Federal Trade Commission v. World Media Brokers

In the

United States Court of Appeals

For the Seventh Circuit

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No. 04-2721

FEDERAL TRADE COMMISSION,

Plaintiff-Appellee,

v.

WORLD MEDIA BROKERS, also

known as 913062 ONTARIO INC.,

624654 ONTARIO LTD., doing business

as EXPRESS MARKETING SERVICES, EXPRESS

MARKETING, doing business as EMS, et al.,

Defendants-Appellants.

____________

Appeal from the United States District Court for

the Northern District of Illinois, Eastern Division.

No. 02 C 6985—Amy J. St. Eve, Judge.

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ARGUED FEBRUARY 9, 2005—DECIDED JULY 27, 2005

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Before BAUER, EASTERBROOK, and ROVNER, Circuit

Judges.

ROVNER, Circuit Judge. Although individuals playing the

lottery rarely strike it rich, those selling lottery tickets

apparently do quite well. Take the case of seven affiliated

Canadian corporations, two United States corporations, and

their six corresponding principal officers, who made mil-

2 No. 04-2721

lions selling chances to play in the Canadian lottery. Their

enterprise came to a halt, however, after the Federal Trade

Commission (“FTC”) initiated an action for injunctive and

other relief pursuant to sections 13(b) and 19 of the Federal

Trade Commission Act (“FTC Act”), 15 U.S.C. §§ 53(b) and

57b, the Telemarketing and Consumer Fraud and Abuse

Prevention Act (“Telemarketing Act”), 15 U.S.C. § 6101-

6108, and the FTC Telemarketing Sales Rule (“TSR”), 16

C.F.R. § 310.1-9. The FTC alleged that the defendants had

engaged in deceptive trade practices by, among other

things, failing to notify U.S. consumers that it is illegal to

buy and sell foreign lottery tickets. The district court

entered a permanent injunction against five of the Cana-

dian corporations and ordered them to pay $19 million in

consumer redress. The court also entered judgment holding

two of the corporate officers, George Yemec and Anita Rapp,

jointly and severally liable. The defendants appeal, arguing

primarily that the district court erred by holding Yemec and

Rapp liable for the corporations’ allegedly deceptive prac-

tices.

I.

In 1999 the FTC began investigating a Canadian tele-

marketing enterprise selling chances to play the Canadian

lottery. The enterprise involved the following string of

interrelated corporations: World Media Brokers, Inc., a/k/a

913062 Ontario Inc.; 1165107 Ontario Inc., d/b/a Canadian

Catalogue, Canadian Catalogue Services, CCS, and

Interwin Marketing; Faby Games Inc., a/k/a 1106759

Ontario Inc., d/b/a Canadian Catalogue Services, and CCS;

624654 Ontario Limited, d/b/a Express Sales, Express

Marketing Services, EMS, and First Telegroup Marketing;

637736 Ontario Limited, d/b/a Express Marketing Services

and EMS; 537721 Ontario Inc., d/b/a Canadian Express

Club; Express Marketing Services Ltd., d/b/a EMS; Cash

No. 04-2721 3

and Prizes, Inc.; and Intermarketing Services, Inc. It is

difficult if not impossible to separate the actions of the

various corporations, which we refer to collectively as “the

corporate defendants.”

The corporate defendants began operations in the late

1980s. At that time, George Yemec, former publisher of

“Whole World Lottery Guide” and “Millions Magazine,”

started several companies that bought groups of lottery

tickets and resold them to U.S. and Canadian consumers.

Anita Rapp served as a corporate officer for several of the

corporate defendants and also handled various financial

matters for them.

The various corporate defendants operated by purchasing

lists of names that telemarketers then used to call individu-

als and offer them chances to play the Canadian lottery.

