Free Memorandum in Support - District Court of California - California

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WILLIAM BLUMENTHAL General Counsel JANICE L. CHARTER Colo. Bar No. 12750 DAVID M. NEWMAN Cal. Bar No. 54218 THOMAS DAHDOUH N.Y. Bar No. 2222370 Federal Trade Commission 901 Market Street, Suite 570 San Francisco, CA 94103 Phone (415) 848-5100/ Fax (415) 848-5184 [email protected] [email protected] [email protected] Attorneys for Plaintiff Federal Trade Commission UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION FEDERAL TRADE COMMISSION, Plaintiff, v. NEXTCLICK MEDIA, LLC, a Delaware limited liability company, dba StopSmoking180.com, StopSmokingResolution.com, BeautifulSkin.com, and OnLineDirectProducts; NEXT INTERNET, LLC, a Delaware limited liability company; KENNETH CHAN, individually and as an officer of NEXTCLICK MEDIA, LLC, and NEXT INTERNET, LLC; and ALBERT CHEN, individually and as an officer of NEXTCLICK MEDIA, LLC, 4:08-cv-01718 VRW

MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFF'S APPLICATION FOR A TEMPORARY RESTRAINING ORDER, PRELIMINARY INJUNCTION, AND OTHER EQUITABLE RELIEF

Defendants.

TRO Memorandum

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TABLE OF CONTENTS Table of Authorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. THE PARTIES, JURISDICTION, AND VENUE. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. The Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. 2. Plaintiff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Defendants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Jurisdiction and Venue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

III. DEFENDANTS' VIOLATIONS OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A. The Free Trial Is Not Free. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1. 2. The Pitch.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Misrepresentation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The Continuity Program: Not Disclosed and Not Easily Cancelled. . . . . . 5 1. 2. Failure to Provide Adequate Disclosure of Continuity Program. . . 5 Defendants Make Cancelling the Continuity Program Difficult, if Not Impossible. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

There Is No Support for the Smoking-Cessation Product Claims. . . . . . . . 9

IV. THE COURT SHOULD ENTER THE REQUESTED RELIEF. . . . . . . . . . . . . . 10 A. B. Section 13(b) of the FTC Act Authorizes the Requested Relief. . . . . . . . 10 This Case Meets the Standard for a TRO and Preliminary Injunction. . . 11 1. Law Violations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 a. Misrepresentations Under the FTC Act.. . . . . . . . . . . . . . . 12 "Free" Trial Offer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Smoking-Cessation Claims. . . . . . . . . . . . . . . . . . . . . . . . . 14 Unfair Practices Under the FTC Act. . . . . . . . . . . . . . . . . . 16 Violations of the Electronic Fund Transfer Act. . . . . . . . . 17

The Individual Defendants are Liable for Injunctive and Monetary Relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

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3.

The Equities Weigh in Favor of Granting Injunctive Relief. . . . . 19

A TRO with an Asset Freeze, an Accounting, Document Preservation, the Appointment of a Receiver, Expedited Discovery, and Immediate Access to Defendants' Business Premises, is Necessary for Effective Final Relief. 20 1. 2. An Asset Freeze is Necessary to Preserve the Possibility of Effective Final Relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 The Appointment of a Temporary Receiver Is Essential for Effective Final Relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 The Court Should Order Additional Ancillary Relief to Ensure that the Defendants' Assets Are Promptly Revealed and that the Court Is Fully Advised at the Preliminary Injunction Hearing.. . . . . . . . . . 23

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V. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

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TABLE OF AUTHORITIES FEDERAL CASES CFTC v. British Am. Commodity Options Corp., 560 F.2d 135 (2d Cir. 1977), cert. denied, 438 U.S. 905 (1978). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Consumer Sales Corp. v. FTC, 198 F.2d 404, 408 (2d Cir. 1952), cert. denied, 344 U.S. 912 (1953). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Floersheim v. FTC, 411 F.2d 874 (9th Cir. 1969). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Fed. Sav. & Loan Ins. Corp. v. Dixon, 835 F.2d 554 (5th Cir. 1987). . . . . . . . . . . . . . . 23 Fed. Sav. & Loan Ins. Corp. v. Sahni, 868 F.2d 1096 (9th Cir. 1989). . . . . . . . . . . . . . 21 FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999). . . . . . . . . . . . . . . . . . . 11 FTC v. Am. Nat'l Cellular, 810 F.2d 1511 (9th Cir. 1987). . . . . . . . . . . . . . . . . . . . . . . 11 FTC v. Amy Travel Service, Inc., 875 F.2d 564 (7th Cir.), cert. denied, 493 U.S. 954 (1989). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 18 FTC v. Brown & Williamson Tobacco Corp., 580 F. Supp. 981 (D.D.C. 1983), aff'd in part and remanded in part, 778 F.2d 35 (D.C. Cir. 1985).. . . . . . . . . . . . . . . . . . . . . . . 10 FTC v. Crescent Publ'g Group, 129 F. Supp. 2d 311 (S.D.N.Y. 2001). . . . . . . . . . . . . 14 FTC v. Cyberspace.com, 453 F.3d 1196 (9th Cir. 2006).. . . . . . . . . . . . . . . . . . 13, 14, 20 FTC v. Five-Star Auto Club, Inc., 97 F. Supp. 2d 502 (S.D.N.Y. 2000). . . . . . . . . . . . . 22 FTC v. Gem Merch. Corp., 87 F.3d 466 (11th Cir. 1996). . . . . . . . . . . . . . . . . . . . . . . . 21 FTC v. Gill, 265 F.3d 944 (9th Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 FTC v. H.N. Singer, Inc., 668 F.2d 1107 (9th Cir. 1982). . . . . . . . . . . . . . . . 2, 10, 11, 21 FTC v. H.N. Singer, Inc., 1982-83 Trade Cas. (CCH) P. 65,011 at 70,618-19 (N.D. Cal. 1982). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 FTC v. Kitco of Nev., Inc., 612 F. Supp. 1282 (D. Minn. 1985). . . . . . . . . . . . . . . . . . . 17

22 FTC v. Minuteman Press, 53 F. Supp. 2d 248 (E.D.N.Y. 1998). . . . . . . . . . . . . . . . . . . 14 23 FTC v. Mylan Laboratories, Inc., 62 F. Supp. 2d 25 (D.D.C. 1999).. . . . . . . . . . . . . . . 10 24 FTC v. Pantron I Corp., 33 F.3d 1088 (9th Cir. 1994). . . . . . . . . . . . . . 10, 11, 12, 14, 15 25 FTC v. Publ'g Clearing House, Inc., 104 F.3d 1168 (9th Cir. 1997). . . . . . . . . 11, 18, 21 26 FTC v. Thomsen-King & Co., 109 F.2d 516 (7th Cir. 1940). . . . . . . . . . . . . . . . . . . . . . 12 27 FTC v. U.S. Oil & Gas Corp., 748 F.2d 1431 (11th Cir. 1984).. . . . . . . . . . . . . . . . . . . 22 28 TRO Memorandum Page iii

