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Federal Trade Commission v. Cleverlink Trading Limited

June 19, 2006

FEDERAL TRADE COMMISSION, PLAINTIFF,
v.
CLEVERLINK TRADING LIMITED, ET AL., DEFENDANTS,
v.
OCEANIC TELECOMMUNICATIONS SERVICES, LLC, AND COLIN SHOLES RELIEF DEFENDANTS.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

The Federal Trade Commission ("FTC") brought an action under Sections 13(b) and 19 of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 53(b) and 57b, and under Section 7(a) of the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 ("CANSPAM"), 15 U.S.C. § 7706, to obtain injunctive and other equitable relief for Defendants' violations of CAN-SPAM, 15 U.S.C. § 7701, et seq., and the FTC's Adult Labeling Rule, 16 C.F.R. Part 316.4. On June 29, 2005, this Court entered a Stipulated Preliminary Injunction. One provision of the injunction applied to a then third party, Oceanic Telecommunications Services, LLC ("Oceanic"). The provision directed that upon being served with the order, Oceanic "shall hold and retain . . . any account or asset of, or held on behalf of, any Defendant, including Cleverlink Trading Limited." The FTC asserts that Oceanic and its primary officer, Colin Sholes, violated this provision, and urges that they be required to show cause why they should not be held in contempt of court. In defense, Oceanic and Colin Sholes argue that (I) they cannot be held in contempt of court because they never violated the provision in question; (ii) this Court lacks jurisdiction over the subject matter in controversy -- the funds allegedly held on behalf of Cleverlink; and (iii) they are not subject to personal jurisdiction in the State of Illinois.

This Court has jurisdiction over the persons of Oceanic and Colin Sholes and the subject matter in controversy. Because the nationwide service provision in § 13(b) of the FTC Act creates personal jurisdiction over any person, corporation or partnership, this Court had personal jurisdiction over both Oceanic and Colin Sholes at that time the preliminary injunction was entered. As to the subject matter -- the funds in Oceanic's bank account that allegedly were held on Cleverlink's behalf -- this Court has jurisdiction to determine the legitimacy of claims to any such asset alleged to be proceeds from a violation of federal law. Finding that jurisdiction exists, the Court reserves its decision on whether Oceanic or Colin Sholes violated the injunction until after further discovery can be completed, including the deposition of Colin Sholes.

Background

The original Defendants in this action sent commercial email messages promoting sexually-oriented internet websites and collected payment for access to the material on these sites. One of the Defendants is Cleverlink Trading Limited ("Cleverlink"). On March 14, 2005, Cleverlink signed a Merchant Payment Processing Services Agreement with Oceanic. (Relief Defendants' Response to FTC's Supplemental Submission Regarding the Court's Jurisdiction Over Oceanic and Sholes, Ex. B.) The terms of the agreement called for Oceanic to provide "online payment processing" and "processing services" to Cleverlink. (Id. at 2.)

According to the Declaration of Colin Sholes, Oceanic's primary officer, "Oceanic does not process credit card transactions."*fn1 (Declaration of Colin Sholes Regarding Jurisdiction Proffer and Evidentiary Submission on Rule to Show Cause Pursuant to 28 U.S.C. § 1746 ("Sholes Decl.") ¶ 37.) Instead, he explains that Oceanic acts only as a sub-account holder in the payment process between customer and merchant. (Id. ¶ 5.) As a sub-account holder, Oceanic develops contractual relationships with merchants that want to accept credit card payments from customers. (Id. ¶ 8.) Oceanic then serves as an intermediary, a transmittal agent, from the master merchant account holder to the merchant. (Id. ¶ 37.)

As described by Colin Sholes, the payment process begins when a customer fills out an order and credit card information on a merchant's website. (Id.) That information gets forwarded to a gateway processor, who writes software that collects and processes credit card information. (Id.) From there, the information is passed on to a merchant bank, who provides initial approval of the transaction, and credits the merchant account. (Id.) A master account holder manages the merchant account where the merchant bank deposits the funds. (Id. ¶ 6.) A master account holder may issue sub-accounts from which the funds pass to the merchant. (Id. at ¶¶ 7-8.) Oceanic held one of these sub-accounts. (Id.) In summary, the credit card funds flow downstream from the merchant bank to the master merchant account holder to the sub-account holder (Oceanic) to the merchant (Cleverlink). (Id. ¶ 9.) When a charge or fee is assessed on the account it flows in the same manner with each party/agent in the chain being responsible to reimburse the party above it. (Id. ¶¶ 11-12.) Oceanic's recourse being against Cleverlink for any fees or charges imposed on Oceanic by the master account holder for Cleverlink's account. (Id.)

