File:Thomas P. Norton v. Federal Trade Commission on October 1996.jpg

96-1944
Thomas P. Norton v. Federal Trade Commission

• 1. Whether sufficient evidence supports the district court's conclusion that petitioners violated Section 5 of the Federal Trade Commission (FTC) Act, 15 U.S.C. 45, in connection with their marketing of greeting card display rack business ventures.
• 2. Whether sufficient evidence supports the district court's conclusion that petitioners' business arrangements with their customers were "franchises" within the meaning of the FTC'S Franchise Rule, 16 C.F.R. 436.
• 3. Whether the district court properly entered various orders designed to preserve petitioners' assets from dissipation pending trial.

No. 96-1944 IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1996 THOMAS P. NORTON, ET AL., PETITIONERS v. FEDERAL TRADE COMMISSION, ET AL. ON PETITION FOR A WRIT OF CERTIORARITO THE UNITED STATES COURT OF APPEALSFOR THE ELEVENTH CIRCUIT BRIEF FOR THE FEDERAL TRADE COMMISSIONIN OPPOSITION WALTER DELLINGERActing Solicitor GeneralDepartment of JusticeWashington, D.C. 20530-0001 STEPHEN CALKINSGeneral Counsel JAY C. SHAFFERDeputy General Counsel ERNEST J. ISENSTADTAssistant General Counsel LAWRENCE DEMILLE-WAGMANAttorneyFederal Trade CommissionWashington, D.C. 20580

• QUESTIONS PRESENTED 1. Whether sufficient evidence supports the dis-trict court's conclusion that petitioners violatedSection 5 of the Federal Trade Commission (FTC)Act, 15 U.S.C. 45, in connection with their marketingof greeting card display rack business ventures.2. Whether sufficient evidence supports the dis-trict court's conclusion that petitioners' businessarrangements with their customers were "fran-chises" within the meaning of the FTC'S FranchiseRule, 16 C.F.R. 436.3. Whether the district court properly enteredvarious orders designed to preserve petitioners'assets from dissipation pending trial. (I)
• TABLE OF CONTENTS Page Opinions below . . . . 1Jurisdiction . . . . 2Statement . . . . 2Argument . . . . 6Conclusion . . . . 12 TABLE OF AUTHORITIES Cases: Anderson v. City of Bessemer City, 470 U. S. 564(1985) . . . . 8Caplin & Drysdale, Chartered v. United States,491 U.S. 617 (1989) . . . . 10Eatable Greetable Products, Inc. v. Sweet StopInc., 627 F. Supp.777(D. Mass. 1986) . . . . 10FTC v. H. N. Singer, Inc., 668 F.2d 1107(9th Cir.1982) . . . . 9FTC v. Security Rare Coin & Bullion Corp.,931 F.2d 1312 (8th Cir. 1991) . . . . 9FTC v. U. S. Oil & Gas Corp., 748 F.2d 1431 (llthCir. 1984) . . . . 9FTC v. World Travel Vacation Brokers, Inc.,861 F.2d 1020 (7th Cir. 1988) . . . . 9FTC v. World Wide Factors, Ltd., 882 F.3d 334(9th Cir. 1989) . . . . 10Porter v. Warner Holding Co., 328 U. S. 395(1946). . . . 9Taylor v. Freeland & Kronz, 503 U.S. 638(1992) . . . . 6United States v. James Daniel Good Real Property,510 U.S .43 (1993) . . . . 11United States v. Michelle's Lounge, 39 F.3d 684(7th Cir. 1994) . . . . 11United States v. Monsanto, 491 U.S. 600(1989) . . . . 10United States v. Moya-Gomez, 860 F.2d 706 (7thCir.1988), cert. denied, 492 U.S. 908(1989) . . . . 10 (III) IV Statutes, regulations rule: Page Federal Trade Commission Act, 15 U.S.C. 41 et seq.:5, 15 U.S.C. 45 . . . . 2, 4, 6, 7, 813(b), 15 U.S.C 53(b) . . . . 928 U. S.C 636(b)(l)(C) . . . . 1016 C.F.R.:Section 436 . . . . 3Section 436.2 (a)(l) (i) . . . . 5Section 436.2 (a)(l) (ii) . . . . 5Fed. R. Civ. P. 65(b) . . . . 9 ------------- IN THE UNITED STATES SUPREME COURT OCTOBER TERM, 1996 No. 96-1944 THOMAS P. NORTON, ET AL., PETITIONERS v. FEDERAL TRADE COMMISSION, ET AL. ON PETITION FOR A WRIT OF CERTIORARITO THE UNITED STATES COURT OF APPEALSFOR THE ELEVENTH CIRCUIT BRIEF FOR THE FEDERAL TRADE COMMISSIONIN OPPOSITION OPINIONS BELOW The per curiam order of the court of appeals (Pet.App. 5a-8a) is unpublished, but the judgment is notedat 101 F.3d 707 (Table). The district court's order entering findings of fact, conclusions of law, and permanent injunctive relief (Pet. App. 10a-34a) is reportedat 1994-1 Trade Cas. (CCH) 70,570. The districtcourt's order affording the receiver relief in certainrespects (Pet. App. 44a-50a) is unreported. 1 Although the petition refers to the Federal Communica-tions Commission as the respondent, the agency that has beenthe party to this case in the lower courts is the Federal TradeCommission. (1) 2
