Cook Islands Rule in Favor of Andersons

IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT RAROTONGA (CIVIL DIVISION)

PLAINT NO. 57/1999

BETWEEN

UNITED STATES OF AMERICA
on behalf of its agency the FEDERAL TRADE COMMISSION, Plaintiff

AND

A LIMITED, Defendant

Mr Manarangi for Plaintiff
Mr Gibson for Defendant
Date of Judgment: 4 December 2001

Judgment of Greig, CJ

This is an application to strike out the Plaintiffs action. It is made pursuant to Rule 131 of the Code of Civil Procedure of the High Court 1981 on the grounds that the proceedings disclose no reasonable cause of action. The principle foundation for this application is based on conflict of law and private international law principles and in particular how the principle or Rule, which is stated as follows, is applied:

English Courts have no jurisdiction to entertain an action:

(i) for the enforcement either directly or indirectly of a penal revenue or other public law of a foreign state;

or;

(ii) founded upon an act of state,

(Dicey & Morris on Conflict of Laws edition 1993 Rule 3 p.97.)

A secondary ground is based on s.13D of the International Trust Act 1984.

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By agreement of counsel this matter was dealt with by submissions, the last submission being filed in the Court on the 24 October 2001. The defendant is the trustee of a trust settled by two American citizens ("the settlors") by a deed of trust dated 10 July 1995. By its amended Statement of Claim dated 29 June 2001, the Plaintiff makes its claim on behalf of the US Federal Trade Commission ("FTC") established in 1914 under the provisions of the Federal Trade Commission Act. It is alleged that the FTC enforces that Act which prohibits false, fraudulent and deceptive acts of or practices in commerce, and the Telemarketing Sales Rule. That Rule prohibits deceptive or abusive telemarketing acts or practices in commerce. It is alleged that the FTC may initiate Federal or District Court proceedings to enjoin violations of the Act or the Rule and to secure equitable relief as is appropriate in seeking redress and restitution.

On 23 April 1998 the FTC commenced an action in the US District Court in Nevada against the settlors and others for contravention of the Act and the Rule. It was alleged that since May 1997 the settlors and others had made false fraudulent and misleading representations in a telemarketing scheme in which media units were sold allegedly to provide an opportunity for receipt of profits generated from supposed and potential sales of some products to television commercials. The scheme as a whole is described as a Ponzi scheme, named after a Charles Ponzi of Boston who in 1920 offered promissory notes which depended on the trading of international postal reply coupons. Although the underlying marketing aspect of the scheme was unsustainable, and the receipt of money continued, it seems that some payments were made to investors out of the moneys received by new investors.

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The Plaintiff alleged against the settlors that they had received a 45% commission from each investment its telemarketers procured. The bank records indicated that some $9,278,417.75 was received by way of these commissions. It was thus calculated that the total sales for which the settlors were allegedly responsible amounted to $20,618,823. It was said that was a conservative estimate but the Plaintiff sought a monetary judgment against the settlors and others concerned in that part of the scheme. Further, it is alleged that $2,250,000.00 was transferred to the settlors' trust in the Cook Islands on 2 March 2000. The District Court in Nevada entered a final order for judgment and permanent injunction against the settlors and other entities involved in that part of this Ponzi scheme. That order was upheld in the United States Court of Appeals for the 9th Circuit.

The final order for judgment and permanent injunction granted in the District Court in Nevada makes a number of findings and orders. The findings include the finding that the settlors among others had made false representations, and had engaged in deceptive acts or practices in violation of s.5(a) of the FTC Act and had violated provisions of the telemarketing rule.

The Court found that it had power to issue injunctive and other relief against violations of the FTC Act, and in the exercise of its equitable jurisdiction to award redress and restitution to remedy the injured consumers, to order disgorgement of profits resulting from defendant's unlawful acts or practices and issue other ancillary equitable relief. The Court entered a monetary judgment against the settlors and others for $20,618,623.00 with post-judgment interest "for equitable monetary relief, including but not limited to consumer redress, and for paying any attendant expenses of administering any redress fund." Any funds collected by the Commission were to be paid into a redress fund for potentially eligible consumers entitled to the fund. The order provided however as follows:

4.

"If, however, the Commission, in its sole discretion, determines that redress is wholly or partially impractical any funds not so used shall be deposited into the United States Treasury as an equitable disgorgement remedy. The enjoined defendants shall have no right to contest the manner of distribution chosen by the Commission or its designated agent."

There were then further provisions, order and injunctions for orders described as the turnover of assets and repatriation of funds overseas including in particular funds in the Cook Islands and various other injunctions and authorities to enforce compliance with the orders and the obtaining of the control over all the assets of the settlors and others.

The Plaintiff in these proceedings in the Cook Islands seeks to enforce these orders made in the United States District Court and in particular that the defendant deliver up to the Plaintiff "for redress and restitution to the settlors' defrauded investors, custody, possession and control of the assets and moneys acquired fraudulently by the settlers and disposed of to the trust together with all accumulation thereto held in custody possession and control of the defendant".

The Federal Trade Commission Act of 1914 which is titled 15 United States Code section 41 to 51, established a Commission of 5 Commissioners appointed by the President by and with the advice and consent of the Senate. It was provided that not more than three of the Commissioners were to be members of same political party. Under s.45(a) (2) the Commission is empowered to prevent persons partnerships or corporations except certain specified entities from using unfair methods or competition in or affecting commerce. The Commission was entitled to

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take proceedings if it appeared to the Commission that such a proceeding would be in the interest of the public. The jurisdiction of the Courts in granting temporary restraining orders and other orders was on the basis of the interest of the public rather than on any stricter ground such as reasonable cause. This was noted in an earlier appeal on the grant of the preliminary injunction in the United States Court of Appeals for the 9th Circuit decision of June 15 1999 No. 98-16378. This section places a lighter burden on the Commission than that imposed on private litigants by the traditional equity standard. The Commission need not show irreparable harm to obtain preliminary injunction.

