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Corporation for Character v. Federal Trade Commission

United States District Court, D. Utah, Central Division

April 22, 2016

FEDERAL TRADE COMMISSION, Defendant. UNITED STATES OF AMERICA, Plaintiff and Counter-Defendant



         This matter is before the court on the motion of Plaintiff/Counterclaim-Defendants Feature Films for Families, Inc., Corporations for Character, L.C., Family Films of Utah, Inc., and Forrest Sandusky Baker, III (collectively, "Family Films") for an order sanctioning the Federal Trade Commission (the "FTC") for failure to participate in good faith in a court-ordered mediation. (Diet. No. 180.) The motion is supported by the declaration of counsel who participated on behalf of Family Films and supporting exhibits and transcripts. The FTC has filed an opposition memorandum as well as supporting declarations and exhibits. The court participated in the mediation, including a two-day mediation session and subsequent telephone conferences. The court has carefully reviewed the law and the supporting and opposing materials. For the reasons stated hereafter, the court GRANTS the motion and imposes sanctions against the FTC.


         On July 10, 2015, this matter was referred by Judge Robert J. Shelby to Judge Clark Waddoups (the "Mediator" when acting in that role) for mediation upon the joint request of Family Films and the FTC. Counsel for Family Films represented to Judge Shelby that tire parties had gone through "extensive discovery" and had had a "full and fair opportunity to understand what the facts are." Counsel for the FTC stated that counsel for Family Films had "set it out very well" and stated "both sides feel that this should be an appropriate time for mediation." (Diet. No. 182, p 3-4.) At this time, discovery in the case was closed and Judge Shelby had granted summary judgment for the FTC on several issues and defined the issues remaining for trial.

         A pre-mediation conference was held before the Mediator on August 10, 2015 to discuss the procedures for mediation, the exchange of position statements, and other requirements for a successful mediation. Daniel McInnis and Russell Harris participated on behalf of Family Films and (XXXXX) and (XXXXX) participated for the FTC. The parties agreed on dates for the mediation, agreed to exchange mediation statements, and requested a two-day session, to which the Mediator agreed. At the Mediator's suggestion, the parties also agreed that at the mediation, each side would initially present a 20 to 30-minute opening statement so that the parties could hear the way the case may ultimately be presented to the jury. The Mediator also discussed the requirement that each side have a person present with authority to settle the case. Counsel for Family Films stated that Family Films would have its in-house counsel, its CFO, and an operational person present, and that the CEO would be available by telephone. Counsel for the FTC stated that any settlement would be required to be approved by the Commission, but when pressed by the Mediator to ensure that whoever was present was in a position to make settlement offers that would be recommended to the Commission, counsel for the FTC stated they would be present and would be able to "participate in that manner." The Mediator further emphasized the requirement saying, "I would require ... that we just have somebody there that has sufficient experience and knowledge to be able to say this is a recommendation that we can take to the commission and support." (XXXXX) again confirmed his understanding of the requirement, stating that "myself and (XXXXX) will be present and we will be able to participate in that manner." (Diet. No. 200, p. 17.) Both of these points later became issues during the mediation.

         During the pre-mediation conference, counsel for Family Films stated that the FTC had requested some financial information that Family Films said it would produce prior to the mediation. Counsel for the FTC acknowledged that this financial information was the only outstanding issue and if the FTC received the information, they had no problem with the dates scheduled for the mediation. The mediation was scheduled for September 16 and 17, 2015.

         On August 12, 2015, (XXXXX) emailed Mr. McInnis a proposed mediation scheduling order and attached the FTC's financial statement forms. The proposed order was never entered. The financial forms asked for substantial and detailed financial information, but neither the email nor the proposed order specified who was to fill out the information requested in the forms. (McInnis Decl. March 15, 2016, Ex. 2.) The next day, August 13, Mr. McInnis responded that he had spoken to (XXXXX) prior to the parties' joint request that mediation be ordered and told him that

[what] I thought I could do was provide pre-existing financials for the companies as well as a similar pre-existing financial summary for Forrest [the CEO and owner]. The companies, as you know, have audited financial statements. I also specifically mentioned that trying to get the usual FTC disclosures for fraudsters would be counterproductive for settlement and I didn't want to go to my client to ask them to consider filling them out. I understood from (XXXXX)] that was fine. I am in the process of getting the financials right now and will provide it tomorrow. But I didn't want there to be any confusion or disappointment on your part regarding the FTC forms.

         (McInnis Decl. March 15, 2016, Ex. 4.)

         Family Films sent the promised financial to (XXXXX) (XXXXX) the next day, August 14, 2015. They included Mr. Baker's Personal Financial Statement as of December 2014, the Feature Films for Families Consolidated Audited Financial Statements for FYE July 31, 2014, Feature Films for Families Interim Financials June 2015, Family Films of Utah Interim Financials June 2015, and Corporations for Character Interim Financials June 2015. (McInnis Decl. March 15, 2016, Ex. 8.)

         (XXXXX) replied on August 21, 2015 that "we've determined that the materials are not sufficient." (McInnis Decl., March 15, 2016, Ex. 9.) He requested a time when counsel could discuss the issue further. Mr. McInnis responded that the financials were the most current personal and corporate financials available, and that updated and audited financials would not be completed until close of the fiscal year. (McInnis Decl., March 15, 2016, Ex. 10.) Apparently, the status of the financials produced remained unchanged during the next month pending the mediation. FTC did not notify either the Mediator or counsel for Family Films that mediation would not be fruitful given the status of the financials produced. In addition, each party provided the Mediator with mediation statements. Family Films' statement articulated what it believed to be a reasonable basis for settlement and identified issues it believed needed to be addressed. The FTC's statement asserted its claims against Family Films, but did not identify any ideas as to how the issues could be resolved.

