November 12, 1959 In the Matter of the Complaint Against U. S. HEALTH CLUB at Bergenfield, New Jersey P.O.D. Docket No. 1/109; APPEARANCES: Bass & Friend 342 Madison Avenue New York 17, New York for the Respondent Robert M. Ague, Esq. & Ralph B. Manherz, Esq. for the Complainant
DEPARTMENTAL DECISION
A complaint was filed by the General Counsel of the Post Office Department on January 15, 1959, charging the Respondent, U.S. Health Club, with conducting a fraudulent scheme through the mails for the sale of a product for prevention and cure of the heart diseases such as arteriosclerosis and atherosclerosis. The product is called "Super Coronaid" with "Choless". It is supposed to lower the cholesterol level of the blood by ingestion of unsaturated fatty acids, the active ingredient of the product. The Complainant charged that the Respondent was making twelve specific false representations as to the product. 1/ They are:
"a. That the use of Respondent's products 'Super-Coronaid' and 'Choless' as directed will 'prevent painful - even fata heart attacks,' that is to say that the said preparations provide a certain means for accomplishing those results;
b. That the use of the said 'Super-Coronaid' and 'Choless' as directed will 'immediately reduce high-cholesterol blood level' and thereby 'avoid heart attacks';
c. That the said 'Super-Coronaid' and 'Choless' provide the most effective means known to medical science 'to prevent coronary artery disease,' including personal treatment by the 'world's leading doctors' in the field;
d. That the use of 'Super-Coronaid' and 'Choless' as directed will insure a substantially 'longer' life to persons afflicted with atherosclerosis and heart disease;
e. That the use of the said 'Super-Coronaid' and "Choless' as directed will prevent 'aging of your arteries';
f. That the use of the said 'Super-Coronaid' and 'Choless' as directed will 'prevent cholesterol from building up inside the arteries' so that it will not 'calcify or harden, causing a clot to form';
h. That the said so-called 'Super Coronaid' and 'Choless' 'gives you a complete program for better heart health, stronger blood vessels, healthier blood, and helps prevent coronary artery disease,' that is to say that persons afflicted with such conditions may safely rely upon the use of the said preparations in the effective treatment thereof with no need for professional medical assistance;
i. That the treatment of atherosclerosis and heart diseases by the use of 'Super-Coronaid' and 'Choless' has been approved by 'THE PRESIDENT' of the United States;
j. That the said 'Super-Coronaid' and 'Choless', when used as directed, keeps 'the fats and cholesterol necessary for the body's use' 'in stable suspension so that they don't settle into the blood vessels';
k. That the said 'Super Coronaid' and 'Choless', when used as directed moves 'fatty deposits' 'from the liver to where the body can use them properly';
l. That simply by the use of 'Super-Coronaid' and 'Choless' as directed, any person will have 'the right combination' of 'valuable unsaturated fatty acids' for effectively 'lowering cholesterol and rendering it harmless to your arteries' regardless of dietary intake."
The Respondent filed an answer denying that it is conducting a fraudulent scheme but admitting that the product in question is sold by it through the mails and that the circular attached to the complaint is a true copy of the sales material which is used. The Respondent averred that it did not have knowledge or information sufficient to enable it to form a belief as to the specific allegations of falsity since the Respondent is a retailer and both the product and the advertising matter were furnished to it by the manufacturer. Both the product and the circular state that U.S. Nutrition Products Company is the manufacturer. A hearing was held on March 18, 1959, where one of the allegations of the complaint was dismissed. Proposed findings were filed by the parties.
The hearing examiner rendered an initial decision in which he found that the allegations of the complaint were true and recommended the issuance of a fraud order pursuant to 39 U.S.C. 259 and 732 to prevent the Respondent from receiving mail connected with the fraudulent enterprise and cashing money orders.
