IRVING, J., for the Court:
¶ 1. Virgil N. Johnson' was convicted in the Hinds County Circuit Court of aggravated assault. He was sentenced to twenty years in the custody of the Mississippi Department of Corrections. Aggrieved, Johnson appeals and asserts (1) that he was denied his right to a speedy trial, (2) that the trial court erred in allowing certain testimony, (3) that the trial judge exhibited bias, (4) that the trial court erred in refusing to grant his for-cause challenge, and (5) that the trial court erred in granting one of the State's jury instructions.
¶ 2. Finding no reversible error, we affirm.
FACTS
¶ 3. On February 28, 2006, Jeremy Boyd was shot four times at his home in Jackson, Mississippi. Boyd, an acquaintance of Johnson, made four pretrial identifications of Johnson as the perpetrator. The first identification was made to Officer Charles Banks of the Jackson Police Department (the JPD), the first officer to arrive at the scene; the second was made to Officer Tommy Nelson of the JPD while Boyd was at the hospital where he had been taken for treatment; the third was made to JPD Officer Kent Daniels; and the fourth identification was made from a photographic lineup. On April 20, 2006, Johnson was arrested, and later indicted, for the aggravated assault of Boyd. He went to trial on March 11, 2008, and was convicted as charged.
¶ 4. At trial, Boyd testified as to what had transpired on February 28, 2006. According to Boyd, he invited Johnson over to his house because he had planned to purchase a vehicle and wanted Johnson's assistance. When Johnson arrived, Boyd, a professional barber, offered to give him a haircut. Boyd seated that after the haircut, Boyd played a video game and that the two of themismoked marijuana. Boyd testified that Johnson then became quiet, so he asked Johnson if he was all right. Johnson told him that he was. Satisfied with Johnson's response, Boyd testified that he turned around and continued to play the video game. Boyd recalled that his gun was on the floor near his feet and that "out of the corner of [his] eye" he saw Johnson get up. Boyd said that he assumed Johnson was going to the bathroom but that Johnson came up behind him and shot him in the back of his neck with Boyd's own gun. Boyd testified that Johnson immediately shot him again. Boyd also testified that Johnson shot him two more times, even though he was playing dead at that point. Boyd further stated that Johnson flipped him over and started rifling through his pockets. Boyd testified that Johnson took $1,900 that he had in his pocket — money that he had planned to use to purchase the vehicle. Boyd stated that Johnson then fled the scene. Boyd used his cellular telephone to call for help.
¶ 5. Officers Banks and Nelson testified that Boyd stated that Johnson had inflicted the gunshot wounds upon him.
¶ 6. Additional facts, if necessary, will be related during our analysis and discussion of the issues.
ANALYSIS AND DISCUSSION OF THE ISSUES
1. Speedy Trial
¶ 7. Johnson contends that his statutory, state, and federal constitutional rights to a speedy trial were violated. A criminal defendant is afforded the right to a speedy trial by the Sixth and Fourteenth Amendments to the United States Constitution and by Article 3, Section 26 of the Mississippi Constitution of 1890. Brengettcy v. State, 794 So.2d 987, 991 (¶ 7) (Miss. 2001) (citing Beavers v. State, 498 So.2d 788, 789 (1986)). Further, "[u]nless good cause be shown, and a continuance duly granted by the court, all offenses for which indictments are presented to the court shall be tried no later than two hundred seventy (270) days after the accused has been arraigned." Miss. Code Ann. § 99-17-1 (Rev. 2007). We separately address Johnson's speedy-trial arguments as they relate to his statutory and constitutional rights.
The Mississippi Supreme Court has "not set a specific length of time as being per se unconstitutional [with respect to state constitutional claims], but instead have applied the four-part balancing test articulated by the U.S. Supreme Court in Barker v. Wingo, 407 U.S. 514, 92 S.Ct. 2182, 33 L.Ed.2d 101 (1972)." Brengettcy, 794 So.2d at 992 (¶ 10).
a. Statutory Right
¶ 8. Pursuant to section 99-17-1, for purposes of the 270-day rule, the time begins to run at arraignment. Johnson was arraigned on April 16, 2007, and, as noted, went to trial on March 11, 2008. However, on April 4, 2007, twelve days before his arraignment, Johnson asserted his right to a speedy trial. The record reflects that Johnson's first trial setting was July 16, 2007; his second trial setting was November 5, 2007; and his third trial setting was March 10, 2008, one day prior to his trial date.
¶ 9. On the first day of his trial, Johnson sought to have his case dismissed due to a speedy-trial violation. The trial judge asked Johnson's attorney to explain the prejudice that Johnson had suffered as a result of the delay. Johnson's attorney asserted that Johnson: (1) suffered from being incarcerated, because he could not make bond, for a crime that he contended he did not commit; (2) was unable to work as a result of his incarceration; (3) could not see his child or provide any financial support to the child; (4) was prevented from pursuing his GED; and (5) was prevented from caring for his sick mother. Thereafter, the trial judge stated:
The Court is going to deny the motion to dismiss for failure to provide a speedy trial. The Court is convinced by the arguments of the State. The Court also recognizes that in Hinds County there has [sic] been delays caused by backlogs of cases. That there were cases older than this case and still are older cases than this case, and the defendant is being brought to trial in a timely manner. The Court acknowledges the request of Mr. Johnson for a speedy trial for reduction in bond, and he did have a $50,000 bond. The mere fact that he could not make the bond is not a prejudice. It's a personal issue.
Johnson argues that the reason for the delay given by the trial judge is insufficient. A crowded docket has been recognized as a reason that constitutes good cause for delay. See State v. Magnusen, 646 So.2d 1275, 1282 (Miss. 1994) (citing Polk v. State, 612 So.2d 381, 387 (Miss. 1992)). Nevertheless, an overcrowded docket will not automatically suffice to establish good cause, as good cause must be determined by evaluating the specific facts of each case. Id. (citing McGee v. State, 608 So.2d 1129, 1133 (Miss. 1992)).
¶ 10. Even if we were to conclude that, because of the congested trial docket, good cause existed for the State's failure to bring Johnson to trial within 270 days of his arraignment, there remains the question of whether a violation of section 99-17-1 occurred because no order was entered on the trial docket. In this regard, we note that Johnson had three trial settings, two of which were within 270 days of his arraignment and the first being just three months following his arraignment. We also note that the trial judge, in denying Johnson's motion to dismiss, stated that "[t]he delay comes only out of necessity and the backlog of cases that may have been tried on the dates that he previously had his trial setting." While the trial judge used the phrase "may have been tried," we do not interpret this to mean that the cases that were set ahead of Johnson's were not tried. Therefore, since Johnson's case was twice set for trial prior to the running of the 270-day period, and since the trial judge found good cause for Johnson's case not being tried, although the finding came on the back end rather than on the front end when the case was continued, the question is whether these facts are sufficient to support a finding that section 99-17-1 was not violated. As we will explain, we find that they are.
There is no document in the record reflecting the trial settings, but during the hearing on Johnson's motion to dismiss, the State advised the trial judge that, based on information contained in the court's case-management system, Johnson had had three trial settings. Johnson's attorney did not deny this fact but pointed out that there was no order reflecting the trial settings.
¶ 11. As noted, section 99-17-1 requires that a defendant be tried within 270 days of his arraignment "[u]nless good cause be shown, and a continuance duly granted by the court. . . ." Here, the trial judge did not enter an order or continuance specific to this case. However, it appears that there was a standing order or practice that all cases that were set for trial on a specific day in a backup position would be automatically continued to another day or term of court if the case that was set ahead of it went to trial. That appears to be what happened here. Section 99-17-1 does not specifically require that any continuance that is granted by the court be in the form of a written order, only that the continuance be "duly granted by the court." Here, based, on the trial judge's comments, it is clear that, by operation of either a standing order or practice known to the bar, all cases that were set on a specific day in a position other than the first were continued by the trial court if the case set ahead of it went to trial. While we do not condone this practice, we cannot say on the unique facts of this case that Johnson was denied his statutory right to a speedy trial. While it is clear that he was not tried within 270 days, it is also clear that the reason for the delay was the congested trial docket. Moreover, Johnson has shown no prejudice to his ability to mount a defense as a result of the delay. Therefore, we find no merit to this issue.
b. Constitutional Right
¶ 12. In Barker, 407 U.S. at 530, 92 S.Ct. 2182, the United States Supreme Court announced four factors that should be considered when determining whether a criminal defendant has been denied his right to a speedy trial. The factors are: (1) "length of delay," (2) "the reason for the delay," (3) "the defendant's assertion of his right," and (4) "prejudice to the defendant." Id. Also, in Smith v. State, 550 So.2d 406, 408 (Miss. 1989), our supreme court stated that a delay of eight months or more is presumptively prejudicial. Further, the Smith court stated that the length-of-delay factor under Barker operates as a "triggering mechanism." Id. We now proceed with an analysis of the Barker factors.
( 1) Length of Delay
¶ 13. In determining whether there has been a constitutional violation of a defendant's right to a speedy trial, the computation of time begins with the date of the defendant's arrest. Murray v. State, 967 So.2d 1222, 1230 (¶ 23) (Miss. 2007) (citing Atterberry v. State, 667 So.2d 622, 626 (Miss. 1995)). As noted, Johnson was arrested on April 20, 2006, and was tried on March 11, 2008. Therefore, 680 days elapsed between the date of Johnson's arrest and the date of his trial. Accordingly, because more than eight months elapsed between the date of Johnson's arrest and the date of his trial, we find that the delay is presumptively prejudicial, requiring us to proceed with an analysis of the remaining Barker factors.
( 2) Reason for Delay
¶ 14. The record is clear that the reason for the delay in bringing Johnson to trial was the backlog of cases that Hinds County was experiencing at the time. It is well settled that delays caused by overcrowded dockets are weighed against the State, although not heavily. McGhee v. State, 657 So.2d 799, 802 (Miss. 1995) (citing Adams v. State, 583 So.2d 165 (Miss. 1991)). Therefore, we weigh this factor slightly against the State.
( 3) Johnson's Assertion of his Right to Speedy Trial
¶ 15. Johnson asserted his right to a speedy trial on April 4, 2007, or 349 days after his arrest and a little over eleven months before he was brought to trial. Therefore, this factor favors Johnson.
