Federal Trade Commission v. Noland, Jr.

1 WO [5] 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA [8] 9 Federal Trade Commission, No. CV-20-00047-PHX-DWL 10 Plaintiff, ORDER 11 v. 12 James D. Noland, Jr., et al., 13 Defendants. [14] 15 On September 9, 2021, the Court granted the FTC’s motion for summary judgment 16 as to liability against the Individual Defendants. (Doc. 406.) Afterward, the Individual 17 Defendants filed a motion for reconsideration (Doc. 411), the Court solicited a response 18 from the FTC (Doc. 416), the FTC filed a response (Doc. 420), and the Individual 19 Defendants filed a reply (Doc. 426). For the following reasons, the motion for 20 reconsideration is denied. 21 RELEVANT BACKGROUND 22 Before addressing the Individual Defendants’ reconsideration arguments, it is 23 helpful to summarize the order that is the subject of their reconsideration request—the 24 order granting the FTC’s motion for summary judgment as to liability. 25 In that order, the Court explained that the FTC has asserted three claims against the 26 Individual Defendants under § 5(a) of the FTC Act. (Doc. 406 at 28-29.) Specifically, in 27 Count One of the operative complaint, the FTC alleges that the Individual Defendants 28 operated two different ventures, SBH and VOZ Travel, as illegal pyramid schemes; in 1 Count Two, the FTC alleges that the Individual Defendants made misleading 2 representations about the likelihood of earning substantial income in each venture; and in 3 Count Three, the FTC alleges that the Individual Defendants furnished SBH affiliates and 4 VOZ Travel participants with materials containing false or misleading representations, 5 thereby providing the means and instrumentalities for the commission of deceptive acts or 6 practices. (Id.) 7 Turning to the merits, the Court explained that the FTC had, in its motion for 8 summary judgment, raised distinct arguments as to why the Individual Defendants’ 9 conduct related to SBH and VOZ Travel provided pathways to liability. (Id. at 33-35, 4210 43, 48.) The Court also noted that the FTC had proffered distinct evidence addressing each 11 venture. (Id. at 4-15 [summarizing SBH-related evidence]; id. at 17-20 [summarizing VOZ 12 Travel-related evidence].) In contrast, the Court noted that the Individual Defendants 13 essentially ignored the VOZ Travel-related arguments and evidence in their response to the 14 FTC’s summary judgment motion, choosing to focus only on the SBH-related arguments 15 and evidence. (See, e.g., id. at 34 [“The Individual Defendants’ responsive arguments 16 focus almost exclusively on SBH. Indeed, the word ‘VOZ’ only appears once throughout 17 the Individual Defendants’ entire brief.”].) Accordingly, the Court found that the FTC’s 18 evidence related to the VOZ Travel program could be treated as undisputed under Rule 19 56(e)(2). (Id. at 2 [“Notably, the Individual Defendants failed to address (let alone dispute) 20 many of the facts submitted by the FTC in support of its motion. As a result, those facts 21 are considered undisputed for present purposes.”].) 22 The Court ultimately concluded that the FTC was entitled to summary judgment on 23 Counts One, Two, and Three based on its VOZ Travel-related evidence and arguments. 24 Specifically, as for Count One, the Court concluded that the first prong of the Ninth 25 Circuit’s pyramid scheme test was satisfied because “the FTC has submitted undisputed 26 evidence that consumers had to pay at least one form of upfront fee—in the form of the 27 SBH annual $49 fee, a separate VOZ annual fee, and/or an initial purchase of VOZ Travel 28 packs—in order to participate in the VOZ Travel program.” (Id. at 35-36.) As for the 1 second prong of the pyramid scheme test, which addresses whether participants’ rewards 2 were largely based on recruitment (as opposed to product sales), the Court concluded it 3 was satisfied because “[u]nlike with SBH, where Affiliates acquired products that could 4 then be consumed or sold, with VOZ there was no product at all. Of note, even after the 5 contract with Advantage Services fell through and no product was foreseeably available, 6 the undisputed evidence shows that the Individual Defendants continued to push Affiliates 7 to join VOZ Travel, purchase VOZ Travel packs, and recruit others to do so.” (Id. at 36.) 