FEDERAL TRADE COMMISSION v. NHS SYSTEMS, INC., ET AL

Filing 153

MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE LOUIS H. POLLAK ON 5/12/2011. 5/13/2011 ENTERED AND COPIES E-MAILED.(kp, )

UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
FEDERAL TRADE COMMISSION,
Plaintiff
v.
NHS SYSTEMS, INC.,
a Pennsylvania corporation, also d/b/a
National Healthcare Solutions and
National Health Net Online, and
HARRY F. BELL, JR.,
individually and as an officer or
principal of NHS Systems, Inc., and
PHYSICIAN HEALTH SERVICE, LLC,
a Missouri limited liability company,
also d/b/a/ American Health Benefits
On Line, and
DONNA NEWMAN,
individually and as an officer or
principal of Physician Health Service,
LLC, and
JOHN E. BARTHOLOMEW,
individually, and
PLUS HEALTH SAVINGS, INC.,
a Pennsylvania corporation
PHYSICIANS HEALTH SYSTEMS,
INC., a Delaware corporation, also d/b/a
American Health Benefits On Line

CIVIL ACTION
No. 08-2215

HEALTH MANAGEMENT, LLC,
a Missouri limited liability company
6676529 CANADA, INC.,
a Canadian corporation
NICOLE BERTRAND,
individually and as an officer or
principal of 6676529 Canada, Inc.
BARRY KIRSTEIN,
individually
“DANNIE BOIE”
a person whose true identity is
unknown, individually
PHS ENTERPRISES, INC.,
a Nevada corporation
FIRST STEP MANAGEMENT, INC.,
a St. Lucia company
GOLD DOT, INC.,
a St. Lucia company
LINKE JN PAUL,
individually and as an officer or
principal of First Step Management, Inc.
and Gold Dot, Inc.
TASHA JN PAUL,
individually and as an officer or
principal of Gold Dot, Inc.
NEVADA BUSINESS SOLUTIONS,
INC.,
a Nevada corporation
INTERFACE MANAGEMENT, INC.,

a Florida corporation, also d/b/a Galaxy
Member Benefits
BEGINNING AGAIN, INC.,
a Florida corporation
Defendants

OPINION
I.
Background
This litigation was initiated by the Federal Trade Commission (“Commission” or “FTC”)
in 2008 against numerous corporations and several individuals associated with one or another of
the corporate defendants. The gravamen of the Commission’s suit is an allegation that the
defendants were participants in a widespread telemarketing scheme designed to peddle fraudulent
health benefit plans to unsuspecting would-be consumers. On May 14, 2008, at the instance of
the Commission, this court entered an ex parte Temporary Restraining Order (“XTRO”), dkt. 6,
designed to prevent dissipation of the defendants’ assets. Key to the court’s order were two
provisions: (1) a “freeze” on “any assets held by, for or under the name of any Defendant at
any . . . ACH network of other payment processor”; and (2) appointment as gatherer and
custodian of the defendants’ assets, of a Receiver, Wayne Geisser. Three weeks later—on June
10, 2008—this court entered a Stipulated Preliminary Injunction (“SPI”), dkt. 15, which added
several more defendants but which, in other respects, largely tracked the earlier order.
Thereafter, Receiver Geisser asked Teledraft—a payment-processing firm that handled funds for
several of the named defendants, but which is not itself a named defendant—to pay over to
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Geisser certain funds identified by Geisser to be receivership assets. Teledraft did not comply.
The FTC then moved this court for an order compelling Teledraft to pay over to Geisser the
disputed funds. On September 24, 2009, this court entered a “turnover order” requiring Teledraft
to pay over to Geisser $264,224.03 (“Turnover Order”). This court reasoned that it had authority
to issue such a directive to nonparty Teledraft because, while the court was without in personam
jurisdiction over Teledraft, the XTRO and the SPI provided the court with in rem jurisdiction
over all receivership funds. In rem jurisdiction flowed from 28 U.S.C. §754, which provides that
[a] receiver appointed in any civil action or proceeding involving
property, real, personal or mixed . . . shall . . . be vested with
complete jurisdiction and control of all such property with the right
to take possession thereof.
Deciding to appeal the Turnover Order, Teledraft moved this court for a stay of the
Turnover Order pending appeal. The motion was addressed in an opinion filed on December 10,
2009. Dkt. 119. The opinion explained that this court did not think the Turnover Order was an
appealable order within the contemplation of either of the two Federal Rules of Civil
Procedure—Rule 62(d) and Rule 62(c)—invoked by Teledraft as authority for a stay. The
Turnover Order was an interlocutory order, not a final judgment, and hence outside the purview
of Rule 62(d). Rule 62(c), prescribing the procedures governing appeals from orders granting or
denying an “injunction” embraces interlocutory as well as final orders, but a turnover order
directing the transfer of funds to a receiver is not, ordinarily, conceived of as an “injunction”
within the meaning of the Rule. However, this court, in its December 10, 2009 opinion, did have
the humility to acknowledge that it was up to the Court of Appeals, not this court, to determine
what constitutes an appealable order and, accordingly, whether the Court of Appeals would find

