UNITED STATES DISTRICT COURT
Magistrate Judge Seltzer
FEDERAL TRADE COMMISSION, Plaintiff,
DIANE M. JONAS,
PAUL A. JONAS, individually;
JAMES W. RAIM,
ROBERT BRIAN ROEMER,
THE BUSINESS OPPORTUNITY
MARKET SYSTEMS, LTD., an Illinois partnership;
NATURAL HEALTH SYSTEMS, INC., an Illinois corporation;
PROGRESSIVE PRODUCTS, INC., an Illinois corporation;
TAMI BRENNAN McCLURE,
PAUL S. JANS,
RICHARD A. HERBERT, M.D.,
MEMORANDUM OF LAW IN SUPPORT OF PLAINTIFF'S SECOND EX PARTE MOTION FOR A TEMPORARY RESTRAINING ORDER, APPOINTING A TEMPORARY RECEIVER, FREEZING ASSETS, AND ORDERING SIX ADDED DEFENDANTS TO CAUSE WHY A PERMANENT RECEIVER SHOULD NOT BE APPOINTED, AND WHY A PRELIMINARY INJUNCTION SHOULD NOT ISSUE
Plaintiff Federal Trade Commission seeks a second ex parte temporary restraining order ("TRO") against six newly added defendants named in the amended complaint, which is filed contemporaneously with this memorandum. On July 10, 1995, this Court entered a TRO against the five defendants originally named in this case, the Business Opportunity Center, Inc. ("BOC"), James W. Raim, Diane M. Jonas, Paul A. Jonas, and Robert Brian Roemer, after finding good cause that they had engaged and were likely to engage in acts and practices that violate Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. 45(a), and that the Federal Trade Commission ("Commission") was therefore likely to prevail on the merits. This Court entered the TRO with an asset freeze and appointed a temporary receiver for BOC and for Market Systems, Ltd., an unincorporated business entity controlled in part by defendant James W. Raim. On July 25, 1995, this Court entered Stipulated Preliminary Injunctions against these five defendants.
Plaintiff's amended complaint names six additional defendants who marketed the Alcohol Neutralizer with the original five defendants by making false claims about government approval of the product and about the findings of a Harvard Medical School study. The defendants' misrepresentations violate Section 5(a) of the FTC Act, 15 U.S.C. 45(a). The six added defendants are Market Systems, Ltd.,(1) Natural Health Systems, Inc., Progressive Products, Inc., Tami Brennan McClure, Paul S. Janus, and Richard A. Herbert, M.D.
The Commission seeks the same relief entered against the original five defendants. The Commission requests a second temporary restraining order with an asset freeze against the six added defendants to preserve the possibility of consumer redress and to stop further consumer injury. Specifically, the Commission seeks an ex parte temporary restraining order (1) appointing a temporary receiver, (2) freezing the added defendants' assets, (3) permitting expedited discovery, and (4) providing related equitable relief. Only an order providing the requested relief will preserve assets for consumer redress and prevent further injury to consumers by ensuring that no more of this product reaches consumers. The Commission also seeks an order to show cause why a permanent receiver should not be appointed and why a preliminary injunction should not issue. As explained more fully below, the defendants' persistent and ongoing deceptive practices, the likelihood of future violations, and the need to safeguard the public from financial and possible physical injury are sufficient to trigger this Court's statutory authority to grant the requested relief.
The six added defendants, like the original five defendants in this case, have defrauded and endangered consumers by marketing the "Alcohol Neutralizer," an herbal capsule that the defendants claim will "neutralize" or "detoxify" alcohol in the blood of people who have been drinking. The defendants rely on two key false claims to market the Neutralizer: that a Harvard Medical School study supports their claim and that the Alcohol Neutralizer is approved by the United States Food and Drug Administration ("FDA") as safe. The defendants have unabashedly targeted people who fear being arrested for drunk driving. Signs on the vending machines used for marketing the Neutralizer warn: "Breathalizers are not 100% accurate," and "DUI cases may cost you $2,500 or more!" Marketing materials add:
Just about everyone knows someone that had just a few social alcoholic drinks, only to be arrested for a DUI violation. Every state in the country has strict DUI laws and most are about to get even stricter. It is for this reason that the Neutralizer is sweeping the country.
(Exs. 28, p. 2; 2B, p. 2).(2)
The danger is obvious. People will trust that this product will enable them to drink and drive safely because the Harvard Medical School purportedly has tested it, and the federal government purportedly has sanctioned it. In fact, the Harvard study upon which the defendants rely does not support that conclusion (ex. 10), and the FDA has not approved the Neutralizer (exs. 6; 7). Worse still, at least one scientific study shows that the principal ingredient in the Neutralizer may have precisely the opposite effect -- people who drink too much and take the Neutralizer may actually stay drunk longer. (Ex. 11). The defendants' gross receipts from their illegal sales exceeded $200,000.(3) To protect the integrity of the marketplace and their innocent victims, they should be required to disgorge all the money they took.