( 4) Prejudice to Johnson
¶ 16. Johnson sets forth in his brief the same reasons regarding how he was prejudiced that his attorney provided to the court during the hearing on his motion to dismiss. "The accused is not required to put forth an affirmative showing of prejudice to prove his right to a speedy trial was violated. Nevertheless, an absence of prejudice weighs against a finding of a violation." Murray, 967 So.2d at 1232 (¶ 30) (quoting Atterberry, 667 So.2d at 627). We find, as did the trial judge, that Johnson's right to a speedy trial was not violated, as we are unable to discern any prejudice to Johnson caused by the delay. Even though Johnson was presumptively prejudiced because of the length of the delay, the clear evidence is that he was not actually prejudiced. While Johnson argued that he was prejudiced in several ways, none dealt with an impairment to his ability to vigorously defend against the charges. Therefore, we cannot find that Johnson's constitutional right to a speedy trial was violated.
2. Admission of Officer Banks's Testimony
¶ 17. In this issue, Johnson contends that the trial court erred by allowing Officer Banks to testify that Boyd had told Officers Banks and Nelson that Johnson was the person who had shot him. As stated, Boyd identified Johnson as the shooter to both Officers Banks and Nelson. At trial, Johnson objected on the basis that the elicited testimony was hearsay that did not fall within any hearsay exception. The trial judge overruled the objection.
¶ 18. Boyd was the State's first witness and was subjected to cross-examination. He testified that Johnson was the person who had shot him. Thus, the jury had already heard Boyd identify Johnson as the shooter before Officer Banks took the stand. Accordingly, because Officer Banks merely repeated what Boyd had already testified to, any error committed by the trial judge in allowing the officer to testify in this regard is harmless.
3. Bias
¶ 19. Johnson also argues that he is entitled to a new trial because the trial judge exhibited bias by suggesting to Officer Daniels how to avoid a hearsay objection. The following transpired at trial:
Q. And once you got to the location, what did you do?
A. Upon arriving at the `location when I first got there, I was briefed by a patrol officer who responded to the scene first before they notified the detective. Got to the scene, the officer told me that —
[ATTORNEY FOR DEFENDANT]: Your Honor, we'd object to what the officer told him, hearsay.
THE COURT: Objection sustained, Counsel. Just use terms of what you learned from your investigation and that will —
THE WITNESS: Yes, Your Honor, thank you.
THE COURT: — keep you out of the hearsay. Hold on, let me finish. And you'll stay out of the area of hearsay. Just tell what you learned as result of your investigation.
THE WITNESS: Thank you, Your Honor.
¶ 20. Johnson cites Jasper v. State, 759 So.2d 1136 (Miss. 1999), Nichols v. Munn, 565 So.2d 1132 (Miss. 1990), and West v. State, 519 So.2d 418 (Miss. 1988) for the proposition that it is impermissible for a trial judge to interject herself into a trial. In Jasper, a police officer testified, on direct examination, that he had recovered stolen property from an individual by the name of Billy Cooper. Jasper, 759 So.2d at 1139 (¶ 18). Then, on redirect, the State asked the officer whether he had learned that Cooper had received the property from the defendant, Steve Jasper. Id. Jasper's attorney objected and moved for a mistrial on the ground of hearsay, as Jasper's attorney argued that Cooper was the proper person to answer that question. Id. The State suggested that the testimony be stricken and that the jury be instructed to disregard it. Id. At that point, the trial judge ordered the jury out of the courtroom. Id. Outside of the presence of the jury, a discussion was held regarding the impropriety of the State's question and the possible remedies to cure the hearsay. Id. at 1139-40 (¶ 19). Jasper's attorney moved for a directed verdict, asserting that "absent the testimony of Billy Cooper, the State was unable to prove their case without the benefit of [the officer's] hearsay testimony." Id. at 1140 (¶ 19). The trial judge asked the State whether it had issued a subpoena for Cooper. Then, the trial judge stated:
Do ya'll have a tag number? Put an all points bulletin out for him. Get a court order that he's evading process or do anything. Otherwise, you're gonna lose this case. And I'm not gonna take the blame for it. . . . Well, let's just get an instanter out on him. And that way when you get him, you bring him to me. If I get him, I'll know what to do with him.
Id.
¶ 21. The Mississippi Supreme Court found that the trial judge did not directly interject himself into the case and merely, outside of the presence of the jury, attempted to "inform the State that it would need the testimony of Cooper in order to corroborate the hearsay testimony offered by [the officer]." Id. at (1120). Based on the finding of the Mississippi Supreme Court that the trial judge did not interject himself into Jasper's trial, we fail to see how Jasper lends Johnson any support.
¶ 22. Johnson also directs our attention to West and Nichols, which were cited by the Jasper court. In West, 519 So.2d at 418, the Mississippi Supreme Court reversed a defendant's murder conviction, finding that the trial judge became actively involved in the case. Specifically, the supreme court held:
We have carefully examined the eight-volume record and find that there are thirty (30) instances where the trial judge improperly, or unnecessarily, interjected himself into the proceedings. Of those thirty instances, twenty are of the type which may be characterized as coaching the district attorney. On nine occasions, the trial judge posed questions to witnesses where the district attorney's questions were ineffective. The questions by the trial judge generally served to strengthen the prosecution's case.
Id. at 421.
¶ 23. In Nichols, 565 So.2d at 1135, the trial judge extensively questioned an expert witness doctor regarding injuries allegedly sustained by a plaintiff. The trial judge also questioned the plaintiff regarding previous accidents that he had been involved in. Id. at 1135-36. Our supreme court held that "the circuit judge was clearly wrong in the manner in which he injected himself into this lawsuit. . . ." Id. at 1137. The court also stated that "there was no necessity for his quite open display of incredulity before the jury both of the plaintiffs case and of the plaintiff himself." Id.
¶ 24. Here, the trial judge's comment to Officer Daniels can hardly be compared to the conduct committed by the trial judges in West and Nichols; therefore, we find Johnson's reliance on them misplaced. The trial judge merely instructed Officer Daniels to state what he learned from his investigation. This act can hardly be viewed as interjecting herself into the law-suit. There is no merit to this issue.
4. Challenges
¶ 25. Johnson contends that the trial judge erred in failing to grant his for-cause challenges of two prospective jurors. In Duncan v. State, 939 So.2d 772, 778-79 (¶ 22) (Miss. 2006) (citing Caston v. State, 823 So.2d 473. 499 (¶ 93) (Miss. 2002)), our supreme court, held that "the trial court is empowered with broad discretion to determine whether a prospective juror can be impartial — notwithstanding the juror's admission under oath as to his or her ability to [be] impartial."
¶ 26. The following exchange occurred during voir dire by Johnson's attorney:
My first question is this, when you walked through that door today, how many of you looked at Virgil Johnson and said to yourself, I wonder what he did. Not what he's charged with, but I wonder what he did? And this is one that requires you obviously as all questions to be very truthful and sometimes do some soul searching.
Would you raise your hand if when you walked through that door or at any time since then you said to yourself I wonder what he did?
Would you raise your hand? This is Mr. Phillips. Yes, tell us what did you think.
MR. PHILLIPS: I think the most personal thing. I walked in the door, and I asked myself the same question you said. I mean I didn't chew on it or anything, but I just — you know, it was kind of my initial reaction.
[ATTORNEY FOR DEFENDANT]: All right. Well let me ask you this. By thinking that, did you think he had done something?
MR. PHILLIPS: I guess so sitting on that side of the table. I mean, you know, I just assumed to be the case.
[ATTORNEY FOR DEFENDANT]: Now, when you said — did you assume it was a case involving an alleged crime?
MR. PHILLIPS: Yes.
[ATTORNEY FOR DEFENDANT]: And why did you assume that?
MR. PHILLIPS: I assumed we're in criminal court. I assumed it was a criminal matter he's. being charged with.
* * *
[ATTORNEY FOR DEFENDANT]: All right. Others? Mr. Stevens?
* * *
MR. STEVENS: Yes. I kind of assumed that probably he was involved in some type of crime.
[ATTORNEY FOR DEFENDANT]: Now, I think you were a former police officer; is that correct?
MR. STEVENS: Correct.
[ATTORNEY FOR DEFENDANT]: I'm sorry?
MR. STEVENS: Right, uh-huh (affirmative).
[ATTORNEY FOR DEFENDANT]: Why did you assume that?
MR. STEVENS: Just by surveilling the area and what's going on. Just like you said, we're in Court, so you assume that there's a defendant, there's a prosecutor. And just looking at both tables, you just assume that okay, that must be the defense on that side, this must be the prosecution on this side. Just putting those two things together and coming up with that scenario.
[ATTORNEY FOR DEFENDANT]: But you said you assumed he did something, not assumed he was charged with something. I think you said you assumed he did something, am I correct?
MR. STEVENS: Right.
[ATTORNEY FOR DEFENDANT]: And what I'm asking you why did you make that assumption other than what you've just described?
MR. STEVENS: Not necessarily that he had done something. I understand that probably that table was, like I said, the defendant's table, and this table was probably the prosecution's table.
Thereafter, Johnson's attorney challenged Phillips for cause, asserting that Phillips could not be fair and impartial. The trial judge declined to strike Phillips, concluding that "simply wondering what somebody did is not enough to strike them from the jury without more." Similarly, the trial judge refused to strike Stevens, concluding that Stevens did not indicate that he could not be fair and impartial. Thereafter, Johnson's attorney used two of his peremptory strikes to keep Phillips and Stevens off of the jury. Therefore, even though the trial judge refused to allow Johnson's attorney to strike Phillips and Stevens for cause, they were ultimately excluded from the jury. Accordingly, Johnson fails to show how he was prejudiced as a result of the trial judge's ruling, as Johnson makes no argument that he planned to use the peremptory challenges to exclude other jurors. This issue lacks merit.
5. Jury Instruction
¶ 27. In his final issue, Johnson argues that the trial judge erred by allowing jury instruction S-3 to be read to the jury. Johnson contends that instruction S-3 is not a proper statement of the law and improperly comments on Boyd's identification of Johnson as the perpetrator. Johnson's attorney objected when the State sought to offer instruction S-3. Thereafter, Johnson's attorney, the State, and the trial judge worked together to come up with an instruction that both sides could agree upon. Then, the trial judge allowed the State to read the following version of S-3 to the jury:
The burden is on the State to prove beyond a reasonable doubt that the offense was committed and that the defendant was the person who committed it. You have heard evidence regarding the identification of the defendant as the person who committed the crime. In this connection, you may consider the witness's opportunity to observe the criminal act and the person committing it, including the length of time the witness had to observe the person committing the crime, the witness's state of mind, and any other circumstances surrounding the event. You may also consider the witness's certainty or lack of certainty, the accuracy of any prior description, and the witness's credibility or lack of credibility, as well as any other factor surrounding the identification. You have heard evidence that prior to this trial, the witness, Jeremy Boyd, identified the defendant, Virgil Johnson, by viewing a photographic spread which contained his photograph.