4

that it had jurisdiction to entertain Teledraft’s appeal. Accordingly, this court granted a stay of
the September 24, 2009 Turnover Order pending the Court of Appeals’ determination whether it
had jurisdiction over Teledraft’s appeal.
On January 8, 2010, the Court of Appeals dismissed Teledraft’s appeal for lack of
jurisdiction. In a memorandum explaining the order of dismissal, the Court of Appeals said,
inter alia:
Although the [Turnover Order] arguably finally disposes of Teledraft’s rights to
assets, the appeal is premature. Non-parties usually must be held in contempt of
district court discovery orders before they have a right to appeal. . . . Because
Teledraft has not been held in contempt for refusing to honor FTC’s motion to
compel requiring it to turn over funds to the receiver, the appeal of the September 25,
2009 order is premature.
Federal Trade Commission v. NHS Systems, Inc. et al., No. 09-3899 (3d Cir. January 6, 2010)
(citations omitted).
II.
The FTC’s Contempt Motion
On March 17, 2010, the FTC filed the instant Motion for an Order to Show Cause Why
Teledraft, Inc., Should not be Held in Contempt. Dkt. 125. In its motion, the FTC asks that
Teledraft be held in contempt for its failure to comply with the XTRO, the SPI, and the Turnover
Order. The FTC further asks that the contempt order require Teledraft to 1) turn over
$264,224.03 to the Receiver, as required by the Turnover Order; 2) pay compensatory sanctions
in the amount of $105,972.33, which represents the amount the Receiver claims he has expended
in attempting to recover funds from Teledraft; and 3) pay a coercive sanction—should Teledraft
fail to comply—of $250 on the first day of non-compliance, with the amount doubling on each
successive day of non-compliance.
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In opposition, Teledraft concedes that it should be held in contempt for its failure to
comply with the Turnover Order.1 Indeed, as discussed above, contempt is the only route
Teledraft can take to obtain appellate review of the Turnover Order. Still, Teledraft argues that
the scope of the contempt order should be narrower than the FTC requests. First, Teledraft
contends that it should only be held in contempt of the Turnover Order, and not, as the FTC
requests, of the XTRO and SPI as well. Second, Teledraft asserts that this court does not have
power to impose any contempt sanctions, either coercive or compensatory. Third, Teledraft
argues that, even if the court has the power to impose sanctions, the amounts requested by the
FTC are excessive. Finally, Teledraft urges this court to reconsider the Turnover Order on
various grounds.2

1

Thus Teledraft does not dispute that the requirements for contempt are met. See
Marshak v. Treadwell, 595 F.3d 478, 485 (3d Cir. 2009) (to establish contempt, movant must
prove, by clear and convincing evidence, “(1) that a valid order of the court existed; (2) that the
defendants had knowledge of the order; and (3) that the defendants disobeyed the order.”).
2

