The opinion of the court was delivered by: LECHNER
This is an action brought by plaintiffs the Federal Trade Commission (the "FTC") and the New Jersey Attorney General (the "State of New Jersey") against defendants National Credit Management Group ("NCMG"), d/b/a "1-800-YES-CREDIT," Glen Buzzetti ("G. Buzzetti") and Joseph Ferguson ("Ferguson")
(collectively, the "Defendants"). The instant action alleges violations of Section 5(a) ("Section 5") of the Federal Trade Commission Act (the "FTCA"), 15 U.S.C. § 45(a), the Credit Repair Organization Act (the "CROA"), 15 U.S.C. § 1679a et seq., the Telemarketing and Consumer Fraud and Abuse Prevention Action (the "TCFA"), 15 U.S.C. § 6101 et seq., the Telemarketing Sales Rule (the "TSR"), 16 C.F.R. Part 310 and the New Jersey Consumer Fraud Act (the "CFA"), N.J.S.A. 56:8-1 et seq.
On 3 March 1998, the Plaintiffs filed a complaint.
Specifically, the Plaintiffs seek, among other things, a permanent injunction enjoining the Defendants from further violations of the aforementioned statutes, appointment of a receiver and an asset freeze which extends to the assets of the Individual Defendants. See Second Consolidated Complaint, PP 140-142, p. 39, PP 3,8; Moving Brief at 37-38. Jurisdiction is alleged pursuant to 28 U.S.C. §§ 1331, 1337(a), 1345 and 1367, and 15 U.S.C. §§ 53(b),
57b, 6102(c), 6103(a), 6105(b), 1679(h)(b) and 1679h(c)(1). See Second Consolidated Complaint, P 4.
Currently before the court is an order to show cause (the "Order to Show Cause") seeking a preliminary injunction
filed by the Plaintiffs. For the reasons set forth below, the request for a preliminary injunction is granted.
On 3 March 1998, the FTC
and the State of New Jersey
each initiated separate suits and filed separate applications for the issuance of TROs in the instant action. During the 3 March 1998 Hearing, the two cases were consolidated and the Plaintiffs were directed to file a consolidated complaint captioned In Re National Credit Management Group L.L.C., 98-936.
See Transcript from 3 March 1998 Hearing at p. 4, lines 8-11; p. 30, lines 6-10. The Defendants were initially served with the applications made by both the FTC and the State of New Jersey for TROs on 2 March 1998. See NCMG Chronology at p. 4. At the 3 March 1998 Hearing, a return date was set for 20 March 1998 to allow the Plaintiffs to file a joint brief and the Defendants an opportunity to file opposition. See Transcript 3 March 1998 Hearing at p. 31, lines 15-21. The Plaintiffs also indicated a reply would be filed. See id. at p. 18, lines 17-18.
The Plaintiffs agreed to treat the instant proceeding and the hearing to be held on 20 March 1998 (the "20 March 1998 Hearing") as one for a preliminary injunction. See Transcript from 3 March 1998 Hearing at p. 35, lines 18, 21-22. The parties declined, however, to treat the 20 March 1998 Hearing as a hearing for a permanent injunction. See id. at p. 35, line 6.
At the 20 March 1998 Hearing, the parties were heard on the issue of whether a preliminary injunction should be issued.
NCMG, which also conducts business under the name of "1-800-YES-CREDIT," advertises credit monitoring and credit card services. See Smith Cert. at P 2; Second Consolidated Complaint, P 8. NCMG was formed as a New Jersey limited liability company by G. Buzzetti and Ferguson in 1995. See Smith Cert. at P 2; see also Certificate of Formation of NCMG attached as Exh. A to Smith Cert. The publically disseminated mailing address for NCMG is 177 Main Street, Suite 230, Fort Lee, New Jersey,
but NCMG is physically located at 115 River Road, Edgewater, New Jersey. See Smith Cert. at P 2.
G. Buzzetti is the Chief Executive Officer, President and eighty-percent equity owner of NCMG.
See Smith Cert. at P 8; G. Buzzetti Deposition (the "G. Buzzetti Dep."), dated 17 October 1997, attached as Exh. F. to Smith Cert. at p. 12, lines 5-7. Ferguson is the Chief Financial Officer, Vice President and twenty-percent equity owner of NCMG. See G. Buzzetti Dep. attached as Exh. F. to Smith Cert. at p. 13, lines 6-10; Ferguson Deposition (the "Ferguson Dep"), dated 10 October 1997, attached as Exh. E to Smith Cert. at p. 10, lines 3-10. G. Buzzetti and Ferguson have been and are the only two equity members of NCMG. See Smith Cert. at P 8.
Beginning in March 1995, the Defendants offered credit monitoring services to consumers throughout the United States. See Second Consolidated Complaint, P 12. Almost from the start, NCMG used the "1-800-YES-CREDIT" toll-free line as the central marketing focus of its business. See Ferguson Dep. attached as Ex. E to Smith Cert. at p. 45, line 21 to p. 46, line 19. The Defendants placed advertisements on cable television and radio for the toll-free telephone number, "1-800-YES-CREDIT." See Second Consolidated Complaint, P 13. These advertisements indicate that if an individual has credit problems he or she should call "1-800-YES-CREDIT" to receive a "confidential analysis" regarding his or her credit history. See id. Many of these advertisements also promise NCMG provides consumers with a complimentary "approved" application for a major credit card without a security deposit. See id.
