F.T.C. v. Freecom Communications, Inc.
| Decision Date | 21 March 2005 |
| Docket Number | No. 03-4063.,03-4063. |
| Citation | 401 F.3d 1192 |
| Parties | FEDERAL TRADE COMMISSION, Plaintiff-Appellant, v. FREECOM COMMUNICATIONS, INC.; Financial Freedom Report; Silent Salesforce; Eleva; American Home Business Association; FFR Marketing; Robert V. Brazell; Don S. Gull; Kelly Haroldsen; Annette S. Brazell; Dana P. Gull, Defendants, and Mark O. Haroldsen, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Lawrence DeMille-Wagman (William E. Kovacic, General Counsel, and John F. Daly, Deputy General Counsel for Litigation, with him on the briefs), Federal Trade Commission, Washington, D.C., for Plaintiff-Appellant.
Evan A. Schmutz (Wm. Kelly Nash with him on the brief), Hill, Johnson & Schmutz, L.C., Provo, UT, for Defendant-Appellee.
Before TACHA, Chief Circuit Judge, and BALDOCK and HENRY, Circuit Judges.
The Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412(b), authorizes a district court to award attorney fees against the Government under the bad faith exception to the common law's "American Rule" that each party bear the financial burden of civil litigation regardless of its outcome. The Government acts in bad faith when its claim (1) is entirely without color and (2) has been asserted wantonly, for purposes of harassment or delay, or other improper reason. Federal Deposit Ins. Corp. v. Schuchmann, 319 F.3d 1247, 1250 (10th Cir.2003). In this case, we must decide whether § 2412(b)'s bad faith exception justified a limited award of attorney fees against Plaintiff Federal Trade Commission (FTC) and in favor of Defendant Mark Haroldsen (Haroldsen). The district court thought so; we do not, and reverse.
The FTC brought this action in 1996. In its first amended complaint, the FTC alleged defendants, a group of interrelated corporations and individuals including Haroldsen, had engaged in "unfair or deceptive acts or practices in or affecting commerce" in violation of § 5, 15 U.S.C. § 45(a), of the Federal Trade Commission Act (FTC Act) (codified at 15 U.S.C. §§ 41-58).1 According to the FTC, defendants from January 1993 onward made a variety of misrepresentations likely to mislead consumers regarding projected income from numerous home-based business ventures which defendants promoted and sold. Defendants sold, among other things, small vending machines which offered a handful of candy for a quarter. Defendants' sales approached $100 million per year at their peak. Counts I through VIII of the FTC's complaint alleged defendants provided fraudulent income projections to consumers in various infomercials, print ads, and seminars. Counts IX and X alleged defendants engaged in false or deceptive consumer telemarketing. Counts XI through XVI alleged defendants used atypical, false, and/or inapplicable success stories and testimonials to reflect the ordinary experiences of satisfied consumers. The FTC sought injunctive relief and consumer redress against defendants under § 13(b) of the FTC Act, 15 U.S.C. § 53(b).
The FTC's complaint further alleged Haroldsen, as the majority shareholder of all corporate defendants (by way of a family trust), "had the authority to control the acts and practices of each of the corporate defendants," including the content of sales materials and presentations. The FTC specifically averred:
At all times relevant to this Complaint, [Haroldsen] has had or should have had knowledge of the content of the sales materials and sales presentations described ... including specifically the language cited in Counts One through Sixteen, and has known or should have known that the representations described in Counts One through Sixteen were and are false and misleading. [Haroldsen] has failed to exercise his authority over the acts and practices described in Counts One through Sixteen. Defendant Mark O. Haroldsen is, therefore, liable for redress to all persons who purchased a home-based business starter kit or related product or service from any of the corporate defendants at any time from January 1, 1993, to the present.
Between May 1997 and October 2001, the FTC entered into consent judgments with ten defendants. An eleventh defendant filed bankruptcy. The judgments imposed injunctive relief upon each defendant. Defendants also were required to submit financial statements that established their inability to pay consumer redress. Furthermore, each judgment provided the court would impose a multi-million dollar judgment against any defendant that submitted a false financial statement.