It is for you to determine the reliability of any identification and give it the weight you believe it deserves.
¶ 28. Johnson's attorney mounted no further objection. Therefore, Johnson cannot now complain that the trial judge erred in allowing instruction S-3 to be read to the jury when he did not object at trial. See Brengettcy, 794 So.2d at 997 (¶ 29) (citing Sanders v. State, 678 So.2d 663, 670 (Miss. 1996)). There is no merit to this issue.
¶ 29. THE JUDGMENT OF THE HINDS COUNTY CIRCUIT COURT OF CONVICTION OF AGGRAVATED ASSAULT AND SENTENCE OF TWENTY YEARS IN THE CUSTODY OF THE MISSISSIPPI DEPARTMENT OF CORRECTIONS IS AFFIRMED. ALL COSTS OF THIS APPEAL ARE ASSESSED TO HINDS COUNTY.
KING, C.J., LEE AND MYERS, P. JJ., GRIFFIS, ISHEE, ROBERTS AND MAXWELL, J J., CONCUR. BARNES, J., CONCURS IN PART AND IN THE RESULT.
of Internet marketing called co-registration (R. Lin Dep. 142-43, 174). Co-registration generates leads and sales via the Internet, often with the help of outside companies that specialize in such marketing (
id. at 172). As described by former Inc21 employee Michael Nelson (and corroborated by Roy Lin himself), co-registration worked as follows (Nelson Dep. 27-28;
see also R. Lin Dep. 177-78):
[Y]ou'd be surfing the web, and a pop-up will appear and says, "You've just won a 42-inch HDTV. Click here to claim your prize." And that takes you to a page where they give you the opportunity to sample different products. . . . There'd be maybe 15 on one page. If you didn't choose any of them, it wouldn't let you go on. It would say, "In order to get the TV, you have to choose at least so many of these," and it would go on for pages and pages. And somewhere along there, there would be a listing for a free trial of the GoFaxer product.
Defendants contracted with a third-party marketing company called Delicate Data to perform co-registration services for GoFaxer. Delicate Data supposedly promised defendants up to 2,000 "sales" per day, a figure that Mr. Nelson told the Lin brothers was "too good to be true" (Nelson Dep. 66-67). Mr. Nelson's concerns proved to be correct.
While co-registration marketing differed from telemarketing in its means for generating sales, the "sales" it generated of GoFaxer — like "sales" of defendants' telemarketed products — were almost all illegitimate. Mirroring the preemptive lawsuit they filed against their own call centers in the Philippines, defendants filed a separate lawsuit against Delicate Data in April 2009 for fraudulently generating over 78,000 sales of GoFaxer through co-registration. That litigation — Inc21.com v. Delicate Data, et al. — was also assigned to the undersigned judge. The complaint in that action alleged (Dkt. No. 1 at ¶ 11, CV 09-1924 WHA):
Shortly after [Inc21] began receiving customer sign-ups from [Delicate Data], [Inc21] began receiving complaints from its customers. The complaints from customers ranged and included, but were not limited to, stating that they had never even heard of the GoFaxer product and never signed up for any service with GoFaxer on the [I]nternet, that they . . . did not even have Internet
access, [and] . . . they never agreed or authorized to be charged for any GoFaxer service.
The complaint further alleged that Inc21 had "paid [Delicate Data] for commissions on 78,071 customers sign-ups" and was "aware that approximately seventy percent (70%) of these customer sign-ups were invalid." Additionally, the complaint stated that due to the volume of cancellation requests, Inc21 believed that "less than 1 percent of the customer sign-ups [from Delicate Data] actually used or accessed the GoFaxer.com service online" ( id. at ¶ 12). The Delicate Data action was dismissed pursuant to stipulation in March 2010.
Expert Marylander's survey of GoFaxer "customers" confirmed the allegations in the Delicate Data complaint. Nearly all of defendants' GoFaxer sales had been fraudulently obtained. First, Expert Marylander noted that of the GoFaxer "customers" that surveyors attempted to contact, only eight percent were successfully interviewed. This was because 58 percent of the billed phone numbers had been disconnected — a figure that Expert Marylander stated was among the highest (or the highest) that he had ever seen in such a survey (Marylander Decl. ¶ 18). Second, of the GoFaxer "customers" that were successfully contacted by surveyors, 97.7 percent stated that they had not agreed to purchase the GoFaxer product ( id. at ¶ 31).
In sum, just as with their telemarketed products, the vast majority of GoFaxer customers had never agreed to purchase the product in the first place.
4. DEFENDANTS' BILLING PRACTICES
The sales tactics described above resulted in a staggering amount of billing activity. For example, according to former Inc21 customer service manager Selena Tran, defendants billed, on average, around 20,000 GlobalYP "customers" per month (Tran Dep. 17-18). While defendants utilized two different marketing approaches to procure customers, all of defendants' products shared a common billing method: LEC billing.
As stated, some GoFaxer customers were billed via credit card (J. Lin Dep. 66). All GoFaxer customers obtained through "co-registration," however, were billed via LEC billing (R. Lin Dep. 176). The small number of GoFaxer customers billed via credit card are not targeted in the instant action.
A detailed history of the LEC-billing industry was already set forth in a prior order. See FTC v. Inc21.com Corp., 688 F. Supp. 2d 927, 929 (N.D. Cal. 2010). How it works in practice will be briefly recapped. Four entities are typically involved in the LEC-billing process: (1) local exchange carriers (or "LECs"), (2) billing aggregators (also called "clearinghouses"), (3) third-party vendors (like defendants), and (4) customers. In exchange for fees, LECs allow pre-approved third-party vendors to place charges for their products and services onto their customers' telephone bills. Although charges from third-party vendors are listed separately on these telephone bills from LEC-related charges, the "total amount due" presented to customers includes third-party vendor charges ( see Dkt. Nos. 7-3, 36-31, 36-35). Billing aggregators act like "middle men" in this process. They contract directly with third-party vendors to facilitate the placement of their charges onto customer telephone bills. They also aid in the collection of these charges from LECs (Lavino Dep. 16-17). Customers pay third-party vendor charges directly to the LECs by simply paying the "total amount due" on their phone bills. After subtracting fees, the LECs then pass the payments along to the billing aggregators. The billing aggregators then pass the payments along to the appropriate third-party vendors, minus their own service fees.
Defendants contracted with the following billing aggregators: Integretel, PaymentOne, The Billing Resource, BSG Clearing Solutions, and ILD (J. Lin Dep. 86-87, 160-61).
As described below, defendants took full advantage of the weaknesses in this billing system to reap the benefits of the unauthorized sales generated by their marketers.
A. The 15-Day "Free" Trial
Customers who purportedly "agreed" to purchase defendants' products were provided with a 15-day "free" trial. If the customer did not cancel within the trial period, billing would immediately ensue (Tran Dep. 35-39). Written notification of this 15-day "free" trial period was provided via a welcome letter or postcard that would be mailed to customers after their sales were "passed" by a TPV provider ( id. at 35-36; Yakubova Dep. 39). This letter would tell customers about the product that they had "purchased," and would warn customers that failure to cancel within 15 days would result in immediate billing (Tran Dep. 37). If a welcome letter was returned as "undeliverable," Inc21 employees would attempt to locate a new mailing address using various third-party search services. If a new address was located, a second welcome letter would be sent. This second mailing would not, however, reset the trial period. Rather, the trial period would always begin running from the date of the telemarketing call ( id. at 38-39).
According to defendant John Lin, defendants gave customers an additional five-day grace period to cancel. Thus, "customers" actually had 20 days to cancel their "purchases" (J. Lin Decl. ¶ 8).
The volume of "undeliverable" welcome letters — at its peak — reached between 100 to 200 per week (Yakubova Dep. 39-40). This was equaled by welcome letters that were mailed back to defendants with notes from customers stating "[p]lease cancel this" and "I did not sign up for this" ( id. at 40-41). For customers where no welcome letter was ever successfully delivered, however, defendants would still bill those customers unless they complained or requested a refund (Tran Dep. 81-83). Of course, reaching defendants and obtaining refunds proved difficult for many of these "customers."
B. Complaints and Refunds
When Michael Nelson, the former systems administrator for Inc21, first set foot in defendants' offices in 2005, he "noticed right away that a lot of phones were ringing on the desks" and "there were people sitting there, but nobody was picking up the phones" (Nelson Dep. 74). When Mr. Nelson asked defendant John Lin, "Why doesn't anybody answer any of those phones?," John Lin replied, "Oh, they're just customers who need assistance. We never answer those phones" ( id. at 75). Then, according to Mr. Nelson, John Lin laughed.
Customers, however, were not amused. When defendants chose to answer phones, complaining customers faced an uphill battle in obtaining refunds. According to Selena Tran, who handled customer service for defendants' various business entities and products, defendants fielded an average of 90 complaints per week for unauthorized billing (Tran Dep. 91). To respond to these complaints, customer service representatives would listen to the TPV recordings of the complaining customers. If a recording sounded "bad," a full refund would be issued. If, however, the TPV recording sounded "good," defendants would then use the recording as ammunition against the customer, offering no refunds or only partial refunds even if the customer asserted that the recording had been falsified ( id. at 88-91; Yakubova Dep. 60-61). Only if the customer threatened to contact the Better Business Bureau or the Attorney General's office would John Lin authorize a large or complete refund (Yakubova Dep. 60-63). Even in these situations, however, customer service agents were instructed to try and "settle" with customers for less than a full refund amount ( id. at 62-63). On this point, the record contains numerous unrebutted declarations from "customers" who were either unable to reach defendants at all or had reached customer support personnel but were unable to cancel or obtain refunds.
Many customers nevertheless lodged complaints with the Better Business Bureau and law enforcement agencies. These complaints were then communicated to defendants (Yakubova Dep. 34).
