FEDERAL TRADE COMMISSION v. KUYKENDALL
FILED
United States Court of Appeals
Tenth Circuit
DEC 11 2002
PATRICK FISHER
Clerk PUBLISH
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
FEDERAL TRADE COMMISSION, Nos. 02-6101 and 02-6102
Plaintiff - Appellee,
v.
H. G. KUYKENDALL, SR., individually
and as an officer of National
Marketing Services, Inc., NPC
corporation of the
Midwest, Inc. and Magazine Club
Billing Service, Inc.; C. H.
KUYKENDALL; DIVERSIFIED
MARKETING SERVICE CORPORATION,
an Oklahoma corporation; NATIONAL
MARKETING SERVICE INC., an Oklahoma
corporation; NPC CORPORATION
OF THE MIDWEST INC., an Oklahoma
corporation; H. G. KUYKENDALL,
JR.; MAGAZINE CLUB BILLINGS
SERVICE, an Oklahoma corporation,
Defendants - Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
(D.C. No. CIV-96-388-M)
Gregory J. Kerwin, Gibson, Dunn & Crutcher LLP (Taggart Hansen, Denver, Colorado;
Andrew W. Lester and Susan B. Loving, Lester, Loving & Davies, Edmond, Oklahoma, with
him on the briefs), Denver, Colorado, for Defendants-Appellants H.G. Kuykendall, Sr. and
C.H. Kuykendall; Walter H. Sargent, Walter H. Sargent, a professional corporation
(Stephen G. Solomon and George W. Velotta II, Derryberry, Quigley, Solomon & Naifeh,
Oklahoma City, Oklahoma, with him on the briefs), Colorado Springs, Colorado, for
Defendants-Appellants Diversified Marketing Service Corp., National Marketing Service,
Inc., NPC Corporation of the Midwest, Inc., Magazine Club Billing Service, Inc., and H.G.
Kuykendall, Jr.
Michele Arington, Attorney, Federal Trade Commission (William E. Kovacic, General
Counsel, John F. Daly, Deputy General Counsel, Gary L. Ivens and S. Brian Huseman, Of
Counsel, with her on the brief), Washington, DC, for Plaintiff-Appellee.
Before TACHA, Chief Judge, ALDISERT(1) and McWILLIAMS, Circuit Judges.
ALDISERT, Circuit Judge.
Kuykendall family members and their corporations appeal from an order for
contempt and require us to decide whether the district court engaged in sufficient findings
of fact and provided adequate protections under the Due Process Clause in imposing a
substantial financial award for consumer redress against them in favor of the Federal Trade
Commission ("FTC" or "Commission"). Specifically, we must determine whether the
proceedings culminating in a $39 million award for violation of a injunction met minimum
requirements of the Clause. Appellants also challenge certain evidentiary rulings.
Appellants argue that: (a) the contempt order fails to include sufficient findings of
fact and conclusions of law; (b) the court deprived Appellants rights assured by the Due
(1) Ruggero J. Aldisert, Senior United States Circuit Judge for the Third Circuit,
sitting by designation.
Process Clause; (c) the court erred in relying on inadmissible preliminary injunction
findings and hearsay declarations; and (d) the award of $39 million for consumer redress is
contrary to undisputed record evidence.
In addition, H.G. Kuykendall, Sr. and C.H. Kuykendall (the "Senior Kuykendalls" or
"Seniors") individually appeal from the district court's order denying their motion to be
dismissed from the contempt proceedings on the premise that they played no role in the
management of the Appellant corporations during the relevant period of alleged contempt.
The district court had jurisdiction pursuant to 28 U.S.C. 1331. Appellants filed a
timely notice of appeal. To the extent that the contempt order modified provisions of an
injunction, we have jurisdiction under 28 U.S.C. 1292(a)(1) and 1294. In addition, the
district court certified its order pursuant to Rule 54(b), Federal Rules of Civil Procedure,
finding no reason for delay of entry of the order.
In reviewing the court's determination of civil contempt, we must decide whether
the court abused its discretion. "A district court has broad discretion in using its contempt
power to require adherence to court orders." O'Conner v. Midwest Pipe Fabrications, Inc.,
972 F.2d 1204, 1209 (10th Cir. 1992) (citations omitted). "Abuse of discretion is
established if the district court's adjudication of the contempt proceedings is based upon an
error of law or a clearly erroneous finding of fact." Reliance Ins., Co. v. Mast Constr. Co.,
84 F.3d 372, 375-376 (10th Cir. 1996). Whether a district court denied due process to
litigants "is a legal question subject to de novo review on appeal." Thomas, Head & Greisen
Employees Trust v. Buster, 95 F.3d 1449, 1458 (9th Cir. 1996).
