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Judge’s Decision to Vacate TRO and Asset Freeze Underscores FTC’s Scary Powers

2 Dec, 2014 By: Theodore F. Monroe


Imagine waking up to discover that a court-appointed receiver has just seized control of your company and bank accounts, and frozen all of your business and personal financial assets. Imagine struggling to buy groceries and to keep the lights on, let alone pay your employees, vendors and lawyers.

A growing number of business owners are finding themselves in just that position as a result of the Federal Trade Commission’s (FTC) increasingly broad and aggressive use of ex parte proceedings (i.e., proceedings held without prior notice to defendants) in federal district courts to obtain temporary restraining orders (TRO) imposing asset freezes and receiverships in cases of alleged consumer fraud.

To obtain an ex parte TRO, the law requires the government to make an initial showing that routine notice requirements should not apply because a substantial risk exists that, if given prior notice of the requested relief, the defendants will conceal and/or dissipate ill-gotten assets that should be used to pay consumer redress. The government must also make a clear showing that: (1) there is a substantial likelihood that it will prevail on the merits; and (2) a balance of the equities weighs in favor of granting the requested relief.

As acknowledged by the courts, this should be a “heavy burden.” Unfortunately, the tendency of many U.S. District Court judges to defer uncritically to the FTC’s judgment concerning the necessity for ex parte relief in such cases is leading to a serious abuse of the ex parte process by the FTC, depriving defendants of proper notice without satisfying what should be a robust and rigorously applied standard.

Take, for example, the recent case of FTC v. MDK Media Inc. et al., where the FTC obtained an ex parte TRO against defendants engaged in an alleged “cramming” scheme by using deceptive tactics to sign mobile phone users for “premium text message content,” and then hiding the charges for the content in consumers’ monthly phone bills. Trusting FTC’s allegations that the defendants’ deceptive practices had unfairly caused consumers to pay millions of dollars in unwanted charges each year, and a substantial risk existed that defendants would attempt to hide or dissipate the wrongful proceeds if given advance notice of the government’s motion, U.S. District Court Judge John F. Walter initially granted the TRO freezing defendants’ assets on an ex parte basis.

The defendants subsequently prevailed on a motion to vacate the asset freeze and TRO based on significant challenges to the veracity of the FTC’s main fact witness, an FTC investigator named David S. Gonzalez. In a 62-page declaration that formed the core of the FTC’s case, Gonzalez identified about 70 customers who complained of unauthorized charges and extrapolated from that data that the defendants were responsible for more than $100 million in “out-of-pocket monetary injury” to consumers. Yet as demonstrated in the defendants’ motion to vacate, Gonzalez and the FTC simply assumed that the defendants fraudulently charged each and every customer that signed up for a premium service, without any evidence tending to show what percentage of the charges, if any, were actually unauthorized.

At the hearing on the defendants’ motion, Judge Walter made it clear that he was unimpressed with the strength of the FTC’s allegations. “The problem I have with the evidence is I have to surmise a bunch of points because Mr. Gonzalez just makes conclusory statements, most of which he can’t back up in his deposition,” Walter said.

Judge Walter also took exception to the fact that the FTC left out significant information from its motion for ex parte relief. “The FTC did not tell the court,” Walter said, “when they applied for the temporary restraining order, that the carriers had gone out of business or withdrawn from this business in November of 2013. That was something that should have been in these papers and should have been red-flagged.”

As a result, on August 28, Judge Walter vacated his earlier order granting the FTC’s requested TRO, and ordered the agency to notify the defendants’ financial institutions that the asset freezes had been lifted.

In most cases, however, the initial asset freeze is enough to prevent the defendants from mounting a meaningful defense for the simple reason that they have no money to pay their lawyers – and as we all know, lawyers do not come cheap, especially when the stakes are so high, which means that historically the FTC has received little push back for their hardball (and perhaps often unwarranted) tactics. Without more pushback, these practices will inevitably continue.             

What can a direct marketing company do to help protect itself? First, call your insurance broker now and buy a good “Errors & Omissions” policy appropriate to the size of your business. This may not pay for a judgment but can provide a defense (payment for attorneys) should you get sued. Second, you should have qualified counsel review your advertising claims and billing practices for compliance with the FTC Act and other federal and state consumer protection statutes to avoid finding yourself in a bad position in the first place.

Theodore Monroe specializes in marketing practices, FTC, payments and credit card processor litigation. He can be reached at (213) 233-2272 or via E-mail at monroe@tfmlaw.com.


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