In the Matter of the Complaint Against U. S. MERCHANDISING, 2389 N.W. Military Drive, Suite 597, San Antonio, TX 78231-2502, WILLIAM ROWELL COLEMAN, 2389 N.W. Military Drive, Suite 597, San Antonio, TX 78231-2502, PATRICIA G. HATHAWAY, Route 2, Box 726, Adkins, TX 78101-9524, PREMIUM EXCHANGE, 11765 West Avenue, Suite 310, San Antonio, Texas 78216-2525 P.S. Docket No. 28/120 January 22, 1988 Randolph D. Mason Administrative Law Judge APPEARANCES FOR COMPLAINANT: Sandra C. McFeeley, Esq. Geoffrey A. Drucker, Esq. Consumer Protection Division Law Department United States Postal Service Washington, D. C. 20260-1144 APPEARANCE FOR RESPONDENTS: John L. Mogford, Jr., Esq. P. O. Box 690561 San Antonio, TX 78269-0561
This proceeding was initiated on October 1, 1987, when the Postal Service filed a Complaint alleging that Respondents U. S. Merchandising, William R. Coleman, and Patricia G. Hathaway are engaged in conducting a scheme or device to obtain money through the mail by means of false representations in violation of 39 U.S.C. 3005. On November 12, 1987, Complainant filed a Motion to Amend the Complaint to include Premium Exchange as an additional respondent. On November 13, 1987, Respondents' counsel informed the undersigned that Respondents did not object to the Motion to Amend and the motion was granted. Specifically, the Complaint, as amended, alleges in paragraph 15 that Respondents falsely represent, directly or indirectly, in substance and effect, whether by affirmative statements, implications, or omissions, that:
(a) Upon receipt of a phone call from a consumer, respondents will furnish the boat and motor described in their initial letter (a letter substantially similar to Exhibit 1 [attached to Complaint]) at no further cost to the consumer except for shipping;
(b) Upon receipt of the prescribed redemption fee, respondents will send a consumer the boat and motor described in their initial letter (a letter substantially similar to Exhibit 1 [attached to Complaint]) and in the redemption voucher within no more than eight weeks;
(c) Upon receipt of an order for an advertising specialty item, respondents will send a consumer a document from which he may obtain a vacation to Mexico at no further cost; and
(d) Upon receipt of a completed registration form, respondents will send a consumer a document from which he may obtain a four-day, three-night vacation to Mexico for two persons, including hotel accommodations and airfare, at no further cost except a $49.50 processing fee per person.
All Respondents except Premium Exchange filed an Answer to the Complaint, alleging that Patricia Hathaway is not a responsible operator of the enterprise, admitting that representations (b) and (d) are made, but denying that representations (a)-(d) are false.
Thereafter, the parties waived the right to an oral evidentiary hearing and agreed to submit evidence in the form of affidavits, depositions, and exhibits. On December 4, 1987, Complainant submitted Proposed Findings of Fact and Conclusions of Law and the following evidence: the affidavit of Postal Inspector Harold G. Cross, the deposition of Mark E. Ogram, sworn declarations of Donald N. Hall and Stanley N. Drinkwater, Jr.,and other documentary evidence. On December 8, 1987, Complainant submitted the affidavit of Aaron Valenzuela, Assistant Attorney General for the State of Texas. All were received in evidence.
Respondents were given until December 23, 1987, to submit their evidence and proposed findings of fact and conclusions of law. To date, no evidence or brief has been submitted by Respondents. To the extent indicated below, proposed findings and conclusions have been adopted; otherwise, they have been rejected as irrelevant or contrary to the evidence. Based on the entire record herein, including the pleadings, deposition, exhibits, affidavits, declarations, and other relevant evidence, I make the following findings of fact and conclusions of law:
1. Respondent William Rowell Coleman is an individual who conducts business under the names U.S. Merchandising and Premium Exchange at 2389 N.W. Military Drive, Suite 597, San Antonio, Texas 78231 and 11765 West Avenue, Suite 310, San Antonio, Texas 78216-2525. He directs and controls the activities of those businesses (Ans. 2-3, 6; Cross Aff. 10 and Exh. 4; Valenzuela Aff. 5).
