In the Matter of the Complaint Against ) June 29, 1989
)
THE CANADIAN EXPRESS CLUB )
C.E.C SERVICES )
624654 ONTARIO LIMITED )
FIRST TELEMEDIA GROUP )
GEORGE MICHAEL YEMEC and )
ANITA FERN RAPP )
ELIZABETH TOTH )
1030 Rand Building )
14 Lafayette Square )
Buffalo, NY 14203-1928 )
and )
Main Post Office Box 823 )
Niagara Falls, NY 14302-0661 ) P.S. Docket No. 28/52
Grant, Quentin E., Chief Administrative Law Judge
APPEARANCE FOR COMPLAINANT:
Jennifer Yopes, Esq.,
Consumer Protection Division,
Law Department,
United States Postal Service,
Washington, DC 20260-6100
APPEARANCE FOR RESPONDENTS:
Elizabeth St. Clair, Esq.,
Rabinowitz, Boudin, Standard,
Krinsky & Lieberman, P.C.,
740 Broadway at Astor Place,
New York, NY 10003-9518
Complainant, the General Counsel of the U.S. Postal Service, filed a complaint on August 11, 1987, alleging that Canadian Express Club, C.E.C. Services and Elizabeth Toth were conducting a lottery or scheme for the distribution of prizes by chance in violation of 39 U.S.C. § 3005 by using the mail to sell shares in blocks of lottery tickets purchased in Canadian lotteries. On October 9, 1987, the undersigned granted Complainant's motion to amend the complaint. The first amended complaint added Anita Fern Rapp, George Michael Yemec, 624654 Ontario Limited and First Telemedia Group as respondents.
Only respondent The Canadian Express Club answered the first amended complaint by the November 5, 1987 due date. This answer denied any violation of the lottery provisions of the statute.
Complainant moved for default orders against the other respondents on November 9, 1987, and the undersigned issued a default order on February 5, 1988. The Judicial Officer upheld the default finding and issued orders against the defaulting respondents on March 7, 1988. After motions and briefing by the parties, the Judicial Officer ordered that the defaulting respondents be permitted to present a defense at the hearing on issues common to all the respondents (P.S.D. July 20, 1988). Upon a motion for clarification by complainant, the Judicial Officer explained the extent of hearing participation allowed to the defaulting parties stating that complainant would not be permitted to introduce evidence proving the allegations of the complaint, nor to obtain discovery, on matters which related only to the defaulting parties (P.S.D. November 18, 1988).
A hearing was held February 28, 1989. Two witnesses testified for the Complainant, Postal Inspector Ron Snyder and Paula Jones. Respondents called two witnesses, Dr. Herman B. Leonard and Stephen Rapp.
The parties have filed proposed findings of fact and conclusions of law which have been fully considered. To the extent indicated below they have been adopted; otherwise, they have been rejected as irrelevant or contrary to the evidence. Based on the entire record and my observation of the witnesses and their demeanor, I make the following findings of fact and conclusions of law.
1. Respondent Canadian Express Club is a business with offices located at 1030 Rand Building, 14 Lafayette Square, Buffalo, NY 14203-1928 (Answer, parag. 2). It was registered with the Ontario Ministry of Consumer and Commercial Relations as a general partnership at the time its business activities were being conducted in Buffalo and when the amended complaint was filed in this matter (CX-5). It is the entity which conducted business at 1030 Rand Building including the sale of shares in lottery tickets which is the subject of this proceeding (Snyder, Tr. 21, 22; Jones, Tr. 58. 59).
2. Ms. Paula Jones, a former employee of Canadian Express Club, testified about its operations at the Rand Building. Her testimony established that the business conducted by Canadian Express Club at the Rand Building included the employment of telemarketers who telephoned members of the public and offered them the opportunity to join with others to purchase shares in "pools" of Canadian lottery tickets and to share any winnings obtained through those tickets (Jones, Tr. 59-60; CX-2).
