United States v. JS&A GROUP, INC., 81 C 4967.

Citation547 F. Supp. 20
Decision Date26 April 1982
Docket NumberNo. 81 C 4967.,81 C 4967.
CourtUnited States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
PartiesUNITED STATES of America, Plaintiff, v. JS&A GROUP, INC., et al., Defendants.

Dan K. Webb, U. S. Atty., Margaret C. Gordon, Asst. U. S. Atty., Chicago, Ill., Gerald C. Kell and Don O. Burley, Dept. of Justice, Washington, D. C., for plaintiff.

Victor E. Grimm, Bell, Boyd & Lloyd, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

DECKER, District Judge.

Plaintiff, the United States of America, acting upon the notification of the Federal Trade Commission ("FTC" or "Commission"), brought this action against defendants, JS&A Group, Inc. ("JS&A"), and Joseph Sugarman, alleging that they violated a trade regulation rule concerning mail order merchandise ("mail order rule"), 16 C.F.R. § 435, promulgated by the FTC. Essentially, the complaint alleges that defendants solicited and processed orders for the sale of mail order merchandise in such a manner as to constitute an unfair or deceptive trade practice in violation of the mail order rule. Plaintiff seeks to recover civil penalties pursuant to 15 U.S.C. § 45(m)(1)(A) for the past violations and to obtain permanent injunctive relief against future violations. Currently before the court is defendants' motion to dismiss.

Defendants' motion is based on the claim that the FTC is not entitled to seek the two remedies that it requests in its complaint but rather is limited to seeking a cease and desist order in an administrative proceeding against violations of the mail order rule. Because the court believes that defendants' arguments concerning the civil penalties provision are the more significant, they will be considered first.

Prior to the enactment of the Magnuson-Moss Warranty — Federal Trade Commission Improvement Act ("Magnuson-Moss Act"), 88 Stat. 2183, which was effective on January 4, 1975, FTC enforcement of its substantive rules was limited to administrative proceedings in which the FTC was empowered to issue cease and desist orders prohibiting future rule violations. The FTC did not have the authority to directly impose fines or penalties for violations, or to seek them in the district courts.

Congress, in 1974, passed the Magnuson-Moss Act for the purpose of, inter alia, "providing the Federal Trade Commission (FTC) with means of better protecting consumers." H.R.Rep.No. 93-1107, 93rd Cong., 2d Sess., reprinted in 1974 U.S.Code Cong. & Ad.News 7702, 7702. For the first time, the FTC was expressly granted the authority to issue substantive rules.1 As part of that authority, Congress included Section 202(a) of the Magnuson-Moss Act, which set up a more stringent method of rule-making than that contemplated by the general provisions of the Administrative Procedure Act ("APA"). Among other things, the Magnuson-Moss Act requires the FTC to make a more detailed notice of rule-making than it would under the APA, to hold an oral hearing where interested persons may present their evidence and conduct cross-examination, and to provide compensation for attorneys' fees and other costs to people who represent interests at the rule-making that would not otherwise be fairly represented. Also, the Magnuson-Moss Act provides for a more stringent judicial review of the factual basis underlying an FTC rule than does the APA.

In addition to setting up this new rule-making structure for FTC substantive rules, the Magnuson-Moss Act also provided new methods of enforcing the rules. Chief among the new enforcement mechanisms is Section 205(m)(1)(A) of the Act, 15 U.S.C. § 45(m)(1)(A). That provision states in relevant part:

"The Commission may commence a civil action to recover a civil penalty in a district court of the United States against any person, partnership, or corporation which violates any rule under this chapter respecting unfair or deceptive acts or practices ... with actual knowledge or knowledge fairly implied on the basis of objective circumstances that such act is unfair or deceptive and is prohibited by such rule. In such action, such person, partnership, or corporation shall be liable for a civil penalty of not more than $10,000 for each violation."

Such civil penalties had previously been available for violations of a final cease and desist order; however, they could not be used to directly enforce a substantive rule.

The procedures leading up to the promulgation of the FTC's mail order rule were conducted before the Magnuson-Moss Act was adopted. All that remained after the effective date of the Act was the final announcement of the rule in the Federal Register, which was done on October 22, 1975, and publication of the statement of basis and purpose on November 5, 1975. In considering the rule, the FTC followed the procedures outlined in the APA, and did not follow the more stringent procedures of the Magnuson-Moss Act, which, of course, had not yet been enacted.

