AE - FTC v. Kuykendall (6-10-2004)

[Riser Adkisson LLP]

Federal Trade Commission v. H.G. Kuykendall, Sr.,
Nos. 02-6101 and, 02-6102 (10th Cir. 06/10/2004)

FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. H. G. KUYKENDALL, SR., individually and as an
officer of National Marketing Service, Inc., NPC Corporation of the Midwest, Inc. and Magazine
Club Billing Service, Inc.; C. H. KUYKENDALL; DIVERSIFIED MARKETING SERVICE CORP., an Oklahoma
corporation; NATIONAL MARKETING SERVICE, INC., an Oklahoma corporation; NPC CORPORATION
OF THE MIDWEST, INC., an Oklahoma corporation; H. G. KUYKENDALL, JR.; MAGAZINE CLUB
BILLING SERVICE, INC., an Oklahoma corporation, Defendants-Appellants.

Nos. 02-6101 and, 02-6102

UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT

June 10, 2004, Filed

DISPOSITION: Vacated, reversed in part, and remanded.

COUNSEL: Gregory J. Kerwin, Gibson, Dunn & Crutcher, LLP (Taggart Hansen and Michael L. Denger,
Gibson, Dunn & Crutcher, LLP, Washington, D.C.; Andrew W. Lester and Susan B. Loving, Lester,
Loving & Davies, P.C., with him on the briefs), Denver, Colorado for Defendants-Appellants H.G.
Kuykendall, Sr. and C.H. Kuykendall.

Walter H. Sargent, Walter H. Sargent, a professional corporation (Stephen G. Solomon and George
W. Velotta II, Derryberry, Quigley, Solomon & Naifeh, Oklahoma City, Oklahoma, with him on the
briefs), Colorado Springs, Colorado, for Defendants-Appellants H.G. Kuykendall, Jr., Diversified
Marketing Services Corp., National Marketing Service, Inc., NPC Corporation of the Midwest, Inc.,
and Magazine Club Billing Service, Inc.

John F. Daly, Deputy General Counsel for Litigation, Federal Trade Commission (William E.
Kovacic, General Counsel, Michele Arington, Attorney, Gary L. Ivens and S. Brian Huseman, Of
Counsel, with him on the briefs), Washington, D.C., for Plaintiff-Appellee.

JUDGES: Before TACHA, Chief Judge, SEYMOUR, EBEL, KELLY, BRISCOE, LUCERO, MURPHY, HARTZ, [*2]
O'BRIEN, McCONNELL, and TYMKOVICH, Circuit Judges.

OPINIONBY: TYMKOVICH

OPINION: TYMKOVICH, Circuit Judge.

On January 28, 2002, the Federal Trade Commission ("FTC" or "Commission") sought $ 51 million in
sanctions and a contempt order against the defendant telemarketers, permanently banning them from
the magazine sales business. The district court held an evidentiary hearing twenty-eight days
later. After the hearing, the court found the defendants in contempt of a prior injunctive order
and imposed $ 39 million in monetary sanctions against them jointly and severally.

On appeal, a panel of this court affirmed the district court's judgment except for its
determination of the amount of monetary sanctions and remanded the case to the district court for
a jury trial to determine the appropriate measure of sanctions. See Federal Trade Commission v.
Kuykendall, 312 F.3d 1329 (10th Cir. 2002) ("Panel Opinion"). We granted rehearing to consider
whether the panel correctly interpreted Supreme Court and Tenth Circuit precedent in ordering a
limited jury trial on remand, as well as to examine several corollary issues related to
individual liability and the procedures required [*3] in contempt actions. n1

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n1 On rehearing en banc we asked the parties to brief the following:1) May a person be
effectively prohibited by the court from resigning his position as an officer or director because
he was a signatory to an original consent decree?

2) If a limited remand is ordered in this civil contempt case to determine only the amount of
consumer injury caused by Appellant's contumacious conduct (damages), (a) must that issue be
tried to a jury? and (b) was a jury timely and properly demanded?

3) If a jury trial is required in this civil contempt case can its consideration be limited to
damages or must it be permitted to consider all issues?

4) Must damages be proved by clear and convincing evidence or merely by a greater weight of the
evidence?Order, April 8, 2003.

As the remainder of this opinion will make clear, our disposition of some of the threshold issues
involved makes it unnecessary to address each of these questions.

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On rehearing, we agree with the panel [*4] and the district court that the underlying proceedings
were correctly classified as civil contempt proceedings, but we hold that the panel erred in
requiring that damages be proven on remand by clear and convincing evidence before a jury. We
also conclude that the district court erred in finding certain individual defendants liable and
in failing to adequately explain its determination of damages. We therefore vacate the Panel
Opinion, reverse the judgment of the district court in part, and remand the case to the district
court for additional proceedings in accord with this opinion.

I. BACKGROUND

This case arises out of a complaint the FTC filed in 1996. The complaint alleged that the
defendants' telemarketing of magazine subscriptions involved persistent deceptive and misleading
practices in violation of § 5 of the Federal Trade Commission Act ("FTC Act"). See 15 U.S.C. § 45
(2000). The FTC sued the owners of the business, H.G. Kuykendall, Sr. and C.H. Kuykendall
(together, the "Senior Kuykendalls" or "Seniors") and H.G. Kuykendall, Jr., both as individuals
and as officers of the corporate defendants--Diversified Marketing Service Corp. ("DMS");
National [*5] Marketing Service, Inc.; NPC Corporation of the Midwest, Inc.; and Magazine Club
Billing Service, Inc.

In March 1996, the FTC moved for a temporary restraining order, which the district court granted.
After an evidentiary hearing, the court also granted the FTC's request for a preliminary
injunction enjoining the defendants from certain specified practices and freezing the assets of
the corporate defendants. The defendants appealed the injunction, but before that appeal was
heard the parties entered into a settlement that was eventually incorporated into a "Stipulated
Final Judgment and Order for Permanent Injunction," filed October 18, 1996 ("Permanent
Injunction"). The Permanent Injunction included twenty-four paragraphs limiting the defendants'
future business conduct. The defendants also paid the FTC $ 1.5 million for consumer redress.

