Summary
denying motion to strike because good faith is relevant for determining whether to issue a permanent injunction and whether to hold defendants individually liable
Summary of this case from Fed. Trade Comm'n v. Quincy Bioscience Holding Co.Opinion
No. CV 01-1896 CBM (Ex)
June 26, 2001
The matter before the Court, the Honorable Consuelo B. Marshall, United States District Judge presiding, is Plaintiff Federal Trade Commission's Motion to Strike Defendants' Affirmative Defenses. Upon consideration of the papers presented, the Court GRANTS IN PART AND DENIES IN PART Plaintiffs Motion to Strike Affirmative Defenses.
JURISDICTION
The Court has jurisdiction pursuant to 28 U.S.C. § 1331, 1337(a), and 1345 and 15 U.S.C. § 53 (b). Venue is proper in this district pursuant to 28 U.S.C. § 1391 (b) and (c) and 15 U.S.C. § 53 (b).
BACKGROUND AND PROCEDURAL HISTORY
The FTC brought this action under Sections 5(a) and 13(b) of the Federal Trade Commission Act ("FTC Act") to obtain injunctive relief, rescission of contracts, restitution, disgorgement, and other equitable relief against Defendants Medicor LLC ("Medicor"), Andrew Rubin, and Matthew Rubin. Medicor sells an electronic claims processing package for approximately $359.00 to customers who wish to work from home part or full time submitting medical bills from doctors to benefits programs such as Medicare and Medicaid. The FTC alleges that Medicor made material misrepresentations to consumers about the amount of potential income they could earn, arrangements for consumers to work with doctors, and Medicor's refund policy. Andrew Rubin is Medicor's principal, and the FTC alleges that his brother, Matthew Rubin, is also a principal of Medicor.
On March 8, 2001, the FTC filed its First Amended Complaint ("FAC"). Defendants Andrew and Matthew Rubin each filed Answers to Plaintiffs FAC on April 16, 2001, asserting affirmative defenses. The FTC filed the present Motion to Strike Affirmative Defenses on May 21, 2001. The Defendants filed their Opposition on June 7, 2001. The FTC filed its Reply on June 13, 2001.
Plaintiffs motion requests to strike affirmative defenses from the answers of Andrew Rubin, Matthew Rubin, and Medicor. Because no answer was ever filed by Medicor and the clerk entered default against Medicor in this case on April 30, 2001, this Order does not address the FTC's request that Medicor's affirmative defenses be stricken.
DISCUSSION
I. Motion to Strike Affirmative DefensesThe FTC argues that Defendants' Affirmative Defenses One through Thirteen should be stricken. Defendants Andrew and Matthew Rubin neither addressed in their Opposition, nor presented at the hearing any arguments regarding, Affirmative Defenses One, Two, Four, Five, Six, and Seven. Under Local Rule 7.9 of the Central District of California, the Court may deem Defendants' lack of opposition as consent to the granting of Plaintiffs motion. Thus, the Court GRANTS without leave to amend Plaintiffs Motion to Strike the following affirmative defenses: the first (failure to state a claim); the second (statute of limitations); the fourth (privilege); the fifth (privilege); the sixth (proximate cause); and the seventh (laches). The remainder of this Order addresses the affirmative defenses discussed in Defendants' Opposition.
A. Standard of Law
A court may strike "from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Fed.R.CIV.P. 12(f). A Rule 12(f) motion to strike is "proper when a defense is insufficient as a matter of law." See Schwarzer, Tashima Wagstaffe, California Practice Guide: Federal Civil Procedure Before Trial ¶ 9:378 (2001). A motion to strike will not be granted if the insufficiency of the defense is not clearly apparent, or if it raises factual issues that should be determined by a hearing on the merits See id. 5 A C. Wright A. Miller, Federal Practice and Procedure, Civil 2d § 1381 at 678. Defenses must provide a "short and plain statement" of the defense under Federal Rule of Civil Procedure 8(a). See Heller Financial, Inc. v. Midwhey Powder Co., 883 F.2d 1286, 1294 (7th Cir. 1989). The sufficiency of the pleading is determined by whether it gives the plaintiff fair notice of the defense. See Wyshak v. City National Bank, 607 F.2d 824, 827 (9th Cir. 1979).
