In the Matter of the Complaint Against ATHENA PRODUCTS, LTD. P. O. Box 14152 at Atlanta, GA 30324-1152, etc. P.S. Docket No. 12/136; 05/06/83 Cohen, James A. APPEARANCES FOR COMPLAINANT: Sandra C. McFeeley, Esq. Anne Gallant, Esq. Consumer Protection Division Law Department United States Postal Service Washington, DC 20260-1112 APPEARANCE FOR RESPONDENT: Tom B. Benham, Esq. Benham & Cohen, P.C. Suite 180, 380 Interstate North Parkway Atlanta, GA 30339-2209
Respondent has appealed from the Initial Decision of an Administrative Law Judge which holds that, with regard to the advertising and sale of the Cellussage System, consisting of a cream, a plastic wrap and a lotion, Respondent is engaged in a scheme for obtaining money through the mail in violation of 39 U.S.C. § 3005.
On November 4, 1981, the Consumer Protection Divison, Law Department, United States Postal Service (Complainant), filed a Complaint alleging that by means of advertising materials distributed to prospective purchasers Respondent falsely represents that:
"...use of Respondent's 'Cellussage sic System' consisting of an herbal cream, lotion, and a clear plastic wrap will rid the user of the condition, dermo-panniculosis deformans, commonly referred to as cellulite."
In a timely filed Answer Respondent denied the allegation of the Complaint. The hearing which was originally scheduled for January 8, 1982, was postponed several times for various reasons including the representation by both parties that a settlement was likely. By Order dated April 6, 1982, the hearing was scheduled to commence on May 4, 1982. On April 29, 1982, Respondent filed a Motion to Enforce Settlement Agreement. On May 3, 1982, the day before the scheduled hearing, Complainant filed a Motion to Amend Complaint to include 19 addresses of Respondent in addition to the eight addresses which were included in the original Complaint. At the hearing on May 4, 1982, the Administrative Law Judge heard evidence relating to both motions and the false representation issue. On Respondent's Motion to Enforce Settlement Agreement, testimony was heard from Respondent's attorney Tom B. Benham, and Complainant's attorneys Sandra C. McFeeley and James F. McMullin. On the remaining issues, Complainant presented the testimony of Postal Inspector Michael P. Flynn and William R. Ayers, M.D., who is Board certified in internal medicine, and serves as Associate Dean and Associate Professor at Georgetown University School of Medicine and Medical Director of the Diet Management Program at that medical school. Complainant also submitted documentary evidence. Respondent presented no evidence on the Motion to Amend the Complaint or the false representation issue.
Following the hearing and the parties submission of proposed findings of fact and conclusions of law and briefs, the Administrative Law Judge issued an Initial Decision in which he denied Respondent's Motion to Enforce Settlement Agreement, granted Complainant's Motion to Amend Complaint, and found that Respondent makes the representation alleged in the Complaint and that the representation is materially false. He therefore concluded that Respondent is engaged in conducting a scheme for obtaining money through the mail in violation of 39 U.S.C. § 3005.
In its appeal Respondent presents nine exceptions to the findings and conclusions of the Initial Decision. Each exception is hereafter addressed.
"1. The ALJ erred in denying the Respondent's motion to enforce the settlement agreement which had been reached in early 1982 between Tom B. Benham, Counsel for Respondent, and James F. McMullin, then Counsel for Complainant, the U.S.P.S."
Respondent contends that sometime after mid-January 1982, Tom Benham, Respondent's Counsel, and James F. McMullin, then counsel for Complainant, entered into a settlement agreement with respect to Respondent's advertisements for its product, the Cellussage System. According to Respondent the settlement agreement arose out of communications between the parties beginning with telephone conversations either on or shortly before December 15, 1981. Specifically, Respondent contends that the actions and words of Mr. McMullin manifested Complainant's assent to Respondent's settlement proposal which was first made in a letter dated December 15, 1981. Further, it contends that under Georgia law a party's assent to a settlement may be implied from circumstances and conduct inconsistent with a refusal. In addition, Respondent argues that Mr. McMullin never communicated any disagreement with the language set forth in Respondent's proposal and under Georgia law, his silence amounts to his agreement to the settlement. Finally, Respondent contends that representations by Mr. McMullin to the presiding Administrative Law Judge and the Administrative Law Judge's secretary show that a settlement agreement had in fact been reached.
