Washington court schools FTC on no-notice TRO request

The Federal Trade Commission likes to seek temporary restraining orders without notice to the party whose business the FTC is seeking to destroy.  (It’s easier if the defendant doesn’t have a chance to tell its story.)  The FTC submits a pile of selective material and argues that, because some defendants in some prior cases misbehaved upon learning of an FTC lawsuit, then it should be assumed that these defendants will do the same.  Not coincidentally, the FTC accompanies these requests for a TRO with a request for an asset freeze, which may prevent a defendant from, say, hiring a lawyer to defend itself.

Most courts rubber stamp these TROs, probably assuming that the FTC is right, or that it won’t hurt a defendant too much to be shut down while the court decides on whether to issue a preliminary injunction.  That’s not true, of course; the FTC and its FTC-friendly receivers can completely destroy a business in that amount of time.

Earlier this summer, a federal district court judge in the state of Washington put a stop to the FTC’s no-notice practice on TROs there, and lectured the FTC on how to write a fair affidavit.  In FTC v. OnlineYellowPagesToday.com, the court’s ruling first noted that Federal Rule of Civil Procedure 65(b) prohibits the issuance of no-notice TROs except under narrow circumstances.  The FTC was also citing section 13(b) of the Federal Trade Commission Act, but as the court noted, that section doesn’t allow no-notice TROs at all if no bond is going to be posted, and doesn’t relieve the FTC of complying with Rule 65(b).

“The strict restrictions imposed by Rule 65(b) reflect the fact that “jurisprudence runs counter to the notion of court action taken before reasonable notice and opportunity to be heard has been granted to both sides of a dispute,” the court wrote.  “Plaintiff provides no evidence that defendants have a history of disregarding court orders, disposing of evidence, or transferring or hiding assets. Nor has plaintiff provided any evidence that individuals or entities similar to defendants have such a history.  Rather, the evidence demonstrates that when confronted by the Better Business Bureau (“BBB”), a government agency, defendants have stopped pursuing the consumers who filed the complaint with the BBB.”

The court then pointed out numerous inadequacies in the declaration (affidavit) submitted by the FTC by one of its own attorneys:

Defendants point to the declaration of Maxine Stanswell, an attorney employed by the FTC, in arguing that the “FTC’s experience shows that other defendants engaged in fraudulent schemes similar to Defendants will often withdraw funds from bank accounts and move or shred documents upon learning of impending legal action.”  However, Ms. Stansell, as a percipient witness, improperly relies on legal analysis and conclusions, improper opinion testimony, and facts outside of her personal knowledge. When she provides the factual basis that is purportedly within her personal knowledge, her statements are vague, conclusory, and non-specific. She states that “based on the FTC’s past experience with other similar defendants as well as the actions of these Defendants, to [provide notice] would likely result in immediate and irreparable injury to the Court’s ability to achieve final effective relief for consumers in this case.”  After summarizing the facts as provided by other witnesses, she states that the “aforementioned deceptive behavior on the Defendants’ part demonstrates a likelihood that Defendants have little concern for following the law and are likely to dissipate or conceal assets, or destroy or conceal evidence of their fraudulent conduct, if they are given advance notice of Plaintiff’s request for temporary relief.”  She then concludes that given defendants’ history of deceptive conduct, as described by consumers, “and the FTC’s past experience with similar defendants, as further explained below, there is good cause to believe that immediate and irreparable harm to Plaintiff’s ability to achieve effective final relief for consumers, including monetary redress or restitution, may occur if . . . Defendants receive advance notice of the  lawsuit and the TRO Motion.”  Ms. Stansell then proceeds to cite a number of cases brought by the FTC, provided on information and belief from FTC staff, in which various defendants transferred assets or destroyed evidence.  However, Ms. Stansell does not explain how the defendants in those cases are similar to the defendants in this case. Additionally, while Ms. Stansell cites a number of district court decisions in the Ninth Circuit that have granted similar motions brought by the FTC, including two from this District in which the court simply signed the proposed order prepared by the FTC, Ms. Stansell has failed to identify the decisions that have refused to grant such a TRO for lack of notice or failure to demonstrate one of the very few circumstances that would justify departing from the notice requirement.

The court didn’t stop there.  It then expressed concerns about the breadth of the proposed TRO.  (The FTC’s TROs are pretty much scorched earth.)

The court also has concerns about the scope of the proposed TRO, which appears to be overly broad. Plaintiff seeks a TRO that (1) requires defendants to stop misrepresenting that consumers have a preexisting business relationship, that consumers have agreed to purchase a listing, that consumers owe money to defendants, and the nature of defendants’ relationships with the consumers and the purpose of their communications; (2) requires defendants to post a notice on their websites that the FTC has filed a lawsuit alleging deceptive practices; (3) freezes defendants’ assets, wherever located; (4) requires third-party entities holding defendants’ assets to hold and prohibit withdrawal of such assets and requires them to provide the FTC with copies of all accounts; (5) requires third-party entities with whom defendants maintain an account or mail receiving box to retain and forward to Ms. Stansell any mail received; (6) requires defendants to provide a list of all locations where any defendant has received mail from January 1, 2009 to the date of the order; (7) requires defendants to stop attempting to collect or assigning any right to collect payment for defendants’ internet directory listings; (8) requires defendants to provide the FTC with complete financial statements; (9) prohibits defendants from destroying evidence or creating or operating a new entity to continue their business; (10) prohibits defendants from disclosing customer information; and (11) requires defendants to take steps to repatriate all documents and assets held by defendants outside of the United States and prohibits defendants from interfering with repatriation.

The court noted that the FTC “has not provided any argument or authority with respect to
many of the requested actions in the proposed TRO, including, but not limited to, requirements on third-party entities or requirements to prohibit defendants from disclosing customer information.”  Additionally, the TRO was too broad to be signed without scrutiny, the court said:

This overly broad TRO, like the proposed TRO before the Honorable Marsha J. Pechman (Case No. C12-1207MJP, Dkt. # 7), would effectively shut down all aspects of defendants’ business without requiring plaintiff to meet any standard of proof.

It’s encouraging when a court hesitates to shut down someone’s livelihood without at least notifying the affected party and giving it a chance to defend itself.  Maybe it will catch on.