These declarations were submitted by customers Abbate (Dkt. No. 36-19), Ballard, Bloom (Dkt. No. 36-21), Brown (Dkt. No. 36-22), Bryan (Dkt. No. 36-23), Beusing (Dkt. No. 36-24), Cronk (Dkt. No. 36-26), Gerber (Dkt. No. 36-31), Groppe (Dkt. No. 36-34), Hammond (Dkt. No. 36-35), Henningsen, Maklari (Dkt. No. 36-42), O'Neil (Dkt. No. 36-44), Rumphol (Dkt. No. 36-45), Smerud (Dkt. No. 36-46), Strickland, Thompson (Dkt. No. 36-49), Van Diest, Webster, and West.
C. Customer Awareness of Monthly Billing
The inherently deceptive nature of LEC billing has been acknowledged by the Federal Communications Commission on numerous occasions. The survey conducted by Expert Marylander confirmed this deception in the instant case. According to the survey, only five percent of defendants' tens of thousands of "customers" were even aware that charges for GlobalYP, MetroYP, NetOpus, the JumPage product, or GoFaxer had appeared on their telephone bills (Marylander Decl. ¶ 33). Breaking this down by product, only 5.7 percent of GlobalYP customers, 2.7 percent of MetroYP customers, 7.5 percent of NetOpus customers, 5.5 percent of JumPage customers, and 3.5 percent of GoFaxer customers knew that they had been LEC-billed for their respective products. The remaining "customers" either did not know, did not remember, or declined to answer ( ibid.).
See, e.g., Press Release, Federal Communications Commission, FCC and Industry Announce Best Practices Guidelines to Protect Consumers from Cramming, 1998 WL 406058 (July 22, 1998). "Cramming" is the practice of placing unauthorized, misleading, or deceptive charges on a consumer's telephone bill.
By contrast, both Roy and John Lin were well aware (or were recklessly indifferent to mountains of evidence) that most of their customers were being billed without their knowledge. In addition to knowing about the fraudulent sales practices set forth in detail above, the Lin brothers were repeatedly put on notice by their own systems administrator, Michael Nelson, that customers had no idea that they were being billed (Nelson Dep. 60) (emphasis added):
I told them that I was — I was very uncomfortable with the fact that almost none of our customers knew that they were our customers. And I believe at one point, I described the business model as "Gee, I hope we don't get caught." And they thought that was funny.
They laughed.
According to Mr. Nelson, based upon the monthly amount that was being billed to customers for the GlobalYP, MetroYP, and NetOpus products, the fact that only ten to twenty customers ever attempted to modify their websites over a four year period, and the fact that the products did not even work properly, it was obvious to him that almost none of Inc21's customers knew that they were customers ( id. at 61-62).
The survey conducted by Expert Marylander confirmed this suspicion. According to the survey, 95.9 percent of defendants' "customers" stated that they had not received any services from the product they had supposedly purchased (Marylander Decl. ¶ 32). Only three customers interviewed as part of Expert Marylander's survey (out of 1,087 surveyed) said that they received any services from the product they had purchased. Of these three customers, only one accurately described the product for which he had been billed ( ibid.).
D. Obtaining LEC-Billing Authorization
Before third-party vendors are allowed to place charges on a particular local exchange carrier's telephone bills, they must first obtain authorization from both the LEC and an associated billing aggregator. For defendants, this involved filling out numerous LEC-billing applications for each of their products in various markets nationwide (R. Lin Dep. 328). Once authorization was given, LECs and billing aggregators would keep a close watch over whether a third-party vendor received more than an acceptable threshold of complaints from customers (J. Lin Dep. 188-89; Lavino Dep. 22-23). Vendors would then be warned and/or suspended if too many customers complained about unauthorized charges.
In this connection, defendants were warned and/or suspended on numerous occasions by LECs and billing aggregators for excessive unauthorized billing:
• In July 2005, Verizon (a local exchange carrier) suspended defendants' authorization to use LEC billing for GlobalYP (J. Lin Dep. 191-92).
• In March 2007, AT T (a local exchange carrier) warned defendants about unacceptably high unauthorized charges
for their GlobalYP and NetOpus products (Tran Dep. 125-27; Wolfe Decl. Att. BB, FTC Exh. 23).
• In June 2008, Qwest (a local exchange carrier) terminated defendants' authorization to use LEC billing for the JumPage product (Lavino Dep. 60-63; Wolfe Decl. Att. GG, FTC Exhs. 142-43).
• In November 2008, Verizon warned defendants about unacceptably high unauthorized charges associated with their JumPage product (J. Lin Dep. 185-89; Wolfe Decl. Att. Z, FTC Exh. 12).
• In May 2009, after defendants failed to reduce customer complaints, Verizon suspended defendants' ability to use LEC billing for the JumPage product (J. Lin Dep. 185-88; Wolfe Decl. Att. Y, FTC Exh. 11).
• In May 2009, PaymentOne (a billing aggregator) asked defendants to provide it with its entire GoFaxer customer
base so that it could attempt to filter out thousands of unauthorized accounts from being billed (J. Lin Dep. 197-200; Wolfe Decl. Att. A, FTC Exhs. 15, 17).
These warnings and suspensions, however, did not deter defendants from finding unscrupulous ways to exploit the weaknesses of the LEC-billing system.
First, the record shows that defendants signed numerous false affidavits when applying for LEC-billing privileges. For example, in defendants' LEC-billing application for its NetOpus product, for which defendant Roy Lin signed an affidavit attesting to the accuracy of its contents (R. Lin Dep. 353-62; Wolfe Decl. Att. V, Gov. Exh. 9):
• Roy Lin admitted at his deposition to using a false business address in Hacienda Heights, despite it being a residence where no business operations were performed.
• Roy Lin admitted at his deposition to naming his mother, Sherry Yu, as the president and principal of NetOpus, despite the fact that she was not involved in the business.
• Roy Lin admitted at his deposition to falsely excluding any mention of himself or his brother, defendant John Lin, as principals or officers of NetOpus.
• Roy Lin admitted at his deposition to falsely excluding any mention of Inc21, GlobalYP, MetroYP, and other affiliated businesses from the NetOpus application.
• Roy Lin admitted at his deposition to falsely excluding any mention that GlobalYP had been suspended by Verizon in July 2005.
Similarly, Roy Lin also admitted at his deposition to submitting a falsified LEC-billing application for GlobalYP, despite signing an affidavit as to its truthfulness (R. Lin Dep. 346-53; Wolfe Decl. Att. U, Gov. Exh. 8). Material omissions also plagued defendants' LEC-billing application for MetroYP, which Roy Lin again admitted contained false information (R. Lin Dep. 329-46; Wolfe Decl. Att. S, Gov. Exh. 4). In fact, Roy Lin plainly admitted at his deposition that he sought to "re-apply" to Verizon for LEC-billing privileges using "a different principal" because he wanted Verizon to believe that the application was from someone other than himself (R. Lin Dep. 301-06; Wolfe Decl. Att. BB, FTC. Exh. 25). All of these misrepresentations were aimed at circumventing safeguards designed to prevent known fraudsters from re-entering the LEC-billing industry using "new" products and business entities.
Second, the Lin brothers improperly used their parents identities to further their deceptive sales and billing practices. As stated, Sherry Yu Lin — the mother of the Lin brothers — was named as "president" of NetOpus. Additionally, relief defendant Sheng Lin — the father of the Lin brothers — was named as "president" of GoFaxer. Neither parent participated in any meaningful way in defendants' business operations (R. Lin Dep. 286-87, 291, 294-95). With respect to Sherry Yu Lin, not only was her signature misleadingly used on LEC-billing applications for NetOpus, defendant Roy Lin continued to sign her name as the president of NetOpus even after she had died. Indeed, her signature was forged by Roy Lin on a Wisconsin telemarketing application dated August 6, 2007, which was more than half a year after she had passed away (J. Lin Dep. 148-49; Wolfe Decl. Att. Y, FTC. Exh. 8). As for Sheng Lin, his name and signature also appeared on numerous GoFaxer applications, despite the fact that he performed no duties for GoFaxer and could not speak English (R. Lin Dep. 294-95). Third, defendants lied to LECs and billing aggregators regarding "action plans" they pledged to implement to reduce unauthorized billing of customers. Specifically, Roy Lin admitted at his deposition that he made false representations to Verizon in 2005 about implementing a new customer "verification process" to minimize cramming complaints surrounding GlobalYP ( id. at 271-76, 281-83; Wolfe Decl. Att. BB, FTC Exh. 22). No such verification process was ever implemented. Meanwhile, customers continued to be billed. Fourth, even in regions where defendants lacked authorization to use LEC billing (either because they had been suspended or had not yet been approved), defendants found ways to get their products onto telephone bills. Specifically, defendant Roy Lin conspired with another vendor, Jeff Lavino, who had access to the LEC-billing industry in regions where defendants did not. Through a contractual arrangement, defendants "sold" its GlobalYP, MetroYP, and JumPage customers to Mr. Lavino so that he could use his LEC-billing privileges to charge them on their telephone bills (Lavino Dep. 19-21, 23-24). The net collections were then split 50/50 between Mr. Lavino's business and defendants, with defendants' cut of the action funneled directly into GST U.S.A.'s checking account ( id. at 33-35).
The "sale" of customers to Mr. Lavino occurred on three occasions: (1) in 2005, after Verizon terminated GlobalYP's LEC-billing authorization (Lavino Dep. 22-24, 31-35; Wolfe Decl. Att. GG, FTC Exh. 133), (2) in 2008, after Qwest suspended billing for JumPage Solutions (Lavino Dep. 60-62; Wolfe Decl. Att. GG, FTC Exh. 142), and (3) when defendants had yet to receive LEC-billing authorization in regions where "customers" had already been acquired (Lavino Dep. 45-47).
E. Over $37 Million in Net Collections
From January 2004 to January 2010, billing records indicate that defendants collected $37,442,602.89 from customers through LEC billing (Wolfe Decl. Atts. M-Q; FTC's Reply 11). Additionally, defendants also received at least $331,346.54 from Mr. Lavino's various business entities — AJAL Partners, Best Web U.S.A., EZ Webmasters, National Connect, and Website on Demand — who LEC-billed consumers on defendants' behalf (Sihota Decl. ¶ 11, Att. B).
In its opening brief, the FTC stated that this figure was $43,824,970.45 (FTC's Br. 16). This was revised downward after the FTC acknowledged that its initial calculations contained an error (FTC's Reply 11). Defendants did not challenge any of the calculations performed by the FTC.
