FTC v. World Media Brokers , 415 F.3d 758 ( 2005 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-2721
FEDERAL TRADE COMMISSION,
Plaintiff-Appellee,
v.
WORLD MEDIA BROKERS, also
known as 913062 ONTARIO INC.,
624654 ONTARIO LTD., doing business
as EXPRESS MARKETING SERVICES, EXPRESS
MARKETING, doing business as EMS, et al.,
Defendants-Appellants.
____________
Appeal from the United States District Court for
the Northern District of Illinois, Eastern Division.
No. 02 C 6985—Amy J. St. Eve, Judge.
____________
ARGUED FEBRUARY 9, 2005—DECIDED JULY 27, 2005
____________
Before BAUER, EASTERBROOK, and ROVNER, Circuit
Judges.
ROVNER, Circuit Judge. Although individuals playing the
lottery rarely strike it rich, those selling lottery tickets
apparently do quite well. Take the case of seven affiliated
Canadian corporations, two United States corporations, and
their six corresponding principal officers, who made mil-
2 No. 04-2721
lions selling chances to play in the Canadian lottery. Their
enterprise came to a halt, however, after the Federal Trade
Commission (“FTC”) initiated an action for injunctive and
other relief pursuant to sections 13(b) and 19 of the Federal
Trade Commission Act (“FTC Act”), 15 U.S.C. §§ 53(b) and
57b, the Telemarketing and Consumer Fraud and Abuse
Prevention Act (“Telemarketing Act”), 15 U.S.C. § 6101-
6108, and the FTC Telemarketing Sales Rule (“TSR”), 16
C.F.R. § 310.1-9. The FTC alleged that the defendants had
engaged in deceptive trade practices by, among other
things, failing to notify U.S. consumers that it is illegal to
buy and sell foreign lottery tickets. The district court
entered a permanent injunction against five of the Cana-
dian corporations and ordered them to pay $19 million in
consumer redress. The court also entered judgment holding
two of the corporate officers, George Yemec and Anita Rapp,
jointly and severally liable. The defendants appeal, arguing
primarily that the district court erred by holding Yemec and
Rapp liable for the corporations’ allegedly deceptive prac-
tices.
I.
In 1999 the FTC began investigating a Canadian tele-
marketing enterprise selling chances to play the Canadian
lottery. The enterprise involved the following string of
interrelated corporations: World Media Brokers, Inc., a/k/a
913062 Ontario Inc.; 1165107 Ontario Inc., d/b/a Canadian
Catalogue, Canadian Catalogue Services, CCS, and
Interwin Marketing; Faby Games Inc., a/k/a 1106759
Ontario Inc., d/b/a Canadian Catalogue Services, and CCS;
624654 Ontario Limited, d/b/a Express Sales, Express
Marketing Services, EMS, and First Telegroup Marketing;
637736 Ontario Limited, d/b/a Express Marketing Services
and EMS; 537721 Ontario Inc., d/b/a Canadian Express
Club; Express Marketing Services Ltd., d/b/a EMS; Cash
No. 04-2721 3
and Prizes, Inc.; and Intermarketing Services, Inc. It is
difficult if not impossible to separate the actions of the
various corporations, which we refer to collectively as “the
corporate defendants.”
The corporate defendants began operations in the late
1980s. At that time, George Yemec, former publisher of
“Whole World Lottery Guide” and “Millions Magazine,”
started several companies that bought groups of lottery
tickets and resold them to U.S. and Canadian consumers.
Anita Rapp served as a corporate officer for several of the
corporate defendants and also handled various financial
matters for them.
The various corporate defendants operated by purchasing
lists of names that telemarketers then used to call individu-
als and offer them chances to play the Canadian lottery.
