Fed. Trade Comm'n v. Tax Club, Inc.

• Decision Date: 17 January 2014
• Docket Number: No. 13 Civ. 210(JMF).,13 Civ. 210(JMF).
• Citation: 994 F.Supp.2d 461
• Parties: FEDERAL TRADE COMMISSION et al., Plaintiffs, v. The TAX CLUB, INC. et al., Defendants.
• Court: U.S. District Court — Southern District of New York

994 F.Supp.2d 461

FEDERAL TRADE COMMISSION et al., Plaintiffs,

v.The TAX CLUB, INC. et al., Defendants.

No. 13 Civ. 210(JMF).

United States District Court, S.D. New York.

Jan. 17, 2014.

Ann F. Weintraub, Darren H. Lubetzky, Savvas Socrates Diacosavvas, Federal Trade Commission, Northeast Region, Guy H. Mitchell, Office of the N.Y.S. Attorney General, New York, NY, Jane M. Azia, Attorney Gen., N.Y.S., New York, NY, Judy Prosper, Office of the Attorney General, White Plains, NY, for Plaintiffs.

Judith A. Archer, Sarah E. O'Connell, Fulbright & Jaworski L.L.P., Peter Guirguis, Akin Gump Strauss Hauer & Feld LLP, New York, NY, Pamela Jones Harbour, Fulbright & Jaworski, Jeffrey D. Knowles, Venable, Baetjer, Howard & Civiletti, Roger Anthony Colaizzi, Venable LLP, Washington, DC, Derek Robert Young, Young Law, Fort Lauderdale, FL, Michael Colbert Hartmere, Venable LLP, Baltimore, MD, Jeffrey D. Horst, Volpe & Koenig, P.C., Philadelphia, PA, Zahra S. Karinshak, Krevolin & Horst, LLC, Atlanta, GA, for Defendants.

OPINION AND ORDER

JESSE M. FURMAN, District Judge:

In this civil enforcement action, the Federal Trade Commission (“FTC”), the State of Florida, and the State of New York (collectively, “Plaintiffs”) sue a group of corporate entities (the “Corporate Defendants”) that this Opinion will refer to as the “Tax Club Enterprise” or the “Enterprise,” and four people associated with the Enterprise (the “Individual Defendants” and, together with the Corporate Defendants, “Defendants”). Plaintiffs allege that the Tax Club Enterprise engaged in deceptive telemarketing tactics, in violation of the Federal Trade Commission Act (the “FTC Act”), 15 U.S.C. § 45(a), the Telemarketing Sales Rule (the “TSR”), 16 C.F.R. Part 310, and Florida and New York state statutes. Defendants move to dismiss the Amended Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons that follow, Defendants' motions to dismiss are DENIED.

BACKGROUND

The following facts are taken from the Amended Complaint (“AC”) (Docket No. 88) and are assumed to be true for purposes of this motion. See, e.g., LaFaro v. N.Y. Cardiothoracic Grp., PLLC, 570 F.3d 471, 475 (2d Cir.2009).

A. History and Structure of the Enterprise

The Tax Club Enterprise is a business that sells products and services to people seeking to build their own small businesses. (AC ¶ 30). Defendant Edward Johnson started the business in 2003 by forming companies known as The Tax Club, Inc. (“TTC”) and Manhattan Professional Group, Inc. (“MPG”). ( Id. ¶ 37). At some point later in 2003, Johnson relocated the business from St. George, Utah, to New York City. ( Id.). At or about the same time, Johnson recruited Defendant Michael Savage to help him run the business; Savage has served as the president of TTC and MPG since 2008. ( Id. ¶ 38). Savage, in turn, hired Defendant Gary Milkwick in 2007, who has served as MPG's Vice President of Operations since at least 2009. ( Id. ¶ 40). Defendant Brendan Pack also joined the business in 2004, and he has supervised sales operations and managed the sales staff at MPG since at least 2010. ( Id. ¶ 39).

In February 2008, these men—the Individual Defendants—began to form new corporate entities related to the business. Between February and September 2008, they formed entities known as VisaVis, Inc. (“VisaVis”), Tahuya, Inc. (“Tahuya”), Ikongo, Inc. (“Ikongo”), and 5410, Inc. (“5410”). ( Id. ¶¶ 41–44). In April 2010, 5410 acquired controlling ownership interests in HB Marketing Services, LLC (“HB Marketing Services”) and Premier Coaching & Consulting, LLC (“Premier Coaching”), which, until then, had been separate companies selling similar products as the Enterprise. ( Id. ¶ 45). Pack formed an entity known as Marble Base, Inc. (“Marble Base”) in May 2010, and in August 2011, Savage formed another known as Skorpios Holdings, Inc. (“Skorpios”). ( Id. ¶¶ 46–47). At this point, these entities were all owned by some combination of Johnson, Savage, and Pack. ( Id. ¶ 51).

