UNITED
STATES DISTRICT COURT FEDERAL TRADE COMMISSION, Plaintiff, v. DIANE M. JONAS, individually and as a principal of The Business Opportunity Center, Inc.; PAUL A. JONAS, individually; JAMES W. RAIM d/b/a Market Systems, Ltd., individually; ROBERT BRIAN ROEMER, individually and as Treasurer of The Business Opportunity Center, Inc.; and THE BUSINESS OPPORTUNITY CENTER, INC., a Florida corporation, d/b/a The Neutralizer, Defendants. --CIV-- Memorandum of Law In Support of Plaintiff's Ex Parte Motion for a Temporary Restraining Order, Appointing a Temporary Receiver, Freezing Assets, Providing Immediate Access to Defendants' Business Premises, Permitting Expedited Discovery, and Ordering Defendants to Show Cause Why a Permanent Receiver Should Not Be Appointed and Why a Preliminary Injunction Should Not Issue I. INTRODUCTION The defendants in this case defraud and endanger 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. Two false claims are central to the defendants' marketing plan: 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 unabashedly target 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!" A marketing brochure adds: 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. (Ex. 2B, p. 2). One 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 also defraud the franchisees through whom they market the Neutralizer. Using a nationwide marketing campaign, the defendants sell a vending machine business opportunity to people who want a business of their own. In USA Today (Ex. 8A, p.5) and the Wall Street Journal (Ex. 2Q, p.28), on television (Ex. 2B, p. 1), and at business opportunity shows all over the country (Exs. 2K, p.7; 2L p. 11), the defendants promise huge profits to people who pay a minimum of $4,475 for the opportunity to sell the Neutralizer through vending machines in restaurant and bar bathrooms (Exs. 2B, p. 16; 2K, pp. 35-38). People who pay $30,000 to $85,000 or more can buy an "exclusive" territory for their vending operation. (Exs. 2Q, pp. 19-20; 2J, pp. 22-24). Between January and April 1995, the number of calls to the defendants' toll-free 800 number increased dramatically from 71 calls to 172 calls monthly (Ex. 5, pp. 17-34), and Defendant Diane Jonas says that "we're so on fire with this thing we can't even see straight." (Ex. 2Q, p. 17). Plaintiff Federal Trade Commission ("Commission") asks the Court to stop this fraud immediately and prevent further injury to consumers. The misrepresentations by Defendants Diane M. Jonas, Paul A. Jonas, Robert Brian Roemer, James W. Raim, and The Business Opportunity Center, Inc. ("BOC") violate Section 5(a) of the Federal Trade Commission Act (the "FTC Act"), 15 U.S.C. 45(a). The defendants also violate the Commission's Franchise Rule, 16 C.F.R. Part 436, which is designed to prevent fraud in the sale of franchises such as the defendants' vending machine franchise. Specifically, the Commission seeks an ex parte temporary restraining order (1) appointing a temporary receiver, (2) freezing the defendants' assets, (3) permitting expedited discovery, and (4) providing related equitable relief. Only an order providing the requested relief will prevent the destruction of documents, 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. In addition, the defendants' attempts to frustrate law enforcement efforts justify the relief requested. On May 5, 1995, the FDA warned Defendant Raim by letter that the Neutralizer violates the Federal Food, Drug, and Cosmetic Act because it is a drug being marketed without required FDA approval. (Ex. 8B). 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, on June 13, 1995 Defendant Diane Jonas encouraged an FTC undercover investigator to invest $30,000 in a Neutralizer franchise. (Ex. 2Q, pp. 13-14). She also said BOC had just negotiated the sale of 500 Neutralizer vending machines in Canada. (Ex. 2Q, pp. 15-16, 35-36). Finally, on June 23, 1995, Defendant Raim refused to cooperate with a legally authorized effort by the FDA to inspect his business premises to determine whether he was complying with the law as he had promised. (Ex. 9, pp. 1-2). His resistance, and the defendants' ongoing sales of the Neutralizer franchises, indicate a likelihood that the defendants continue to violate the law. These 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). The Commission is also authorized to initiate court proceedings to enjoin violations of the Franchise Rule, pursuant to Section 19(b) of the FTC Act, 15 U.S.C. 57b(b). B. The Defendants 1. James W. Raim James W. Raim is the owner and president of Market Systems, Ltd., an unincorporated business. (Exs. 9, p.7; 2N, p.63).