Defendants' position in their motion to dismiss is that, because the mail order rule proceedings were conducted prior to the adoption of the Magnuson-Moss Act and so did not follow the new stringent procedures provided by Congress, violations of the rule should not subject the defendants to the new penalties provided by that Act. Defendants' argument requires the court to consider the effect and purpose of three statutory provisions included in the Magnuson-Moss Act in an attempt to divine Congress' intent.2

As an initial response, the FTC argues that the civil penalty section is clear on its face. Section 205(a) of the Magnuson-Moss Act allows the FTC to recover civil penalties for violations of "any rule under this Act" (emphasis added). Focusing on the phrase "any rule," the FTC suggests that Congress intended the civil penalty provision to apply to rules promulgated before the Magnuson-Moss Act was passed, as well as rules promulgated thereafter. The FTC's position is supported in an article written by an attorney on leave from the Commission, where the author states, "Section 5(m)(1)(A) clearly imposes civil liability for violations of `any' Commission trade regulation rule, whether adopted before or after January 4, 1975, the effective date of the Magnuson-Moss Act." Bickart, Civil Penalties under Section 5(m) of the Federal Trade Commission Act, 44 U.Chi.L.Rev. 761, 770 (1977).

The court is unable to accept that argument put forth by the FTC. It appears that, on this point, the Magnuson-Moss Act is ambiguous. When Congress refers to "any rule under this Act," it is not at all clear whether the act referred to is the Federal Trade Commission Act as a whole, or only the Magnuson-Moss Act. Nor does the quite sparse legislative history of the civil penalty provision itself provide any clues to how that ambiguity should be resolved.

Defendants argue that the legislative history of the Magnuson-Moss Act, as a whole, requires the court to find that Congress did not intend the civil penalty provision to apply to rules promulgated before the Act was passed. Defendants point particularly to Congress' concern about the procedures followed by the FTC in rule-making:

"Because of the potentially pervasive and deep effect of rules defining what constitutes unfair or deceptive acts or practices and the broad standards which are set by the words `unfair or deceptive acts or practices', the committee believes greater procedural safeguards are necessary. Accordingly, it has fashioned the rulemaking procedures and judicial review provisions described below which we believe to be more appropriate in this context than merely relying upon the provisions of sections 553 and 706 of title 5 the APA."

H.R.Rep.No. 93-1107, supra, at 7727. Defendants contend that it would be unfair to apply the harsh civil penalties to rules promulgated under the less stringent requirements of the APA, and that it would substantially emasculate the new requirements if old rules had the same effect as the new ones.

Though Congress was concerned about the procedures used by the FTC in promulgating its earlier substantive rules, it did not regard those rules to be any less valid, however. As part of Section 202 of the Magnuson-Moss Act, Congress addressed the issue of the validity of the FTC rules already in effect and those about to go into effect.

"(c)(1) The amendments made by subsections (a) and (b) the new rulemaking procedures of this section shall not affect the validity of any rule which was promulgated under section 6(g) of the Federal Trade Commission Act prior to the date of enactment of this section. Any proposed rule under section 6(g) of such Act with respect to which presentation of data, views, and arguments was substantially completed before such date may be promulgated in the same manner and with the same validity as such rule could have been promulgated had this section not been enacted."

The parties here do not dispute that the mail order rule properly fits into the second category recognized by Congress in that subsection, and so was not rendered invalid by the new rule-making procedures. See United States v. Braswell, Inc., 1981-2 Trade Reg.Rep. (CCH) ¶ 64,325 (N.D.Ga. Sept. 28, 1981).

It appears from the above "savings provision" that Congress did intend the civil penalties to apply to violations of the pre-Magnuson-Moss Act rules. Defendants suggest that the court should interpret the phrase "with the same validity as such rule could have been promulgated had this section not been enacted" to mean that all provisions of the Magnuson-Moss Act should not apply to the old rules, including the civil penalty provision. Congress was careful, however, to only exempt the old rules from the requirements in Section 202 of the Act. There is nothing in the savings provision or its legislative history to indicate that the civil penalty provisions in Section 205 were also excluded. Nor is there any indication that Congress intended to create a two-tiered system of rules with different enforcement...

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