"Evidentiary decisions rest with the sound discretion of the trial court, and we
review those decisions only for an abuse of discretion. Our review is especially deferential
when the challenged ruling concerns the admissibility of evidence that is allegedly
hearsay." United States v. Tome, 61 F.3d 1446, 1449 (10th Cir. 1995).
I.
In 1996, the FTC filed a complaint against the individual and corporate Appellants
for violations of 5 of the Federal Trade Commission Act, 15 U.S.C. 45, alleging various
deceptive and misleading acts and practices in the telemarketing of magazine subscription
packages. The Senior Kuykendalls and H.G. Kuykendall, Jr. were sued in their individual
capacity as well as officers of the corporate Appellants. The corporate defendants were
Diversified Marketing Service, Corp. ("DMS"), National Marketing Service, Inc., NPC
Corporation of the Midwest, Inc., and Magazine Club Billing Service Inc. These businesses
were owned and operated by the Kuykendall family as part of a common telemarketing
enterprise to sell magazine subscription packages.
The FTC alleged that the individual and corporate Appellants misrepresented the
price and duration of subscription packages, misrepresented consumers' ability to cancel
subscription packages, failed to cancel packages when requested, misrepresented the need
for and use of consumers' credit card and bank account information, engaged in
unauthorized billing of consumers' credit card and bank accounts, threatened to harm
consumers' credit ratings and wrongfully reported consumer arrears to credit reporting
agencies resulting in damage to consumers' credit standing.
The FTC moved the court for a temporary restraining order ("TRO") and an order to
show cause why a preliminary injunction should not issue. The court granted the FTC's
request for a TRO and conducted a hearing for the preliminary injunction in which the
Commission offered evidence of consumer complaints to third parties such as the Better
Business Bureau and state attorneys general. The FTC also presented evidence of
consumer complaints made directly to Appellants. On July 2, 1996, the district court
issued a preliminary injunction that enjoined all Appellants from specified business
practices, froze the assets of the corporate Appellants and H.G. Kuykendall Jr. and
appointed a temporary receiver for the corporate Appellants pending conclusion of a trial
on the merits.
A.
All Appellants appealed the preliminary injunction but prior to trial the parties
negotiated and agreed to a settlement. The terms of the parties' settlement were
incorporated into a "STIPULATED FINAL JUDGMENT AND ORDER FOR PERMANENT
INJUNCTION" ("Permanent Injunction") filed October 18, 1996. App. at 1019. The
Permanent Injunction outlined 24 separate paragraphs governing Appellants' future conduct
including the specific enjoining of Appellants from: (a) misrepresenting of the cost or
duration of any magazine subscription - the purpose for which Appellants will use a
consumer's credit card or bank account information; (b) misrepresenting a consumer's
ability to cancel subscriptions or that a consumer's credit rating will be damaged by failing
to pay for a magazine subscription package; (c) failing to comply with applicable state laws
governing subscription cancellation; (d) submitting information concerning a consumer's
failure to pay for a subscription when the consumer exercised a right to cancel or the
Appellants do not possess documentary evidence of an obligation to pay; (e) submitting
charges or any negotiable instrument to a consumer's credit card or bank account unless
Appellants have first obtained both the consumer's express agreement to purchase and the
authorization to bill charges; (f) failing to comply with the Telemarketing Sales Rule, 16
C.F.R. Part 310; (g) utilizing independent sales organizations unless such organizations
adhere to detailed procedures outlined in Permanent Injunction; (h) processing any
subscription order unless Appellants' tape recording of the conversation with the consumer
(referred to as a "verification tape" and is meant to verify that a consumer is agreeing to
purchase a magazine subscription) includes clear, complete and understandable disclosures
of all material terms of the magazine subscription order; and (i) failing to cancel, at the
consumer's request, all or any portion of a magazine subscription package purchased after
the date of the Permanent Injunction when Appellants have reason to believe that any
prohibited misrepresentation had been made.