(1) He formulated the Alcohol Neutralizer over a two-year period (Ex. 2N, p. 42) and continues to manufacture the product (Exs. 2N, p. 42; 9, pp. 11-13). He, or Market Systems, first marketed the Alcohol Neutralizer through vending machines sometime in early 1994. (Exs. 8A, pp. 5-27; 2N, p. 42). In December 1994, he and Defendant Paul Jonas agreed that Mr. Jonas would distribute the product through vending machine franchises. (Exs. 2N, pp. 6-7; 2Q, p. 18). Mr. Raim now supplies the Alcohol Neutralizer to BOC (Ex. 2N, p. 42), a company co-owned by Paul and Diane Jonas (Ex. 2-O, p.7), which is now the marketing arm for the vending machine franchises (Ex. 2J, p.8). The Neutralizer packaging, however, continues to bear Market Systems' name and address. (Exs. 2N, p. 43; 2J, p. 32). Mr. Raim also develops promotional medical materials for distribution through BOC to prospective and new franchisees. (Ex. 2N, pp. 56, 62). Even after BOC began marketing the Neutralizer, however, Mr. Raim has continued distributing franchise literature under Market Systems' name. (Ex. 9, pp. 10-21). Mr. Raim is also personally involved in the sale of Neutralizer franchises as a reference for potential investors. (Ex. 2N, pp. 15-17, 40-64). He maintains an office at 738 N. LaSalle, Suite 110, Chicago, Illinois. (Ex. 1B). 2. The Business Opportunity Center, Inc. BOC became the "marketing arm" for James Raim's Alcohol Neutralizer franchises in December 1994 and has actively sold franchises since early January 1995. (Exs. 9, p.23; 3; 4; 2J, p.8; 2N, pp. 9, 24-25; 2-O, p. 6). BOC is a Florida corporation and maintains offices at 1000 N. U.S. 1, Suite 301, Jupiter, Florida (Ex. 1A); 4361 Northlake Boulevard, in Palm Beach Gardens, Florida (Ex. 2B, p. 18); 4400 PGA Boulevard, West Palm Beach, Florida (Ex. 2Q, p. 25); and 36 Commerce Way, Woburn, Massachusetts (Exs. 2B, p. 18; 2K, p. 29; 2Q, pp. 21-23). 3. Paul A. Jonas Paul Jonas is co-owner of BOC and is personally involved in the sale of Alcohol Neutralizer franchises. (Ex. 2-O, p. 7). Mr. Jonas initiates sales calls (Ex. 2L, p. 9) and provides information regarding the product and the franchise (Ex. 2-O, pp. 3-17). He also attends franchise trade shows, which are primary vehicles for selling the franchise. (See Ex. 2Q, p. 11). 4. Diane M. Jonas Diane Jonas is a principal and director of BOC and co-owns it with her husband, Paul Jonas. (Exs. 1A, p.3; 2A, p. 3; 2-O, p. 7; 2Q, p.8). Ms. Jonas is personally involved in the sale of Neutralizer franchises. (Ex. 2Q, pp. 8-37). She initiates sales calls (Ex. 2L, p. 11) and represents BOC at franchise trade shows around the country (Ex. 2Q, p. 19). Ms. Jonas also claims to be involved personally in the formulation of the Alcohol Neutralizer. (Ex. 2Q, pp. 10, 13). 5. Robert Brian Roemer Robert Brian Roemer is BOC's corporate attorney and treasurer. (Exs. 2N, p. 4; Ex. 12H). Mr. Roemer is involved personally in the sales of Neutralizer franchises. (Ex. 2N, pp. 1-33). He is listed as a BOC "corporate reference" and provides prospective investors with information about the product and the franchise (Ex. 2N, pp. 19-26), including misrepresentations about FDA approval and FDA recognition of safety (Ex. 2N, pp. 7, 12-13). Mr. Roemer also provides legal advice during the sales call and offers ongoing legal services as part of the Neutralizer franchise offer. (Ex. 2N, pp. 14-15, 17-19). Mr. Roemer has an office at 4361 Northlake Boulevard, Palm Beach Gardens, Florida. (Ex. 2B, p. 18). III. ACTS OR PRACTICES VIOLATING SECTION 5 A. The Defendants' Misrepresentations The two misrepresentations alleged by the Commission are key to selling the Alcohol Neutralizer as a product and as a franchised vending machine business package. The first, 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. The second, that an independent medical study by researchers from Harvard Medical School shows 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. Taken together, these two misrepresentations assure consumers who want to buy a franchise that the Neutralizer will be in great demand -- and profitable. The defendants make the misrepresentations to consumers interested in purchasing a vending machine franchise to sell the Neutralizer. Consumers responding to the defendants' advertisements call a toll-free 800 number, eventually hear a sales pitch by a BOC sales representative, and receive a promotional brochure by Federal Express. (Exs. 2; 2B; 2K, pp. 5-6; 2J). Sales representatives, including Paul and Diane Jonas, make follow-up telephone calls to prospective purchasers (Ex. 2L, pp. 9, 11), and the promotional brochures contain a list of references to contact, including Robert Roemer (Exs. 2B, p.18; 2G, p. 20; 2J, p. 17). 