In addition, the attempts of the six added defendants', along with the five original defendants, to frustrate law enforcement efforts justify the relief requested. On May 5, 1995, the FDA warned Defendant Market Systems, Ltd., by a letter to Defendant James W. Raim, that the Neutralizer violates the Federal Food, Drug, and Cosmetic Act because it is a drug being marketed without required FDA approval. (Ex. 8B).(4)
The FDA ordered that manufacturing and distribution of the Neutralizer stop immediately. By letter of May 16, 1995 (ex. 8C), Defendant Raim stated that "practically all" of the claims were "discontinued many weeks ago." By letters of May 18 and 22, 1995 (ex. 8D), he promised to stop distributing the Neutralizer and "related promotional materials." Despite the FDA's warning and Defendant Raim's promises, he and Defendants Janus, McClure, and Herbert continued to promote and market the Alcohol Neutralizer through Natural Health Systems, Inc. (exs. 53, p. 5; 55, p. 10; 56, pp. 13-16; 70, pp. 78, 79, 80, 81, 87, 89, 90, 92, 93), and Market Systems (exs. 32, pp. 4, 5, 25-27; 33, p. 1; 48, pp. 30, 31; 53, p. 4; 55, p. 2; 70, pp. 86, 88, 91), and their successor, Progressive Products, Inc. (exs. 50; 52; 56; 58; 70, p. 216). These defendants' surreptitious, continued marketing of the Neutralizer indicates a likelihood that they will continue to violate the law. Their recent attempts to thwart law enforcement efforts demonstrate the need for the kind of relief requested here.
II. THE PARTIES
A. The Federal Trade Commission
The Commission is an independent agency of the United States government created by the FTC Act, 15 U.S.C. 41 et seq. The Commission, among other duties, is charged with the enforcement of Section 5(a) of the FTC Act, 15 U.S.C. 45(a). The Commission is authorized to initiate court proceedings to enjoin violations of the FTC Act and to secure such equitable relief as may be appropriate in each case under Section 13(b) of the FTC Act, 15 U.S.C. 53(b). FTC v. U.S. Oil & Gas Corp., 748 F.2d 1431, 1434 (11th Cir. 1984) (per curiam) (aff'g and adopting FTC v. U.S. Oil & Gas Corp., No. 83-1702 CIV-WMH (January 7, 1984)).
B. The Defendants Added in the Amended Complaint
In conjunction with James W. Raim, who was named in the original complaint, Defendants Tami Brennan McClure, Paul S. Janus, and Richard A. Herbert, M.D., promoted and marketed the Alcohol Neutralizer through three companies that they controlled: Natural Health Systems, Inc., Market Systems, Ltd., and Progressive Products, Inc. They originally marketed the Neutralizer through Natural Health Systems and Market Systems. (See generally ex. 70). When the FDA instructed them to stop distributing the Neutralizer, they formed Progressive Products as a successor to Natural Health Systems and Market Systems and continued marketing the Neutralizer under a new name -- "Neutrahol." All of these defendants except Dr. Herbert operated from an office suite at 738 N. LaSalle, Chicago, Illinois. (Exs. 24, pp. 1-2; 25). All of the individual defendants, including Dr. Herbert, marketed or sold the Alcohol Neutralizer or Alcohol Neutralizer distributorships, franchises, or business ventures through Market Systems, Ltd., which contracted with Defendants BOC, Diane Jonas, Paul Jonas, and Robert Brian Roemer in Florida to market the Alcohol Neutralizer. (Exs.44; 57, 61, pp. 2-4). Below is a brief description of the relationships among these defendants followed by a table providing detailed citations to exhibits that demonstrate the roles played by the individuals in each company.
1. Natural Health Systems, Inc., and Its Principals
Natural Health Systems, Inc., an Illinois corporation, was incorporated on April 9, 1993. (Ex. 34, p. 9). James Raim and Tami Brennan McClure have both been president of the corporation, and Mr. Raim has also been general manager. James Raim and Paul Janus were involved personally in sales of the Neutralizer on behalf of Natural Health Systems. Paul Janus signed at least one contract on behalf of the corporation and played other important roles in advertising and marketing. See the table below for citations to exhibits demonstrating the roles played by Defendants Raim, Brennan, and Janus in this company.
2. Market Systems, Ltd., and Its Principals
Market Systems, Ltd., is a partnership controlled by Tami Brennan McClure, Paul S. Janus, and James W. Raim.(5) (Ex. 26). Tami Brennan and James Raim have been president of Market Systems, and Paul Janus has been vice-president. As the exhibits cited in the chart below demonstrate, James Raim and Paul Janus engaged in direct sales on behalf of Market Systems and played other important roles in sales and advertising. Richard Herbert was Medical Director of Market Systems. Dr. Herbert played a central role in promoting the Alcohol Neutralizer. See the table below for citations to exhibits demonstrating the roles played by Defendants Raim, Brennan, Janus, and Herbert in this company.
3. Progressive Products, Inc., and Its Principals
The FDA ordered Market Systems to cease manufacture and distribution of the Alcohol Neutralizer on May 5, 1995 (ex. 8B), and the company promised to do so (exs. 8C; 8D). Subsequently, on June 5, 1995, Defendant Janus incorporated Progressive Products, Inc., in Illinois (ex. 49) with Paul Janus as Progressive's president (exs. 58, p. 1; 70, p. 211). Progressive is the successor to Market Systems and Natural Health Systems. Market Systems transferred all of its assets to Progressive. (Ex. 60, pp. 1, 2). Natural Health Systems and Market Systems notified their customers that changes in the Neutralizer were about to occur. (Ex. 59, pp. 1-2). Progressive changed the name of the Neutralizer to "Neutrahol" (ex. 50) and prepared for distribution under a new label (exs. 51; 52; 53). Progressive also began renegotiating contracts with distributors and customers of Market Systems and Natural Health Systems. (Exs. 55, pp. 1-2, 7-8, 10-12; 57; 58, pp. 1-5). See the table below for citations to exhibits demonstrating the roles played by Defendants Raim and Janus in this company.