8 During the course of this analysis, the Court repeatedly emphasized the undisputed nature 9 of the FTC’s evidence and arguments related to VOZ Travel. (See, e.g., id. at 35 [“The 10 Individual Defendants largely ignore the FTC’s evidence and arguments related to the VOZ 11 Travel program. Whatever the reason for this approach, it effectively dictates the outcome 12 here—the FTC’s initial evidentiary submissions are sufficient to meet its burden of 13 production on the pyramid-scheme claim as applied to VOZ Travel and, because that 14 evidence is essentially undisputed, it follows that the FTC is entitled to summary 15 judgment.”]; id. at 36-37 [“The Individual Defendants make no arguments and cite no 16 evidence to demonstrate that there is a genuine dispute of material fact regarding VOZ 17 Travel. . . . The Individual Defendants’ failure to make any effort to defend the legality 18 and legitimacy of VOZ Travel is telling.”]; id. at 41 [“The FTC has established, and the 19 Individual Defendants do not seriously dispute, that VOZ Travel operated as a pyramid 20 scheme.”].) 21 As for Count Two, the Court concluded the Individual Defendants’ income claims 22 regarding VOZ Travel—in which they claimed that participants could earn six- or seven23 digit incomes through “Casual Effort”—were “obviously false” because “VOZ Travel did 24 not even offer a product for sale.” (Id. at 43.) As with Count One, the Court emphasized 25 that the FTC’s arguments and evidence on this topic were undisputed. (Id. [“The FTC is 26 entitled to summary judgment . . . for the simple reason that the Individual Defendants do 27 not even attempt to defend some of the categories of misrepresentations identified in the 28 FTC’s motion. As noted, the FTC specifically argues that Individual Defendants made 1 false income claims regarding VOZ Travel. . . . The FTC contends these representations 2 were, due to their falsity, likely to mislead consumers and material. The Individual 3 Defendants make no effort to argue otherwise and the Court agrees.”].) 4 As for Count Three, the Court again concluded that the FTC was entitled to 5 summary judgment because its evidence and arguments were undisputed. (Id. at 48 [“The 6 FTC is entitled to summary judgment on Count Three. As the FTC correctly notes, liability 7 on this claim flows from the finding of liability on Count Two, and the Individual 8 Defendants make no effort to address this claim in their response.”].) 9 Finally, for the sake of completeness, the Court also conducted an analysis of the 10 SBH-related evidence and arguments bearing on Counts One and Two and concluded the 11 FTC would not be entitled to summary judgment on those counts if it were moving solely 12 on SBH-related grounds. (Id. at 37-41 [Count One]; id. at 46-47 [Count Two].) 13 Nevertheless, because the VOZ Travel-related evidence and arguments provided an 14 independent basis for granting summary judgment in the FTC’s favor, the Court concluded 15 that the FTC’s motion should be granted “irrespective of the presence of any disputes of 16 fact as to . . . SBH.” (Id. at 42, 47.) 17 DISCUSSION 18 I. Legal Standard 19 “The Court will ordinarily deny a motion for reconsideration of an Order absent a 20 showing of manifest error or a showing of new facts or legal authority that could not have 21 been brought to its attention earlier with reasonable diligence.” LRCiv. 7.2(g)(1). 22 Reconsideration is an “extraordinary remedy” that is available only in “highly unusual 23 circumstances.” Kona Enters., Inc. v. Est. of Bishop, 229 F.3d 877 , 890 (9th Cir. 2000) 24 (internal quotation marks omitted). “Motions for reconsideration are disfavored . . . and 25 are not the place for parties to make new arguments not raised in their original briefs.” 26 Motorola, Inc. v. J.B. Rodgers Mechanical Contractors, 215 F.R.D. 581, 582 (D. Ariz. 27 2003). 