Katharine Gibbs School (Inc.) v. F.T.C.

• Citation: 612 F.2d 658
• Decision Date: 12 December 1979
• Docket Number: Nos. 1123,1124,1126,s. 1123
• Parties: 1980-1 Trade Cases 63,077 KATHARINE GIBBS SCHOOL (INCORPORATED), et al., Petitioners, v. FEDERAL TRADE COMMISSION, Respondent. to 1130, 1135, 1137 to 1139, 1141 and 1310, Dockets 78-4204, 78-4206, 78-4209, 78-4210, 78-4214, 78-4215, 79-4007, 79-4017, 79- 4039, 79-4046, 79-4057, 79-4064 and 79-4073.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 658

612 F.2d 658

1980-1 Trade Cases 63,077

KATHARINE GIBBS SCHOOL (INCORPORATED), et al., Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.

Nos. 1123, 1124, 1126 to 1130, 1135, 1137 to 1139, 1141 and

1310, Dockets 78-4204, 78-4206, 78-4209, 78-4210,

78-4214, 78-4215, 79-4007, 79-4017, 79-

4039, 79-4046, 79-4057,

79-4064 and 79-4073.

United States Court of Appeals, Second Circuit.

Argued June 11, 1979.

Decided Dec. 12, 1979.

Abe Fortas, James M. Johnstone, Washington, D. C., Steven J. Olson, St. Paul, Minn., Lewis M. Popper, Washington, D. C., for petitioners.

Gerald P. Norton, Washington, D. C., for respondent; General Counsel, F.T.C., Washington, D. C., on brief.

Linden & Deutsch, New York City, on brief, for petitioners Katharine Gibbs School (Incorporated) and Katharine Gibbs School-Huntington, Inc.

Rogin, Nassau, Caplan, Lassman & Hirtle, Hartford, Conn., on brief, for petitioner Computer Processing Institute.

William H. Cusick, McGraw-Hill, Inc., New York City, on brief, for petitioner McGraw-Hill, Inc.

Rogers & Wells, New York City, on brief, for petitioner Berkeley School of Westchester, Inc.

Mataraso & Macaffer, Albany, N. Y., on brief, for petitioner Albany Business College, Inc.

Fortas & Koven, Washington, D. C., on brief, for petitioner National Home Study Council.

Wald, Harkrader & Ross, Sachs, Greenbaum & Taylor, Washington, D. C., on brief, for petitioner Association of Independent Colleges and Schools.

Kirkland & Ellis, Bernard H. Ehrlich, Washington, D. C., on brief, for petitioners National Association of Trade and Technical Schools and National Association of Cosmetology Schools.

Dechert, Price & Rhoades, Philadelphia, Pa., on brief, for petitioner National Association of Cosmetology Schools.

Oppenheimer, Wolff, Foster, Sheppard & Donnelly, St. Paul, Minn., on brief, for petitioner Control Data Corporation.

Baker & Hostetler, Washington, D. C., on brief, for petitioner Cleveland Institute of Electronics, Inc.

Before VAN GRAAFEILAND and NEWMAN, ^* Circuit Judges, and BONSAL, District Judge. ^**

VAN GRAAFEILAND, Circuit Judge:

Twelve petitions have been filed with this Court seeking review of a Trade Regulation Rule issued by the Federal Trade Commission on December 18, 1978, entitled "Proprietary Vocational and Home Study Schools." See 16 C.F.R. § 438. ¹ The Rule's broadly stated purpose, as set forth in the Commission's Statement of Basis and Purpose, ² is "to alleviate currently abusive practices against vocational and home study school students and prospective students." Although the Rule does not define "abusive practices", the Commission's Statement of Basis and Purpose shows that the Commission's concern was with unfair and deceptive advertising, sales, and enrollment practices engaged in by some of the schools. See 43 Fed.Reg. at 60802.

The more than 7,000 proprietary vocational schools that will be covered by the Rule on its January 1, 1980, effective date are no strangers to regulation. Almost every State has legislation aimed at eliminating some or all of the abuses that trouble the Commission. The United States Veterans Administration and Office of Education have also been active in this area. In 1972, the Commission itself issued a set of guidelines for private vocational and home study schools, See 16 C.F.R. § 254, and has since instituted proceedings against several schools under section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45.