The court declines to reconsider the Turnover Order. Although “the law of the case
doctrine does not limit the power of trial judges to reconsider their prior decisions,” Williams v.
Runyon, 130 F.3d 568, 573 (3d Cir. 1997), such a motion “cannot be used simply to reargue
theories on which the court has already ruled . . . or to relitigate a point of disagreement with the
court.” Kimberly-Clark Worldwide, Inc. v. First Quality Baby Products, 2011 U.S. Dist. LEXIS
18003, at * 8 (M.D. Pa. Feb. 24, 2011).
Teledraft again asserts (1) that the Receiver failed to comply with 28 U.S.C. § 754 and
thus failed to secure in rem jurisdiction over Teledraft assets; (2) that Teledraft should only be
compelled to turn over $57,328.89; and (3) that Teledraft should be permitted to assert a
recoupment action against the Receivership defendants. These contentions are rejected for the
reasons stated in the Turnover Order. Teledraft also argues that this court erred in its
determination that Teledraft possessed Receivership assets in the Western District of New York.
See Teledraft Opp’n at 5 n.5. It does not appear that Teledraft raised this argument in its briefing
of the Turnover motion, and Teledraft has not presented any justification for its failure to raise
the issue. Accordingly, that final ground for reconsideration is also rejected. See St. Mary’s
Water Auth. v. St. Paul Fire & Marine Ins. Co., 2007 U.S. Dist. LEXIS 34814, at *1 (M. D. Pa.
May 11, 2007) (in context of Rule 59(e), reconsideration unavailable where movant “tender[s]
new legal theories, or raise[s] arguments which could have been offered or raised prior to entry”
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A. The scope of the contempt order
Teledraft argues that it should not be held in contempt for violating the XTRO and the
SPI because, it asserts, those earlier orders did not apply to Teledraft and that, even if they did,
Teledraft did not violate them. This argument is essentially a request that the court reconsider
the Turnover Order, in which the court found 1) that both the XTRO and the SPI apply to
Teledraft, and 2) that Teledraft had failed to comply with either order.3 As noted above, see
supra note 2, the court declines to reconsider the Turnover Order.
Teledraft does present two novel grounds to support its contention that it should only be
found in contempt of the Turnover Order. First, Teledraft seems to contend that, because this
court did not rule that it had power over Teledraft until the Turnover Order, any contempt finding
must be based on the Turnover Order only and can only concern Teledraft’s conduct after July
2009. But this argument ignores the fact that the XTRO and SPI unambiguously directed
Teledraft to freeze and deliver Receivership assets, in May and June of 2008. Second, Teledraft
seeks to reframe the Turnover Order as “extending the scope of the earlier [injunctive orders],”
see dkt. 127 at 13, and thus again contends that its obligations only began at the time the
Turnover Order was issued. This argument also lacks merit. The Turnover Order did not
“extend” the XTRO and SPI to Teledraft, it confirmed that those orders applied to Teledraft—by
their plain language and pursuant to this court’s in rem jurisdiction.

of order).
3

The plain language of the XTRO and SPI clearly encompass Teledraft. For example,
both orders specified that the freeze applied to any “independent contractors” of the defendants,
and also to “any assets held by, for or under the name of any Defendant at any . . . ACH Network
or other payment processor.” XTRO at § II.A.4; SPI at § IV.A; see also Turnover Order at 6
(“Although Teledraft is not a party to this litigation, the XTRO and SPI apply to Teledraft.”).
7

Although the XTRO and SPI apply to Teledraft, the court finds it unnecessary to issue a
contempt order grounded in Teledraft’s non-compliance with those orders in addition to
Teledraft’s non-compliance with the Turnover Order. The Turnover Order confirms that the
XTRO and SPI apply to Teledraft, and thus this court need—at least at this time—only rule that
Teledraft is in contempt of the Turnover Order. Accordingly, the accompanying order will note
that Teledraft is in contempt of the Turnover Order, and that Teledraft must, in two stages,4 turn
over $264,224.03 to the Receiver.
B. The power to impose contempt sanctions
The FTC has requested both compensatory and coercive sanctions. Teledraft argues that
this court does not have power to impose contempt sanctions given that this court lacks personal
jurisdiction over Teledraft, while the FTC invokes the court’s inherent contempt power which,
the FTC contends, includes the power to compensate and coerce.5
Teledraft relies primarily on the Fifth Circuit’s decision in United States v. Dickinson,

4

Teledraft concedes that it possesses $57,328.89 of Receivership assets, but it states that
the remainder of the $264,224.03 has been dissipated. The court agrees with the FTC that
Teledraft should be required to turn over the $57,328.89 promptly, and that Teledraft should be
afforded somewhat more time to turn over the balance of Receivership assets. The
accompanying order reflects these considerations.
5

The FTC also seeks to rebut Teledraft’s jurisdictional argument by contending that this
court will have personal jurisdiction over Teledraft as soon as the FTC serves the Order to Show
Cause and contempt order on Teledraft, thus “ensuring personal jurisdiction over Teledraft for
purposes of contempt.” But even assuming that service of the Order to Show Cause would be
sufficient service for the purposes of establishing personal jurisdiction, the FTC would also have
to show a sufficient basis (i.e., minimum contacts and reasonableness) for personal jurisdiction.
The potential basis for personal jurisdiction over Teledraft was discussed in the briefing in
support of the Turnover Order, but this court did not reach the question because it found the
service of process to be defective. For the purposes of this motion, the court again need not
reach the question of minimum contacts given that its in rem jurisdiction is sufficient to sustain
the imposition of contempt sanctions.
8

