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Federal Trade Commission v. Sean Cantkier

March 3, 2011

FEDERAL TRADE COMMISSION, PLAINTIFF,
v.
SEAN CANTKIER, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Beryl A. Howell United States District Judge

MEMORANDUM OPINION

The Federal Trade Commission ("FTC" or "Plaintiff") brought this action against defendant Scot Lady for allegedly misrepresenting his affiliation with federal homeowner assistance programs in online advertisements. The FTC alleges that Mr. Lady placed deceptive ads on various web search engines. These web search ads, inter alia, incorporated the names and the official website addresses of federal programs, but, when clicked, the ads directed web users to Lady's private websites that collected marketing leads for mortgage loan modification or foreclosure relief services. The FTC also alleges that Lady's lead collection websites themselves contained deceptive representations, such as the claim that he has a "97% Success Rate" in helping his clients obtain a mortgage modification. Lady moved to dismiss the complaint for failure to state a claim upon which relief can be granted and also moved to strike certain portions of the complaint. For the reasons discussed below, the Court denies Lady's motions.

I.Factual and Procedural Posture

The FTC originally filed this action on May 14, 2009 as a John Doe case against One or More Unidentified Parties. ECF No 1. On June 18, 2009, the FTC filed a First Amended Complaint identifying and naming several individual defendants - including, as relevant here, defendant Lady ("Lady" or "Defendant").*fn1 ECF No. 6. Defendant Lady was served on June 18, 2009. ECF No. 8, 27.

On December 7, 2009, Lady moved to dismiss the First Amended Complaint for failure to state a claim and moved to strike certain portions of the First Amended Complaint. ECF No. 58, 59. This motion was denied as moot with leave to refile after the Court granted the FTC's motion to file its Second Amended Complaint. ECF No. 92. On March 29, 2010, Lady filed a renewed motion to dismiss and motion to strike. ECF No. 94, 95.

In its Second Amended Complaint, the FTC alleges the following facts.

In response to the recent crisis in the housing market, the federal government introduced and widely publicized a number of federal homeowner relief and financial stability programs aimed at reviving the United States economy and assisting distressed homeowners whose mortgage loans have become unaffordable. Second Amended Complaint ("SAC" ) ¶ 15. These programs are promoted through various government websites, such as www.financialstability.gov and www.makinghomeaffordable.gov. Id.

In addition, the Department of Housing and Urban Development ("HUD") has designated thousands of HUD-approved non-profit housing counseling agencies to provide assistance to consumers who are at risk of foreclosure or falling behind on their mortgage payments. Id. ¶ 17. These HUD-approved housing counseling agencies provide services at no cost to homeowners, negotiating with lenders to make homeowners' mortgage loans more affordable. Id. To publicize these services, HUD has engaged in a substantial public education campaign, including joint efforts with the Treasury Department and other federal agencies, a toll-free number, 1-888-995-HOPE, and an alliance with the Homeowner Preservation Foundation and the Hope Now Alliance. Id.

The FTC has alleged that Lady and certain other defendants were running deceptive online advertisements featuring the names, phone numbers, and website addresses of federal homeowner relief and financial stability programs. Id. ¶¶ 25-27. The advertisements allegedly appeared on popular web search engines, such as Google and MSN, and were targeted to users using as search terms keywords related to the federal assistance programs. Id. ¶¶ 20-25. The Second Amended Complaint alleges that the advertisements represented that they were sponsored by federal homeowner relief and financial stability programs by featuring text and titles associated with those programs, including "makinghomeaffordable.gov" and "financialstability.gov." Id. ¶¶ 25-27. When web users clicked these ads, they were not directed to the websites for the federal programs, but rather to private Internet websites ("lead collection websites") that collected marketing leads for mortgage loan modification or foreclosure relief services. Id. ¶¶ 26-28. These lead collection websites had no actual connection with government programs; they solicited consumers to enter personal identifying and confidential financial information, and then the operators of the websites sold the consumers' confidential information as marketing leads to persons who sell mortgage loan modification or foreclosure relief services. Id.

