Fed. Trade Comm'n v. Johnson

FEDERAL TRADE COMMISSION, Plaintiff,

v.JEREMY JOHNSON, et al., Defendants.

Case No. 2:10-cv-02203-MMD-GWF

UNITED STATES DISTRICT COURT DISTRICT OF NEVADA

DATED: June 6, 2013

ORDER

I. SUMMARY

Before the Court are the following ripe motions brought by various parties in this case:

1. Various Vowell Entities' Motion to Lift Stay (dkt. no. 743);

2. The Federal Trade Commission's ("the FTC" or "the Commission") Motion for Sanctions (dkt. no. 785);

3. Various Vowell Entities' Motion to Order Receiver to Segregate Assets (dkt. no. 790);

4. The Receiver's Motion to Seal Confidential Declaration (dkt. no. 796);

5. Magistrate Judge Foley's Report and Recommendation regarding the FTC's Motion for Sanctions (dkt. no. 803);

6. Various I Works Defendants' Motion for Judgment on the Pleadings (dkt. no. 810);

7. Various I Works Defendants' Motion for Leave to File Out-of-Time Opposition to the FTC's Motion to Amend (dkt. no. 811);8. Relief Defendants' Motion to Dismiss (dkt. no. 886); and

9. The FTC's Motion to Strike Certain Affirmative Defenses Raised by the I Works and Muir Defendants (dkt. no. 911).

The Court addresses each below.

II. BACKGROUND

The FTC brought this suit on December 21, 2010, against Defendants Jeremy Johnson, Loyd Johnston, numerous other individuals, and numerous entities, including I Works, Inc. and Elite Debit, Inc., alleging that Defendants engaged in fraudulent business activities on the Internet that deceptively enrolled unwitting consumers into memberships for products or services, then charged their credit cards or debit funds without consumer authorization or knowledge. (See Compl, dkt. no. 42.) The Commission alleges numerous violations of Section 5(a) of the Federal Trade Commission Act ("the FTC Act"), 15 U.S.C. § 45(a) (prohibiting unfair or deceptive business activities) as well as violations of Section 907(a) of the Electronic Fund Transfer Act ("the EFTA"), 15 U.S.C. § 1693e(a), and its corollary Section 205.10(b) of Regulation E, 12 C.F.R. § 205.10(b) (governing the rights and liabilities of consumers engaged in electronic funds transfer activities). (See id. at 73-80.)

Finding that the Commission established a likelihood of success on the merits, the Court entered a preliminary injunction against Defendants and appointed a receiver ("the Receiver") to manage the approximately $300 million of disputed funds the Commission alleges belongs to consumers defrauded by Defendants. (See dkt. no. 130.) Since the injunction was issued on February 10, 2011, the Receiver has endeavored to preserve the receivership estate while the parties engage in discovery on the merits of the claims brought by the Commission. In response to the discovery of property belonging to the receivership estate held by various non-defendants, the Court on March 25, 2013, clarified the scope of the preliminary injunction by finding these third-party-owned assets as constituting receivership assets and setting forth various procedures for disputing the characterization of assets as belonging to the estate. (See dkt. no. 897.)

The Commission also since filed an amended complaint naming additional individuals and entities as relief defendants. (See First Amended Complaint ("FAC"), dkt. no. 830.)

III. DISCUSSION

A. Various Vowell Entities' Motion to Lift Stay (dkt. no. 743)

Various non-parties, including Todd L. Vowell, Kombi Capital, LP, REO Recovery, LLC, Paydirt Capital, Inc., and Fishhook Partners, LLC,¹ move this Court for relief from its September 28, 2012, Order staying certain counterclaims and cross-claims filed by these entities in a Utah state court case. They seek reconsideration of this Order pursuant to Fed. R. Civ. P. 60(b)(4), which provides a court authority to "relieve a party or its legal representative from a final judgment, order, or proceeding" if "the judgment is void." However, they fail to raise any legitimate basis for reconsidering the Court's order, and attempt only to make arguments rejected by the Court in deciding the Motion for Order Clarifying Preliminary Injunction. (See dkt. no. 580.) As the stay imposed on the Utah state action attempts only to maintain the orderly preservation of assets and claims as against the receivership estate and these non-parties, the Court will not disturb its earlier order imposing a stay. This Motion is denied.