3. Persons who wished to purchase a share in a lottery pool were permitted to pay by credit card or by sending payment in the form of check, money order or cash. Those who sent payment were told to send it to C.E.C. Services, Main P.O. Box 823, Niagara Falls, NY 14302-0661 (Jones, Tr. 63). Presumably Respondents made the necessary arrangements with VISA, Mastercard and American Express for handling credit card charges (see CX-1, p. 2a, order form).
4. The application for P.O. Box 823, Niagara Falls, NY 14302 was signed by defaulted respondent Elizabeth Toth, listing the business name "Express Sales" at 1030 Rand Building, Buffalo, NY
(CX-3).
5. Persons contacted by Canadian Express Club telemarketers who requested more information about the lottery offer were sent several pages describing the lottery options available with an order form and a return envelope addressed to C.E.C. Services, Main P.O. Box 823, Niagara Falls, NY 14302-0661 (Jones, Tr. 61-62; CX-1). Canadian Express Club's Toronto office sent similar mailings to persons in the United States which included a return envelope addressed to the Niagara Falls Post Office Box (Snyder, Tr. 14-15; CX-1).
6. The evidence shows that Canadian Express Club offered, in exchange for payment of $60.00 or more, shares in pools of lottery tickets which it would purchase on behalf of the group of participants it organized. Paula Jones met with Postal Inspector Ron Snyder in July of 1987, shortly before quitting her job at Canadian Express Club, and dictated a telephone pitch which she had used there as a telemarketer (Jones, Tr. 64-65; Snyder, Tr. 15-17, 52, 53; CX-2). The pitch included the following description of Respondent's operation:
[W]hat we do is organize a group of 250 people and starting on Saturday, we will be purchasing 1,000 tickets a week for six straight weeks on behalf of the group. Now, that being a total of 6,000 tickets, the idea behind the group approach is that those same tickets will be shared equally amoung all 250 people in that group. Now, once the six weeks are over, what we then do is total up all the winnings from all 6,000 tickets and each person in the group gets their equal share of the prize money. Now the tickets are played in the 6/49 and that's Canada's largest nationwide lottery . . ..
7. The pooling arrangement is described as follows in the mailing sent by Canadian Express Club:
We will be buying 1000 tickets a draw for six straight draws in the LOTTO 6/49, giving us a total of 6000 tickets. The Group is made up of 250 shareholders who will split the total winnings from all these tickets equally.
(CX-1, page 2a)
8. An order form in Canadian Express Club's solicitation presents options for purchasing the shares, e.g., one share for six weeks for $60.00 or two shares for six weeks for $120.00 (CX-1, p. 2a).
9. Persons who paid Canadian Express Club by credit card ultimately could send their payment through mail to their credit card company (Stip., Tr. 45). It is a matter of common knowledge that most credit card bills are paid by mail. Thus, Canadian Express Club would be paid indirectly through the use of the mail by most of its credit card customers.
10. Lottery tickets in the Ontario Lottery cost one Canadian dollar (Snyder, Tr. 41). Based on the recent exchange rate ($1.18 Canadian for $1.00 U.S.) Respondents charge about $17,700 in Canadian dollars for each 6,000 lottery tickets they purchase on behalf of a group.
11. Respondents do not determine the method by which winners in the Canadian Lottery are selected. They have no control over picking the winning number or the amount of winnings awarded to the winning number (CX-1; Tr. 49, 104). The entity conducting the Canadian lottery selects winning numbers through some random process and declares prize winners and allocates prizes to winning numbers as a result (Tr. 105).
12. Respondents' expert witness Herman B. Leonard has a Ph.D. in economics. Since 1986 he has been a professor of public management at Harvard University. He teaches finance and financial management at the Graduate School. Prior to 1986 he held assistant and associate professorships of public policy at the Kennedy School of Government at Harvard. He has also done research in the field of statistics and has taught that subject in the Kennedy School. Dr. Leonard has an interest in the subject of lotteries, primarily in connection with teaching a course in state and local finance which has as one of its components the use of lotteries as a means of public finance (RX-1; Tr. 86, 88).