The FTC, inter alia, sought preliminary injunctive relief against the defendants' allegedly deceptive practices. On June 25, 2009, the Court held a hearing on an order to show cause as to why a preliminary injunction should not issue against Lady and certain other defendants.*fn2 See Preliminary Injunction, ECF No. 26. No defendants appeared at the hearing. The Court determined that there was "good cause to believe that Defendants Scot Lady [and others] have engaged, and are likely to continue to engage, in acts or practices that violate Section 5 of the FTC Act, 15 U.S.C. § 45, and that the FTC is, therefore, likely to prevail on the merits of this action." Preliminary Injunction at 2. Specifically, the Court found it likely that "Defendants Scot Lady [and others] have engaged in illegal activity by placing advertisements on Internet search results pages that divert consumers searching for the Making Home Affordable program or other homeowner relief or financial stability programs of the United States government to websites marketing loan modification services or obtaining leads for the sale of such services." Id. at 2-3.

Accordingly, on June 25, 2009, the Court entered a preliminary injunction that, inter alia, enjoined Lady and other defendants from placing Internet advertisements that contain hyperlinks labeled "MakingHomeAffordable.gov," "financialstability.gov," or any other term that identifies a federal homeowner relief or financial stability program, or that contain the top-level domain name "gov," or otherwise misrepresent an affiliation with a federal homeowner relief or financial stability program. Id. at 6. The preliminary injunction also prohibited Lady and other defendants from making any false representation that they are affiliated with the U.S. government or that they operate federal homeowner relief or financial stability programs. Id. at 6-7.

The Second Amended Complaint alleged that Defendant's "deceptive acts or practices" violated Section 5(a) of the Federal Trade Commission Act ("FTC Act" or the "Act"), 15 U.S.C. § 45(a). SAC ¶¶ 1, 34-44. Specifically, the FTC alleged three counts against Defendant Lady: that he falsely represented that he operated federal homeowner relief or financial stability websites and had an affiliation with the United States government (Count I); that he falsely represented that he would "obtain for consumers mortgage loan modifications, in all or virtually all instances, that will make their mortgage payments substantially more affordable" (Count II); and that he falsely represented that "he has helped over 97% of his clients obtain a mortgage loan modification" (Count III). Id. ¶¶ 36-44.

Pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), the Second Amended Complaint seeks to permanently enjoin Defendant's allegedly deceptive practices and to obtain equitable monetary remedies, such as rescission or reformation of contracts, restitution, and disgorgement of ill-gotten monies. Id. ¶ 46, Prayer for Relief.

On February 25, 2011, the Court heard oral argument on Defendant's motion to dismiss the Second Amended Complaint pursuant to Rule 12(b)(6) and his motion to strike pursuant to Rule 12(f).

The motions are presently before the Court.

II.Discussion

A.Motion to Dismiss

i.Standard of Review

To survive a motion to dismiss under Rule 12(b)(6), a plaintiff need only plead "enough facts to state a claim to relief that is plausible on its face" and to "nudge[ ] [his or her] claims across the line from conceivable to plausible." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); Fed. R. Civ. P. 12(b)(6). "[A] complaint [does not] suffice if it tenders naked assertions devoid of further factual enhancement." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (internal quotation marks omitted) (citing Twombly, 550 U.S. at 557). Instead, the complaint must plead facts that are more than "merely consistent with" a defendant's liability; "the plaintiff [must plead] factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.

"[O]nce a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint." Twombly, 550 U.S. at 563. Under the standard set forth in Twombly, a "court deciding a motion to dismiss must . . . assume all the allegations in the complaint are true (even if doubtful in fact) . . . [and] must give the plaintiff the benefit of all reasonable inferences derived from the facts alleged." Aktieselskabet AF ...


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