In its opening brief, the FTC stated that defendants received at least $324,856.15 from Mr. Lavino, citing the declaration of David Sihota to support this amount (FTC's Br. 16). Mr. Sihota's declaration, however, expressly states that defendants received $331,346.54 from Mr. Lavino's business entities.
5. RELIEF DEFENDANT SHENG LIN
As stated, relief defendant Sheng Lin — the father of defendants Roy and John Lin — was the "president" of GoFaxer in name only. He was not involved in any of defendants' business operations (R. Lin Dep. 287; J. Lin Dep. 90-91). Nevertheless, Sheng Lin drew a regular salary of $7,000 per month from Inc21 was well as periodic bonuses as high as $300,000 (S. Lin Dep. 13-14; Walch Dep. 111-14, 116). In total, he received at least $434,000 in wages and bonuses from defendants, not including the benefits he received from medical insurance, business loans, and the use of a GoFaxer credit card for his personal expenses (Walch Dep. 122-23, 126-30).
* * *
The FTC instituted this enforcement action on January 5, 2010 (Dkt. No. 1). This order follows the issuance of a temporary restraining order on January 19, a preliminary injunction on February 19, and an accelerated discovery schedule (granted at defendants' request) (Dkt. Nos. 28, 57-58). A hearing on the instant summary judgment motions was held on September 15.
ANALYSIS
Summary judgment may be granted if the pleadings and supporting documents, viewed in the light most favorable to the non-moving party, show that there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. FRCP 56(c). For a genuine issue of fact to be material, the evidence must be such that a reasonable jury could return a verdict for the non-moving party. A declarant's bald, uncorroborated, and conclusory assertions need not be credited to defeat summary judgment. Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 2002); see also FTC v. Stefanchik, 559 F.3d 924, 929 (9th Cir. 2009).
In the instant cross-motions for summary judgment, two sets of claims are in the spotlight: (1) claims brought under Section 5 of the Federal Trade Commission Act, and (2) claims brought under the Telemarketing Sales Rule (or TSR). Each set of claims will be addressed in turn.
1. THE FEDERAL TRADE COMMISSION ACT
The FTC has broad powers under the Federal Trade Commission Act to prevent businesses from engaging in unfair or deceptive practices. 15 U.S.C. 41-58. Section 5 of the FTC Act, which is at issue here, empowers the FTC to prevent the use of "unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce[.]" 15 U.S.C. 45(a). Both businesses and individuals who perpetrate such acts are subject to injunctive and equitable liability.
A. Claim One: Deceptive Billing Practices
The FTC's first claim for relief is that defendants engaged in deceptive billing practices in violation of Section 5 of the FTC Act by placing unauthorized charges on the telephone bills of consumers. "An act or practice is deceptive if `first, there is a representation, omission, or practice that, second, is likely to mislead consumers acting reasonably under the circumstances, and third, the representation, omission, or practice is material.'" FTC v. Gill, 265 F.3d 944, 950 (9th Cir. 2001).
The undisputed record establishes that all three elements have been proven with respect to defendants' LEC-billing practices. First, the FTC has produced an avalanche of unrebutted evidence that defendants placed monthly charges for all five of their products on the telephone bills of consumers and collected over $37 million from this practice. This is true for both their telemarketed products (GlobalYP, MetroYP, NetOpus, and the JumPage product) and GoFaxer, which was "sold" exclusively through co-registration. The placement of these charges on consumer telephone bills (and the inclusion of those charges in the "total amount due" shown on these bills) constituted an affirmative representation by defendants that the consumer had in fact authorized the purchase and owed payment to defendants.
Second, the consumer survey conducted by Expert Marylander, an expert with qualifications that defendants did not challenge, revealed that — on average — nearly 97 percent of defendants' "customers" had not agreed to purchase the products for which they had been billed, 96 percent of these "customers" had not received any services from defendants, and only five percent of these "customers" were even aware that charges for defendants' products had been placed on their telephone bills. This survey, which carried a 95 percent confidence level and was conducted pursuant to what this order finds was a reliable methodology, provides compelling and unrebutted evidence in support of the FTC's argument that the placement of unauthorized charges on consumer telephone bills was deceptive, false, and likely to mislead almost any consumer acting reasonably under the circumstances. See FTC v. Verity Int'l, Ltd., 443 F.3d 48, 63 (2d Cir. 2006) (affirming the district court's conclusion that the placement of adult entertainment charges on phone bills "capitaliz[ed] on the common and well-founded perception held by consumers that they must pay their telephone bills"); see also Kemp v. AT T, 393 F.3d 1354, 1360 (11th Cir. 2004) (affirming the district court's conclusion that customers foreseeably believe that all phone bill charges have to be paid in order to maintain phone service). The deposition testimony of
defendants' own employees, the multiple lawsuits filed by defendants alleging unauthorized sales of their own products, and the declarations filed by over forty of defendants' "customers" confirm that consumers were in fact misled by the deceptive charges placed on their telephone bills.
Third, the representation that consumers owed defendants monthly payments for products that they had never agreed to purchase was material. A representation is material if it "involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product." FTC. v. Cyberspace.Com LLC, 453 F.3d 1196, 1201 (9th Cir. 2006) (citation omitted). Here, the representation at issue was the inclusion of fraudulent charges on the telephone bills of tens of thousands of unsuspecting consumers. These unauthorized charges resulted in over $37 million being funneled directly to defendants' pockets via LEC billing, despite compelling evidence that nearly 97 percent of these customers never agreed to purchase defendants' products. This demonstrates that the inclusion of these unauthorized charges on consumer telephone bills undoubtedly affected the conduct of defendants' "customers" — they paid defendants for products that they had never purchased. Given this backdrop, defendants' representations were undoubtedly material.
In their defense, defendants provide no rebuttal evidence or expert testimony to create a genuine issue of material fact on any of these elements. For example, defendants failed to depose Expert Marylander regarding the merits of his survey, did not conduct a rebuttal survey, and did not depose any of the forty-plus customers who submitted declarations. The only arguments presented by defendants in their opposition brief and at the September 15 hearing were that: (1) Expert Marylander's survey methodology was flawed, (2) defendants subjectively believed that consumers owed the charges that they were billed, (3) customers were given ample warning of the 15-day "free" trial period, and (4) the charges that appeared on consumer telephone bills complied with FCC disclosure requirements. None of these arguments is persuasive.
A fifth argument was raised at the hearing pertaining to affidavits prepared by Postal Inspector Andrew Wong. The Wong affidavits were relied upon by the FTC during the initial stages of this litigation to obtain a temporary restraining order. These affidavits, however, were not relied upon or even cited in the FTC's motion for summary judgment. As such, this argument by defense counsel is rejected.
i. The Reliability of the Marylander Survey
Defendants' criticisms of Expert Marylander's survey do not create any genuine issues of material fact for trial. In FTC v. Stefanchik, the United States Court of Appeals for the Ninth Circuit affirmed the district court's summary judgment order in an enforcement action involving deceptive marketing claims. Just like the instant case, the FTC in Stefanchik provided a collection of declarations from deceived consumers as well as survey evidence showing that 92 percent of Stefanchik's customers made no money from the mortgage-flipping scheme that he had marketed. To challenge the FTC's survey results, the defendants in Stefanchik produced two expert opinions criticizing the methodology of the survey. The Ninth Circuit affirmed the district court's conclusion that these expert criticisms did not create a genuine issue of material fact for trial, but were instead directed towards the admissibility of the FTC's survey evidence:
Stefanchik and Beringer contest the methodology of the FTC's survey and assert that issues of fact exist, but they do not contest the truth or validity of the individual responses reported in the survey. They offered no competent affirmative evidence of their own, either in the form of survey results, contrary consumer declarations, sworn affidavits, or testimony, to identify consumers who were able to make substantial amounts of money using the Stefanchik method as claimed in the marketing materials.
Stefanchik, 559 F.3d at 929. After confirming that no factual dispute existed, the Ninth Circuit went on to explain that "[t]he FTC is not required to show that all consumers were deceived[.]"
Ibid. Rather, the FTC's evidence that Stefanchik's practices were deceptive and misleading to an overwhelming number of consumers was more than sufficient to warrant summary judgment.
So too here. As in Stefanchik, the FTC has put forth numerous declarations from defrauded customers illustrating the deceptive nature of defendants' billing practices. The FTC also conducted an expert survey showing that almost all of defendants' "customers" had been deceived by these practices. Unlike in Stefanchik, however, defendants in the instant case have provided no expert opinions challenging the reliability of Expert Marylander's survey. Instead, defendants rely upon pure attorney argument to criticize the reliability of his survey results. All of these criticisms fail. For example, contrary to defense counsel's assertions, Expert Marylander's survey was not "automated" and lacking in a "human element." Rather, the survey was conducted by trained, live interviewers (Marylander Decl. ¶¶ 21, 25). Another failed argument made by defense counsel is that the Marylander survey did not account for "customers" who might have forgotten whether they had purchased defendants' products or had been billed by defendants. This is wrong. Expert Marylander's survey expressly allowed customers to answer "I don't know" and "I don't remember" to questions asked by interviewers ( id. at ¶¶ 25, 28, 33). Tellingly, despite the availability of this option, nearly 97 percent of "customers" still stated that they had not agreed to purchase defendants' products.
