Utah traditionally has been a hive of activity in the telemarketing and “how to make money” education verticals.  The Utah Consumer Protection Division (the “Division”) and the Division’s lawyers at the Office of the Attorney General appear to be trying to change that.  Industry participants have been watching closely a lawsuit filed by the attorney general on behalf of the Division in federal court in Utah.  Last week, that lawsuit was thrown out on jurisdictional grounds.  The lawsuit and the court decision shed light on the aggressive approach the Division is taking to this type of business activity and the limits on the authority of states to use the remedial tools available to the FTC.

Under 15 U.S.C § 6103(a), an attorney general of any state can bring suit in federal district court, as parens patriae, when the state has reason to believe that telemarketing violations are adversely affecting its residents.  The district court here concluded that the Division did not have parens patriae standing, because no Utah resident had been injured—REW did not sell its services to Utah residents.

Some background:

On June 24, 2019, the Division filed a complaint and sought an ex parte asset freeze in the U.S. District Court for the District of Utah against Real Estate Workshop (REW), its principals, and related businesses alleging that the defendants had violated the federal Telemarketing Sales Rule (TSR), the Utah Consumer Sales Practices Act, the Utah Business Opportunity Disclosure Act, and the Utah Telephone Fraud Prevention Act when it sold its tax lien and real estate investment training to consumers.  The state proceeded in federal court based on the parens patriae provision of the federal Telemarketing Act, in which the TSR finds its bases.  Under 15 U.S.C § 6103(a), an attorney general of any state can bring suit in federal district court, as parens patriae, when the state has reason to believe that telemarketing violations are adversely affecting its residents.

Utah’s legal strategy in this case is notable for three reasons.  First, the Division was previously in settlement discussion with REW prior to filing its complaint and temporary restraining order seeking an asset freeze.  The FTC, on the other hand, typically does not seek an asset freeze after a defendant knows it is under investigation, as the basis on which the FTC seeks an ex parte asset freeze is that if the defendant knew of the investigation it would dissipate assets.  Second, the Division sought to extend its asset freeze to another company, Carnegie Academy, and its dba entity ProSource Tax Liens (“ProSource”), which, according to the Division, was a successor to REW.  The Division, however, did not sue ProSource and did not indicate any intention to do so.  Ultimately, the Division withdrew its effort to extend the TRO to ProSource (and executed a mutual release in which ProSource released claims against the Division for proceeding in bad faith).  Third, the Division sought to proceed as parens patriae, despite REW not selling its services to Utah consumers.

The district court ultimately dismissed the case because the Division did not have standing to bring the case in federal court.  A state may establish parens patriae standing when its citizens have suffered injury and that injury implicates a state interest that is more than just the sum of the private injuries suffered by its citizens.  The court, however, found that the state could not establish a concrete injury to its residents.  No Utah resident purchased REW’s services, and although Utah argued that it was protecting “an honest marketplace” and its “business reputation,” and “promoting its reputation for responding to out-of-state consumer complaints,” the court found that this did not amount to a concrete injury to its citizens.  Therefore, the court dismissed the case.

What happens next remains to be seen.  The Division could appeal the decision, try to proceed in state court and/or in a Utah administrative proceeding, or perhaps could entice the FTC to step in.  This case seems far from over, and this loss is not likely to change how the Division views the type of businesses involved.  Stay tuned.