Fed. Trade Comm'n v. Noland
| Decision Date | 11 May 2023 |
| Docket Number | CV-20-00047-PHX-DWL |
| Parties | Federal Trade Commission, Plaintiff, v. James D. Noland, Jr., et al., Defendants. |
| Court | U.S. District Court — District of Arizona |
The bench trial in this matter took place over the course of 11 trial days in January and February 2023. The Court's findings of fact and conclusions of law are set forth below.
Rule 52(a)(1) of the Federal Rules of Civil Procedure provides that
The Ninth Circuit has explained that a district court's findings under Rule 52(a) “should be explicit enough to give the appellate court a clear understanding of the basis of the trial court's decision, and to enable it to determine the ground on which the trial court reached its decision.” Alpha Distrib. Co. of Cal., Inc. v. Jack Daniel Distillery, 454 F.2d 442, 453 (9th Cir. 1972). With that said, such findings must also 2 Gensler, Federal Rules of Civil Procedure, Rules and Commentary, Rule 52, at 46-47 (2021). Put another way, “the judge need only make brief definite, pertinent findings and conclusions upon the contested matters; there is no necessity for over-elaboration of detail or particularization of facts.” Fed.R.Civ.P. 52, advisory committee's note to 1946 amendment.[1]
Before turning to the FTC's outstanding claims, it is helpful to provide an overview of the complicated factual and procedural history of this case and make some factual findings regarding witness credibility and other issues that are broadly relevant to the outstanding claims.
Between 2017 and 2020, James “Jay” Noland (“Noland”), Lina Noland, Thomas Sacca (“Sacca”), and Scott Harris (“Harris”) (together, “Defendants”) operated a pair of multi-level marketing businesses (“MLMs”). The first, Success by Health (“SBH”), offered coffee products, other beverages, and nutraceuticals, while the second, VOZ Travel (“VOZ Travel”), promised to offer certain travel-related benefits.
In January 2020, the FTC filed a lawsuit against Defendants, which was assigned case number 20-cv-00047 and will be referred to as the “Lead Action.” In the operative complaint in the Lead Action, the FTC alleges that Defendants violated various provisions of the Federal Trade Commission Act (“FTC Act”) by operating SBH and VOZ Travel as unlawful pyramid schemes, by making false representations in the course of operating those ventures, and by engaging in certain product-shipping and refund practices that violated rules promulgated by the FTC. (Lead Action, Doc. 205.)[2] During the early stages of the Lead Action, the FTC sought-and the Court granted-a temporary restraining order and a preliminary injunction. (Lead Action, Docs. 19, 38, 106, 109.) These orders resulted in the appointment of a receiver to operate SBH and an asset freeze, among other things.
As the proceedings in the Lead Action were unfolding, the FTC identified another avenue for seeking relief, which stemmed from a different lawsuit the FTC had filed against Noland in the District of Arizona nearly two decades earlier. In that lawsuit, which was assigned case number 00-cv-02260 and will be referred to as the “Contempt Action,” the FTC accused Noland of engaging in various forms of misconduct related to an MLM called Bigsmart, which the FTC alleged to be a pyramid scheme. (Contempt Action, Doc. 1.) During the early stages of the Contempt Action, Noland filed bizarre pleadings filled with sovereign-citizen arguments.[3] Later, in 2002, Noland agreed to settle the FTC's allegations. The settlement agreement, which clarified that Noland was not admitting any wrongdoing, took the form of a stipulated permanent injunction that forbade Noland (and others “in active concert or participation” with Noland) from engaging in certain practices. (Contempt Action, Doc. 66.) As relevant here, the forbidden practices included (1) operating a “prohibited marketing scheme,” including a pyramid scheme; (2) making any “false or misleading statement . . . of material fact” in connection with an MLM; and (3) failing to take “reasonable steps” to monitor compliance with the permanent injunction. (Id. at 3-4, 6-7.)