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FTC v. Va. Homes Mfg. Corp., 509 F. Supp. 51 (D. Md.), aff'd, 661 F.2d 920 (4th Cir. 1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 FTC v. Warner Communications, Inc., 742 F.2d 1156 (9th Cir. 1984). . . . . . . . . . . 11, 19

3 FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020 (7th Cir. 1988).. . . . . 15, 19 4 FTC v. World Wide Factors, 882 F.2d 344 (9th Cir. 1989).. . . . . . . . . . . . . 11, 12, 19, 20 5 Goodman v. FTC, 244 F.2d 584 (9th Cir. 1957). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6 In re Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984). . . . . . . . . . . . . . . . . . . . . . 12, 14, 15 7 In re Nat'l Credit Mgmt. Group LLC, 21 F. Supp. 2d 424 (D.N.J. 1998). . . . . . . . . . . . 22 8 9 10 11 Novartis Corp. v. FTC, 223 F.3d 783 (D.C. Cir. 2000). . . . . . . . . . . . . . . . . . . . . . . . . . 15 12 P.F. Collier & Son Corp. v. FTC, 427 F.2d 261 (6th Cir. 1970). . . . . . . . . . . . . . . . . . . 23 13 Porter v. Warner Holding Co., 328 U.S. 395 (1946).. . . . . . . . . . . . . . . . . . . . . . . . . . . 23 14 SEC v. Am. Bd. of Trade, Inc., 830 F.2d 431 (2d Cir. 1987). . . . . . . . . . . . . . . . . . . . . . 22 15 SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082 (2d Cir. 1972). . . . . . . . . . . . . . . . . . 21 16 United States v. Odessa Union Warehouse Co-op, 833 F.2d 172 (9th Cir. 1987). . 11, 19 17 18 19 20 21 22 23 24 25 26 27 28 FEDERAL STATUTES AND REGULATIONS 15 U.S.C. §§ 41-58. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 15 U.S.C. § 45(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 16 15 U.S.C. § 45(n). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 15 U.S.C. § 52. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 15 U.S.C. § 53(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 2, 10 15 U.S.C. § 55(a)(1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 15 U.S.C. § 56(a)(2).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 15 U.S.C. § 1693e(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 15 U.S.C. § 1693o(c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 28 U.S.C. §§ 1331, 1337(a), and 1345.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 TRO Memorandum Page iv In re Thompson Med. Co., 104 F.T.C. 648 (1984), aff'd on other grounds, 253 U.S. App. D.C. 18, 791 F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086. . . . . . . . 13 -14, 15 Kraft, Inc. v. FTC, 970 F.2d 311, 322 (7th Cir. 1992), cert. denied, 507 U.S. 909 (1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 15

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12 C.F.R. § 205.10(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

TRO Memorandum

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I. INTRODUCTION The Federal Trade Commission asks this Court to halt an egregious scheme in which Defendants enroll unwitting consumers in monthly continuity plans and then make it impossible for them to cancel. Defendants lure consumers with assurances of a free trial of stop-smoking or skin-care products. Yet along with the supposed "free" trial product comes a full month's supply which must be returned or consumers will be charged as much as $99.95 every month for additional product. Before they can return any product, however, consumers must contact Defendants, which Defendants make nearly impossible by failing to answer either their telephones or their email. Many consumers find that the only way to break out of this never-ending nightmare is to cancel the credit or debit card account they thought they were providing to Defendants solely to pay a nominal shipping and handling fee for the trial product. The Federal Trade Commission ("Commission" or "FTC") has filed a complaint pursuant to Section 13(b) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. § 53(b), alleging that Defendants are engaged in false and deceptive business practices. The FTC seeks a temporary restraining order ("TRO") enjoining Defendants from continuing their deceptive practices, and ordering ancillary equitable relief, including (1) an asset freeze; (2) appointment of a receiver; (3) an accounting of all revenues, expenses, and assets; (4) limited expedited discovery; and (5) document preservation. The FTC also seeks an order to show cause why a preliminary injunction should not issue. This equitable relief is needed to stop Defendants from causing further consumer injury and to preserve assets for consumer redress. Without such relief, Defendants will continue to mislead consumers and may dissipate assets that could be used to redress the injury that they have caused and continue to cause. II. THE PARTIES, JURISDICTION, AND VENUE A. The Parties 1. Plaintiff

Plaintiff, the Federal Trade Commission, is an independent agency of the United TRO Memorandum Page 1 of 24

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States Government created by statute. FTC Act, 15 U.S.C. §§ 41-58. The FTC enforces Sections 5(a) and 12 of the FTC Act, 15 U.S.C. §§ 45(a) and 52, which prohibit, respectively, unfair or deceptive acts or practices, and false advertisements for food, drugs, devices, services, or cosmetics in or affecting commerce. Enforcement of the Electronic Fund Transfer Act ("EFTA") is also vested in the FTC. 15 U.S.C. § 1693o(c). Pursuant to the EFTA, every violation of that statute constitutes a violation of the FTC Act as well. Id. The FTC is authorized to initiate, by its own attorneys, federal district court proceedings to enjoin violations of the FTC Act and to secure such equitable relief as may be appropriate in each case, including consumer redress. FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1112-13 (9th Cir. 1982); 15 U.S.C. § § 53(b) & 56(a)(2). 2. Defendants

Defendants are NextClick Media, LLC ("NextClick"), its principals Kenneth Chan and Albert Chen, and its parent Next Internet, LLC ("Next Internet").1 Both NextClick and Next Internet are limited liability companies organized in Delaware. Kauffman Exs. N, O, P, Q. NextClick does business under a number of names including StopSmoking180.com, StopSmokingResolution.com, BeautifulSkin.com, and OnLineDirectProducts. Kauffman Exs. R, S, T. The addresses of both NextClick and Next Internet are, or at times relevant to the FTC's complaint have been, 667 Folsom Street in San Francisco, 880 Harrison Street in San Francisco, and 2525 East Charleston Road, Suite 101, and 2513 East Charleston Road, Suite 102, in Mountain View. Kauffman Exs. U at 1, V, W, X, Y, Z, NN. Defendant Kenneth Chan is CEO and a member of both limited liability company

Kauffman Ex. L at 2 (NextClick was "founded and funded" by Next Internet), Ex. M at 1-2. References to declarations cited in this memorandum include the declarant's last name followed by the paragraph number(s) or the appropriate exhibit number(s), e.g., Kauffman ¶ 10, or Kauffman Ex. L at 2. When there is more than one declaration for a particular consumer, the name is followed by -1 or -2, to indicate the first or second declaration, respectively. Personal information, including street address and financial information, has been redacted from the exhibits. TRO Memorandum Page 2 of 24