2. Respondent Patricia G. Hathaway is an individual whose home address is Route 2, Box 726, Adkins, Texas 78101 (Ans. 4). She is active in the conduct of Coleman's businesses. Specifically, she applied as an "officer" on behalf of respondents for delivery of mail to an agent, and on the application for Premium Exchange she identified herself as a member of the firm whose mail is to be delivered (Cross Aff., Exh. 2-3). Hathaway's role in these businesses is one of trust and responsibility. In this regard, Coleman has given her a power of attorney authorizing her to deposit and to withdraw money from bank accounts maintained for U.S. Merchandising (Cross Aff. 7, Exh. 5-6).
3. While Respondents may vary their approach from consumer to consumer in some minor respects, they conduct their promotion substantially as follows:
a. Respondents send an unsolicited letter to owners or operators of businesses informing them that they have been selected to redeem a 10-foot sport fishing boat and electric motor and inviting them to telephone respondents at a specified number (Ans. 7; Drinkwater decl. 2; Hall decl. 1-2; Ogram depo. Exh. 1).
b. A consumer who telephones as instructed reaches an agent of respondents and learns that he must purchase an advertising specialty item (an item with a business name or logo printed on it), such as ballpoint pens, for about $300 in order to receive the boat and motor described in the letter. As a further inducement, a caller may be offered a free vacation in Mexico, including airfare, if he purchases Respondents' products (Ans. 8; Ogram depo. at 6-7; Drinkwater decl. 3).
c. A consumer who agrees to purchase an advertising specialty item subsequently receives a C.O.D. parcel costing about $300. The parcel contains a cover letter, an invoice for the advertising specialty item, a document entitled "Mexico Vacation Voucher," a document entitled "Electra Sport Boat and Motor Validation Certificate," and a "rebate check" for $100 (valid only toward purchase of respondent's products) (Ans. 9; Drinkwater decl. 4).
d. In some cases Respondents require direct payment before shipping anything (Ogram depo. p. 6-7).
e. When the boat redemption voucher arrives, usually after the customer has made a substantial expenditure for advertising products, some customers learn for the first time that they must pay an $89 "redemption fee" in order to receive the boat. Similarly, although some are told during the initial telephone call (Ogram depo. Exh. 2), many customers do not learn until they receive the vacation voucher that the trip to Mexico requires payment of a $49.50 reservation fee per person (Drinkwater aff. 3, 5; Cross aff. 2).
f. A consumer who sends respondents the required payment for the boat and motor does not receive them within the six to eight weeks indicated on the redemption voucher. If they arrive at all, it is only many months later (Valenzuela aff. 5; Ogram depo. p. 10-11; Drinkwater decl. 7; Hall decl. 4, 6).
g. No document providing the consumer with a free vacation ever arrives (Ogram depo. p. 9; Drinkwater decl. 7).
4. Respondents make the following materially false representations (a)-(d) set forth in paragraph 15 of the Complaint:
"(a) Upon receipt of a phone call from a consumer, Respondents will furnish the boat and motor described in their initial letter (a letter similar to Exhibit 1 [attached to Complaint]) at no further cost to the consumer except for shipping."
Respondents' initial solicitation letter makes representation (a) by informing the reader that he has been "selected to redeem and receive a new 10 foot ELECTRA SPORT FISHING BOAT AND OUTBOARD MOTOR." The letter further states:
"This fishing and recreational craft is engineered and constructed with several individually pressurized chambers for your safety and will give years of trouble-free, low maintainance operation.
Please call our southwest regional office to arrange for shipment of boat and motor....
Please note: There is no purchase necessary. "
( See , e.g. , Ogram depo. Exh. 1; Hall depo. Exh. 1.)
When many readers call the long-distance telephone number to "redeem" their boat and motor, they are informed that there is a delivery charge of $89 (Ogram depo. Exh. 2). The charge appears reasonable to many ordinary readers because they assume that the boat is a substantial size (Hall decl. p. 2).
