United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
ANDREA R. WOOD, District Judge.
Plaintiff Federal Trade Commission ("FTC") has sued Defendants Construct Data Publishers ("Construct Data"), Wolfgang Valvoda ("Valvoda"), and Susanne Anhorn ("Anhorn") under the FTC Act ("FTCA"), 15 U.S.C. § 41 et seq., alleging that they engaged in a plan fraudulently to induce businesses and nonprofit organizations in the United States and other countries to pay for unordered listings in an Internet directory. The defendants initially appeared in this case through counsel, but subsequently directed that counsel to withdraw and then defaulted. Thereafter, the Court entered a default judgment in the amount of $9.1 million and imposed a permanent injunction that, inter alia, froze the defendants' assets. Now appearing through new counsel, the defendants have filed the Motion to Vacate Default Judgment and Order for Permanent Injunction ("Motion to Vacate") (Dkt. No. 57) and the Motion to Modify the Asset Freeze Order ("Motion to Modify") (Dkt. No. 68). For the reasons discussed below, the Motion to Vacate is granted and the Motion to Modify is denied without prejudice.
On March 14, 2013, the FTC filed a Complaint for Permanent Injunction and Other Equitable Relief ("Complaint") against Valvoda and Anhorn (together, the "Individual Defendants"), as well as Construct Data (together with the Individual Defendants, "Defendants"). The Complaint alleges that Defendants have violated Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), by engaging in deceptive practices in the marketing and selling of Internet directory listings to small businesses and organizations that participate in trade shows and exhibitions. Specifically, the Complaint alleges that Defendants targeted consumers in the United States and other countries with mailings falsely representing (1) that the consumers had a preexisting business relationship with Defendants; and (2) that Defendants were affiliated or otherwise connected with a particular trade show or exhibition, or the organizer of that event. Along with the Complaint, the FTC filed a motion for an ex parte temporary restraining order supported by witness declarations, consumer complaints, court orders, and other evidence that Defendants engaged in practices that violated Section 5(a).
The Court issued an ex parte temporary restraining order on March 15, 2013 (the "TRO"), which, among other things, enjoined Defendants from engaging in the activities that the FTC alleged violated Section 5(a) and froze Defendants' assets. The asset freeze allowed the Individual Defendants to "pay from their individual personal funds reasonable, usual, ordinary, and necessary living expenses, " subject to the prior written agreement of the FTC. (TRO at 8-9, Dkt. No. 14.) The FTC subsequently provided each Defendant with copies of the Complaint, the TRO, and other court filings, as well as notice of the preliminary injunction hearing.
At the preliminary injunction hearing on April 17, 2013, defense counsel stated that Defendants, "after making a considered decision, " would not present evidence, but would instead "focus efforts and resources towards either litigating this matter on the merits or attempting to settle." (Apr. 17, 2013 Tr. at 5, PX 13, Dkt. No. 71-4.) Defendants' counsel further represented that the decision was based on the "success rate of challenging a preliminary injunction in the wake of an ex parte TRO" and "resources." ( Id. ) The Court then granted the preliminary injunction, which continued the asset freeze and other relief that had been granted previously in the TRO. The preliminary injunction order allowed the Individual Defendants to continue to pay their reasonable living expenses from their personal funds, after providing financial statements and an accounting as required by that order and subject to the prior written agreement of the FTC.
On June 10, 2013, the FTC served Construct Data and Anhorn with process in Slovakia pursuant to the Hague Convention. At the next status hearing on July 11, 2013, defense counsel acknowledged service of process as to those Defendants and requested that the Court grant them an additional 14 days to answer the Complaint. The Court granted the extension and set July 25, 2013 as the deadline for their answer. No answer was ever filed, however.