B. Various Vowell Entities' Motion to Order Receiver to Segregate Assets (dkt. no. 790)

Triple Seven LLC, Power Monkeys LLC, and Kombi Capital, a subset of the Vowell Entities, bring this Motion seeking to segregate and preserve funds from the receivership estate in which they claim an interest. (See dkt. no. 790.) These entities claim, without support or justification, that the Receiver's actions will or will likely result in the drying up of assets in which they have an interest. The Receiver, as an officer of the Court, is bound to preserve assets that belong to the receivership estate and to hold them in trust for victims of Defendants' alleged activities. Further, the Court has already determined that various funds these entities claim an interest in are actually properly part of the receivership estate. Accordingly, no basis exists to grant this Motion.

C. The Receiver's Motion to Seal Confidential Declaration (dkt. no. 796) The Receiver filed this Motion to Seal to ensure the protection of confidential

financial and personal information revealed in the deposition of Kerry Johnson. As this Motion is supported by compelling reasons for the documents' sealing, the Receiver's Motion is granted. See Pintos v. Pac. Creditors Ass'n, 605 F.3d 665, 677-78 (9th Cir. 2010) ("[A] party seeking to seal judicial records must show that compelling reasons supported by specific factual findings . . . outweigh the general history of access and the public policies favoring disclosure."); Golden Boy Promotions, Inc. v. Top Rank, Inc., No. 2:10-CV-01619, 2011 WL 686362, at *1 (D. Nev. Feb. 17, 2011) ("Factors to consider include, but are not limited to: the public interest in understanding the judicial process and whether disclosure of the material could result in improper use of the material for scandalous or libelous purposes or infringement upon trade secrets.").

D. Magistrate Judge Foley's Report and Recommendation regarding the FTC's Motion for Sanctions (dkt. no. 803)

Magistrate Judge George Foley, Jr. issued this Report and Recommendation recommending granting of the FTC's Motion for Sanctions. (See dkt. nos. 785 and 803.) The Motion for Sanctions seeks a default order against numerous corporate defendants(collectively "Corporate Defendants"), including the I Works Defendants² and the Muir Corporate Defendants,³ for failing to comply with the Court's October 25, 2012, Order to Show Cause why local counsel has not been retained (see dkt. no. 738), and for sanctions against I Works, Inc. (hereinafter "I Works") itself for failing to respond to the Court's November 27, 2012, Order compelling responses to FTC's interrogatories (see dkt. no. 766). Neither I Works Defendants nor Muir Corporate Defendants responded to the FTC's Motion for Sanctions. Thereafter, Judge Foley issued his order recommending default. (See dkt. no. 803.)

Muir Corporate Defendants and I Works Defendants objected to Judge Foley's Report and Recommendation.⁴ (See dkt. nos. 827 and 832.) The Muir Corporate Defendants concede that they failed to comply with two Court orders — to obtain local counsel, and to show cause — but contend that Judge Foley inappropriately recommended the severest form of sanction. Since they now have retained counsel,they argue that the underlying reason for default is moot. The I Works Defendants also object to the Report and Recommendation, but again concede that they failed to comply with Court orders regarding local counsel and response to interrogatories.

Awarding a termination sanction, such as a default judgment, "is very severe." Conn. Gen. Life Ins. Co. v. New Images of Beverly Hills, 482 F.3d 1091, 1096 (9th Cir. 2007). "Only 'willfulness, bad faith, and fault' justify terminating sanctions." Id. (quoting Jorgensen v. Cassiday, 320 F.3d 906, 912 (9th Cir. 2003)). To determine whether a case-dispositive sanction is just, a court must look to the following five factors: "(1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its dockets; (3) the risk of prejudice to the party seeking sanctions; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions." Id. "The sub-parts of the fifth factor are whether the court has considered lesser sanctions, whether it tried them, and whether it warned the recalcitrant party about the possibility of case-dispositive sanctions." Id.

Reviewing the record makes clear that sanctions are appropriate against Corporate Defendants. As the parties should be aware, this case commandeers extensive judicial resources due to the complexity of legal issues at stake, the number of parties involved, and the voluminous filings that daily inundate the Court's docket. While failure to respond to Court orders is a serious violation, it is particularly problematic in a case as demanding as this one. Although the Court understands that Corporate Defendants were unable to respond to Court orders pro se, see United States v. High Country Broad Co., 3 F.3d 1244, 1245 (9th Cir.1993) (per curiam) ("A corporation may appear in federal court only through licensed counsel."), their failure to swiftly retain counsel and to respond to numerous Court orders is sanctionable nonetheless. Although I Works Defendants claim that they were without representation during the period in which they were ordered to produce their interrogatory and retain local counsel, they continued to be represented by outside counsel, John Barlow. Further, even if they were without counsel to represent them before this Court, they surely hadrepresentatives able to communicate directly with the...