• JURISDICTION The judgment of the court of appeals was entered onOctober 29, 1996. A petition for rehearing was deniedon February 10, 1997. The petition for a writ of cer-tiorari was filed on May 12, 1997 (a Monday). Thejurisdiction of this Court is invoked under 28 U.S.C.1254(1).
• STATEMENT 1. Petitioners Thomas P. Norton, Jordan Ashley,Inc., Gold Coast Developers, Inc., and National Vending Systems, Ltd., Inc., were involved in the distribution of greeting cards through business ventures that they marketed to customers. For a payment of between $5,000 and $15,000, petitioners would supply their customers with an initial inventory of greeting cards and display racks. Customers were also informed that a professional locator service would assist them in finding suitable retail locations for the greeting card displays. Pet. App. 19a-20a. After receiving numerous complaints from customers about petitioners' greeting-card marketing ventures, the Federal Trade Commission (FTC) filed a complaint against petitioners in district court on November 16, 1993. The complaint alleged that petitioners had violated Section 5 of the Federal Trade Commission Act (FTC Act), 15 U. S.C. 45, by making false and misleading representations concerning the greeting card display rack business ventures that Patricia Riley, a petitioner in this Court, was not (as relevant here) involved in the business operations of the greeting-card venture and was not one of the original defendants to the complaint brought in district court, but for simplicity we makeno further distinction among the petitioners. 3 they marketed to customers, and the FTC's "Franchise Rule," 16 C.F.R. 436, by failing to provide prospective franchisees with disclosures required by the Rule. The complaint sought monetary relief for injuries suffered by customers as a result of the deceptive trade practices, as well as injunctive relief and theappointment of a receiver.On December 6, 1993, the district court granted theFTC's request for a temporary restraining order(TRO), appointed a receiver for the corporate defendants, and froze the defendants' assets. On December8, the receiver, Linda L. Carroll, took control of the corporations' books and offices. In examining thecorporate records, Carroll discovered the existence ofa condominium purchased with funds from petitioner Gold Coast. She then performed a title search, which revealed that Gold Coast held title to the property,and seized and secured the condominium on December 13. On December 13, 1993, petitioner Patricia Riley,the wife of petitioner Thomas Norton, moved in district court that the TRO be modified, to permit Rileyand Norton to occupy the condominium during the litigation. Riley contended that the condominium be-longed to her, not to Gold Coast; her claim was basedon a quitclaim deed from Gold Coast to her datedSeptember 21, 1993. Riley, however, had not submitted the deed for recordation until December 9,after she learned of the TRO and the seizure of the corporate offices, and recordation had not been accom-plished at the time that the receiver completed hertitle search. The district court held a hearing onDecember 15 and then denied Riley's motion, noting that the evidence established that the condominium had been purchased with funds from Gold Coast. Pet.App. 46a, 48a-49a.2. On March 8 and 14, 1994, the district court conducted a trial on the merits. The FTC presentedtestimony from four consumers regarding their experiences with petitioners, from petitioners' tax ac-countant, who identified tax returns for petitionersJordan Ashley and Gold Coast Developers; and fromthe receiver, who described petitioners' corporatestructure. The FTC also provided evidence regardingthe volume of petitioners' business. Although peti-tioners cross-examined all the FTC'S witnesses, theyrested their case without presenting any witnesses oftheir own, and without introducing any exhibits. SeeGov't C.A Br. 10-11.On April 5, 1994, the court entered an order con-cluding that petitioners had violated Section 5 of theFTC Act and the Franchise Rule, and directing relief against petitioners.3 Pet. App. 10a-34a. As to theSection 5 count, the court ruled that the four consumer-witnesses' testimony, which was "charac-teristic of those who purchased [petitioners'] business opportunities" (id. at 12a), established that peti-tioners had misrepresented the business opportuni-ties that they marketed to prospective franchisees.The court found specifically that