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Defendants. Kauffman Exs. L at 2, AA at 1, BB, CC. Chan formulates, directs, controls, and participates in the acts and practices of NextClick, including the various acts and practices set forth herein. Kauffman Ex. L at 2. Defendant Albert Chen is a member of NextClick and the company's president. Kauffman Exs. BB, L at 2. Chen formulates, directs, controls, and participates in the acts and practices of NextClick, including the various acts and practices set forth herein. Kauffman Ex. L at 2. B. Jurisdiction and Venue

The Court has subject matter jurisdiction over the Commission's claims pursuant to 28 U.S.C. §§ 1331, 1337(a), and 1345. All Defendants transact business in the Northern District of California. III. DEFENDANTS' VIOLATIONS OF LAW Defendants' deceptive activities generally fall into three categories. First, Defendants' "free trial" offerings simply are not free. Second, Defendants fail to disclose adequately that, once consumers accept such purportedly free trials, they are locked into continuity programs for which their debit and credit card accounts are charged on a monthly basis. Third, Defendants deceptively advertise their smokingcessation products as effective and superior to nicotine-based products. A. The Free Trial Is Not Free 1. The Pitch

Since mid-2006, Defendants have operated several websites featuring "free trials" of various products. The StopSmoking180.com website offers an herbal patch that Defendants advertise will help consumers stop smoking. Defendants' StopSmokingResolution.com website offers a similar product. Defendants' BeautifulSkin.com website features a package of three different skin care products advertised to treat acne. Consumers come to these websites in three different ways. First, consumers searching the Internet for remedies to stop smoking or for acne treatments find these TRO Memorandum Page 3 of 24

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websites on their own. M. Allen-1 ¶ 2, McCoy ¶ 2, Netherton ¶ 2. Second, Defendants send out bulk emails to consumers advertising these products. Kauffman Ex. B, Carpenter ¶ 2, Craddock ¶ 2, Graves ¶ 1. Third, some consumers are directed to these websites from other websites which offer free gift cards and other incentives to consumers who will try products on a free trial basis. Drinkhahn ¶ 2. Both in their emails to consumers and on their websites, Defendants represent their offerings as a completely free trial. For example, a typical unsolicited email from Defendants states "FREE 10 DAY SUPPLY" in large red and black block letters. Directly below that line is a blue block that tells consumers to "CLICK HERE TO TRY IT FREE!" Kauffman Ex. B at 2. Clicking on that hyperlink takes the consumer to one of Defendants' websites. Once on the website, the headline of the first page describes the offering as a "FREE TRIAL." The first page of both the www.StopSmoking180.com website and the www.BeautifulSkin.com website repeats the word "Free" in large colored print at least four times. Kauffman Exs. A (StopSmoking180), C (BeautifulSkin ­ "free" is stated five times). The StopSmokingResolution.com website also states that the stop smoking patch is a "FREE TRIAL," and that the consumer will receive a "NOCOST 10-Day Supply." Kauffman Ex. A. After filling out the form at the top of the first page on StopSmoking180, for example, a shipping information page opens up for the consumer and, yet again, the consumer is confronted with the word "FREE" three times and is told "FREE for 10 days. Simply fill out the information below to start your FREE trial today. Simply pay low shipping and handling." Kauffman Ex. E. 2. The Misrepresentation

In fact, Defendants' claim that these products can be tried for free is false. Once a consumer orders the trial, Defendants send the consumer a total of 30 days' worth of smoking-cessation patches. Anderson Ex. 1 at 1 ("When I opened the envelope, there was a 30 day supply (3 boxes), not just the 10 day free sample that was advertised."), Carpenter ¶ 3, Pesl ¶ 2. The same is true for the skin-care products. M. Allen-1 ¶ 2. Consumers can either try to return the product, or they can elect to keep it. TRO Memorandum Page 4 of 24

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Regardless of what consumers decide to do, however, they receive nothing for free. First, consumers who elect to keep all of the product receive a month's supply of the products and are charged for exactly that ­ a month's supply of the product.2 Second, consumers who are able to return unused product (which they must do in order to avoid the full monthly charge) not only must pay the postage for returning the product, but are assessed a $7.95 restocking fee as well. Ward Ex. 1 at 1, Benning Ex. 1 at 2, Carpenter ¶ 7. Only small print on the Terms and Conditions or Cancellation Policy pages of Defendants' websites mentions the restocking charge, which, in the face of large print claiming over and over that the trial is free, is not an adequate disclosure. Kauffman Exs. G, H at 1, Z, Benning Ex. 1 at 2 ("[Defendant's return policies and restocking fee] does not appear on your ad . . . . You still owe me $7.95" in refunds.) This small print also contradicts another statement on the StopSmoking180.com website that purchasers unhappy with the product may return it for a "full refund." Kauffman Ex. J at 2 ("What is the Guarantee? Try Nicocure for 10 days. If at any time you feel the product isn't working for you, simply return the unused portion for a full refund."). In sum, whether a consumer keeps the trial product or returns it, the consumer bears some appreciable cost. In no sense is it "free." B. The Continuity Program: 3 Not Disclosed and Not Easily Cancelled 1. Failure to Provide Adequate Disclosure of Continuity Program

Consumers who agree to Defendants' "free" trial are automatically enrolled in a continuity program which, unless consumers cancel within the prescribed time period for the trial, results in the imposition of continuing monthly charges of up to $99.95 until cancellation occurs. Until recently, the only references to this program on Defendants'

The monthly charges are $99.95 for the smoking-cessation products and up to $69.95 for the acne product. M. Allen-1 ¶ 2, Anderson Ex. 1 at 1, Brown ¶ 4. A continuity program is a type of negative option plan. Under this program, subscribers receive periodic shipments of goods without receiving prior announcements from sellers describing the goods, and without receiving prior notification forms. TRO Memorandum Page 5 of 24
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website were buried in the "Terms and Conditions" page or appeared in microscopic type at the bottom of the billing page of the website. Kauffman Exs. F at 2, G, H at 1, Z. In addition, Defendants lull consumers into thinking that they will have an opportunity to opt into the program after trying the product. Directly above the boxes in which consumers input their billing information on the website, on a page which consumers must access to sign up for the trial, the website asks, "Why do [Defendants] need my credit card information?" The response: "Your 10 day trial is absolutely free! Charges will only be made to your credit card if you find that StopSmoking180 is the product for you and you choose to continue with the stop smoking 180 program for a discounted membership price." Kauffman Ex. F at 1 (Emphasis added.) The reality, however, is far different ­ consumers must, in fact, take affirmative action to avoid further charges. As mentioned above, Defendants have recently made changes to their websites. Even now, however, Defendants' description of the continuity program on the StopSmoking180.com website is buried in small type at the bottom of a page that touts the "free" nature of the offer numerous times, in substantially larger letters. Kauffman Ex. DD at 2. In a recent email advertisement from Defendants for StopSmoking180, the word "free" has the most prominent lettering, and near it appears the statement, "all you pay is shipping & handling!" Kauffman Ex. GG at 2. Moreover, the BeautifulSkin and StopSmokingResolution websites continue to advertise those offerings as free or discounted with no disclosures whatsoever about the continuity program on the first page of the websites. Kauffman Exs. EE, FF.4 Defendants also have a new website promoting their Zero Nicotine product. (See Section C, infra, for a description of the various smoking-cessation products.) On www.nicotinecure.com, the front page in bold letters still states "FREE TRIAL,"