While Respondent has conceded (Brief on Motion to Enforce Settlement, p. 2) that no written documentation from Respondent or Complainant confirms that an agreement had been reached, it relies on testimony of Mr. McMullin and Orders of the Administrative Law Judge to supports its position that the Postal Service had agreed to its settlement proposal. In this regard, Respondent quotes portions of Mr. McMullin's responses to questions posed by the Administrative Law Judge during the hearing (Resp. Brief, p. 7 quoting Tr. 53). However, a reading of Mr. McMullin's entire testimony shows that although the parties believed a settlement was likely and Mr. McMullin may have represented that he was going to file a consent agreement, agreement on the language of the consent agreement was not reached, and the specific language in Mr. Benham's letter of December 15, 1981, was never accepted by Complainant. Moreover, Mr. Benham's own testimony leads to the conclusion that no agreement was reached on how to handle the mail (Tr. 14-16, 28-29). Finally, the Administrative Law Judge's Order reciting conversations with counsel reflect both the expectation and likelihood of a settlement, but not that a settlement agreement had been reached.
In the circumstances of this case, Complainant's delay in finally rejecting Respondent's proposed language does not constitute any direct, implied or presumed admission or agreement to the proposal. (I.D., pp. 11-14 and authorities cited therein). Respondent's arguments to the contrary are not persuasive. The findings and conclusions of the Initial Decision support the Administrative Law Judge's denial of the Motion to Enforcement Settlement.
Furthermore, the relief Respondent requests is enforcement of a consent agreement. While the negotiation of a consent agreement is between Respondent and Complainant represented by the Law Department, "neither the Judicial Officer nor the Administrative Law Judges. . . would be bound to accept as a basis for dismissal or suspension of a proceeding. . . any agreement considered by them to be improperly executed or otherwise defective in material respect on its face . . ." Jay Norris Corp., P.S. Docket No. 4/152 (P.S.D. June 21, 1976, at 10-11). The alleged agreement, even if agreed to by the parties, would be defective because it was not executed and the evidence does not establish its terms.
"2. The ALJ erred in granting Complainant's motion to amend the Complaint, thus, allowing the U.S.P.S., pursuant to a motion filed one day before the hearing between the parties, to add some nineteen addresses to the caption of its Complaint filed against Athena."
Respondent contends that the Administrative Law Judge erred in his interpretation of the Rules of Practice in granting Complainant's Motion to Amend the Complaint. Respondent takes the position that in order to amend the Complaint it was necessary for Complainant to comply with the service requirements of 39 C.F.R. § 952.8(a) and to serve individually each post office box listed in the Motion to Amend.
The cited provision of the Rules of Practice states in part:
"...the Recorder shall cause a notice of answer and hearing and a copy of the complaint to be transmitted to the postmaster at any office of address of the Respondent or to the inspector in charge of any division in which the Respondent is doing business, which shall be delivered to the Respondent or his agent by said postmaster or a supervisory employee of his post office or a postal inspector. A receipt acknowledging delivery of the notice shall be secured from the Respondent or his agent and forwarded to the Recorder, U.S. Postal Service, Washington, D.C. 20260, to become a part of the official record." (Emphasis added.)
Respondent contends that the Administrative Law Judge erred by emphasizing the word "any" in the quoted provision. It argues that the Administrative Law Judge's interpretation of the rule would permit the Postal Service to serve only one of any number of addresses listed in a Complaint and that this is contrary to the intent of the service provision and, furthermore, does not reflect the practical implementation of the service requirement that is customarily followed. It asserts that the file in this case contains numerous certified mail return receipts from each post office box identified in the original Complaint.
Respondent's reliance on 39 C.F.R. § 952.8 to establish the addresses to which service of the Complaint and amendments thereto are required is misplaced. While, as a matter of practice, service of the Complaint initiating the proceeding is sought at all addresses included in the caption, the rule permits the Complaint to be served at any address. Moreover, in this case, Respondent was represented by counsel and proper service could and was accomplished by providing counsel with the Motion to Amend. See United States v. Davis, 38 F.R.D. 424, 425-26 (N.D.N.Y. 1965).
Furthermore, as found by the Administrative Law Judge, the service requirements applicable to amendments to pleadings are included in 39 C.F.R. § 952.12 which authorizes:
"(b) By consent of the parties a pleading may be amended at any time. Also a party may move to amend a pleading at any time prior to the close of the hearing and, provided that the amendment is reasonably within the scope of the proceeding initiated by the Complaint, the presiding officer shall make such ruling on the motion as he deems to be fair and equitable to the parties."