III. ACTS OR PRACTICES VIOLATING SECTION 5
The two misrepresentations alleged by the Commission are key to selling the Alcohol Neutralizer. The first misrepresentation, that the Alcohol Neutralizer or its ingredients are FDA approved or recognized as safe, assures prospective buyers that the government certifies the safety of this product as a sobriety aid. (Ex. 28, pp. 5, 26 [Market Systems]; ex. 8A, p. 17 [Market Systems]; ex. 44, p. 1 [Natural Health Systems]; ex. 48, pp. 2, 10-15 [Natural Health Systems]; ex. 64, pp. 8-9 [Dr. Herbert]). The second misrepresentation, that independent researchers from Harvard Medical School found that the product or its ingredients will "guard against toxic side effects of alcohol consumption" and, thus, will rapidly lower the amount of alcohol in a person's blood, assures prospective buyers that the product is tested and effective. (Ex. 29, p. 1 [Market Systems]; ex. 38, p. 4 [Natural Health Systems]; ex. 48, p. 8 [Natural Health Systems]; ex. 51, pp. 1-3 [Progressive Products]; compare ex. 2B, p. 10 and ex. 65, p. 23, #99-102 [Dr. Herbert]; ex. 62, p. 4 [Dr. Herbert]). Taken together, these two misrepresentations assure consumers who want to distribute or resell the product that the Neutralizer will be in great demand -- and profitable.
A representation is a "deceptive act or practice" that violates Section 5 of the FTC Act, 15 U.S.C. 45(a), if it is material and likely to mislead consumers acting reasonably under the circumstances. Cliffdale Assocs., Inc., 103 F.T.C. 110, 165 (1984) (cited with approval in FTC v. Atlantex Assocs., 1987-2 Trade Cas. (CCH) 67,788 at 59,252-53 (S.D. Fla.), aff'd, 872 F.2d 966 (11th Cir. 1989)). Express claims, or deliberately made implied claims, are presumed to be material. Thompson Medical Co., Inc., 104 F.T.C. 648, 816 (1984), aff'd, 791 F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086 (1987); Cliffdale Assocs., 103 F.T.C. at 168. Moreover, an implied claim or an omission is presumed to be material where the claim or omission is likely to affect a consumer's choice of, or conduct regarding, a product, see Cliffdale Assocs., 103 F.T.C. at 182; see also FTC v. Southwest Sunsites, Inc., 105 F.T.C. 7, 149, aff'd, 785 F.2nd 1431 (9th Cir. 1986), or pertains "to the central characteristics of a product or service, such as those relating to its purpose, safety, efficacy, or cost." Thompson Medical Co., 104 F.T.C. at 816-17; see also FTC v. Southwest Sunsites, Inc., 665 F.2d 711, 723 (5th Cir.), cert. denied, 456 U.S. 973 (1982). A claim is "likely to mislead" if it is false. Thompson Medical Co., 104 F.T.C. at 818-19. Consumers are entitled to interpret reasonably each representation as meaning precisely what it purports to mean, and are under no obligation to doubt the veracity of a claim. See id. at 788, 792 n.6.(6)
A. Misrepresentations of Government Approval
The defendants claim that the FDA has "approved" or "generally recognized as safe" the Alcohol Neutralizer or its ingredients for lowering a person's blood alcohol level. Marketing materials distributed by Market Systems and Natural Health Systems state:
All the herbs in Neutralizer are on the FDA's G.R.A.S. (Generally Recognized As Safe) list.
(Exs. 28, p. 26, see also p.15 [Market Systems]; 8A, pp. 17, 24 [Market Systems]; 48, pp. 2, 15 [Natural Health Systems]). Other marketing materials state that the "FDA has approved all of its ingredients" (ex. 28, p. 5 [Market Systems]), or that "our manufacturing lab does not manufacture any products that do not conform to FDA regulations" (ex. 44, p. 1 [Natural Health Systems]).
In a taped telephone conversation with a Commission investigator, Defendant James Raim, the president of Market Systems and president or general manager of Natural Health Systems, claimed that the Neutralizer is on the FDA's generally recognized as safe ("GRAS") list. He stated:
Oh, it's 100 percent safe. All the ingredients are on the FDA's what we call generally regarded or generally recognized as safe list. That's the GRAS list that they have.
