In the Matter of the Petition by

 THE DINERS' CLUB, INC. 

 for a review of proposed annulment and denial of second-class
 mail privileges of "THE DINERS' CLUB MAGAZINE."

 P.O.D. Docket No. 1/225

 October 20, 1960

 William A. Duvall Chief Hearing Examiner

 POST OFFICE DEPARTMENT, WASHINGTON 25, D. C.

 APPEARANCES:
 Nathaniel Whitehorn, Esq. 
 Joseph S. Hellman, Esq. 
 Hays, Sklar & Herzberg
 579 Fifth Avenue
 New York 17, New York, and
 Roy C. Frank, Esq. 
 717 Barr Building Washington 6, D.C.
 for the Petitioner

 Adam G. Wenchel, Esq., and
 Dean M. A. Murville, Esq. 
 Office of the General Counsel
 Post Office Department
 for the Respondent

The Diners' Club, Inc., the Petitioner, is a New York Corporation, with its principal office at 10 Columbus Circle, New York 19, New York, and has as its principal business the operation of a credit system under which members may make purchases from member establishments and charge the purchases to their Diners' Club accounts by the presentation of their membership cards to the member organizations. The headquarters office of the Diners' Club pays bills so incurred and renders monthly statements to the members. Of the cost of each item purchased with a credit card, the Diners' Club receives a percentage from the member or contract establishment from whom the purchase was made.

Another phase of the Petitioner's business is the publication of a magazine called "The Diners' Club Magazine," hereinafter referred to as the Magazine. Petitioner has owned and published the Magazine since the March, 1955, issue was published. On March 4, 1955, the Magazine was accorded entry into the mails as second-class matter at New York, New York, and this entry later was transferred to Canton, Ohio. Additional second-class mail permits were granted for the Magazine at Los Angeles, California, on January 14, 1959, and at San Bernardino, California, on May 13, 1959.

On July 16, 1959, and on July 31, 1959, Petitioner filed applications for re-entry of the Magazine, because of a change of frequency of issuance and because of a change in the office of publication, at Dayton, Ohio.

By letter, dated September 30, 1959, Respondent advised the Petitioner, in substance, that the Magazine was regarded as being designed primarily for advertising purposes in contravention of Section 226 of Title 39, United States Code, ¹/ and Section 132.22 of the Postal Manual, as will be explained later in more detail. Respondent further advised Petitioner, in effect, that a period of 60 days would be allowed within which Petitioner might bring the Magazine into conformity with the cited statute and regulation, and that upon failure of compliance, proceedings would be instituted to deny the application for re-entry and to annul existing second-class entries.

On December 7, 1959, Respondent advised Petitioner that unless an appeal was taken within 15 days from the receipt of the notice, the applications for re-entry would be denied and the existing second-class mail privileges for the Magazine would be revoked. The reasons stated in the notice of December 7, 1959, were substantially the same as those contained in the letter of September 30, 1959.

The Petitioner appealed within the time limit fixed by the applicable Rules of Practice, a copy of which had been sent to the Petitioner with the letter of December 7, 1959.

In the answer filed by the Respondent to the Petition, a new basis for the proposed denial and revocation was affirmatively alleged, namely, that the Magazine is designed for circulation at nominal rates and is, therefore, not entitled to second-class mail privileges under Section 226, Title 39, United States Code, and Section 132.228 of the Postal Manual.

Petitioner moved to dismiss the portion of the answer containing the new ground for the proposed actions. The motion to dismiss was granted, but a motion to amend the answer so as to add the new basis for denial and revocation was granted over the objection of counsel for the Petitioner. The amendment was allowed because: (1) to have denied it could have resulted in putting the parties to the expenditure of additional time, effort and money, since nothing would preclude the Respondent from instituting a new proceeding based upon the new ground; and (2) the proof to be adduced on this issue was readily available to the Petitioner. (See: Order dated April 15, 1960; Tr. 10) The amendment of a complaint during a hearing is not error in the absence of a "showing of surprise which may have hampered presentation of respondent's defense on this aspect of the case". (3 Pike and Fischer Admin. Law (2d) 50; N.L.R.B. v. Dinion Coil Co. , 201 F.(2d) 484; N.L.R.B. v. Roure-Dupont Mfg. Co., Inc. , 199 F.(2d) 631.) That the Petitioner was fully prepared to meet this issue will be shown later in this Initial Decision.