NCMG receives a daily estimate of 5,000 weekday and 1,500 weekend "inbound" telephone calls from consumers responding to its television and radio advertisements. See Smith Cert. at P 13; Ferguson Dep. attached as Exh. E to Smith Decl. at p. 50, lines 2-3 (estimating 6,000 to 7,000 incoming calls daily). NCMG does not engage in "cold calling." See Ferguson Dep. attached Exh. E to Smith Cert. at p. 38, lines 10-12. On average, five to nine percent of consumers calling the toll-free number purchase the initial credit analysis (the "Initial Analysis") offered by NCMG for $ 95.00. See G. Buzzetti Dep. attached as Exh. F to Smith Cert. at p. 58, lines 1-7. NCMG has approximately 100,000 to 150,000 customers who have either purchased the Initial Analysis or the two-year program (the "Program") offered by NCMG to consumers who either desire to establish or re-establish their credit. See Ferguson Dep. attached as Exh. E. to Smith Cert. at p. 64, lines 11-18.
In its first two years of operations, NCMG grew from having only a few employees to a company with more than 270 employees. See Smith Cert. at P 39; Ferguson Dep. attached as Exh. E to Smith Cert. at p. 19, lines 19-22 and p. 25 lines 13-16. The net revenues of NCMG for the six months ended 30 June 1997 was $ 6,318,975. See Financial Statements attached as Exh. E to Smith Cert. at 3.
Since its inception, the Individual Defendants have participated in and supervised the day-to-day operations of NCMG. See Smith Cert. at P 8; Second Consolidated Complaint, PP 9-10. Both G. Buzzetti and Ferguson help produce the materials used by NCMG and provided to consumers. See Ferguson Dep. attached as Exh. E to Smith Cert. at p. 44, lines 7-8; G. Buzzetti Dep. attached as Exh. F to Smith Cert. at p. 21, lines 6-18. Ferguson also oversees the computer and telephone systems, as well as the distribution and processing departments. See Ferguson Dep. attached as Exh. E to Smith Cert. at p. 19, line 24 to p. 20, line 18. Additionally, G. Buzzetti supervises the advertising campaigns and the sales staffs of the customer relations and credit analyst departments. See G. Buzzetti Dep. attached as Exh. F to Smith Cert. at p. 27, line 6 to p. 28, line 7; p. 34, line 17 to p. 35, line 4. In fact, G. Buzzetti has designed and produced most of the advertisements.
See id. p.34, line 17 to p. 35, line 24.
a. The Illinois Investigation
On 28 January 1996, NCMG was identified as a potential target of an FTC investigation known as "Operation Payback." See Plaintiffs' Chronology at 2. Operation Payback involved a nationwide sweep of credit repair companies. See id. This investigation led to the filing of a complaint in the United States District Court for the Northern District of Illinois against NCMG by the Illinois Attorney General (the "Illinois Action"). See id. at 3.
The Illinois Attorney General asserted claims arising under the TSR, the Illinois Credit Services Act (the "ICSA"), which is similar to the CROA, and the Illinois Consumer Fraud Act (the "ICFA"). See A. Buzzetti Cert. at P 2. The suit sought to enjoin the collection of fees by NCMG prior to the completion of the two-year program offered by NCMG. See id.
NCMG filed a counterclaim in the Illinois Action alleging that the ICSA, ICFA and the advance-fee restrictions regarding credit improvement services of the TSR violated the First Amendment as applied and on their face. See A. Buzzetti Cert. at P 3; see also Counterclaim attached as Exh. 1 to A. Buzzetti Cert.
The judge presiding over the Illinois Action requested that the FTC file an amicus brief concerning the constitutionality of the credit repair section of the TSR "because the pleadings raise serious questions about the constitutionality of [the TSR], 16 CFR § 310.4(a)(2), and the [FTC's] authority to regulate credit repair services absent a clear statement from Congress." See A. Buzzetti Cert. at P 4; Order attached as Exh. 2 to A. Buzzetti Cert.
On 20 March 1997, oral argument was held on this issue. See Plaintiffs' Chronology at p. 3. Thereafter, the Illinois Attorney General entered into a stipulation of dismissal with prejudice as to all claims.
See A. Buzzetti Cert. at P 7; Stipulation of Dismissal attached as Exh. 5 to A. Buzzetti Cert.
b. The New Jersey Investigations
Meanwhile, on 27 February 1996, the OCP opened a file on NCMG after receiving five consumer complaints.
See Plaintiffs' Chronology at 5. Investigator Smith was assigned to inquire into the practices of NCMG against which there were twenty consumer complaints as of 10 January 1997. See id. at 6.
As part of the investigation by the State of New Jersey, subpoenas ad testificandum were issued for Ferguson, Catherine Lucena ("Lucena"), Lazarus Manrique, G. Buzzetti, Larry Gilligan, Irene Weekley ("Weekley") and Richard Ornitz ("Ornitz"). See Plaintiffs' Chronology at 8; Defendants' Chronology at 2-3.
Then, in the Summer of 1997, NCMG was identified as a potential target in a similar, but separate, investigation commenced by the FTC known as "Operation Eraser." See Plaintiffs' Chronology at 4. Operation Eraser was a nationwide sweep of credit repair companies. See id. After conducting an investigation into the practices of NCMG, approval was sought on 30 December 1997 to institute an action against NCMG. See id. at 5. On 25 February 1998, the FTC approved the filing of a complaint on its behalf. See id.