The Senior Kuykendalls and H.G. Kuykendall, Jr., executed the Permanent Injunction both as
individuals and as officers of the corporate defendants n2 and signed separate acknowledgments
stating that they had read and understood the various provisions they were agreeing to follow,
including the Telemarketing Sales Rule and the Permanent Injunction [*6] itself. App. at 1042-43,
1089-91. Among other things, the signatories to the Permanent Injunction agreed (1) to be
enjoined from "misrepresenting, either orally or in writing, directly or by implication, any
material fact"; (2) to ensure that any tape recorded conversations "reflect the entirety of the
conversation" and include clear and understandable disclosures of all material terms of the
order; and (3) to be enjoined from failing to cancel "all or any portion of" a subscription at
the customer's request "where the defendants have reason to believe that any misrepresentation"
had been made. App. at 1019-47. Each Kuykendall also agreed to notify the FTC in the event "of
any change in his employment status within ten (10) days of such change." App. at 1038.

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n2 Although they signed the stipulation as officers, apparently the Senior Kuykendalls had
resigned their positions as corporate officials prior to the settlement and by that time were
only shareholders in the corporations. See App. at 164, 166, 682-83, 690.

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On January 14, 1997, as required by the Permanent Injunction, the defendants sent a compliance
report to the FTC setting forth new drafts of subscription agreements and new policies that had
been drafted to comply with the Permanent Injunction. See App. at 2045-2128. The FTC did not
respond to the compliance report and until spring 2001 had no interaction with the defendants. In
April 2001, responding to consumer complaints, the FTC sent defendants a letter
expressing "concern[] that [the defendants] may be engaged in practices that violate the
Permanent Injunction." App. at 1093-96. Later that month, FTC representatives conducted an on-
site investigation of the defendants' activities and seized copies of corporate records and
consumer complaints.

Approximately nine months later, on January 28, 2002, the FTC filed a motion to show cause why
the defendants should not be found in contempt of the Permanent Injunction and requested that the
district court award $ 51 million in contempt sanctions. All of the defendants moved to dismiss
on due process grounds, and the Senior Kuykendalls additionally moved to dismiss, claiming a lack
of personal liability. The district court denied [*8] these motions. The defendants also moved
for additional time and discovery. The district court granted the defendants a short extension of
time to file their briefs, but rejected the remainder of their motion, including their request to
conduct further discovery.

Prior to trial, the parties exchanged evidence they intended to introduce at the hearing. The
defendants deposed three employees of the FTC who had submitted declarations in support of the
motion to show cause. The defendants also had access to ten declarations filed by the FTC that
the FTC claimed were representative of the types of telemarketing practices engaged in by the
defendants.

The evidentiary hearing began twenty-eight days after the FTC filed its show cause motion. On
February 25 and 26, 2002, the FTC and the defendants both introduced evidence and put on live
witnesses. The FTC's evidence included the testimony of two customers, an investigator from the
Oklahoma Attorney General's office, the individual defendants themselves, and selected employees
of the defendants. The defendants called four witnesses, including H.G. Kuykendall, Jr., provided
their customer service records, and had the opportunity to cross-examine [*9] the FTC's
witnesses.

On March 4, 2002, the district court entered an Order for Contempt and Modifying the Permanent
Injunction. App. at 556-60. The court found the defendants had engaged in "many instances" of
conduct violating five specific paragraphs of the Permanent Injunction. It found the consumer
injury caused by this conduct was "at least $ 39,000,000" and held each of the defendants jointly
and severally liable for consumer redress in that amount. This appeal followed.

II. CLASSIFICATION OF CONTEMPT PROCEEDINGS

A.

The panel held in Part II of its opinion that this case is one of civil contempt under
International Union, United Mine Workers of America v. Bagwell, 512 U.S. 821, 129 L. Ed. 2d 642,
114 S. Ct. 2552 (1994). We agree. However, while the panel correctly stated that "having decided
that the contempt proceeding was civil in nature does not end our inquiry," see Panel Opinion,
312 F.3d at 1337, we do not agree with the panel's conclusions about Bagwell and its application
to this case. In contrast to the panel's decision, we hold that in a contempt action for
compensatory civil sanctions, a jury trial is not required and damages need only be [*10] proven
by a preponderance of the evidence.

In its opinion, the panel held this case required a departure from the traditional dichotomy
between civil contempts and criminal contempts: "With a nod to Gertrude Stein, there are civil
contempts and there are civil contempts." Id. at 1338. This was based on the panel's conclusion
that Bagwell teaches that certain "high-end" contempt actions require different procedures than
those usually followed in civil contempt actions, namely, a jury as neutral factfinder and an
enhanced burden of proof. Id. The panel went on to find that the complexity of the injunction and
the remedy imposed on the defendants here made it such a high-end case. Id. at 1340-41. The panel
then applied a sliding scale of procedural safeguards and found that while the district judge's
finding of liability could be affirmed completely, the question of "determining the amount of
consumer injury" had to be answered by a jury utilizing a clear and convincing standard of proof.
Id. at 1342.

This is where our analysis parts company from the Panel Opinion. We read Bagwell to leave in
place just two traditional types [*11] of contempt: civil contempt and criminal contempt. The
Supreme Court did not create the high-end exception with a sliding scale of procedural
requirements that the panel invokes. See 312 F.3d at 1338-39, 1342. Indeed, Bagwell explicitly
states that there are only "two forms of contempt" and their "procedural contours . . . are well
established." 512 U.S. at 827.

The Bagwell Court, in dicta, did acknowledge the difficulties inherent in the use of contempt
sanctions for "out-of-court disobedience to complex injunctions [which] often require elaborate
and reliable factfinding" and, therefore, that "the considerations justifying expedited
procedures do not pertain." Id. at 833-34; see also id. at 843 (Scalia, J., concurring) ("As the
scope of injunctions has expanded, they have lost some of the distinctive features that made
enforcement through civil process acceptable."). It may be that the Supreme Court will one day
decide that some injunctions do not "sufficiently resemble their historical namesakes to warrant
the same extraordinary means of enforcement." Id. at 844 (Scalia, J., concurring). [*12] But the
Court has thus far declined to find that modern injunctions have reached this point. See id.
The "Court of Appeals should follow the case which directly controls, leaving to [the Supreme]
Court the prerogative of overruling its own decisions." Agostini v. Felton, 521 U.S. 203, 237,
138 L. Ed. 2d 391, 117 S. Ct. 1997 (1997) (quoting Rodriguez de Quijas v. Shearson/Am. Express,
Inc., 490 U.S. 477, 484, 104 L. Ed. 2d 526, 109 S. Ct. 1917 (1989)).