The hearing was held before me and both parties were represented by counsel who participated in the examination and cross-examination of witnesses, and who have filed proposed findings of fact, conclusions of law and reasons in support thereof.

I adopt the statement of the issues appearing at pages 16 and 17 of Petitioner's brief, as follows:

A. Is The Diners' Club Magazine designed primarily for advertising purposes contrary to 39 U.S.C. sec. 226 and section 132.226b, Postal Manual, by virtue of the reasons set forth in respondent's initial ruling of December 7, 1960? (sic) (3-8)

B. Did respondent call to the attention of petitioner in writing before the institution of agency proceedings, all facts or conduct upon which he purports to base his denial of petitioner's applications for re-entry of the Magazine to the second-class mails at Dayton, Ohio, and his annulment of the Magazine's existing second-class entries at Canton, Ohio, and San Bernardino, California, contrary to the provisions of the Administrative Procedure Act, 5 U.S.C. sec. 1001, et seq .? (Amendments to Petition, par. 2; 3)

C. At the time of respondent's ruling of December 7, 1959, purporting to deny petitioner's applications for re-entry of its Magazine to the second-class mails at Dayton, Ohio, and purporting to annul the Magazine's existing entries at Canton, Ohio, and San Bernardino, California, did there exist in the Federal Register the published "procedures" of the Post Office Department to which petitioner was "required to resort", as required by the Administrative Procedure Act, 5 U.S.C. sec. 1001, et seq .? (Amendments to Petition, par. 3; 3)

D. Is there a separation of functions between the adjudicating and prosecuting authorities of the Post Office Department with respect to the denial and annulment of second-class mail permits, as required by the Administrative Procedure Act, 5 U.S.C. sec. 1001, et seq .? (Amendments to Petition, par. 4; 3-4)

E. Is The Diners' Club Magazine a nominal rate publication within the meaning of 39 U.S.C. sec. 226, 39 C.F.R. 22.2(b)(8), 132.228 Postal Manual? (Amendment to Answer; 10-11)

F. Does the burden of proof with respect to all of the issues in this proceeding rest upon the respondent?

With respect to issue "B", above, I find now as a fact that at the time of the issuance of the proposed denial and revocation, on December 7, 1959, the sole basis in the mind of the Respondent for these actions was that which was stated in the notice. Looking at the matter realistically, it would be detrimental to the position of the Respondent to withhold a reason for the taking of his proposed action. In other words, the more grounds that he considers valid and sets forth in his notice, the stronger his case is likely to be. The Respondent would, therefore, have no incentive not to state all the bases for his proposed action that it is felt would support the taking of the proposed action. There being no convincing indication to the contrary in the record, I find as a fact that as of December 7, 1959, when the notice was issued to the Petitioner, the Respondent proposed to deny the applications for re-entry and revoke the existing second-class permits for the sole reason that it was believed that the publication was designed primarily for advertising purposes as set forth in the notice of December 7.

This finding does not preclude the propriety of the later inclusion, by amendment, of some ground for the proposed action that was discovered subsequent to the time of the notice -- so long, as in this case, the Petitioner is not deprived of due process. Specific provision for the amendment of pleadings is made in Rule 7(e) of the Rules of Practice. Indeed, the Petitioner is benefited by this procedure since it relieves him of the risk of harassment by repeated administrative proceedings with their attendant costs in time and money. Issue "B" is resolved in favor of the Respondent.