The Respondent did not specifically deny the allegations of falsity in the complaint. The Rules of Practice provide that:
"Any facts alleged in the complaint which are expressly admitted or not denied in the answer may be considered as proved, and no further evidence in respect of such facts need be adduced at the hearing." Rule 201.8(c) 2/
The examiner made an affirmative finding that the representations were being made and that the representations were false. The Respondent has filed exceptions in a brief on appeal from the initial decision of the examiner. In his brief the Respondent did not except to the finding of falsity as to the representations. Oral arguments on appeal were presented before the undersigned on June 18, 1959.
The Respondent excepted to the failure of the examiner to order the production of a medical report about an identical product sold by another company signed by the medical witness who testified for the Complainant at this proceeding. 3/ After the appeal briefs had been filed and the oral arguments presented the Complainant on its own motion reversed its position and furnished the Respondent with a copy of the report. An opportunity to cross-examine the medical witness was given to the Respondent but the Respondent elected not to have the hearing re-opened but rather filed a supplemental brief to which the Complainant replied on November 5, 1959. The discussion in these briefs centers around the report and the testimony of the doctor and how they relate to the Respondent's intent to deceive. In his supplemental brief the Respondent appears now to be denying the falsity of the claims which was deemed to have been admitted.
It would seem that if he intended to raise this question he should not be permitted to do so at this late stage of the proceeding after pleadings and briefs have been filed and hearing and arguments held. Rule 7(e) of the Rules of Procedure, supra, footnote 2, provides that:
"An amendment of a pleading may be offered by any party at any time prior to the close of the hearing."
The Respondent did not request the hearing to be re-opened when the medical report was received in evidence. If, in the light of the report, the Respondent desired to amend his pleading, a motion asking leave to reopen the hearing to receive the document and amend the complaint should have accompanied his letter of September 25, 1959, wherein he asked that the report be received into evidence. This was not done and the Respondent should not now be permitted to do now what he failed to do at the proper time.
The fact situation appears comparable to that presented in Magnet Cove Barium Corp. v. U.S., (S.D. Texas, 1959) where the Court held that a casual reference to a procedural question raised after hearing in the last pleading of the case did not properly raise the question and it was deemed to have been waived.
The first exception of the Respondent is to the finding of the examiner that the representations in the advertisement were made with an intent to deceive.
The Supreme Court in Reilly v. Pinkus, 338 U.S. 269 (1949), held:
"proof of fraudulent purpose is essential - 'an actual intent to deceive.' Consequently fraud under the mail statutes is not established merely by proving that an incorrect statement was made. An intent to deceive might be inferred from the universality of scientific belief that advertising representations are wholly unsupportable..."
It would seem that if the Respondent admits the falsity of the claims and that the representations alleged in the complaint are being made but offers no proof of an honest belief in those claims other than the bare assertion that the advertising matter was furnished by the manufacturer, it would not be necessary to prove any other facts as to intent to deceive. Intent should be inferred from the admission of falsity and the failure to adduce any affirmative proof of an honest belief in the representations.
Nevertheless, the Complainant proceeded to attempt to prove by expert testimony that there was a universality of scientific belief on the subject in an effort to establish an inference of intent to deceive. Testimony from Dr. Kenneth C. Campbell of the Food and Drug Administration of the Department of Health, Education and Welfare was adduced at the hearing. This was the only expert testimony offered. He testified that experimentation is currently being conducted with the use of unsaturated fatty acids as a reducer of the cholesterol level in humans (Tr. 44); and that the experiments on unsaturated fatty acids have not been conclusive and there is a split of a medical opinion about the effects of unsaturated fatty acids on reducing cholesterol level and whether the cholesterol level affects heart disease (Tr. 46). He testified that science does not know the exact amount of unsaturated fatty acids it takes to affect the cholesterol level of the blood, if in fact it does have such an effect, but that the experiments on unsaturated fatty acids have generally used for testing purposes a quantity of anywhere fro six to eight to twenty grams of unsaturated fatty acids per day (Tr. 41, 71, 74) and the product of the Respondent would result in the daily ingestion of only two to three grams. (Tr. 42)
He also testified that even with the use of higher number of grams per day it was generally agreed among the medical profession that a diet control is a prerequisite to successful use of the acids. (Tr. 72, 73) The only significant reference to diet in the advertising matter of the Respondent is the statement: "until recently, only the most rigid diet could combat high cholesterol blood levels ... Such diets require the utmost 'will power' as well as constant medical attention and food supplements so patients would not get too weak. Now science has found a new method of treatment. Medically approved plan (sic) as directed can help reduce dangerous cholesterol blood levels."