Additionally, the Permanent Injunction required Appellants to create and maintain
written records of consumer complaints for a period of five years, permit representatives
of the FTC access to corporate offices and allow the FTC to monitor compliance. The
Appellants were ordered to notify the FTC of any change in the employment status of the
individual Appellants or the structure of the corporate Appellants that might affect these
compliance obligations. The Appellants were also ordered to pay the Commission $1.5
million for consumer redress and subsequently file, within 90 days, a report with the
Commission setting forth the manner in which they had complied with the Permanent
Injunction.
The Senior Kuykendalls and H.G. Kuykendall Jr. signed the Permanent Injunction
individually and as officers of the Appellant corporations. They also signed separate
"Acknowledgment" statements indicating that they had read and understood the
Telemarketing Sales Rule, the Compliance Guidelines of the Telemarketing Sales Rule and
the Permanent Injunction, and that they agreed to comply with the applicable provisions of
these documents for all of DMS' business practices.
In accordance with the Permanent Injunction, Appellants paid the $1.5 million and,
within 90 days, filed their report with the FTC setting forth the manner in which they had
complied with the terms of the Permanent Injunction. The report addressed each of the
Permanent Injunction's orders individually and discussed the Appellants' new business
practices. The report also included appendices that contained sample subscription
agreement forms drafted to comply with the Permanent Injunction, customer response
forms drafted to elicit customer feedback and new company guidelines that were issued to
Appellants' employees and independent agents. The Commission has subsequently
complained in their appellate brief that Appellants did not provide any information
concerning consumer complaints or copies of telemarketing scripts or verification tapes
that would enable the FTC to determine whether Appellants' assurances of compliance were
in fact accurate. Appellants assert, however, that at the time the report was filed, the FTC
did not respond and gave no indication that compliance efforts were inadequate.
B.
After receiving continued consumer complaints, the FTC notified Appellants in
April 2001 of its concern that the Appellants were operating their business in violation of
the Permanent Injunction. Pursuant to the agreed monitoring provisions, the FTC requested
that the corporations furnish certain business records and stated that Commission
representatives would be visiting Appellants' offices to conduct employee interviews.
Among the records examined were telemarketing scripts, verification tapes, consumer
complaints made directly to Appellants, consumer complaints made to third parties before
being sent to Appellants for a response and electronic files comprising a database of
numerous customer contacts. The FTC alleged that these materials illustrated a habitual
violation of the Permanent Injunction and that deceptive, misleading and unfair patterns of
business practice remained the norm. The FTC also alleged that Appellants' financial
statements revealed profits from these proscribed practices approaching tens of millions of
dollars.
On January 28, 2002, the FTC filed a motion in district court requesting an order to
show cause why the Appellants should not be found in contempt for violating the Permanent
Injunction. The Commission alleged that Appellants violated eight separate provisions of
the Permanent Injunction and requested the court to: (a) determine that Appellants were in
contempt of court; (b) enjoin them from further telemarketing until they could show that
they can operate in compliance with the Permanent Injunction; (c) extend the monitoring
provisions of the Permanent Injunction for an additional five years; and (d) award consumer
redress in an amount of no less than $51 million. The district court entered an order to
show cause on January 30, 2002, remitted Appellants' response to the order to be due
under expedited briefing by February 13, 2002 and scheduled a hearing to be held on
February 25, 2002.
Pursuant to the Appellants' request, the court granted a short extension to respond to
the FTC's motion, but denied their request for a status and scheduling conference. The
court also permitted Appellants to take depositions of FTC employees who had submitted
declarations in support of the motion to show cause. Appellants subsequently filed a
motion to dismiss the case asserting that they had been denied protections assured under
the Due Process Clause and denied protections against improper hearsay evidence. The
Senior Kuykendalls filed an additional motion to dismiss the case against them arguing that
they could not be held liable for contempt because they were not involved in the
management or day-to-day operations of the Appellant corporations after 1996. Both
motions were denied and the hearing commenced on the morning of February 25, 2002.
C.
The hearing was held February 25 and 26, 2002. The Commission presented the
testimony of eight witnesses: two consumers, an investigator in the Oklahoma Attorney
General's Office, the individual Kuykendall Appellants, their customer service and
collection manager and the corporate Appellants' accountant. The Appellants presented the
testimony of four witnesses and had the opportunity to cross examine each of the FTC
witnesses.