(Ex. 2N, p. 44).(7)
The defendants' claim -- that the Neutralizer is generally recognized as safe, or "GRAS," by the FDA -- is false and misleading. Their reference to GRAS misrepresents the FDA status of the Alcohol Neutralizer and falsely suggests that the FDA has reviewed and found this product to be safe for the marketed use. The FDA's GRAS regulations, 21 C.F.R. Parts 182 and 184, apply only to food substances and food uses. The regulations, which provide a list of GRAS food substances, do not apply to the Alcohol Neutralizer because it is not a food substance (ex. 7), and the defendants do not market it as a food substance. The defendants sell the Neutralizer to reduce the amount of alcohol in a person's system, a use which is beyond the scope of the GRAS regulations (ex. 7), and which renders the product a drug (exs. 6; 8B). However, even if a GRAS listing were relevant to the Neutralizer, most of the Neutralizer's ingredients, as identified by the defendants, are not listed as GRAS in the FDA's regulations at all. Out of 15 listed ingredients, only three are listed as GRAS for use in food. For example, two Neutralizer ingredients, cardamon and ginger, are listed as GRAS as spices and other natural seasonings and flavors at 21 C.F.R. 182.10; and one Neutralizer ingredient, citrus, is listed as GRAS as an essential oil, oleoresin, or natural extractive at 21 C.F.R. 182.20. (Ex. 7). What is dispositive here, though, is that the FDA has never issued regulations listing any food substance as GRAS for lowering a person's blood alcohol level. (Ex. 7).
FDA does require that a product intended for use to minimize or reduce inebriation must have an approved new drug application. A claim that the FDA "approved" the Neutralizer or its ingredients is patently false and misleading. Alcohol Neutralizer is not FDA approved for any use. (Ex. 6). Moreover, the FDA has not approved any drug product as safe and effective for minimizing or reducing inebriation or for rapidly lowering a person's blood alcohol levels. (Ex. 6).
These claims are material because they are deliberately made express or implied claims about the safety of the product, see Thompson Medical Co., 104 F.T.C. at 816-17, and they are likely to mislead because they are false. See id., at 818-19. These claims, therefore, violate Section 5.
B. Misrepresentations about the Scientific Support for the Neutralizer's Effectiveness (Count II)
The defendants claim that an independent medical study by researchers at the Harvard Medical School shows that the Alcohol Neutralizer is effective in lowering the amount of alcohol in a person's blood. (Exs. 2B, p. 8; 2J, p. 9). Market Systems' product label on The Neutralizer states:
This product's formula helps safeguard against the toxic side effects of alcohol consumption, as demonstrated by a Harvard Medical School study.
(Ex. 29, p. 1). Natural Health Systems promotional materials state:
(Exs. 38, p. 2, 4; 48, p. 8). Labeling materials for distribution by Progressive Products under the name Neutrahol state:
NeutraHOL's effectiveness has been independently documented by:
1. Harvard Medical School's analysis of the main ingredient, Daidzin (from the Pueraria plant).(8)
2. A double blind study of NeutraHOL at work in a social setting.(9)
3. Proceedings of the National Academy of Science [sic], USA. Daidzin: A potent, selective inhibitor of human mitochondrial aldehyde dehydrogenase.(10)
(Ex. 51, pp. 1, 2) (citations omitted). Finally, Dr. Herbert claimed that the Harvard study supported his conclusion that "the Neutralizer product is effective." (Exs. 62, p. 4; 2B, p. 10).
The defendants' representations regarding this Harvard study are false and misleading. First and foremost, this Harvard study did not find that Pueraria had any effect on the elimination rate of alcohol. Instead, the study showed that a Pueraria extract decreased a Syrian hamster's (not a human's) desire to drink alcohol in the first place, and not that Pueraria could reduce blood alcohol levels after alcohol ingestion. The Harvard researchers did not even attempt to study the toxic side effects of alcohol consumption or the ability of Pueraria to remove alcohol from the blood system rapidly. (Ex. 10). Under questioning by Montel Williams on his nationally televised talk show, Defendant Herbert admitted that the Harvard Medical School has never studied the Neutralizer or the combination of ingredients used in the Neutralizer. (Ex. 63, pp. 33-34).
Another medical study involving Pueraria was published in response to the Harvard Medical School study by a group of researchers in Indianapolis, Indiana. The Indiana study was conducted, in part, to see whether Pueraria affects a liver enzyme that breaks down alcohol in blood. The Indiana study found, contrary to the defendants' claims, that blood alcohol concentrations receded more slowly when a component of Pueraria was used. (Ex. 11). Thus, the Neutralizer might actually slow the elimination of alcohol from the system and prolong its effects.
This claim, too, is material because it is a deliberately made express or implied claim about the efficacy of the product, see Thompson Medical Co., 104 F.T.C. at 816-17, and it is likely to mislead because it is false. See id., at 818-19. This claim, therefore, also violates Section 5.(11)
A. This Court Has Authority To Grant the Relief Requested
As final relief in this case, the Commission seeks a permanent injunction, including disgorgement of ill-gotten gains and restitution to injured consumers, under Sections 13(b) and 19 of the FTC Act, 15 U.S.C. 53(b), 57b(b). To preserve the possibility of effective final relief, the Commission now seeks a temporary restraining order with an asset freeze, appointment of a receiver, and a preliminary injunction. Under Section 13(b), the Court may resort to the full range of its equitable powers in molding remedies for violations of Section 5(a):
Congress, when it gave the district court authority to grant a permanent injunction against violations of any provisions of law enforced by the Commission, also gave the district court authority to grant any ancillary relief necessary to accomplish complete justice because it did not limit that traditional equitable power explicitly or by necessary and inescapable inference.