There were multiple variations on the offers extended. The

most common offers involved opportunities to buy packages

or groupings of tickets in two of Canada’s largest lotteries,

Lotto 6/49 and Lotto Super 7. Telemarketers promised

would-be buyers that “playing by mail in a small group is

the best way to play the Canadian government guaranteed

lottery.” The options to play included packages with

combinations of individual and group tickets that could be

purchased for anywhere from $77 up to $1,000. Other

possibilities included a year-long “subscription” to play

Lotto 6/49 and Lotto Super 7 (available for a set fee plus an

additional $17.95 “service fee”), or a stake in the lotteries

comprised of a combination of seven individual tickets, 700

group tickets, one share in the so-called “7,000 group,” and

a draw from what was called the “Cash & Prizes Program.”

Others were given a chance to take advantage of a special

“introductory offer” to join the “Jackpot Alert Service,” a

900 number where callers entered a pin number and paid

$1.99 a minute to get lottery information.

The FTC investigated the corporate defendants’ opera-

tions for several years. During its investigation, the FTC

4 No. 04-2721

gathered declarations from individuals who had partici-

pated in the lotteries and also procured tape-recordings of

telemarketers’ calls. Relying on this evidence, in 2002 the

FTC filed actions in Ontario, Canada (“the Canadian

proceeding”) and the Northern District of Illinois. In the

Canadian proceeding the FTC obtained two ex parte orders:

an injunction authorizing it to freeze certain corporate

assets, and an order allowing it to search the corporate

defendants’ premises.1

Several months later, in October 2002, the FTC filed its

complaint in district court, alleging that the corporate

defendants and six individual corporate officers violated

Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which pro-

hibits unfair or deceptive acts or practices in or affecting

commerce, and two provisions of the TSR—16 C.F.R.

§ 310.3(a)(1)(ii) (requiring telemarketers to disclose mater-

ial limitations on any goods or services offered) and

§ 310.3(a)(4) (forbidding telemarketers from making false or

misleading statements to induce purchase of goods or

services). Specifically, the FTC alleged that the defendants

had misled consumers by representing, among other things,

that it was legal for U.S. citizens to play the Canadian

lottery. In November the district court entered a stipulated

order for a preliminary injunction and an asset freeze

against both the individual and corporate defendants.

In August 2003, the FTC moved for partial summary

judgment against Yemec, Rapp, and five of the Canadian

1

Just over one year later, in October 2003, the Ontario Superior

Court of Justice dissolved the injunction on the basis that the FTC

had lacked standing to obtain the injunction, had not fully

disclosed certain information, and had failed to establish a strong

prima facie case of fraud against the defendants or demonstrate

that the defendants were likely to remove assets before judgment.

The FTC’s appeal of that decision was still pending in Canada at

the time this appeal was briefed.

No. 04-2721 5

corporate defendants. In March 2004, the district court

granted the FTC’s motion. The court concluded that it was

undisputed that the Canadian corporate defendants used

telemarketers to call consumers in the United States and

sell group and individual tickets in the Canadian lottery. In

these calls, telemarketers failed to inform consumers that

selling Canadian lottery tickets to U.S. citizens is illegal.

See 18 U.S.C. § 1301 (making it a crime to “transmit” a

ticket or interest in a lottery in foreign commerce); 18

U.S.C. § 1302 (making it a crime to mail any lottery ticket

or instrument representing a ticket or interest in a lottery);

18 U.S.C. § 1953 (making it a crime to send in foreign

commerce any instrument designed for use in a numbers,

policy, or bolita game). In fact, when consumers questioned

the legality of buying tickets in the Canadian lottery, the

telemarketers were trained to assure them that it was legal.

Thus, concluded the court, the corporate defendants had

engaged in deceptive practices forbidden by 15 U.S.C.

§ 45(a)(1), namely by misleading reasonable consumers into

believing that it was legal for them to purchase tickets or

interests in the Canadian lottery.

Likewise, the corporate defendants had violated

§ 310.3(a)(1)(ii) of the TSR by failing to conspicuously (or at

all, for that matter) disclose that selling foreign lottery

tickets is illegal. The district court found that the Canadian

corporate defendants had also violated § 310.3(a)(4) of the

TSR by falsely assuring consumers of the legality of their

purchases. Finally, the district court concluded that Yemec

and Rapp were individually liable for the corporate defen-

dants’ deceptive practices because they had authority to

control the corporations and knew or should have known

that it was illegal to sell Canadian lottery tickets to U.S.

citizens.

