Fed. Trade Comm'n v. Commerce Planet, Inc.

• Decision Date: 22 June 2012
• Docket Number: Case No.: 8:09–cv–01324–CJC(RNBx).
• Citation: 878 F.Supp.2d 1048
• Parties: FEDERAL TRADE COMMISSION, Plaintiff, v. COMMERCE PLANET, INC., a corporation, and Michael Dill Charles Gugliuzza, and Aaron Gravitz individually and as officers of Commerce Planet, Inc., Defendants.
• Court: U.S. District Court — Central District of California

878 F.Supp.2d 1048

FEDERAL TRADE COMMISSION, Plaintiff,

v.COMMERCE PLANET, INC., a corporation, and Michael Dill Charles Gugliuzza, and Aaron Gravitz individually and as officers of Commerce Planet, Inc., Defendants.

Case No.: 8:09–cv–01324–CJC(RNBx).

United States District Court,

C.D. California,

Southern Division.

June 22, 2012.

Eric D. Edmondson, David M. Newman, Kerry O'Brien, Evan Rose, Federal Trade Commission, San Francisco, CA, Raymond E. McKown, Federal Trade Commission, Los Angeles, CA, for Plaintiff.

Vatche Chorbajian, San Diego, CA, Alan A. Greenberg, Wayne R. Gross, Michael A. Piazza, Greenberg Traurig LLP, Irvine, CA, for Defendants.

MEMORANDUM OF DECISION

CORMAC J. CARNEY, District Judge.

I. INTRODUCTION

The Federal Trade Commission (“FTC”) brought this action for injunctive and monetary equitable relief against Commerce Planet, Inc. (“Commerce Planet”) and several of its directors and officers, including Michael Hill, Aaron Gravitz, and Charles Gugliuzza (collectively, “Defendants”), for deceptive and unfair business practices arising from Defendants' website marketing of a web creation and hosting service called OnlineSupplier. OnlineSupplier was marketed as a free “Online Auction Starter Kit” that purported to help consumers sell products on eBay. Consumers were permitted a free trial period to use OnlineSupplier with payment of a small shipping and handling fee. If consumers did not cancel the service within the trial period, they were automatically charged a recurring monthly fee ranging from $29.95 to $59.95. The FTC alleges that during the relevant time period (July 2005 to March 2008), Defendants deceptively marketed OnlineSupplier as a free auction kit on its website without adequately disclosing the program's negative option plan, which required consumers to affirmatively cancel their membership or otherwise incur a monthly charge to their credit card. The FTC alleges that consumers unwittingly signed up for OnlineSupplier, believing they had ordered a free kit, only to discover later that they had been enrolled in OnlineSupplier's continuity program when they saw monthly charges on their credit card bill. The FTC alleges that between July 2005 and March 2008, Commerce Planet obtained over $45 million from over 500,000 consumers.

The FTC settled with all Defendants except for Mr. Gugliuzza, Commerce Planet's former president and consultant from July 2005 to November 2007. In the operative First Amended Complaint (“FAC”), the FTC asserts two counts against Mr. Gugliuzza for (i) deceptive practices and (ii) unfair practices in violation of section 5(a) of the Federal Trade Commission Act (the “FTC Act” or “Act”), 15 U.S.C. § 45(a). The FTC requests injunctive and monetary equitable relief against Mr. Gugliuzza under section 13(b) of the FTC Act, 15 U.S.C. § 53(b). Between January 31, 2012 and February 28, 2012, the Court conducted a sixteen-day bench trial that involved over 300 exhibits and 22 witnesses. The parties thereafter submitted extended closing briefs. The Court, by this Memorandum of Decision, issues its findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a). After carefully reviewing all the evidence, testimony, and arguments presented by the parties' counsel, the Court concludes that the FTC has proven by a preponderance of the evidence that Mr. Gugliuzza is individually liable for the deceptive and unfair marketing of OnlineSupplier in violation of section 5(a) of the FTC Act. The Court finds that a permanent injunction against Mr. Gugliuzza is appropriate because there is a cognizable danger that he will repeat the deceptive and unfair marketing tactics he authorized and implemented with OnlineSupplier. The Court also finds that monetary equitable relief against Mr. Gugliuzza is proper in the amount of $18.2 million as restitution for his wrongful and knowing participation in the deceptive marketing of OnlineSupplier.

II. BACKGROUND

Commerce Planet marketed and sold OnlineSupplier, a webhosting service that purported to provide consumers an inexpensive platform to sell products online. Commerce Planet hired Mr. Gugliuzza to provide an assessment of the company and recommend ways to improve its profitability. From July 2005 to November 2007, Mr. Gugliuzza served in various capacities as the company's consultant, president, de facto executive and in-house counsel, and director. Mr. Gugliuzza helped transition the company from telemarketing to internet marketing of OnlineSupplier, whereby consumers could sign up for the program from its website. Internet sign-ups of OnlineSupplier dramatically improved the company's revenue. At the same time, numerous consumers complained to the Better Business Bureau (“BBB”), the Attorney General, and to Commerce Planet regarding confusion as to the nature and cost of OnlineSupplier and demanded refunds. OnlineSupplier was also subject to excessive credit card chargebacks. In March 2008, the FTC served a civil investigative demand (“CID”) on Commerce Planet, after which Commerce Planet changed its webpages for OnlineSupplier under the guidance of outside counsel knowledgeable in FTC Act compliance. Sales of OnlineSupplier thereafter plummeted. In November 2009, the FTC filed suit against Commerce Planet and three of its key officers and employees, Messrs. Hill, Gravitz, and Gugliuzza, for their alleged involvement in the deceptive and unfair marketing of OnlineSupplier during the relevant time period.

