Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 87 C 8449-Nicholas J. Bua, Judge.
Bauer, Chief Judge, Easterbrook and Ripple, Circuit Judges.
The defendants-appellants, Scott Walker, his mother Carol Walker, and two corporate entities under their control, World Travel Vacation Brokers, Inc. (World Travel), and C-S-K Enterprises, Inc. (C-S-K), raise several challenges to the district court's grant of a preliminary injunction. The injunction, inter alia, restrains the defendants from engaging in deceptive advertising in violation of section 5 of the Federal Trade Commission Act (the FTCA), 15 U.S.C. § 45(a), and orders them to comply with the provisions of the Truth in Lending Act. 15 U.S.C. § 1601 et seq. The plaintiff-appellee, the Federal Trade Commission (the FTC), initiated these proceedings after receiving numerous consumer complaints that the defendants' travel agency misrepresented the cost of vacation packages to Hawaii. The case was referred to a magistrate who recommended that a preliminary injunction be issued. The district court agreed and granted the preliminary injunction. We now affirm.
The FTC commenced this action by filing a complaint in the district court on September 28, 1987. The complaint alleged that the defendants engaged in false and deceptive trade practices in violation of section 5 of the FTCA. The complaint also alleged that the defendants violated the Truth in Lending Act by failing to issue promptly consumer credit statements. See 12 C.F.R. § 226.12(e)(1); 15 U.S.C. § 1666(e). The complaint sought preliminary and permanent injunctive relief, including restitution, and any other appropriate equitable relief. Contemporaneously with the filing of the complaint, the FTC moved for a temporary restraining order to prevent the defendants from engaging in the allegedly fraudulent practices set forth in the complaint.
The district court granted the FTC's motion for a temporary restraining order, which included an asset freeze on all of the defendants' corporate and personal assets and compelled the defendants to produce certain corporate and individual financial records. FTC v. World Travel Vacation Brokers, Inc., No. 87 C 8449 (N.D. Ill. Sept. 28, 1987) (temporary restraining order). That order subsequently was modified on November 16, 1987. The amended order extended the period for the defendants to furnish the financial records until November 18, 1987. The defendants have not complied with the district court's order. The modified order also authorized the defendants to withdraw up to $125,000 of the frozen assets to pay for attorneys' fees. The FTC's request for a preliminary injunction was referred to a magistrate.
After a seven-day hearing, on December 16, 1987, the magistrate recommended that a preliminary injunction be issued against all of the defendants. She also recommended that the freeze of corporate and individual assets be continued. The district court implicitly adopted the recommendation of the magistrate and issued a preliminary injunction on December 18, 1987. The injunction was amended three days later. FTC v. World Travel Vacation Brokers, Inc., No. 87 C 8449 (N.D. Ill. Dec. 21, 1987) (amended preliminary injunction). The defendants then timely filed a notice of interlocutory appeal challenging the validity of the preliminary injunction.*fn1
This case involves an alleged scheme whereby World Travel, under the control of the individual defendants Scott and Carol Walker, fraudulently advertised and induced consumers to purchase vacations to Hawaii.*fn2 In particular, the defendants advertised and solicited consumers to purchase a $29 certificate which could be redeemed for roundtrip airfare to Hawaii, provided that consumers met additional conditions. The most important condition was that consumers book hotel reservations through World Travel for a minimum of eight days and seven nights at World Travel's calculated "hotel cost." The defendants also required a pre-booking deposit of $100 per person (which was not disclosed until the consumer received the certificate).
Despite the advertised claim of $29 airfare to Hawaii, however, the defendants charged consumers full airfare and hotel rates. They managed to hide the true aspect of the "hotel cost" through a three-part calculus. First, they added the air and accommodation costs together to determine the wholesale vacation cost. Then, an additional $50 profit per person was assessed; the $29 certificate price was not deducted from the price of the airfare nor from the total purchase price of the package. Finally, they divided this figure--the wholesale cost plus profit--by eight (the number of days booked), and represented the resulting amount to consumers as the daily "hotel cost" of the vacation. Nowhere did the defendants disclose that airfare was added into the "hotel cost" determination. Moreover, the method of division--based on the number of days stayed at the hotel, instead of the travel industry's custom of stating price on the basis of nights--further distorted actual costs imposed on the consumer. World Travel sold between 600,000 and 700,000 of the $29 Hawaiian vacation certificates.
