F.T.C. v. Bay Area Business Council, Inc.

• Decision Date: 25 August 2005
• Docket Number: No. 04-2173.,04-2173.
• Citation: 423 F.3d 627
• Parties: FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. BAY AREA BUSINESS COUNCIL, INC., a Florida Corporation, Bay Area Business Council Customer Service Corp., a Florida Corporation, American Leisure Card Corp., a Florida Corporation, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

423 F.3d 627

FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. BAY AREA BUSINESS COUNCIL, INC., a Florida Corporation, Bay Area Business Council Customer Service Corp., a Florida Corporation, American Leisure Card Corp., a Florida Corporation, et al., Defendants-Appellants.

No. 04-2173.

United States Court of Appeals, Seventh Circuit.

Argued May 6, 2005.

Decided August 25, 2005.

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John A. Singer (argued), Federal Trade Commission, Chicago, IL, for Plaintiff-Appellee.

Thomas C. Little, Clearwater, FL, for Defendants-Appellants.

Before KANNE, ROVNER, and WOOD, Circuit Judges.

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ILANA DIAMOND ROVNER, Circuit Judge.

In 2002 the Federal Trade Commission ("FTC") initiated an action for injunctive and other equitable relief against several Florida corporations and their officers and directors. See 15 U.S.C. §§ 53(a)-(b) (giving FTC power to bring suit in district court and seek preliminary injunction), 57b (authorizing FTC to bring suit and seek equitable relief); 15 U.S.C. § 6101-08 (Telemarketing and Consumer Fraud and Abuse Prevention Act). The FTC alleged that the following interrelated corporations, run by Peter Porcelli, Bonnie Harris, and Christopher Tomasulo, engaged in deceptive trade practices in violation of section 5(a) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. § 45(a), and the Telemarketing Sales Rule ("TSR"), 16 C.F.R. § 310.1-10.9: Bay Area Business Council, Inc. ("BABC"); Bay Area Business Council Customer Service Corp. ("BABC Customer Service"); American Leisure Card Corp. ("American Leisure"); Bay Memberships, Inc.; Bay Vacations, Inc.; and Sr. Marketing Consultants, Inc. In particular, the FTC alleged that the defendants misled consumers into believing that they would receive a credit card in exchange for a hefty "one-time" fee. The district court granted the FTC's motion for summary judgment against all of the corporate defendants and Porcelli and Harris. The defendants appeal, and we affirm.

I.

The FTC based its action on an alleged telemarketing scheme run primarily out of Largo, Florida. Managing BABC and later American Leisure, Porcelli contracted with a telemarketing company in Utah¹ to call consumers throughout the United States who had recently applied for and been denied consumer credit. Referring to those credit applications, telemarketers opened by saying, "Our records indicate that within the past 12 months, you filed an application for a credit card and you are now eligible to receive your MasterCard." After answering a few short "verification" questions, consumers were told that they were "guaranteed to receive a MasterCard that does not require a security deposit with an initial pay as you go limit of $2000."

In addition to the "MasterCard," consumers were promised a "fabulous" Florida vacation and a free 30-day trial "BABC membership." These offers, however, did not figure prominently in the script, which focused on the "MasterCard." The card was offered as a way to boost flagging credit ratings, as demonstrated by the following scripted promise: "[N]othing [customer name] looks better on your Equifax credit report than a MasterCard."

This supposed opportunity, however, came at a cost. Telemarketers explained that "like most cards there is a one time processing [fee] of $174.95 plus shipping and handling, which covers the cost of processing the MasterCard order and getting the vacation package delivered to you on a priority basis." In order to pay the fee, consumers were required to provide personal account information. After obtaining an account number and securing agreement from the consumer, telemarketers played an automated "disclosure" concluding with, "you agree to everything we spoke about over the phone today, Correct?" Within days of the call, BABC and

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American Leisure debited customer accounts for anywhere from $199 (including "shipping and handling") to $499.

Some time later, customers received the "MasterCard" and accompanying package from BABC or American Leisure. Instead of a credit card, the package contained an "acceptance form" for a "ChexCard™ MasterCard®." The card stated "Bay Area Business Council" prominently across the top and contained a copy of the MasterCard logo in the lower right-hand corner. The back contained a meaningless painted-on black stripe in place of the customary magnetic strip on credit and debit cards. The explanatory material revealed that the card was a "stored value card" that the customer could receive only after mailing in a $15 activation fee. After the actual card arrived (four to six weeks later), it could only be used if a customer pre-loaded his or her own funds onto it.