This representation is false because the "boat and motor", if ever sent, is nothing more than an inflatable rubber raft with a cheap motor. Since $89 is substantially more than it would cost to ship the cardboard box sent by Respondents, the customer is essentially buying the boat. Accordingly, the representation that the boat and motor will be sent at no cost except for shipping is false.
Since persons who call to "redeem" the boat are told that they must buy about $300 worth of pens to receive the boat, the representation that they will receive a valuable boat for only the cost of delivery is an inducement to purchasing the pens and remitting the $89 delivery charge. Accordingly, representation (a) is materially false.
"(b) Upon receipt of the prescribed redemption fee, respondents will send a consumer the boat and motor described in their initial letter (a letter substantially similar to Exhibit 1 [attached to Complaint]) and in the redemption voucher within no more than eight weeks;"
Respondents admit making representation (b). Ans. 15(b). Also, the representation is expressly made in Respondents' solicitations (Ogram depo. Exh. 5; Drinkwater decl. Exh. 2).
The representation is materially false because many customers did not receive the boat and motor for up to 8 or 9 months, and some never received their boat (Ogram depo. p. 12; Drinkwater decl. 7; Hall decl. p. 2).
"(c) Upon receipt of an order for an advertising specialty item, respondents will send a consumer a document from which he may obtain a vacation to Mexico at no further cost; and (d) Upon receipt of a completed registration form, respondents will send a consumer a document from which he may obtain a four-day, three-night vacation to Mexico for two persons, including hotel accommodations and airfare, at no further cost except a $49.50 processing fee per person."
Respondents admit making representation (d), Ans. 15(d), and it is expressly made in the "Mexico Vacation Voucher." Respondents made representation (c) in telephone conversations with prospective consumers by saying that that the latter would receive a "free" trip to Mexico if they purchased the pens (Drinkwater decl. 3). Although some were told about the reservation fee during the telephone solicitation (Ogram depo. Exh. 2), the typical prospective customer was told that the vacation was "free" (Cross aff. 2; Drinkwater decl. 3).
First, representation (c) is false because customers who purchase pens with the expectation of receiving a free trip to Mexico are subsequently told that they must pay a $49.50 per person reservation fee. Second, both representations (c) and (d) are false because no customer ever receives either a trip to Mexico or any document entitling him to such a trip (Ogram depo. p. 9; Drinkwater decl. 7).
False representations (c) and (d) are material because they are an important inducement to the purchase of pens. Mr. Ogram's precise recitation of the terms of the offer in his letter to respondents demonstrates how important the vacation offer was to him (Ogram depo. Exh. 2).
1. (a) Respondents' advertisements and telephone solicitations must be considered as a whole and the meaning is to be determined in light of the probable impact on a person of ordinary mind. Donaldson v. Read Magazine , 333 U.S. 178, 189 (1948); Peak Laboratories, Inc. v. U.S. Postal Serv. , 556 F.2d 1387, 1389 (5th Cir. 1977). The statute is intended to protect the gullible, naive, and less critical consumer, as well as the more sophisticated, wary consumer. Fields v. Hannegan , 162 F.2d 17 (D.C. Cir. 1947), cert. denied , 332 U.S. 773 (1947); M.K.S. Enterprises, Inc. v. United States Postal Service , 459 F. Supp. 1180, 1184 (E.D.N.Y. 1978); Gottlieb v. Schaffer , 141 F. Supp. 7 (S.D.N.Y. 1956); Leo Daboub , P.S. Docket No. 19/185 (P.S.D. July 10, 1986). Express misrepresentations are not required. It is the net impression which the solicitation is likely to make upon individuals to whom it is directed which is important, and even if a solicitation is so worded as not to make an express representation, if it is artfully designed to mislead those responding to it, the false representation statute is applicable. G.J. Howard Co. v. Cassidy , 162 F. Supp. 568 (E.D.N.Y. 1958); See also , Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council , 425 U.S. 748 (1976).
(b) Where an advertisement is ambiguous or capable of more than one meaning, if one of those meanings is false, the advertise- ment will be held to be misleading. Rhodes Pharmacal Co. v. F.T.C. , 208 F.2d 382, 387 (7th Cir. 1953); Ralph J. Galliano , P.S. Docket No. 19/15 (P.S.D. May 2, 1985 at p. 9).