28 … 1 II. The Parties’ Arguments 2 The Individual Defendants seek reconsideration of the summary judgment order to 3 the extent it granted summary judgment in the FTC’s favor on Counts One, Two, and 4 Three. (Doc. 411 at 5.) According to the Individual Defendants, “the FTC’s purported 5 evidence demonstrates that VOZ Travel packs were a legitimate product line that was about 6 to launch at the time the FTC initiated this action and obtained the temporary restraining 7 order. It is the FTC itself that caused the VOZ Travel pack not to launch, preventing the 8 product line from reaching consumers. Accordingly, the court erred in . . . finding that the 9 Individual Defendants failed to put forth any ‘evidence to demonstrate that there is a 10 genuine dispute of material fact regarding VOZ Travel’ as a legitimate product line and 11 not an illegal pyramid scheme.” (Id. at 1.) In support of their assertion that they “had every 12 intention of providing discounted travel packages to affiliates and consumers upon launch,” 13 the Individual Defendants proffer a piece of evidence they did not submit with their 14 response to the FTC’s summary judgment motion—a letter written by SBM’s counsel on 15 January 8, 2020 to Advantage Services, the VOZ Travel vendor. (Id. at 2, citing Doc. 8116 2 at 71.)1 In that letter, counsel made a demand that the vendor “cure the material breaches 17 . . . within fifteen (15) days.” (Doc. 81-2 at 71-72.) In the Individual Defendants’ view, 18 this letter demonstrates that the VOZ Travel contract “was not terminated as of January 13, 19 2020” and that the “only reason” why VOZ Travel participants never received a product 20 that could be resold was the FTC’s pursuit of a temporary restraining order as part of this 21 case, which was the true cause of the Advantage Services contract termination. (Id. at 222 3.) Once this “crucial context” is considered, the Individual Defendants argue, “there is 23 genuine, disputed issue of material fact as to VOZ Travel as a supposed pyramid scheme.” 24 (Id. at 3.) Finally, although the reconsideration motion focuses primarily on the 25 circumstances surrounding the termination of the Advantage Services contract, the 26 Individual Defendants also raise several additional arguments. First, they argue that the 27 FTC’s expert, Dr. Bosley, conducted “no analysis” as to VOZ Travel. (Id. at 4.) Second, 28 1 This letter was originally proffered by the FTC during the early stages of this case in support of a different motion. 1 they argue that the affiliate declarations they submitted in response to the FTC’s summary 2 judgment motion “create a triable issue of fact” as to the VOZ Travel-related claims 3 because some of these declarations “explicitly list the VOZ Travel product.” (Id. at 4-5.) 4 Third, they argue that, because they previously requested permission to “allow a new 5 company to deliver the VOZ product to affiliates—sans any MLM component,” this 6 request provides “added context” and “wholly negates” any suggestion that VOZ Travel 7 was a pyramid scheme. (Id. at 5.) 8 The FTC opposes the Individual Defendants’ motion. (Doc. 420.) The FTC begins 9 by arguing that the motion should be denied because the Individual Defendants cite the 10 wrong legal standards and make no effort to satisfy LRCiv 7.2(g)’s standard for 11 reconsideration. (Id. at 1-3.) In a related vein, the FTC notes that the Individual Defendants 12 do not proffer any new “evidence that was not already in the record at the time they 13 responded to the FTC’s Liability MSJ,” do not proffer any new legal authorities, and 14 simply attempt to raise new arguments they could have raised (but did not raise) in their 15 response to the summary judgment motion. (Id. at 3-4.) At any rate, the FTC contends the 16 Individual Defendants’ new arguments also fail on the merits. As for the letter to 17 Advantage Services, the FTC contends it is irrelevant because (1) “[r]egardless of what 18 might have happened had there been no TRO, the Individual Defendants, for three months 19 prior to the TRO, ran a scheme that rewarded recruiting while providing no product or 20 service,” (2) the “Individual Defendants provide no evidence that they or Advantage 21 Services actually planned to take advantage of the contractual ‘cure period’ to mend their 22 relationship,” and (3) in their answer, the Individual Defendants admitted that the 23 Advantage Services contract had been