The BeautifulSkin.com website has now been changed so that it offers a half-off trial package of the skin care products, Kauffman Ex. FF, and sends product every 45 days for $99.95 plus shipping and handling. TRO Memorandum Page 6 of 24

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Kauffman Ex. OO at 1, while Defendants continue to bury the truth in fine print at the bottom of a long web page. Kauffman Ex. PP at 2. Beyond, that, however, Defendants make inconsistent statements about their continuity program. The terms and conditions page essentially tells consumers that they will receive 20 more patches and be charged $99.95 if they do nothing further (and then 30 patches per month thereafter, also at a charge of $99.95). Kauffman Ex. QQ. Yet, in fine print on the ordering page, the page consumers must go to in order to participate in the trial, Defendants say merely, "If you are happy with the product, we will send you the rest of the month's supply...[for $99.95]." Kauffman Ex. PP at 2. Consumers cannot be expected to anticipate silence on their part as communicating happiness with the product. Thus, Defendants continue to obfuscate the fact that consumers will receive additional product and be charged nearly $100 unless they take affirmative, preventive action. Some consumers were solicited by telephone, and even these were not told about the continuity plan until after they had supplied credit card information to pay for the shipping and handling for the supposedly free trial. See Vander Meeden Ex. C at 71, 91, 128-29, 137-38. Two consumers who were told this during the call and then wanted to cancel immediately were not permitted to do so. Vander Meeden Ex. C at 128-29, 13738. 2. Defendants Make Cancelling the Continuity Program Difficult, if Not Impossible

Once consumers figure out, perhaps through receiving a month's supply of product or a confirming email or finding unexplained charges on their credit or debit card accounts, that they have unwittingly gotten into a continuity program which they must cancel in order to avoid further charges, their difficulties have only just begun. Defendants make cancelling so difficult that consumers who diligently follow the instructions on the website are unable to cancel within the time period that Defendants impose (generally an extremely short period of 20 to 30 days from the date of order). Atha Ex. 1, Brown ¶¶ 5, 7, Drinkhahn ¶¶ 4-10, Graves ¶¶ 3-6, Isaac Ex. 1, Klipfel Ex. 1, TRO Memorandum Page 7 of 24

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McCoy ¶¶ 3-8, Pesl ¶ 3, Pesch Ex. 1 at 1. Similarly, consumers who ultimately decide to continue in the continuity program, but later decide to cancel the subscription before the next monthly shipment, have a difficult time doing so. M. Allen-1 ¶¶ 3, 6, Barrios Ex. 1, Hinderliter Ex. 1, Netherton ¶¶ 3-6. Defendants erect a series of roadblocks that make it virtually impossible to return product within the given period of time. For example, Defendants will accept returns only if the consumer first has obtained an "RMA" number. In order to obtain such a number, the consumer must contact Defendants by calling them, by logging onto the "Members" section of the website, or by emailing the customer service department. Kauffman Ex. T. However, when consumers try to use one of these three avenues, they are routinely stymied. Consumers who attempt to call the customer service number posted on the websites generally hear only a voice message saying that the number's mailbox is "full" and that no further messages can be left, or the telephone line simply is not answered. K. Allen Ex. 1 at 1, Carpenter ¶ 4, Craddock ¶ 4, McCoy ¶¶ 3-4, Pesch Ex. 1 at 1, Varga ¶ 5, Law Ex. 1, Goddard Ex. 1 at 1. The few consumers who were able to leave messages did not receive return calls. M. Allen-1 ¶ 3, M. Allen-2 Ex. A at 2, Klipfel Ex. 1, Law Ex. 1 at 1, Hinderliter Ex. 1, Weigel Ex. 1. The username or password that Defendants give consumers to log onto the "Members" section of the website often does not work. M. Allen-1 ¶ 3, M. Allen-2 Ex. A at 1-8, Carpenter ¶ 4, Klipfel Ex. 1, McCoy ¶ 4 & Ex. A at 5, 7. When consumers use email to cancel or to request a correct username or password enabling them to log on, Defendants either do not reply or send form responses saying that someone will look into the situation. K. Allen Ex. 1, Atha Ex. 1, Carpelan Ex. 1 at 1, Carpenter ¶ 4, Drinkhahn ¶ 5, Farris Ex. 1, Klander Ex. 1, Netherton ¶ 4, Pesch Ex. 1 at 1-2 ("You can not get in touch with [defendants] to discuss anything, they make it impossible by having a number and email address that is not answered."), Robichaud Ex. 1 at 1 ("I have tried numerous times to contact this company ­ they simply do not exist."), Uyema Ex. A at 1. Due to the cancellation roadblocks Defendants have erected, many consumers are unable to cancel within the requisite period and incur unauthorized TRO Memorandum Page 8 of 24

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charges of up to $99.95 per month on consumers' debit or credit cards. Anderson Ex. 1 at 1 ("[B]ecause of the $99.95 taken from our account, we now can not pay our electric bill in full"), Benning Ex. 1 at 1, Brown ¶ 6, Bulleck Ex. 1 at 1, Craddock ¶ 4, Price Ex. 1 at 1-2 ("I DID NOT get any response from beautiful skin. Not only that, but there was a charge to my credit card TODAY!!! HELP") (Emphasis in Original), Sauer Att. A at 2, Slaughter Ex. 1 at 1. This game Defendants are playing is the final cog in their wheel of deception. Unsuspecting consumers are involuntarily enrolled in a continuity plan that they are unable to cancel through any of the methods Defendants give them. Consumers must then resort to cancelling their credit or debit cards to avoid further charges, M. Allen-1 ¶¶ 4-5, Carpenter ¶ 6, Pesl ¶¶ 3-4, Uyema Ex. A at 1, but by then, Defendants are $70$100 richer through each deception. More than 100 consumers have complained to the Silicon Valley Better Business Bureau ("BBB") about NextClick's practices. Vander Meeden Ex. C. Despite that, not only did NextClick continue those practices, but it ignored a request from the BBB to explain its conduct, ultimately causing the BBB to issue a consumer alert about the company. Vander Meeden ¶ 5 & Exs. A, B. C. There Is No Support for the Smoking-Cessation Product Claims

To compound the injury further, the smoking-cessation products that Defendants sell do not work or certainly have not been proven to work.5 There simply is no scientific evidence to support Defendants' claims that they sell "the world's most effective quit smoking program," Kauffman Exs. A at 1, B at 1, E at 1, F at 1, I, J at 1, that their products have "a 97% success rate," Kauffman Exs. A at 1, I at 1, or that their herbal product is inherently better than nicotine-based patches. Kauffman Exs. A at 1, D at 1, I, J at 2. Dr. Neal Benowitz, an expert on nicotine and nicotine addiction, examined the ingredients in these products and conducted a medical literature review. In light of his

These are herbal patches called Nicocure, StopSmoking 180®, and ZeroNicotine. Page 9 of 24 TRO Memorandum

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professional experience and knowledge, he concluded that lobelia, the primary ingredient in Nicocure and StopSmoking 180®, is ineffective in smoking cessation, and that none of the ingredients in Defendants' products has been shown to be superior to nicotinebased products for smoking cessation. Benowitz ¶¶ 6-12. Given this conclusion, Dr. Benowitz had no trouble dismissing Defendants' 97% claim for its lobelia-based product. Benowitz ¶¶ 9-11. Thus, Defendants' claims are certainly unsubstantiated and most likely false.