In June 2004, the district court entered final judgment

against Yemec, Rapp, and the five Canadian corporate

6 No. 04-2721

defendants.2 The judgment permanently enjoined Yemec,

Rapp, and the corporate defendants from engaging in any

telemarketing in the United States and from selling lottery

tickets to U.S. residents. The court also ordered Yemec,

Rapp, and the corporate defendants to pay $19 million in

consumer redress. See 15 U.S.C. § 57b(b) (giving court juris-

diction to authorize necessary relief, including consumer

redress); 15 U.S.C. § 6105(b) (granting FTC authority to

seek the same penalties for violations of the Telemarketing

Act as for violations of the FTC Act). Finally, the order

enjoined the defendants from selling or disclosing customer

lists and required them to provide existing customer lists to

the FTC.

II.

We review the district court’s grant of summary judgment

de novo, Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986),

construing all facts and drawing all reasonable inferences

in favor of the non-moving party, Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 255 (1986). Although all five Canadian

corporate defendants appealed, none of the arguments on

appeal relate to the corporate defendants’ liability. Instead,

the defendants argue only that the district court erred by

granting summary judgment against Yemec and Rapp and

holding them jointly and severally liable for the $19 million

in consumer redress.

To hold an individual liable for a corporation’s deceptive

practices, the FTC must first prove an underlying corporate

violation of section 5 of the FTC Act. See FTC v. Amy Travel

Serv., Inc., 875 F.2d 564, 573 (7th Cir. 1989); see also FTC

2

The remaining corporate and individual defendants have since

been dismissed or had default judgments entered against them;

thus, the district court’s judgment is final and appealable under

28 U.S.C. § 1291.

No. 04-2721 7

v. Freecom Communications, Inc., 401 F.3d 1192, 1203 (10th

Cir. 2005). Section 5 prohibits “[u]nfair or deceptive acts or

practices in or affecting commerce.” 15 U.S.C. § 45(a)(1).

The FTC may establish corporate liability under section 5

with evidence that a corporation made material representa-

tions or omissions likely to mislead a reasonable consumer.

See FTC v. Tashman, 318 F.3d 1273, 1277 (11th Cir. 2003);

FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020,

1029 (7th Cir. 1988).

We agree with the district court that the telemarketers’

script would likely mislead a reasonable consumer into

believing that it was legal to play the Canadian lottery in

the United States. Not only did the telemarketers fail to tell

U.S. consumers about laws prohibiting buying and selling

lottery tickets in foreign commerce, they were instructed to

give the following response to those consumers who said

that they had previously heard that playing Canadian

lotteries was illegal: “Well that’s just not true! We have

players from each and every one of the 50 states. What you

may have heard about is a U.S. postal regulation that

doesn’t allow anyone to send tickets through the mail, but

we don’t do that in this game anyway.” It is beyond ques-

tion that the legality of playing would be material to a

consumer’s decision to purchase the lottery packages.

Accordingly, the corporate defendants engaged in deceptive

practices both by omitting information about the legality of

their offers and by falsely assuring U.S. consumers that

playing the Canadian lottery was legal.

The defendants’ failure to inform consumers about pro-

hibitions on playing foreign lotteries also runs afoul of at

least two provisions of the TSR. Section 310.3(a)(1)(ii) of the

TSR requires telemarketers to fully and clearly disclose any

material limitations or restrictions on the goods or services

offered for sale. 16 C.F.R. § 310.3(a)(1)(ii). It goes without

saying that the legality of the offer itself qualifies as a

material restriction subject to disclosure. It is equally

8 No. 04-2721

apparent that the telemarketers’ assurances about the

legality of playing violated § 310.3(a)(4), which forbids

“making a false or misleading statement to induce any

person to pay for goods or services.” Id. § 310.3(a)(4); cf.

FTC v. Affordable Media, 179 F.3d 1228, 1233 (9th Cir.