Rather than revamping the longstanding criminal/civil distinction, the Court's holding in Bagwell
was simply that in a case involving noncompensatory fines amounting to "serious criminal
sanctions," courts must apply the rules of criminal contempt that afford alleged contemnors such
protections as trial by jury. See 512 U.S. at 838-39. The Court emphasized that its holding did
not impose additional burdens in cases involving compensatory, civil contempt remedies. Id. at
838 ("Our holding, however, leaves unaltered the longstanding authority of judges . . . to enter
broad compensatory awards for all contempts through civil proceedings."). Therefore, the
important question in this case, as in [*13] Bagwell, is whether the contempt of which the
defendants were accused is criminal or civil in nature.

B.

The Bagwell Court observed that "the distinguishing characteristics of civil versus criminal
contempts are somewhat less clear" than are the "procedural contours" of each type. 512 U.S. at
827. One distinguishing characteristic is, however, well established: "[A] contempt sanction is
considered civil if it 'is remedial, and for the benefit of the complainant.'" Id. (quoting
Gompers v. Bucks Stove & Range Co., 221 U.S. 418, 441, 55 L. Ed. 797, 31 S. Ct. 492 (1911)). As
the panel states, "Consumer redress is a classic remedial sanction." 312 F.3d at 1337; see also
Law v. NCAA, 134 F.3d 1438, 1443 (10th Cir. 1998) ("[A] critical feature of civil contempt is
that the punishment is remedial.") (internal quotation omitted); In re Maurice, 73 F.3d 124, 127-
28 (7th Cir. 1995) (holding that a contempt sanction "is civil in nature, if the payment is
designed to compensate for harm done"). Therefore, where the sanctions sought in contempt
proceedings are solely to be used to compensate injured consumers, the proceedings [*14] are
civil in nature. n3

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n3 The Bagwell Court's extended analysis of the rationale and complexity of the injunction before
it, and of the defendants' opportunities to purge the sanction, was necessary because that case
involved fines that were not compensatory. See 512 U.S. at 834 ("Neither party nor any court
[below] has suggested that the challenged fines are compensatory. . . . The issue before us
accordingly is limited to whether these fines, despite their non-compensatory character, are
coercive civil or criminal sanctions."). Bagwell and subsequent cases have noted that
the "dichotomy between coercive and punitive" sanctions can be analytically difficult. Id. at
829; see also Mackler Prods., Inc. v. Cohen, 146 F.3d 126, 129-30 (2d Cir. 1998). But where, as
here, the sanctions sought are not coercive, this difficult analysis is unnecessary.

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The defendants here argue that the district court's assessment of sanctions against them does not
qualify as [*15] compensatory because (1) the FTC may retain funds in excess of what it requires
to redress consumer injury and (2), notwithstanding number (1), the remedy is not for the benefit
of the FTC, but for third-party consumers. Although as we discuss further in Part V below, we
reverse certain provisions of the district court's contempt order because they allow
noncompensatory sanctions, the fact that the order included some non-compensatory relief is not
determinative of whether the proceedings were civil or criminal. That decision must of course be
made at the outset of the proceedings, at the time of the motion to show cause and before the
calculation of sanctions. In this case, the FTC's motion sought "an award of consumer redress
commensurate with the total payments consumers made to defendants since they regained control of
the business, less refunds defendants have made to consumers." App. at 42. This is clearly a
request for compensatory sanctions. The conduct of the parties and the court throughout the
proceedings similarly showed that the focus was on the amount of consumer injury that could be
demonstrated, rather than punitive or other non-compensatory sanctions.

Nor can the fact [*16] that the FTC is not seeking redress for its own losses, but for those of
consumers, remove this case from the auspices of civil contempt. We note initially that the
defendants apparently did not raise this issue below, which generally precludes our consideration
of it on appeal. See Tele-Communications, Inc. v. Comm'r, 104 F.3d 1229, 1233 (10th Cir. 1997);
In re Walker, 959 F.2d 894, 896 (10th Cir. 1992). Furthermore, civil contempt proceedings
are "considered to be a part of the action from which they stem." D. Patrick, Inc. v. Ford Motor
Co., 8 F.3d 455, 459 (7th Cir. 1993) (quoting 4 Charles A. Wright & Arthur R. Miller, Federal
Practice and Procedure § 1017, at 71 (1987)). This contempt claim stems from an original action
brought pursuant to the FTC's powers under the FTC Act. As we discuss more fully below, Congress
established the FTC at least in part "to protect consumers from economic injuries." See FTC v.
Febre, 128 F.3d 530, 536 (7th Cir. 1997). Recognizing this, courts have allowed the FTC to sue
for "the full amount lost by consumers." Id.

The defendants correctly point out that the FTC is not [*17] entitled to rely on all the
provisions of the FTC Act while also taking advantage of the simplified nature of a contempt
action. The defendants agreed in the Permanent Injunction, however, that the FTC's role would be
to remedy past allegations of consumer fraud and to pursue redress for consumers harmed by the
defendants' conduct. App. at 1020, 1036. The defendants, in agreeing to the Permanent Injunction,
knew that their ongoing business practices were subject to FTC and judicial oversight and that
traditional remedies would be available for breach of their agreement. Not allowing the FTC to
pursue contempt sanctions for the benefit of injured consumers in this case would serve neither
the intent of Congress in creating the Commission nor the intent of the parties in agreeing to a
settlement, civil damages, and ongoing regulation of the defendants' business practices through a
permanent injunction. We therefore hold that the actions taken in this case are properly
characterized as civil contempt proceedings.

C.