There were multiple variations on the offers extended. The
most common offers involved opportunities to buy packages
or groupings of tickets in two of Canada’s largest lotteries,
Lotto 6/49 and Lotto Super 7. Telemarketers promised
would-be buyers that “playing by mail in a small group is
the best way to play the Canadian government guaranteed
lottery.” The options to play included packages with
combinations of individual and group tickets that could be
purchased for anywhere from $77 up to $1,000. Other
possibilities included a year-long “subscription” to play
Lotto 6/49 and Lotto Super 7 (available for a set fee plus an
additional $17.95 “service fee”), or a stake in the lotteries
comprised of a combination of seven individual tickets, 700
group tickets, one share in the so-called “7,000 group,” and
a draw from what was called the “Cash & Prizes Program.”
Others were given a chance to take advantage of a special
“introductory offer” to join the “Jackpot Alert Service,” a
900 number where callers entered a pin number and paid
$1.99 a minute to get lottery information.
The FTC investigated the corporate defendants’ opera-
tions for several years. During its investigation, the FTC
4 No. 04-2721
gathered declarations from individuals who had partici-
pated in the lotteries and also procured tape-recordings of
telemarketers’ calls. Relying on this evidence, in 2002 the
FTC filed actions in Ontario, Canada (“the Canadian
proceeding”) and the Northern District of Illinois. In the
Canadian proceeding the FTC obtained two ex parte orders:
an injunction authorizing it to freeze certain corporate
assets, and an order allowing it to search the corporate
defendants’ premises.1
Several months later, in October 2002, the FTC filed its
complaint in district court, alleging that the corporate
defendants and six individual corporate officers violated
Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which pro-
hibits unfair or deceptive acts or practices in or affecting
commerce, and two provisions of the TSR—16 C.F.R.
§ 310.3(a)(1)(ii) (requiring telemarketers to disclose mater-
ial limitations on any goods or services offered) and
§ 310.3(a)(4) (forbidding telemarketers from making false or
misleading statements to induce purchase of goods or
services). Specifically, the FTC alleged that the defendants
had misled consumers by representing, among other things,
that it was legal for U.S. citizens to play the Canadian
lottery. In November the district court entered a stipulated
order for a preliminary injunction and an asset freeze
against both the individual and corporate defendants.
In August 2003, the FTC moved for partial summary
judgment against Yemec, Rapp, and five of the Canadian
1
Just over one year later, in October 2003, the Ontario Superior
Court of Justice dissolved the injunction on the basis that the FTC
had lacked standing to obtain the injunction, had not fully
disclosed certain information, and had failed to establish a strong
prima facie case of fraud against the defendants or demonstrate
that the defendants were likely to remove assets before judgment.
The FTC’s appeal of that decision was still pending in Canada at
the time this appeal was briefed.
No. 04-2721 5
corporate defendants. In March 2004, the district court
granted the FTC’s motion. The court concluded that it was
undisputed that the Canadian corporate defendants used
telemarketers to call consumers in the United States and
sell group and individual tickets in the Canadian lottery. In
these calls, telemarketers failed to inform consumers that
selling Canadian lottery tickets to U.S. citizens is illegal.
See 18 U.S.C. § 1301 (making it a crime to “transmit” a
ticket or interest in a lottery in foreign commerce); 18
U.S.C. § 1302 (making it a crime to mail any lottery ticket
or instrument representing a ticket or interest in a lottery);
18 U.S.C. § 1953 (making it a crime to send in foreign
commerce any instrument designed for use in a numbers,
policy, or bolita game). In fact, when consumers questioned
the legality of buying tickets in the Canadian lottery, the
telemarketers were trained to assure them that it was legal.
Thus, concluded the court, the corporate defendants had
engaged in deceptive practices forbidden by 15 U.S.C.
§ 45(a)(1), namely by misleading reasonable consumers into
believing that it was legal for them to purchase tickets or
interests in the Canadian lottery.
Likewise, the corporate defendants had violated
§ 310.3(a)(1)(ii) of the TSR by failing to conspicuously (or at
all, for that matter) disclose that selling foreign lottery
tickets is illegal. The district court found that the Canadian
corporate defendants had also violated § 310.3(a)(4) of the
TSR by falsely assuring consumers of the legality of their
purchases. Finally, the district court concluded that Yemec
and Rapp were individually liable for the corporate defen-
dants’ deceptive practices because they had authority to
control the corporations and knew or should have known
that it was illegal to sell Canadian lottery tickets to U.S.
citizens.