This gives the impression to the reader that at long last diet is unnecessary and the "new scientific discovery" of the Respondent will act alone to reduce cholesterol level without the necessity of a diet. Thus, the person with potential heart problems is lured into the belief that he can prevent heart attacks merely by taking the product. He is told that "all scientists do not agree," but this is the only significant qualifying phrase that I can locate in the advertising. There are constant references to "scientific research", "the President's heart specialist" and other high-sounding phrases which makes the claims of the Respondent sound quite authoritative. Dr. Campbell testified that many doctors would use unsaturated fatty acids on some heart patients, not necessarily because they were convinced of its effectiveness but because a prudent practitioner should not overlook any possibilities. He testified that, while there was disagreement in the medical profession as to both the question of whether cholesterol level affects heart disease and the amount of unsaturated fatty acids that it takes to lower the cholesterol level, there is a universality of scientific opinion that the number of grams contained in the product of the Respondent would have no effect on cholesterol level and on prevention and cure of heart disease. (Tr. 55, 81.)
The Respondent compares the summary of testimony given by the Complainant in his proposed findings with the statements in Dr. Campbell's medical report contending that such a comparison shows such inconsistency as to warrant total disregard of the testimony. The Complainant challenges this in his reply brief saying that it is actually the testimony of the doctor which is important as a comparison with the prior medical report. The Respondent in his supplemental brief at pages 6 and 7 has undertaken to quote part of Dr. Campbell's medical report. In quoting from this report the Respondent conveniently omits many of the qualifying parts of the report without indicating by use of asterisks that these matters have been omitted, a practice which is universally deplored by the legal profession.
The Respondent also rearranged the paragraphs of the report from which he quoted. The Respondent cites the doctor's use of the term "consensus of medical opinion" and states that this is not equivalent to the "universality" rule required by Reilly v. Pinkus, supra. While I believe the doctor used the term "consensus of medical opinion" at some points as equivalent to a "universality of scientific opinion," in others he apparently meant something less than "universality." As previously mentioned the doctor admitted that much was not known about the relationships between heart trouble and cholesterol level and between cholesterol and unsaturated fatty acids. However, on the pertinent subject of whether the number of grams of unsaturated fatty acids contained in the product of the Respondent would have any effect, the testimony of the doctor is clear and convincing that it would not and that such is the universality of scienific opinion among those who are informed on the subject. The facts of this case can be compared with the facts of Reilly v. Pinkus, supra. The question there was whether iodine had an effect as weight reducer. The Court discussed the testimony of a medical doctor who had expressed the view that it did have such value. Even he, however, had conceded that the daily dosage of iodine to reduce weight would have to be 50 to 60 times more than the iodine contained in the product in question. Although there is no testimony from a medical witness in support of the fact that unsaturated fatty acids do have effect on cholesterol level and in turn on heart conditions, Dr. Campbell admitted that some hold that opinion. But, we have the testimony that the amount required to be effective would be anywhere from three to seven times the amount contained in the product of this Respondent and the doctor expressed his own opinion that even that amount would be effective. (Tr 71).
A similar situation was also presented in Leach v. Carlile, 258 U.S. 138 (1921) where the Court held that, although the substance which was sold was not entirely worthless, it was so far from being the panacea for which it was advertised and that by so advertising, a fraud was being perpetuated on the public.
