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Federal Trade Commission v. Johnson

United States District Court, D. Nevada

August 16, 2016

FEDERAL TRADE COMMISSION, Plaintiff,
v.
JEREMY JOHNSON, et al., Defendants.

          FINDINGS OF FACT AND CONCLUSIONS OF LAW

          MIRANDA M. DU UNITED STATES DISTRICT JUDGE

         I. INTRODUCTION

         The Federal Trade Commission (“FTC”) brought this action against Defendants Jeremy Johnson, I Works, Inc. (“IWorks”), Terrason Spinks (“Spinks”), Jet Processing, Inc. (“Jet Processing”), and numerous other individuals and corporate entities. The FTC alleges that Defendants participated in a fraudulent scheme on the Internet that involved deceptive enrollment of consumers into memberships for various products, charging consumers' credit cards or debit accounts for said memberships without authorization, and then setting up merchant accounts in the names of numerous corporate entities to process IWorks credit cards sales to circumvent credit card companies' monitoring programs and tracking. The Court granted summary judgment on several claims and the FTC settled with all but two Defendants, Spinks and Jet Processing.

         This Order thus addresses the remaining claims against these two Defendants, as well as the consumer injury for which these Defendants are jointly and severally liable. The Court also addresses the FTC's request for a final order permanently enjoining Spinks and Jet Processing from engaging in deceptive practices, and holding Spinks and Jet Processing jointly and severally liable for $280, 911, 870 in consumer redress.

         II. PROCEDURAL BACKGROUND

         A. Complaint and Amended Complaint

         In 2010 the FTC brought suit against Jeremy Johnson, IWorks, Spinks and Jet Processing, among a number of other individual and corporate defendants, for violations of the FTC Act, 15 U.S.C. § 45(a). (ECF No. 1.) In February 2013, the FTC filed an amended complaint adding several more defendants and asserting a number of claims under Section 5(a) of the FTC Act as well as the Electronic Funds Transfer Act, 15 U.S.C. § 1693e(a) (“EFTA”), and Regulation E, 12 C.F.R. § 205.10(b). (ECF No. 830.)

         1. Spinks

         The FTC alleged in its Amended Complaint that Terrason Spinks was a business associate of Jeremy Johnson who worked in the IWorks headquarters and received regular reports of consumer complaints and high levels of chargebacks. (ECF No. 830 ¶¶ 347, 352.) It further alleged that Spinks participated in the IWorks scheme by obtaining merchants accounts on behalf of IWorks, owning and acting as an officer of Jet Processing (which the FTC alleges was a front for obtaining new accounts), submitting a Chargeback Reduction Plan to a bank on behalf of Jet Processing, and maintaining signatory authority over six bank accounts which received funds from IWorks or its sales. (Id. ¶¶ 348-51.)

         2. Jet Processing

         In the Amended Complaint the FTC alleged that Jet Processing is a company incorporated in Nevada in 2009. (ECF No. 830 ¶ 172.) The FTC further alleged that Jet Processing was established as a front in order to obtain new merchant accounts so that IWorks and other defendants could continue to process credit and debit card charges even after old merchant accounts were terminated. (Id. at ¶¶ 4, 173-175.)

         B. Summary Judgment Orders

         Over several years of litigation, the Court issued four partial summary judgment orders. The first order, issued on March 31, 2015 (“SJ Order I”), concluded that at least some of the websites upon which the FTC relied violated the FTC Act. SJ Order I also granted summary judgment in favor of the FTC on the EFTA claim for fund transfers from three consumers. (ECF No. 1586.)

         After the parties met and identified additional websites that they stipulated were similar to the ones the Court had already found deceptive, the Court issued a second summary judgment order (“SJ Order II”) finding several additional sites deceptive. (ECF No. 1794.)

         On December 31, 2015, the Court granted summary judgment (“SJ Order III”) in favor of the FTC on the issues of affiliate liability (finding that IWorks was responsible for deceptive sites hosted by marketing partners), common enterprise liability (finding that the tangle of corporate defendants, including Jet Processing, operated as a single enterprise), and individual liability for Defendants Jeremy Johnson and Ryan Riddle. (ECF No. 1818.) The Court denied the FTC's summary judgment request as it related to individual liability for Spinks, even though Spinks did not directly address any of the FTC's arguments. The Court found that the FTC has not met its prima facie burden of establishing facts showing the Spinks had the requisite levels of knowledge and participation. (Id. at 11.)

         Finally, the Court granted partial summary judgment against a number of unrepresented corporate defendants on June 9, 2016. (ECF No. 1924.)

         C. Bench Trial

         Every defendant, except for Spinks and Jet Processing, eventually reached a settlement agreement with the FTC. (See ECF Nos. 1203, 1204, 1407, 1860, 1913, 1931, 1939-41, 1981, 1991.)

