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From Antitrust Law Daily, August 18, 2014

Owner personally liable for company’s deceptive advertising practices

By Linda O’Brien, J.D., LL.M.

The sole owner of a limited liability company was personally liable for injunctive relief and the payment of restitution for the deceptive marketing practices of his company in connection with three fraudulent schemes, the U.S. Court of Appeals in San Francisco has ruled. The permanent injunction granted by the district court, barring the owner from certain types of marketing and advertising, was not overly broad. However, the district court’s grant of summary judgment as to a fourth scheme was reversed and the case remanded for modification of the permanent injunction and amount of restitution (FTC v. Grant Connect, LLC, August 15, 2014, Smith, M.).

In 2003, the FTC brought an enforcement action against Kyle Kimoto and his company, Assail, Inc., for deceptive advertising of ostensible credit cards, charging consumer recurring fees, and erecting barriers to cancellation. A permanent injunction was issued that barred Kimoto from telemarketing and ordered him to pay restitution. Kimoto subsequently formed Vertek Group to engage in Internet marketing schemes. Although Kimoto’s spouse was the title owner of Vertek, Kimoto organized and ran the company. Through Vertek, Kimoto directed and participated in several deceptive marketing schemes—an unsecured line of credit, government grant, and a work from home scheme. Each scheme imposed an initial processing fee, automatic recurring monthly charges, and enrollment in additional offers. In 2008, the FTC pursued criminal charges against Kimoto for his activities in connection with his Assail company, and Kimoto was ultimately convicted and incarcerated. In 2009, Vertek marketed a nutritional supplement in which the company made unsubstantial claims and used the same deceptive ordering process.

In 2009, the FTC brought suit against Vertek, Kimoto and various participants in the four schemes. The district court, in granting the FTC’s motion for summary judgment, found that the four schemes were deceptively marketed in violation of the FTC Act and that Kimoto was personally involved in the practices and knew the advertising was misleading. The court also permanent enjoined Kimoto personally from engaging in a variety of advertising practices and ordered him to pay restitution. Kimoto appealed.

Personal liability. The district court properly held that Kimoto was personally liable for both injunctive relief and restitution with respect to Vertek’s line of credit, government grant, and work from home schemes. In rejecting Kimoto’s argument that he sought the advice of counsel and was imprisoned when Vertek received many of the consumer complaints regarding the line of credit scheme, the appellate court noted that his level of participation and knowledge of the deceptive webpages showed that he knew or was recklessly indifferent to Vertek’s deceptive practices. Kimoto was well aware of the fraudulent nature of the schemes before he was imprisoned, and his reliance of advice of counsel was no defense on the question of knowledge.

Kimoto was personally liable for Vertek’s false advertising of the government grant scheme, since he both controlled Vertek and directly participated in establishing the scheme, according to the court. Although Vertek did not market the scheme to consumers until after Kimoto was incarcerated, he had materially participated in the drafting of the scheme, and the marketing materials did not change after Kimoto ceased his active involvement. Kimoto also received phony testimonials before the product was launched and had knowledge that the scheme was deceptive before his imprisonment.

Additionally, Kimoto wrote the deceptive text for the webpages associated with the work from home scheme and received the product description which deceptively promised that consumers could earn inflated incomes. Thus, he possessed the requisite scienter to be personally liable for injunctive relief and for restitution, the court determined.

Nutritional supplement. The district court erred in granting summary and permanent injunction based on Vertek’s violations of the FTC Act in connection with the nutritional supplement scheme. Accordingly to the appellate court, Kimoto did not control Vertek at the time the nutritional supplement scheme was developed and there was no evidence that he directly participated in the scheme. He was incarcerated beginning in April 2008, whereas the scheme was not developed by Vertek until February 2009.

Scope of the injunction. Finally, the scope of the district court’s permanent injunction was not overbroad. The injunction barred Kimoto from engaging in certain types of marketing and advertising, and on all use of testimonials. To determine if an injunction is overbroad, the court considered (1) the seriousness and deliberateness of the violation, (2) the ease with which the violation may be transferred to other products, and (3) whether the respondent had a history of prior violations. In this case, Vertek operated as a common enterprise with the other participants in the scheme. Kimoto personally participated in three of the schemes before his imprisonment, his fraudulent conduct could easily be transferred to new product lines, and he previously engaged in the same deceptive marketing practices. Accordingly, the injunction was not overbroad and was reasonably tailored to prevent Kimoto from engaging in similar illegal practices in future advertisements, the court concluded.

The case is No. 11-18023.

Attorneys: Peter Borenstein, University of Loyola Law School, and Erica L. Reilley (Jones Day) for Kyle R. Kimoto. Theodore P. Metzler for the Federal Trade Commission.

Companies: Vertek Group, LLC; Grant Connect, LLC

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