Defense counsel's best argument is directed at the use of the phrase "Internet services" in the Marylander survey. According to defense counsel, the phrase "Internet services" may have given interviewees the impression that defendants were selling Internet access services. While this order agrees that different language could have been chosen by Expert Marylander, it is undisputed that the surveyx questions presented to interviewees also stated the name of the specific product supposedly purchased by each customer ( id. at ¶ 31). For example, GoFaxer customers were asked: "Did you or your company agree to purchase any Internet services from GoFaxer?" The specific mentioning of defendants' products disarms any criticisms directed at the phrase "Internet services." In any event, defendants produced no evidence that any interviewees were confused or misled by the questions presented in Expert Marylander's survey. Even if they did, such evidence would likely go to the admissibility of the survey evidence, and would not create a genuine issue of material fact for trial. Absent any affirmative evidence showing that customers were not deceived by their billing practices, defendants cannot rebut the FTC's survey evidence.
ii. The Subjective Belief of Defendants
Defense counsel's second argument is that both Roy and John Lin subjectively believed that their "customers" had actually authorized being billed. This also fails. As stated, liability for deceptive practices under Section 5 of the FTC Act is measured solely by whether a reasonable consumer was likely to have been misled. See Gill, 265 F.3d at 950; see also FTC v. Publ'g Clearing House, 104 F.3d 1168, 1171 (9th Cir. 1997). As such, it is immaterial to liability whether the Lin brothers subjectively believed that the charges placed on consumer telephone bills were valid.
iii. The "Free" Trial and FCC Compliance
The two remaining arguments raised by defense counsel — that consumers were given fair warning of the 15-day "free" trial period and that all LEC-billed charges complied with FCC disclosure rules — miss the point for exactly the same reason. Even if true, these arguments do not rebut the FTC's showing that reasonable consumers were likely to have been misled (and were in fact misled) by defendants' LEC-billing practices. Given the compelling evidence of deception set forth in Expert Marylander's unrebutted survey, it is immaterial to liability whether consumers who never bought defendants' products in the first place were given a warning in the mail that they would be billed once their 15-day "free" trial expired. It is also immaterial to liability whether defendants' charges — 97 percent of which were unauthorized to begin with — were properly displayed on consumer telephone bills pursuant to FCC rules. What defense counsel is essentially arguing is that fraudulent sales and unauthorized charges can somehow be cleansed of impropriety through post-hoc disclosures. This order rejects such an argument.
Since there are no genuine issues of material fact as to whether defendants' billing practices were deceptive in violation of Section 5 of the FTC Act, the FTC's motion for summary judgment on this claim is GRANTED.
B. Claim Two: Unfair Billing Practices
Under Section 5 of the FTC Act, an unfair practice or act is one that "causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition." 15 U.S.C. 45(n). It is not a bar to liability if a violation is caused by more than one perpetrator. Rather, liability under the Act may be found if a business facilitated or provided substantial assistance to a deceptive scheme resulting in substantial injury to customers. FTC v. Neovi, Inc., ___ F.3d ___, 2010 WL 2365956, at *4 (9th Cir. 2010) (citation omitted).
As with the prior claim, the FTC has more than met its burden of proving each of these elements. First, while losses incurred by individual customers may have been relatively small, an act or practice can cause "substantial injury" by doing a "small harm to a large number of people[.]" Id. at *6 (citation omitted). Given that nearly 97 percent of defendants' tens of thousands of "customers" did not agree to purchase defendants' products and over $37 million in largely unauthorized charges flowed directly to defendants through LEC billing, a "substantial injury to consumers" has been proven.
Second, given the evidence that nearly 97 percent of defendants' "customers" never agreed to purchase defendants' products in the first place, it follows that these "customers" had no reason to scrutinize their telephone bills for defendants' fraudulent charges. Indeed, only five percent of defendants' "customers" ever noticed these charges appearing on their telephone bills. This unrebutted evidence supports a finding that the harm suffered by consumers was not reasonably avoidable. In their defense, defendants argue that their LEC-billing activities were compliant with FCC disclosure requirements and that customers could have reasonably avoided unauthorized charges by either disputing them or not paying them. This order declines to allow defendants to blame unsuspecting consumers for failing to detect and dispute unauthorized billing activity. As other courts have wisely concluded, the burden should not be placed on defrauded customers to avoid charges that were never authorized to begin with. See, e.g., FTC v. Kennedy, 574 F. Supp. 2d 714, 720-21 (S.D. Tex. 2008); FTC v. The Crescent Publishing Group, Inc., 129 F. Supp. 2d 311, 322 (S.D.N.Y. 2001). In sum, the FTC has met its burden of proving that these unauthorized charges were not reasonably avoidable by consumers.
Third, the record demonstrates that nearly all of defendants' "customers" received no countervailing benefits from defendants' billing practices. At the September 15 hearing, defense counsel argued that defendants invested heavily in providing benefits for their customers, such as spending over $350,000 in search-engine marketing fees for JumPage customers. This argument ignores, however, the unrebutted fact that nearly 97 percent of defendants' "customers" never wanted these "benefits" in the first place. Moreover, 96 percent of defendants' "customers" stated that they received no services from defendants or their products. Given this evidence, it cannot be said that defendants' "customers" benefitted at all from services that they never agreed to purchase, didn't know were being provided to them, and never wanted in the first place. In any event, the $350,000 spent by defendants on its "customers" is far outweighed by the $37 million in unauthorized payments extracted from them. For these reasons, the FTC has sufficiently shown that the injuries caused by defendants' billing practices were not outweighed by countervailing benefits to consumers or competition.
As with the prior claim, defendants have not shown that any genuine issues of material fact exist for trial. Defendants' best argument raised in their opposition brief is that the injuries suffered by consumers were reasonably avoidable because consumers could have mitigated their harm by cancelling and obtaining a refund once unauthorized charges were detected. This argument is rejected. In FTC v. Neovi, the United States Court of Appeals for the Ninth Circuit affirmed the district court's summary judgment order in an enforcement action involving fraudulent checks. In so holding, the Ninth Circuit agreed with the district court that it was "likely" that consumers never noticed the unauthorized activity on their accounts. Moreover, even if they did, the Ninth Circuit recognized that the hassle of obtaining reimbursements required substantial investments of time, trouble, aggravation, and money, especially since the defendants in Neovi were uncooperative in providing remedies to consumers. As such, the Ninth Circuit agreed with the district court's conclusion that consumers suffered unavoidable injuries that could not be fully mitigated. Neovi, 2010 WL 2365956, at *6-7.
The same rationale applies here. The undisputed record in the instant action shows that only five percent of defendants' "customers" were aware that they had been billed for defendants' products. For those customers that noticed the unauthorized charges on their telephone bills, the evidence also shows that defendants' approach towards "customer service" involved letting telephone calls go unanswered and making it difficult for complaining customers to obtain a complete refund. As in Neovi, the time, trouble, aggravation, and money lost by such consumers were unavoidable injuries that could not have been fully mitigated.
For these reasons, the FTC's motion for summary judgment that defendants engaged in unfair billing practices in violation of Section 5 of the FTC Act is GRANTED.
C. Individual Liability
To establish individual liability for equitable restitution under the FTC Act, an individual must have "participated directly in the deceptive acts or had the authority to control them" and "had knowledge that the corporation or one of its agents engaged in dishonest or fraudulent conduct, that the misrepresentations were the type upon which a reasonable and prudent person would rely, and that consumer injury resulted." FTC v. Network Servs. Depot, Inc., ___ F.3d ___, 2010 WL 3211724, at *7 (9th Cir. 2010) (emphasis in original); see also Stefanchik, 559 F.3d at 931 (citation omitted). The FTC may establish knowledge by showing that an individual "had actual knowledge of material misrepresentations, [was] recklessly indifferent to the truth or falsity of a misrepresentation, or had an awareness of a high probability of fraud along with an intentional avoidance of the truth." Id. (citation omitted). The FTC need not prove that an individual actually intended to defraud consumers. Publ'g Clearing House, 104 F.3d at 1171.
The record demonstrates that individual defendants Roy and John Lin can be held liable for equitable restitution. First, the evidence is overwhelming that both Roy and John Lin were officers and principals of the defendant corporations and had the authority to control all aspects of their business operations. Second, this order has already concluded that the misrepresentations made by defendants — namely, the placement of unauthorized charges on telephone bills — were the type upon which a reasonable and prudent person would rely, and that consumer injury resulted. Third, the record demonstrates that both Roy and John Lin had actual knowledge that a massive number of their "customers" were being billed without authorization, or — at the very least — were recklessly indifferent as to whether the tens of thousands of customers being billed were legitimate. The evidence to support this knowledge — covered in exacting detail herein — includes the numerous warnings and suspensions that defendants received from LECs and billing aggregators regarding unauthorized sales, their knowledge that their best-selling products were "very, very, very broken" and that only two to five percent of customers were using them, and repeated communications from at least one Inc21 employee who said he was "very uncomfortable with the fact that almost none of our customers knew that they were our customers."
In addition to this evidence, the Lin brothers clearly had knowledge that their customers were being billed without authorization based upon the two lawsuits they filed against their own marketers. Even after filing these lawsuits, however, the Lin brothers made the conscious choice to continue billing customers acquired by the very entities they had sued. This demonstrates that both Roy and John Lin were aware of a high probability of fraud with respect to customers being acquired and billed, but intentionally avoided uncovering the truth. Finally, even after being suspended by various LECs for placing excessive unauthorized charges on consumer telephone bills, the Lin brothers found ways to exploit the weaknesses in the LEC-billing industry. They falsified LEC-billing applications and sold their "customers" to a third-party vendor so that LEC billing could continue ad infinitum. The Lin brothers knew exactly what they were doing.
This order rejects defense counsel's argument — raised at the September 15 hearing — that holding Roy and John Lin liable herein will discourage businesses from suing their own contractors for fraud. The Lin brothers undoubtedly had the power to cancel and issue refunds for each and every "sale" obtained by the marketers they sued. That would have been proper. Instead, they chose a different path. They chose to embrace many of these "sales" despite knowing that the process of acquiring them was laced with fraud.
Because overwhelming, unrebutted evidence shows that both Roy and John Lin participated directly in the deceptive acts, had the authority to control them, and — at a minimum — were well aware of a high probability of fraud surrounding the "customers" that they were billing, this order finds that they can and are hereby held individually liable for equitable restitution under the FTC Act.
2. THE TELEMARKETING SALES RULE
Turning to the FTC's second set of claims, the Telemarketing Sales Rule was enacted due to a directive from Congress to "prescribe rules prohibiting deceptive telemarketing acts or practices and other abusive telemarketing acts or practices." 15 U.S.C. 1602(a)(1). The TSR prohibits "any seller or telemarketer" from misrepresenting "[a]ny material aspect of the performance, efficacy, nature, or central characteristics of goods or services that are the subject of a sales offer." 16 C.F.R. 310.3(a)(2)(iii). It further prohibits both sellers and telemarketers from "[m]aking a false or misleading statement to induce any person to pay for goods or services[.]" 16 C.F.R. 310.3(a)(4). Any violation of the TSR constitutes an unfair and deceptive practice in violation of Section 5 of the FTC Act. 15 U.S.C. 57a(d)(3), 6102(c)(b). The TSR, however, includes an important exemption relevant to the instant motions: it exempts "[t]elephone calls between a telemarketer and any business, except calls to induce the retail sale of nondurable office or cleaning supplies." 16 C.F.R. 310.6(b)(7). Curiously, while the TSR defines the terms "seller," "telemarketer," and "customers," it does not define the term "business."
