Thursday, June 16, 2022

timeshare exit ads could proximately cause harm even w/o telling people to stop paying

Diamond Resorts U.S. Collection Development, LLC v. Newton Group Transfers, LLC, 2022 WL 1652587, No. 9:18-CV-80311-REINHART (S.D. Fla. Apr. 4, 2022) (magistrate)

I will confess that the main message I take from the cases in which timeshare companies are aggressively suing timeshare exit firms is that one should never buy a timeshare. The companies selling them really want to take your money forever, and, in the US, they are often allowed to do so if you go past any cooling-off period. As a result, timeshare exit firms may be preying on people who are already victims—a standard way of finding victims!

Defendants NGT and NGE advertised an ability to help customers terminate their timeshare contract or ownership; other defendants were part of the exit process. One defendant was a law firm.

As detailed below, none of the advertising specifically mentioned Diamond, nor did it direct, instruct nor encourage consumers to stop paying on their timeshare obligations. The advertising also didn’t say that nonpayment or foreclosure on the timeshare is an option for an exit solution, or that nonpayment on the timeshare may be the best and only option for an exit. The advertising attempted to target timeshare owners (the target lists for mailers weren’t always accurate). One mailer, for example, said:

We are attempting to contact you because our records suggest that you are an owner who may be affected by new Timeshare Laws allowing developers to raise maintenance fees with no restriction…. We are sending experts to your area in an effort to meet with you in person ... These experts will be able to sit down with you, talk about your individual situation, and explain exactly how we can get you out of your timeshare contract while, in some cases, recouping a portion of your investment.

439 people with timeshare contracts with Diamond hired one of the defendant companies. The mailer went to 315 of them, in 42 states. The “new law” referred to a Florida law.

Another mailer advertised that a

program is being extended to select owners to fully cancel all Timeshare Ownership obligation, and will go into process immediately in accordance with the permission of current recipient.

In order to be considered for cancellation of all future obligation, you must call on or before [date].

Certain recipients may have the opportunity to recoup a portion of their investment into ownership. Restrictions will apply. Please call immediately for further detail.

The information contained in this document is confidential to the person to whom it is addressed. No part of this document may be disclosed in any manner to any third party.

Although this was sent to at least 17 Diamond owners, defendants didn’t have a special program for Diamond owners.

New clients received a welcome letter stating:

Since 2005, The Newton Group ESA and Newton Group Transfers have assisted in successfully helping thousands of timeshare owners end their timeshare contractual obligations.

With our service comes a 100% guarantee to terminate the entire ownership of your timeshare, and a 100% guarantee to terminate all your future financial responsibilities associated with your timeshare.

With our A+ rating with the Better Business Bureau, Newton Group Transfers not only offers a guaranteed service, but our unparalleled track record proves it.

Defendant NGT also published a Consumer’s Guide to Timeshare Exit, which was sent by email to prospective customers. The Guide didn’t encourage nonpayment; it stated that stopping payment could result in collection efforts by the resort, could damage credit, and could result in penalties and interest, collection calls, and foreclosure. It did make “disparaging remarks” about timeshare operators, e.g., warning about “companies that charge hundreds or even thousands of dollars to help you list your timeshare for sale” to no avail and sell customer information to others. It also said that resorts

are experts at getting people into timeshares (not out of them). For that reason, it is dangerous to contact them for assistance in exiting your timeshare. They have no financial incentive in getting you out of your contract, and many representatives will use existing owners’ vulnerability against them to attempt to sell them more properties.

These resorts have a vested interest in keeping you as a client, and they are very good at what they do. They employ people trained and experienced in delivering powerful presentations that seek to manipulate your emotions. It doesn’t matter who you are or how long you’ve owned your property, meeting with these resort representatives can be dangerous, and no one is immune to their tactics – they are that good.

NGE’s website claims to be the “The #1 Trusted Timeshare Exit” and “The #1 Trusted Name In Timeshare Exit.” It offers a “100% Money Back Guarantee” and advertises a “Timeshare Transfer Exit” solution and a “Timeshare Attorney Exit” solution. Video on the site describes principal Gordon Newton as a “timeshare exit industry expert.” He describes the timeshare industry as consisting of “con artists” and “scams” with contracts that “go on into perpetuity,” with “never-ending fees.” The website also identifies “Our Law Firm,” DC Capital, and says, “even though there is one flat fee, each client has their own separate independent legal engagement with DC Capital Law. This means the attorneys at DC Capital Law work directly for our clients and have a fiduciary and ethical duty to act in the best interest of our clients.”

Defendant NGT also offered a “skin in the game guarantee,” which stated, “A well-intentioned timeshare exit/transfer company should be willing to shoulder the burden of all aspects of your timeshare until it is no longer in your name. For instance, if any maintenance fees or special assessments become due during the process, they should be covered on your behalf.”