The nationwide advertisements sponsored by NCMG claim NCMG can assist consumers in obtaining unsecured major credit cards and in establishing or re-establishing credit. The advertisements encourage consumers to telephone "1-800-YES-CREDIT." See Pamela Anderson Decl. at P 2; Brooks Cert. at P 2; Cheek Cert. at P 2; Clark Decl. at P 2; DeFalco Decl. at P 2; Domenico Cert. at P 2; Deshaies Decl. at P 2; Eleby Cert. at P 2; Hunter Cert. at P 2; Johnson Cert. at P 2; Kepshire Decl. at P 2; Leos Decl. at P 2; Lewis Decl. at P 2; Pettit Decl. at P 2; Prine Decl. at P 2; Shuler Decl. at P 3; Struble Cert. at P 2; Stocksill Decl. at P 2; Strait Decl at P 3; Torres Cert. at P 2; Upchurch Decl. at P 3.
As mentioned, NCMG advertises in the print media as well as on the radio and on television. See G. Buzzetti Dep. attached as Exh. F to Smith Cert. at p. 34, lines 9-16. The majority of such advertisements, however, are seen on a cable television channel, the Prevue channel, and promise consumers a "confidential analysis" or "an educational analysis with a trained credit information specialist." See Smith Cert. P 10; see also Videotaped copies of televised commercials (the "Videotape") included as Exh. AA to Smith Cert. In some advertisements, the spokespersons have stated consumers will receive a complimentary application for an unsecured major credit card with no security deposit. See Second Consolidated Complaint, P 13. The words, "COMPLIMENTARY MAJOR CREDIT CARD APPLICATION APPROVED," appear in large letters.
See Videotape included as Exh. AA to Smith Cert.
The advertisements fail to disclose any of the limitations, terms or conditions of the issuers of the credit cards. To the contrary, NCMG advertisements superimpose the word "APPROVED" on persons purporting to provide testimonials about how NCMG helped them re-establish their credit. See Smith Cert. at P 11; Videotape included as Exh. AA to Smith Cert. The display of the word "APPROVED" and its frequency, size and placement, leads the ordinary consumer to believe NCMG is promising a credit card. See id. at PP 10-11. See, e.g., Deshaies Decl. at P 2; Eleby Cert. at P 2; Johnson Cert. at P 2; Parker Cert. at P 2; Shuler Decl. at P 2; Stocksill Decl. at P 2; Strait Decl. at P 2; Upchurch Decl. at P 2. Disclaimers which are applicable to the cable-advertised services provided by NCMG are illegible because written in small, white print against a strongly colored background. See Videotape included as Exh. AA to Smith Cert.
NCMG represents its credit analysts have earned the designation of "FCRA Trained and Certified,"
see G. Buzzetti Dep. attached as Exh. F to Smith Cert. at p. 55, lines 13-21, implying that the credit analysts have participated in some form of training that has governmental approval or authorization. To become "FCRA Trained and Certified" a credit analyst must pass the "Fair Credit Reporting Act Quiz." See Letter, dated 14 November 1997, from A. Buzzetti, Esq. attached as Exh. M to Smith Decl. NCMG is the producer and administrator of the "Fair Credit Reporting Act Quiz" which consists of twelve multiple choice questions, six true/false questions and two short answer questions. See id.
Consumers who call "1-800-YES-CREDIT" reach a NCMG representative who offers consumers the Initial Analysis in exchange for an up-front fee of $ 95.00. See, e.g., Transcript attached to First Gross Decl. at p. 19, line 25 to p. 20, line 2. During this initial phone conversation, NCMG represents the information the consumer is being asked to provide -- name, address, social security number, checking account number, employment and income - is necessary to enable the credit analyst to gather information concerning the credit history of the consumer extending back seven to ten years.
See Smith Cert. at P 14; Ornitz Dep. attached as Exh. K to Smith Cert. at p. 16, lines 9-19. Representations are also made that the $ 95.00 fee is the charge associated with the accumulation and monitoring of the information contained in the credit profile of the consumer. See Smith Cert. at P 14. NCMG does nothing to dispel the impression the advertisements create that the consumer will receive both an unsecured credit card and a personalized confidential analysis of his or her credit history.
With respect to the analysis, the telemarketer indicates the consumer will receive personalized attention from "trained credit analysts who are educated and trained in the credit systems laws ... [and] are able to pinpoint deficiencies in [the consumer's] credit and negative information that can be either erased or modified by law."
Transcript attached to First Gross Cert. at p. 5, lines 1-12. As to the credit card, the telemarketer represents that consumers who qualify for the Initial Analysis have a ninety-five percent success ratio on qualifying for an unsecured major credit card as well. See Smith Cert. at P 21. See, e.g., Transcript attached to First Gross Cert. at p. 6, lines 10-18.
During this initial phone call no fees or costs are mentioned other than the $ 95.00 up-front fee. See G. Buzzetti Dep. attached as Exh. F to Smith Cert. at p. 90, lines 6-14. See, e.g., Struble Cert. at P 7; Torres Cert. at P 6. Consumers are led to believe there is a genuine selection process by which only some will qualify for the Initial Analysis offered by NCMG. They are also led to believe the payment of the $ 95.00 fee is risk-free because qualifying consumers get the Initial Analysis and non-qualifying consumers can get a refund of the $ 95.00. See, e.g., Transcript attached to First Gross Decl. at p. 6, lines 21-23; Transcript attached to Second Gross Decl. at p. 11, line 23 to p. 12, line 1.