The complaint alleged three distinct TSR violations: (1) failure to disclose the negative option feature of defendants' sales offer, (2) use of "preacquired account information" to charge customers without their "express informed consent," and (3) failure to obtain "express verifiable authorization" before placing charges on consumers' telephone bills. Due to the "business-to-business" exemption in the TSR, however, the FTC has limited its motion to telemarketing calls made to non-businesses.
Defendants have also moved for summary judgment with respect to the FTC's claims under the TSR. As defense counsel argued at the hearing, the products that were telemarketed by defendants — GlobalYP, MetroYP, NetOpus, and the JumPage product — were each intended to be sold exclusively to businesses. As such, defendants contend that they are entitled to summary judgment on all claims brought under the TSR because their telemarketing practices fall within the "business-to-business" exemption. All of these arguments are addressed below.
A. Claim Three: Failure to Disclose the Negative Option Feature
The TSR states that it is a deceptive telemarketing act to fail to disclose truthfully, and in a clear and conspicuous manner, all material terms of the negative option feature of an offer, including: (1) the fact that the customer will be charged unless affirmative steps are taken to avoid it, (2) the date(s) charges will be submitted for payment, and (3) the specific steps the customer must take to avoid being charged. See 16 C.F.R. 310.3(a)(1)(vii). A "negative option" is a provision in an offer or agreement under which a customer's failure to take an affirmative step to cancel is interpreted by the seller as an acceptance of the offer. 16 C.F.R. 310(t).
According to the FTC, there are no genuine issues of material fact regarding defendants' failure to inform non-business consumers about the negative option feature of defendants' 15-day "free" trial offer during telemarketing calls. As evidence of this claim, the FTC focuses on two customer declarations — one from an individual consumer, Roger Gerber, and one from an employee of a non-profit entity, Diane Haney ( See Declarations of Gerber and Haney). Both Mr. Gerber and Ms. Haney stated in their declarations that no "material terms" or "offers" were ever mentioned to them during the telemarketing calls they received from defendants. Beyond these two declarations, the FTC provides no direct evidence in support of this claim except a list of defendants' "current customers" where individuals, public and government entities ( e.g., schools, libraries, police departments), and churches have been marked. There is no survey evidence regarding the number of non-business "customers" that received telemarketing calls for defendants' products where the negative option feature was inadequately disclosed.
In their filings, defendants focus their challenge on the TSR's "business-to-business" exemption. Specifically, defendants argue that the "business-to-business" exemption must extend to any telemarketing call intended to be made to a business. Under this construction, defendants contend that all of their telemarketing calls fall under this exemption because defendants' "indisputably" intended to sell their telemarketed products solely to businesses. As a separate argument, defendants assert that a di minimus exemption also applies to TSR violations, and that the FTC's limited proof on its TSR claims should be rejected.
Both of defendants' arguments fail. First, the plain language of the TSR clearly and unambiguously states that the "business-to-business" exemption applies solely to "telephone calls" between telemarketers and businesses. Nowhere in this language are the subjective intentions of telemarketers referenced. Second, there is no di minimus exemption to violations of the TSR. Indeed, the FTC considered such an exemption prior to formally adopting the rule. See Notice of Proposed Rulemaking, 60 Fed. Reg. 8313, 8332 (Feb. 14, 1995) (proposing to exempt "solicitation of sales by any person who engages in fewer than ten (10) sales each year through the use of the telephone"). This proposal was rejected. See Revised Notice of Proposed Rulemaking, 60 Fed. Reg. 30406, 30423 (June 8, 1995) (deleting the proposed de minimus exemption). For these reasons, defendants' motion for summary judgment that the TSR is inapplicable to defendants' telemarketing activities in toto is DENIED.
Since defendants have produced no affirmative evidence rebutting the declarations submitted by Mr. Gerber and Ms. Haney, and because the FTC has produced clear evidence that defendants' telemarketers failed to disclose the negative option feature of their 15-day "free" trial offer to at least two of defendants' non-business "customers," the FTC's motion for summary judgment on this claim is GRANTED.
B. Claim Four: Use of Preacquired Account Information to Charge Consumers
Under the TSR, when sellers seek to impose charges on consumers using "preacquired account information" after the expiration of a free trial offer, the seller is required to obtain the express informed consent of the consumer before billing. As defined by the TSR, "preacquired account information" means "any information that enables a seller or telemarketer to cause a charge to be placed against a customer's or donor's account without obtaining the account number directly from the customer." 16 C.F.R. 310.2(w); see also 68 Fed. Reg. 4580, 4616-23 (January 29, 2003) (explaining that express consent is required because consumers do not expect to be billed via account sources not traditionally used to pay for purchases). For such transactions, telemarketers must: (1) obtain from the customer at least the last four digits of the account number being charged, (2) obtain the customer's express agreement to be charged for the services and to be charged using that account, and (3) make and maintain an audio recording of the entire marketing transaction. 16 C.F.R. 310.4(a)(6)(i) (emphasis added).
In the instant action, defendants indisputably used "preacquired account information" to impose charges on customer accounts after the expiration of a free trial period. This is because in the context of LEC billing, the only "account information" required by a seller to bill a customer is the customer's telephone number. This is information that defendants obviously acquired prior to cold-calling customers. Additionally, the unrebutted record shows that defendants failed to "make and maintain an audio recording of the entire marketing transaction" for any of their telemarketing phone calls. Indeed, Roy Lin admitted as much at his deposition (R. Lin Dep. 55).
Given the numerous non-business entities found within defendants' list of "current customers" and the unrebutted declarations of Mr. Gerber and Ms. Haney confirming that at least two non-businesses were called by defendants' telemarketers, the FTC's motion for summary judgment on this claim is GRANTED.
C. Claim Five: Failure to Obtain Express Authorization Before LEC Billing
Finally, the TSR requires that telemarketers obtain "express verifiable authorization" if they intend to use payment methods such as LEC billing. To satisfy this requirement for the types of sales offers made by defendants herein, an audio recording of the transaction must clearly evidence the customer's authorization of payment for the services, as well as the customer's receipt of all the following information: (1) the number if charges (if more than one) to be submitted for payment, (2) the dates the charges will be submitted for payment, (3) the amount of the charges, (4) the customer's name, (5) the customer's billing information identified with sufficient specificity that the customer understands what account will be used to collect payment, (6) a telephone number for customer inquires that is answered during normal business hours, and (7) the date of the customer's oral authorization. 16 C.F.R. 310.3(a)(3)(ii)-(iii).
Like its claim targeting defendants' failure to disclose the negative option feature of their telemarketing offers, the FTC has provided clear evidence through the unrebutted declarations of Mr. Gerber and Ms. Haney that non-businesses were contacted by defendants' telemarketers and "express verifiable authorization" was not obtained. Accordingly, the FTC's motion for summary judgment on this claim is GRANTED.
3. RELIEF DEFENDANT SHENG LIN
The disgorgement of funds received as a result of deceptive, unfair, or abusive practices is proper where "it is established that the relief defendant possesses property or profits illegally obtained and the relief defendant has no legitimate claim to them." FTC v. Think Achievement Corp., 144 F. Supp. 2d 1013, 1020 (N.D. Ind. 2000); see also FTC v. Transnet Wireless Corp., 506 F. Supp. 2d 1247, 1273 (S.D. Fla. 2007); SEC v. Colello, 139 F.3d 674, 677 (9th Cir. 1998). In the instant case, the undisputed record shows that relief defendant Sheng Lin drew a substantial salary and large bonuses in excess of $434,000, despite having no involvement in defendants' business operations. The record also shows that these payments were derived directly from defendants' deceptive and unfair billing practices. For these reasons, the FTC has proven that relief defendant Sheng Lin has no legitimate claim to these funds — rather, they belong to the many consumers who were harmed by defendants' unlawful billing practices. As such, the FTC's motion for summary judgment on its claim against relief defendant Sheng Lin is GRANTED.
SCOPE OF RELIEF
Under Section 13(b) of the FTC Act, "the Commission may seek and after proof, the court may issue, a permanent injunction." 15 U.S.C. 53(b). This grant of permanent injunctive power also gives courts broad equitable authority to "grant any ancillary relief necessary to accomplish complete justice," including ordering monetary judgment for restitution. FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1113 (9th Cir. 1982); FTC v. Pantron I Corp., 33 F.3d 1088, 1102 (9th Cir. 1994). In the instant action, the FTC seeks both a permanent injunction and monetary restitution. Each will be addressed below.
1. INJUNCTIVE RELIEF
The undisputed record provides compelling proof that defendants not only abused the privileges of LEC billing, but falsified information on LEC-billing applications, lied to LECs and billing aggregators regarding "action plans" to reduce unauthorized billing, and even went so far as to circumvent suspensions and the application process altogether by LEC-billing customers through an intermediary. Additionally, the FTC has produced mountains of evidence that defendants' telemarketing activities were laced with fraud. Telemarketers hired by defendants did not truthfully, clearly, and conspicuously disclose all material terms of the negative option feature of their sales offers, did not maintain recordings of entire sales transactions, and did not obtain express verifiable authorization for each and every phone call made to consumers. Defendants knew that these and other violations were occurring and knew that thousands of defrauded customers were being LEC-billed without authorization.
Given this record, the following permanent injunctive relief is ORDERED:
1. Defendants are permanently enjoined from billing customers, either directly or through an intermediary, by placing any charges on any telephone bill. This injunction also runs against any business or operation defendants Roy Lin and John Lin currently own or operate as well as any future endeavors.
2. Defendants are permanently enjoined from telemarketing any product or service to any consumers, including businesses, unless and until a plan of operation is approved by the Court. Any plan of operation must set forth a procedure that will ensure, with reasonable certainty, that the requirements of the TSR
are met for
all telemarketing phone calls made by defendants and/or their telemarketers. Additionally, any plan of operation must allow for the FTC and/or the Court to verify compliance with the plan (
i.e., there must be an audit trail). Any proposed plan of operation must be provided to the FTC at least 30 calendar days before being submitted to the Court for approval. If defendants and the FTC are unable to stipulate to such a plan, the Court will allow briefing and notice a hearing on the matter if necessary.