Motions to strike are generally disfavored. See Schwarzer, et al., supra, at ¶ 9:375. Courts often require a showing of prejudice such as delay or confusion of the issues by the moving party. See Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1528 (9th Cir. 1993) rev'd on other grounds, 510 U.S. 517 (1994). Courts generally do not determine disputed or substantial questions of law on a motion to strike. See 5A Wright Miller, supra, § 1381, at 674. Leave to amend is freely granted if a portion of an affirmative defense is stricken. See Schwarzer, et al., supra, at ¶ 9:412.
B. Defendants' Affirmative Defenses
1. Mitigation of Damages
Defendants Andrew and Matthew Rubins' third affirmative defenses are that the FTC is barred from recovery because it failed "to take reasonable action to mitigate the alleged damages." Andrew Rubin's Answer to First Amended Complaint ("A. Rubin Answer") at ¶ 37; Matthew Rubin's Answer to First Amended Complaint ("M. Rubin Answer") at ¶ 37. Plaintiff argues that because the FTC is seeking only equitable relief, not damages, the defense of mitigation of damages is inapplicable. See Reply at 3 n. 3. At oral argument, Defendants' counsel agreed that if the FTC is only seeking equitable relief in the form of restitution, the defense of mitigation of damages would not apply. All relief sought by Plaintiff is equitable and dependent upon the amount of gain received by the Defendants, not the amount of loss suffered by the Plaintiff. Thus, mitigation of damages is not relevant. Defendants' defense of mitigation of damages fails as a matter of law, and the Court GRANTS Plaintiffs Motion to Strike Defendants' third affirmative defenses.
2. Good Faith
Defendants Andrew and Matthew Rubins' eighth affirmative defenses are that they "had no ability to modify or alter" Medicor's marketing practices. A. Rubin Answer at ¶ 42; M. Rubin Answer at ¶ 42. Both Defendants' ninth affirmative defenses are that the alleged misrepresentations were not approved by the Defendant or by Medicor. A. Rubin Answer at ¶ 43; M. Rubin Answer at ¶ 43. Plaintiff argues that good faith is not a defense to a violation of the FTC Act. Plaintiff further argues that Defendants are liable for the action of the employee telemarketers because they had control of Medicor. Defendant Andrew Rubin argues that he had no control of Medicor's sales department, and Defendant Matthew Rubin argues that he had no control of Medicor.
Plaintiffs assertion that good faith is not a defense to relief sought under section 13(b) for violation of section 5 of the FTC Act is correct. See FTC v. Hang-Ups Art Enterprises, 1997 — 1 Trade Cas. (CCH) ¶ 71,709 at 79,055 (C.D. Cal. 1995) (citing FTC v. World Travel Vacation Brokers, 861 F.2d 1020, 1029 (7th Cir. 1988), for the proposition that good faith does not provide a defense against an advertiser's misrepresentations). However, should the court determine that there has, in fact, been a violation of section 5, the court would have the option of granting permanent injunctive relief. See id. Injunctive relief is proper when there exists some cognizable danger of recurrent violation. See id. To determine whether the violations are likely to recur, the court must examine the deliberateness and seriousness of the violation and also the violator's history of unfair advertising practices. See id. The Defendants' good faith could be considered in evaluating the deliberateness of the violation. See id.