terminated. (Id. at 4-5, citing Doc. 222 ¶ 79.) As 24 for Dr. Bosley, the FTC contends that the Individual Defendants’ arguments are “baffling” 25 because “Dr. Bosley’s report includes a detailed analysis of VOZ Travel, culminating in 26 her conclusion that ‘[i]n promoting the VOZ compensation structure, SBH is offering a 27 second pyramid scheme and misrepresenting the income opportunity to prospective and 28 current participants.’” (Id. at 5, citing Doc. 286-7 at 75-84.) As for the affiliate 1 declarations, the FTC argues that the references to VOZ Travel purchases are irrelevant 2 because “there was no VOZ Travel product, [so] what consumers actually bought was the 3 right to earn income by recruiting additional consumers” and because the questionnaires 4 didn’t include any questions related to VOZ Travel. (Id. at 5-6.) Finally, as for the request 5 for permission to allow a new company to deliver the VOZ Travel product, the FTC 6 responds that the “Individual Defendants do not explain how this professed ‘willingness 7 and desire’ relates to their actual operation of the product-less VOZ Travel pyramid 8 scheme.” (Id. at 6.) 9 The Individual Defendants filed a reply. (Doc. 426.) In response to the FTC’s 10 argument that they failed to submit any new evidence, the Individual Defendants cite the 11 affiliate declarations they submitted in response to the FTC’s summary judgment motion 12 and note that several declarations contain references to the travel and training opportunities 13 offered through VOZ Travel. (Id. at 2-3.) The Individual Defendants also reiterate their 14 position that VOZ Travel was “actively in development” at the time this lawsuit was filed 15 and that the FTC is to blame for the lack of a product launch. (Id. at 2, 4-5.) On that note, 16 they contend there is “no authority . . . for the proposition that pre-launch sales of products 17 or services in development inherently violate the law because there is no immediate 18 delivery of the product or service to the purchasers.” (Id. at 2.) Finally, the Individual 19 Defendants argue for the first time that “the FTC and the Court misconstrue VOZ as a 20 separate enterprise or entity from SBH, rather than what it was: a product of SBH” and 21 suggest that, “[t]o the extent of any of the conflicting characterizations in the record of 22 VOZ as a separate entity rather than a product of SBH, the Court erred in resolving those 23 conflicting characterizations on summary judgment.” (Id. at 3-4.) 24 III. Analysis 25 The Individual Defendants’ motion for reconsideration is denied. 26 As an initial matter, the motion does not come close to satisfying LRCiv 7.2(g)’s 27 standard for reconsideration. The Individual Defendants do not cite any new evidence or 28 new legal authorities. Instead, they simply attempt to offer new arguments in defense of 1 the VOZ Travel program that they failed to raise in their response to the FTC’s summary 2 judgment motion. This is impermissible. See, e.g., Motorola, 215 F.R.D. at 582 (“Motions 3 for reconsideration are . . . not the place for parties to make new arguments not raised in 4 their original briefs.”). 5 To the extent the Individual Defendant seek to proffer, for the first time, certain 6 pieces of evidence (such as the January 8, 2020 letter to Advantage Services) in support of 7 their new VOZ Travel-related arguments, this approach is also foreclosed by Rule 56. In 8 its summary judgment motion, the FTC proffered extensive evidence suggesting that the 9 Individual Defendants’ statements regarding the VOZ Travel program were “a complete 10 fabrication,” that “[t]here was nothing,” that “SBM and Advantage Services both 11 terminated the entities’ contract with each other” before the issuance of the TRO, and that 12 the Individual Defendants “had not retained a new vendor as of the entry of the TRO.” 13 (Doc. 285 at 20.) In their response to the FTC’s motion, the Individual Defendants failed 14 to respond to the FTC’s proffered evidence on these points. (Doc. 335.) For this reason, 15 the FTC’s evidence on these points was considered undisputed under Rule 56(e)(2). (Doc. 16 406 at 2.) The Court was entitled to rely on this undisputed evidence for purposes of