In June 2004, the district court entered final judgment
against Yemec, Rapp, and the five Canadian corporate
6 No. 04-2721
defendants.2 The judgment permanently enjoined Yemec,
Rapp, and the corporate defendants from engaging in any
telemarketing in the United States and from selling lottery
tickets to U.S. residents. The court also ordered Yemec,
Rapp, and the corporate defendants to pay $19 million in
consumer redress. See 15 U.S.C. § 57b(b) (giving court juris-
diction to authorize necessary relief, including consumer
redress); 15 U.S.C. § 6105(b) (granting FTC authority to
seek the same penalties for violations of the Telemarketing
Act as for violations of the FTC Act). Finally, the order
enjoined the defendants from selling or disclosing customer
lists and required them to provide existing customer lists to
the FTC.
II.
We review the district court’s grant of summary judgment
de novo, Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986),
construing all facts and drawing all reasonable inferences
in favor of the non-moving party, Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 255 (1986). Although all five Canadian
corporate defendants appealed, none of the arguments on
appeal relate to the corporate defendants’ liability. Instead,
the defendants argue only that the district court erred by
granting summary judgment against Yemec and Rapp and
holding them jointly and severally liable for the $19 million
in consumer redress.
To hold an individual liable for a corporation’s deceptive
practices, the FTC must first prove an underlying corporate
violation of section 5 of the FTC Act. See FTC v. Amy Travel
Serv., Inc., 875 F.2d 564, 573 (7th Cir. 1989); see also FTC
2
The remaining corporate and individual defendants have since
been dismissed or had default judgments entered against them;
thus, the district court’s judgment is final and appealable under
28 U.S.C. § 1291.
No. 04-2721 7
v. Freecom Communications, Inc., 401 F.3d 1192, 1203 (10th
Cir. 2005). Section 5 prohibits “[u]nfair or deceptive acts or
practices in or affecting commerce.” 15 U.S.C. § 45(a)(1).
The FTC may establish corporate liability under section 5
with evidence that a corporation made material representa-
tions or omissions likely to mislead a reasonable consumer.
See FTC v. Tashman, 318 F.3d 1273, 1277 (11th Cir. 2003);
FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020,
1029 (7th Cir. 1988).
We agree with the district court that the telemarketers’
script would likely mislead a reasonable consumer into
believing that it was legal to play the Canadian lottery in
the United States. Not only did the telemarketers fail to tell
U.S. consumers about laws prohibiting buying and selling
lottery tickets in foreign commerce, they were instructed to
give the following response to those consumers who said
that they had previously heard that playing Canadian
lotteries was illegal: “Well that’s just not true! We have
players from each and every one of the 50 states. What you
may have heard about is a U.S. postal regulation that
doesn’t allow anyone to send tickets through the mail, but
we don’t do that in this game anyway.” It is beyond ques-
tion that the legality of playing would be material to a
consumer’s decision to purchase the lottery packages.
Accordingly, the corporate defendants engaged in deceptive
practices both by omitting information about the legality of
their offers and by falsely assuring U.S. consumers that
playing the Canadian lottery was legal.
The defendants’ failure to inform consumers about pro-
hibitions on playing foreign lotteries also runs afoul of at
least two provisions of the TSR. Section 310.3(a)(1)(ii) of the
TSR requires telemarketers to fully and clearly disclose any
material limitations or restrictions on the goods or services
offered for sale. 16 C.F.R. § 310.3(a)(1)(ii). It goes without
saying that the legality of the offer itself qualifies as a
material restriction subject to disclosure. It is equally
8 No. 04-2721
apparent that the telemarketers’ assurances about the
legality of playing violated § 310.3(a)(4), which forbids
“making a false or misleading statement to induce any
person to pay for goods or services.” Id. § 310.3(a)(4); cf.