IV. THE COURT SHOULD ENTER THE REQUESTED RELIEF In its Complaint, the FTC seeks a permanent injunction and other equitable relief to redress the injury caused by Defendants' deceptive practices. To preserve the possibility of effective final relief and to prevent Defendants from committing further law violations pending resolution of this action, the FTC seeks a noticed TRO, including an asset freeze, appointment of a receiver, limited expedited discovery, other equitable relief, and an order to show cause why a preliminary injunction should not issue. A. Section 13(b) of the FTC Act Authorizes the Requested Relief

The FTC Act authorizes a district court to grant permanent injunctions to enjoin violations of the Act in "proper cases." 15 U.S.C. § 53(b).6 Numerous courts have held that Section 13(b) applies to any provision of law enforced by the FTC.7 Incident to its authority to issue permanent injunctive relief, this Court has the inherent equitable power to grant all temporary and preliminary relief necessary to

The Commission proceeds under the second proviso of Section 13(b), which gives the Commission the authority to initiate a permanent injunction action in district court. See FTC v. Pantron I Corp., 33 F.3d 1088, 1102 (9th Cir. 1994); FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1110-13 (9th Cir. 1982). FTC v. Va. Homes Mfg. Corp., 509 F. Supp. 51, 53-54 (D. Md.) (ruling that Section 13(b) was appropriate to remedy violations of the Magnuson-Moss Warranty Act), aff'd, 661 F.2d 920 (4th Cir. 1981); FTC v. Mylan Laboratories, Inc., 62 F. Supp. 2d 25, 36-7 (D.D.C. 1999); FTC v. Brown & Williamson Tobacco Corp., 580 F. Supp. 981, 982 (D.D.C. 1983) (applying Section 13(b) to enjoin deceptive tar claims for cigarettes), aff'd in part and remanded in part, 778 F.2d 35 (D.C. Cir. 1985). Page 10 of 24 TRO Memorandum
7

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effectuate final relief, including a TRO, an asset freeze (including a freeze on individual assets), appointment of a receiver, expedited discovery, a preliminary injunction, and other necessary remedies. Pantron I, 33 F.3d at 1102 (holding that section 13(b) "gives the federal courts broad authority to fashion appropriate remedies for violations of the [FTC] Act"); Singer, Inc., 668 F.2d at 1113 ("We hold that Congress, when it gave the district court authority to grant a permanent injunction against violations of any provisions of law enforced by the Commission, also gave the district court authority to grant any ancillary relief necessary to accomplish complete justice . . . ."). Numerous courts in the Ninth Circuit have granted or affirmed injunctive relief similar to that requested here. See, e.g., FTC v. Affordable Media, LLC, 179 F.3d 1228, 1232-33 (9th Cir. 1999) (ex parte TRO, preliminary injunction, asset freeze, accounting); FTC v. Publ'g Clearing House, Inc., 104 F.3d 1168, 1170 (9th Cir. 1997) (ex parte TRO, preliminary injunction); FTC v. World Wide Factors, 882 F.2d 344, 346 (9th Cir. 1989) (TRO, preliminary injunction, asset freeze); FTC v. Am. Nat'l Cellular, Inc., 810 F.2d 1511, 1512-14 (9th Cir. 1987) (TRO, preliminary injunction, asset freeze, appointment of receiver); Singer, 668 F.2d at 1109-13 (preliminary injunction and asset freeze). B. This Case Meets the Standard for a TRO and Preliminary Injunction

The evidence submitted by the Commission meets the standard for issuing a TRO and a preliminary injunction. To grant the Commission a preliminary injunction to enforce the FTC Act, the Court "must 1) determine the likelihood that the Commission will ultimately succeed on the merits and 2) balance the equities." Affordable Media, 179 F.3d at 1233 (quoting FTC v. Warner Communications, Inc., 742 F.2d 1156, 1160 (9th Cir. 1984)). See also World Wide Factors, 882 F.2d at 346 (holding same). The Court need not consider the same factors as it would in a motion for injunctive relief among private litigants. United States v. Odessa Union Warehouse Co-op, 833 F.2d 172, 174-75 (9th Cir. 1987). See also Affordable Media, 179 F.3d at 1233 (holding the Commission has "a lighter burden . . . than that imposed on private litigants") (quoting Warner, 742 TRO Memorandum Page 11 of 24

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F.2d at 1159). Unlike private litigants, "the Commission need not show irreparable harm." Id. "Harm to the public interest is presumed." World Wide Factors, 882 F.2d at 346. Moreover, in balancing the equities, the public interest should receive greater weight than private interests. Id. at 347.8 As discussed herein, the evidence submitted by the Commission shows both that it is likely to prevail on the merits and that the equities weigh in its favor. 1. Law Violations a. Misrepresentations Under the FTC Act

"Free" Trial Offer. Section 5(a) of the FTC Act prohibits deceptive acts and practices in or affecting commerce. To prevail under Section 5(a), the FTC must demonstrate that "first, there is a representation, omission, or practice that, second, is likely to mislead consumers acting reasonably under the circumstances, and third, the representation, omission, or practice is material." Pantron I Corp., 33 F.3d at 1095 (citing In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 164-65 (1984)); FTC v. Gill, 265 F.3d 944, 950 (9th Cir. 2001). As set forth below, all three of these elements are established sufficiently for the Court to grant a TRO and preliminary injunction. Defendants' various deceptions place them squarely in violation of Section 5 of the FTC Act. As the consumer declarations and other evidence discussed above demonstrate, Defendants not only omit material information from their sales pitch, but make express misrepresentations as well. They falsely tout their trial offer as free; they hide the fact that taking advantage of the trial offer will result in automatic enrollment in an expensive monthly continuity plan and thus charges to the consumer's credit or debit card; they fail to disclose clearly that returning unused product will be at the consumer's expense and result in a restocking fee; and worst of all, they make it virtually impossible