With respect to issue "C", in the light of the remarks and findings above under issue "B", and in view of the provisions of the Rules of Practice published in Volume 24, Federal Register, page 3592, on May 5, 1959 (39 C.F.R. Part 204), I find that as of December 7, 1959, there did exist in the Federal Register the published "procedures" of the Post Office Department to which Petitioner was "required to resort" as required by the Administrative Procedure Act, 5 U.S.C. Sec. 1001, et seq.

Issue "D" relates to the validity of the regulations governing the administrative organization of the Post Office Department. Questions of this type are outside the scope of the jurisdiction of Hearing Examiners. ( Engineers Public Service Corp. v. S.E.C. , 138 F.(2d) 936)

With respect to issue "F", the first sentence of section 7(c) of the Administrative Procedure Act (5 U.S.C. 1006(c)) provides that: "Except as statutes otherwise provide, the proponent of a rule or order shall have the burden of proof." This being so, and since the Petitioner is the moving party insofar as the application for re-entry is concerned, the Petitioner has the burden of proof as to this phase of the proceeding. On the other hand, the Respondent is the proponent in the revocation aspect of this proceeding and the burden is upon the Respondent to show that the Petitioner no longer is eligible to enjoy second-class mail privileges for the Magazine. In a case of this type, the question as to the burden of proof that rests on the Petitioner is largely academic, since, if the Respondent fails to meet his burden of proof, the Petitioner must prevail.

Issue "E", whether the publication is designed for circulation at nominal rates, has been a sort of will-o-the-wisp in this proceeding. It was first raised by and then stricken from the answer. It arose again, as indicated above, by amendment to the answer. At the hearing, after some testimony had been taken concerning this issue, counsel for the Respondent stated, in effect, that while the Respondent would not urge that either the old subscription rate of 60 cents per year or the new rate of $1.00 per year, which went into effect in May and June of this year, is a nominal subscription rate, Respondent nevertheless would maintain that the conditions under which subscriptions are taken render both subscription rates nominal. (Tr. 180) Finally, in the proposed findings of fact and conclusions of law submitted by the Respondent, the following statement is made: "The only substantive issue in this case is whether the publication is designed primarily for advertising purposes." This statement could, and perhaps should, be treated as a withdrawal of the allegation that the publication is designed for circulation at nominal rates. Rather than leave the matter further suspended, however, it is deemed to be preferable to dispose of this issue here upon the basis of the evidence of record.

For the fiscal year ending March 31, 1959, publishing costs were $308,000 while revenues from subscriptions, alone, amounted to $420,000. Advertising revenues increased the margin of profit for this period. For the nine months ending December 31, 1959, publishing costs were $618,000 and subscription revenue was $400,000. Advertising income resulted in a profitable operation. In the latter period, costs were increased by increases in postage rates, increases in frequency of publication, and increased printing costs. These cost increases are to be offset, in whole or in part, by the increase in the subscription rates mentioned above. (Tr. 42-44) These facts appear in testimony given by an officer of the Petitioner and nowhere are they controverted. These facts clearly do not support the contention of the Respondent and I find as a fact that the Magazine is not designed primarily for circulation at nominal rates.

There remains for consideration issue "A", that is, whether the Magazine is designed primarily for advertising purposes, as alleged by the Respondent.

In the letter of September 30, 1959, from the Respondent to the Petitioner, the former advised the latter, with respect to this issue, as follows:

* * * * * * * *

The law (39 United States Code 226; Postal Manual, section 132.22) requires, among other things, that a publication to qualify for second-class mail privileges must have a "legitimate list of subscribers" and prohibits the entry of publications "designed primarily for advertising purposes, or for free circulation, or for circulation at nominal rates." Some of the publications designed for advertising purposes are defined in section 132.226b, Postal Manual, as "those owned and controlled by individuals or business concerns and conducted as an auxiliary to and essentially for the advancement of the main business or calling of those who own or control them."