petitioners' repre-sentatives would typically represent to investors thatthey could make substantial sums through the pur-chase of a distributorship, recouping the initialinvestment quickly, and that investors could dependon a professional locating company familiar with each. The court found that there was no real distinction amongthe corporate petitioners, and that all the petitioners had engaged in the actionable misrepresentation Pet. App. 11a. investor's region of the country to obtain suitableretail outlets for greeting-card sales. Id. at 12a-13a.In fact, the court found, "[virtually all of thesestatements later proved to be false" (id. at 13a); thelocating company usually failed to secure adequateoutlets for the card racks and proved unwilling to findreplacement locations, investors experienced greatlydisappointing sales volume and earnings, and franchi-sees discovered other distributors in the areas inwhich they had been promised exclusive distributionrights. Id. at 13a-14a.The court also concluded, based on the same evi-dence, that petitioners' business arrangements withtheir customers constituted "franchises" within the meaning of the FTC's Franchise Rule, which re-quires "a franchiser to provide prospective franchisees with a complete and accurate disclosure contain-ing twenty categories of in formation." Pet. App. 17a. Under the Rule, a business arrangement may be a"franchise" if (a) the franchisee sells goods or serv-ices identified with the service mark of the fran-chiser, and the franchiser gives "significant assis-tance" to the franchisee in marketing plans and pro-motional activities, or (b) the franchisee sells goodsor services supplied by the franchiser, and the fran-chiser provides the services of a person able to secureretail outlets for rack displays. Id. at 18a-19w, see 16C.F.R. 436.2(a)(l)(i) and (ii). The court found that theevidence introduced at trial satisfied both tests for afranchise arrangement, and in particular that peti-tioners "gave purchasers substantial assistance inoperating their distributorships," and that petition-ers "insisted that [customers] use a professionallocating company specified by [petitioners] in order toselect the locations for their [greeting-card] rack displays." Pet. App. 19a. The court also found thatpetitioners required their customers to pay fees ofsubstantial amounts, between $5,000 and $15,000, "inorder to acquire their initial sets of racks and cards,without which they could not have commencedoperation of their card distributorships." Id. at 20a.The district court granted injunctive relief andrequired petitioners to pay more than $9 million inredress. The court also continued the receivershipand ordered the receiver to formulate a plan to satisfypetitioners' liability. To facilitate redress, the court"directed petitioners to transfer title to the condominium to the receiver. Pet. App. 20a-30a.3. On appeal, petitioners challenged the entry of the TRO (permitting seizure of the corporate offices),Pet. C.A. Br. 18-34, the district court's denial of attorney's fees from petitioners' seized funds to defend the action, id. at 35-45, the entry of the injunction against a related corporation, id. at 45-48, and the seizure of the condominium, id. at 48-54. Petitioners did not,however, specifically challenge the factual basis forthe district court's findings of liability under either Section 5 of the FTC Actor the Franchise Rule. The court of appeals summarily affirmed. Pet. App. 5a-8a. ARGUMENT Petitioners argue (Pet. 20-28) that the evidence does not support the district court's conclusion that they violated Section 5 of the FTC Act and the FTC'sFranchise Rule. Those arguments, however, were not raised in petitioners' principal brief in the court of appeals, and, accordingly, have been waived. Taylorv. Freeland & Kronz, 503 U.S. 638, 644-645 (1992).The arguments are in any event without merit, as is petitioners' summary contention (Pet, 28-29) that they were denied fair opportunity to present thei rcase to an impartial court. Further review is there-fore not warranted.1. Petitioners contend that evidence presented tothe district court did not demonstrate violations ofSection 5 of the FTC Act and did not establish that the business opportunities they sold were "fran-chises" under the FTC's Franchise Rule. Pet. 20-28.The evidence presented to the district court, however,fully supports that court's