The district court found that the evidence presented by the FTC showed that the
Appellants did engage in pervasive, deceptive practices. The testimony of two witnesses,
Ms. Villalobos and Ms. Stewart, along with the Appellants' records documenting other
consumer complaints and consumer declarations obtained by the Commission, were
deemed to show "typical" experiences. Among the 67 direct consumer complaints that
were proffered, 26 indicated that Appellants misrepresented the cost or duration of the
subscription package. Among the 874 third-party complaints, 249 contained allegations of
Appellants' misrepresentation of the cost or duration of the subscription packages. The
FTC concluded by presenting testimony to the corporate Appellants' accountant to
authenticate financial statements produced by the Appellants.
The Senior Kuykendalls admitted that when they signed the preliminary injunction,
they knew it required them to take affirmative steps to ensure Appellants' compliance.
They also knew that after signing the Permanent Injunction, they remained co-owners of the
corporate Appellants until October or November 2001, at which time they sold their
interest to Kuykendall Junior. The Seniors further admitted that their efforts to ensure
compliance consisted of checking in periodically with the corporate Appellants'
management and counsel. Although they could have asked to see consumer complaints or
required changes in the telemarketing scripts, they did not do so and instead relied on
Kuykendall Junior's leadership.
On March 1, 2002, the court entered orders denying motions to dismiss, and on
March 4, 2002, the court entered an order for contempt finding each of the Appellants in
civil contempt of the permanent injunction. The court determined that the injury to
consumers caused by the Appellants' contemptuous conduct amounted to at least $39
million and ordered the Appellants to pay the Commission $39 million to be used for
consumer redress.
II.
Our beginning point is to evaluate Appellants' argument that the court erred in
characterizing these proceedings as civil contempt. They contend that this was a criminal
contempt proceeding and, as such, they were entitled to a trial by jury. We do not write on
a clean slate on this issue. In Int'l Union, United Mine Workers of Am. v. Bagwell, 512
U.S. 821 (1994), the Supreme Court went to great pains to delineate the distinction
between the two forms of contempt:
"Criminal contempt is a crime in the ordinary sense," Bloom v.
Illinois, 391 U.S. 194, 201 (1968), and "criminal penalties may
not be imposed on someone who has not been afforded the
protections that the Constitution requires of such criminal
proceedings," Hicks v. Feiock, 485 U.S. 624, 632 (1988). See In
re Bradley, 318 U.S. 50 (1943) (double jeopardy); Cooke v.
United States, 267 U.S. 517, 537 (1925) (rights to notice of
charges, assistance of counsel, summary process, and to present
a defense); Gompers v. Bucks Stove & Range Co., 221 U.S. 418,
444, (1911) (privilege against self-incrimination, right to proof
beyond a reasonable doubt). For "serious" criminal contempts
involving imprisonment of more than six months, these
protections include the right to jury trial. Bloom, 391 U.S. at
199; see also Taylor v. Hayes, 418 U.S. 488, 495 (1974). In
contrast, civil contempt sanctions, or those penalties designed to
compel future compliance with a court order, are considered to
be coercive and avoidable through obedience, and thus may be
imposed in an ordinary civil proceeding upon notice and an
opportunity to be heard. Neither a jury trial nor proof beyond a
reasonable doubt is required.
Although the procedural contours of the two forms of contempt
are well established, the distinguishing characteristics of civil
versus criminal contempts are somewhat less clear. In the
leading early case addressing this issue in the context of
imprisonment, Gompers v. Bucks Stove & Range Co., 221 U.S.
at 441, the Court emphasized that whether a contempt is civil or
criminal turns on the "character and purpose" of the sanction
involved. Thus, a contempt sanction is considered civil if it "is
remedial, and for the benefit of the complainant. But if it is for
criminal contempt the sentence is punitive, to vindicate the
authority of the court." Ibid.
Bagwell, 512 U.S. at 826-828 (footnotes omitted).
Applying the foregoing precepts, we have no difficulty in concluding that the
proceedings in the case at bar were for civil contempt. The sanction imposed was remedial
and not designed to vindicate the authority of the court. Nor were the monetary sanctions
to be paid to a court clerk as a fine - or even to some third party non-profit organization as
was the case in FTC v. Figgie Int'l, 994 F.2d 595 (9th Cir. 1993) (holding that the portion
of the court order that provided for distribution of unclaimed funds to non-profit safety
organizations was criminally punitive).
In the instant case, the FTC asked for a monetary sanction to provide redress to
consumers injured by Appellants' conduct in violation of the Permanent Injunction.