Once the consumer agrees to the Initial Analysis, the NCMG representative manually turns on a tape recorder connected to the telephone and records a "verification" of the verbal authorization of the consumer for NCMG to debit the $ 95.00 fee from the checking account of the consumer. See Smith Cert. at P 19; see also G. Buzzetti Dep. attached as Exh. F to Smith Cert. at p. 87, line 14 to p. 88, line 1. NCMG also requests the address, social security number of the consumer. No portion of the sales pitch and dialogue with the consumer is recorded and the sales person has exclusive control over when and for how long the tape machine runs. See Smith Cert. at P 19; see also G. Buzzetti Dep. attached as Exh. F to Smith Cert. at p. 87, line 15 to p. 88, line 23. NCMG failed to produce, in response to the investigative subpoena of the State of New Jersey, the verification tapes for at least one third of the approximately 260 identified consumers. See Smith Cert. at P 29.
During this initial phone conversation, the consumer is told a credit analyst will get back to him or her within two weeks with the results of the Initial Analysis. See, e.g., Transcript attached to Second Gross Decl. at p. 5, lines 22-25. Subsequent to the purchase of the Initial Analysis and prior to the return phone call from a credit analyst, NCMG does not conduct an analysis of the credit history of the consumer nor does it verify through independent sources any of the credit problems the consumer volunteered to the NCMG representative. See Smith Cert. at P 20. Since on or about August 1997 and until recently, NCMG has not even purchased the credit reports of the consumer from any of the major credit reporting bureaus because the cost
was deemed uneconomical by G. Buzzetti. See G. Buzzetti Dep. attached as Exh. G to Smith Cert. at p. 8, lines 1-5. The only information NCMG verifies either through its own sources or through independent entities is the accuracy of the checking account routing numbers and the name and address of the owner of the account which is to be used by NCMG to produce "phone checks"
that debit the account of the consumer. See Letter of Albert Buzzetti, Esq., attached as Exh. N. to Smith Cert. at 2; G. Buzzetti Dep. attached as Exh. F to Smith Cert. at p. 59, lines 11-18.
NCMG representatives encourage consumers to call National Business Reporting Bureau (the "NBRB") to obtain a report or reference on NCMG. See Transcript attached to First Gross Cert. at p. 24, line 13 to p. 26, line 12. The Defendants equate the NBRB with the Better Business Bureau (the "BBB"). See G. Buzzetti Dep. attached as Exh. F to Smith Cert. at p. 16, line 2 to p. 17, line 4. The Defendants imply the NBRB is an independent, third-party reporting organization which provides objective and reliable reports accurately describing the business practices of its members. See id. at p. 24, lines 13-19. Now under a Federal court receivership, the NBRB was in the business of providing references for telemarketers for a fee. See Moscowitz Decl. at P 3(c). As the NBRB told prospective subscribers to its service, it did nothing to screen or qualify its clients. See Attachment B to Moscowitz Cert. at p. 5.
Once NCMG obtains the checking account information of a particular consumer, the alleged check debiting scheme is set in motion. Many consumers have stated they telephoned NCMG within several minutes to several hours of the initial phone call, informed NCMG that they had changed their minds, and specifically instructed NCMG not to debit their checking accounts. See, e.g., Pettit Cert. at P 4; Stocksill Cert. at P 4; Alston Cert. at p. 2; Torres Cert at P 5. Despite these instructions, NCMG still proceeded and debited the accounts of these consumers. See Pettit Cert. at P 5; Stocksill Cert. at P 5; Alston Cert. at p. 2; Torres Cert at P 7. These consumers were either verbally assured their cancellation request would be honored,
see, e.g, Pettit Cert. at P 4, Torres Cert. at P 5, or were shuffled from one extension to another, leaving messages that were not returned. See, e.g., Parker Cert. at PP 3-6.
As indicated, within several days to several weeks after the initial phone call, a credit analyst telephones the consumer. Contrary to what has been promised, however, the credit analyst does not discuss the credit history of the consumer; rather, the purpose of the call is to sell the Program offered by NCMG for prices ranging from several hundred dollars to well over a thousand dollars.
See, e.g., Lewis Cert. at P 4; Prine Cert. at P 4. If a consumer declines to purchase the Program, the credit analyst insists on mailing the package (the "Package")
detailing the Program for the consumer to review. See, e.g., DeFalco Cert. at P 4; Strait Cert. at P 3. The credit analyst often fails to inform consumers NCMG will use the previously supplied checking account information to debit the checking account of the consumer unless the consumer exercises his or her right of rescission. The rescission option is not voluntarily disclosed by the credit analyst during this conversation. See Lucena Dep. attached as Exh. H to Smith Cert. at p. 60, lines 2-6. This right of rescission is exercised by returning the Package via "certified U.S. mail," so that it is received by NCMG "by midnight of the third business day" including the date of receipt by the consumer. See Ornitz Dep. attached as Exh. K to Smith Cert. at p. 47, line 13 to p. 55, line 10. NCMG indicated its policy is now to provide customers with a five business day right of rescission effective when the materials are postmarked. See G. Buzzetti Cert. at P 26; Ornitz Cert. at PP 6, 25.