This is particularly true where the evidence demonstrates that a defendant's business is rooted in deception, for a "court of equity is under no duty `to protect illegitimate profits or advance business which is conducted [illegally].'" CFTC v. British Am. Commodity Options Corp., 560 F.2d 135, 143 (2d Cir. 1977) (quoting FTC v. Thomsen-King & Co., 109 F.2d 516, 519 (7th Cir. 1940)), cert. denied, 438 U.S. 905 (1978). Page 12 of 24 TRO Memorandum

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for consumers to escape the monthly charges for a product many consumers never signed up to receive in the first place. Consumers may lose close to $100 or more before they figure out what Defendants have done and what can be done to stop it. Even consumers who decide to continue with the program find down the road that they are unable to exit. In addition to the financial loss, this causes great inconvenience to consumers who must cancel their credit or debit cards to avoid further charges. No doubt, Defendants will argue that they do disclose their continuity plan and their restocking fee, which is what they often tell the BBB when consumers complain after the fact. Benning Ex. 1 at 1-3. As the Ninth Circuit recently observed, however, "A solicitation may be likely to mislead by virtue of the net impression it creates even though the solicitation also contains truthful disclosures." FTC v. Cyberspace.com, 453 F.3d 1196, 1200 (9th Cir. 2006). Defendants' websites create the impression that they are offering a no-strings attached, free trial offer. Inconspicuous fine print paragraphs at the bottom of web pages and buried in separate Terms and Conditions web pages are insufficient to dispel that misrepresentation. A case the Cyberspace.com court found instructive involved a situation very similar to that presented here. In Floersheim v. FTC, 411 F.2d 874, 876-78 (9th Cir. 1969), the appearance and repetition of certain words created a deceptive impression that was not cured by a small-print disclaimer contradicting that impression. Here, the deception is not merely an impression, it is overt. The word "free" appears over and over again, and the only disclosure of a cost or condition anywhere near that word is that there will be a charge of $3.95 for shipping and handling. Kauffman Exs. A at 1, C at 1-2, D at 1. Indeed, Defendants even spell it out in large type: "Your Cost: Only $3.95." Id. (Emphasis added.) Defendants' disclosures are inadequate to dispel these express claims for numerous reasons: their placement is nowhere near the claims, the claims themselves do not alert consumers to look for disclosures, and Defendants are attempting to use disclosures to contradict express claims. Cyberspace.com 453 F.3d at 1200-01. It was reasonable for consumers to rely on Defendants' claims since these claims TRO Memorandum Page 13 of 24

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were express. Thompson Med. Co., 104 F.T.C. 648, 788-89, n. 6 (1984), aff'd on other grounds, 791 F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086 (1986). There can be no question that Defendants' misrepresentations and omissions were material to consumers. "A misleading impression created by a solicitation is material if it `involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product.'" Cyberspace.com, 453 F.3d at 1201 (quoting Cliffdale Assocs., Inc., 103 F.T.C. at 165). See also Minuteman Press, 53 F. Supp. 2d 248, 258 (E.D.N.Y. 1998) (citing same). Here, the "free" trial claim was not just implied, but was express. Express claims are presumed to be material. Pantron I Corp., 33 F.3d at 1095-96; Kraft, Inc. v. FTC, 970 F.2d 311, 322 (7th Cir. 1992), cert. denied, 507 U.S. 909 (1993). In addition, it is self-evident that consumers would view the strings attached to the supposed free trial offer as information critical to their decision as to whether to subscribe to the offer. "Information concerning prices or charges for goods or services is material . . . ." FTC v. Crescent Publ'g Group, 129 F. Supp. 2d 311 (S.D.N.Y. 2001), citing Thompson Medical, 104 F.T.C. at 816. Smoking-Cessation Claims. Section 12 of the FTC Act prohibits the dissemination of any false advertisement in order to induce the purchase of food, drugs, devises, services, or cosmetics. An advertisement is "false" if it is "misleading in a material respect." 15 U.S.C. § 55(a)(1). See also Pantron I, 33 F.3d at 1099 ("Indeed, a `false advertisement' need not even be `false'; it need only be `misleading in a material respect'"). As with Section 5(a) of the FTC Act, to prevail under Section 12, the FTC must show that there was a material representation that misled consumers acting reasonably under the circumstances. These elements are all established sufficiently to warrant a TRO and preliminary injunction. First, Defendants have made express claims that their smoking-cessation products are very effective ­ "97% success rate," "world's most effective" ­ and better than nicotine-based patches. The FTC's expert, Dr. Benowitz, has testified that, at a minimum, there is no reasonable basis for these claims, and that the claims for the patch TRO Memorandum Page 14 of 24

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containing lobelia are false. Benowitz ¶¶ 6-12. Section 12 of the FTC Act is violated if an express or implied message is false or "the advertiser lacked a reasonable basis for asserting that the message was true." Pantron I, 33 F.3d at 1096 (quoting Thompson Medical, 104 F.T.C. at 819). Second, Defendants' misrepresentations are likely to mislead reasonable consumers. False claims are inherently "likely to mislead." Thompson Med., 104 F.T.C. at 788, 818-19. Moreover, reasonable consumers have no obligation to doubt the veracity of express claims, as in this case. Third, Defendants' false claims are material. Express misrepresentations, as well as implied claims that significantly involve health or safety, are presumed to be material. Kraft, 970 F.2d at 322; Novartis Corp. v. FTC, 223 F.3d 783, 786 (D.C. Cir. 2000). Because Defendants' claims about their products' smoking-cessation ability involve "health, safety, or other areas with which the reasonable consumer would be concerned [such as] . . . . the purpose, safety, efficacy, or cost of the product . . . . [or] its durability, performance, warranties or quality," the claims are material as a matter of law. Cliffdale Assocs., 103 F.T.C. at 182-83 (FTC's Policy Statement on Deception). See also Pantron I Corp., 33 F.3d at 1095-96 (citing Cliffdale Assocs. standard with approval); Novartis, 223 F.3d at 786 (same).9 Moreover, Defendants' claims are material because they go to the core reason why smokers would decide to try these products. See Kraft, 970 F.2d at 322 (statement material if likely to affect consumers' decision to buy the product or service). Unquestionably, smoking leads to increased risk for emphysema, lung cancer, heart problems, and other serious health problems. For many smokers who want to quit, a smoking cessation product that claims a high effectiveness rate is obviously very attractive.

