impression of the
mailer is deceptive.
d.

The misrepresentations were material.

As discussed above, a misleading impression created by a solicitation is material if it
involves information that is important to consumers and likely to affect their choice of or
conduct regarding a product. In this case the misleading net impressions are that the mailers
came from the newspaper being marketed, that any current subscription would be "renewed"
automatically, and that the consumer was being offered the lowest price available. These are
misrepresentations regarding source and price - two crucial pieces of information when
purchasing a product and highly likely to affect consumers' choice and conduct regarding their
newspaper subscription. The misrepresentations were therefore material.
e.

2004 Consent General Judgment

Defendants argue that the 2004 Consent General Judgment ("2004 Judgment") prevents
this Court from holding that the mailers at issue are deceptive. They claim that the 2004
Judgment functioned as an agreement between the parties and the State of Oregon as to what
language would acceptable for future mailers, and that the defendants "were required" to use the
language specified. Paragraph 16 of the 2004 Judgment states:
Defendants shall, or shall continue, to provide consumers (inside
or outside Oregon) being solicited by them by mail to purchase a
magazine subscription or subscriptions with substantially the same
information and explanations (with the exception of possible
differing dba company name and address changes and the specific
information about the subscription or subscriptions being solicited)
in all future mailings sent to consumers, in as clear and
conspicuous form or clearer, as set out on the attached two-sided
mail piece in Exhibit 1 which is incorporated by reference.
Defendants shall continue to provide in contrasting red and in the

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same font size on the front side of their mailers as shown in
Exhibit 2 the phrase "NOTICE OF RENEW AL I NEW ORDER."
In addition, on the front side of the two-sided document shown in
Exhibit 1, defendants shall also provide in a clear and conspicuous
way in at least 7 point font and in contrasting red color at the
bottom the phrase "INDEPENDENT AGENT NOT A BILL KEEP
THIS PORTION FOR RECEIPT OF OFFER." If a customer has
purchased a subscription from defendants and defendants seek to
offer a renewal of that subscription, the phrase "NOTICE OF
RENEW AL" may be used by defendants in lieu of "NOTICE OF
RENEW AL I NEW ORDER.
The Court is unpersuaded by the defendants' arguments. First, the mailer does not
comply with the requirements set out in Paragraph 16. The words "INDEPENDENT AGENT"
do not appear on the front of the mailer in any font size or color, let alone in contrasting red.
Second, Paragraph 8 of the 2004 Judgment states:
Defendants shall not imply that that plaintiff [the State of Oregon]
approves of defendants' past business practices, current efforts to
reform their practices, or any future practices defendants adopt.
Plaintiffs settlement of this case does not constitute approval for
past, present, or future business practices.
The defendants' argument is thus inapposite to the plain language of the judgment itself.
Third, defendants' arguments about the 2004 Judgment ignore the existence of
subsequent litigation between these same parties and the State of Oregon. In 2015, the Marion
County Circuit Court entered an Assurance of Voluntary Compliance ("2015 AVC"), essentially
shutting down the defendants' business and entering a permanent injunction. Paragraph 12 of
the 2015 AVC states the prohibited conduct under the injunction:
Each Respondent is permanently prohibited from engaging in any
or all of the following conduct:
c)
From engaging in the magazine or newspaper subscription
business. This includes the sale of newspaper or magazine
subscriptions, conducting business as a subscription clearing
house, and using, purchasing, renting or leasing any customer list
from any third party.

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It is unclear to the Court how the defendants can rely on the 2004 Judgment to show that

the State of Oregon "approved" of their practices, when the same state brought the subsequent
case against them, leading to the permanent injunction.
Finally, regardless of all of the above, nothing about the prior litigation or other
background circumstances of this case changes the Court's legal analysis of the net impression
given by the mailers at issue. The mailers are deceptive.
f.

All motions to strike expert reports are denied as moot.

The Court has determined that the mailers at issue are deceptive on their face, as a matter
of law. Each side submitted expert reports to bolster their arguments for why the mailers are or
are not deceptive. The Court did not find these expert opinions to be helpful to its analysis.
Therefore, because the Court does not rely on any of these opinions, the motions to strike are
moot and the Court need not consider whether they are admissible for summary judgment
purposes.
g.

Conclusion

The net impression of the mailers at issue is that they are deceptive on their face because
they are likely to mislead a reasonable consumer in a way that is material to their purchase of the
product. The FTC's motion for summary judgment is GRANTED as to this issue.
II.

Plaintiff FTC's other motions for summary judgment and the defendants'
motions for summary judgment are all denied.

The FTC has submitted overwhelming evidence in support of their motions for summary
judgment on the issues of common enterprise, individual liability, and the remedies of permanent
injunction and monetary relief. It is likely that the defendants, particularly Jeffery Hoyal, Hoyal
and Associates, Dennis Simpson, and Reality Kats, Inc., were involved in a common scheme to

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mislead consumers and profit from their confusion. It is likely that these defendants, and possibly
some others, can be held jointly and severally liable for this deception. However, the defendants
have submitted declarations and affidavits in support of their own motions as well. The Court is
cognizant of its role at summary judgment, which is not to weigh the evidence or make findings
of fact. This role must be reserved for trial. Therefore, all of these motions are denied.
ORDER

PlaintiffFTC's motion for summary judgment (#348) is GRANTED in part and DENIED
in part. The defendants' motions (##320, 321, 323, 325, 327, 329, 333, 339, 341, 342) are
DENIED. Plaintiffs motions to strike (#416, 449) are DENIED. The Hoyal defendants' motion
to strike (#410) is DENIED. The case will proceed to trial on the issues of common scheme,
individual liability, and remedy.

United States Magistrate Judge

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