FTC v. Affordable Media, 179 F.3d 1228, 1233 (9th Cir.
1999). Thus, the FTC has established that the five
Canadian corporate defendants violated section 5 of the
FTC Act and subsections (a)(1)(ii) and (a)(4) of the TSR.
Yemec and Rapp essentially concede corporate wrongdo-
ing, but maintain that their involvement was too inconse-
quential to warrant individual liability. Upon establishing
corporate liability, the FTC is obligated to demonstrate that
the individual defendants either participated directly in the
deceptive acts or practices or had authority to control them.
Amy Travel, 875 F.2d at 573; see also Freecom Communica-
tions, 401 F.3d at 1204; FTC v. Publ’g Clearing House, Inc.,
104 F.3d 1168, 1170 (9th Cir. 1997). The FTC must also
prove that the individual defendants either knew or should
have known about the deceptive practices, but it is not
required to prove subjective intent to defraud. Amy Travel,
875 F.2d at 573-74. Instead, the FTC may fulfill the
knowledge requirement with evidence that the individuals
had “actual knowledge of material misrepresentations,
reckless indifference to the truth or falsity of such misrepre-
sentations, or an awareness of a high probability of fraud
along with an intentional avoidance of the truth.” Id. at 574(citation and internal quotations omitted).
We begin with Yemec, who argues primarily that he
cannot be individually liable because he did not “directly or
indirectly make false or misleading statements to U.S.
consumers or participate in practices designed to induce
U.S. consumers to purchase shares or interests in foreign
lottery tickets.” Yemec’s argument misses the mark.
Whether he personally made misrepresentations is irrele-
vant so long as the FTC has shown that he had authority to
control the corporations’ deceptive practices. See Freecom
No. 04-2721 9
Communications, 401 F.3d at 1204 (fact that defendant
“never personally misrepresented the income . . . is beside
the point because the law did not require the FTC to make
such a showing”).
Such authority may be demonstrated by active partici-
pation in the corporate affairs, including assuming duties
as a corporate officer. Amy Travel, 875 F.2d at 573. There
is no question that Yemec assumed the duties of a corporate
officer. He incorporated and served as the director, presi-
dent, and secretary of World Media Brokers, Inc. He also
served as the director, secretary, and treasurer of 624654
Ontario Ltd., and as the director, president, secretary, and
treasurer of both 637736 Ontario Ltd. and 537721 Ontario
Inc. Given his status as a corporate officer of multiple
corporations, Yemec would be hard-pressed to establish that
he lacked authority or control over them. Indeed, Yemec
concedes in his brief that he “did have authority and control
over the Corporate Defendant-Appellants which he owned
and managed.”
There is also ample evidence establishing that Yemec
knew selling Canadian lottery tickets to U.S. consumers
was illegal. For instance, in 1995 the Assistant Attorney
General of Oregon wrote Canadian Express Club, warning
it that the sale of foreign lottery tickets or pools was a
criminal offense. At least two consumers also wrote and
asked to be taken off the corporate defendants’ mailing lists
on the grounds that the foreign lottery business was illegal.
Additionally, the United States Postal Service personally
named Yemec in 1989 when it ordered several of the corp-
orate defendants to cease and desist sending material re-
lating to lotteries in the mail. Yemec ignores this damning
evidence, instead making a vague, blanket pronouncement
that he cannot be liable because he “took all necessary
steps” to keep telemarketers from making misrepresenta-
tions and fired those telemarketers who failed to follow
company guidelines. Yemec, however, does not explain how
10 No. 04-2721
he prevented telemarketers from misleading consumers. See
Morfin v. City of East Chicago, 349 F.3d 989, 1002 (7th Cir.
2003) (party opposing summary judgment must point to
specific facts establishing a genuine issue of material fact
for trial).