On August 19, 2013, defense counsel moved to withdraw from its representation of Valvoda, citing his failure to respond to communications. The Court granted that motion at a hearing on August 22, 2013. At the same hearing, defense counsel informed the Court that his remaining clients, Construct Data and Anhorn, would not be filing an answer or responsive pleading. On October 30, 2013, defense counsel moved to withdraw from representing Construct Data and Anhorn because "they no longer wish[ed] to continue to be represented by counsel in this proceeding" and had requested that defense counsel withdraw. (Mot. to Withdraw at ¶ 3, Dkt. No. 37.) On November 6, 2013, the FTC moved for entry of default against Construct Data and Anhorn, serving notice on all parties. At a motion hearing on November 13, 2013, defense counsel stated with regard to his withdrawal motion: "Essentially, we concede. It's not so much that defendants want to switch counsel, want new counsel, they are opting to no longer have counsel at all." (Nov. 13, 2013 Tr. at 2, PX 16, Dkt. No. 71-4.) The Court granted the motion to withdraw and entered orders of default against Construct Data and Anhorn.
The FTC served Valvoda with process on November 15, 2013. When he failed to respond, the FTC moved for entry of default against him on December 20, 2013, again serving notice on all parties. Valvoda again failed to respond, and the Court entered the requested default order on January 7, 2014. On January 30, 2014, the FTC filed its motion for a default judgment against all Defendants, along with a declaration from its investigator addressing the appropriate amount of monetary relief-approximately $9.1 million, which represented the FTC's "estimate of Construct Data's sales revenue during the years 2005 through 2013." (Supp. Menjivar Decl. at ¶ 3, Dkt. No. 52-1.) The FTC served its motion, supporting declaration, and proposed default judgment on all Defendants. None responded. The hearing on the FTC's motion was held on February 11, 2014. Defendants did not appear, and the Court entered an order granting a default judgment and permanent injunction. The permanent injunction did not independently detail any asset freeze order. Instead, it incorporated by reference the asset freezes imposed by the TRO and preliminary injunction.
The FTC served copies of the order granting the default judgment and the permanent injunction on Defendants on February 11, 2014. On March 11, 2014, current defense counsel entered an appearance on behalf of all Defendants and filed the Motion to Vacate. This was followed on April 1, 2014 by the Motion to Modify.
I. The Motion to Vacate
Defendants argue that the default judgment and permanent injunction should be vacated with respect to the Individual Defendants because the Court lacks personal jurisdiction over them, and with respect to all Defendants because there is good cause to do so. As discussed below, in light of the current record, the Court concludes that it may exercise personal jurisdiction over the Individual Defendants. However, the Court nonetheless finds that good cause exists to vacate the default judgment and permanent injunction.
A. Personal Jurisdiction
Defendants first argue that the default judgment should be vacated as to the Individual Defendants because the Court lacks personal jurisdiction over them. "When a district court enters a default judgment without personal jurisdiction over the defendant, the judgment is void, and it is a per se abuse of discretion to deny a motion to vacate that default judgment.'" be2 LLC v. Ivanov, 642 F.3d 555, 557 (7th Cir. 2011) (citing Relational, LLC v. Hodges, 627 F.3d 668, 671 (7th Cir. 2010)). Because they had notice of this lawsuit and still defaulted, the Individual Defendants have the burden of proving the absence of personal jurisdiction. Id. They have failed to meet this burden.
Due process requires that a nonresident defendant have "certain minimum contacts with [the forum] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.'" Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940)). The contacts between the defendant and the forum state may not be "random, isolated, or fortuitous." Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 774 (1984). Instead, "the sufficiency of the contacts is measured by the defendant's purposeful acts." NUCOR Corp. v. Aceros y Maquilas de Occidente, S.A. de C.V., 28 F.3d 572, 580 (7th Cir. 1994). Parties establish minimum contacts when they "purposefully avail" themselves of "the privilege of conducting activities within the forum... thus invoking the benefits and protections of its laws." Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985) (citation omitted). Because modern business often is transacted solely by mail and wire communications, physical presence is not required to create such minimum contacts. Id. at 476. Depending on the nature of the contacts, a court may exercise general or specific jurisdiction over defendants. Here, the FTC does ...