1999). Thus, the FTC has established that the five

Canadian corporate defendants violated section 5 of the

FTC Act and subsections (a)(1)(ii) and (a)(4) of the TSR.

Yemec and Rapp essentially concede corporate wrongdo-

ing, but maintain that their involvement was too inconse-

quential to warrant individual liability. Upon establishing

corporate liability, the FTC is obligated to demonstrate that

the individual defendants either participated directly in the

deceptive acts or practices or had authority to control them.

Amy Travel, 875 F.2d at 573; see also Freecom Communica-

tions, 401 F.3d at 1204; FTC v. Publ’g Clearing House, Inc.,

104 F.3d 1168, 1170 (9th Cir. 1997). The FTC must also

prove that the individual defendants either knew or should

have known about the deceptive practices, but it is not

required to prove subjective intent to defraud. Amy Travel,

875 F.2d at 573-74. Instead, the FTC may fulfill the

knowledge requirement with evidence that the individuals

had “actual knowledge of material misrepresentations,

reckless indifference to the truth or falsity of such misrepre-

sentations, or an awareness of a high probability of fraud

along with an intentional avoidance of the truth.” Id. at 574

(citation and internal quotations omitted).

We begin with Yemec, who argues primarily that he

cannot be individually liable because he did not “directly or

indirectly make false or misleading statements to U.S.

consumers or participate in practices designed to induce

U.S. consumers to purchase shares or interests in foreign

lottery tickets.” Yemec’s argument misses the mark.

Whether he personally made misrepresentations is irrele-

vant so long as the FTC has shown that he had authority to

control the corporations’ deceptive practices. See Freecom

No. 04-2721 9

Communications, 401 F.3d at 1204 (fact that defendant

“never personally misrepresented the income . . . is beside

the point because the law did not require the FTC to make

such a showing”).

Such authority may be demonstrated by active partici-

pation in the corporate affairs, including assuming duties

as a corporate officer. Amy Travel, 875 F.2d at 573. There

is no question that Yemec assumed the duties of a corporate

officer. He incorporated and served as the director, presi-

dent, and secretary of World Media Brokers, Inc. He also

served as the director, secretary, and treasurer of 624654

Ontario Ltd., and as the director, president, secretary, and

treasurer of both 637736 Ontario Ltd. and 537721 Ontario

Inc. Given his status as a corporate officer of multiple

corporations, Yemec would be hard-pressed to establish that

he lacked authority or control over them. Indeed, Yemec

concedes in his brief that he “did have authority and control

over the Corporate Defendant-Appellants which he owned

and managed.”

There is also ample evidence establishing that Yemec

knew selling Canadian lottery tickets to U.S. consumers

was illegal. For instance, in 1995 the Assistant Attorney

General of Oregon wrote Canadian Express Club, warning

it that the sale of foreign lottery tickets or pools was a

criminal offense. At least two consumers also wrote and

asked to be taken off the corporate defendants’ mailing lists

on the grounds that the foreign lottery business was illegal.

Additionally, the United States Postal Service personally

named Yemec in 1989 when it ordered several of the corp-

orate defendants to cease and desist sending material re-

lating to lotteries in the mail. Yemec ignores this damning

evidence, instead making a vague, blanket pronouncement

that he cannot be liable because he “took all necessary

steps” to keep telemarketers from making misrepresenta-

tions and fired those telemarketers who failed to follow

company guidelines. Yemec, however, does not explain how

10 No. 04-2721

he prevented telemarketers from misleading consumers. See

Morfin v. City of East Chicago, 349 F.3d 989, 1002 (7th Cir.

2003) (party opposing summary judgment must point to

specific facts establishing a genuine issue of material fact

for trial).

Indeed, to prevent consumer confusion, Yemec would have

had to instruct the telemarketers to call U.S. consumers

and offer them opportunities to participate in an illegal

lottery. It goes without saying that Yemec never took such

action. Moreover, Yemec makes no attempt to explain the

scripts, which he approved, directing telemarketers to as-

sure consumers that selling and purchasing foreign lottery

tickets is legal. In short, the undisputed evidence estab-

lishes that Yemec had the requisite knowledge and control

to be individually liable for the corporate defendants’

violations of the FTC Act and the TSR. See FTC v. Gem

Merch. Corp., 87 F.3d 466, 470 (11th Cir. 1996).

