F.T.C. v. World Media Brokers

• Decision Date: 27 July 2005
• Docket Number: No. 04-2721.,04-2721.
• Citation: 415 F.3d 758
• Parties: FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. WORLD MEDIA BROKERS, also known as 913062 Ontario Inc., 624654 Ontario Ltd., doing business as Express Marketing Services, Express Marketing, doing business as EMS, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

415 F.3d 758

FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. WORLD MEDIA BROKERS, also known as 913062 Ontario Inc., 624654 Ontario Ltd., doing business as Express Marketing Services, Express Marketing, doing business as EMS, et al., Defendants-Appellants.

No. 04-2721.

United States Court of Appeals, Seventh Circuit.

Argued February 9, 2005.

Decided July 27, 2005.

COPYRIGHT MATERIAL OMITTED

John F. Daly, Imad D. Abyad (argued), Federal Trade Commission, Office of the General Counsel, Washington, DC, for Plaintiff-Appellee.

Brian D. Grubb (argued), Amin Law, Chicago, IL, for Defendants-Appellants.

Before BAUER, EASTERBROOK, and ROVNER, Circuit Judges.

ILANA DIAMOND ROVNER, Circuit Judge.

Although individuals playing the lottery rarely strike it rich, those selling lottery tickets apparently do quite well. Take the case of seven affiliated Canadian corporations, two United States corporations, and their six corresponding principal officers, who made millions selling chances to play in the Canadian lottery. Their enterprise came to a halt, however, after the Federal Trade Commission ("FTC") initiated an action for injunctive and other relief pursuant to sections 13(b) and 19 of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 53(b) and 57b, the Telemarketing and Consumer Fraud and Abuse Prevention Act ("Telemarketing Act"), 15 U.S.C. § 6101-6108, and the FTC Telemarketing Sales Rule ("TSR"), 16 C.F.R. § 310.1-9. The FTC alleged that the defendants had engaged in deceptive trade practices by, among other things, failing to notify U.S. consumers that it is illegal to buy and sell foreign lottery tickets. The district court entered a permanent injunction against five of the Canadian corporations and ordered them to pay $19 million in consumer redress. The court also entered judgment holding two of the corporate officers, George Yemec and Anita Rapp, jointly and severally liable. The defendants appeal, arguing primarily that the district court erred by holding Yemec and Rapp liable for the corporations' allegedly deceptive practices.

I.

In 1999 the FTC began investigating a Canadian telemarketing enterprise selling chances to play the Canadian lottery. The enterprise involved the following string of interrelated corporations: World Media Brokers, Inc., a/k/a 913062 Ontario Inc.; 1165107 Ontario Inc., d/b/a Canadian Catalogue, Canadian Catalogue Services, CCS, and Interwin Marketing; Faby Games Inc., a/k/a 1106759 Ontario Inc., d/b/a Canadian Catalogue Services, and CCS; 624654 Ontario Limited, d/b/a Express Sales, Express Marketing Services, EMS, and First Telegroup Marketing; 637736 Ontario Limited, d/b/a Express Marketing Services and EMS; 537721 Ontario Inc., d/b/a Canadian Express Club; Express Marketing Services Ltd., d/b/a EMS; Cash and Prizes, Inc.; and Intermarketing Services, Inc. It is difficult if not impossible to separate the actions of the various corporations, which we refer to collectively as "the corporate defendants."

The corporate defendants began operations in the late 1980s. At that time, George Yemec, former publisher of "Whole World Lottery Guide" and "Millions Magazine," started several companies that bought groups of lottery tickets and resold them to U.S. and Canadian consumers. Anita Rapp served as a corporate officer for several of the corporate defendants and also handled various financial matters for them.

The various corporate defendants operated by purchasing lists of names that telemarketers then used to call individuals and offer them chances to play the Canadian lottery. There were multiple variations on the offers extended. The most common offers involved opportunities to buy packages or groupings of tickets in two of Canada's largest lotteries, Lotto 6/49 and Lotto Super 7. Telemarketers promised would-be buyers that "playing by mail in a small group is the best way to play the Canadian government guaranteed lottery." The options to play included packages with combinations of individual and group tickets that could be purchased for anywhere from $77 up to $1,000. Other possibilities included a year-long "subscription" to play Lotto 6/49 and Lotto Super 7 (available for a set fee plus an additional $17.95 "service fee"), or a stake in the lotteries comprised of a combination of seven individual tickets, 700 group tickets, one share in the so-called "7,000 group," and a draw from what was called the "Cash & Prizes Program." Others were given a chance to take advantage of a special "introductory offer" to join the "Jackpot Alert Service," a 900 number where callers entered a pin number and paid $1.99 a minute to get lottery information.