In the instances when a customer declines to purchase the Program, and in attempt to save the sale, NCMG at times sends the customer the Package for his or her review. The consumer accepts the Package thinking he or she is merely receiving promotional materials from NCMG, unaware of the negative option if the Package is not timely returned. The Package includes, inter alia, an introductory letter, a schedule of payments (the "Schedule of Payments"), payment terms (the "Payment Terms"), a Disclosure Agreement (the "Disclosure Agreement") and a guarantee (the "Guarantee"). See Package attached as Exh. Q to Smith Cert. The Disclosure Agreement states the verbal authorization of the consumer has been recorded and that it is binding whether or not the consumer signs the Disclosure Agreement.
See id. at 340. By referring to the consumer as an "applicant" and indicating the need for signature, the Disclosure Agreement conveys the impression that the consumer is not bound to purchase the services offered by NCMG unless he or she signs the "application." See Smith Cert. at P 32-33. See, e.g., Torres Cert. at P 9 (indicating she "never signed the contract that was enclosed in the Package and in fact, returned it unsigned with the other items"). The signature line was deleted in or about April 1997. See id. at P 32.
The Package also includes the Schedule of Payments which sets forth the fees associated with the purchase of the Program and which NCMG will automatically debit from the checking account of the consumer. See Schedule of Payments attached as Exh. Q to Smith Cert. at 345. The Disclosure Agreement and the Payment Terms accompanying the Schedule of Payments indicate consumers can exercise their right of rescission in the following manner: "The Package must be received by NCMG via certified U.S. mail, by midnight of the third business day, from the date you receive the Disclosure Agreement, at our business address. (delivery confirmation recorded)." Id. at 343; see id. at 341. The Defendants include the date of receipt as the first day in the calculation of the three-day period. See Ornitz Dep. attached as Exh. K to Smith Cert. at p. 54, line 12 to p. 55, line 4. Many consumers do not discover this negative option either until their checking accounts have been debited or until the expiration of the rescission period. For example, Gina DeFalco did not learn of the three-day return requirement until she discovered a $ 400.00 debit on her checking account. See DeFalco at P 5. When she complained, she was told of the three-day requirement. See id.
Some consumers do not receive the Package, but find their accounts debited anyway. See, e.g., Prine Cert. at P 5; Leos Cert. at P 5; Whited Cert. at PP 5, 7. Still others comply with the rescission policy and even telephone NCMG to state the Package is being returned and NCMG should not debit their accounts. See, e.g., Shuler Cert. at P 5; Strait Cert. at P 8. Nevertheless, NCMG debits their accounts. See Shuler Cert. at P 9; Strait Cert. at P 9.
As indicated, NCMG provides to its customers who purchase the Program, inter alia, the Disclosure Agreement, the Guarantee and the Schedule of Payments. Different versions of these documents have been used but no one at NCMG was able to identify when changes were made.
See Smith Cert. at P 30; G. Buzzetti Dep. attached as Exh. G to Smith Cert. at p. 30, line 4 to p. 31, line 6; p. 41, lines 10-18. In the Disclosure Agreement apparently used during the majority of the time since NCMG was formed in 1995, there was a signature line for the consumer and a direction in the cover letter that the consumer should sign the Disclosure Agreement and mail it back to NCMG. See Versions of Disclosure Agreement attached to Smith Cert. as Exh's. R (March 1996, April 1996, July 1996 and other months where date is illegible) and S (September 1996). Some consumers who desired to cancel their purchase of the Program before or upon review of the Package believed they could void any contract of sale with NCMG if they refused to sign the Disclosure Agreement. See, e.g., Patricia Anderson Decl. at P 7; Torres Cert. at P 9.
At least as recently as September 1996, the Guarantee and Payment Terms also displayed a signature line at the bottom of each document with the designation "Applicant" and "Co-Applicant." See Payment Terms attached as Exh. S to Smith Cert.; Guarantee attached as Exh. T to Smith Cert. The signature lines were deleted from these forms in or about April 1997. See Smith Cert. at P 32.
The current version of the Guarantee states: "If for any reason after completing our ... Program you are not 100% satisfied, [NCMG] will refund your ... Program in full!!! (provided the client meets the terms and conditions set forth in the Disclosure Agreement.)" Current version of the Guarantee attached as Exhibit Q to Smith Cert. as Attachment One. Immediately below this statement, the Guarantee also states: "This Guarantee is based on the premise that the client has agreed to maintain a current status on all creditor accounts/bills throughout the terms of the ... Program or Guarantee becomes null and void." See id.
NCMG produces certain written documents which it terms "credit educational materials." Some of these materials are sent to consumers who purchase the Program. See Smith Cert., P 28. Apparently, there is one set of materials received by consumers receive who are seeking to establish credit and a slightly different set of materials received by consumers who desire to re-establish credit. See 8 December 1997 A. Buzzetti Letter attached as Exh. Q to Smith Cert.
Separate and apart from the Package NCMG sends to each consumer who is presumably enrolled in the Program, other materials are available to purchasers of the Program. Customers, however, must specifically ask for these materials which include additional sample letters and booklets. See Smith Cert. at P 39; G. Buzzetti Dep. attached as Exh. F to Smith Cert. at p. 75, lines 7-21. Credit analysts do not inform consumers during the scripted sales presentation that the Program is almost entirely a self-help program. See Smith Cert. at P 39; Eleby Cert. at P 15; see also Lucena Dep. attached as Exh. H to Smith Cert. at p. 24, lines 9-11.
On advice of their banking institutions, many consumers have closed their accounts and reopened new ones just to preclude NCMG from gaining access to their bank accounts. See Torres Cert. at P 10. Without taking such action, many consumers faced mounting bank overdraft service charges because the unwanted debits made by NCMG drained their accounts of funds needed for essential bills. See Deshaies Cert. at P 7; Whited Cert. at PP 5-6; Hunter Cert. at P 7; Shuler Decl. at P 9.