         The Court held a three-day bench trial to determine whether, and to what extent, Spinks and Jet Processing were liable for violations of the FTC Act and the EFTA. Specifically, the parties identified the following issues of fact to be resolved by the Court: 1) the extent of Spinks participation in, and ability to control, the unlawful acts; 2) whether Spinks had actual knowledge or showed reckless indifference to the misrepresentations; 3) whether the deceptive sites were widely disseminated; 4) whether the so-called Google sites made claims that were misleading and whether Defendants knew or should have known about those claims; 5) whether the remaining sites, on which the Court previously denied summary judgment, are deceptive; and 6) the amount of unreimbursed consumer injury associated with the deceptive acts at issue. (See ECF No. 1961.)

         The FTC presented the testimony of seven witnesses. The witnesses included two former IWorks employees, Tracey Kramm and Sara Marker. Representatives from Visa and Mastercard also testified, as well as two FTC employees involved in the FTC's investigation. Finally, Spinks himself testified.

         At the conclusion of the trial, the Court noted that it would rely on evidence offered in support of the several summary judgment motions in addition to the testimony and exhibits offered at trial. Based on this information, the Court makes the following findings of fact and conclusions of law.

         III. FINDINGS OF FACT

         A. Liability

         1. Terrason Spinks

         1. Spinks met Jeremy Johnson in High School in St. George, Utah, sometime around 1993. (ECF No. 2001 at 99-100; ECF No. 1240-7 at 21.)

         2. Approximately seven years later, while working as a mortgage broker, Spinks ran into Johnson at an airport. The two struck up a conversation and had lunch. Afterwards, Spinks helped Johnson obtain several mortgages. (ECF No. 2001 at 103.).

         3. Spinks eventually began working from an office on the first floor of 249 East Tabernacle St. in St. George, UT, which was also home to IWorks. (ECF No. 2000 at 23; ECF No. 2001 at 125.)

         4. Spinks began working with IWorks at least as early as 2006. (ECF No. 1240-7 at 82-83.)

         Google Product

         5. In late 2005 or early 2006, Spinks developed an idea to market a Google AdWords product that taught customers how to use Google's AdWords and Pay-Per-Click to drive traffic to websites (“Google Product”). Spinks was familiar with these techniques because he used them to advertise his mortgage business. (ECF No. 2001 at 106.)

         6. Spinks knew that Johnson was involved in telemarketing and internet marketing, so he approached Johnson with his Google Product idea. (Id. at 103-04) The final product Spinks developed was called “Growing Rich with Google.” (Id. At 108.)

         7. Spinks and Johnson entered into an oral agreement under which Spinks would create the product and the two would split any profits. (ECF No. 2001 at 107-08.)

         8. iWorks created a landing page and an order page for the Google Product, and Spinks worked with Johnson to create a marketing plan. (Id. at 107, 173.)

         9. Spinks reviewed the content of the sites created by IWorks. (ECF No. 1240-7 at 163-64; ECF No. 2001 at 695.)

         10. Spinks helped set up customer service for the Google Product and attempted to drive web traffic to the Google Product sites for around two or three months. (ECF No. 2001 at 114-15; Ex. 724 (ECF No. 1969).)

         11. While attempting to drive web traffic to the Google Product, Spinks also attempted to drive traffic to IWorks Grant Products. (ECF No. 2001 at 161.)

         Merchanting

         12. Spinks transitioned from marketing to merchanting in January 2007. (ECF No. 2001 at 116, 215.) He turned control of the Google Product over to Jeremy Johnson and no longer received any revenue from it. (Id. at 115.)

         13. Spinks described merchanting as acquiring merchant accounts for companies, including IWorks. (Id.)

         14. Independent Sales Organizations (“ISOs”) are intermediaries between merchants and banks. They perform a function similar to a mortgage broker, except they connect merchants and acquiring banks rather than lenders and borrowers. (ECF N0. 2000 at 9-10.)

         15. ISOs help merchants, like IWorks, acquire merchant accounts with banks. Banks that open merchant accounts in this context are referred to as acquiring banks. Merchant accounts allow e-commerce companies like IWorks to receive payment for goods and services via debit and credit cards. (ECF No. 2001 at 135; ECF No. 2000 at 61.)

         16. When a customer purchases a good or service from an e-commerce merchant like IWorks, the ISO or sub-ISO who facilitated the account, the acquiring bank, and the credit card company all receive revenue. (ECF No. 2000 at 77.)

         17. Acquiring banks often have their own underwriting departments and generally establish criteria for ISOs to follow. For example, an acquiring bank may dictate what type of business they are interested in and what level of risk they are willing to tolerate. (Id. at 63.)