         The mediation conference proceeded as scheduled on September 16, 2015. As they had committed, Family Films, represented by Mr. McInnis, appeared along with its in-house counsel, the CFO, and an operations manager. (XXXXX) appeared alone for the FTC. He stated that (XXXXX) was unable to attend because of an urgent criminal matter. Neither (XXXXX) (XXXXX) nor (XXXXX) had given prior notice to opposing counsel or the court (XXXXX) would not be present. (XXXXX) refused to provide any further details. Mr. McInnis objected strongly to the absence of (XXXXX) as (XXXXX) had been the counsel who indicated there was a reasonable basis to believe a settlement could be reached.

         Nevertheless, Family Films agreed to proceed and make an effort to resolve the case. In a combined session, the Mediator requested each of the parties to present its opening position statement. (XXXXX) declined, saying he had not prepared a statement on behalf of the FTC. Instead, (XXXXX) stated that he was prepared to discuss only the amount of a civil penalty and that the starting point was $ 16, 000 per violation, which would result in a penalty of $2, 7 trillion. (McInnis Decl. March 15, 2016, ¶¶ 32, 36 and Ex. 11.) Notwithstanding this refusal, Mr. McInnis gave an approximately 30-minute statement explaining Family Films' position, weaknesses he perceived in the FTC's case, and a basis for settlement. The parties then separated and the Mediator caucused first with (XXXXX) The discussion soon focused on (XXXXX) understanding of the financial statements and his concern that he did not have sufficient financial information. It became evident that (XXXXX) understanding of Family Films' financial condition was significantly different than what Family Films claimed. After discussion with each side, and the agreement of Family Films, the Mediator suggested that Family Films' CFO go through the audited financial statements with (XXXXX). explain the ability of the companies to pay a penalty, and answer any questions. The parties then met together, and the CFO went through the consolidated financial statements in detail and explained to (XXXXX) the companies' financial condition. During the course of the discussion, it became evident that (XXXXX) either had not prepared well for the mediation or lacked even a basic understanding of financial statements. In a separate session the Mediator expressed significant disappointment in (XXXXX) apparent lack of preparation and his unwillingness to engage in meaningful discussion of any avenue to resolve the dispute. The mediation session then adjourned with a request from the Mediator for the parties to review their positions and to come the next morning prepared to discuss proposals to settle the case.

         The next morning, counsel for Family Films presented his additional ideas for how the case may be resolved and suggested a settlement proposal. (XXXXX) complained that Family Films and Mr. Baker had not provided sufficient financial information for the FTC to make a decision about what an appropriate civil penalty may be. (XXXXX) (XXXXX) repeated that it was the FTC's policy to seek an appropriate civil penalty and injunction that would not be so severe as to put Family Films out of business. When requested by the Mediator that he make a proposal for settlement, (XXXXX) responded that only the FTC could approve a settlement. The Mediator asked whether there was any proposal he could make that he would recommend to the FTC as a reasonable settlement. (XXXXX) responded that he was not prepared with any proposal that he would recommend to the FTC. It quickly became apparent that (XXXXX) was not in a position to advance negotiations for a settlement and that no further progress could be made in the mediation. The mediation adjourned. Family Films committed to provide (XXXXX) and the FTC with additional financial information, and the parties committed to a further conference call with the Mediator, which was held on September 30, 2015. At the September 30, 2015 conference call, the parties tentatively scheduled a further mediation session for October 14, 2015.

         On September 22, 2015, (XXXXX) requested that Mr. McInnis provide information on assets and liabilities for the Family Films companies and information on Mr. Baker's assets and liabilities for 2015. (McInnis Decl. March 15, 2016, Ex. 12.) On September 28, 2015, Mr. McInnis sent (XXXXX) additional unaudited financial information and offered a telephone conference to explain and answer any questions about the materials. Over the next several days the parties exchanged emails, in which (XXXXX) complained that the information was still insufficient and that unless supplemental information was provided and clarified, "we believe that an additional round of mediation would not be worthwhile." (McInnis Decl. March 15, 2016, Ex, 13-15.) On September 30, Mr. McInnis provided (XXXXX) (XXXXX) with the additional information requested, which was unaudited and as it then currently existed in the company's records. Mr. McInnis also reiterated the offer for a telephone conference, in which Family Films would explain and answer any questions about the financial statements. (McInnis Decl. March 15, 2016, Ex. 16.) The next day, (XXXXX) communicated to Mr. McInnis that the FTC specifically had questions about Mr. Baker's finances, and (XXXXX) and Mr. McInnis continued to exchange emails attempting to set a time for a conference call to discuss the financial materials provided. (McInnis Decl. March 15, 2016, Ex. 17.) On October 2, 2015, (XXXXX) sent Mr. McInnis an email with an attached list of information the "FTC feels it needs to review before it can enter a settlement agreement." The attached list included twenty-seven categories of requested information, many of which were requests for documents for several prior years that had already been provided. For example, the first two categories included a request for tax returns for Mr. Baker and for the companies for years 2012 through 2014. (McInnis Decl. March 15, 2016, Ex. 18.) Mr. McInnis responded by asking if (XXXXX) really wanted him to ask Family Films to provide the information and stated that "this is not the way to try to settle a case in good faith." (McInnis Decl. March 15, 2016, Ex. 19.) Nevertheless, a conference call between the parties was held on October 5, during ...

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