FTC v. U.S. Oil & Gas Corp., 748 F.2d 1431, 1434 (11th Cir. 1984) (per curiam) (quoting FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1113 (9th Cir. 1982); see also Porter v. Warner Holding, Inc., 328 U.S. 395, 397-98 (1946); FTC v. Elders Grain, Inc., 868 F.2d 901, 907 (7th Cir. 1989); FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 571-72 (7th Cir.), cert. denied, 493 U.S. 954 (1989); FTC. v. Southwest Sunsites, Inc., 665 F.2d 711, 718 (5th Cir.), cert. denied, 456 U.S. 973 (1982). "[T]his Court's inherent equitable powers may be employed to issue a preliminary injunction, including a freeze of assets, during the pendency of an action for permanent injunctive relief." U.S. Oil & Gas, 748 F.2d at 1434; see also Levi Strauss & Co. v. Sunrise Int'l Trading, Inc., 51 F.3d 982, 987 (11th Cir. 1995) (reaffirming U.S. Oil & Gas). By temporarily and preliminarily enjoining the defendants' illegal practices, this Court will effectuate Congress' intent in enacting Section 13(b) by protecting consumers from the effects of deceptive trade practices "as soon as possible." FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020, 1028 (7th Cir. 1988); see also Southwest Sunsites, 665 F.2d at 719.
Section 13(b) authorizes the issuance of a temporary restraining order or a preliminary injunction "in proper cases . . . and after proper proof." 15 U.S.C. 53(b) (second proviso). Conduct that violates Section 5 of the Act, 15 U.S.C. 45, is a proper case. FTC v. Atlantex Assocs., 1987-2 Trade Cas. (CCH) 67,788, 59,253 (S.D. Fla.). "Proper proof" means that the Court need make only a "preliminary assessment" of whether FTC "likely will prevail" on the merits. See FTC v. University Health, Inc., 938 F.2d 1206, 1218 (11th Cir. 1991) (applying statutory injunctive standard in a case brought under Section 13(b) (first proviso).(12) Unlike private litigants who seek restraining orders or preliminary injunctions, the Commission need not satisfy the traditional equity standard of irreparable injury, which is presumed in a statutory enforcement action. University Health, 938 F.2d at 1218; Gresham v. Windrush Partners, Ltd., 730 F.2d 1417, 1423 (11th Cir.), cert. denied, 469 U.S. 882 (1984); FTC v. World Wide Factors, Ltd., 882 F.2d 344, 347 (9th Cir. 1989); H.R. Conf. Rep. No. 624, 93rd Cong., 1st Sess. 31 (1973), reprinted in 1973 U.S. Cong. & Admin. News 2417, 2533. As discussed below, the Commission's evidence amply demonstrates a likelihood that it will prevail on the merits of this case.
B. The Evidence Amply Justifies Entry of a Temporary Restraining Order and Preliminary Injunction
1. Evidence of Section 5 Violations
As discussed above, the affidavits and other materials submitted to this Court demonstrate that the defendants violate Section 5 of the FTC Act by making two material misrepresentations: that FDA has approved or generally recognized as safe the Alcohol Neutralizer or its ingredients; and that an independent medical study by researchers from Harvard Medical School shows that Alcohol Neutralizer "guards against the toxic side effects of alcohol consumption," and, thus, rapidly lowers the amount of alcohol in a person's blood (supra, para. III). The evidence presented of Section 5 violations amply demonstrates a likelihood that the Commission will prevail on the merits of this issue.
2. Defendants' Liability for Monetary Relief
To establish a corporate defendant's liability for disgorgement or restitution in Section 5 cases, the Commission must demonstrate (1) that the corporation made material misrepresentations or omissions, (2) that the material misrepresentations or omissions were widely disseminated, and (3) that consumers purchased the defendants' products or services. See FTC v. Security Rare Coin & Bullion, 931 F.2d 1312, 1316 (8th Cir. 1991); FTC v. Amy Travel, 875 F.2d at 573; FTC v. Kitco of Nevada, Inc., 612 F. Supp. 1282, 1293 (D. Minn. 1985).(13) As discussed above, the defendants here do violate Section 5 in widely disseminated promotions by making misrepresentations in written materials and orally (supra, para. III). Also, the evidence shows that sales to many customers by Natural Health Systems, Market Systems, and Progressive Products exceeded $200,000.00. (Supra, n. 2; see generally ex. 70). These three defendants, therefore, are liable for equitable monetary relief.
For the individual defendants to be held liable for a monetary judgment, the Commission also must show that (1) the individual defendants had the authority to control the deceptive acts or practices or participated in them and (2) the individual defendants had some knowledge of the acts or practices. See, e.g., Jordan Ashley, 1994-1 Trade Cas. (CCH) 70,570 at 72,096 (S.D. Fla. 1994) (Ex. 13) (citing Amy Travel, 875 F.2d at 573); Magui, 1991-1 Trade Cas. at 65,728. An individual's status as a corporate officer gives rise to a presumption of authority to control a closely-held corporation. "A heavy burden of exculpation rests on the chief executive and primary shareholder of a closely held corporation whose stock-in-trade is overreaching and deception." Standard Educators, Inc. v. FTC, 475 F.2d 401, 403 (D.C. Cir.), cert. denied, 414 U.S. 828 (1973). To show that an individual defendant had some knowledge of the wrongful conduct, the Commission need not show that the defendant had actual knowledge of falsity; it is sufficient that the defendant had an awareness of a high probability of fraud coupled with an intentional avoidance of the truth, or acted with reckless indifference to the truth or falsity of such representations. Atlantex Assocs., 1987-2 Trade Cas. at 59,253 (Ex. 15); Kitco, 612 F. Supp. at 1292-94. The Commission need not show specific intent to defraud. See, e.g., Jordan Ashley, 1994-1 Trade Cas. at 72,096.