In addition to the inoperable "ChexCard," customers received information on redeeming their free vacation (a time share presentation) and on their BABC "membership." The "membership" supposedly entitled consumers to take advantage of numerous "free" goods and services, such as gasoline, nationwide long distance, internet access, voice mail, and film developing. Although this was not mentioned in the materials, the privilege of BABC membership cost the consumer $10 a month. The only notice of the fee was contained in the automated "disclosure" played in the initial sales call, where it was revealed that the $10 would be taken directly from the consumer's account each month.

Not surprisingly, BABC received a host of complaints from customers who thought they had been going to receive a credit card. Incorporated separately but doing business under the name Bay Area Business Council, BABC Customer Service handled customer's complaints and requests for refunds. Special Technologies, Inc. essentially succeeded BABC Customer Service in July 2002. Both operated from a suite in Largo next to the offices of Porcelli and Harris. That suite received all calls placed to the toll free numbers for BABC, American Leisure, Sr. Marketing Consultants, and Bay Memberships, Inc. In addition to calls from disgruntled consumers, corporate records reveal that between November 2001 and July 2002, BABC received over 900 written consumer complaints forwarded from the Better Business Bureau, state attorney generals' offices, and private lawyers.

The remaining corporate defendants also worked in conjunction with BABC. Like BABC Customer Service, Sr. Marketing Consultants, Inc. did business under BABC's name. Sr. Marketing Consultants, however, had only four employees, three of whom were related to Porcelli. They operated from Porcelli's mother-in-law's home in Dunedin, Florida. Sr. Marketing Consultants charged BABC and American Leisure for the "ChexCards," and then, through a series of transactions, gave the proceeds to Harris, who handled most of BABC's finances. At the end of July 2002, Porcelli created Bay Memberships, Inc. as a way to ensure that banks, which had begun refusing to process payments to BABC and American Leisure, would continue to charge customers. In the three weeks that Bay Memberships, Inc. operated, it processed approximately $200,000 in debits from customer accounts. Although it is not entirely clear from the record, Bay Vacations, Inc. was apparently another shell corporation doing business for BABC.

In August 2002, the FTC filed its action alleging that BABC, Inc., BABC Customer Service, American Leisure, Porcelli, Tomasulo, and Harris violated Section 5(a) of

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the FTC Act, 15 U.S.C. § 45(a), and multiple provisions of the TSR by engaging in deceptive trade practices. The FTC later amended its complaint to name Bay Memberships, Inc., Bay Vacations, Inc., and Sr. Marketing Consultants, Inc. as defendants (collectively the "corporate defendants"). The FTC also secured an ex parte temporary restraining order with an accompanying freeze on the defendants' assets. On August 15, 2002, a temporary receiver, accompanied by FTC employees, entered the corporate defendants' premises in Largo, Florida to seize business records and shut down operations pursuant to the restraining order.

After conducting extensive discovery, the FTC moved for summary judgment against the corporate defendants, Porcelli, and Harris.² With its motion the FTC filed the required Northern District of Illinois Local Rule 56.1(a)(3) statement of undisputed material facts. In response to the FTC's motion, the defendants filed a document averring that an attached affidavit sworn by Porcelli contested "the vast majority of all facts listed as undisputed by the FTC." The defendants also submitted affidavits from three former BABC employees and one former BABC Customer Service employee. The affidavits made the following three assertions: (1) that most BABC consumers who called asked about their vacation package, not about a credit card, (2) that BABC had a consumer refund policy, and (3) that Porcelli was in Canada from May 2002 until shortly after BABC was shut down by the FTC in August. The district court concluded that the defendants' response failed to comply with Local Rule 56.1. It thus accepted as true all the facts in the FTC's Rule 56.1 statement.

On that record, the court granted the FTC's motion for summary judgment. The court concluded that the undisputed facts established that the defendants had violated section 5 of the FTC Act by misleading reasonable consumers into believing they would receive a credit card. See 15 U.S.C. § 45(a) (forbidding deceptive practices affecting commerce). This deception, the court concluded, also violated 16 C.F.R. § 310.3(a)(2)(iii) (prohibiting misrepresentations about any material aspect of a sales offer) and § 310.3(a)(4) (forbidding misleading statements to induce payment for goods). And the court determined that the defendants violated 16 C.F.R. § 310.3(a)(1)(i) by failing to tell consumers about the extra $15 fee required to obtain the "ChexCard," id. (requiring clear and conspicuous disclosure of all costs associated with goods offered for sale). Finally, the...