         18. ISOs sometimes contract with third parties which the parties in this case have referred to as “sub-ISOs.” Sub-ISOs are essentially independent sales agents for ISOs. (Id. at 28.)

         19. Spinks began merchanting in late 2007 or early 2008, when he founded Empower Processing with a relative. (ECF No. 2001 at 116.)

         20. Spinks conducted Empower Processing business from his home. (Id. at 124.)

         21. Empower Processing had a handful of clients, one of which was IWorks. Spinks set up merchant accounts for IWorks on behalf of Empower Processing. (Id. at 120.)

         22. Spinks ended Empower Processing and parted ways with his relative in either 2007 or 2008, around the same time he formed a Utah corporation called Jet Processing, Inc. (“Jet Processing Utah”). (Id.)

         23. Jet Processing Utah was formed in 2008. Its offices were located at 249 East Tabernacle, in the same building as IWorks. (Id. at 124.)

         24. Jet Processing Utah was a sub-ISO for two ISOs called Swipe and Cynergy. (ECF No. 1999 at 184.)

         25. Spinks set up a Nevada corporation also called Jet Processing about a year later. (ECF No. 2001 at 124.)

         26. Spinks helped IWorks set up merchant accounts through Jet Processing. (Id. at 134.)

         27. Spinks also co-owned a company called Merchant Works, which was set up to process sales for IWorks. (Id. at 186-87.)

         28. It is not clear from the evidence produced at trial when Merchant Works, Inc. was created, but the company applied for merchant accounts in December of 2007. (Tr. Exs. 700, 701, 702.)

         29. Spinks applied for at least three merchant accounts on behalf of Merchant Works (d/b/a Growing Rich With Google, Rebates Millionaire, and Grant A Day) to process sales of IWorks products. In each of the applications, he identified himself as an owner/officer of Merchant Works. (Tr. Exs. 700, 701, 702.)

         30. Spinks assisted in testing websites as part of his role in helping set up merchant accounts for Easy Google Profit, and IWorks product. (ECF No. 2001 at 177; Tr. Ex. 321 (ECF No. 1243-10).)

         31. Tr. Ex. 2405 contains a list of 15 merchant accounts Spinks helped set up for IWorks through Swipe and Cynergy Data (page 1) and Jet Processing (page 2). (ECF No. 2001 at 224; Tr. Ex. 2405.)

         32. Spinks was familiar with the IWorks products for which he set up merchant account, and knew about IWorks' practice of including upsells with core products. (ECF No. 2001 at 133, 141.)

         33. Spinks also knew that IWorks' grant program included a membership. (ECF No. 1240-7 at 46.)

         Dealing with Chargeback Problems

         34. A chargeback is a reversal of a sale; it typically occurs when a cardholder wants a sale reversed for various reasons including fraud. The cardholder files a dispute with the bank that issued the credit or debit card to the consumer. (ECF No. 2000 at 25.)

         35. Visa has established at least 20 reasons codes for chargebacks. The card-issuing bank enters the reason code into the Visa system based on the conversation the bank had with its cardholder. (Id. at 26-27.) Reason code 83 is for fraud. The predominant code associated with the IWorks chargebacks was 83, fraud chargebacks. (Id. at 26.)

         36. During the period 2008-2010, Jeremy Johnson and IWorks were in the Visa chargeback monitoring program because “they had an excessive number of fraud chargebacks.” (Id. at 16.)

         37. IWorks entered the MasterCard ECM program in 2008. (Id. at 92.)

         38. The average chargeback rate for IWorks, when it was in the MasterCard monitoring program, ranged from 1.7% to 5% across several acquiring banks. (Id. at 95.)

         39. IWorks was placed on the MATCH list by IWorks' acquiring banks 19 times. (Id. at 97.)

         40. Spinks knew that Visa and Mastercard both placed IWorks into monitoring programs due to high levels of chargebacks. (ECF No. 2001 at 145-46.)

         41. Spinks received, but testified that he did not review, a number of different reports discussing IWorks' chargeback problems.[1] (Id. at 135; Tr. Exs 338, 342-44, 352, 355-57, 720.) Spinks participated in numerous meetings where IWorks' chargeback problems were discussed. (ECF No. 1999 at 185-87, 194-95; ECF No. 2001 at 147-49.)

         42. Spinks also received emails detailing problems with various IWorks websites. (ECF No. 152 ¶ 351; ECF Nos. 1243-10, 1243-11; Tr. Exs. 321, 322.)

         43. MasterCard developed a system for tracking and cataloging merchants whose accounts have been terminated. At the times relevant to this case, that system was known as the Terminated Merchant File (TMF”). (ECF No. 2000 at 90, 110-11.)

         44. Online merchants experience an average chargeback rate of about 0.2%. IWorks experienced chargeback rates between 1.7 and 5%. (Id. at 94-95.)