Though the panel concluded that the proceedings in this case were civil, it went on to find the
injunction here so complex that it fell within its "Bagwell exception" [*18] and required
heightened due process protections. In particular, the panel held that due process required the
calculation of sanctions in this case to be made by a jury applying the clear and convincing
standard of evidence. Panel Opinion, 312 F.3d at 1342.

We disagree that a jury is needed to meet due process requirements in a compensatory civil
contempt proceeding. It is well-established in our circuit that compensatory contempt actions are
appropriately held before a judge, applying a clear and convincing standard for liability and a
preponderance of the evidence standard for sanctions. See Reliance Ins. Co. v. Mast Constr. Co.,
159 F.3d 1311, 1318 (10th Cir. 1998). As explained above, nothing in Bagwell forces a contrary
conclusion, and we decline to extend Bagwell in this case. Not only is the language from Bagwell
relied on by the panel to establish a high-end exception dicta, but the panel decision would also
create an exception the district courts would have difficulty applying on many levels, including
during the determination of whether an injunction is complex or simple, when a jury is required,
and what the jury's burden of [*19] proof should be. n4 We decline to go down this path and thus
hold fast to the orthodox model for contempt actions. We therefore reiterate that in compensatory
civil contempt proceedings a jury is not required; district court judges should require proof of
contempt by clear and convincing evidence and proof of the amount of compensatory damages by a
preponderance of the evidence.

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n4 We note that none of the handful of cases cited by the panel in support of the idea of
a "Bagwell exception" actually applied the exception, each finding that its case was a simple
civil contempt action that did not require any additional procedural protections. See United
States v. Santee Sioux Tribe, 254 F.3d 728, 736 (8th Cir. 2001); NLRB v. Ironworkers Local
433,169 F.3d 1217, 1220 (9th Cir. 1999); EEOC v. Local 638, Sheet Metal Workers' Int'l Ass'n, 13
F. Supp. 2d 453, 458 (S.D.N.Y. 1998). Conversely, Cobell v. Norton, 357 U.S. App. D.C. 306, 334
F.3d 1128 (D.C. Cir. 2003), cited by the corporate defendants and H.G. Kuykendall, Jr., involved
what the court found to be criminal sanctions not related to the alleged contempt. Id. at 1146.
It therefore fell within Bagwell's definition of criminal contempt and is not applicable to this
case.

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III. NOTICE AND HEARING

The defendants claim that even under the traditional civil contempt regime, the process below was
constitutionally deficient because the district court (1) failed to give them sufficient time for
discovery, (2) did not allow them to prepare adequately for the show cause hearing, and (3) did
not permit meaningful pretrial motions to challenge the merits of the FTC's allegations or the
admissibility of certain evidence. When analyzing claims relating to a party's ability to present
its case, we apply the longstanding rule that in civil contempt proceedings all that is required
to satisfy the Due Process Clause is that defendants be given reasonable notice and an
opportunity to be heard. See Bagwell, 512 U.S. at 827.

The defendants make much of the fact that for nearly five years the FTC expressed no concern with
their telemarketing practices and then, after the April 2001 letter and visit, again went silent
for nine months to prepare its case. Meanwhile, the defendants were not apprised of any
developments and were given only a few weeks after the filing of the motion to show cause to
prepare for the hearing at which the FTC sought and received [*21] tens of millions of dollars in
sanctions. Though we find the FTC's behavior in this case questionable, we cannot agree that it
amounts to "subverting the most basic principles of the American justice system" or a denial of
due process. Opening Br. of H.G. Kuykendall, Sr., & C.H. Kuykendall at 6 (filed May 28, 2002). n5

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n5 In any event, it should be lost on no one that the inadequacies in the evidence presented by
the FTC and the paucity of the district court's fact-finding on liability and damages detailed
below may well have been cured by additional discovery by both sides and less precipitous
proceedings.

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It must also be noted that the defendants, in exchange for the dismissal of the Commission's
original claim against them, agreed to the Permanent Injunction. By agreeing to an ongoing court-
supervised Permanent Injunction prospective in nature, the defendants were aware they were
subjecting themselves to the lowered procedural protections available in the event of contempt
proceedings. See D. Patrick, 8 F.3d at 459 [*22] (quoting 11 Wright & Miller, supra, § 2960, at
590). Moreover, the Permanent Injunction did not require the FTC to provide the defendants with
any updates, nor did it limit the dates of violations or the amounts for which the FTC could seek
redress.

After the April 2001 letter, the defendants were aware the FTC was investigating whether their
practices violated the Permanent Injunction, and they had ten months to conduct their own
investigation and to consider possible defenses to any claim the FTC might have brought. They had
nearly a month to respond to the specific allegations in the show cause motion and to prepare for
the hearing.

In addition, most of the FTC's evidence consisted of the defendants' own records, to which the
defendants obviously had equal access, and the testimony of the defendants themselves, their
employees, and their customers. At the hearing, the FTC presented testimony from eight witnesses,
including the defendants and two of their employees, an investigator from the office of the
Oklahoma Attorney General, and two consumers. They also produced written evidence of hundreds of
consumer complaints made to the FTC, state attorneys general, and other agencies, [*23] such as
Better Business Bureaus, all of which had previously been forwarded to the defendants and were in
their possession.

The defendants were able to testify on their own behalf, introduce the testimony of others, cross
examine the FTC's witnesses, and introduce their business records into evidence. The defendants
also had the opportunity at any time to contact other customers to discover any mitigating
evidence, but apparently did not do so. See App. at 772. The defendants did present the testimony
of the general manager of DMS, who discussed his own investigation into consumer declarations,
including his review of tapes of calls with these consumers and records of correspondence. His
conclusion that most of the declarations were inaccurate was heard by the court. Id. at 934, 948-
65.

We certainly agree with the defendants that the Commission's conduct raises questions about its
bona fides. We cannot help but wonder why the Commission failed to inform the defendants that the
scripts submitted for review by the FTC's court-appointed receiver were misleading, see App. at
886-87, and why, if the defendants' conduct was as grievous to the public as the FTC claims, the
[*24] Commission waited five years to do anything about it. Surely the public would have been
better served had the Commission paid closer attention to the defendants' activities before 2001.
n6 We also are cognizant that the district court limited the time and scope of the evidence it
would hear and did not give the defendants as much leeway as they would have preferred.

