Thanks to the Supreme Court’s AMG decision, scammers are getting off Scot-free.
The latest set back for the FTC is a decision in their Redwood case against defendants Jason and Eunjung Cardiff.
Last October the FTC secured summary judgment against defendants Jason Cardiff and Eunjung Cardiff.
Judgment was granted over the Cardiff’s violations of the FTC Act. The court ruled in favor of the FTC on all sixteen counts of alleged fraud.
When it came time to assigning a monetary penalty to the Cardiffs, the then pending AMG Supreme Court case threw a spanner in the works.
A decision on the Cardiff’s monetary judgment was stayed pending the outcome of the AMG case.
The AMG decision was handed down in April.
In summary, the Supreme Court’s AMG decision saw the FTC barred from seeking monetary relief under Section 13(b) of the FTC Act.
Up until the AMG decision, this was the section commonly used by the FTC to combat consumer fraud.
In response to the AMG decision, the FTC put forth it was still entitled to monetary relief under Section 19 of the FTC Act and the Restore Online Shoppers’ Confidence Act (ROSCA).
To that end both the FTC and the Cardiffs were directed to file supplemental briefs last month.
A hearing was then held on June 28th to resolve the matter, as well as additional points of contention brought up in the briefs.
I’ve sectioned each part of the court’s order below, including my own thoughts at the end.
ROSCA and Section 19 of the FTC Act
As part of summary judgment granted last year, the court found the Cardiffs violated ROSCA.
These violations pertained to signing up consumers for autoship without their consent.
The Cardiff’s ROSCA violation constituted an equivalent FTC Act Section 18 rule violation, which in turn allows the FTC to
pursue recovery for those consumers in a suit under Section 19 of the FTC Act.
The Cardiffs argued against the FTC being able to seek ROSCA violations because the FTC
- failed to specifically invoke Section 19 remedies in its Complaint;
- failed to timely disclose its damages calculations and new witnesses under Federal Rule of Civil Procedure 26; and
- is judicially estopped from altering its position expressed in oral argument before the Ninth Circuit.
That Ninth Circuit reference pertains to a VPL Medical injunction appeal filed by the Cardiffs.
With respect to point one, the court found the FTC did invoke ROSCA in their complaint.
The Complaint gave notice of the facts underlying the FTC’s ROSCA claim and specifies that a ROSCA claim qualifies as a rule violation under Section 18 of the FTC Act.
As a result;
No pleading deficiency bars the FTC from seeking rescission of autoship and damages from the Cardiffs under Section 19 of the FTC Act.
On point three the court found the FTC wasn’t judicially estopped from altering it’s position, because;
The Ninth Circuit and numerous other courts permit a party to alter its theory of recovery or otherwise change its position in response to a change in law.
Here the AMG decision is cited as a “change in law”.
Absent a stronger showing of the usual factors supporting judicial estoppel, the Court’s acceptance of the FTC’s current position does not “undermin[e] the integrity of the judicial process” in any way.
Point two is where the court ruled against the FTC.
There is no question that the FTC relies on a late-disclosed witness and evidence to support its ROSCA damages calculation.
The Court is not persuaded by the FTC’s arguments that its late disclosure of … ROSCA damages is substantially justified or harmless.
The FTC had put forth that the change in law
justifie(d) their failure to provide a computation of the smaller amount of damages associated only with the ROSCA violation.
The court rejected this argument, because
the change in law regarding remedies under Section 13(b) had no effect on the availability of ROSCA Section 19 remedies in this case.
In other words, the FTC wasn’t prevented from seeking damages under ROSCA prior to the AMG decision.
The FTC was required to timely disclose computations of damages for all causes of action, including the ROSCA violation, notwithstanding that the law changed with respect to the computation of damages for equitable monetary relief under its wholly separate and distinct Section 13(b) cause of action.
In other words, as the Cardiffs put it, the FTC should not have “put all its eggs in the Section 13(b) basket.”
The omission of the computation of ROSCA damages under Rule 26(a)(iii) may have been a tactical decision, but it was not substantially justified or harmless.
The FTC were also pulled up on how withholding evidence and a witness was also “not harmless”.
The court did permit the FTC to “proceed to trial on damages for ROSCA violations”, but only based ‘on evidence and witnesses that have been properly disclosed.’
With respect to monetary damages, this is problematic because ‘the FTC has no evidence to present at trial to support its nascent theory of damages.’
Thus with points one, two and three addressed, the court concluded;
In the absence of any other theory of monetary relief after AMG, the Court concludes that the FTC cannot recover damages for consumers in this action.
No issues regarding monetary relief remain for trial.
The Redwood Preliminary Injunction
As part of their brief, the Cardiff’s argued
the FTC cannot seek a permanent injunction against them or, at the least, that the proposed permanent injunction should be narrowed.
The court disagreed on a blanket removal of the preliminary injunction.
The FTC may still seek a permanent injunction against the Cardiffs under Section 13(b) without first initiating administrative proceedings.