         45. Jeremy Johnson and IWorks were placed on the TMF in April 2009. (ECF No. 1999 at 189.)

         46. Spinks knew that IWorks had problems with chargebacks when he first started working with IWorks. (ECF No. 2001 at 142.) Spinks knew that IWorks and Jeremy Johnson had been placed on the TMF around the time it occurred. (ECF No. 1240-7 at 95.)

         47. After Johnson and IWorks were placed on the Terminated Merchant File, Tracy Kramm worked with Spinks to set up new merchant accounts for new corporate entities through Jet Processing. (ECF No. 1999 at 188.) The purpose of the new accounts was to process IWorks sales. (Id. at 191-92.)

         48. Spinks participated in calls and meetings with IWorks employees and representatives from Swipe, Visa, regarding the large number of chargebacks. (ECF No. 1999 at 185-87; ECF No. 1240-7 at 66.)

         49. Spinks also prepared a Chargeback Mitigation Plan for Jet Processing. (ECF No. 152 ¶ 348; ECF No. 2001 at 167-68; Tr. Ex. 501-A.)

         2. Jet Processing

         50. Jet Processing was incorporated in Nevada on February 24, 2009. (Tr. Ex. 501A.) When it was incorporated, Jet Processing was co-owned by Spinks and Jeremy Johnson. (Id.)

         51. In Spinks and Jet Processing's Answer to the FTC's Complaint, they admitted that Jet Processing set up merchant accounts for IWorks products and opened bank accounts for both Jet Processing business and IWorks.[2] (ECF No. 152 ¶¶ 347, 350.)

         52. Spinks and Jeremy Johnson were officers and directors of Jet Processing. (Tr. Ex. 285.) Spinks served as President and Treasurer of the company. (ECF No. 2001 at 194.)

         53. Spinks had signatory authority over Jet Processing's bank accounts. (Id.)

         54. Spinks eventually purchased Jeremy Johnson's share of Jet Processing and became sole owner. (ECF No. 2001 at 171.)

         B. Consumer Harm

         55. Before trial, the Court found that 87 grant sale sites violate the FTC Act. (ECF No. 1586, 1794, 1908-1.)[3]

         1. The Grant Sale Sites Reserved for Trial Also Violate the FTC Act as Alleged in Counts II, IV and VI

         56. At trial, Defendants argued that the Court should not admit certain sites produced by third-party broker Paradigm Visions, Inc. (“PVI”) because, according to Defendants, the FTC had failed to disclose a certificate of custodian of records from PVI during discovery. The FTC, however, has demonstrated that it timely disclosed the PVI records as issue to Defendants during discovery and that Defendants failed to object to the admission of these records by the applicable deadline. (See ECF 1998 at 1-2.)

         a. Twelve Sale Sites (Tr. Exs. 82-93) Produced by the PVI Violate the FTC Act as Alleged in Counts II, IV, and.

         57. The Court denied summary judgment as to Counts II, V and VI for 12 PVI-produced grant sites that the Court labelled as incomplete sites: Tr. Exs. 82-93; SJ Order II (ECF 1794) at 3-4.

         58. The grant sites that are Tr. Exs. 82-93 were produced to the FTC by PVI pursuant to a CID and these sites were hosted by PVI. (ECF No, 1635-3at ¶ 2-4.)

         59. The landing page introduced as Tr. Ex. 82 (ECF No. 1272-4) directed consumers to one of 11 order pages, Tr. Exs. 82-93. (ECF No.1635-3 at ¶ 7.)

a. The graphics, typeface, statements, appearance, and content for the 11 PVI-produced order pages are identical, except that the price of the grant product varies as does the cost of the shipping and handling. (ECF No. 1635-3 at ¶ 7(a).)
b. The PVI sites that the Court identified as “Incomplete Sites” in SJ Order II, Tr. Exs. 82-93, are complete in that they consist of a landing and an order page for each site.

         60. Tr. Exs. 82-93 violate the FTC Act as alleged in Count II for the following reasons:

a. The landing page, Tr. Ex. 82, states: “If you've always wanted to get your share of the BILLIONS of Grant dollars that are given away by the Federal Government and private Grantors EVERY YEAR, this is your chance!” This statement is virtually identical to the representations on the grant sites the Court ruled deceptive under Count II. Tr. Ex. 10 promise “Billions of dollars are given away each year.”; Tr. Exs. 17-20 explain “The Government gives away BILLIONS each year!”; Tr. Ex. 14 asserts “The U.S. Government and private foundations award MILLIONS IN GRANTS to people just like you who are in need of financial help.”.
b. The landing page of Tr. Ex. 82 lists three steps; step 3 tells the consumer to “use our software to apply for even MORE ...

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