In the FTC's view, Noland violated these provisions through his operation of SBH and VOZ Travel. Accordingly, in February 2020, the FTC filed a motion in the Contempt Action for an order to show cause why Noland should not be held in contempt for violating the permanent injunction. (Contempt Action, Doc. 78.) In response to the show-cause motion, Noland submitted declarations from Harris and Sacca in which they acknowledged that Noland had advised them of the permanent injunction and of the limitations imposed by it. (Contempt Action, Docs. 82-1, 82-2.) Based on that evidence, the FTC moved for an order to show cause why Harris and Sacca, too, should not be held in contempt. (Contempt Action, Doc. 91.)
In July 2022, the Court issued an order consolidating the Lead Action and the Contempt Action for all purposes. (Lead Action, Doc. 516.)
As noted, the Court granted the FTC's request, made at the outset of the case, to appoint a receiver to assume control over SBH, VOZ Travel, and other related entities. Although this decision has been the subject of intense criticism by Defendants (and some SBH affiliates) over the past three years, the evidence presented during the bench trial leaves no doubt in the Court's mind that it was the correct decision.
The receivership also provides the backdrop for various developments that bear on the remaining disputed issues in this case. For example, as part of the preliminary injunction, the Court authorized the receiver to resume SBH product sales in the hope that such sales would “provide some relief to the Affiliates who feel harmed by the TRO.” (Lead Action, Doc. 106 at 28.) The Court “allow[ed] the receiver to reactivate shipping and sell what SBH products she has in her possession.” (Id.) The receiver reopened sales in mid-May 2020. (Tr. 368.) However, the receiver did not reactivate the SBH commission structure. (Tr. 366, 381, 397.)
SBH product sales plummeted after these changes were instituted. In the years before entry of the TRO, affiliates bought an average of $6,694.23 in SBH products per day. (Ex. 38 at 11-12.) In contrast, during the 275-day period in which the receiver sold SBH products, SBH product sales averaged $413.56 per day (id. at 12)-a decrease of nearly 95% from pre-TRO sales. The relevance of these developments is discussed in more detail in later portions of this order.
After assuming control over SBH, the receiver also identified various irregularities in how Defendants had been operating the business. For example, the receiver discovered “that one of the products [G-Burn] contained an ingredient banned by the FDA” and thus discontinued selling that item. (Tr. 370, 397.) The receiver also became concerned that Defendants lacked “substantiation of the products' claims that they had been making on their website and in other promotional materials” and, after defense counsel was unable to provide any substantiation materials, arranged for “the website . . . to be changed and all of the product descriptions on the website . . . to be changed.” (Id. at 370.) The receiver also discovered that SBH had been operating in Kentucky without registering with the state, lacked commercial liability insurance, and had not been collecting sales tax on product sales. (Id. at 368-69.)
Separately, Defendants were required to “immediately” provide a copy of the TRO to each “affiliate, . . . employee, . . . and representative of any Defendant.” (Lead Action, Doc. 38 at 27.) The TRO also barred Defendants from “[t]ransacting any of the business of the Receivership Entities.” (Id. at 23.) Nevertheless, after being served with the TRO on January 13, 2020, Noland went to the beach and broadcasted a six-minute statement to SBH affiliates, never mentioning the TRO but instead mentioning some “legal matters that we're dealing with right now” and stressing how Defendants “do[] things the right way, bringing tons of integrity, transparency to the industry.” (Ex. 121 at 5:5-10.) Defendants did not disclose the existence of the TRO to SBH affiliates until January 24, 2020. (Lead Action, Doc. 351-2 at 7.) The relevance of these developments is discussed in more detail infra, primarily in relation to the necessity and scope of injunctive relief.
Finally the discussion of the receiver's role in this case would not be complete without noting that, in April 2021, the Supreme Court held in AMG Capital Mgmt., LLC v. FTC, 141 S.Ct. 1341 (2021), that the FTC may not obtain “equitable monetary relief such as restitution or disgorgement” pursuant to its authority under § 13(b) of the FTC Act. Id. at 1344. After AMG Capital was decided, Defendants argued that the receivership and asset freeze should be lifted. (Lead Action, Doc. 383.) In a September 2021 order, the Court disagreed, explaining in relevant part that ...
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