In November 2011, the Enterprise underwent a reorganization, as a result of which Johnson was no longer an owner of any corporate entities associated with the Enterprise. ( Id. ¶¶ 48, 50). Instead, the corporate entities comprising the Enterprise were held by Savage, Pack, and Milkwick, as well as a non-party named Lindsay Kush. ( Id.). Many of the entities were owned by Skorpios which, in turn, was owned by Savage, Pack, Milkwick, and Kush. ( Id.). Milkwick formed two more entities in February 2012, 6015, LLC (“6015”) and 1800Accountant, LLC (“1800Accountant”), both of which became additional holdings of Skorpios. ( Id. ¶ 49). These entities—twelve in total—are the Corporate Defendants.

B. The Enterprise's Business and Marketing Techniques

As noted, the Tax Club Enterprise sells products and services to assist people in developing their own small businesses. ( Id. ¶ 30). Among other things, the Enterprise sells tax advice, business planning services, and business credit development assistance. ( Id.).

The Enterprise markets its products by calling potential customers over the telephone. ( Id. ¶¶ 31–32). It identifies these potential customers by purchasing their contact information (known as “consumer leads”) from businesses that sell similar products as the Enterprise. ( Id. ¶ 31). Once the Enterprise acquires a lead, a sales representative calls the potential customer and states that he or she is calling “on behalf of” the company from which the lead was purchased. ( Id. ¶ 33, 95). The Enterprise's sales representative then says that the Enterprise offers an array of services that are essential to the success of the potential customer's business, and that these services will ultimately pay for themselves. ( Id. ¶ 33). Such services allegedly include “unlimited, year round consulting,” “comprehensive business plans,” and “personal business advisors.” ( Id. ¶¶ 33, 95). If a consumer does, in fact, purchase an Enterprise product, a sales representative will make “upsell” calls to that consumer, attempting to persuade him or her to buy additional products, sometimes indicating that the customer must supplement the already-purchased products with additional ones to recoup the money already he or she already spent. ( Id. ¶ ¶ 34, 114–19). One entity within the Enterprise, 5410, provides financing to consumers so that they can make these additional purchases. ( Id. ¶ 55).

When consumers buy the Enterprise's products with credit or debit cards, the transactions are processed through various accounts, known as “merchant accounts,” that Defendants have established with merchant acquiring banks. ( Id. ¶¶ 57, 63, 65–66). Defendants have set up over fifty such accounts since 2008. ( Id. ¶ 65). Proceeds processed through these accounts are then deposited into the Corporate Defendants' commercial bank accounts ( id. ¶¶ 69–71), and are often transferred among the various commercial bank accounts maintained by the different corporate entities ( id. ¶ 76). In fact, the purpose of the Enterprise's numerous corporate entities other than TTC, MPG, and 5410 is to maintain these merchant and commercial bank accounts, receiving and redistributing funds from consumer purchases. ( Id. ¶ 56).

In their Amended Complaint, Plaintiffs allege that the representations that employees of the Enterprise make on the telemarketing calls are misleading in several ways. For example, they contend that the representation that the Enterprise calls potential customers “on behalf of” the companies from which it purchases the customer leads is inaccurate. ( Id. ¶¶ 99–101). In addition, contrary to the representations made on the calls, “in numerous instances, consumers who purchase the Defendants' products and services are not able to recoup the purchase price from future business income” ( id. ¶ 106), “are unable to access a live tax or business advisor” ( id. ¶ 111), “do not receive individualized business plans” ( id. ¶ 112), and “receive only generic business credit information” ( id. ¶ 113). Further, the upsell calls are “masked as fulfillment calls that were scheduled for the ostensible purpose of providing services that the customer already purchased,” and the telemarketers on such calls fail to “disclose promptly that the purpose of the call is ... to sell additional products and services.” ( Id. ¶ 115).

The result of these practices has been an extraordinarily high level of consumer complaints against the Enterprise. Apparently, dissatisfied consumers have filed numerous complaints against TTC with the Better Business Bureau of Utah, have initiated a high rate of chargebacks (that is, disputes of charges on credit card bills) with their credit card issuers, and have requested many returns (that is, requests for reversal of charges on credit card accounts) from the Enterprise itself. ( Id. ¶¶ 121–30). As a result of the high rate of chargebacks and returns, at least two merchant acquiring banks have terminated the Enterprise's accounts. ( Id. ¶ 132). In addition, state attorneys general brought some of the consumer complaints to the attention of Johnson and Savage. ( Id. ¶ 135).

C. Procedural History

Plaintiffs filed their initial Complaint on January 9, 2013 (Docket No. 1), accompanied by a motion for a temporary restraining order and preliminary injunction (Docket No. 2). The Court held hearings on the requested temporary relief on January 11 and 15, 2013, and entered interim Orders on January 11 and 18, 2013 (Dockets No. 31 and 65), which, inter alia, prohibited Defendants from making false or misleading statements; prohibited them from failing to disclose certain information to people receiving calls from the Defendants; and established a monitoring program to record sales, billing, and fulfillment calls. The Court subsequently replaced those Orders with a stipulated preliminary injunction order containing essentially the same terms. (Docket No. 74).

On March 18, 2013, Defendant...