* * * * * * * *

An examination of the copies which accompanied the applications for second-class reentry and a study of other issues of the publication shows that practically all of the advertisements and textual matter appearing therein are tied in some way by reference to Diners' Club Incorporated, and to its activities. A considerable percentage of the advertisements relate to the activities or functions of the Club itself.

As prepared and circulated "Diners' Club Magazine" is designed primarily for advertising purposes, that is, as a house organ conducted as an auxiliary to and essentially for the advancement of Diners' Club, Inc., and its stockholders, and, therefore, comes within the prohibition of the law cited.

* * * * * * * *

This letter was followed by the letter of December 7, 1959, which contained, among other things, the following paragraphs:

* * * * * * * *

On the other hand, we find that the circulation of "The Diners' Club Magazine" is almost in its entirety to members of the Diners' Club who pay nothing additional for it other than their annual membership fee, there being no difference in the amount of such fee in case a member should not want the magazine. The purpose of "The Diners' Club Magazine" is to create and maintain interest in the Diners' Club. Therefore, there is a tie in with the activities and functions of the Diners' Club. Thus the advertising is slanted to members of the Club and the clearing of their accounts in part of the business of the Club, as evidenced by statements appearing in connection with numerous advertisements, such as

"Send me the items as listed below and charge my Diners' Club Acct. $........" "Charge the car of your choice...anywhere in the world]" "Bill my Diners' Club account....." "Liquor charged on your Diners' Club Card" "Charge Diners Card No. ........" "In conjunction with the Diners' Club DAVEGA presents fine gifts exclusively for Diners' Club Members." "Charge your Diners' Club account, give account number and authorized signature."

Therefore, the conclusion of the Department remains that "The Diners' Club Magazine" as prepared, published, and circulated comes within the prohibition of section 132.126b (sic) Postal Manual, which reads

"Those owned or controlled by individuals or business concerns and conducted as an auxiliary to and essentially for the advancement of the main business or calling of those who own or control them."

* * * * * * * *

From the foregoing communications it is apparent that it was the Director's view that the Magazine is designed primarily to advertise the credit-card aspect of the business of the Diners' Club.

With respect to this issue, the first witness was the Vice-President of the Diners' Club in charge of administration, research and financial matters. It was his uncontroverted testimony that the Magazine is not essential to the credit-card business of the Petitioner; that only a nominal number of new credit-card club members is obtained through the Magazine because most of the subscribers already are members; and that advertising in the Magazine is open to non-member business establishments and member establishments alike.

Next, Sidney Garfield, the President of W. B. Doner and Company, an advertising agency, testified that his company solicited and obtained the advertising account of the Petitioner. In studying the Magazine it was found that the income level of the subscribers to the Magazine was higher than that for the subscribers to any other publication Doner and Company had encountered; that the Magazine's readership had a very high spending power; that the Magazine would be a good advertising medium for manufacturers of high-priced, good quality merchandise. Mr. Garfield stated that if the primary purpose of the publication were to advertise the credit-card aspect of Petitioner's business, it would be "silly" for other advertisers to use it for their advertisements; and that there are many advertisers who are anxious to offer their products through the Magazine regardless of whether they are affiliated with the Petitioner.

The National Advertising Director of the Magazine, Leonard Mogel, is the President of Mogel Associates, which concern contracts for all the advertising in the Magazine. Mr. Mogel has charge of advertising policies, practices and rates for the Magazine. This witness testified that various business concerns, such as publishers, distillers and automobile manufacturers who have no connection with the Petitioner's credit-card business advertise in the Magazine and that these types of advertisers are increasing; that the decision to put such a legend as "charge to your Diners' Club Account" in an advertisement is made entirely by the advertiser and that the Magazine exercises no control whatsoever over the making of such a decision; that advertisers will insert such a legend in advertisements appearing in publications other than the Magazine; that the Magazine carries advertisements of non-member firms; that some member firms insert advertisements in the Magazine without mentioning the Diners' Club; that the Magazine had been carrying articles by well-known authors and that it is hoped to continue this policy on a larger scale in the future; that the percentage of advertisements mentioning the Diners' Club has decreased and that the percentage of such advertisements will further decrease as the number of national advertisers increases; that advertisers who mention the Diners' Club receive no special treatment vis-a-vis those advertisers who do not mention the Petitioner; that members of the Diners' Club could maintain their memberships without being or becoming subscribers to the Magazine; and that persons not members of the Diners' Club could subscribe to the Magazine.