13. Dr. Leonard testified that it is not difficult to understand the operation of lotteries at a rudimentary level but that it might require some expertise in statistics to understand whether the activities of The Canadian Express Club in this case constitute the operation of a lottery because the element of risk is a statistical concept. Dr. Leonard was permitted to testify as an expert on risk, or chance, as a statistical concept (Tr. 90, 93, 102).
14. Dr. Leonard testified that The Canadian Express Club acted only as the purchasing, or pooling, agent of persons desiring to play the Canadian Lottery and that all actions taken by Canadian Express were deterministic; that is, they did not involve the drawing of numbers or any other action introducing random choice which is the risk, or chance, element in a lottery operation. In his view, the risk assumed by a purchaser of shares in a Canadian Express pool was created by the entity which operated the Canadian Lottery and drew the winning numbers and that Canadian Express made no change in that risk (Tr. 109-110). Dr. Leonard testified that a lottery participant faces exactly the same risk purchasing lottery tickets through Canadian Express as he would buying them directly in Canada (Tr. 110).
15. Dr. Leonard also testified that the pooling of participants by Canadian Express was a deterministic action, involving no random process such as drawing random numbers or otherwise introducing risk.
16. Dr. Leonard testified that from the participants' perspective the pooling arrangement whereunder they agree to share winnings reduces their risk (Tr. 116) similar to reduction of the risk of loss achieved through the purchase of automobile insurance (Tr. 117). Through Dr. Leonard, Respondents introduced a series of exhibits illustrating statistically the reduction of risk achieved by pooling and the fact that the larger the pool, the less risk a participant faces (RX-3 through 6; Tr. 118-132).
17. Respondents' solicitation states that Respondent uses the "Cambridge Equation Selection" and "Cambridge Formula Selections" in picking numbers for its groups to play, the clear implication being that the use of the Cambridge method increases the chance that a group will win a substantial amount in the Canadian Lottery (CX-1, pp. 2a, 4a).
18. Respondent introduced several exhibits in support of its argument that the Postal Service is selectively enforcing § 3005 against Canadian Express Club and Canadian lotteries (RX-9-39). These exhibits include complete copies of magazines such as "Lottery Players," which contain numerous advertisements soliciting participation in Canadian and other foreign lotteries as well as state lotteries. Complainant introduced pages from the Postal Bulletin showing that the Postal Service has issued lottery orders against many companies and that those companies include some which are still advertising in lottery magazines in violation of Postal orders. See, for example, I.L.A., advertised in RX-10 page 96, RX-11 p. 2, RX-12 p. 31, RX-17 last page (Lottery Order issued at CX-14, p. 41, CX-15, p. 1); Lotterie Einnehme Hameln, RX-14, p. 2 (Lottery Order issued at CX-15, p. 5). It is a matter of public record that the Postal Service issues lottery orders on a regular basis.
19. Although most of the lottery orders issued by the Judicial Officer are against Canadian lotteries they are also issued against lotteries conducted from other countries (CX-14, pages 2, 7, 8, 29, 31, 37, 41, 42, 43, 45, 59, 64; CX-15).
A. The Lottery Issue
Respondents argue that the complaint should be dismissed because they are not conducting a lottery within the meaning of 39 U.S.C. § 3005. Specifically, they assert that they simply act as a purchasing and pooling agent for individuals wishing to play lotteries conducted by Canadian entities as to which Respondents have no relationship or control. Because they are not conducting the Canadian lottery they argue that the entry fee charged by them is not consideration and that the winnings distributed by them are not a prize, consideration and prize being two of the elements of a lottery. Finally, they argue that their actions are deterministic, as defined by Dr. Leonard, creating no chance, the third necessary element of a lottery.