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n6 To the extent these questions give rise to a concern that the FTC waited until it could obtain
a large monetary settlement, it should be allayed by our holding in Part V below, which makes
clear that any damages the FTC receives must be distributed to injured consumers and cannot be
retained. Similarly, our discussion of the various defendants' liability in Part IV should make
clear that although civil contempt actions do not require heightened due process requirements,
courts still must insist on sufficient evidence to establish contempt and damages.

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Nonetheless, courts in civil contempt proceedings may proceed in a "more summary fashion" than
[*25] in an "independent civil action." See D. Patrick, 8 F.3d at 459 (citing 11 Wright & Miller,
§ 2960, at 590). The defendants here agreed to that procedural structure by agreeing to the
Permanent Injunction. They had notice from April 2001 that they should investigate whether their
practices might have violated the terms of the Permanent Injunction and had time to prepare for a
possible contempt action. The district court allowed them to respond to the evidence presented by
the FTC and to introduce their own evidence. Most of the evidence in this case involved the
defendants' own behavior and their own records. They have not given the district court or this
court any reason to believe they would have found any significant evidence had they been given
more time or discretion to conduct discovery. Indeed, the defendants told the district court at
the end of the hearing that they had no more witnesses and did not need any more time to present
their case. App. at 1006-07. In this civil contempt proceeding, therefore, the court gave the
defendants adequate notice and opportunity to be heard to satisfy the Due Process Clause.

IV. VIOLATIONS OF THE PERMANENT INJUNCTION [*26]

Having held that the district court appropriately conducted the proceedings below as civil
contempt proceedings, we turn to the specifics of the court's finding of contempt for each of the
defendants. We review a district court's determination of civil contempt for abuse of discretion.
O'Connor v. Midwest Pipe Fabrications, Inc., 972 F.2d 1204, 1209 (10th Cir. 1992). "Abuse of
discretion is established if the district court's adjudication of the contempt proceedings is
based upon an error of law or a clearly erroneous finding of fact." John Zink Co. v. Zink, 241
F.3d 1256, 1259 (10th Cir. 2001) (internal quotation omitted). Though this standard is
deferential, a district court must provide findings of facts on which it bases its judgment
sufficient to make possible meaningful appellate review. See Fed. R. Civ. P. 52(a); Joseph A. v.
New Mexico Dep't of Human Res., 69 F.3d 1081, 1087 (10th Cir. 1995).

As discussed above, in the civil contempt context, a plaintiff must prove liability by clear and
convincing evidence. Reliance Ins. Co v. Mast Constr. Co., 159 F.3d 1311, 1315 (10th Cir. 1998).
[*27] This means the FTC "has the burden of proving, by clear and convincing evidence, [1] that a
valid court order existed, [2] that the defendants had knowledge of the order, and [3] that the
defendants disobeyed the order." Id. (citations omitted). There is no question here that the
defendants had knowledge that a court order--the Permanent Injunction--was in effect. The issues
on appeal are (1) what the Permanent Injunction required of each defendant and (2) whether the
evidence clearly and convincingly showed that each defendant failed to comply with those
requirements.

The district court's contempt order states, "The evidence clearly and convincingly indicates that
defendants' acts and practices in connection with the sale of magazine subscriptions and magazine
subscription packages violate the following injunctive provisions of the Permanent Injunction:
Paragraph I, Paragraph II, Paragraph VII, Paragraph IX, and Paragraph XIII." In essence, the
paragraphs cited required the defendants to refrain from misrepresenting the nature of the
subscriptions they sold, in particular their true cost, duration and cancellation policies; to
refrain from threatening to report customers [*28] to credit bureaus; and to allow consumers who
were misled to cancel their subscriptions.

A. DMS

The district court's finding that DMS violated the above provisions was not an abuse of
discretion. The record contains direct testimony of two customers regarding conduct of DMS
telemarketers found to violate the Permanent Injunction and written evidence of sixty-seven other
direct consumer complaints and 874 complaints lodged with third parties, such as state Better
Business Bureaus and attorneys general. The record also contains copies of the scripts used
throughout the period by DMS's telemarketers and audiotapes of a number of calls, all of which
support the district court's finding of "many instances of misrepresentation of [the cost,
nature, and cancellation policies of the magazine subscription packages it sold] and violating
the Telemarketing Sales Rule." App. at 557-58.

For example, according to one script, the DMS telemarketer was to lead potential customers to
believe they "have been selected for [DMS's] New Millennium all cash Sweepstakes" to win $
50,000. Id. at 1250. Then, the telemarketer was directed to tell consumers that as a contestant
in the sweepstakes [*29] they could participate in "a very special part of our promotion," which
would entitle them to a free diamond watch and four free magazines if they paid $ 3.45 per week
for the next 48 months. Id. Other scripts followed a similar pattern, some offering "free"
airline tickets that actually required costly multiple day tie-in stays at resorts or hotels. See
id. at 1250-57.

After a customer indicated interest, the initial caller would transfer the prospect to another
employee who would close and verify the deal. In rapid fire and confusing language, the DMS
caller would again emphasize the customer's entry in the "sweepstakes" and would obtain the
customer's credit card information. The script would offer the customer the choice of paying on
either a two or three-month plan, pursuant to which the customer would pay either two or three
months' worth of their subscription cost each month, thus frontloading the cost of the package.
Id. at 1254. Only at this point would DMS begin to record the conversation and tell customers the
total price of the subscriptions they were buying. Id. at 1255-56.

Two DMS customers, Mary Steward and Jessica Villalobos, testified specifically [*30] that the
telemarketers deceived them about what they were purchasing and authorizing and refused to cancel
their orders when they later complained. See id. at 582-96, 623-36. Another customer declared
that she understood she would only have to pay $ 1 for each of twelve magazines per month as a
shipping charge. After her credit card was charged $ 64 per month, DMS refused to cancel her
subscription and threatened to report her to a credit reporting agency. Id. at 1199-1200. She and
other customers said they were either misled about cancellation or not given the information
necessary to cancel their orders until after the closing of DMS's two-day cancellation window.
See, e.g., id. at 1199-1200, 1203-04, 1207, 1225-29, 1231-32, 1235-38, 1241, 1246-47.