The Vice-President of the Ben Sackheim Advertising Agency, Lewis Nemerson, testified on the basis of his 30 years of experience that in selecting a publication for the placement of advertising matter the important factors are the products to be sold, the type of products the audience (made up by the publications' subscribers) wants, and the nature and economic status of the audience. Advertisers have an interest in the editorial content of a publication because a magazine should be of a general nature and it should be of interest to its intended audience in order to be of value as an advertising medium. Mr. Nemerson said that in his view the Magazine is such a publication. He said that national advertisers would not be attracted to and would not use the Magazine if the advertisers believed that the purpose of the Magazine was to advance the Petitioner's credit-card business. Mr. Nemerson has recommended the use of the Magazine to clients who were and are unaffiliated with the Petitioner. Mr. Nemerson agreed with earlier testimony that it is the advertiser who makes the decision as to the copy to be used in his advertisement, and that reference in advertisements to the Diners' Club credit card is made because the advertiser believes it will be to his benefit.

The Associate Publisher of Argosy, Adventure, True Adventure, and Railroad Magazines, Thomas Harragan, testified that the greatest source of revenue to any magazine is advertising. Subscription rates are kept low for the purpose of obtaining a large circulation in order that the publication will be attractive to advertisers. Publications carrying a large amount of advertising relating to only one field are less attractive to advertisers in other businesses. In Mr. Harragan's view, the Magazine has become more diversified in its editorial content in recent months than it was formerly, and Mr. Harragan regards it as being competitive - both for readership and for advertisers - with two of his publications and a number of other magazines. He believes the purpose of the publisher is for the Magazine to be financially self-supporting and not to promote Petitioner's credit-card business, and he believes that if the latter were its chief purpose it would not be attractive to national advertisers who are not affiliated with the Diners' Club.

The President of Esquire, Inc., John Smart, was the last of Petitioner's witnesses. Esquire, Inc. publishes Esquire Magazine, Coronet, and the Gentlemen Quarterly. Mr. Smart agreed with earlier testimony that the primary source of revenue in the publishing business is from advertising and that it is the policy of the average magazine to keep subscription rates low in order to build up circulation, thereby enhancing the value of the publication as an advertising medium. A "house organ" would appeal neither to subscribers nor advertisers. Mr. Smart stated that the more recent issues of the Magazine have been more well-rounded and that, in advertising, it competes with the publications of Esquire, Inc. Mr. Smart's opinion is that the Magazine is designed to make money as a publishing venture. References to credit-card privileges, various seals of approval, and the like, are included in advertising copy as a matter of routine in advertisements appearing in various publications, and these references are for the benefit of the businesses in whose advertisements they appear. Esquire, Inc. has advertised in the Magazine to get subscriptions; it has included in its advertisements such words as "charge it to your Diners' Club Account"; and Mr. Smart indicated that the purpose of Esquire, Inc. was to obtain subscriptions and that Esquire, Inc. is not interested in aiding Petitioner's credit-card business.

The testimony of the witnesses and the exhibits received in evidence in this proceeding indicate that the Magazine is a separate business enterprise owned and operated by the Petitioner. The purpose of the Petitioner is that the publishing and the credit-card facets of the business shall be financially self-sustaining and that they shall be independent of each other. If either undertaking should cease operating, the other could and would remain in business.