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.(2) 1. Misrepresentations of Government Approval (Count I) 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. On the cover of the franchise brochure, the defendants state: The Alcohol Neutralizer is a blend of 15 herbs that help detoxify alcohol from the system rapidly. All the herbs in Neutralizer are on the FDA's G.R.A.S. (Generally Recognized As Safe) list. (Exs. 2B, p.1; 2C, p.1; 2G, p.3). Inside the brochure, the defendants state that the "FDA has approved all of its ingredients." (Exs. 2B, p. 3; 2G, p. 5; 2J, pp. 3, 5). The brochure also states: The fear is removed with the "Neutralizer" [because] all of its natural components are regarded as safe by FDA. The FDA does not require individual product approval for the "Neutralizer" (as with a pharmaceutical product). All ingredients meet the FDA's strict guide line for the G.R.A.S. list (generally regarded as safe list). (Ex. 2J, pp. 3, 5). In a taped telephone conversation with a Commission investigator, Defendant Roemer claimed that the "Neutralizer is on the FDA's GRAS list." (Ex. 2N, p. 13). He further stated that "[b]ecause it's on the [FDA's] GRAS list [that] is the only reason they [the defendants] can do it like this," meaning that "formal testing" for the FDA was not required. (Ex. 2N, p. 13). Defendant Raim also claimed that the product was recognized as safe by the FDA. 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). The defendants' claim that the Neutralizer is generally recognized as safe ("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. (Ex. 7). Out of 15 listed ingredients, only three are listed as GRAS for use in food. (Ex. 7). 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). That the FDA "approved" the Neutralizer or its ingredients is also patently false and misleading. Alcohol Neutralizer is not the 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. 2. 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). The defendants' sales brochure cites an endorsement titled "Harvard Study Confirms Herb's Benefits" and begins with the following paragraphs: A study done by Harvard Medical School found that the herb Pueraria guards against the toxic side effects of alcohol consumption. Pueraria is the primary ingredient in the herbal formula called Alcohol Neutralizer. This product combines Pueraria and fourteen other herbs that help to rapidly detoxify the system of alcohol thus lowering ones (sic) alcohol level. (Exs. 2B, p. 8; 2J, p.9). In support of the product's efficacy, defendant Raim provided federal investigators with a copy of a Harvard Medical School study by Dr. Wing Ming Keung and Dr. Bert Vallee involving Syrian hamsters, titled "Daidzin and daidzein [Pueraria extracts] suppress free-choice ethanol intake by Syrian Golden Hamsters." (Ex. 9, pp. 25-29). 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 alcohol elimination rate. 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 rapidly alcohol from the blood system. (Ex. 10). 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. B. Franchise Rule Violations (Counts III and IV) The Commission's Franchise Rule prevents fraud by requiring a franchisor to provide prospective franchisees with a complete and accurate basic disclosure document containing twenty categories of information, including information about current and former franchisees. 16 C.F.R. 436.1(a). The Rule also requires that a franchisor have a reasonable basis for any oral, written, or visual earnings or profit representations, id. 436.1(b)(2), (c)(2), and (e)(1), and that it provide prospective franchisees with an earnings claim document containing certain substantiating information. Id. 436.1(b)(3). Failure to provide any of the information required is an unfair or deceptive omission that violates Section 5. Id. 436.1.