The Commission has amply demonstrated a likelihood that Tami Brennan McClure, Paul S. Janus, and Richard A. Herbert, M.D., will be liable for a monetary judgment. Tami Brennan McClure, as a partner and chief executive of Market Systems and Natural Health Systems, has the authority to control the business practices of these small, closely held companies. (Exs. 26, pp. 2, 7-8, 17; 34, pp. 3, 11; 35, p. 1-5). Paul S. Janus is vice-president and a partner of Market Systems (exs. 26, pp. 2, 17; 30, p. 2; 55, p. 3; 70, pp. 54, 286) and president of its successor, Progressive Products (ex. 70, p. 208). He actively participated in the formulation of the deceptive promotional materials to market the Alcohol Neutralizer (exs. 32, pp. 16-20; 33, p. 1; 48, pp. 3-7, 10) and had the authority to sign contracts and perform other significant acts on behalf of the companies (exs. 26, p. 18; 32, pp. 2, 14-15; 52, p. 6; 53, pp. 4, 6; 55, p. 8; 70, pp. 140, 208, 236). Mr. Janus also participated directly in sales for Market Systems (exs. 28, p. 2; 70, pp. 25, 54, 56, 67, 74-76) and Natural Health Systems (ex. 70, pp. 11, 50, 56, 199-201) and distributed deceptive materials (ex. 28, p. 2). Dr. Herbert, as Medical Director of Market Systems (ex. 62, pp. 1-2), had the authority and the expertise to control the deceptive business practices in promoting the Alcohol Neutralizer. Dr. Herbert also personally misrepresented the findings of the Harvard Medical School study and the FDA status of the Neutralizer (exs. 2B, p. 10; 62, p. 4; 63, pp. 17-20; 64, pp. 8-9; 65, p. 23, #99-102). Each individual defendant, therefore, participates in deception or has authority to control the deceptive practices. Given the degree of participation and authority of these individuals in the deceptive scheme, it is inconceivable that they could avoid knowing about the misrepresentations that constitute the core of the defendants' fraudulent scheme. There is a likelihood, therefore, that all of the individual defendants will be liable for a monetary judgment.
3. The Equities Favor Granting Temporary and Preliminary Relief
A preliminary injunction is a particularly appropriate remedy where the Commission shows "some reasonable likelihood of future violations." See CFTC v. Hunt, 591 F.2d 1211, 1220 (7th Cir.), cert. denied, 442 U.S. 921 (1979). The defendants' past misconduct "gives rise to the inference that there is a reasonable likelihood of future violations." SEC v. R.J. Allen & Assoc., Inc., 386 F. Supp. 866 (S.D. Fla. 1974); see also Hunt, 591 F.2d at 1220. The need for injunctive relief is especially acute where injunctive relief may prevent significant injury to consumers, as is true in this case. See World Travel Vacation Brokers, 861 F.2d at 1331-33. In contrast, requiring the defendants to comply with the law is hardly an unreasonable burden. See World Wide Factors, 882 F.2d at 347 ("there is no oppressive hardship to defendants in requiring them to comply with the FTC Act, refrain from fraudulent representation or preserve their assets from dissipation or concealment"); United States v. Diapulse Corp. of Am., 457 F.2d 25, 29 (2d Cir. 1972) ( defendants "can have no vested interest in a business activity found to be illegal.") Any hardship that a preliminary injunction and asset freeze imposes on defendants is temporary and outweighed by the public interest in preserving available assets for redress to consumers. The defendants have systematically deceived consumers, and the scheme continues unabated. The deception should be halted immediately to prevent further injury to the public.
C. An Asset Freeze, Temporary Receiver, and Expedited Discovery are Necessary to Preserve Effective Final Relief
The Commission's request for an ex parte order is warranted under the circumstances of this case. Rule 65(b) of the Federal Rules of Civil Procedure provides that a court may enter a temporary restraining order without notice to the opposing party where it appears that "immediate and irreparable injury, loss or damage will result to the applicant before the adverse party or his attorney can be heard in opposition." Where, as here, defendants' business operations have been permeated by fraud, there is a strong likelihood that defendants will attempt to dissipate their assets after they are given notice of the amended complaint. Mindful of this, courts have ordered the ex parte appointment of receivers, the freezing of assets, expedited discovery, and other ancillary relief in circumstances similar to those found here.(14)
The appointment of a receiver will prevent the individual defendants from using the businesses as vehicles for their fraudulent practices:
The district court's exercise of its equity power in this respect is particularly necessary in instances in which the corporate defendant, through its management, has defrauded members of the investing public; in such cases, it is likely that, in the absence of the appointment of a receiver to maintain the status quo, the corporate assets will be subject to diversion and waste to the detriment of those who were induced to invest in the corporate scheme and for whose benefit, in some measure, the SEC injunctive action was brought.