The majority of the advertisements appearing in the Magazine do carry legends such as "charge to your Diners' Club Account", but the decision to insert such a legend is the decision of the advertiser over which the Petitioner exercises no control. The use of similar legends is a usual, normal advertising practice. It can not be gainsaid that some benefit redounds to the credit-card business from the appearance in the Magazine of advertisements bearing such a legend, but this benefit is incidental and it is a matter of little or no interest to the advertiser. Advertisements are solicited and accepted from member establishments and non-member businesses, and there is no discrimination as to advertising rates between the two groups of advertisers. Advertisers are free to, and do, advertise in the Magazine the fact that they will honor credit cards other than those of the Diners' Club.

The Magazine is becoming more diversified in its editorial content and should, therefore, appeal to a greater number of subscribers. By achieving wider circulation, it should be more attractive to advertisers who desire to promote the sale of their merchandise to more people. The Petitioner has developed an aggressive campaign to obtain advertisements of national advertisers irrespective of their affiliation or non-affiliation with the Petitioner's credit-card business. If the Magazine were a "house organ" the development of this campaign would be largely futile because national advertisers would be unlikely to use such a publication.

When all of the foregoing facts, which are forcefully impressed upon one by this record, are taken into consideration, they are individually and collectively incompatible with the position that the Magazine is designed primarily to promote the Petitioner's credit-card business. I find as a fact that the Magazine is not so intended or designed.

In the Respondent's proposed findings of fact and conclusions of law there is the suggestion of a desire to broaden the advertising issue of this proceeding so as to make this issue one which would encompass advertising purposes in general. The pleadings, the testimony of the witnesses and a large number of the exhibits demonstrate clearly that the advertising issue was limited to advertising as that term is illustrated in section 132.226b of the Postal Manual. Respondent's citations of and quotations from National Association of Trailer Owners, Inc., P.O.D. Docket No. 1/144, and Conover-Mast Publications, Inc., H.E. Docket No. 5/173, are inapposite for the reason that the issues in these proceedings were much broader than is the advertising issue in the instant case. (See pp. 2-6 of the transcript of the proceedings and p. 3 of the Initial Decision in P.O.D. Docket No. 1/144; and the Answer, p. 2 of the Initial Decision and p. 6 of the Amended Departmental Decision in H.E. Docket No. 5/173.) When, as in this case, a Petitioner has predicated his preparation on notice that the case would be tried on a limited phase of the advertising question, matters presented for the first time in proposed findings of fact and conclusions of law which would enlarge the scope of this issue are untimely raised.

Based upon the entire record in this case and upon the findings of fact heretofore made, I reach the following conclusions of law insofar as the issues of this case are concerned:

1. The publication "The Diners' Club Magazine" conforms to the requirements of Section 226 of Title 39, United States Code, and Sections 132.226b and 132.228 of the Postal Manual.

2. The rulings of the Respondent set forth in letters to the Petitioner dated September 30, 1959, and December 7, 1959, are set aside and the application for re-entry into the mails as second-class matter of "The Diners' Club Magazine" is granted.

3. The Petitioner had sufficient notice of the bases upon which the Respondent proposed to revoke the second-class mail permit for "The Diners' Club Magazine" and to deny the re-entry application for said publication.

4. The published procedures of the Post Office Department to which the Petitioner was required to resort were in existence in the Federal Register at the time of the mailing of the Respondent's letters of September 30, 1959 and December 7, 1959.

5. The Petitioner had the burden of proof in that phase of this case involving the application for re-entry of the Magazine into the mails as second-class matter and the Respondent had the burden of proof with respect to that phase of the case involving the revocation of the second-class mail permit previously held by the Publisher for the Magazine.

Proposed findings of fact and conclusions of law submitted by the parties have been fully considered and they are adopted to the extent herein indicated. Otherwise, such proposed findings and conclusions are outside the scope of the jurisdiction of the Hearing Examiner, or they are denied for the reasons stated or because of their immateriality.

1/ By Public Law 86-682, approved September 2, 1960, 39 U.S.C. 226 was slightly revised and designated 39 U.S.C. 4354. For the sake of uniformity all sections of Title 39 U.S.C. referred to herein will be identified by their numbers prior to re-codification.