The subjective good faith of the advertiser is not a valid defense to an enforcement action brought under Section 5; instead, the FTC need merely establish that "the representations, omissions, or practices would likely mislead consumers, acting reasonably, to their detriment." See FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020, 1029 (7th Cir. 1988). Page 15 of 24 TRO Memorandum

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Not only is Defendants' deception likely to mislead consumers, but it may also pose a significant health risk to consumers in that consumers may forgo more effective smoking-cessation products to their detriment. As the FTC's nicotine-addiction expert has explained, smoking-cessation products exist (like the recently introduced Chantix prescription drug) that offer some real help to smokers. Benowitz ¶ 9. Defendants' actions here slowed down smokers from getting real help to try to quit smoking. Carpenter ¶ 9. Accordingly, the Commission has demonstrated a likelihood of success on the merits, and a TRO and preliminary injunction prohibiting Defendants' false or misleading advertisements for their smoking-cessation products are warranted. b. Unfair Practices Under the FTC Act

Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), makes unfair acts or practices unlawful. An unfair act or practice is one that causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers themselves and that is not outweighed by countervailing benefits either to consumers or competition. 15 U.S.C. § 45(n). Consumers provide Defendants with their credit or debit card account numbers to pay the $3.95 shipping and handling fee for the trial product. Kaufman Exs. F at 1, G at 2. Defendants then use these same account numbers to assess dramatically higher charges for the continuity plan that, as discussed above, is inadequately disclosed. See supra Section III. B. I. Consumers unable to cancel the plan due to Defendants' refusal to communicate with them are charged despite their attempts to cancel. See supra Section III. B. 2. These consumers did not authorize the charges and, thus, were not able to avoid them. See supra Section III. B. 2.; see, e.g., Higby Ex. 1 at 1-2. Moreover, in many cases, Defendants made it impossible for consumers to avoid them. See supra at Section III. B. 2. Since there can be no countervailing benefits associated with Defendants' behavior, the assessment of these charges is a classic case of an unfair practice under the FTC Act. TRO Memorandum Page 16 of 24

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c.

Violations of the Electronic Fund Transfer Act

Because these charges were not authorized, those assessed using a debit card account number violate the Electronic Fund Transfer Act ("EFTA"). Section 907(a) of the EFTA, 15 U.S.C. § 1693e(a), provides that a "preauthorized electronic fund transfer from a consumer's account may be authorized by the consumer only in writing, and a copy of such authorization shall be provided to the consumer when made." Section 205.10(b) of Regulation E, 12 C.F.R. § 205.10(b), the regulation issued by the Federal Reserve Board to implement EFTA, similarly provides that "[p]reauthorized electronic fund transfers from a consumer's account may be authorized only by a writing signed or similarly authenticated by the consumer. The person that obtains the authorization shall provide a copy to the consumer." Defendants assessed these charges without obtaining written authorization from consumers and thus violated EFTA. 2. The Individual Defendants are Liable for Injunctive and Monetary Relief

The Commission is also likely to succeed in demonstrating that the individual Defendants are liable for the business Defendants' deceptive practices. An individual may be held liable under the FTCA for corporate practices if the FTC first can prove the corporate practices were misrepresentations or omissions of a kind usually relied on by reasonably prudent persons and that consumer injury resulted. FTC v. Kitco of Nevada, Inc., 612 F. Supp. 1282 (D.Minn. 1985). Once corporate liability is established, the FTC must show that the individual defendants participated directly in the practices or acts or had authority to control them. Kitco, 612 F. Supp. at 1292; FTC v. H.N. Singer, Inc., 1982-83 Trade Cas. (CCH) P. 65,011 at 70,618-19 (N.D. Cal. 1982). Authority to control the company can be evidenced by active involvement in business affairs and the making of corporate policy, including assuming the duties of a corporate officer. Kitco, 612 F. Supp. at 1292; see e.g., Consumer Sales Corp. v. FTC, 198 F.2d 404, 408 (2d Cir. 1952), cert. denied, 344 U.S. 912, 73 S.Ct. 335, 97 L.Ed. 703 (1953).

FTC v. Amy Travel Service, 875 F.2d 564, 573 (7th Cir.), cert. denied, 493 U.S. 954 (1989). As discussed above, NextClick has engaged in misrepresentations that were reasonably relied upon by consumers and which caused consumer injury. Thus, the first requirement for demonstrating individual liability is met. TRO Memorandum Page 17 of 24

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As for the second requirement, both individual defendants are in positions to exercise control of NextClick. Kenneth Chan is the CEO of NextClick, and Albert Chen is its president. They are the only members of the NextClick limited liability company. See supra, Section II. A. 1. Obviously, this is a closely-held company with these two at the helm. To obtain restitution from an individual for corporate misconduct, the FTC must also show that an individual had knowledge of the deception. Publ'g Clearing House, 104 F.3d at 1171. Knowledge can be demonstrated by showing actual knowledge of material misrepresentations, reckless indifference to the truth or falsity of the misrepresentation, or an awareness of a high probability of fraud along with an intentional avoidance of the truth; the Commission need not show intent to defraud. Id. The "degree of participation in business affairs is probative of knowledge." Amy Travel, 875 F.2d at 574. NextClick's website describes Kenneth Chan as "responsible for the overall vision, strategy, and direction of the company," and states that Albert Chen's expertise "is in marketing, product development, sales management and business development for software and systems companies." Kauffman Ex. L at 2. These descriptions admit that these individuals are responsible for setting the direction of the company. It is highly likely, therefore, that they had a hand in crafting, or at least approving, the language on the websites that is at the heart of the promotions for the smoking-cessation and skin products. It also seems likely that they would be aware of the scores of consumer complaints forwarded to the company by the Better Business Bureau, the BBB's request for modification of some of NextClick's advertising, the failure of NextClick to respond to that request, and the subsequent failure of NextClick to address additional complaints forwarded by the BBB, Vander Meeden ¶ 6, since these sorts of interactions with an entity like the BBB would be significant to any business, particularly a closely-held business such as NextClick. These factors provide strong indications of "knowledge," as defined above, by the individual defendants that consumers were being misled by TRO Memorandum Page 18 of 24

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NextClick's website. Moreover, a very egregious aspect of the matter at issue is the carefully constructed scheme to make it impossible for consumers to contact the company to cancel the continuity plan in which they became unwittingly enrolled. The notion that the two individuals running this company were not aware of and, indeed, responsible for this scheme defies credulity. At a minimum, Defendants Chan and Chen would have to be intentionally avoiding the truth not to have that awareness. Such intentional avoidance satisfies the knowledge requirement for holding an individual liable. 3. The Equities Weigh in Favor of Granting Injunctive Relief

Once the FTC has shown a likelihood of success on the merits, the Court must balance the equities, assigning greater weight to the public interest than to Defendants' private concerns in determining whether to grant injunctive relief. World Wide Factors, 882 F.2d at 347; Warner Communications, 742 F.2d at 1165 ("Although private equities may be considered, public equities receive far greater weight."). See also World Travel, 861 F.2d at 1030. The equities strongly support immediate injunctive relief. As noted above, the public equities in favor of halting law violations are much stronger than the private equities, especially where, as here, the activities are deceptive. The evidence, discussed below, demonstrates that Defendants are still causing injury through their deceptive trial offer and product claims. Even in the absence of such evidence, their prior violations give rise to an "inference . . . that future violations are likely to occur." Odessa, 833 F.2d at 176. In spite of receiving numerous consumer complaints forwarded by the BBB, Vander Meeden Ex. C, Defendants continue to tout the "free" nature of the trial offer of their smoking-cessation products. Kauffman Exs. DD at 2, EE at 1, FF at 2, GG at 2. The few changes Defendants have made in their websites do not cure their deceptions. For example, Defendants have altered their smoking-cessation product website to include at the bottom of the first page a disclosure about the automatic continuity plan enrollment and restocking fee. This language, however, is buried in a small-print paragraph of TRO Memorandum Page 19 of 24