The same is true for Rapp. She attempts to downplay her

role in the corporate defendants’ operations, characterizing

herself as a “mere telemarketing consultant.” This charac-

terization is inconsistent with Rapp’s responses in the

district court to the FTC’s Local Rule 56.1(a) statements.

There she admitted that she served as a corporate officer

for at least two of the corporate defendants. Specifically, she

admitted that she is the director and president of 624654

Ontario Ltd., and that she was the president, secretary, and

treasurer of 637736 Ontario Ltd. Rapp also admitted

performing a number of tasks that evince active participa-

tion in the corporate affairs. For instance, she registered

and renewed three different business names for 624654

Ontario Ltd. (“Express Sales,” “First Telemedia Group,”

“First Telegroup Marketing”), and also registered and

cancelled the name “Express Marketing Services” for it. She

is also an authorized signing officer for 637736 Ontario Ltd.

Finally, the record contains multiple letters sent by Rapp to

banks handling the corporate defendants’ accounts. In those

No. 04-2721 11

letters she gives the banks directions on handling different

accounts and holds herself out as an “authorized officer” of

several of the corporate defendants. This evidence estab-

lishes a level of corporate involvement sufficient to demon-

strate the requisite authority to control the corporate

defendants. See Publ’g Clearing House, 104 F.3d at 1170

(authority control shown by defendant’s authority to sign

documents on company’s behalf and role as corporate

officer).

Rapp’s level of corporate involvement likewise suffices to

demonstrate that, at the very least, she should have known

about the corporation’s deceptive practices. She was

handling most of the financial matters for several of the

defendants, something she could not have done without

knowledge of what the corporations were selling. Since the

entire premise of the corporation’s business was marketing

foreign lottery tickets, Rapp must have known what was

going on. She too was personally named in the cease and

desist order from the United States Postal Service, and thus

had notice that trafficking in foreign lotteries is illegal.

Accordingly, the district court did not err by holding Rapp

jointly and severally liable with the corporate defendants.

See id.

One final matter. In her reply brief Rapp argues for the

first time that the district court erred by deeming certain

facts admitted on account of the defendants’ failure to

respond to the FTC’s request for admissions. See

Fed. R. Civ. P. 36(a). Rapp, however, has waived the argu-

ment because she fails to identify what “admissions” she is

referring to, or explain how the alleged error by the district

court affected its decision. See, e.g., Estate of Moreland v.

Dieter, 395 F.3d 747, 759 (7th Cir. 2005) (“Perfunctory or

undeveloped arguments are waived.”). The argument is

waived for the additional reason that Rapp raises it for the

first time in the reply brief. See Carter v. Tennant Co., 383

F.3d 673, 679 (7th Cir. 2004). Waiver aside, we can see no

12 No. 04-2721

error in the district court’s handling of the FTC’s requests

for admissions. The district court allowed the defendants to

withdraw their admissions, which had become binding

owing to their failure to respond in a timely fashion to the

FTC’s Rule 36 requests for admissions. See Fed. R. Civ. P.

36(a) (matters deemed admitted when party fails to respond

within 30 days); McCann v. Mangialardi, 337 F.3d 782, 788

(7th Cir. 2003) (same). Despite being allowed to withdraw

their admissions and being given additional time to re-

spond, the defendants never filed any response to the FTC’s

Rule 36 requests. Given that, we cannot say that the

district court erred by deeming the facts admitted.

III.

For the foregoing reasons, we AFFIRM the district court’s

judgment granting partial summary judgment in favor of

the FTC, entering a permanent injunction, and holding

Yemec and Rapp jointly and severally liable for $19 million

in consumer redress.

A true Copy:

Teste:

________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit

USCA-02-C-0072—7-27-05