The processing department of NCMG provides the offered "assistance" and "monitoring" to consumers. There are nine employees in the processing department available to provide credit services to the approximately 200,000 customers of NCMG.
See Irene Weekley Dep. (the "Weekly Dep.") attached as Exh. J to Smith Cert. at p. 14, lines 16-20. This assistance, for the most part, includes forwarding consumers additional materials in the form of more sample letters upon the request and initiative of the consumer. See id. at p. 17, lines 2-20. Weekley, who is the Vice-President of the processing department and who has been with NCMG since March 1995, could not identify any other resources available to the clients of NCMG during the Program except the inventory of sample letter that the processing department provides to consumers upon their request. See Weekley Dep. attached as Exh. J to Smith Cert. at p.17, lines 2-20. It appears the processing department is the only department within NCMG which assembles information for customers who call and request it. See id. at p. 21, lines 6-17.
The business practices of NCMG stand in contrast to the genuine counseling and debt management services a consumer can receive from a non-profit consumer credit counseling agency, such as Consumer Credit Counseling Services of New Jersey, Inc. ("CCCS") for minimal fees.
See Marabotto Cert.
Injunctive relief is an extraordinary remedy which should be granted only if a plaintiff produces evidence sufficient to demonstrate the following four factors:
(1) the likelihood that the plaintiff will prevail on the merits at a final hearing;
(2) the extent to which the plaintiff is being irreparably harmed by the conduct complained of;
(3) the extent to which the defendant will suffer irreparable harm if the preliminary injunction is issued; and
See, e.g., AT & T Co. v. Winback and Conserve Program, Inc., 42 F.3d 1421, 1427 (3d Cir. 1994), cert. denied, 514 U.S. 1103, 131 L. Ed. 2d 757, 115 S. Ct. 1838 (1995); Gerardi v. Pelullo, 16 F.3d 1363, 1373 (3d Cir. 1994); S & R Corp. v. Jiffy Lube Int'l, Inc., 968 F.2d 371, 374 (3d Cir. 1992); Opticians Ass'n of Am. v. Independent Opticians of Am., 920 F.2d 187, 191-92 (3d Cir. 1990); Alessi v. Pennsylvania, Dep't of Pub. Welfare, 893 F.2d 1444, 1447 (3d Cir. 1990); Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 799 (3d Cir. 1989); Fechter v. HMW Indus., Inc., 879 F.2d 1111, 1116 (3d Cir. 1989); Jews for Jesus v. Brodsky, 1998 U.S. Dist. LEXIS 2962, CIV.A.No. 98-274, 1998 WL 111676, at *5-6 (D.N.J. 6 Mar. 1998); Federal Trade Comm'n v. National Invention Servs., Inc., 1997 U.S. Dist. LEXIS 16777, CIV.A.No. 97-3459, 1997 WL 718492, at *3 (D.N.J. 11 Aug. 1997); Genovese Drug Stores, Inc. v. TGC Stores, Inc., 939 F. Supp. 340, 343 (D.N.J. 1996); United States v. Richlyn Labs., Inc., 827 F. Supp. 1145, 1150 (E.D.Pa. 1992); Apollo Techs. v. Centrosphere Indus., 805 F. Supp. 1157, 1191 (D.N.J. 1992); Glenside West Corp. v. Exxon Co., U.S.A., 761 F. Supp. 1118, 1132 (D.N.J. 1991); CPC Int'l, Inc. v. Caribe Food Distribs., 731 F. Supp. 660, 664 (D.N.J. 1990). The grant or denial of a preliminary injunction lies within "'the sound discretion of the district judge, who must balance all of these factors in making a decision.'" FM 103.1, Inc. v. Universal Broad. of N.Y., Inc., 929 F. Supp. 187, 193 (D.N.J. 1996) (citing Kershner v. Mazurkiewicz, 670 F.2d 440, 443 (3d Cir. 1982); Atlantic Coast Demolition v. Board of Chosen Freeholders of Atlantic City., 893 F. Supp. 301, 307 (D.N.J. 1995)).
Where, however, injunctive relief is sought pursuant to a statutory provision, a different standard is applicable.
See United States v. Focht, 882 F.2d 55, 57 (3d Cir. 1989); National Invention Servs., 1997 WL 718492, at *3; Waterfront Comm'n of NY Harbor v. Construction and Marine Equip. Co., 928 F. Supp. 1388, 1398 (D.N.J. 1996); Richlyn Labs., 827 F. Supp. at 1150 (citing United States v. Toys "R" Us, Inc., 754 F. Supp. 1050, 1053 (D.N.J. 1991)); see also United States v. Roach, 947 F. Supp. 872, 876-877 (E.D.Pa. 1996). "Indeed, because Congress has seen fit to act in a given area by enacting a statute, irreparable injury must be presumed in a statutory enforcement action." Richlyn Labs., 827 F. Supp. at 1150 (citing United States v. Odessa Union Warehouse Co-Op, 833 F.2d 172, 176 (9th Cir. 1987)); see National Invention Servs., 1997 WL 718492, at *3 (implementing the statutory injunction standard when a suit was brought pursuant to Section 5 of the FTCA, one of the same provisions at issue in the instant case); Roach, 947 F. Supp. at 877. The passage of the FTCA, in a sense, results in an implied finding that violations of this statutory enactment will harm the public and should be restrained if necessary. See generally Richlyn Labs., 827 F. Supp. at 1150 (citation omitted).