(3) 1. Defendants' Failure To Make Basic Disclosures BOC's vending machine business opportunity is a product franchise, and the defendants must disclose specified material information by providing prospective investors with the basic disclosure document. A product franchise is a business relationship in which: (1) a person (franchisee) offers, sells, or distributes goods identified by a trademark, service mark, trade name, advertising or other commercial symbol designating another person (franchisor), 16 C.F.R. 436.2(a)(1)(i)(A); (2) the franchisor exerts significant control over the franchisee's method of operation or gives significant assistance to the franchisee in the franchisee's method of operation, 16 C.F.R. 436.2(a)(1)(i)(B); and (3) the franchisee is required to pay the franchisor a sum of at least $500 within six months after the franchisee commences business operations as a condition of obtaining the franchise. 16 C.F.R. 436.2(a)(3)(iii). The Neutralizer business opportunity meets all three criteria. The defendants prominently display a trademark symbol next to the tradename "Alcohol Neutralizer" on the label of pre-packaged capsules and on their vending machines. (Exs. 2B, p. 1; 9, p. 17). They offer significant assistance to investors, such as: (1) the services of a professional locator to locate the vending machines (Ex. 2K, pp. 22-26); (2) a "lease agreement" to use when placing the vending machines (Ex. 2K, p. 32); (3) a $2 million liability policy (Ex. 2-O, p. 6); (4) a "Customer Service Department" in Woburn, Massachusetts, for use "anytime you [investor] have any problems" for "as long as ... you're with our company and ... you're a distributor," including assistance with vending machine repairs or maintenance (Ex. 2K, pp. 26-29, 51); (5) consultation with Dr. Richard Herbert on medical issues connected with Alcohol Neutralizer use (Ex. 2N, pp. 15-16, 55-57); and (6) legal assistance from defendant Roemer if a lawsuit is brought against a franchisee as a result of Alcohol Neutralizer use (Ex. 2N, pp. 14, 17-20). Finally, the minimum price of the franchise package is $4,475.00. (Exs. 2B, p. 16; 2K, pp. 19, 37). The defendants' offering, therefore, is a product franchise about which they must disclose the required material information. They do not do so, however, and thereby violate Section 5.(4) 2. Defendants' Failure To Make Disclosures About Earnings The defendants also must disclose certain information about written and oral earnings claims that they make. A "Potential Sales Projection" contained in their printed brochure purports to give prospective franchisees "some idea of the income that can be generated from Alcohol NEUTRALIZER sales." The "projection" indicates that a potential investor can earn from $135,000 to $810,000 net profit annually from 100 machines and from $6,750 to $40,500 net profit annually with the five vending machines included in the basic package. (Ex. 2B, p. 16). BOC confirms the projections during a sales call and further entices prospective investors by stating that the projections are "really conservative." (Ex. 2K, pp. 35-36). These claims state specific levels of potential profits and, thus, are earnings claims as defined by the Rule. 16 C.F.R. 436.1(b). The defendants fail to make required disclosures, however, and thereby violate Section 5. IV. ARGUMENT 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, immediate access to the defendants' records, 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 19(b) similarly authorizes this Court to grant any relief "necessary to redress injury to consumers" resulting from violations of the Franchise Rule. 15 U.S.C. 57b(b). 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).(5) 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, which forbids deceptive acts or practices. First, the defendants make 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.A.). The defendants also violate Section 5 by failing to provide material information required by the Franchise Rule (supra, para. III.B.). 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).(6) As discussed above, the defendants here do violate Section 5 in widely disseminated promotions by providing their deceptive brochures to prospective purchasers, by making misrepresentations in their oral sales pitches, and by violating the Franchise Rule (supra, para. III). Also, Diane Jonas indicated that consumer purchases are booming. (Ex. 2Q, p. 17). For the individual defendants to be held liable for a monetary judgment, the Commission also must show that (1) the individual defendants participated in the deceptive acts or practices or had the authority to control them and (2) the individual defendants had some knowledge of the 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 Diane Jonas, Paul Jonas, James Raim, and Robert Roemer will be liable for a monetary judgment. Diane Jonas, as the co-owner and founding corporate principal of BOC, has the