Activities identical in nature to those conducted by Respondents were held to violate the lottery provisions of 39 U.S.C. § 3005 in Universal Life Church, Inc., P.S. Docket No. 7/62 (P.S.D. Feb. 14, 1980, aff'g I.D. Aug. 31, 1979) and Canadian Express Services, P.S. Docket No. 28/149 (P.S.D. Dec. 30, 1988). Consequently, it is not necessary to discuss at length each of Respondents' arguments on this issue. However, because they present a unique argument for the proposition that their activities do not involve the element of chance, that argument will be considered in detail.
Respondents' solicitations and telephone pitch represent that participation in the share program will produce a monetary return based on increased chances from multiple ticket entries and Respondents' use of the Cambridge Equation Formula (CX-1, p. 2a, 4a; CX-2, p. 1). Therefore, their argument that their purchasing and pooling activities involve no chance conflicts with their solicitation, certainly from a participant's standpoint. The testimony of their expert witness, Dr. Leonard, and exhibits introduced through him were directed to risk reduction rather than increase of chance. Indeed, this evidence shows that pooling of entries in a lottery and equal sharing of winnings by pool or group members reduces statistically the amount of risk to which a group member is exposed as against the risk had he purchased an individual ticket without pooling. Dr. Leonard was reluctant to agree that statistical risk reduction translates to increased chance. He did acknowledge, however, that an individual who prefers to win smaller amounts more often gains that objective through pooling, foregoing the smaller chance of winning big by holding a winning ticket individually (Tr. 127, 128). Whether the pooling performed by Canadian Express is viewed as reducing risk or increasing chance, it is obvious as a matter of common sense and as represented in the solicitations that the pooling service increases the chance that a participant will get some return, albeit small, on his investment and that this return may be a share of a large jackpot. Further, it is obvious that Respondents' selection of the pool in which a participant is placed affects his chance of winning because some pools will win more than others. Calling Respondents' purchasing and pooling operation deterministic, rather than random, acts does not alter the fact that a participant's chances are affected by Respondent's actions.
B. Use of the Mail
The evidence underlying findings of fact numbers 3, 4, and 5, supra, supports the conclusion that Respondents use the United States mail for direct receipt of remittances for purchase of shares in lottery pools.
Many participants, however, at Respondents' invitation, use credit cards to pay for pool shares. In these instances participants are billed by the credit card companies. Most of these bills are paid by mail. The credit card companies pay Respondent. Respondents argue that the plain meaning of § 3005, carefully construed as required, does not reach indirect use of the mail and, therefore, that it may not be held in violation of the statute where participants make payment for Respondents' shares to a credit card company rather than directly to Respondents. Further, Respondents argue that there is no evidence of a relationship between them and any credit card company or of any control by them of the activities of a credit card company or that they ever communicated with a credit card company. These latter arguments are refuted by the invitation extended by Respondents in their telephone pitch and direct mail solicitation to use VISA, Mastercharge, or American Express credit cards for payment.
Respondents' argument as to indirect use of the mails was dealt with earlier on Respondents' prehearing motion to dismiss paragraph 9(c) of the complaint. Respondents' evidence and post-hearing arguments have not persuaded me that the reasons for denying that motion were not sound. As was said in that decision, nothing in the statute makes it inapplicable to lotteries or schemes under which money or property is obtained by a respondent indirectly by inviting the use of credit cards. The encouragement to use credit cards was very much part of the scheme used here by Respondents to obtain money or property. They necessarily contemplated that many, if not most, shares would be paid for by credit card and that the mail would be used in making payment. Also, as was pointed out in the decision on the motion to dismiss, the Judicial Officer issued a cease and desist order in Conte & Company, Inc., P.S. Docket No. 29/131 (P.S.D. Sept. 29, 1988) prohibiting use of credit card arrangements for seeking, indirectly, remittances by mail for lottery participation. This reflects the Judicial Officer's construction of the statute and is to be considered as guidance here.