In addition to the foregoing certain facts about this Respondent and its relationship with U.S. Nutrition Products Company are pertinent. Postal Inspector Hegarty who investigated this case testified that there was no business office for U.S. Health Club at Bergenfield, New Jersey, its mailing address, but that approximately fifty parcels were mailed per day at that post office. Advertising matter was also mailed at the post office through the use of a mailing concern known as Mailmasters at Dumont, New Jersey. Mr. Sidney Horwitt was the person who deposited the mailings. (Tr. 13)
It was discovered that the Respondent company was owned by Mr. Peter Small whose home address was 376 Maitland Avenue, West Englewood, New Jersey. The Inspector contacted Mr. Small at American Diet Aides Company at Yonkers, New York. Mr. Small stated that his ownership of the company was a matter of record in the State of New Jersey and that the officers were himself, his wife and a Rose Dalton. He told the Inspector that he had received a copy of the complaint against U.S. Health Club. (Tr. 14) A letter to the Inspector from the Department of State of the State of New Jersey was introduced as Complainant's Exhibit 5. The Secretary of State said that a Certificate of Trade Name for U.S. Health Club was filed on October 3, 1957, and that the name and address of the party in interest was one Mimi O. Horwitt, 18 Woodland Road, Great Neck, Long Island, New York. No testimony was offered by the Respondent at the hearing.
The Respondent avers that the U.S. Nutrition Products Company whose name appears on the product and advertising matter furnishes both of these items to the Respondent. Counsel analogizes Respondent company to a retailer such as the "corner drug store" arguing that as a mere retailer the U.S. Health Club cannot be responsible for knowing the truth or falsity of the representations for its products which are furnished to it by suppliers, wholesalers, or manufacturers. Respondent contends that to require it to have knowledge of these claims would impose an insurmountable requirement on"it and all other" retailers. No evidence was offered as to the reputation or existence of U.S. Nutrition Products Company, however, the averment of the Respondent as to the relationship between that company and the Respondent was not challenged by the Complainant.
While the facts enumerated above concerning the Respondent, its owners, its agents, its offices, and its mode of doing business do not necessarily prove any wrong-doing on its part, such facts clearly indicate that the analogy to the "corner drug store" is inappropriate. This Respondent is not such a retailer; it is a mail order house selling a preparation which it says will cure a variety of heart diseases. The doctrine of caveat emptor is not applicable to mail order enterprises since the buyer and seller are not dealing at arm's length. 4/ To permit the Respondent to rely on such a defense would be to sanction wrong-doing and to permit a mail order house to cloak itself in a shroud of immunity. In Sovereign Pocohontas Co. v. Bond, 120 F.2d 39 (C.A.D.C., 1941), the Court said:
"Where a party represents a material fact to be true to his personal knowledge, as distinguished from belief or opinion, when he does not know whether it is true or not, and it is actually untrue, he is guilty of falsehood, even if he believes it to be true, and if the statement is thus made with the intention that it shall be acted upon by another, who does so act upon it to his injury, the result is actionable fraud." The Respondent discusses a former proceeding of the Post Office Department, Low's Food Store, H.E. Docket 4/207, saying that the examiner in his initial decision in that proceeding relied heavily on the fact that the Respondent company's name was the only name which appeared on the advertising matter and the product which was sold while in the instant case, the manufacturer's name appears on both. While the Respondent says that in their opinion this question is immaterial, the fact that the examiner relied on this fact should distinguish that proceeding from the instant one. I can find no merit to this contention. Permitting a Respondent to give a "credit line" to its supplier should not permit it to evade its responsibilities to the public. I agree with the Respondent that the question is immaterial. It is also immaterial that the examiner in Low discussed the point.