Where an injunction is sought pursuant to a statutory provision, the moving party must establish "probable cause exists to believe that the statute in question is being violated and that there is some reasonable likelihood of future violations." Richlyn Labs., 827 F. Supp. at 1150 (citing Instant Air, 882 F.2d 797 at 803; see Focht, 882 F.2d at 57 (citation omitted); Commodity Futures Trading Comm'n v. Hunt, 591 F.2d 1211, 1220 (7th Cir.), cert. denied, 442 U.S. 921, 61 L. Ed. 2d 290, 99 S. Ct. 2848 (1979)); Toys "R" Us, 754 F. Supp. at 1053 (citing Focht, 882 F.2d at 57). Additionally, the public interest must be examined. See National Invention Servs., 1997 WL 718492, at *3; Roach, 947 F. Supp. at 877; see also Federal Trade Comm'n v. University Health, Inc., 938 F.2d 1206, 1217 (11th Cir. 1991); World Travel, 861 F.2d at 1029; Federal Trade Comm'n v. Staples, Inc., 970 F. Supp. 1066, 1071 (D.D.C. 1997).
No immediate or specific showing of the exact way in which violations of the statute will result in public harm is necessary. See Richlyn Labs., 827 F. Supp. at 1150 (citation omitted).
A. Preliminary Injunction
Proving a violation of the statute sued upon is akin to the traditional requirement of proving likelihood of success on the merits. To obtain injunctive relief, the Plaintiffs must show by a preponderance of the evidence that the Defendants have committed a violation of the applicable statutes and that such violations will likely occur in the future. See Toys "R" Us, 754 F. Supp. at 1058.
In determining whether a moving party has satisfied its burden of establishing a reasonable likelihood of future violations of the applicable statute in the absence of injunctive relief, the following factors, among others, are considered:
(1) the degree of scienter involved on the part of the defendant;
(2) the isolated or recurrent nature of the infraction;
(3) the defendant's recognition of the wrongful nature of his conduct;
(4) the sincerity of the defendant's assurances against future violations; and
(5) the nature of the defendant's occupation.
Richlyn Labs., 827 F. Supp. at 1150 (quoting Toys "R" Us, 754 F. Supp. at 1058-59); see Securities and Exchange Comm'n v. Bonastia, 614 F.2d 908, 912 (3d Cir. 1980).
Additionally, it is important to consider the voluntary cessation by a defendant of challenged practices, the genuineness of the efforts of a defendant to conform to the applicable laws, the progress of a defendant towards improvement and compliance by a defendant with any recommendations made by the Government. See Richlyn Labs., 827 F. Supp. at 1150; Toys "R" Us, 754 F. Supp. at 1058-1059 (citing, inter alia, City of Mesquite v. Aladdin's Castle, Inc., 455 U.S. 283, 289, 71 L. Ed. 2d 152, 102 S. Ct. 1070 (1982); Odessa Union Warehouse Co-Op, 833 F.2d at 176)).
Moreover, while past misconduct does not automatically lead to the conclusion that there is a reasonable likelihood of future violations, "it is highly suggestive of the likelihood of future violations and the court should therefore look at the totality of the circumstances and any factors suggesting that the infraction might not have been an isolated occurrence." Richlyn Labs., 827 F. Supp. at 1150 (citing Hunt, 591 F.2d at 1220); see Toys "R" Us, 754 F. Supp. at 1059 ("Essentially, the court must make a prediction of the likelihood of future violations based upon an assessment of the totality of the circumstances surrounding the violator and the violations that were committed.").
1. Section 5 of the FTC30
a. Violations of Section 5
Section 5 of the FTCA states: "Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commere, are declared unlawful." Id.; World Travel, 861 F.2d at 1029. In order to establish an act or practice as deceptive, the FTC must demonstrate that the representations, omissions or practices likely would mislead consumers acting reasonably under the circumstances. See National Invention Servs., 1997 WL 718492, at *4; World Travel, 861 F.2d at 1029; Federal Trade Comm'n v. Wilcox, 926 F. Supp. 1091, 1098 (S.D.Fla. 1995) (citing, inter alia, World Travel Vacation Brokers, 861 F.2d at 1029); Federal Trade Comm'n v. American Standard Credit Sys., 874 F. Supp. 1080, 1087 (C.D.Cal. 1994) (citations omitted). Additionally, "misrepresentations of material facts made for the purpose of inducing consumers to purchase services constitute unfair or deceptive acts or practices forbidden by Section 5(a)." World Travel, 861 F.2d at 1029 (quotation omitted). Explicit claims or deliberately-made implicit claims utilized to induce the purchase of a service or product are presumed to be material. See Wilcox, 926 F. Supp. at 1098 (citations omitted).
To be actionable under Section 5, a defendant need not have engaged in the practices or made the misrepresentations with an intent to deceive. See World Travel, 861 F.2d at 1029 (citing Beneficial Corp. v. Federal Trade Comm'n, 542 F.2d 611, 617 (3d Cir. 1976), cert. denied, 430 U.S. 983, 52 L. Ed. 2d 377, 97 S. Ct. 1679 (1977)); Wilcox, 926 F. Supp. at 1098 (quoting Regina Corp. v. Federal Trade Comm'n, 322 F.2d 765, 768 (3rd Cir. 1963) ("Deception may be accomplished by innuendo rather than by outright false statements....")). "An advertiser's good faith does not immunize it from responsibility for its misrepresentations...." World Travel, 861 F.2d at 1029 (quotation omitted). Furthermore, the omission of material information, even if an advertisement does not include falsehoods, may result in a violation of Section 5. See id. (citations omitted).