In the amendment sought by Complainant the product and the alleged false representation in the advertisements were unchanged. Only addresses were added to the Complaint. With respect to the addresses, no showing has been made that the amendment was not fair and equitable, or that Respondent was prejudiced in any way. Where no prejudice is shown, amendments to pleadings are treated liberally. Smith v. Boyer, 442 F.Supp. 62 (W.D.N.Y. 1977).
Accordingly, the Administrative Law Judge's ruling granting the Motion to Amend was proper. See Athena Products Ltd., P.S. Docket No. 11/107 (P.S.D. Aug. 31, 1982, at 5-6). Respondent's exception has no merit.
"3. The ALJ erred in his Finding of Fact, located at page 19 of his initial decision, which states that Respondent's advertising materials make the representation as alleged in paragraph 3 of the government's Complaint."
"5. The ALJ erred in Conclusion of Law number 2, located at page 29 of the initial decision, by stating the Conclusion of Law found therein."
6. The ALJ erred in Conclusion of Law number 3, located at page 30 of the initial decision, by stating the conclusion of law stated therein."
Respondent's Exceptions 3, 5 and 6 relate to whether Respondent's advertisements make the representation that use of the Cellussage System will rid the user of cellulite. The Administrative Law Judge, quoting from Respondent's advertisements (CX-2, 5, 8, 12, 17, 19-24), reached the conclusion that the average person reading these advertisements would interpret them substantially as characterized in paragraph 3 of the Complaint (I.D. at 19-24). Respondent contends the Administrative Law Judge relied on isolated passages of the advertisements and that the impression created from a fair reading of its advertisements is not that the Cellussage System will permanently rid users of cellulite deposits but only that it will give immediate results on the appearance of skin surfaces pockmarked by cellulite deposits and that it may prove beneficial on a long range basis.
Respondent's contentions have been considered in light of the language used in its advertisements. Under the ordinary reader test of Donaldson v. Read Magazine, Inc., 333 U.S. 178 (1948), the overall impression created by each advertisement is that use of Cellussage System will rid the user of the condition commonly known as cellulite. Therefore, Respondent's contentions under these exceptions are without merit.
"4. The ALJ erred in his Finding of Fact, located at page 26 of the initial decision, which states that Respondent's representation concerning its product, the Cellussage System, is materially false."
"8. The ALJ erred in Conclusion of Law number 7, located at page 30 of the initial decision, by stating the Conclusion of Law found therein."
Both of these exceptions relate to the findings and conclusions of the Administrative Law Judge that the representation alleged in the Complaint for the Cellussage System is materially false. Respondent attacks Complainant's evidence on the falsity of the representation on the grounds it was based solely on the testimony of Complainant's expert witness Dr. Ayers. It contends Dr. Ayers' testimony shows that he clings to traditional opinions in his belief that cellulite is merely subcutaneous fat that can be removed only by "reducing the amount of calories taken in, by increasing the energy burned in exercise, or by a combination of the two" (Resp. Brief at 13-14). According to Respondent, the Administrative Law Judge's decision condemns new ideas in direct contradiction to the rulings of the Supreme Court in American School of Magnetic Healing v. McAnnulty, 187 U.S. 94 (1902), and Reilly v. Pinkus, 338 U.S. 269 (1949). In the latter case the Supreme Court stated at p. 274:
" W e do accept the McAnnulty decision as a wholesome limitation upon findings of fraud under the mail statutes when the charges concern medical practices in fields where knowledge has not yet been crystallized in the crucible of experience. For in the science of medicine, as in other sciences, experimentation is the spur of progress. It would amount to condemnation of new ideas without a trial to give the Postmaster General power to condemn new ideas as fraudulent solely because some cling to traditional opinions with unquestioning tenacity."
Respondent's reliance on the McAnnulty and Reilly v. Pinkus decisions is misplaced. Those opinions presuppose conflicting credible medical or scientific opinions. As stated in Reilly v. Pinkus, at 274, immediately prior to the above quotation:
"We do not understand or accept the McAnnulty holding as prescribing an inexorable rule that automatically bars reliance of the fact-finding tribunal upon informed medical judgment every time medical witnesses can be produced who blindly adhere to a curative technique thoroughly discredited by reliable scientific experiences."
Furthermore, in Reilly v. Pinkus, the Court found that medical opinion was in a state of flux on the value of the product in achieving an advertised use. Nevertheless, the Court found that the respondent in that case had made misrepresentations in its advertising which went beyond permissible puffing and were material representations "on which credulous persons, eager to reduce, were entitled to rely." (Id.)
Although Respondent contends the medical treatment of cellulite is in an area that has not been "crystallized in the crucible of experience," it submitted no rebuttal evidence to Complainant's case. Indeed, Respondent presented no witnesses on the efficacy of the Cellussage System.