With an October 22, 2001 bench trial looming, the FTC and Haroldsen — the only remaining defendant — engaged in settlement discussions. Counsel for the two parties tentatively agreed on a settlement consisting of injunctive relief and $350,000 in consumer redress. The five-member FTC Board, however, rejected the settlement. Subsequently, the district court entered an order on October 3, 2001, directing On October 11, the date of the conference, counsel appeared on behalf of the FTC. No member of the FTC board authorized to settle the case appeared. Rather, the FTC Board authorized counsel to settle only if Haroldsen would pay $2 million in consumer redress. Haroldsen rejected the FTC's offer and the case did not settle.
On October 17, five days prior to trial, Haroldsen moved to dismiss counts IX through XVI of the FTC's complaint. Haroldsen argued the counts failed to plead fraud with particularity under Fed.R.Civ.P. 9(b). In the alternative, Haroldsen filed a motion in limine seeking to severely restrict the FTC's trial evidence on all counts. The district court denied Haroldsen's motion to dismiss as beyond the deadline for dispositive motions, but granted his motion in limine. The court concluded counts IX through XVI "are not alleged with the specificity or particularity required by Fed.R.Civ.P. 9(b)." The court thus barred the FTC from introducing any evidence in support of those counts. The court concluded the FTC had pled counts I through VIII with particularity. Nevertheless, the court restricted the FTC's evidence only"to those acts and practices alleged with particularity in the First Amended Complaint."
On the first day of trial, the FTC sought to introduce the testimony of four consumers who had purchased home-based businesses from the corporate defendants after listening to their "sales pitch." The court excluded three of the consumers' testimony, however, because none of the three could verify they actually heard the allegedly misleading statements specifically pled in counts I through VIII of the complaint. The fourth consumer testified he did not earn near the income which defendants represented he would earn. On the second day of trial, the FTC presented three witnesses. The first two witnesses testified regarding defendants' allegedly false statements that individuals purchasing home-based vending machine businesses could expect monthly income of $80 per machine. The third witness testified regarding Haroldsen's involvement in defendants' corporate affairs. The FTC again presented three witnesses on the third day of trial. Two witnesses testified regarding Haroldsen's involvement in corporate affairs. The third witness testified regarding the basis for the $80 income figure. On the final day of the FTC's case-in-chief, the FTC presented the testimony of two corporate officers. The officers testified Haroldsen was well aware of defendants' alleged misrepresentations. The FTC's final witness was defendants' human resources director. He testified Haroldsen was involved in many aspects of defendants' business operations.
At the close of the FTC's case, Haroldsen moved for judgment on partial findings pursuant to Fed.R.Civ.P. 52(c). The district court granted Haroldsen's motion and subsequently entered written findings and conclusions. The court found the FTC failed to introduce any credible evidence that Haroldsen (1) engaged in deceptive acts or practices by misrepresenting the income potential of defendants' products and services, (2) had authority to control any alleged deceptive acts or practices of defendants, and (3) either knew or should have known of any material misrepresentations made by defendants.
Notably, the district court's order concluded with findings the FTC "refused to participate in good faith in settlement discussions prior to the trial ... in disregard of the court's orders," and the FTC's "prosecution of this case has been conducted in bad faith, vexatiously, wantonly and for oppressive reasons." The court reiterated the latter finding in its conclusions of law. The district court's separate judgment specifically stated the FTC's "prosecution of this action has been undertaken in bad faith, vexatiously, wantonly and for oppressive reasons." The FTC moved the court to amend the judgment by deleting this language, and to delete the latter two findings from its findings and conclusions as beyond the scope of the evidence and contrary to procedural safeguards. The district court amended the judgment, but did not, based on the record, disturb its findings.2
Haroldsen subsequently moved for attorney fees and expenses pursuant to 28 U.S.C. § 2412(b). The FTC's response addressed both the course of the litigation and the evidence it was prepared to introduce absent the court's order granting Haroldsen's motion in limine. Following a hearing, the court imposed attorney fees against the FTC, explaining:
[C]ontinued pursuit of the [FTC's] claims against Defendant Haroldsen may have been deemed appropriate through the close of discovery [July 2, 2001]. However, after said closure, the [FTC's] evaluation of the evidence...
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