Indeed, to prevent consumer confusion, Yemec would have
had to instruct the telemarketers to call U.S. consumers
and offer them opportunities to participate in an illegal
lottery. It goes without saying that Yemec never took such
action. Moreover, Yemec makes no attempt to explain the
scripts, which he approved, directing telemarketers to as-
sure consumers that selling and purchasing foreign lottery
tickets is legal. In short, the undisputed evidence estab-
lishes that Yemec had the requisite knowledge and control
to be individually liable for the corporate defendants’
violations of the FTC Act and the TSR. See FTC v. Gem
Merch. Corp., 87 F.3d 466, 470 (11th Cir. 1996).
The same is true for Rapp. She attempts to downplay her
role in the corporate defendants’ operations, characterizing
herself as a “mere telemarketing consultant.” This charac-
terization is inconsistent with Rapp’s responses in the
district court to the FTC’s Local Rule 56.1(a) statements.
There she admitted that she served as a corporate officer
for at least two of the corporate defendants. Specifically, she
admitted that she is the director and president of 624654
Ontario Ltd., and that she was the president, secretary, and
treasurer of 637736 Ontario Ltd. Rapp also admitted
performing a number of tasks that evince active participa-
tion in the corporate affairs. For instance, she registered
and renewed three different business names for 624654
Ontario Ltd. (“Express Sales,” “First Telemedia Group,”
“First Telegroup Marketing”), and also registered and
cancelled the name “Express Marketing Services” for it. She
is also an authorized signing officer for 637736 Ontario Ltd.
Finally, the record contains multiple letters sent by Rapp to
banks handling the corporate defendants’ accounts. In those
No. 04-2721 11
letters she gives the banks directions on handling different
accounts and holds herself out as an “authorized officer” of
several of the corporate defendants. This evidence estab-
lishes a level of corporate involvement sufficient to demon-
strate the requisite authority to control the corporate
defendants. See Publ’g Clearing House, 104 F.3d at 1170(authority control shown by defendant’s authority to sign
documents on company’s behalf and role as corporate
officer).
Rapp’s level of corporate involvement likewise suffices to
demonstrate that, at the very least, she should have known
about the corporation’s deceptive practices. She was
handling most of the financial matters for several of the
defendants, something she could not have done without
knowledge of what the corporations were selling. Since the
entire premise of the corporation’s business was marketing
foreign lottery tickets, Rapp must have known what was
going on. She too was personally named in the cease and
desist order from the United States Postal Service, and thus
had notice that trafficking in foreign lotteries is illegal.
Accordingly, the district court did not err by holding Rapp
jointly and severally liable with the corporate defendants.
See id.One final matter. In her reply brief Rapp argues for the
first time that the district court erred by deeming certain
facts admitted on account of the defendants’ failure to
respond to the FTC’s request for admissions. See
Fed. R. Civ. P. 36(a). Rapp, however, has waived the argu-
ment because she fails to identify what “admissions” she is
referring to, or explain how the alleged error by the district
court affected its decision. See, e.g., Estate of Moreland v.
Dieter, 395 F.3d 747, 759 (7th Cir. 2005) (“Perfunctory or
undeveloped arguments are waived.”). The argument is
waived for the additional reason that Rapp raises it for the
first time in the reply brief. See Carter v. Tennant Co., 383
F.3d 673, 679 (7th Cir. 2004). Waiver aside, we can see no
12 No. 04-2721
error in the district court’s handling of the FTC’s requests
for admissions. The district court allowed the defendants to
withdraw their admissions, which had become binding
owing to their failure to respond in a timely fashion to the
FTC’s Rule 36 requests for admissions. See Fed. R. Civ. P.
36(a) (matters deemed admitted when party fails to respond
within 30 days); McCann v. Mangialardi, 337 F.3d 782, 788
(7th Cir. 2003) (same). Despite being allowed to withdraw
their admissions and being given additional time to re-
spond, the defendants never filed any response to the FTC’s
Rule 36 requests. Given that, we cannot say that the
district court erred by deeming the facts admitted.
III.
For the foregoing reasons, we AFFIRM the district court’s
judgment granting partial summary judgment in favor of
the FTC, entering a permanent injunction, and holding
Yemec and Rapp jointly and severally liable for $19 million
in consumer redress.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—7-27-05