(c) An inconspicuous disclaimer is not sufficient to dispel the effect of false representations. Leo Daboub, supra ; Gottlieb v. Schaffer , supra .
(d) The Administrative Law Judge can determine whether the representations are made, their effect on the ordinary mind, and materiality without the assistance of lay or expert testimony. Standard Research Labs , P.S. Docket No. 7/78 (P.S.D. Oct. 27, 1980); The Robertson-Taylor Company , P.S. Docket Nos. 16/98-102, 16/120-121, P.S.D. March 31, 1986 at page 29); Vibra-Brush v. Schaffer , 152 F. Supp. 461 (S.D.N.Y. 1957), rev'd on other grounds , 256 F.2d 681 (2nd Cir. 1958).
2. Applying the foregoing standards, I find that Respondents make the representations alleged in 15(a)-(d) of the Complaint, as amended. The language contained in the advertisements, together with the telephone solicitations, when read and heard in context, which directly or impliedly make these representations are set forth in the Findings of Fact.
3. As set forth in the Findings of Fact, the representations contained in paragraph 15 of the Complaint, as amended, are materially false.
4. Complainant has established its case by a preponderance of the reliable and probative evidence of record. S.E.C. v. Savoy Industries, Inc. , 587 F.2d 1149, 1168 (D.C. Cir. 1978).
5. The representations made by Respondents are material because they have a tendency to persuade consumers to order and pay for Respondent's pens and make other remittances.
6. Respondents are engaged in the conduct of a scheme for obtaining remittances of money through the mail by means of materially false representations in violation of 39 U.S.C. 3005.
7. Respondents argue that any Cease and Desist Order issued in this case should not include Patricia G. Hathaway. Complainant argues that Hathaway should be subjected to the Cease and Desist Order because the scheme requires her services for its successful operation. For the reasons set forth below, the Cease and Desist Order should be issued against all Respondents.
8. Congress amended 39 U.S.C. 3005 in 1983 to provide in subsection (a)(3) that the Postal Service may order a "person" who is engaged in a scheme to obtain money through the mails through false representations to "cease and desist" from such conduct. Congress's purpose in granting the Postal Service this power over individuals was to strengthen the deterrent effect of the statute and reduce the possibility of evasion of Postal Service orders. W.G. Charles Company , P.S. Docket Nos. 19/103-105, 161-62, 179, 182-84; 20/16, 32 (Decision on Motion to Dismiss, January 28, 1985 at p. 10).
9. A cease and desist order will be issued against individuals who are responsible for the conduct of a business. Federal Trade Commission v. Standard Education Society , 302 U.S. 112 (1937). The individuals need not have been responsible for the false advertising itself; it is sufficient if they played some other significant role in the scheme, such as receiving the money from customers. W.G. Charles Company , P.S. Docket Nos. 19/104, 19/162 (P.S.D. Sep. 10, 1985) and W.G. Charles Company , P.S. Docket Nos. 19/105, 19/161, 20/32 (P.S.D. Sept. 30, 1985 at pp. 10-13) (affirming W.G. Charles Company , Docket Nos. 19/103-105, 161-162, 179, 182-84; 20/16, 20/32, Decision & Order on Motion to Dismiss, January 28, 1985 at page 10); Barrett Carpet Mills, Inc. v. Consumer Product Safety Comm. , 635 F.2d 299 (4th Cir. 1980).
10. William Rowell Coleman admittedly played a major role in the scheme and should be subjected to the Cease and Desist Order.
11. Patricia G. Hathaway has also played an integral and important part in the scheme. She is a trusted associate of Coleman, which is evidenced by the fact that she is responsible for the cash received by the business and has access to the bank account. She represents herself as a responsible agent or officer. Accordingly, Hathaway is a major participant in the scheme and should be subject to the cease and desist order. If she were not, Coleman could attempt to use her to circumvent the order. Cotherman v. Federal Trade Com. , supra at 594-95; W.G. Charles Company , supra.
12. Accordingly, the attached False Representation Order and Cease and Desist Order should be issued.