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Federal Trade Commission v. Datacom Marketing Inc.

May 24, 2006

FEDERAL TRADE COMMISSION, PLAINTIFF,
v.
DATACOM MARKETING INC. ET AL DEFENDANTS.



The opinion of the court was delivered by: James F. Holderman, District Judge

MEMORANDUM OPINION AND ORDER

On May 9, 2006, plaintiff Federal Trade Commission, ("FTC"), filed a three-count complaint alleging that defendants Datacom Marketing Inc., Datacom Direct Inc., and its corporate owners, officers and directors Bernard Fromstein, Judy Provencher, Paul Barnard, Judy Neinstein and Stanley Fromstein,*fn1 , violated § 5(a) of the FTC Act of 1914, as amended, 15 U.S.C. § 45(a), by engaging in deceptive acts and practices in or affecting commerce. (Dkt. No. 1). Pending before the court is the FTC's motion for a preliminary injunction which accompanied the FTC's request for a temporary restraining order ("TRO") and other equitable relief. (See the FTC's proposed order at Dkt. No. 9). After conducting a hearing on May 24, 2006, this court grants the FTC's motion for preliminary injunction for the reasons set forth below.

BACKGROUND

A. Procedural History

The FTC's complaint was filed under seal on May 9, 2006. (Dkt Nos. 7, 13, 20). The seal was lifted on May 11, 2006 at 12:00 p.m. Central Daylight Savings Time. (Dkt. No. 20). All filings in this case have been placed on this court's public docket. Accompanying the FTC's complaint on May 9, 2006 was the FTC's ex parte request for a TRO. (Dkt. Nos. 1, 7, 8, 10, 13). The court granted the TRO on May 9, 2006, took the motion for preliminary injunction under advisement and set a status for May 15, 2006. (Dkt. Nos. 16, 17). The court in its TRO found that there was good cause to believe that: (1) the defendants had violated Section 5(a) of the FTC Act and therefore the FTC was likely to prevail on the merits, (2) irreparable harm would result by the defendants ongoing violations of the FTC Act unless the defendants were restrained, (3) there was irreparable damage to the court's ability to grant effective relief unless the defendants' ability to conceal or dispose of their assets was restrained, and (4) the equities favored the issuance of the TRO.*fn2 (Dkt. No. 17 at pgs. 2-3).

The TRO ordered: (1) the defendants restrained from engaging in unfair or deceptive acts or practices in or affecting commerce, creating other business, or disclosing customer information to third parties, (2) the freezing of the defendants assets and mail, (3) the defendants to provide the FTC with complete financial information and consent to the release of financial records to the FTC, (4) third parties restrained from assisting the defendants in the collection of accounts, (5) the preservation of all records, and, (6) expedited discovery. (Id. at pgs. 6-18).

The court signed and entered the TRO on May 9, 2006 at 11:25 a.m. (Id. at pg. 21). The terms of the TRO set for it to expire on May 19, 2006 at 11:59 p.m. (Id.) Counsel for the FTC and the corporate defendants appeared before the court on May 15, 2006 and the court set the preliminary injunction hearing for May 24, 2006. (Dkt. No. 22).

On May 18, 2006, the FTC file a first motion in limine for an order admitting the sworn declarations of nineteen consumers and two law enforcement officers that the FTC submitted as exhibits on May 9, 2006 in support of its motion for a TRO and preliminary injunction. (Dkt. No. 25). On May 23, 2006, the FTC filed a second motion in limine seeking the admission of business records. (Dkt. No. 33). The court granted both of these motions. (Dkt. Nos. 37, 38, 53). On May 19, 2006, the corporate defendants appeared before Judge William Hibbler, who was sitting as the district's emergency judge, seeking the unfreezing of their assets. (Dkt. No. 29). Judge Hibbler allowed the payment of $11,448.00 of group medical insurance but denied all other relief. (Dkt. No. 32). On May 23, 2006, the corporate defendants filed a motion in limine to exclude the testimony of the FTC's previously undisclosed witnesses Carol Chatburn and Douglas McKenney. (Dkt. No. 49). That motion was taken under advisement and these witnesses were permitted to testify as an offer of proof. (Dkt. No. 54).