The Respondent relies on U.S. v. Balanced Foods, 146 F.Supp 154, (S.D.N.Y., 1955). The defendants there were charged with having shipped misbranded food in interstate commerce in violation of the Federal Food Drug and Cosmetic Act. 5/ The Act provides that one who in good faith receives a product backed by a guaranty of the supplier or manufacturer cannot be held responsible. Instead it is made a crime to give a false guaranty. 6/ The Court held that where the defendant had received such a guaranty the fact that he had been warned by the Food and Drug Administration that the product was misbranded was not a sufficient basis to prove that he did not receive the product in good faith.
Exhibits 6A and 6B of the Complainant consist of correspondence between the Complainant and the Respondent. The Complainant advised the Respondent on September 22, 1958, approximately two months before the issuance of the complaint in this proceeding, that the Food and Drug Administration had advised it that present medical science does not recognize the efficacy of the products sold for the purposes advertised. The Complainant properly afforded the Respondent an opportunity to compromise the proceedings indicating that it recognized that other products were being sold by the Respondent which it did not question. The Respondent replied on October 14, 1958, as follows:
"We are writing in reply to your letter of September 22nd, regarding the advertisement and sale of Super Coronaid with Choless. We do not manufacture this product, nor do we prepare the advertising material. We have been dealing with the manufacturer for over a year and have found them to be completely reliable, and they have advised us that both the product and the advertising are proper.
Under the circumstances we feel that we can continue handling this product, and wish to suggest that you direct your inquiries to the manufacturers themselves."
The letter was signed by Mimi Horwitt. Without deciding what effect this letter has on the question of intent it is sufficient to note that this is a far cry from the guaranty furnished by the manufacturer which was the determinative fact in Balanced Foods, supra. The Respondent cannot be permitted to rely on a self-serving statement such as this to escape liability under the fraud statute. It should also be noted that this letter is not even signed by the owner of the Respondent company. The Court in Balanced Foods, supra, at 156, stated:
"The defendants, in the transaction of their business handling as the testimony indicated, from 1,500 to 2,000 different products, would undoubtedly have a right, with such assurances as were given in this case, to proceed in the transaction of their business until there was such an adjudication or authoritative determination that the merchandise was misbranded."
Thus the determinative factor was the assurances given. The decision is inapplicable to the facts in this proceeding.
In Stone v. U.S., 113 F.2d 70 (C.A. 6, 1940), the Court said:
"Appellants do not seriously contend that the statements made concerning the value of the securities were true, but each denies that he was lying. Ech urges on us that he may have spoken falsely, but what was said untruly was reputed to be true to him, because he relied on reputed facts furnished from reliable sources. Each said he invented no fact which was put into circulation by him or that he wilfully disguised any fact with the intent to defraud or deceive prospective purchasers of the stock.
***but as affecting intent or good faith, ignorance of facts set up as defense is unavailing where the defendant, by the exercise of due diligence could have become aware of his mistakes, especially where others may suffer a loss by his mistatements."
There is no indication that the Respondent in this proceeding exercised any diligence in attempting to discover what was the true efficacy of the product. Sufficient evidence was introduced at the hearing to indicate the worthlessness of the product for the purposes claimed. The Respondent acted with a reckless disregard for the truth. 7/ Without knowledge of the efficacy of the product, the Respondent undertook to offer it for sale through the mails upon representations furnished it by another that the product was an effective treatment for heart disease, high cholesterol blood level, coronary artery disease and aging of the arteries. From such acts an inference of an intent to deceive can be drawn. The inference was not rebutted. The fact that medical science is still in doubt as to the effect of greater quantities of the active ingredient of the product does not justify the representations of the Respondent. In fact the state of knowledge requires special care on the part of a seller. Leach v. Carlile, 267 Fed. 61 (C.A. 7, 1920.
The Respondent contends that, since it is selling products other than that which is involved in this proceeding, this is not a proper proceeding for the Post Office Department. That is a determination for the Complainant who initiated this proceeding and not for the Judicial Officer. While a more effective procedure might have been for the Food and Drug Administration to have proceeded against the manufacturer of the product on a misbranding charge, assuming such could be proved, sufficient proof was adduced to warrant the issuance of a fraud order.