Falsity: A reasonable jury could conclude that the Mailer’s statement about “new laws” was a false assertion of objective fact in that no such law existed, and so too with video statements disparaging the timeshare industry and its practices (“con artists” and “scams,” with a “virtually nonexistent” resale market and contracts that “go on into perpetuity,” with “never-ending fees”) and claims disparaging the timeshare industry in the Consumer Guide. The 100% guarantee was also factual and could be found to be false. One customer testified that she requested, but did not receive, a refund after she failed to exit her timeshare, creating a genuine issue of material fact.

Not so with the “Skin in the game” guarantee, which appeared only in an unidentified document and used conditional language – “your timeshare should be financially invested”; “A well intentioned timeshare exit/transfer company should be willing to” take on financial obligations; any maintenance fees or special assessments should be covered on your behalf.”

Also puffery: statements that Newton is “The #1 Trusted Name in Timeshare Exit” and “#1 Trusted Timeshare Exit” are not actionable, and that Mr. Newton is “a timeshare industry expert.” Nor did Diamond identify specific false/misleading statements in the welcome letter.

As to remaining claims, Diamond’s survey raised a factual issue on deceptiveness, as did disputed testimony from defendants’ former customers about what they were told about their ability to exit their timeshares. [In advertising?] “Viewed in the light most favorable to Diamond, a reasonable jury could conclude that Defendants’ advertisements deceived customers, had the capacity to deceive them, and were material to their decision making.”

Likewise with claims in advertising that the Newton Group has a “proven exit process” that “offers a safe, legal and worry-fee end to timeshare ownership.” And statements in the mailer that the recipient had been “personally selected for a special program,” when it was targeted to timeshare owners. 

What about standing/causation? Diamond argued that it was harmed by false advertising that (1) caused timeshare owners to stop making contractually-required payments, (2) discouraged future timeshare and points purchases, and (3) harmed its reputation. But “the Lanham Act does not create a cause of action based on Defendants causing an injury to Diamond; it creates a cause of action if Defendants’ false and deceptive advertisements caused an injury to Diamond.”

Still, Diamond could get to a jury. True, none of the ads told consumers to stop paying or specifically mentioned Diamond, and there was no direct evidence that the ads caused customers to stop paying or buying timeshares. There was disputed evidence that defendants instructed clients to stop making contract payments outside of the advertising.

While some courts have granted summary judgment in similar cases on proximate cause grounds, the magistrate judge here agreed with the minority view that there was sufficient circumstantial evidence to create a genuine issue of material fact on proximate causation: The ads were viewed by a lot of people; owners who viewed the ads ceased payments shortly after seeing the advertisement and/or shortly after retaining defendants; Diamond’s expert opined that the advertisements were likely to cause viewers to hire defendants and stop making payments; and deceptive advertising isn’t required to be the sole cause or the predominant cause of the plaintiff’s injury.

“[A] reasonable jury could find that Defendants’ advertisements directly and proximately caused economic harm to Diamond.” Diamond’s theory of harm was that defendants caused Diamond owners to not make new purchases and/or to default on existing financial obligations; more than 70% of Diamond’s sales are to current timeshare owners, and a large percentage of owners who retained defendants stopped making payments. “Diamond’s survey expert, Dr. Isaacson, will testify that Defendants’ advertisement made it substantially more likely that a timeshare owner would want to get out of its contract with Diamond.” [But did the false parts do that? In non-timeshare cases, courts generally require that the falsity be shown to cause the harm, not the non-false parts. This is sometimes part of materiality.] The jury isn’t required to believe that, but it could.

There was also a genuine issue of material fact about proximate cause of reputational harm, which could be inferred “from circumstantial evidence and from disparagement of the plaintiff’s entire industry.” [Citing Lexmark, which is arguably a bit of a stretch when the whole industry is being disparaged.]

And Diamond might be entitled to disgorgement of profits.

Contributory false advertising: This requires both direct false advertising and that the relevant defendant “intended to participate in” or “actually knew about” the false advertising and that it actively and materially furthered the unlawful conduct—either by inducing it, causing it, or in some other way working to bring it about. There were genuine issues of material fact on law firm DC Capital’s potential contributory liability. The judge pointed to “the commonality of ownership between Newton and DC Capital, the close working relationship between them, the sharing of CRM information, the general retainer that requires DC Capital to prioritize Newton clients, the description of DC Capital as ‘Our Law Firm’ on the Newton Website, and DC Capital receiving 95% of its work by referrals from Newton.”

Tortious interference claims also survived. “[A]n agent can be held liable for tortious interference if the agent was acting solely for its own purposes and not in the best interests of the principal,” and there was record evidence “that timeshare owners received results that were no better than (and potentially worse) than what they could have achieved without Defendants’ involvement, as well as evidence that defendants “accrued substantial revenue without providing promised services.” Whether the owners were already predisposed to breach the timeshare agreements was a jury issue.

Florida Unfair and Deceptive Trade Practices Act (FDUTPA): FDUTPA prohibits “[u]nfair methods of competition, unconscionable acts or practices, and unfair or deceptive acts or practices in the conduct of any trade or commerce.” This extends to any deceptive practice, not just false advertising, so those claims survived too. And, while law firms might not be engaged in “trade or commerce,” DC Capital could be held responsible for Newton’s statements under coconspirator or other vicarious liability theories.

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