In three separate disbursements, a total of $517,168.80 were deposited in Oceanic's account as the sub-account holder for Cleverlink. (Oceanic's Opposition to the FTC's Motion to Show Cause, Ex. 3.) Of those total receipts, Oceanic transmitted only $136,539.54 to Cleverlink pursuant to the Merchant Payment Processing Services Agreement. (Id.) Oceanic alleges that during April, May and June of 2005, Cleverlink incurred a number of fees and charges against its funds held by Oceanic -- fees and fines totaling $364,022.28. (Id.)

The FTC served Oceanic with the Stipulated Preliminary Injunction on June 30, 2005. (FTC's Motion To Preserve Assets and For Rule To Show Cause As To Why Third Party Oceanic Should Not Be Held In Contempt Of Court, Att. B.) The preliminary injunction directed that upon being served with the order, Oceanic "shall hold and retain within its control and prohibit the withdrawal, removal, assignment, transfer, pledge, encumbrance, disbursement, dissipation, conversion, sale, or other disposal of any account or asset of, or held on behalf of, any Defendant, including Cleverlink Trading Limited, unless authorized in writing by the Court or counsel for the FTC." (Id.) The stipulated injunction replaced an earlier ex parte TRO that was served on Oceanic on June 28. (Id., Att. A.) The TRO did not reference Oceanic specifically, but it did order the retention of funds owned, controlled or held by or for the benefit of Cleverlink. (Id.) When served with the preliminary injunction, Oceanic's bank account contained more than $300,000. (FTC's Reply Memo in Support of its Motion To Preserve Assets and For Rule To Show Cause As To Why Third Party Oceanic Should Not Be Held In Contempt Of Court, Att. D, Bresnahan Declaration ("Bresnahan Decl.") ¶ 5(c), Ex.1 at WCB0054). Cleverlink was Oceanic's first client. (Sholes Decl. ¶ 20.) Oceanic alleges that it "had one other customer located in St. Petersburg, Florida," but presents no other evidence regarding this client and admits that it currently has no business. (Id.)

From July 22, 2005 through September 30, 2005, $245,000 was withdrawn or transferred from the account containing Cleverlink's funds. (Bresnahan Decl. ¶ 5(c), Ex.1 at WCB0057-58.) Colin Sholes personally withdrew $85,000 in cash increments of $9,000 or $9,500. (Id. at WCB0060-68.) No evidence has been presented as to where these monies were disbursed after being withdrawn or transferred from Oceanic's account.

DISCUSSION

Section 13(b) of the FTC Act permits the FTC to seek an injunction whenever it believes a corporation is violating or about to violate the Act. 15 U.S.C. § 53(b).*fn2 Rule 65 empowers this Court to enter a binding injunction "upon the parties to the action, their officers, agents, servants, employees, and attorneys, and upon those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise."*fn3 Fed. R. Civ. P. 65(d). Oceanic and Colin Sholes challenge this Court's jurisdiction, both personal and subject matter, to have entered a preliminary injunction prohibiting them from withdrawing or transferring the funds in Oceanic's account that allegedly were held on behalf of Cleverlink.

I. Personal Jurisdiction

While the FTC Act and Rule 65 prescribe certain remedial or equitable measures, a court still must have jurisdiction over any person against which that power is exercised. See Insur. Corp. of Ireland, Ltd. v. Compagnie des Bauxities de Guinee, 456 U.S. 694, 711 n.1 (1982) ("A district court must have personal jurisdiction over a party before it can enjoin its actions"); U.S. v. Kirschenbaum, 156 F.3d 784, 795 (7th Cir. 1998) ("The district court's attempt to enjoin Mrs. Kirschenbaum and other third-parties over whom the court had no personal jurisdiction is void and so binding on no one"). This limit on a court's equitable reach applies even to assets that are alleged to be proceeds of unlawful acts. See Kirschenbaum, 156 F.3d at 795 ("However convenient it might be for ...


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