Evidence was presented by the Commission concerning the fact and amount of injury to
consumers and the court stated that it was making the $39 million award as redress for
consumer injury resulting from the Appellants' insubordinate conduct. The court even
entitled the second section of its contempt order, "Compensation for Injuries resulting
from Defendants' Contumacious Conduct." App. at 558. By its terms the order requires
that all funds "shall be deposited into a fund administered by the Commission or its agent to
the used for equitable relief, including but not limited to, consumer redress." Id. at 559
(emphasis added). Consumer redress is a classic remedial sanction.
III.
But having decided that the contempt proceeding was civil in nature does not end our
inquiry. We must determine whether the procedure utilized by the district court in
assessing damages in the amount of $39 million was constitutionally adequate to protect
the Appellants' right to due process.
With a nod to Gertrude Stein, there are civil contempts and there are civil
contempts. Bagwell teaches that not all civil contempt proceedings require the same
procedural protections to satisfy Due Process requirements. At one end of the spectrum
are those proceedings that require a minimum of fact-finding:
Certain indirect contempts...are appropriate for imposition
through civil proceedings. Contempts such as failure to comply
with document discovery, for example, while occurring outside
the court's presence, impede the court's ability to adjudicate the
proceedings before it and thus touch upon the core justification
for the contempt power. Courts traditionally have broad authority
through means other than contempt - such as by striking
pleadings, assessing costs, excluding evidence, and entering
default judgment - to penalize a party's failure to comply with
the rules of conduct governing the litigation process. See, e.g.,
Fed. Rules Civ. Proc. 11, 37. Such judicial sanctions never have
been considered criminal, and the imposition of civil, coercive
fines to police the litigation process appears consistent with this
authority. Similarly, indirect contempts involving discrete,
readily ascertainable acts, such as turning over a key or payment
of a judgment, properly may be adjudicated through civil
proceedings since the need for extensive, impartial factfinding is
less pressing.
Bagwell, 512 U.S. at 833. In such cases it is well established that civil contempt sanctions
"may be imposed in an ordinary civil proceeding upon notice and an opportunity to be
heard." Id. at 827.
At the higher end of the spectrum, specifically with respect to contempts involving
defiance of sophisticated injunctions, more detailed and conscientious procedural
protections are required:
Contempts involving out-of-court disobedience to complex
injunctions often require elaborate and reliable factfinding. Cf.
Green v. United States, 356 U.S. 165, 217, n. 33 (1958) (Black,
J., dissenting) ("Alleged contempts committed beyond the court's
presence where the judge has no personal knowledge of the
material facts are especially suited for trial by jury. A hearing
must be held, witnesses must be called, and evidence taken in any
event. And often...crucial facts are in close dispute" (citation
omitted)). Such contempts do not obstruct the court's ability to
adjudicate the proceedings before it, and the risk of erroneous
deprivation from the lack of a neutral factfinder may be
substantial. 356 U.S. at 214-215. Under these circumstances,
criminal procedural protections such as the rights to counsel and
proof beyond a reasonable doubt are both necessary and
appropriate to protect the due process rights of parties and
prevent the arbitrary exercise of judicial power.
Bagwell, 512 U.S. at 833-834.
What procedural protections satisfy the dictates of the Due Process Clause before a
substantiated financial sanction may be imposed is a difficult question. The FTC contends
the full panoply of criminal law protections to a civil contempt proceeding suggested in
Bagwell applies only when a court determines that the sanctions imposed were not
compensatory. The Commission seeks to persuade us that because the present sanction is
deemed compensatory, Bagwell's high-end exception should not apply. It argues that such
an interpretation would directly contravene the established case law, reaffirmed in Bagwell,
that judges are authorized "to enter broad compensatory awards for all contempts through
civil proceedings." Id. at 838.
We disagree. Even though Bagwell itself was not a compensatory sanctions case,
the Court initially engaged in a prolonged analysis of civil and criminal contempt
judgments, and then applied its analysis to the facts before it. At no time did the Court
confine its detailed analysis and specific exception for "complex injunctions" to any
particular set of civil contempt proceedings. The Court began its discussion by stating that
the civil and criminal distinction depended on both the "character and purpose" of the
sanction involved. Id. at 827 (emphasis added). Other courts have similarly interpreted the
teaching of Bagwell.