SEC v. First Fin. Group of Tex., 645 F.2d 429, 438 (5th Cir. Unit A May 1981); see also U.S. Oil & Gas, 748 F.2d at 1432 (holding that appointment of receiver and asset freeze was appropriate in case where defendants deceptively telemarketed interests in oil and gas leases); R.J. Allen & Assocs., 386 F. Supp. at 878 ("[A] receiver is permissible and appropriate where necessary to protect the public interest and where it is obvious, as here, that those who have inflected [sic] serious detriment in the past must be ousted."); SEC v. Keller Corp., 323 F.2d 397, 403 (7th Cir. 1963) ("[I]t is hardly conceivable that the trial court should have permitted those who were enjoined from fraudulent misconduct to continue in control of [the corporate defendant's] affairs for the benefit of those shown to have been defrauded"); In re McGaughey, 24 F.3d 904, 907 (7th Cir. 1994) ("The appointment of a receiver is an especially appropriate remedy in cases involving fraud and the possible dissipation of assets since the primary consideration in determining whether to appoint a receiver is the necessity to protect, conserve and administer the property pending final disposition of a suit."). Here, the defendants have sold the Neutralizer by perpetuating the fraud that the Neutralizer will rapidly and safely sober up a drinker and that the federal government and Harvard Medical School researchers agree with such claims.
The defendants' assets must be frozen to preserve the possibility of disgorgement of illegally obtained money or restitution to the victims of their deceptive scheme. "The reparation of funds caused by the defalcation and fraud of these defendants is required by natural justice and is within the equity power of this Court." R.J. Allen & Assocs., 386 F. Supp. at 880. As the Eleventh Circuit recently reaffirmed, "[a] request for equitable relief invokes the district court's inherent equitable powers to order preliminary relief, including an asset freeze, in order to assure the availability of permanent relief." Levi Strauss & Co. v. Sunrise Int'l Trading, Inc., 51 F.3d at 987. Defendants' business operations depend upon significant false and deceptive claims, thus evincing a strong likelihood that the defendants will conceal or dissipate their assets.(15)
For the foregoing reasons, Plaintiff Federal Trade Commission requests that this Court issue the requested ex parte temporary restraining order and preliminary injunction.
LAWRENCE H. NORTON
1. At the time of its original filing, the Commission believed that Market Systems, Ltd., was merely a name under which James W. Raim did business. See Plaintiff's Memorandum in Support of Application for Temporary Restraining Order at 4-5 & n.1 (filed July 10, 1995). As discussed in this memorandum, the evidence indicates that Market Systems, Ltd., is a partnership in which Defendants Raim, Tami Brennan McClure, Paul S. Janus, and Richard A. Herbert are partners.
2. In this memorandum, the Commission references exhibits numbered 1 through 70. Exhibits 1 through 23 were filed on July 10, 1995 in support of the Commission's first application for a temporary restraining order. Exhibits 24 through 70 accompany this memorandum.
3. Between November 30, 1994 and June 9, 1995, the defendants deposited at least $153,476.71 into a Market Systems, Ltd. account. (Ex. 66). Between April 6 and July 7, 1995, they deposited at least $35,854.72 into a Natural Health Systems, Inc. account. (Ex. 67). Finally, the defendants received a check for $50,420.00 from a distributor (ex. 70, p. 217), which they deposited into a Progressive Products, Inc. account (ex. 69, p. 1).
4. The defendants knew it was illegal for them to make "any specific claims to the general public" about the safety or efficacy of the Neutralizer. (Exs. 31, p. 3; 28, p. 5). They also received repeated warnings that they were violating the law and endangering the public. (Exs. 30, p. 4; 40, pp. 4-5; 41, p. 2; 63).
5. Market Systems, Ltd., was incorporated in Illinois on December 2, 1991, but was involuntarily dissolved on May 2, 1994, for failure to file an annual report and pay an annual franchise tax to the State of Illinois. (Ex. 1B).
6. The Commission need not prove intent to deceive or knowledge that a representation violates Section 5 in order to prove a violation of Section 5. See, e.g., FTC v. International Diamond Corp., 1983-2 Trade Cas. (CCH) 65,725 at 69,707 (N.D. Cal.) (knowledge or intent not elements of proof in Section 5 administrative action).
7. In a taped, though possibly unpublished, interview, Dr. Herbert repeats this claim that the Neutralizer's ingredients are "FDA approved as safe." (Ex. 64, p. 9).
8. This "independent documentation" is an excerpt from a "Citylife" article citing the Harvard study. (Ex. 51, p. 3). This article is also cited in the brochure used by Defendant Business Opportunity Center (ex. 2B, p. 8), which the defendants adapted for the Progressive Products materials to use the name "Neutrahol."
9. This is a "study" done by Defendant Herbert. (Exs. 2, p. 2, par. 4; 2J; Ex. 65, p. 23). Defendant Herbert himself admitted that this was "not a scientific study." (Ex. 63, p. 29).
10. This is the title of, and publication in which, the Harvard study, cited in all the defendants' materials, appears. (Cf. exs. 51, p. 3; 38, p. 4; 9, pp. 7, 25-29).