The problem of the scope of the order raised by Tour lanes v. Summerfield, 231 F.2d 773 (C.A.D.C., 1956) and Sunshine v. Summerfield, 221 F.2d 47 (C.A.D.C., 1954) has been obviated by the modification of the fraud order to permit a Respondent to receive mail not connected with the fraudulent enterprise. 8/ Such a provision is now contained in all postal fraud orders and was approved in Parker v. Summerfield, 265 F.2d 960 (C.A.D.C. 1959). The first exception of the Respondent is disallowed.
The Respondent excepts to the taking of official notice of prior proceedings by the examiner. Official notice can properly be taken of prior departmental proceedings, but in this proceeding the examiner did not base his decision upon any facts which might have been discovered as a result of such notice so the question is not material. The exception is disallowed.
The last exception of the Respondent is to the finding of the examiner that the Rules of Practice of the Post Office Department are in compliance with the Administrative Procedure Act. 9/ This question was raised by a preliminary motion of the Respondent to dismiss the proceeding. In Borg-Johnson v. Christenberry, 169 F.Supp. 746 (S.D.N.Y., 1959), the Court held that the Judicial Officer could not, because of the requirements of Section 7(a) of the Administrative Procedure Act, preside at agency hearings. The Respondent reads this decision as invalidating all other Rules of Practice. Such an inference is unwarranted.
The Supreme Court in Electric Bond Company v. S.E.C., 303 U.S. 419 (1938), held that, where one part of a statute is declared invalid, "divisibility and not integration is the guiding principle," and the remainder of the statute remains valid. The same construction is applicable to rules since rule-making is a delegation of the legislative function.
The Respondent challenges the authority of the Judicial Officer to make a final Departmental decision. The Court in U.S. Bio-Genics Corp. v. Christenberry, 173 F.Supp. 645 (S.D.N.Y., 1959), said:
"valid delegation of the power to make a final agency decision is not limited, however, to those who may be delegated to conduct hearings...The Judicial Officer may not be validly empowered to conduct hearings but his delegated power to issue final order is valid." 10/ The Court cited the Final Report of the Attorney General's Committee on Administrative Procedure which was issued in 1941, where it was recommended that in single headed departments and agencies, such as the Post Office Department, chief deciding officers or boards of review be established to exercise the final power of decision. By establishing a Judicial Officer in this Department, the Postmaster General followed the recommendation of the Committee.
The Respondent questions the placing of the hearing examiners under the administrative supervision of the Judicial Officer, 11/ and the fact that a thirty day notice on rule making was not given when the rules were promulgated. These problems were discussed by the Court in Borg-Johnson, supra and the contentions were held to be without merit. The exception is disallowed.
The initial decision of the hearing examiner is affirmed. An appropriate fraud order will issue.
Charles D. Ablard Judicial Officer
1/ Charge 6 was dismissed at the hearing at the request of the Complainant.
2/ 39 C.F.R. Part 201.
3/ Jencks v. U.S., 353 U.S. 657 (1957); N.L.R.B. v. Adhesive Products Corporation, 258 F.2d 403 (C.A. 2, 1958).
4/ See FTC v. Standard Education Society, 302 U.S. 112 (1937)
5/ 21 U.S.C. 301 et seq.
6/ Section 331 (h)
7/ Kercheval v. United States, 12 F.2d 904 (C.A. 8, 1926) and Darnell v. Darnell, 200 F.2d 747 (C.A.D.C., 1952).
8/ 23 F.R. 3740, May 29, 1958.
9/ 5 U.S.C. 1001 et seq.
10/ A comparable delegation to the Deputy Postmaster General was held valid in Parker v. Summerfield, 265 F.2d 354 (C.A.D.C., 1959).
11/ A comparable organizational structure was held to be proper by the Department of Interior in U.S. v. O'Leary, et al, 66 I.D. 17 Jan. 21, 1959.