The Administrative Law Judge properly relied on the testimony of Complainant's expert in finding that Respondent's representation was false. The expert's unrebutted statement that his opinion concerning the product reflected the consensus of medical opinion (Tr. 117-118) is sufficient to establish Complainant's case and to distinguish it from the concerns expressed in Reilly v. Pinkus, and McAnnulty, supra. See, e.g., U.S. Health Club, Inc., v. Major, 292 F.2d 665 (3d Cir. 1961). Accordingly, Exceptions 4 and 8 have no merit.
"7. The ALJ erred in Conclusion of Law number 6, located at page 30 of the initial decision, in applying the 'preponderance of the evidence' standard in his determination whether Respondent was in violation of 39 U.S.C. § 3005."
Respondent contends that inferences play a primary role in the determination of whether there has been a violation of 39 U.S.C. § 3005. In this regard, Respondent refers to the determination by the Administrative Law Judge of the effect of challenged advertisements on the minds of ordinary readers. It than argues that where an agency relies on inferences to impose drastic sanctions amounting to a deprivation of livelihood for the sanctioned party, the standard of proof which should properly be employed is the clear and convincing standard rather than the preponderance of evidence standard. In support of this proposition Respondent cites Collins Security Corp. v. S.E.C., 562 F.2d 820 (D.C. Cir. 1977).
The Supreme Court in effect overruled Collins in Steadman v. S.E.C., 450 U.S. 91 (1981), holding that the preponderance of evidence standard is to be applied in administrative proceedings before the S.E.C. in determining violations of the antifraud provision of the Federal Security laws. As indicated by the Court of Appeals for the District of Columbia Circuit, the Steadman ruling has made the "clear and convincing" standard of proof "ineffectual." Seaton v. S.E.C., 670 F.2d 309, 311 (D.C. Cir. 1982); accord, Hinkle Northwest, Inc. v. S.E.C., 641 F.2d 1304, 1307 n.3 (9th Cir. 1981). Moreover, orders issued under 39 U.S.C. § 3005 do not have the drastic effect referred to by Respondent. Rather they simply prevent Respondent from obtaining orders for a product which has been found to be misrepresented. Wilmont Products, P.S. Docket No. 6/46 (P.S.D. July, 1979). Under such circumstances the preponderance of evidence standard is to be applied. Telex & twx Directory, P.S. Docket No. 13/6
(P.S.D. April 1, 1983) and cases cited therein. Thus, the preponderance of evidence standard was properly employed by the Administrative Law Judge.
"9. The ALJ erred ins sustaining a U.S.P.S. objection to counsel for Respondent's cross-examination, located at pages 115 and 116 of the transcript of the May 4, 1982, hearing."
Respondent contends that it was denied the opportunity of exploring the credibility of Complainant's expert witness because the Administrative Law Judge sustained an objection by Complainant to the following question asked on cross-examination:
"Have you Dr. Ayers ever at any time actually tested any product about which you have testified?" (Tr. 115.) Respondent argues that it had a right to question the scope of Dr. Ayers' practical knowledge and experience as it related to his prior testimony and that he was prevented from doing so when the Administrative Law Judge sustained the objection made by Complainant. While the objection should not have been sustained, no reversible error was committed.
At the hearing Respondent's counsel argued that Dr. Ayers' response to the question would be that he had never tested any such product (Tr. 115-116). Assuming that would have been the response, the witness's credibility would not have been in doubt and his testimony could have been and was properly relied on to establish the falsity of Respondent's representation. Neither Complainant nor its witness is required to conduct tests of the product to provide its case. See, e.g., GHP Laboratories, Inc., P.S. Docket No. 10/149 (P.S.D. Nov. 30, 1981, at pp. 8-10). Complainant's witness was properly considered to be an expert and his opinion testimony which was in accordance with the consensus of informed medical and scientific opinion relating to the representation about the product was sufficient to establish Complainant's prima facie case. This testimony was unrebutted and persuasive, and constitutes a preponderance of the evidence to support the allegations of the Complaint. The failure to perform actual tests on the product does not detract from this result.
After consideration of the entire record and Respondent's appeal, it is concluded that the Administrative Law Judge properly denied Respondent's Motion to Enforce Settlement Agreement and properly granted the Motion to Amend Complaint. Furthermore, it is concluded that Respondent is engaged in a scheme to obtain money through the mail by means of materially false representations. Accordingly, Respondent's appeal is denied and a remedial order under 39 U.S.C. § 3005 is being issued with this decision.