In light of the Cardiff’s intention to continue manufacturing oral strips, the court did however narrow the scope of the granted injunction.
The Court’s MSJ Order has already made the factual finding that the Cardiffs’ unfair and deceptive acts relating to the sales of untested thinstrip products are likely to recur.
Indeed, the Cardiffs’ plans to continue in the thinstrip manufacturing and distribution business are well documented, and they now argue that the permanent injunction should not bar them from engaging in the manufacture and distribution of thinstrip products to sophisticated business entities, in addition to barring the Cardiffs from direct retail sales and advertisement to consumers.
In response, the FTC argues that the Cardiffs’ thinstrip retail business was wholly fraudulent, as evidenced by the judgment against them on 16 separate counts, and they “simply cannot be trusted” to make truthful claims about thinstrip products to any purchasers, sophisticated or not.
The Court agrees that the Cardiffs’ prior business practices and history of contempt in this litigation do not inspire much confidence in their future endeavors.
But the FTC’s proposed permanent injunction bans the Cardiffs from making any misrepresentations or unsubstantiated claims about any products and also requires the Cardiffs to engage in randomized, double-blind, and placebo-controlled testing by qualified researchers for any products they sell.
These provisions, combined with a ban on the Cardiffs’ participation in any direct-to-consumer sales of thinstrip products, appear sufficiently tailored to prevent unfair or deceptive acts or practices from recurring.
Accordingly, the Court will slightly narrow the FTC’s proposed preliminary injunction such that the Cardiffs’ participation in the manufacture and distribution of thinstrip products is not categorically banned—only the unfair, deceptive, and fraudulent manufacture and distribution of thinstrip products without scientific substantiation.
And so the Cardiffs are able to resume selling their oral strips – just without all the fraud they were engaged in prior to the FTC action.
The Cardiffs’ living expenses
The Cardiffs had requested the court order the Redwood/VPL Receiver
pay their living expenses from the portion of Jason Cardiff’s VPL salary held as part of the Receivership Estate.
The court declined the request on the basis that,
because the Preliminary Injunction over VPL has been dissolved, any future salary Jason Cardiff receives from VPL will not be part of the Receivership Estate and can be used to pay the Cardiffs’ living expenses.
Thoughts
Eupepsia Thin advertisements and websites also contained testimonials from individuals claiming that they used the product to lose weight.
Each of these testimonialists admit in declarations that they did not use Eupepsia Thin to lose weight and were instructed by the infomercial director to say that their weight loss was due to Eupepsia Thin.
Jason Cardiff denies that he knew that people giving testimonials about their experiences with Eupepsia Thin in television advertisements had not used Eupepsia Thin to lose weight.
The evidence shows, however, that Jason responded to an email from (a) contractor stating:
“[I] am working on getting testimonials from people who have already lost weight and I’m getting before pictures for them … they will still have the product and do the testimonials but ill [sic] have before pictures from their past fat lives lol.”
-excerpt from summary judgment order against Jason and Eunjung Cardiff, October 9th, 2020
Thanks to the AMG decision we have a situation where scammers have been judged to have defrauded consumers, but won’t face any monetary penalty.
As it stands right now, if you’ve defrauded consumers in the US and been caught be the FTC, there’s a good chance your reputation will take a hit but not your hip wallet.
For scammers like the Cardiffs who, through repeated dishonesty in proceedings, have demonstrated they clearly don’t care about their reputations, not facing any monetary penalties is an unequivocal win.
And fair enough. If all one cares about is not having to pay a penalty for being found to have defrauded consumers, the Cardiffs won the case.
Hopefully they’ve learned something here other than “we got away with it!” but, based on Cardiff’s boasting linked above, I doubt it.
Cardiff even goes so far as to characterize coverage of judgment entered against him spanning thirteen counts of fraud as “unproven lies”.
Ditto the numerous on the record instances of the FTC and court catching out the Cardiffs’ voluminous lies and misconduct since the FTC filed suit in early 2018.
But I digress.
From a regulatory perspective, at least as far as FTC Act violations go, this is the new normal.
Well, at least until the FTC finds an alternative way to hold scammers financially accountable.
In the meantime I’d be surprised if we see any new MLM related regulatory filings from the FTC. Why bother?
The FTC has openly acknowledged that the AMG decision has attached an aura of “perceived powerlessness” to it. And, again at least as far as MLM regulation pertaining to violations of the FTC Act go, they’re not wrong.
FTC v. Neora is still playing out. I checked the docket earlier today and as of yet there’s been no substantial developments.
I’ve scheduled our next case docket check in that case for July 17th.
Looking forward the court has yet to
rule on the pending Motion for Default Judgment against the Entity Defendants and enter Judgment and the Permanent Injunction, including dissolution of the Asset Freeze and Stay of Actions.
These matters will be addressed after the Redwood Receiver files their final accounting.
Update 19th March 2022 – Final judgment has been entered against the Cardiffs.