The FTC investigated the corporate defendants' operations for several years. During its investigation, the FTC gathered declarations from individuals who had participated in the lotteries and also procured tape-recordings of telemarketers' calls. Relying on this evidence, in 2002 the FTC filed actions in Ontario, Canada ("the Canadian proceeding") and the Northern District of Illinois. In the Canadian proceeding the FTC obtained two ex parte orders: an injunction authorizing it to freeze certain corporate assets, and an order allowing it to search the corporate defendants' premises.¹

Several months later, in October 2002, the FTC filed its complaint in district court, alleging that the corporate defendants and six individual corporate officers violated Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which prohibits unfair or deceptive acts or practices in or affecting commerce, and two provisions of the TSR — 16 C.F.R. § 310.3(a)(1)(ii) (requiring telemarketers to disclose material limitations on any goods or services offered) and § 310.3(a)(4) (forbidding telemarketers from making false or misleading statements to induce purchase of goods or services). Specifically, the FTC alleged that the defendants had misled consumers by representing, among other things, that it was legal for U.S. citizens to play the Canadian lottery. In November the district court entered a stipulated order for a preliminary injunction and an asset freeze against both the individual and corporate defendants.

In August 2003, the FTC moved for partial summary judgment against Yemec, Rapp, and five of the Canadian corporate defendants. In March 2004, the district court granted the FTC's motion. The court concluded that it was undisputed that the Canadian corporate defendants used telemarketers to call consumers in the United States and sell group and individual tickets in the Canadian lottery. In these calls, telemarketers failed to inform consumers that selling Canadian lottery tickets to U.S. citizens is illegal. See 18 U.S.C. § 1301 (making it a crime to "transmit" a ticket or interest in a lottery in foreign commerce); 18 U.S.C. § 1302 (making it a crime to mail any lottery ticket or instrument representing a ticket or interest in a lottery); 18 U.S.C. § 1953 (making it a crime to send in foreign commerce any instrument designed for use in a numbers, policy, or bolita game). In fact, when consumers questioned the legality of buying tickets in the Canadian lottery, the telemarketers were trained to assure them that it was legal. Thus, concluded the court, the corporate defendants had engaged in deceptive practices forbidden by 15 U.S.C. § 45(a)(1), namely by misleading reasonable consumers into believing that it was legal for them to purchase tickets or interests in the Canadian lottery.

Likewise, the corporate defendants had violated § 310.3(a)(1)(ii) of the TSR by failing to conspicuously (or at all, for that matter) disclose that selling foreign lottery tickets is illegal. The district court found that the Canadian corporate defendants had also violated § 310.3(a)(4) of the TSR by falsely assuring consumers of the legality of their purchases. Finally, the district court concluded that Yemec and Rapp were individually liable for the corporate defendants' deceptive practices because they had authority to control the corporations and knew or should have known that it was illegal to sell Canadian lottery tickets to U.S. citizens.

In June 2004, the district court entered final judgment against Yemec, Rapp, and the five Canadian corporate defendants.² The judgment permanently enjoined Yemec, Rapp, and the corporate defendants from engaging in any telemarketing in the United States and from selling lottery tickets to U.S. residents. The court also ordered Yemec, Rapp, and the corporate defendants to pay $19 million in consumer redress. See 15 U.S.C. § 57b(b) (giving court jurisdiction to authorize necessary relief, including consumer redress); 15 U.S.C. § 6105(b) (granting FTC authority to seek the same penalties for violations of the Telemarketing Act as for violations of the FTC Act). Finally, the order enjoined the defendants from selling or disclosing customer lists and required them to provide existing customer lists to the FTC.

II.

We review the district court's grant of summary judgment de novo, Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), construing all facts and drawing all reasonable inferences in favor of the non-moving party, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Although all five Canadian corporate defendants appealed, none of the arguments on appeal relate to the corporate defendants' liability. Instead, the defendants argue only that the district court erred by granting summary judgment against Yemec and Rapp and holding them jointly and severally liable for the $19 million in consumer redress.

To hold an individual liable for a corporation's deceptive practices, the FTC must first prove an underlying corporate violation of section 5 of the FTC Act. See FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 573 (7th Cir.1989); see also FTC v. Freecom Communications, Inc., 401 F.3d 1192, 1203 (10th Cir.2005). Section 5 prohibits "[u]nfair or deceptive...