B. Factual Background

According to the May 9, 2006 complaint, the FTC alleged that the corporate defendants were located in Toronto, Canada but transacted business in the Northern District of Illinois and throughout the United States. (Dkt. No. 1 at pgs. 2-3). The complaint does not allege the location of the individual defendants but does allege that they too transacted business in both the Northern District of Illinois and throughout the United States. (Id. at pgs. 3-4). The FTC alleged that the defendants have engaged in a common enterprise sharing officers, employees, office locations and commingling funds in furtherance of their scheme to engage in unfair or deceptive acts or practices in or affecting commerce. (Id. at pgs. 5).

The deceptive scheme involved the selling of business directories. The FTC contends that sales in the alleged scheme exceeds $1 Million per month.*fn3 According to the witness declarations filed by the FTC, the defendants' scheme started with the defendants' telemarketers "cold calling" businesses and organizations in the United States and often asked the receiving caller to verify information such as the business' name, address and telephone number for their directories. (Dkt. No. 12 at Exs. PX 2, ¶ 5; PX 5, ¶ 5; PX 8, ¶ 5; PX 10, ¶ 5; PX 11, ¶ 5; PX 16, ¶ 6; PX 17, ¶ 9; PX 22, ¶5).*fn4 Other times, the defendants asked whether the business or organization wanted to be listed in the directories or described the directories. (Id. at Exs. PX 2, ¶ 5; PX, 11 ¶ 5). The FTC's position is that the defendants' initial call usually did not indicate that the purpose of the call was to sell their directories, but instead was designed to make the other party believe that it merely confirmed pre-existing information already listed in a telephone directory. (Id.) The alleged goal was to make the consumer businesses and organizations believe that they already had a pre-existing business relationship with the defendants. (Id. at Exs. PX 7, ¶ 7; PX 8, ¶ 6; PX 17, ¶ 8).

A second call was placed later that day or the next day to verify contact information allegedly for shipping purposes. (Id. at Exs. PX 1, ¶ 12; PX 2, ¶ 10; PX 7, ¶¶ 7, 8). The second call was recorded and the telemarketer asked a series of quick, leading closed-end "yes" or "no" questions. (Id. at Ex. PX 7, ¶ 8). Despite the fact that the defendants' call script required the telemarketer to mention that a directory costing $399.00 would be mailed to the consumer, (Id. at Ex. PX 19, pg. 26), the FTC alleged that actual practice was not mentioned unless the consumer pushed for that information. (Id. at Exs. PX 2, ¶ 5; PX 7, ¶ 7, PX 10, ¶ 5; PX 16, ¶ 6; PX 17, ¶ 8; PX 22, ¶ 5). The FTC's proof established that a directory was then shipped to the consumer from a New Hampshire mail drop but consumers found the directory to be useless because its contained missing, inaccurate or incomplete information. (Id. at Exs. PX 1, ¶ 7; PX 2, ¶ 7).

An invoice for the $399.00 price ($379 plus $20 for shipping and handling) would be sent to the consumer approximately a week to one month after the directory was delivered. (Id. at Exs. PX 1, ¶ 6; PX 2, ¶ 7; PX 3, ¶ 9; PX 5, ¶ 7; PX 6, ¶ 5; PX 7, ¶ 11; PX 9, ¶¶ 5, 10; PX 10, ¶¶ 6, 8; PX 11, ¶ 4). The invoice typically listed the person who answered the original call as the individual who authorized the purchase of the directory. (Id.) The invoice instructed payment to be sent to the New Hampshire mail drop. (Id.) According to the FTC, the alleged business and organization victims often pay these invoices despite the alleged worthless value of the directory because they are unaware that they never intended to order the directory, there was confusion caused by the listing of the name of the person who first received the call on the invoice, or to resolve the dispute over the charge. (Dkt. No. 11at pgs. 8-9 (citing Dkt. No. 12)). The FTC also alleged that other businesses and organizations who disputed the charge were pursued by collection agencies. (Dkt. No. 12 at Exs. PX 3, ¶¶ 14, 15; PX 9, ¶¶ 11, 14). The FTC further alleges that the defendants engage in various other fraudulent and misleading follow up methods designed to convince the consumer businesses and organizations that they owe the defendants money. These allegedly deceptive practices include: (1) the use of the responses from the prior recorded conversations out of context in an attempt to demonstrate consent to purchase, (Id. at Ex. PX 21, ¶ 5), (2) repetitive billing after an account has already been paid originally in error in an attempt to get a ...


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