A. The Parties

The FTC is an independent agency of the United States Government created by statute. 15 U.S.C. §§ 41–58. The FTC enforces section 5(a) of the Act, 15 U.S.C. § 45(a), which prohibits unfair or deceptive acts or practices affecting commerce. The FTC is authorized to bring suit in federal court to enjoin violations of the Act and to secure an array of suitable equitable relief, including consumer redress. 15 U.S.C. § 53(b).

Commerce Planet is a Utah corporation with its headquarters in Goleta, California. (Exhs. 1175, 2043–2051.) Commerce Planet began operations as NeWave, Inc. (“NeWave”),¹ which was founded by Messrs. Gravitz and Hill at the end of 2003 and taken public in January 2004. (Gravitz, 2/1/12, 140:1–3; Hill, 2/7/12, 111:1–18; Hill 2/17/12, 72:23–25.) ² Through NeWave's subsidiary at the time, Online Supplier, Inc., the company began marketing and selling an online web creation and hosting service called OnlineSupplier. (Exh. 31.) Effective June 2006, NeWave changed its name to Commerce Planet, Inc. (Exhs. 31, 2043–2051.) Commerce Planet began operations as a holding company and conducted its business through three wholly-owned subsidiaries: Consumer Loyalty Group, Inc. (“CLG”), Legacy Media, LLC (“Legacy Media”), and Ivenia, LLC (“Ivenia”). ( Id.) Mr. Hill served as the company's Chief Executive Officer from 2004 to September 2007, after which he remained as the company's Chief Strategic Officer until December 2008 when he left the company. (Hill, 2/7/12, 111:19–112:1, 112:17–18.) Mr. Gravitz, who served as the head of media at NeWave, was president of Legacy Media from 2006 until December 2008 when he left the company. (Gravitz, 2/1, 6:14–19; 2/22, 12:25–13:2.) Mr. Gugliuzza served as the company's titular consultant from July 1, 2005 to September 2006. (Gugliuzza, 2/21/12, 110:25–111:5; Exh. 1035.) From September 11, 2006 to November 5, 2007, Gugliuzza served as president of Commerce Planet. (Gugliuzza, 2/21/12, 110:21–24, 116:3–13; Exhs. 228, 259–60.) Commerce Planet was only licensed to do business in California but received customer orders nationwide and from international locations. (Exh. 31.)

During the relevant time period, Legacy Media functioned as the marketing and advertising arm of Commerce Planet and shared the same office as the parent company. (Gravitz, 2/1/12, 82:19–83:1, 163:3–6, Exh. 31.) CLG handled the customer service component of the company and also shared the same office as Commerce Planet. (Exh. 31.) Christopher Seidel, who joined NeWave in 2004 and served as the company's vice president of operations, was the president of CLG from 2006 until his departure in 2009. (Seidel, 2/14/12, 52:7–11, 67:9–16; Exhs. 318, 1292a–24.) José Guardiola served as CLG's customer service manager from August 2006 to August 2007. (Guardiola, 2/21/12, 4:19–15, 7:3–4, 35:23–24.) Paul Daniel was Commerce Planet's Chief Financial Officer from July 2005 to May 2006. (Daniel, 2/14/12, 15:23–16:2.) David Foucar replaced Mr. Daniel as CFO from June 2006 to October 2007. (Foucar, 2/16/12, 130:19–23, 161:16–18.) Jaime Rovelo served as the company's final CFO from the end of 2007 to February 2009. (Rovelo, 2/10/12, 4:20–22, 5:20–25, 33:1–2.) The company's in-house counsel was Jeffrey Conrad from mid–2004 to the end of 2006. (Conrad, 2/8/12, 40:20–25, 86:19–24.) Paul Huff replaced Mr. Conrad as Commerce Planet's in-house counsel from 2007 until August 2008. (Huff, 2/15/12, 115:9–11; Exh. 117.) In January 2009, Commerce Planet's assets were acquired by Superfly and later purchased by Lenco Mobile, Inc. (Cruttenden, 2/28/12, 29:17–30:9, 33:13–21; Exh. 132.) Commerce Planet is currently no longer in business. (Cruttenden, 2/28/12, 24:16–17.)

B. OnlineSupplier

Commerce Planet primarily marketed and sold OnlineSupplier. (Exh. 31.) The bulk of company's revenue was generated from OnlineSupplier and associated upsell products. (Gravitz, 2/1/12, 7:16–20, 133:16–134:9; Hill 2/7/12, 159:10–18.) Messrs. Gravitz and Hill developed the concept for OnlineSupplier. (Hill, 2/7/12, 112:25–113:5.) OnlineSupplier was a website hosting service designed to enable consumers to create and manage a website to sell products on that site and on other internet sites. (Gravitz, 2/1/12, 6:20–7:3.) The service included a hosted website created by the customer; access to an inventory of products; access to the customer service department; and an information kit consisting of a 23–page manual on how to use...