Hundreds of written declarations and complaints likewise show pervasive confusion about the total
cost, duration, and cancellation policies of DMS's subscription packages. Id. at 1099-1147, 1199-
1248, 1358-1811. Audiotapes and transcripts reveal conversations between customers in various
states of bewilderment and frustration and DMS representatives who spoke quickly, did not clearly
state the dollar and cents amounts [*31] involved either in the monthly billing or the total
subscription costs, and generally ignored the specific questions asked. See Aplt. Addendum, Exs.
19A, 22A, 26A, 26B; App. at 1008, 1266.

This evidence supports the district court's finding that DMS misrepresented the cost and duration
of subscription packages and consumers' ability to cancel subscriptions. Because such conduct was
prohibited under the Permanent Injunction, the district court did not abuse its discretion in
holding DMS in contempt.

B. Other Corporate Defendants

Contrary to the district court's ruling, finding that DMS's actions were contrary to the promises
it made in the Permanent Injunction does not necessarily mean that every defendant who signed the
Permanent Injunction is jointly and severally liable for that conduct. The FTC also sought
contempt sanctions against National Marketing Service, Inc.; NPC Corporation of the Midwest,
Inc.; and Magazine Club Billing Service, Inc. It is axiomatic that each defendant is entitled
to "an individualized determination of his interests." de la Llana-Castellon v. INS, 16 F.3d
1093, 1096 (10th Cir. 1994). The district court's only acknowledgment of this [*32] requirement
is the conclusory statement that "each individual defendant, during the applicable time period,
controls or has authority to control one or more of the corporate defendants." App. at 557.

Neither the court nor the FTC pointed us to any evidence that any corporate defendant other than
DMS engaged in any of the conduct outlined above in Part IV.A, nor has our review of the record
revealed any. Indeed, from all that appears in the record, the complaining customers seem only to
have dealt with DMS employees. See App. at 1099-1249. The FTC has also failed to provide us with
any reason to believe the other corporate defendants could control DMS, or that the corporate
structure was nothing more than an effort to conceal the assets of DMS and not a legitimate
liability-limiting arrangement. Cf. Donovan v. Burgett Greenhouses, Inc., 759 F.2d 1483, 1486
(10th Cir. 1985) (engaging in a piercing-the-corporate-veil analysis and finding owner liable
where "the record supports the district court's finding that the defendant had engaged in a
deliberate effort to hide his assets"). Their only apparent relationship to the activities at DMS
appears to have been in receiving [*33] payment for ancillary services, such as equipment
leasing, billing, and collecting provided to DMS, and sharing some common ownership interests
with DMS. App. at 760-61, 1054-55.

Although there may be reason to believe the other corporate defendants were part of a "common
enterprise" to fraudulently sell magazines, the FTC failed to put evidence of such activity in
the record to satisfy the clear and convincing evidence standard. Because the FTC provided no
clear evidence that any corporation other than DMS failed to comply with any specific provision
of the Permanent Injunction or could have controlled the activities at DMS, they cannot be held
vicariously in contempt, and the district court abused its discretion in so holding them. n7

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -

n7 The FTC argues that the defendants waived their right to argue this point because they did not
raise it below. See Aple. Br. at 54 (filed July 9, 2002). It was the FTC's burden, however, to
provide clear and convincing evidence of each defendant's contempt, and the defendants had no
obligation to rebut evidence that was not presented.

- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - - [*34]

C. H.G. Kuykendall, Jr.

H.G. Kuykendall, Jr., signed the Permanent Injunction, both as an individual and as an officer of
DMS, and served as president of DMS throughout the period during which these violations
occurred. "A command to the corporation is in effect a command to those who are officially
responsible for the conduct of its affairs." Wilson v. United States, 221 U.S. 361, 376, 55 L.
Ed. 771, 31 S. Ct. 538 (1911). H.G. Kuykendall, Jr., himself told the district court, "I'm the
one that's responsible for everything." App. at 779. He therefore was obligated "to take
appropriate action within [his] power for the performance of the corporate duty" and may
appropriately be held jointly liable for the contempt. Wilson, 221 U.S. at 376; see also United
States v. Voss, 82 F.3d 1521, 1526 (10th Cir. 1996) (holding that individual liability for
contempt "may arise from the agent's general control over the organization's operations").

Having failed to prevent the employees of the corporation for which he was responsible from
misleading consumers, H.G. Kuykendall, Jr., violated the requirements of the Permanent
Injunction. The district court [*35] did not abuse its discretion by holding him in contempt.

D. The Senior Kuykendalls

The record justification for holding the Seniors liable is not so clear. A court may find
individuals in contempt of injunctions like that involved here under three circumstances. One is
exemplified by the liability of H.G. Kuykendall, Jr., and involves the failure of an individual
in control of a corporation to prevent the corporation's violation of an injunction. See Wilson,
221 U.S. at 376; Voss, 82 F.3d at 1526.

Second, a direct, personal violation of the terms of an injunction would, of course, be a
legitimate basis for holding an individual liable. See Voss, 82 F.3d at 1526. For example,
Paragraph XVIII of the Permanent Injunction required the individual defendants to inform the FTC
within ten days of "any change in his employment status." App. at 1038. This is an explicit
agreement by the individuals who signed the Permanent Injunction to take a certain action, and
failure to do so could be the basis for contempt liability.

Finally, an individual could agree contractually in the Permanent Injunction to insure the
compliance of a corporate [*36] entity. Even if the individual were not "officially responsible"
for oversight of the corporation, if the corporation thereafter violated the Permanent
Injunction, the individual could be held in contempt for failing to fulfill the contractual
agreement. We discuss these theories in turn.