In Equal Employment Opportunity Comm'n v. Local 638, Sheet Metal Workers Int'l
Assoc., 13 F. Supp. 2d. 453 (S.D.N.Y. 1998), the court encountered an opportunity to
interpret Bagwell as it determined the type of process due defendants in a civil contempt
proceeding. Without differentiating between compensatory and non-compensatory
damages, the court recognized Bagwell's general premise that full evidentiary hearings are
not required in cases where civil contempt sanctions are imposed, however, the court was
quick to appreciate that Bagwell "carv[ed] out an exception to this general rule in cases
involving out-of-court disobedience to complex injunctions in which crucial facts are in
close dispute, [and] may necessitate the holding of a hearing, the calling of witnesses, and
the presentation of evidence by the parties." Local 638, 13 F. Supp. 2d. at 458. The court
went on to conclude that the "Bagwell exception" - as it was coined - did not apply
because of the simplicity of the issues presented. Id. Similarly, in Nat'l Labor Relations
Bd. v. Ironworkers Local 433, 169 F.3d 1217 (9th Cir. 1999), the court, while conceding
that similar disconcert was not present in the case before it, paid heed to the concerns
raised by the Court in Bagwell:
[T]he Court in Bagwell was clearly concerned about the possible
abuse of power when a judge orders oppressive sanctions for
violations of complex standards of the judge's own making. See
Bagwell, 512 U.S. at 831 (recognizing that "the contempt power
. . . is `liable to abuse'"). The Court explained that the contempt
power is unique because "civil contempt proceedings leave the
offended judge solely responsible for identifying, prosecuting,
adjudicating, and sanctioning the contumacious conduct." Id.
Furthermore, when the contempts involve "out-of-court
disobedience to complex injunctions" that "often require
elaborate and reliable factfinding," the Supreme Court observed
that "the risk of erroneous deprivation from the lack of a neutral
factfinder may be substantial." Id. at 834.
Ironworkers Local 433, 169 F.3d at 1220.
Most recently, in United States v. Santee Sioux Tribe of Neb., 254 F.3d 728, 736
(8th Cir. 2001), the court applied the doctrine of Bagwell to civil compensatory sanctions
imposed against an Indian Tribe for violations of a gaming act. The court determined that
the injunction, unlike that in Bagwell, was not complex and therefore a traditional civil
contempt hearing was sufficient procedural protection to ensure simply that the Tribe cease
gaming.
It is against the background of the foregoing tenets that we now turn to the case at
hand.
IV.
In the instant case, the injunction is decisively complex. As previously outlined, the
Permanent Injunction essentially served as a code of conduct that was judicially drafted to
intimately govern the Appellants' behavior. The Appellants were bound by detailed
prohibitions rather than superficially discernable mandates. To calculate a precise loss
sustained by consumers and then to formulate a proper dollar amount necessary for redress,
it is necessary that there be extensive and impartial fact-finding.
In Bagwell, the Court concluded that an injunction was "complex" merely because it
proscribed certain union conduct during protests. Supporters were prohibited from
obstructing ingress and egress, throwing objects, physically threatening employees, placing
tire-damaging "jack-rocks" on roads and picketing with more than a specified number of
demonstrators. 512 U.S. at 822 (a determination that was separate from the Court's finding
that the sanctions were not compensatory). The present injunction is decisively more
complex. It involves the supervision of a intricate marketing program occurring in the
private and relatively intangible medium of wire communications rather than on real and
public company property. Accordingly, we hold that we are dealing with a complex
injunction and apply the appropriate fact-finding procedures.
We emphasize initially that we bridle our opinion in agreement with the court's
determination that:
The evidence clearly and convincingly indicates that the defendants' acts and
practices in connection with the sale of magazine subscriptions and magazine
subscription packages violate the...injunctive provisions of the Permanent
Injunction...[V]iolations have occurred between October 21, 1996, and the
date of this Order [March 4, 2002] and include many instances of: a)
misrepresentation of the costs of the defendants' subscription packages; b)
misrepresentation of the cost of the subscription packages by describing the
cost as merely a shipping charge; c) misrepresentation of the cost of the
subscription packages by describing some of the magazine subscriptions
therein as "free"; d) misrepresentation of consumers' ability to cancel
defendants' subscription packages, e) misrepresentation that consumers can
cancel at any time; f) misrepresentation of the enforceability of defendants'
subscription package agreements; and g) violating the Telemarketing Sales
Rule.