conclusions.As to the violation of Section 5 of the FTC Act, thedistrict court based its conclusions on the testimonyof six witnesses presented by the FTC at trial,including four customers whose experiences it foundto be "characteristic" of those who purchased peti-tioners' business opportunities. Pet. App. 12a. Thosecustomers testified, and the district court found, thatpetitioners represented that an investor could expectto make substantial sums through a distributorship,often up to $50,000 per year; that an investor couldrecoup his initial investment quickly, within sixmonths; and that each investor would have the rightto operate as an exclusive distributor within histerritory. Ibid. "Virtually all of these statementslater proved to be false." Id. at 13a.As to the violation of the Franchise Rule, the cus-tomer witnesses testified that petitioners' represen-tatives assured them that "a `professional locatingcompany' familiar with each investor's region of thecountry would find retail outlets suitable for cardsales and willing to accept card display racks."Indeed, petitioners' representatives insisted thattheir customers defer to the locating companies inchoosing retail outlets. The assurances of substantial assistance from the professional locator servicealso proved false. Pet. App. 13a.Based on that testimony, the district court was fully justified in concluding that petitioners violatedSection 5 of the FTC Act and the Franchise Rule.Petitioners argue, however, that the customers'testimony was based on vague recollection, that the FTC excessively prepared those witnesses for trial,and that the testimony was "tailored by the directline of questioning by the FTC's attorneys," Pet- 24.Petitioners had ample opportunity to, and did, cross-examine each of the FTC's witnesses. None of peti-tioners' challenges to the witnesses' testimony dem-onstrates that any of the district court's specific factual findings was clearly erroneous, see Andersonv. City of Bessemer City, 470 U.S. 564, 573-575 (1985),or presents an important legal issue warranting thisCourt's review.Petitioners' contentions based on its summary of handwritten consumer complaints received by theFTC, see Pet. 22-28; Pet. App. 53a-54a, are irrelevant.The handwritten complaints were included with theevidence presented to the court in support of theFTC's motion for a TRO. The district court's finaljudgment, however, was based on the live testimony ofwitnesses at trial, and not on the TRO evidence.Petitioners were, moreover, flee to show at trial thatthe customers who testified did not have experiencesthat were characteristic of petitioners' franchisees,but they failed to produce any evidence to supporttheir case.2. There was also no error in any of the ordersentered by the district court to preserve petitioners'assets pending trial. Nothing in the Federal Rules of Civil Procedureor the two statutes cited by petitioners precluded thecourt from entering a TRO ex parte against petition-ers. See Pet. 20-21, 28. Federal Rule of Civil Proce-dure 65(b) expressly contemplates that a TRO may beentered exparte in certain circumstances. See Fed.R. Civ. P. 65(b) ("A temporary restraining order maybe granted without written or oral notice to theadverse party or that party's attorney.").There is also no basis for petitioners' argumentthat Section 13(b) of the FTC Act, 15 U.S.C. 5303),precludes entry of such a TRO. Section 13(b) pro-vides that, "in proper cases the Commission mayseek, and after proper proof, the court may issue, apermanent injunction." The courts of appeals thathave interpreted Section 13(b) have all held that itdoes not restrict the equitable powers of the districtcourt, and that it authorizes the court to employ itsfull complement of inherent equitable powers whenenforcing the FTC Act, including the power to grantprovisional injunctive relief. See FTC v. SecurityRare Coin & Bullion Corp., 931 F.2d 1312, 1314 (8thCir. 