The FTC argues the Defendants have misrepresented (1) NCMG will provide a "personal credit analysis," (2) the customers of NCMG receive a pre-approved credit card, and (3) NBRB is an independent consumer reporting agency. See Moving Brief at 12. In response, the Defendants argue contested factual and legal issues preclude a finding of likelihood of success in proving a violation of Section 5 and that NCMG does not engage in an "unconscionable commercial practice" prohibited by Federal law. See Opposition at 15.
In determining if deceptive claims pursuant to Section 5 are present, a court is not limited to express claims, but may also look to the overall net impression conveyed by the advertising and promotional statements of a defendant. See Kraft, Inc. v. Federal Trade Comm'n, 970 F.2d 311, 314 (7th Cir. 1992), cert. denied, 507 U.S. 909, 122 L. Ed. 2d 652, 113 S. Ct. 1254 (1993); Federal Trade Comm'n v. U.S. Sales Corp., 785 F. Supp. 737, 751 (N.D.Ill. 1992); Beneficial Corp., 542 F.2d at 617. In Beneficial Corp. the Circuit explained the rationale for the net impression rule:
The parties agree that the tendency of the advertising to deceive must be judged by viewing it as a whole, without emphasizing isolated words or phrases apart from their context. An intent to deceive is not an element of a deceptive advertising charge under [Section] 5.... Whether particular advertising has a tendency to deceive or mislead is obviously an impressionistic determination more closely akin to a finding of fact than to a conclusion of law.
Id. at 617 (citation omitted); see also American Home Prods. Corp., 695 F.2d at 688.
To establish a violation of Section 5(a), the FTC must show "1) ... a reasonably prudent person would rely on the allegedly deceptive advertisements, 2) ... the advertisements were widely disseminated, and 3) ... consumers purchased the product." FTC v. World Travel, 861 F.2d 1020, 1029 (7th Cir. 1988); see Wilcox, 926 F. Supp. at 1098. Once the FTC has satisfied its burden, a defendant, to avoid liability, must establish that consumers did not rely on the representations or that such reliance was unreasonable. See World Travel, 861 F.2d at 1029.
The second and third criteria can be disposed of easily in the instant matter. NCMG advertises its credit services on television and radio for its toll-free telephone number, "1-800-YES-CREDIT." See Second Consolidated Complaint, P 13. Considering NCMG does not engage in "cold-calling" and receives 5,000 weekday and 1,500 weekend "inbound" telephone calls from consumers responding to its advertisements, its advertisements are widely disseminated. Moreover, the numerous consumer certifications submitted in support of the allegations of the Plaintiffs identifies a group of consumers who have seen or heard the adds for NCMG and have purchased the Initial Analysis and possibly the Program. Accordingly, the remaining element which must be determined is whether the advertisements are deceptive.
i. NCMG will provide a "personal credit analysis"
The FTC contends the Defendants misrepresent that consumers who pay $ 95.00 will receive a "personal credit analysis" from a "trained credit analysis" who will provide consumers with "information with respect to [a consumer's] profile so that [he or she] may attempt to establish and/or re-establish ... credit." See Moving Brief at 13 (quoting Transcript attached to Second Gross Cert. at p. 5, line 23 to p. 6, line 1). The FTC argues consumers do not receive such a personal analysis but, rather, "a sales pitch from a telemarketer attempting to sell the 'education materials'" offered by NCMG. See id. Moreover, the FTC argues consumers who purchase these "educational materials" are unable to obtain assistance despite numerous telephone calls to NCMG credit analysts. See id. (citing Pamela Anderson Cert. at P 11; Cheek Cert. at P 7).
Without specifically addressing this claim, the Defendants contend the allegations asserted in the Second Consolidated Complaint are based upon stale information and do not address the current conduct of NCMG. See Opposition at 4. The Defendants contend NCMG materials "provide a valuable educational resource to persons who are in need of information on how to navigate through the maze of the nation's credit laws and practices." Id. at 16 (citing Szwak Cert. at P 14).
The Wilcox case is instructive in the instant matter. In Wilcox, the FTC brought an action seeking permanent injunctive relief and other equitable relief against defendants who were engaged in the direct mail business. See 926 F. Supp. at 1096. The FTC argued the solicitations by and the awards promised to consumers who purchased the items offered by the defendants created a false or misleading impression causing consumers to believe they could claim valuable merchandise or substantial amounts of money by forwarding a nominal fee to the defendants. See id. at 1098. In actuality, consumers responding to the solicitations received little or nothing in return. See id.
The Wilcox court found these practices to be deceptive. See 926 F. Supp. at 1099. The court observed that customers never received the "guaranteed award" promised in the solicitations. See id. Moreover, the court rejected the arguments by defendants that the number of consumer declarations and consumer complaints constituted such a small percentage of their total mailings that they were insufficient to prove the solicitations violated Section 5.
In determining the practices of the defendants violated Section 5, the Wilcox court quoted U.S. Sales Corp. which stated:
The FTC needs only to show that a reasonable consumer, upon hearing the advertisement, likely would be misled to his detriment. In other words, the FTC is only required to show that it is likely, not that it is certain, that a reasonable consumer would be mislead. Accordingly, the FTC does not need to ...