3. All LECs and billing aggregators who have collected payments on behalf of defendants and have held those payments in escrow shall issue direct refunds to customers from whom the funds were collected.
No fees may be deducted from these refunds. All refunds shall be accompanied by a written explanation that the Court has ordered the refund and suspended any further LEC billing with respect to defendants' products and services. The notice should advise that if the customer desires to continue receiving defendants' services, then the customer should contact defendants and make direct-pay billing arrangements. Once these refunds have been issued, the LEC or billing aggregator must file a declaration with the Court (under seal if necessary) setting forth the dollar amounts of each refund and the recipient of each refund. These declarations must also be served on defendants and the FTC to ensure that these customers are not provided with excessive refunds. Any amounts held in escrow that, for whatever reason, cannot be refunded directly (perhaps because the customer cannot be located) shall be paid to the FTC and applied against the restitution amount awarded herein.
4. The freeze on defendants' bank accounts as set forth in the preliminary injunction shall remain in place until the full restitution amount has been paid.
The funds in these frozen accounts may only be withdrawn by defendants to satisfy the judgment of restitution herein. In other words, the financial institutions with control over these frozen accounts are authorized to facilitate the payment of frozen funds directly to the FTC to satisfy the judgment in this dispute. Under no circumstances shall defendants be allowed to withdraw or transfer funds from these frozen accounts for any other purposes.
5. Individual defendants Roy and John Lin shall no longer be entitled to
monthly stipends for living expenses from the funds deposited in the Court's registry. Such funds shall be applied against the restitution ordered in this action. The FTC shall submit a proposed order by October 7, 2010, directing the transfer of these funds from the Court's registry to the FTC in satisfaction of the judgment.
6. Defendants shall certify under oath, by October 7, 2010, that they have complied with the terms of this injunction pertaining to their LEC-billing and telemarketing activities.
7. All LECs and billing aggregators subject to this injunction shall certify under oath, by October 29, 2010, that they have complied with the terms of this injunction pertaining to direct refunds of any funds held in escrow. This certification shall be
submitted at the same time as the declaration detailing refunds issued to defendants' customers.
* * *
2. MONETARY RESTITUTION
The FTC Act was designed to protect consumers from economic injuries. As such, courts have often awarded restitution in the full amount of funds lost by consumers rather than limiting restitution solely to a defendant's profits. See Stefanchik, 559 F.3d at 931 (citing FTC v. Febre, 128 F.3d 530, 536 (7th Cir. 1997)). This is because equity may require a defendant to restore his victims to the status quo, even where the loss suffered by consumers exceeds the defendant's unjust enrichment. FTC v. Figgie Int'l, Inc., 994 F.2d 595, 606-07 (9th Cir. 1993).
The FTC, however, is not required to prove that every individual consumer was injured to justify such an award. See Stefanchik, 559 F.3d at 929 n. 12 (citation omitted). To require such individualized proof "would thwart effective prosecutions of large consumer redress actions and frustrate the statutory goals of [Section 13(b) of the FTC Act]." Figgie Int'l, 994 F.2d at 605 (citations omitted). As such, it is sufficient for the FTC to prove that misrepresentations were widely disseminated (or impacted an overwhelming number of consumers) and caused actual consumer injury. Importantly, the existence of some satisfied customers does not constitute a bar to liability or an award of restitution. Stefanchik, 559 F.3d at 929 n. 12 (citation omitted). If the FTC can meet this burden, it must then "show that its calculations reasonably approximated the amount of customers' net losses[.]" Then, "the burden shifts to the defendants to show that those figures [are] inaccurate." Febre, 128 F.3d at 535.
The undisputed record shows that defendants' deceptive and unfair billing practices impacted an overwhelming number of consumers. Indeed, thousands of unauthorized charges were tacked onto telephone bills nationwide. The evidence also shows that consumers paid these unauthorized charges to defendants, despite the fact that nearly 97 percent of them never agreed to purchase defendants' products in the first place. This is sufficient, if not compelling, proof of actual consumer injury suffered by almost every "customer" acquired by defendants. Given this record, the FTC has proven its entitlement to an award of restitution in the full amount of funds lost by consumers. The inquiry now turns to calculating the amount that consumers paid to defendants as a result of the unlawful conduct. See Gill, 265 F.3d at 958.
The full amount that consumers paid to defendants as a result of the deceptive and unfair billing practices detailed herein may be measured from declarations and billing records submitted by the billing aggregators who funneled LEC-billing revenue to defendants. According to these billing records, defendants received $37,442,602.89 in net collections through LEC billing its "customers" from 2004 through 2009 (Wolfe Decl. Atts. M-Q). Importantly, these net collections account for refunds paid directly to consumers by the LECs and billing aggregators (R. Lin Dep. 314-16; Walch Dep. 48, 53, 55-57).
Defendants also received at least $331,346.54 from consumers through its "customer-sharing" agreement with Jeff Lavino (Sihota Decl. ¶ 11, Att. B). In collaboration with Mr. Lavino, defendants LEC-billed consumers in regions where their LEC-billing privileges had either been suspended or had not yet been authorized. Since the evidence shows that Mr. Lavino took a 50 percent "cut" of the net collections before depositing the remaining funds into GST U.S.A.'s checking account, the net losses suffered by the consumers billed through Mr. Lavino was at least double the amount that defendants received from this arrangement. In other words, a reasonable calculation of the harm to customers attributable to defendants' relationship with Mr. Lavino is $662,693.08. Adding this amount to the $37,442,602.89 that defendants received from their billing aggregators, a reasonable calculation of the total harm suffered by consumers is $38,105,295.97 (Wolfe Reply Decl. Att A).
While the burden falls squarely on defendants to show that these calculations are inaccurate, the FTC nevertheless acknowledges that the record contains some evidence that a handful of defendants' customers agreed to purchase their products. As stated, 36 customers returned the court-ordered notification form (mailed during the preliminary injunction stage of this litigation) indicating that they had authorized defendants' LEC-billing charges (FTC's Br. 24). Additionally, defendants' former systems administrator, Michael Nelson, testified that he had responded to as many as twenty requests from customers to update their website information between July 2006 and March 2010. Assuming that these twenty requests came from legitimate Inc21 customers, this translates to a total of 56 valid customers from 2004 through 2009. Assuming that these 56 customers paid the maximum monthly fee charged by defendants between 2004 and 2009 (namely, $39.99 per month) for the entire 60-month period between 2004 and 2009, the FTC proposes that $134,366.40 be deducted from the restitution award to reasonably account for these "valid" sales. Thus, according to the FTC, an award of $37,970,929.57 in restitution is reasonable and justified.
56 customers × $39.99 per month × 60 months = $134,336.40.
Defendants attack this calculation from three different angles. First, defendants argue that a three-year statutory limit on damages applies to the FTC's claims. Second, defendants assert that the FTC's estimation wrongly assumes that all customers are entitled to a refund. Third, defendants contend that restitution must be limited to net receipts. All of these arguments fail.
Starting with defendants' first argument, it is true — as defendants point out — that Section 19 of the FTC Act contains a three-year limitations period. See 15 U.S.C. 57b(d). That said, subsection (e) of Section 19 clearly states that "[n]othing in this section shall be construed to affect any authority of the Commission under any other provision of law." 15 U.S.C. 57b(e). Since the claims asserted by the FTC against defendants in the instant case were expressly brought under Section 13(b) of the Act (and not Section 19), the three-year limitations period does not apply to these claims. See 15 U.S.C. 53(b); see also FTC v. H. N. Singer, Inc., 668 F.2d 1107, 1109-12 (9th Cir. 1982) (discussing Sections 13 and 19 as separate and independent bases for the FTC to seek equitable relief under the Act).
As for defendants' second argument, since the FTC has sufficiently justified a restitution award of net consumer losses, "the burden shifts to the defendants" to show that the FTC's calculations are inaccurate. Febre, 128 F.3d at 535. While defendants argue in their opposition brief that many defrauded customers have already received refunds, they have not put forth any competent evidence or alternative calculations establishing the amounts that have been refunded, the customers who received them, or an alternative measure of restitution. In other words, they have not met their burden of showing that the FTC's calculations are inaccurate. Additionally, defendants cannot blame the LEC-billing industry for failing to keep clear records of whether customers paid their bills or received refunds. This order declines to allow defendants to use the bookkeeping deficiencies of the very system they exploited as a shield to awarding restitution.
The spreadsheets attached to the reply declarations submitted by defendants Roy and John Lin supposedly evidencing valid customers and refunds are bereft of foundation and analysis. Moreover, their contents have not been properly authenticated.
Finally, defendants' argument that restitution must be limited to net receipts is based entirely upon non-binding case law and a misreading of the Ninth Circuit's decision in Neovi (see D's Opp. 23). In Stefanchik, the Ninth Circuit expressly authorized awards of "the full amount lost by consumers[.]" Stefanchik, 559 F.3d at 931 (citation omitted). The facts of the instant case warrant such relief.
For these reasons, restitution is hereby ordered in the amount of $37,970,929.57. All defendants shall be held jointly and severally liable for this entire amount. Up to $434,000 in funds improperly received by relief defendant Sheng Lin may be disgorged by the FTC and applied against the restitution owed by defendants. This includes funds held in the $100,000 certificate of deposit bearing Sheng Lin's name at Bank of America.
Counsel shall meet and confer and submit a plan of notice and distribution of these funds to defendants' current and former customers by October 7, 2010. As stated at the hearing, refunds must be limited to customers who acknowledge, under penalty of perjury, that they were billed without authorization by defendants and are entitled to the refund amount presented to them. Any claim form mailed to customers must clearly set forth — based upon billing records obtained from LECs, billing aggregators, and defendants — the total amount that the customer was supposedly charged, the total amount that the customer supposedly paid to defendants, the total amount of refunds (if any) that have already been issued to the customer, and the total amount of restitution to which the customer is entitled. Any undistributed amounts shall be distributed as per future court order.
CONCLUSION
For the foregoing reasons, the FTC's motion for summary judgment is GRANTED. Defendants' motion for summary judgment is DENIED. The FTC shall ensure that a copy of this order is served upon any and all LECs, billing aggregators, and financial institutions who may be subject to the injunctive relief ordered herein. The Court will retain jurisdiction to enforce the terms of the permanent injunction. Judgment shall be entered accordingly.
IT IS SO ORDERED.
Dated: September 21, 2010.