authority to control BOC's business practices. She actively promotes the sale of the Neutralizer vending franchise by attending trade shows, making sales calls, and formulating and distributing the Neutralizer franchise brochure. Her husband, Paul Jonas, co-owns BOC and participates in the sale of Neutralizer franchises by initiating sales calls to potential investors, attending trade shows, and distributing Neutralizer literature. In addition, Mr. Jonas negotiates directly with James Raim d/b/a Market Systems, the Neutralizer's creator. Mr. Raim has authority to control his business, and develops and provides deceptive promotional materials to his marketing arm, BOC. Robert Roemer personally misrepresents the FDA status, safety, and efficacy of the Neutralizer to prospective purchasers. Each individual defendant, therefore, participates in deception or has authority to control the deceptive practices. There is also a likelihood that each individual defendant knew about the misrepresentations, which constitute the core of the defendants' fraudulent scheme. Robert Roemer makes the misrepresentations himself, and all the defendants distribute the franchise brochures and must be aware of the misrepresentations contained in them. Indeed, James Raim and Diane Jonas provided deceptive brochures in response to requests for information about the Neutralizer and their business opportunities. There is a likelihood that all of the 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 interested 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, Immediate Access, 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 are permeated by fraud, there is a strong likelihood that defendants will attempt to dissipate their assets or destroy documents during the pendency of the action. Mindful of this, courts have ordered the ex parte appointment of receivers, the freezing of assets, and other ancillary relief, including access to the defendants' business premises, in circumstances similar to those found here.(7) The appointment of a receiver will prevent the individual defendants from using the corporate defendant as the vehicle 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 continue to sell Neutralizer franchises 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 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. IV. CONCLUSION For the foregoing reasons, Plaintiff Federal Trade Commission requests that this Court issue the requested ex parte temporary restraining order and preliminary injunction. Respectfully Submitted, __________________________ 1. 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). However, Mr. Raim continues to do business as Market Systems, Ltd. (Ex. 9, pp. 1, 7). 2. 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). 3. The franchisor must provide the disclosure and earnings claims documents to prospective franchisees at the earlier of: (1) the first personal meeting between the franchisor and the franchisee; (2) ten days prior to the execution of any agreement imposing a binding legal obligation on the franchisee; or (3) ten days prior to accepting any consideration from a prospective franchisee. 16 C.F.R. 436.1(a), 436.1(b)(3), and 436.2(g). 4. The Franchise Rule also applies to business opportunity ventures where: (1) the franchisee sells goods or services supplied by the franchisor, 16 C.F.R. 436.2(a)(1)(ii)(A); (2) the franchisor secures locations for the display racks or provides the franchisee with the services of a person able to secure sites for the display racks, 16 C.F.R. 436.2(a)(1)(ii)(B); and (3) the franchisee is required to pay the franchisor a sum of at least $500, 16 C.F.R. 436.2(a)(3)(iii). The defendants' business ventures satisfy these requirements. Investors sell the Alcohol Neutralizer through a vending service, which is provided by the franchisor. (Ex. 2K, pp. 8, 37). The defendants provide a professional locator to assist an investor in locating sites for the vending machine. (Exs. 2K, pp. 22-26; 2M, p. 20; 2Q, pp. 20-21). The defendants require a minimum $4,475.00 investment. (Exs. 2B, p. 16; 2K, pp. 19, 37). The defendants also must make the required material disclosures, therefore, because their offering is a business opportunity franchise. 5. 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. 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 [1156] 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. 6. 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. 7. 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). |