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legalistic caveats, despite the fact that this information is very material to consumers. The emphasis everywhere continues to be on the word "free," and the website continues to proclaim, "Your Cost: Only $3.95." Kauffman Ex. DD at 2. Accordingly, the alteration still fails to cure the net impression of the website, which is that the product trial is a no-strings attached, free offer. "A solicitation may be likely to mislead by virtue of the net impression it creates even though the solicitation also contains truthful disclosures." Cyberspace.com, 453 F.3d at 1200. Moreover, the true nature of Defendants' scheme is exposed by their failure to respond to consumers attempting to extricate themselves from the continuity plan web in which they have been ensnared. This practice has spanned too long a period of time for it to be a mistake or a mere operational problem. Because Defendants are on notice that consumers have been deceived and harmed by their practices, yet have continued to maintain a deceptive website and ignore consumer attempts to cancel, it is likely that, without action from this Court, Defendants will continue to mislead consumers. The public interest in an injunction is therefore high. As to Defendants' interests, the FTC's proposed temporary restraining order restrains Defendants only from engaging in this illegal conduct, and protects assets from dissipation. Such a restriction does not work an undue hardship on Defendants, for they have no legitimate interest in persisting with conduct that deceives consumers and violates federal law. See World Wide Factors, 882 F.2d at 347 (upholding district court finding of "no oppressive hardship to defendants in requiring them to comply with the FTC Act, refrain from fraudulent representation or preserve their assets from dissipation or concealment"). C. A TRO with an Asset Freeze, an Accounting, Document Preservation, the Appointment of a Receiver, Expedited Discovery, and Immediate Access to Defendants' Business Premises, is Necessary for Effective Final Relief 1. An Asset Freeze is Necessary to Preserve the Possibility of Effective Final Relief

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As part of the final recovery in this case, the Commission seeks redress for the TRO Memorandum Page 20 of 24

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consumers who were defrauded by Defendants' misrepresentations. To preserve the possibility of such relief, and to ensure that funds do not disappear during the course of this litigation, the Commission requests that this Court order a temporary freeze of Defendants' assets. A district court's authority to enter orders preserving Defendants' assets is ancillary to its equitable authority to order consumer redress. Singer, 668 F.2d at 1113; Gem Merch., 87 F.3d 466, 468-69 (11th Cir. 1996). A court may impose an asset freeze based on the mere possibility of dissipation of assets. Fed. Sav. & Loan Ins. Corp. v. Sahni, 868 F.2d 1096, 1097 (9th Cir. 1989).10 That possibility is present where, as here, Defendants have engaged in pervasive fraudulent activity. See Publ'g Clearing House, 104 F.3d at 1171; Singer, 668 F.2d at 1113; SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1106 (2d Cir. 1972). In this case, freezing Defendants' assets is essential to prevent their dissipation or waste of assets during the pendency of this litigation. Defendants' systematic deception provides them with the motive and the opportunity to conceal and dissipate assets. Indeed, Defendants' contact with consumers consists not only of deceptive ads designed to extract money from consumers, but a course of conduct clearly designed to frustrate consumers' ability to avoid having unauthorized charges billed to their credit or debit card accounts. Any hardship on Defendants caused by the freezing of assets and related equitable relief would be temporary, and is greatly outweighed by the public's interest in preserving assets obtained through Defendants' fraud. 2. The Appointment of a Temporary Receiver Is Essential for Effective Final Relief

As another means to maintain the status quo, Plaintiff seeks the appointment of a

In Sahni, the Ninth Circuit reversed a district court's denial of an asset freeze where the district court had required a showing that asset dissipation was not only possible but likely. 868 F.2d at 1097. The court held that "[s]o long as the district court continued to believe that FSLIC was likely to succeed on the merits, the court should only have required FSLIC to show a possibility of dissipation of assets." Id. Requiring a showing of a "likelihood" of dissipation "placed an unnecessarily heavy burden on FSLIC." Id. Page 21 of 24 TRO Memorandum

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temporary receiver, who will locate and preserve corporate assets and records to obviate the threat of destruction, dissipation, or secretion. A temporary receiver is appropriate "where necessary to prevent the dissipation of a defendant's assets pending further action by the court" and to help preserve the status quo to allow an examination of the defendant's past business transactions. SEC v. Am. Bd. of Trade, Inc., 830 F.2d 431, 436 (2d Cir. 1987). The appointment of a receiver is a well-established equitable remedy available to the Court in civil enforcement proceedings for injunctive relief. See, e.g., FTC v. U.S. Oil & Gas Corp., 748 F.2d 1431, 1432 (11th Cir. 1984). See also FTC v. Five-Star Auto Club, Inc., 97 F. Supp. 2d 502, 533-34 (S.D.N.Y. 2000) (permanent injunction, ordering receiver to wind up the business affairs of corporate defendants); In re Nat'l Credit Mgmt. Group LLC, 21 F. Supp. 2d 424, 463 (D.N.J. 1998) ("[a] temporary receiver can preserve records and make an accounting that will assist in (1) identifying the assets of the Defendants, (2) determining the size and the extent of the fraud, and (3) identifying the individuals injured"). A receiver is necessary here because, as shown above, Defendants' business is permeated by fraud, and because of the demonstrable risk that their misconduct will continue. Defendants' pervasive misconduct also shows that assets would likely be dissipated absent appointment of a receiver. Given that there may be other aspects to Defendants' business,11 a receiver is necessary to untangle the Defendants' financial affairs. Because there seems to be little distinction between NextClick and Next Internet, the FTC requests that the temporary receivership extend to both companies. While NextClick and Next Internet are separate entities, there is much evidence to indicate that Next Internet and NextClick are closely intertwined. The two companies share the same office spaces. Kauffman Exs. U, V, W, X. Both individual Defendants are involved in the two companies. Kauffman Exs. L at 2, AA, MM. A recent press release on

Next Internet claims on its website to have other Internet companies up and running, in addition to NextClick. Page 22 of 24 TRO Memorandum

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NextClick's website announced that Next Internet had provided NextClick with a $4 million infusion of cash on July 4, 2007. Kauffman Ex. HH. Finally, at least four on-line job postings for the target companies have spoken interchangeably of the employer as NextClick and Next Internet. Kauffman Exs. II at 1-2, JJ at 1, KK at 1, LL at 1. The legal fiction that two companies are separate entities should not stand in the way of a remedy that comports with reality. [T]he law is clear that where a parent possesses latent power, through interlocking directorates, for example, to direct the policy of its s