465 F.2d 496 (5th Cir. 1972). In Dickinson, the Fifth Circuit addressed “whether a person may
with impunity knowingly violate an order which turns out to be invalid.” Id. at 509. In
answering that question, the court noted that:
the rule that unconstitutional court orders must nevertheless be obeyed until set aside
presupposes the existence of at least three conditions: (i) the court issuing the
injunction must enjoy subject matter and personal jurisdiction over the controversy;
(ii) adequate and effective remedies must be available for orderly review of the
challenged ruling; and (iii) the order must not require an irretrievable surrender of
constitutional guarantees.
Id. (footnote omitted) (emphasis added). Teledraft seeks to import these factors into the context of
this case by arguing that this court’s earlier finding, that it lacks personal jurisdiction over Teledraft,
should now preclude this court from ordering any form of contempt sanctions. As an initial matter,
Dickinson is distinguishable given that it addressed whether contempt sanctions could be upheld
even after the underlying order was reversed on appeal, whereas in this case the underlying orders
remain intact.
But even if Dickinson does apply to this case, the Dickinson court’s personal jurisdiction
requirement focuses on the court’s power to issue the underlying order, rather than on its power to
impose sanctions on a non-party. See id. (“[T]he court issuing the injunction must enjoy subject
matter jurisdiction and personal jurisdiction over the controversy . . . .”) (emphasis added); see also
id. at 512 (“As a matter of jurisdiction (i), the District Court certainly has power to formulate Free
Press-Fair Trial orders in cases pending before the court and to enforce those orders against all who
have actual and admitted knowledge of its prohibitions.”). This court has already concluded that it
has sufficient power, based on in rem jurisdiction, to order Teledraft to comply with the underlying
orders, and accordingly the Dickinson test would be satisfied even if it did apply to this case.

9

Teledraft’s argument in favor of a limited contempt order is further undermined by the longstanding principle that courts enjoy “inherent power to enforce compliance with their lawful orders
through civil contempt.” Spallone v. United States, 493 U.S. 265, 276 (1990). The contempt power
includes the power “to coerce the defendant into compliance with the court’s order and to
compensate for losses sustained by the disobedience.” McDonald’s Corp. v. Victory Investments,
727 F.2d 82, 87 (3d Cir. 1984). Here, Teledraft’s proposal—that the contempt order be limited to
requiring delivery of the $264,224.03—would eviscerate the purposes underlying contempt (i.e., to
enforce compliance with orders), and would reduce contempt to a means of facilitating appellate
review. In other words, Teledraft simply asks this court to repeat its earlier command that it turn
over the Receivership funds, which would render the contempt order a nullity.
Moreover, Teledraft’s proposal would be at odds with the Third Circuit ruling in this case
that found that Teledraft could not appeal the Turnover Order. In dismissing Teledraft’s appeal, the
Third Circuit noted that a “‘contempt order effectively transforms the ‘interlocutory’ [order] into the
‘final’ [order] by giving the [nonparty] witness a distinct and severable interest in the underlying
action.’” FTC v. NHS Systems, Inc. et al., No. 09-3899 (3d Cir. Jan. 8, 2010) (quoting In re Flat
Glass Antitrust Litig., 288 F.3d 83, 89 (3d Cir. 2002)). In Re Flat Glass and the other cases cited
by the Third Circuit recognized that the contempt requirement serves to “discourage appeals in all
but the most serious cases.” Id. at 90 n.10 (quoting In re Grand Jury (Schmidt), 619 F.2d 1022,
1025 (3d Cir. 1980)); see also id. at 89 (“‘[T]he contempt route is a difficult path to appellate review,
and one that may carry with it a significant penalty for failure.’”) (quoting MDK, Inc. v. Mike’s Train
House, Inc., 27 F.3d 116, 121 (4th Cir. 1994)).
In this case, Teledraft asks the court to issue a contempt order that would fail to “discourage
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appeals.” Absent the possibility of sanctions, there is little to discourage a party from standing in
contempt of, and then appealing, any adverse order. In other words, Teledraft’s “for appeal purposes
only” contempt theory would turn contempt into an empty formality.
In sum, the court finds that it has the power to impose contempt sanctions on Teledraft.
Personal jurisdiction is not a prerequisite to imposing such sanctions in this case, and sanctions are,
moreover, an inherent facet of the contempt power. Finally, a sanctionless contempt order would
undermine the policies underlying the requirement that a nonparty must be held in contempt before
appealing a court order. Accordingly, the court will exercise its discretion to determine the type and
amount of sanctions that are warranted in this case.6
C. Compensatory Sanctions
The FTC has asked for at least7 $105,972.33 in compensatory sanctions, designed to
refund the Receiver for the costs he has incurred in seeking to gain Teledraft’s compliance with
the injunctions. Teledraft argues that compensatory sanctions are only available to compensate
the aggrieved party for costs associated with the contempt proceedings themselves. Thus,
Teledraft argues, because the Receiver has not expended any funds associated with the contempt
motion,8 the Receiver is not entitled to any compensatory fees.