FTC v. Kuykendall, No. CIV-96-388-M, 2 (W.D. Okla. Mar. 4, 2002) (Order for Contempt
and Modifying the Permanent Injunction), reprinted in App. at 557.
We are not, however, satisfied that the fact-finding procedure utilized by the district
court in calculating a multimillion dollar sanction in this complex case complied with the
protections assured by the Due Process Clause. Before the defense had an opportunity to
present its case to rebut a claim of $51 million made by the FTC, the court, sitting as fact-
finder on February 25, 2002, stated that it "sees no reason why we cannot be concluded
with this matter by the close of business today," App. at 571, and even instructed defense
counsel to "reserve [its] opening until the beginning of [its] evidence," App. at 581, before
directing the FTC to call its first witness. Suggesting that the defendants have only one day
to present its defense of a $51 million claim is, to say the least, strong medicine.
The heart of the FTC case in calculating the amount of consumer redress stemmed
from Appellants corporate financial statement presented by the Appellants to the FTC in
April, 2001. These statements indicated that the corporate defendants received
approximately $44 million from consumers during the years 1997 through 2000, while
refunding approximately $2 million during the same period. The FTC asked the court to
extrapolate an amount for 2001 year, suggesting that if the conduct persisted through the
end of that year, Appellants would probably have taken in another $10 million while
returning approximately $1 million. On the basis of these statistics, the FTC stated that
"[b]y the end of 2001, defendants' [sic] will have grossed approximately $51 million from
their contumacious operations over the past five years," and that "[a]ccordingly, the
Commission prays that the Court enter an award for consumer redress against defendants
for no less than $51,000,000." App at 72-73. Basically, the FTC claimed that every dollar
of revenue was the product of deceit.
We agree that in civil contempt cases compensatory awards may be granted for total
losses sustained as a result of the contumacy. United States v. United Mine Workers of
Am. 330 U.S. 258, 304 (1947). Moreover, consumer redress in FTC cases has been
measured by the amount of sales less refunds. McGregor v. Cherico 206 F.3d 1378, 1387
(11th Cir. 2000); Figgie Int'l 994 F.2d at 606. In the present case, however, the judicial
determination of the award for consumer redress was an "action[] tried upon the facts
without a jury." Rule 52(a), Federal Rules of Civil Procedure. Under Rule 52(a), "the
court shall find the facts specially" but the present record shows that the sole finding of
fact is found in the court's March 4, 2002 Order, I. Findings, 4, which reads in its
entirety: "The evidence further indicates that the consumer injury caused by defendants'
contumacious conduct amounts to at least $39 million." Reprinted in App. at 558.
Such a casual finding of millions of dollars without one iota of explanation does not
meet the fact-finding requirement of Rule 52. The court supplied absolutely no indication
how it arrived at this amount - no formula, no set of guidelines, no explanation, not even
the most rudimentary reckoning of cause and effect to demonstrate the extent and the
manner in which the consumers had been damaged. Absent any explication whatsoever,
such an award is arbitrary and capricious. The teachings of Bagwell do not permit such a
naked statement to suffice in a proceeding relating to a violation of a complex injunction.
Moreover, although the court has broad discretion in regulating the reception of
evidence, in a proceeding where the Appellants stood in jeopardy of being assessed $51
million, the draconian timetable imposed by the court - "by the close of business today"
- in and of itself, exceeds the limits of permissible discretion and dangerously approaches
a complete violation of procedural due process.
This, too, must be said. We express no opinion on the amount of damages that were
awarded by the court. Our problem has been with the procedures, and not with the quantum
of sanctions previously imposed.
V.
The Court teaches in Bagwell that there is no hard and fast rule to determine the
minimum fact finding procedures to satisfy necessary protections of the Due Process
Clause where a sanction is to be imposed for violating terms of an injunction. But the
Court has furnished considerable guidance. As outlined, there may be cases where the
general rule should apply - "civil contempt sanctions...may be imposed in an ordinary civil
proceeding upon notice and an opportunity to be heard" - and others where the facts
describing the violation of a complex injunction are universally controverted and a jury
must be empaneled and the burden of proof beyond a reasonable doubt standard should be
employed to establish both the violation and the amount of remedial damages. 512 U.S. at
