The Ninth Circuit Court of Appeals has upheld a lower court’s decision in a case brought by the Federal Trade Commission (FTC) against the operators of Success by Health (SBH) and VOZ Travel, two multi-level marketing businesses. The court affirmed the district court’s rulings on several key issues, including the imposition of financial penalties and a permanent ban on the defendants’ future involvement in multi-level marketing.
Background of the Case
The case involved James Noland, Lina Noland, Thomas Sacca, and Scott Harris, collectively referred to as the “Individual Appellants.” They were accused of violating the Federal Trade Commission Act and consumer protection rules through their operation of SBH, which sold coffee, tea, and nutraceutical products, and VOZ Travel, which purported to sell travel services. The FTC alleged that both businesses operated as pyramid schemes.
James Noland had a history of running fraudulent multi-level marketing schemes. In 2002, he was subject to a permanent injunction that barred him from operating unlawful multi-level marketing programs.
District Court’s Initial Actions
The district court swiftly took action after the FTC filed the lawsuit. It issued a temporary restraining order and a preliminary injunction, freezing the Individual Appellants’ assets and placing their businesses under a receivership. The court later granted summary judgment in favor of the FTC on certain claims and, after an 11-day bench trial, issued a final judgment.
The district court found the Individual Appellants liable for operating a pyramid scheme, violating the FTC Act, and violating consumer protection rules. The court awarded monetary damages to compensate consumers, permanently barred the defendants from future involvement in multi-level marketing schemes, and imposed a civil sanction on those found in contempt of the 2002 permanent injunction.
The Appeal and the Court’s Findings
The Individual Appellants appealed the district court’s decision, but they did not dispute their liability. Instead, they challenged specific aspects of the relief granted. The Ninth Circuit Court of Appeals addressed each of their arguments.
Asset Freeze and Receivership: The appellants argued that the district court’s initial asset freeze and receivership, established as part of the preliminary injunction, were improper. The appeals court determined this part of the appeal was moot because a permanent injunction had been issued. This final injunction did not address the receivership or asset freeze, so the appeals court did not address whether the preliminary measures were correctly implemented.
Civil Compensatory Sanction: The district court ordered a civil compensatory sanction of over $7.3 million against James Noland, Harris, and Sacca for violating the 2002 permanent injunction. The appeals court affirmed this sanction. The court explained that this sanction was appropriate because the Individual Appellants’ actions demonstrated a pattern of operating unlawful pyramid schemes. The court found that the financial penalty, which was based on the net revenues of SBH and VOZ Travel, was an accurate measure of consumer loss. The appellants had the opportunity to provide evidence of any offsets to the sanction but failed to do so. The appeals court also noted that any money left over after consumer redress would either be returned to the Individual Appellants or used for other purposes, as determined by the court.
Monetary Damages Under Section 19: The Individual Appellants argued that the district court did not have the authority to grant monetary relief of $6,829 for rule violations under Section 19 of the FTC Act. They claimed the FTC was required to conduct administrative proceedings and issue a cease-and-desist order before seeking monetary relief in federal court. The appeals court rejected this argument, stating that the FTC was correct in pursuing this action in federal court. The court explained that the specific section of the law under which the FTC brought its claims (violations of the Merchandise Rule and Cooling-Off Rule) did not require prior administrative proceedings. The court also clarified that the monetary relief was specifically for consumer redress.
Prohibition on Future Multi-Level Marketing: Finally, the Individual Appellants challenged the district court’s decision to permanently bar them from participating in any future multi-level marketing programs. The appeals court upheld this ban. It considered factors such as the seriousness and deliberateness of the violations, the ease with which deceptive practices could be transferred to other ventures, and the defendants’ history of prior violations. The court concluded that given the Individual Appellants’ past conduct and James Noland’s own statements, they had not demonstrated an ability to operate lawful multi-level marketing programs. The court acknowledged the importance of an individual’s right to pursue their chosen profession but determined that the ban was warranted in this case.