The defendant claims that in this case the enforcement of the judgment and of the law of the United States will amount to the enforcement directly or indirectly of a penal or other public law of a foreign state as described in Rule 3 in Dicey and Morris. That is not a rule of statute but is, under the system adopted in that textbook, a principle which has been recognized over time in the Courts of England, Australia and New Zealand. It is I think, a principle which applies equally in the Cook Islands. In Dicey and Morris at page 101 it is said in Huntington v Attrill [1893] AC150 at 156 (PC):

"The Privy Council defined penal to include not only crimes in the strict sense, but "breaches of public law punishable by pecuniary mulct or otherwise, at the instance of the state, government, or someone representing the public", and adopting the test laid down by the United States Supreme Court "all suits in favour of the state for the recovery of pecuniary penalties for any violation of statutes for the protection of its revenue or other municipal laws, and to all judgments for such penalties.""

So in Attorney General of New Zealand v Ortiz [1984] AC1 (34-35 CA the statutory provisions in New Zealand for forfeiting historic articles illegally exported was held to be penal though not part of the Criminal code. The category of other public law referred to in the Rule is described in Dicey and Morrison p 103:

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"The expression 'other public law' refers to all those Rules (other than penal and revenue laws) which are enforced as an assertion of the authority of the central or local government."

That part of the Rule has been subject to discussion and criticism and there have been conflicting dicta in various Courts in the Commonwealth. The existence of that subrule was accepted by Davison CJ in his judgment in the High Court in Attorney General for the United Kingdom v Wellington Newspapers Limited [1988] 1NZLR 129. In the New Zealand Court of Appeal the issue in the case was decided on the basis that a secret service agent's duty of secrecy arose from the relationship of employment and that the Rule was not designated to meet the sort of problems that arises out of the international imperatives of secrecy. There is no rejection of the Rule so far as it might apply to public laws. But the Court refused to extend the Rule to the particular circumstances. Cooke P who gave the leading judgment in the Court of Appeal referred at page 174, it appears with approval, to an article by Dr F A Mann entitled, International Enforcement of Public Rights (1987 New York University Journal of International Law and Politics 604) in which he writes "that the decisive question is whether the plaintiff asserts a claim that, by its nature, involves the assertion of a sovereign right". Quoting Grotius, Dr Mann suggests that claims are capable of international enforcement, "if they arise from acts that may be done not only by the King but also by anyone else."

The application of the Rule to public laws was clearly endorsed by Lord Denning MR in Attorney General of New Zealand v Ortiz. The Rule was also endorsed by Kirby P

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in Attorney General for the United Kingdom v Heinemann Publishers Australia Pty Ltd (1987) 10 NSWLR 86 and by a majority in the High Court of Australia in HMAG v Heinemann Publishers 1988 165 CLR 30.

The explanation of the Rule is set out by Lord Denning in the Ortiz case (1982) 3 All ER 432 at 457 as follows:

"Applied to our present problem a class of laws which will be enforced are those laws which are an exercise by the sovereign government of its sovereign authority over problems in this territory and over its subjects where ever they may be. But other laws will not be enforced. By international law every sovereign state has no sovereignty beyond its own frontier. The Courts of other countries will not allow it to go beyond the bounds. They will not enforce any of its laws which purport to exercise sovereignty beyond the limits of its authority."

In the leading judgment in the High Court of Australia in HMAG v Heinemann there is an extensive discussion as to the explanation of the principle as it applies to the enforcement of public laws. At page 43 there is a quotation from Judge Leonard Hand in Moore v Mitchell 1929 30F. (2d) 600 at page 604.

"To pass upon the provisions for the public order of another state is, or at any rate should be, beyond the powers of a Court: it involves the relations between the states themselves, with which Courts are incompetent to deal and which are entrusted to other authorities. It may commit the domestic state to a position which will seriously embarrass its neighbor....... No Court is to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper."

And later at page 46 the judgment of the High Court goes on:

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"For the purposes of the principle of unenforceability under consideration the action is to be characterized by reference to the substance of the interest sought to be enforced, rather than the form of the action:..., Thus to concentrate on the private law character of the causes of action or to grounds for relief pleaded by the appellant is to overlook the appellant's central interest in bringing the action. That interest is to ensure the continued secrecy of the operations of the British Security Service by enjoining disclosure of information relating to those operations and by discouraging revelations by others."

I accept that those principles and observations and explanations apply here. The FTC Act is a regulatory provision to prevent and control fraudulent and other trading which is contrary to the Act and other Acts. Wide powers are given to the Commission and to the Courts to enjoin conduct which is said to be contrary to the Act or Rules and to take steps for the enforcement of these regulations and preventative measures both personally and otherwise throughout the world. Power is given to give judgments in moneys which may exceed any appropriate redress and which in the end may in part or whole become part of the general public funds of the US Treasury.

The action taken here by the Plaintiff is to enforce these regulatory rights and powers. They are or have a flavour of punishment and I conclude that these are, at least in part, penal provisions and fall within the relevant principle. It is also a public law which is sought to be enforced by the state or the sovereign alone for regulatory purposes and is one which ought not to be enforced here.

As I mentioned at the outset the defendant also claims the benefit of s.13D of the International Trust Act. However it did not make any claim other than that applied to the enforcement directly or indirectly of the penal or public laws of the foreign

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state. It is not therefore a ground which is separate or independent of the principal ground already dealt with.

In the result then there will be an order striking out the claim of the Plaintiff. Costs will follow the event. I will receive submissions from the counsel as to the quantum.

CHIEF JUSTICE

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