As a preliminary matter, we must note that even in a contempt proceeding, a district court must
follow the strictures of Federal Rule of Civil Procedure 52(a) and provide findings of facts on
which it bases its judgment sufficient to make possible meaningful appellate review. See Joseph
A., 69 F.3d at 1087. The district court's contempt order in this case provides us with very
little upon which to base our review of the Seniors' liability. As pointed out above, the only
finding in the order that ties the Seniors to the contempt is the conclusion that "each
individual defendant, during the applicable time period, controls or has authority to control one
or more of the corporate defendants." App. at 557. The order refers to no supporting facts or
evidence, specifically those providing any basis for clearly determining whether any particular
individual [*37] defendant had such control over the organizations' operations that he could have
done anything to ensure compliance with the Permanent Injunction.

Nonetheless, because of our deferential standard of review, we have studied the record to
determine whether it supports the Seniors' joint liability with the other defendants. The five
paragraphs of the Permanent Injunction the court found the Seniors to have violated all involve
the interaction of the magazine business with customers and potential customers. We have found no
evidence or even any allegation that the Seniors were personally involved in these aspects of the
business. And, as discussed above, none of the corporate defendants other than DMS was shown to
have acted contumaciously, so the Seniors' involvement in those corporations may not be the
source of liability. Thus, the Seniors' liability, if any, must flow either from their having
agreed to insure DMS's compliance or from official responsibility for the affairs of DMS.

As the FTC acknowledged at oral argument, Paragraph X is the provision of the Permanent
Injunction that most nearly suggests an agreement by the defendants to insure one another's
compliance. That paragraph [*38] requires the "defendants" to implement a compliance program.
Because all the signatories to the Permanent Injunction (including the Seniors) are "defendants,"
the FTC argues this obligates all signatories to oversee the compliance monitoring program and
other aspects of Paragraph X.

Some evidence exists to support such a reading. The strongest such evidence is the Seniors'
testimony at the contempt hearing that they understood the Permanent Injunction placed some
affirmative obligations on them and that, partly in response to that understanding, they helped
the companies set up a compliance system. They also testified that they occasionally received and
read the reports generated by the compliance system. App. at 680, 690-91, 704.

We are nonetheless not convinced that Paragraph X can be read so broadly as to make the Seniors
insurers of the other defendants' compliance. First, it is important to note that nothing in the
district court's contempt order suggests the district court was relying on this reading of the
Permanent Injunction to find the Seniors in contempt. Equally important, the district court did
not find, and the FTC did not even allege, that any defendants, including [*39] the Seniors,
actually violated Paragraph X. Furthermore, the Permanent Injunction must not be read in the
light most favorable to the FTC, but rather must be strictly construed, see Consumers Gas & Oil,
Inc. v. Farmland Indus., Inc., 84 F.3d 367, 371 (10th Cir. 1996), to ensure it is clear enough to
place a defendant on notice of what he must do to comply. See Voss, 82 F.3d at 1525. Any
ambiguities should be read in the light most favorable to the defendants. Id.

The agreement would have to be much more explicit if it were in fact intended to bind individual
defendants as guarantors of compliance for corporations over which they have no official
responsibility, particularly in a case where the FTC seeks to hold those individuals liable for $
51 million in consumer redress. n8 See id. This contractual theory thus cannot serve as the basis
for the Senior's liability.

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -

n8 Paragraph XVIII puts affirmative obligations on the individual signatories, requiring them to
inform the FTC within ten days of any change in their employment status with the corporate
defendants. It is not clear from the record whether the Seniors, in admitting they knew the
Permanent Injunction placed some affirmative obligations on them, were referring to Paragraph X
or XVIII. In any event, the FTC and the court did not suggest either Paragraph X or Paragraph
XVIII as a basis for contempt.

- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - - [*40]

That leaves the control theory suggested by the district court's order and under which the
district court appropriately found H.G. Kuykendall, Jr., liable. The FTC and the panel emphasized
our holding in Voss that "an individual who is responsible for insuring that a corporation
complies with a court order cannot escape liability merely by removing himself from the day-to-
day operations of the corporation and washing his hands of responsibility." See id. at 1526
(quoting Colonial Williamsburg Foundation v. Kittinger Co., 792 F. Supp. 1397, 1406 (E.D. Va.
1992)). We agree, but before this becomes a relevant issue, the FTC must have met its burden of
providing clear and convincing evidence that the Seniors had the management control or power to
prevent the contempt in the first place.

The FTC admits the Seniors did not hold official positions with any of the corporations during
the period in question, but asserts they nevertheless had the authority to control the
corporations. It bases this assertion on two facts: that the Seniors signed the Permanent
Injunction as officers of some of the corporate defendants and that together the Seniors owned
[*41] a majority of the stock of DMS. See App. at 676-79, 684-85, 697-701.

Notably, neither H.G. Kuykendall, Sr., nor C.H. Kuykendall signed as an officer of DMS, the only
corporate entity involved in the contumacy, although they both signed the Permanent Injunction
individually and as officers of National Marketing Service, Inc.; NPC Corporation of the Midwest,
Inc.; and Magazine Club Billing Service, Inc. Since the evidence that the other corporate
defendants committed contempt or could control DMS is inadequate, the Seniors' alleged ability to
control them is irrelevant to their individual liability and is not a legitimate reason to hold
them in contempt.

Even if the actions of the other corporations were relevant, these signatures are the only
evidence that the Seniors held any official role with any of the corporations during the period
in question, and the other evidence, which the FTC does not dispute, shows that neither has had
any official position at any corporate defendant since before the execution of the Permanent
Injunction. See id. at 164. Both testified at the hearing in this case and provided separate
affidavits declaring that they had resigned from all of their [*42] corporate positions in March
of 1995, well before the dates relevant to this contempt proceeding. Id. at 164-67. The FTC seems
to agree, stating in its brief that "the Senior Kuykendalls no longer held official positions in
the corporations." Aple. Supp. Br. on Reh'g En Banc at 29 (filed July 3, 2003). The FTC in no way
claims the Seniors fraudulently led them to believe they actually had control of the corporations
at the time they entered into the Permanent Injunction.

The Senior Kuykendalls could not confer on themselves actual control over the corporations simply
by signing as officers. n9 Since no evidence exists that the Seniors actually were officers,
these signatures cannot serve as the basis for finding that the Seniors had the official power
necessary to hold them liable. See Wilson, 221 U.S. at 376.