C. Selective Enforcement
Respondents placed in evidence numerous exhibits in support of their contentions that in this proceeding the Postal Service is (a) selectively enforcing 39 U.S.C. § 3005 in violation of the due process clause's guarantee of equal protection of the law, (b) that the Postal Service is discriminating against Canadian-run lotteries in violation of the Canada-United States Free Trade Agreement's provisions for equal treatment of each others business enterprises, and (c) that the Postal Service is violating the prohibition found in 39 U.S.C. § 403(c) that in providing services it shall not make undue or unreasonable discrimination among users of the mail. 1/
The Judicial Officer recently held that Respondents' contentions that they have been treated more harshly than their competitors and other organizations and that the Postal Service is discriminating against Canadian-run lotteries was not supported by evidence similar to that introduced by the parties in this matter. He pointed out that while the bulk of foreign complaints filed with him involve Canadian lotteries, mailers from other countries have also been the subject of enforcement action. Canadian Express Services, P.S. Docket No. 28/149 (P.S.D. Dec. 30, 1988). I find Respondents' evidence in this case no more persuasive than that presented to the Judicial Officer in 28/149 on the contentions of selective and discriminatory enforcement. The latter point is supported by evidence introduced by Complainant in this matter (CX-14, 15) showing lottery orders issued against lotteries run from other countries.
As to Respondents' reliance on 39 U.S.C. § 403(c), they have not made a showing of discrimination. Further, the Judicial Officer in Canadian Express Services, supra, observed that § 403 does not appear to be directed to individual prosecutions of violation of § 3005.
The solicitation of remittances for participation in a lottery is proscribed by § 3005, and it is no defense in a § 3005 proceeding that others may be conducting similar activities. Gottlieb v. Schaffer, 141 F. Supp. 7, 19 (S.D.N.Y. 1956); Universal Life Church, Inc., P.S. Docket No. 7/62 at 8 (P.S.D. Feb. 14, 1980); see also FTC v. Universal-Rundle Corp., 387 U.S. 244, 251-52 (1967). Furthermore it is well established that agencies have reasonably broad discretion in deciding whether and against whom to initiate proceedings and the agency is not required to proceed against every violator. Heckler v. Chaney, 470 U.S. 821, 831 (1985); Water Transp. Ass'n v. ICC, 715 F.2d 581, 594 (D.C. Cir. 1983), cert. denied, 465 U.S. 1006 (1984); Nutrition Headquarters, Inc., P.S. Docket No. 12/156 at 3 (P.S.D. Aug. 31, 1987). Thus Complainant's determination to initiate proceedings against Respondents as one of many lottery advertisers is not inappropriate or illegal.
In their proposed conclusions of law, Respondents have not argued the applicability of, and protection offered by, 18 U.S.C. § 1307(b), one of the affirmative defenses set up in their answer to the amended complaint. Presumably, they have abandoned that defense.
1. 39 U.S.C. § 3005(a) authorizes the Postal Service to issue mail stop and cease and desist orders when there is sufficient evidence that a person is "engaged in conducting a lottery, gift enterprise, or scheme for the distribution of money or of real or personal property by lottery, chance, or drawing of any kind . . ."
2. The three necessary elements of a lottery under 39 U.S.C. § 3005 are the furnishing of consideration, the offering of a prize, and the distribution of the prize by chance. Brooklyn Daily Eagle v. Voorhies, 181 F.2d 579, 581 (C.C.E.D.N.Y. 1910); Paul W. Schuette, P.S. Docket No. 29/117 (P.S.D. March 16, 1989); Universal Life Church, Inc., P.S. Docket No. 7/62 (P.S.D. Feb. 14, 1980, aff'g I.D. August 31, 1979).
3. The scheme operated by Respondents involves the three elements of a lottery.
4. Complainant has established the facts alleged in its complaint by a preponderance of the credible evidence.
5. Respondents are conducting a lottery or scheme for the distribution of money by chance in violation of 39 U.S.C. § 3005(a).
The proposed orders attached hereto should be issued against Respondents.
___________________