Defendants could also be held individually liable for injunctive relief under the FTC Act for Medicor's practices if the FTC proves that Medicor "committed misrepresentations or omissions of a kind usually relied on by a reasonably prudent person, resulting in consumer injury" and "that the individual defendants participated directly in the acts or practices or had authority to control them." FTC v. American Standard Credit Systems, Inc., 874 F. Supp. 1080, 1087 (C.D. Cal. 1994). Further, to be held individually liable for restitution, the Defendants must have "had knowledge that the corporation or one of its agents engaged in dishonest or fraudulent conduct." Id. at 1089. The defendants' degree of control is relevant to the determination whether the defendants had knowledge. See id. The question whether Defendants had sufficient control of Medicor to be held individually liable is one of fact, and Defendants will be given the opportunity to prove their allegations at trial.
Because good faith is relevant to determine whether to issue a permanent injunction and whether to hold Defendants individually liable, the Court DENIES Plaintiffs Motion to Strike Defendants' eighth and ninth affirmative defenses.
3. Consent
Defendants' tenth affirmative defenses are that the FTC "consented to each and every act complained of in the Complaint." A. Rubin Answer at ¶ 44; M. Rubin Answer at ¶ 44. Plaintiff argues that Defendants must identify the actions to which it consented. Defendants argue that they have previously indicated a portion of their basis for asserting the defense. Defendants' Answers offer Plaintiff no indication as to how consent would bar the FTC's claims. Therefore, Plaintiffs Motion to Strike Defendants' tenth affirmative defenses is GRANTED with leave to amend.
4. Unclean Hands
Defendants' eleventh affirmative defenses are that the FTC's action is barred by the doctrine of unclean hands because the FTC deprived them of access to Medicor documents and because the FTC did not notify Medicor that it believed that its marketing practices were deceptive or misleading. A. Rubin Answer at ¶ 45; M. Rubin Answer at ¶ 45. Plaintiff argues that the defense of unclean hands cannot be invoked against a governmental agency acting in the public interest. Defendants argue that there is an exception to the governmental agency's immunity "to prevent an egregious injustice."
Some courts have held that the defense of unclean hands can be asserted against the government when the government's conduct is so outrageous as to cause constitutional injury. See SEC v. Sands, 902 F. Supp. 1149, 1166 (C.D. Cal. 1995). Defendants have asserted specific wrongdoing by the government in their Answers. Defendants may be able to prove that the FTC acted unconstitutionally. Cf. id. (granting SEC's motion to strike affirmative defense of unclean hands after discovery had been completed and defendants had produced no evidence of unconstitutional actions by the SEC). Thus, Plaintiffs Motion to Strike Defendants' eleventh affirmative defenses is DENIED.
5. Estoppel
Defendants' twelfth and thirteenth affirmative defenses assert estoppel. A. Rubin Answer at ¶¶ 46-47; M. Rubin Answer at ¶¶ 46-47. Both parties agree that the general rule that estoppel is not a defense against the government has an exception in situations of "affirmative misconduct" by the government. U.S. v. Ruby, 588 F.2d 697, 703-04 (9th Cir. 1978). Defendants have not alleged the essential elements of estoppel. However, Defendants' Opposition argues that there are facts supporting a defense of estoppel. See Opposition at 6:19-7:6. Thus, Plaintiffs Motion to Strike Affirmative Defenses Twelve and Thirteen is GRANTED with leave to amend.
Based on the foregoing, the Court GRANTS WITHOUT LEAVE TO AMEND Plaintiffs Motion to Strike the following affirmative defenses: the first (failure to state a claim); the second (statute of limitations); the third (mitigation of damages); the fourth (privilege); the fifth (privilege); the sixth (proximate cause); and the seventh (laches). The Court GRANTS WITH LEAVE TO AMEND Plaintiffs Motion to Strike the following affirmative defenses: the tenth (consent); the twelfth (estoppel); and the thirteenth (estoppel). The Court DENIES Plaintiffs Motion to Strike the following affirmative defenses: the eighth (good faith); the ninth (good faith); and the eleventh (unclean hands). If Defendants choose to amend, any Amended Answers are to be filed with the Court no later than July 6, 2001.
SO ORDERED.