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -

n9 The reason the Seniors signed as officers given these facts is not clear to us. The most
plausible explanation is that because the Seniors were officers when the FTC's initial
investigation began and continued to participate in the negotiation of the Permanent Injunction,
they were simply included on the forms. Such carelessness in the execution of the Permanent
Injunction confuses the issue of contempt, but does not support a finding of liability.

- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - - [*43]

The only remaining justification for holding the Seniors liable is their ownership interests in
the corporate entities, particularly DMS. The record is again barren on this point. The FTC did
not introduce any corporate records or other evidence that the district court could have used to
support its finding that the Seniors had the power to prevent the contempt.

The only evidence we have as to the Seniors' ownership is their own testimony, which does not
support a finding that either H.G. Kuykendall, Sr., or C.H. Kuykendall had a controlling interest
in any of the corporations at any time the Permanent Injunction was in effect. H.G. Kuykendall,
Sr., did testify that as a "co-owner" of DMS at the time of the Permanent Injunction he,
collectively with C.H., could have removed H.G. Kuykendall, Jr., as president. App. at 677. C.H.
Kuykendall testified that he thought the Seniors' combined holdings in DMS was less than eighty-
five percent. Id. at 698. The only evidence as to either defendant's individual ownership share
is H.G. Kuykendall, Sr.'s statement that he "never owned all of it, or half of it." Id. at 687.

This limited testimony does not support a finding that either [*44] Senior had a controlling
interest in any corporate defendant during the relevant time period. Though the Seniors together
may have owned a majority interest in the corporations, as noted above, each individual is
entitled to "an individualized determination of his interests." de la Llana-Castellon v. INS, 16
F.3d 1093, 1096 (10th Cir. 1994). In Voss, this court held that there must be a finding that the
defendant was "somehow personally connected with" the contempt. 82 F.3d at 1526 (quotation
omitted); see also McGregor v. Chierico, 206 F.3d 1378, 1383-84 (11th Cir. 2000) (agreeing with
defendant's claim that the FTC and district court had "simply lumped together all of the
defendants without considering the weight of the evidence as it applied to each individual and
corporate defendant").

In this case the FTC did not introduce evidence that would support a finding that either
individual Senior had "effective control" of DMS or treated the corporate defendants as "alter
egos." Cf. Donovan v. Burgett Greenhouses, Inc., 759 F.2d 1483, 1486 (10th Cir. 1985). Nor do the
FTC or the district court appear to have endeavored [*45] to find clear and convincing evidence
that the Seniors together in fact exerted control over DMS in such a way as to be personally
connected with the contumacy. Indeed, the evidence shows the Seniors had no executive role with
any of the corporations from the time of the Permanent Injunction and received no income from
DMS. See App. at 678, 688. Because no evidence exists in the record to support the district
court's finding that the Seniors could control, and therefore prevent, the contempt committed at
DMS, that finding is in error.

Though contempt proceedings may have somewhat diluted procedural requirements, they do not lessen
the need for clear and convincing evidence of a defendant's liability. See United States v.
Microsoft Corp., 331 U.S. App. D.C. 121, 147 F.3d 935, 940 (D.C. Cir. 1998). The FTC and the
district court here simply skipped over a determination of individual culpability, focusing
almost entirely on the nature and extent of the contempt itself. Having found such contempt, they
then simply assumed every signatory to the original Permanent Injunction was jointly and
severally liable for its breach. Even in the streamlined context of a contempt [*46] hearing,
this falls short of meeting the required standard of proof. See McGregor, 206 F.3d at 1383-84.
The district court's ruling that the Seniors were in contempt was thus based on a clearly
erroneous fact finding and a misapplication of the law. We therefore reverse the district court's
judgment as it relates to the liability of H.G. Kuykendall, Sr., and C.H. Kuykendall.

V. CONTEMPT SANCTIONS

Having concluded that the district court did not abuse its discretion in finding DMS and H.G.
Kuykendall, Jr., liable for civil contempt, we turn now to the question of what sanctions the
district court may assess against them. As noted in Part II.B above, the FTC sought and the
district court intended to grant compensatory sanctions. The district court found the actual loss
to consumers caused by the defendants' conduct to be at least $ 39 million and, accordingly,
ordered the defendants to pay that amount to the FTC "in order to compensate the injuries
resulting from [this] conduct." App. at 558; see also Panel Opinion, 312 F.3d at 1337. While we
review the amount of a damage award for clear error, "the methodology a district court uses in
calculating [*47] a damage award, such as determining the proper elements of the award or the
proper scope of recovery, is a question of law" we review de novo. S. Colo. MRI, Ltd. v. Med-
Alliance, Inc., 166 F.3d 1094, 1100 (10th Cir. 1999).

Initially, we underscore that while the district court has the responsibility to assess the facts
and calculate actual damages based upon evidence presented at the contempt hearing, see FDIC v.
Hamilton, 122 F.3d 854, 860 (10th Cir. 1997), it must set forth clear reasons for its findings so
this court has an adequate basis for review. See Prairie Band of Potawatomi Indians v. Pierce,
253 F.3d 1234, 1245 (10th Cir. 2001) ("Without adequate findings of fact and conclusions of law,
appellate review is in general not possible"); see also In re Chase & Sanborn Corp., 872 F.2d
397, 398 (11th Cir. 1989) (vacating sanctions and remanding for findings because the court could
not "determine what factors the trial judge considered in imposing the amount of the sanctions").
We agree with the panel that the district court failed to set forth an adequate basis for
arriving at its $ 39 million figure and unduly [*48] hamstrung the parties in submitting evidence
in the truncated proceedings. This constituted error that requires us to vacate the judgment and
set forth the appropriate method for calculating damages on remand.

In doing so, we must address three questions. First, as a threshold matter, is the FTC authorized
to seek sanctions on behalf of consumers in a compensatory civil contempt proceeding such as this
one? Second, if such an action is allowed, how, if at all, should the court use the defendants'
gross receipts in calculating compensatory sanctions? Finally, how should the district court
administer whatever funds may be assessed to compensate injured consumers?

A.



((Truncated))
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