527. We do not believe that the latter draconian requirement should be imposed here.
First, as stated previously, we are satisfied that the court properly determined that
the Appellants were in violation of the Permanent Injunction. We affirm its determination
of liability in all respects. Considering the nature of the factual defenses interposed by the
Appellants in the previous truncated hearing, we conclude that the protections afforded by
the Due Process Clause can be satisfied by remanding these proceedings for a new trial
only for the purpose of determining the amount of consumer injury caused by Appellants'
contumacious conduct. In accordance with the directions from the Court in Bagwell, we
conclude that a jury should be utilized to determine the complex facts necessary to render
an appropriate award. As to the burden of proof, we note that the district court stated that
the FTC's burden of proof is the standard of clear and convincing evidence. See
Kuykendall, No. CIV-96-388-M, 2 (Order for Contempt and Modifying the Permanent
Injunction), reprinted in App. at 557. The same burden will be utilized in the limited new
trial before a jury.
VI.
The Seniors assert they should not have been found jointly and severally liable for
the contempt sanctions because they were not involved in the affairs of the Appellant
corporations and therefore they lacked the requisite knowledge and involvement in the
post-1995 Permanent Injunction activities of the corporations. They contend that they
resigned from their offices in the Appellant corporations and have not been involved in the
day-to-day operations, have not supervised sales operations, did not write or edit marketing
scripts and were generally unaware of the alleged violations in the appellant corporations'
marketing practices.
We do not agree that this is sufficient to immunize them. Preliminarily, we note
that the Seniors did not notify the FTC of any change in their employment status as required
by the Permanent Injunction. More important, however, a party may defend a contempt
charge on the ground that compliance is impossible, but that defense is not available when
the inability to comply is self-induced. "[A]n individual who is responsible for insuring that
a corporation complies with a court order cannot escape liability merely by removing
himself from the day-to-day operations of the corporation and washing his hands of
responsibility." United States v. Voss, 82 F.3d 1521, 1526 (10th Cir. 1996) (quoting
Colonial Williamsburg Found. v. Kittinger Co., 792 F. Supp. 1397, 1406 (E.D. Va. 1992),
aff'd., 38 F.3d 133, 136 (4th Cir. 1994)). The district court properly found that the
Seniors, as signatories of the Permanent Injunction, agreed to undertake a variety of
affirmative obligations to ensure the Appellant corporations' compliance. Voluntary self-
removal does not prevent potential liability.
We hold that because the Seniors occupied positions of responsibility for the
Appellant corporations' conduct relating to the Permanent Injunction, they were properly
joined with Kuykendall Junior and the Appellant corporations in the contempt proceedings.
They shall remain so joined in the limited new trial for damages.
VII.
Although we remand for a new trial, we nevertheless meet the evidentiary question
raised by Appellants. In exercise of its discretion, the district court determined that
the consumer declarations and complaints satisfied each of the elements of the rule
governing the residual exception to hearsay Rule 807, Federal Rules of Evidence. The
declarations and complaints had circumstantial guarantees of trustworthiness as all were
made under oath subject to penalty of perjury, FTC v. Amy Travel Serv., Inc., 875 F.2d 564,
576 (7th Cir. 1989). Additionally, the declarations were being offered as evidence of
Appellants' violation of the Permanent Injunction and the court found that "reasonable
efforts" could not have produced more probative evidence under the circumstances of the
hearing and their admission provided the court with greater opportunity to ascertain the
truth and eliminate expense and delay. FTC v. Kuykendall, Case No. CIV-96-388-M, 4
(D.C. Okla. March 1, 2002) (Order), reprinted in App. at 554. The Appellants were also
given notice of the consumer declarations approximately one month before the evidentiary
hearing and had the opportunity to subpoena the individual consumers if they so desired.
We are satisfied that the district court did not exceed its permissible discretionary
authority.
Declarations of FTC employees were also properly admitted pursuant to Rule 1006,
Federal Rules of Evidence, that provides, in pertinent part, that "[t]he contents of
voluminous writings, recordings, or photographs which cannot conveniently be examined in
court may be presented in the form of a chart, summary, or calculation." The declarations
were properly accepted as summaries of evidence obtained from Appellants' business
records. We conclude that in this respect also, the district court did not exceed its
appropriate discretionary authority.
* * * * *
We have considered all contentions raised by the parties and conclude that no
further discussion is necessary.
We AFFIRM the judgment of the district court except its determination of the
amount of monetary sanctions to redress consumer injuries. We REMAND the
proceedings for a limited new trial in accordance with the procedures hereinbefore set
forth.