its 17 summary judgment analysis, and the Individual Defendants cannot obtain reconsideration 18 of the summary judgment order by belatedly proffering evidence that was always available 19 to them in an effort to create factual disputes. See, e.g., Preston v. City of Pleasant Hill, [20] 642 F.3d 646, 652 (8th Cir. 2011) (affirming denial of “Preston’s motion to reconsider” 21 where one of the “improper” purposes of the motion was to “belatedly bring[] the DHS 22 applications to the district court’s attention, even though the DHS applications were 23 available to Preston at the time he resisted defendants’ summary judgment motion”); Moro 24 v. Shell Oil Co., 91 F.3d 872, 876 (7th Cir. 1996) (denying Rule 59(e) motion, where 25 movant “submitted a second affidavit of Moro that contained statements not found in 26 Moro’s initial affidavit filed in opposition to Shell's summary judgment motion,” because 27 “[t]he rule does not provide a vehicle for a party to undo its own procedural failures, and it 28 certainly does not allow a party to introduce new evidence or advance arguments that could 1 and should have been presented to the district court prior to the judgment”). See generally 2 2 Gensler, Federal Rules of Civil Procedure, Rules and Commentary, Rule 56, at 170 3 (2021) (“Parties sometimes seek to introduce additional evidence after summary judgment 4 has been granted by seeking reconsideration . . . [but] courts generally will not consider 5 evidence if it was available with reasonable diligence at the time the court resolved the 6 summary judgment motion.”). 7 The Individual Defendants’ new arguments also fail on the merits. As for Count 8 One, the Individual Defendants do not seem to dispute the conclusion in the summary 9 judgment order that the first prong of the pyramid scheme test was satisfied as to VOZ 10 Travel. Instead, they seem to dispute only the finding as to the second prong—that 11 participants’ rewards were primarily based on recruitment rather than retail sales. Nothing 12 in the Individual Defendants’ motion suggests this finding was incorrect, let alone 13 manifestly erroneous. As the FTC correctly points out in its response, sales of VOZ Travel 14 packs spanned for many months despite the absence of an underlying product and the sales 15 efforts even continued after relationship with Advantage Services began to fall apart. 16 Additionally, and as noted in the summary judgment order, it is undisputed that Noland 17 made false statements during a December 20, 2019 phone call related to the VOZ Travel 18 program, by falsely claiming that the “biggest travel deal ever” had “just happened” and 19 been “inked” when, in fact, no new travel contract had just been signed. (Doc. 406 at 1820 19.) On this record—and particularly in light of the Individual Defendants’ failure to offer 21 any sort of defense of the VOZ Travel program in their summary judgment response—it 22 would have been wholly speculative to conclude that, but-for the FTC’s pursuit of this 23 lawsuit, the Advantage Services relationship would have somehow been repaired in mid24 January 2020, resulting in the provision of travel products to consumers for resale. Nor 25 would such a hypothetical development have undermined the finding underlying the 26 liability finding on Count One—that, on this record, VOZ Travel rewards were based 27 primarily on recruitment. 28 The phrase “on this record” has significance here. In their reply in support of their 1 motion for reconsideration, the Individual Defendants seem to suggest that the liability 2 finding as to Count One was based on “the proposition that pre-launch sales of products or 3 services in development inherently violate the law because there is no immediate delivery 4 or the product or service to the purchasers.” (Doc. 426 at 2.) This is inaccurate. In a 5 different case, with different facts, such pre-launch sales might very well be permissible. 