1991) (rescission); FTC v. World Travel Vaca-tion Brokers, Inc., 861 F.2d 1020, 1026 (7th Cir.1988) (preliminary injunction); FTC v. U.S. Oil &Gas Corp., 748 F.2d 1431, 1434 (11th Cir. 1984) (assetfreeze, appointment of receiver); FTC v. H. N, Singer,Inc., 668 F.2d 1107, 1111, 1113 (9th Cir. 1982)(rescission). Indeed, as this Court has explained, thecomprehensiveness of the district court's equitablejurisdiction "is not to be denied or limited in theabsence of a clear and valid legislative command."Porter v. Warner Holding Co., 328 U.S. 395, 398(1946). No such limitation exists in the FTC Act.Accordingly, there can be no doubt about the district 10 court's authority to grant an ex parte TRO in aproper case.Nor does 28 U.S.C. 636(b)(l)(C) preclude the FTCfrom seeking an ex parte TRO. That Section pro-vides that, when a matter has been submitted by adistrict court judge to a magistrate judge for a recom-mendation, the magistrate judge "shall file his pro-posed findings and recommendations * * * with thecourt and a copy shall forthwith be mailed to allparties." Petitioners contend that, because thedistrict judge referred the FTC's motion for a TROto a magistrate judge, Section 636(b)(l)(C) requiredthe magistrate judge to notify petitioners of his re-commendations. Nothing in the lanaguage of Section626 indicates, however, that magistrate judges mustgive notice in matters that a district judge couldproperly dispose of ex parte. See Eatable GreetableProducts, Inc. v. Sweet Stop Inc., 627 F. Supp. 777,779-780 (D. Mass. 1986) (noting that magistrate hadrecommended entry of ex parte TRO).b. Petitioners incorrectly argue they were enti-tled to pay their attorneys from funds frozen to pre-serve the possibility of redressing injured consumers.See Pet. 29. In fact, there is no such right. "Courtsregularly have frozen assets and denied attorney feesor limited the amount of attorney fees." FTC V.World Wide Factors, Ltd., 882 F.2d 344,347 (9th Cir.1989) (citing United States v. Monsanto, 491 U.S. 600,614 (1989), and Caplin & Drysdale, Chartered v.United States, 491 U.S. 617, 626 (1989) (no constitu-tional right to use frozen funds for attorney's fees,even in a criminal case)). To the extent that petition-ers suggest that United States v. Moya-Gomez, 860F.2d 706 (7th Cir. 1988), cert. denied, 492 U.S. 908(1989), entitles them to use frozen funds to pay attor- --------11 ney's fees, Pet. 29, they misread that case, which heldonly that due process requires that an adversaryhearing be held before the government "may byforfeiture continue to deprive a criminal defendant ofassets to pay attorneys in a criminal case." UnitedStates v. Michelle's Lounge, 39 F.3d 684, 691 (7th Cir.1994).c. Finally, there is no merit to petitioners' con-tention (Pet. 29) that the receiver's seizure of thecondominium was unconstitutional because petition-ers did not receive a pre-seizure or prompt post-seizure hearing. In fact, the court held an adversaryhearing on the matter on December 15, 1993, two daysafter the seizure. See Pet. App. 44a-50a. Further, asthis Court stated in United States v. James DanielGood Real Property, 510 U.S. 43 (1993):Unless exigent circumstances are present, theDue Process Clause requires the Government toafford notice and a meaningful opportunity to beheard before seizing real property subject to civilforfeiture. * * * To establish exigent circumtances, the Government must show that lessrestrictive measures-i.e., a lis pendens, re-straining order, or bond-would not suffice toprotect the Government's interests in preventingthe sale, destruction, or continued unlawful use ofthe real property.Id. at 62 (emphasis added).4 Here, exigent circums-tances justfied the pre-hearing seizure of thecondominium. The condominium contained corporate ___________________(footnotes) 4 James Daniel Good Real Property was decided onDecember 13, 1993, the same day that the receiver occupied thecondominium property and books that were being hidden from the receiver and could have been destroyed. Pet. App. 46a.Further, by the time of the seizure, the receiver, whois obligated to protect the corporate assets, already knew that petitioners were attempting to destroy evidence and secrete assets. Id. at 45a. - A lis pen-dens or bond could not have adequately assured thatpetitioners would not take such actions. In addition,petitioners were already subject to a restraining order and had violated it by withdrawing frozen funds.Id. at 46a-47a. Thus, the seizure of the condominiumdid not deny petitioners due process. CONCLUSION The petition for a writ of certiorari should bedenied. Respectfully submitted. WALTER DELLINGERActing Solicitor General STEPHEN CALKINSGeneral Counsel JAY C. SHAFFERDeputy General Counsel ERNEST J. ISENSTADTAssistant General Counsel LAWRENCE DEMILLE-WAGMANAttorneyFederal Trade Commission JULY 1997

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