11. Defendant Herbert also admitted to another misrepresentation. He initially told a national television audience on the Montel Williams show recently that "blood alcohol levels on a majority of [his] patients decreased moderately" an hour and a half after taking the Neutralizer. (Ex. 63, p. 18). On the same show, however, Dr. Herbert admitted that the product "only works by decreasing your ability to take in alcohol because you're not thirsty for it" and not by decreasing blood alcohol levels. (Ex. 63, p. 32).
12. In FTC v. University Health, Inc., 938 F.2d 1206 (11th Cir. 1991), the Commission brought a case under Section 13(b) (first proviso), 15 U.S.C. 53(b), to obtain preliminary injunctive relief before filing a complaint. Because a complaint had not yet been filed, the Court required the Commission to "`raise questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals.' Warner Communications Inc., 742 F.2d  at 1162 [(9th Cir. 1984)] (quoting FTC v. National Tea Co., 603 F.2d 694, 698 (8th Cir. 1979)." 938 F.2d at 1218. The Court in National Tea explained that this standard is not to "rais[e] so strict a requirement that the statute's intended protection of the public interest will be frustrated," but merely to "insure that the courts will invoke their independent judgment in reviewing applications for preliminary injunctive relief," and, thus, comport with the legislative intent. National Tea Co., 603 F.2d at 698. Even where a complaint is yet to be filed, the Commission is not required to prove that it has a "strong" or "substantial" likelihood of success. Id. It is sufficient that the Commission show that it "likely will prevail." University Health, 938 F.2d at 1218. Here, the Commission has filed a complaint and has produced abundant evidence that it likely will prevail on the merits.
13. Once the Commission has made this showing, reliance by individual consumers is presumed based on the materiality of the deceptive representations, and the Commission need not prove that individual consumers subjectively relied upon the representations. See FTC v. Figgie Int'l, Inc., 994 F.2d 595, 605-06 (9th Cir. 1993); FTC v. Magui Publishers, Inc., 1991-1 Trade Cas. 69,425 at 65,728 (C.D. Cal.); Security Rare Coin, 931 F.2d at 1316; Kitco, 612 F. Supp. at 1293.
14. See U.S. Oil & Gas, 748 F.2d at 1432 (holding that appointment of receiver and asset freeze was appropriate in case where defendants deceptively telemarketed interests in oil and gas leases). See also FTC v. United Wholesalers, Inc., No. 94-8620-Civ-Moore (S.D. Fla. 1994) (granting ex parte TRO and asset freeze with temporary receiver, and subsequently granting preliminary injunction); FTC v. Wolf, No. 94-8119-Civ-Ferguson (S.D. Fla. 1994) (granting ex parte TRO and preliminary injunction with asset freeze, receiver, immediate access and expedited discovery); FTC v. Southeast Necessities Company, Inc., No. 94-6848-Civ-Hurley (S.D. Fla. 1994) (granting ex parte TRO and preliminary injunction with asset freeze, receiver, immediate access and expedited discovery); FTC v. Wilcox, No. 93-6913-Civ-Roettger (S.D. Fla. 1993) (granting ex parte TRO and preliminary injunction with asset freeze, receiver, immediate access and expedited discovery); FTC v. Jordan Ashley, 93-2257-Civ-Nesbitt (S.D. Fla. 1993) (granting ex parte TRO with asset freeze, receiver, immediate access and expedited discovery and granting a permanent injunction banning the defendants from selling business opportunities and requiring them to pay $9.1 million in consumer redress); FTC v. O'Rourke, No. 93-6511-Civ-Gonzalez (S.D. Fla. 1993) (granting ex parte TRO and preliminary injunction with asset freeze, receiver, immediate access and expedited discovery); FTC v. The Cambridge Exchange, Ltd., Inc., No. 93-6300-CIV-King (S.D. Fla. 1993) (granting ex parte TRO with asset freeze, temporary receiver, immediate access and expedited discovery); FTC v. First Am. Trading House, Inc., No. 92-6049-Civ-Paine (S.D. Fla. 1992) (granting ex parte TRO with asset freeze, temporary receiver, immediate access and expedited discovery); FTC v. U.S. Rarities, No. 92-0363-Civ-Kehoe (S.D. Fla. 1992) (granting ex parte TRO with asset freeze and expedited discovery); FTC v. Applied Telemedia Eng'g and Mgmt., No. 91-0635-Civ-Ryskamp (S.D. Fla. 1991) (granting ex parte TRO with asset freeze and temporary receiver); FTC v. Continental Communications, Inc., No. 88-6876-Civ-Zloch (S.D. Fla. 1988) (granting ex parte TRO with asset freeze and temporary receiver); FTC v. Bliss Holidays Int'l, No. 88-0397-Civ-Ryskamp (S.D. Fla. 1988) (granting ex parte TRO with asset freeze); and FTC v. Atlantex Assocs., No. 87-0045-CIV-Nesbitt (S.D. Fla. 1987) (granting ex parte TRO with asset freeze).
15. The defendants' receipts in this case exceed the known value of assets frozen by more than $140,000.00. Their gross receipts exceeded $200,000.00. (See n.2 supra). In contrast, liquid assets frozen pursuant to the Temporary Restraining Order issued in this case on July 10, 1995, total less than $60,000.00. (Ex. 69, pp. 1, 2).