6

The FTC has stated that, should Teledraft file a timely and prompt appeal, it will not
oppose a stay of the compensatory sanctions (and tolling of the coercive sanction), provided that
Teledraft post a bond in the amount of 120% of the $264,224.03, plus the amount of any
sanctions imposed. Teledraft has expressed a willingness to post such a bond, and Teledraft is of
course permitted to move this court for a stay of the compensatory sanctions pending appeal.
7

The Receiver has sought to reserve his right to supplement his submission to reflect
additional time and expenses. Dkt. 125 at 7 n.4.
8

The FTC has handled the briefing on the contempt motion, and the Receiver has filed a
one-page notice stating its agreement with the FTC’s position. Dkt. 126.
11

Teledraft’s restrictive theory of the scope of compensatory sanctions relies on the Third
Circuit’s statement that “[compensatory sanctions] are restricted to reasonable amounts incurred
in prosecuting the [contempt] petition.” Lichtenstein v. Lichtenstein, 425 F.2d 1111, 1113 (3d
Cir. 1970). But Teledraft’s interpretation of what it means to “prosecute the petition” is overlynarrow. Lichtenstein cited, in support of the above proposition, Schauffler v. United Ass’n of
Journeymen, 246 F.2d 867 (3d Cir. 1957), which described compensatory sanctions as including
those costs “necessarily incurred . . . in connection with the prosecution of the petition in civil
contempt, including counsel fees and other expenditures incurred in the investigation,
preparation, presentation and final disposition of the petition.” Id. Although the court has not
yet received an itemized account of the expenses that underlie the FTC’s sanction request, it is at
least possible that some expenses are attributable to “investigation” and “preparation” of the
petition.
Moreover, “district courts are afforded broad discretion to fashion a sanction that will
achieve full remedial relief,” and “[o]ften this discretion involves ordering payment for the costs
of past non-compliance . . . .” John T. v. Del. Cnty. Intermediate Unit, 318 F.3d 545, 554 (3d
Cir. 2003). Thus compensatory sanctions are available not only for litigation costs associated
with the contempt proceedings, but are also more broadly available “to compensate for losses
sustained by disobedience.” McDonald’s Corp., 727 F.2d at 87; see also Nat’l Drying Mach. Co.
v. Ackoff, 245 F.2d 192, 194 (3d Cir. 1957) (“Whether an award in civil contempt be measured in
terms of a plaintiff’s loss or a defendant’s profit, such an award, by very definition, must be an
attempt to compensate plaintiff for the amount he is out-of-pocket or for what defendant by his
wrong may be said to have diverted from the plaintiff or gained at plaintiff’s expense.”).
12

In sum, the Receiver is entitled to receive compensatory sanctions for losses arising from
Teledraft’s disobedience. The accompanying order will refer this matter to the Honorable M.
Faith Angell, United States Magistrate Judge, for a determination of the appropriate amount of
such compensatory sanctions.
D. Coercive Sanctions
The FTC also requests a two-tiered coercive sanction. First, it asks that Teledraft be
ordered to turn over $57,328.89—the amount of Receivership property Teledraft concedes it
possesses—within 48 hours of the entry of a contempt order. The FTC then asks that the
remainder of the $264,224.03 be turned over within one week of a contempt order. If Teledraft
fails to meet either of these deadlines, the FTC asks that Teledraft be fined $250 on the first day
of noncompliance, with the fine amount doubling each day thereafter.
Although such coercive sanctions are not uncommon, see, e.g., FTC v. Productive Mktg.,
136 F.Supp.2d 1096, 1113 (C.D. Cal. 2001), the court declines to impose coercive sanctions in
this case. It is apparent that Teledraft’s primary goal at this stage in the litigation is to obtain
appellate review of the Turnover Order and, at this point, there is no reason to believe that
Teledraft will not file a timely appeal. Accordingly, the accompanying order will impose a
deadline for the turnover of funds, but the order will not impose per diem coercive sanctions. If
Teledraft fails to comply with or appeal the contempt order, the FTC may file a renewed request
for additional sanctions.
III.
Conclusion
Teledraft has knowingly refused to comply with a lawful order of this court, and thus is in
13

contempt. Moreover, the court’s power to impose sanctions is not precluded by the lack of
personal jurisdiction over Teledraft. Accordingly, the court will impose compensatory sanctions
in an amount to be determined by the Magistrate, but the court declines, at this time, to impose
coercive sanctions. An appropriate order accompanies this opinion.

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