6 Nevertheless, the facts of this case—which, again, were deemed undisputed for summary 7 judgment purposes in light of the Individual Defendants’ failure to dispute the FTC’s 8 evidence related to VOZ Travel or proffer their own arguments and defenses related to that 9 program—were that the Individual Defendants sold VOZ Travel packs over a period of 10 many months despite the absence of an underlying product, continued their sales efforts 11 even after the underlying contract was terminated, failed to disclose the termination of the 12 contract during certain communications with consumers, and made affirmative false 13 statements to consumers about other aspects of the contractual relationship. 14 The Individual Defendants also raise various reconsideration arguments that are 15 based on the contents of the affiliate declarations. As an initial matter, those arguments 16 fail because the Individual Defendants made no effort in their summary judgment response 17 to identify any statements within the declarations—which were submitted as a single, 18 1,882-page exhibit (Doc. 335-3)—that touched upon the VOZ Travel program. It was not 19 the Court’s role to hunt through such a voluminous exhibit in search of isolated statements 20 that might support the Individual Defendants’ position, particularly where the Individual 21 Defendants made no effort in their response to defend the VOZ Travel program. See Fed. 22 R. Civ. P. 56(c)(3) (“The court need consider only the cited materials . . . .”); Gensler, 23 supra, Rule 56, at 169-70 (“The court has no duty to search the record to identify the facts 24 that might . . . defeat summary judgment. . . . [A] party who fails to cite to materials in 25 the record cannot complaint when the judge does not independently locate them and 26 consider them when ruling.”). Nor do the belatedly proffered portions of the affiliate 27 declarations create a triable issue of fact as to the VOZ Travel pyramid-scheme liability 28 finding. For example, even assuming that one consumer believed he was obtaining a 1 “travel opportunity” when he purchased a VOZ Travel pack (Doc. 335-3 at 123), the 2 undisputed evidence submitted by the FTC establishes that no such opportunity actually 3 existed. 4 As for the Individual Defendants’ post-lawsuit statements concerning their desire to 5 begin operating VOZ Travel without an MLM component, these statements shed no light 6 on whether the Individual Defendants’ pre-lawsuit operation of VOZ Travel with an MLM 7 component qualified as a pyramid scheme. 8 As for the Individual Defendants’ contention that it was erroneous to construe VOZ 9 Travel and SBH as separate enterprises, this argument fails for several reasons. First, it is 10 not properly before the Court. The Individual Defendants not only failed to raise this 11 argument in their summary judgment brief but also failed to raise it in their motion for 12 reconsideration, instead waiting to raise it for the first time in their reply in support of their 13 reconsideration motion. Zamani v. Carnes, 491 F.3d 990, 997 (9th Cir. 2007) (“The district 14 court need not consider arguments raised for the first time in a reply brief.”). Second, on 15 the merits, this marks another instance where the Individual Defendants are improperly 16 seeking to reopen factual issues that were established against them for summary judgment 17 purposes due to their failure to respond to the FTC’s evidence and arguments. As discussed 18 above, the FTC’s summary judgment motion raised distinct arguments as to why the 19 Individual Defendants’ conduct related to SBH and VOZ Travel provided pathways to 20 liability and proffered distinct evidence addressing each venture. For example, the FTC’s 21 expert, Dr. Bosley, opines that “[i]n promoting the VOZ compensation structure, SBH is 22 offering a second pyramid scheme.” (Doc. 286-7 at 84.) It was not manifestly erroneous 23 to treat this evidence as undisputed under Rule 56(e)(2) and then rely on that undisputed 24 evidence for purposes of the resulting summary judgment analysis. 25 Finally, given these conclusions, the Individual Defendants have also failed to 26 identify any basis for reconsideration of the liability findings on Counts Two and Three. 27 … 28 … 1 Accordingly, IT IS ORDERED that the Individual Defendants’ motion for 2 || reconsideration (Doc. 411) is denied. 3 Dated this 25th day of October, 2021. [4] 5 om ee 6 f t _o—— Dominic W. Lanza 7 United States District Judge [28] -12-