The FTC also alleged that the defendants engaged in credit card fraud and failed to follow accurately federal law concerning the refund of cancelled credit purchases. Approximately ninety-nine percent of World Travel's customers purchased the $29 certificates with credit cards. By its own admission, "World Travel had difficulties with the credit card operations, especially from customers requesting a credit from World Travel, and also writing their credit card issuer for 'charge back' on their credit card." Appellants' Br. at 7 (citation omitted). The defendants submit that frequent changes of World Travel's "processors" caused the delays in credit card refunds.*fn3 After purchasing a certificate, a customer had three days to cancel the purchase and receive a refund. The problems with its processors led World Travel to implement an "11 Day Policy" to estimate whether customers were entitled to a refund.
This policy was based upon the assumption that it would typically take four days by first-class mail for a certificate to arrive at a consumer's address; a consumer had three days to review the certificate for possible cancellation; and another four days through first-class mail to arrive back at World Travel's office. Thus, certificates received back by World Travel more than 11 days after mailing were deemed late.
Id. at 8 (citation omitted).
The FTC introduced evidence, that "in a number of instances, consumers provided defendants with documented proof that they had returned their certificates within 11 days of the date the certificates were mailed by defendants, yet defendants refused to issue refunds to these consumers." Appellee's Br. at 9. In addition, although World Travel represented to consumers that they would make prompt credit refunds, these refunds in many cases were delayed until customers complained.*fn4 The FTC presented evidence that the delayed funds were diverted to the personal accounts of the individual defendants.
District Court Proceedings
The district court issued a preliminary injunction, subsequently amended, enjoining several practices of the defendants. FTC v. World Travel Vacation Brokers, Inc., No. 87 C 8449 (N.D. Ill. Dec. 21, 1987) (amended preliminary injunction). The court's order addressed four major points: (1) the district court noted that it had subject matter jurisdiction of the case; (2) it stated that the FTC likely would succeed on the merits of both the FTCA and the Truth in Lending Act claims; (3) the court concluded that immediate and irreparable damage to the FTC's ability to effectuate relief for injured consumers would occur if the preliminary injunction was not issued; and (4) after weighing all of the equities in the case, the court determined that the preliminary injunction, including an asset freeze, would be in the public interest.
The district court entered this preliminary injunction on the recommendation of the magistrate who had conducted a hearing.*fn5 The magistrate first had confronted the issue of whether a court may grant preliminary injunctive relief under section 13(b) of the FTCA. 15 U.S.C. § 53(b).*fn6 That provision explicitly grants the district court jurisdiction to enter preliminary injunctions to preserve the status quo while the FTC conducts administrative proceedings. However, the last proviso in section 13(b) also grants the district courts authority to grant permanent injunctive relief after proof in "proper cases." After evaluating case law from other circuits, the magistrate decided that this permanent injunction proviso of section 13(b) permits the exercise of full equitable powers, including the ordering of temporary relief; even in the absence of administrative FTC proceedings. Although the magistrate noted language in this court's decision in United States v. JS & A Group, Inc., 716 F.2d 451 (7th Cir. 1983), that she believed could be construed as requiring a different result, she determined that the language merely was dictum which should not be read to control the case. Tr. of Dec. 16, 1987.
The magistrate then addressed whether this litigation is a "proper case" under the section 13(b) proviso. After noting that there exists some conflict between courts in determining the nature of a "proper case," the magistrate adopted the view that "any conduct which violates section 5 of the FTC Act is a proper case for consumer redress under section 13(b)." Id. at 31. Section 5 prohibits "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce. . . ." 15 U.S.C. § 45(a)(1). Accordingly, the magistrate concluded that this was a proper case under the statute.
Next, the magistrate examined whether the FTC should be granted a preliminary injunction and the appropriate scope of any such injunction. The magistrate noted that the court had to choose between two approaches in determining this issue: (1) it could apply the traditional equitable factors applied by courts in determining whether to grant injunctive relief; or, (2) it could apply the more lenient standard applied when an agency seeks to enforce a statute--likelihood of success and balancing of equities. The magistrate decided to apply the traditional four-part test for a preliminary injunction: likelihood of success; irreparable harm to the plaintiff; balance of equities; and the effect on public interest. With respect to the likelihood of success on the merits, the magistrate determined that the FTC would, in all probability, prevail on both the FTCA and Truth in Lending Act claims against both the corporate and individual defendants. The magistrate then "considered the relative interests of the parties, the potential harms to all interested persons, and the public interest in this ...