The Commission decided, however, that all of the foregoing regulatory efforts were inadequate, and, in 1974, it published for comment and public hearing a proposed Trade Regulation Rule. The Commission proceeded originally under the rulemaking power granted it in section 6(g) of the Federal Trade Commission Act, 15 U.S.C. § 46(g), which in National Petroleum Refiners Association v. FTC, 482, F.2d 672, 157 U.S.App.D.C. 83, (D.C.Cir. 1973), Cert. denied, 415 U.S. 951, 94 S.Ct. 1475, 39 L.Ed.2d 567 (1974), was held broad enough to permit the issuance of substantive as well as procedural rules. However, on January 4, 1975, in the midst of the Commission's hearings, Congress passed the Magnuson Moss Warranty-Federal Trade Commission Improvement Act, Pub.L.No.93-637, 88 Stat. 2183, Title II of which prescribes with preciseness the Commission's authority to issue rules and general statements of policy and outlines the rulemaking procedures to be followed in connection therewith. See 15 U.S.C.A. § 57a (Supp.1979). Following enactment of this legislation, the Commission changed its hearing procedures to comply with the new statutory requirements. Our primary task on this appeal is to determine whether the Rule finally adopted was within the general powers of the Commission under the Federal Trade Commission Act as refined and limited by the specific provisions of section 57a and, if so, whether the Rule was supported by substantial evidence and was neither arbitrary nor capricious.

Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a), declares that "unfair or deceptive acts or practices in commerce" are unlawful, and section 6(g) (A) interpretive rules and general statements of policy with respect to unfair or deceptive acts or practices in or affecting commerce (within the meaning of section 45(a)(1) of this title), and

empowers the Commission to make rules and regulations for the purpose of carrying out this provision. Section 57a(a)(1) redefines this grant of authority by providing that the Commission may prescribe:

(B) rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce (within the meaning of section 45(a)(1) of this title). Rules under this subparagraph may include requirements prescribed for the purpose of preventing such acts or practices.

The Magnuson-Moss Act also provides that, after any Commission rule takes effect, a violation thereof shall be an unfair or deceptive act under 15 U.S.C. § 45(a)(1) unless the Commission otherwise provides. 15 U.S.C. § 57a(d)(3). It empowers the Commission to commence a civil action for a violation of any rule, in which action the Commission may seek, among other remedies, rescission or reformation of contracts, the refund of money or the return of property, and money damages. 15 U.S.C. § 57b(b).

Petitioners contend, and we agree, that in order to comply with section 57a(a) (1)(B) the Commission must define with specificity in the Rule those acts or practices which are unfair or deceptive and may include requirements for preventing them. Petitioners contend further, and again we agree, that the challenged Rule does not comply with these statutory provisions. Instead of defining with specificity those acts or practices which it found to be unfair or deceptive, the Commission contented itself with treating violations of its "requirements prescribed for the purpose of preventing" unfair practices as themselves the unfair practices. ³ We think that Congress expected more than this.

Requirements designed to prevent unfair practices are predicated upon the existence of unfair practices. These unfair practices, which are the statutorily required underpinning for the Commission's "requirements", should have been defined with specificity.

"Because the prohibitions of section 5 of the Act are quite broad, trade regulation rules are needed to define with specificity conduct that violates the statute and to establish requirements to prevent unlawful conduct." Conf.Rep.No.93-1408, Joint Explanatory Statement of the Committee of Conference, Reprinted in (1974) U.S.Code Cong. & Ad.News, pp. 7702, 7755, 7763.

The statute requires that the Commission's Statement of Basis and Purpose, which must accompany a Rule, shall include statements as to the prevalence of the acts or practices treated by the Rule and the manner in which such acts or practices are unfair or deceptive. 15 U.S.C. § 57a(d)(1). These provisions would be meaningless if the only unfair acts or practices defined in the Rule were possible future violations of its remedial requirements.

We conclude that the Commission erred in failing to comply with the procedural requirements of section 57a(a)(1)(B). We also find several substantive provisions of the Rule to be defective, and the combination of procedural and substantive errors requires that the Rule be set aside. We will remand the Rule to the Commission so that the Commission may comply with section 57a(a)(1) (B) and delete or amend those provisions which we find to be improper.

In the paragraphs that follow, we deal with petitioner's additional claims of error.

I THE REFUND PROVISIONS

Instead of defining with specificity the advertising, sales, and enrollment practices it deemed unfair and deceptive and setting forth requirements for preventing them, the Commission decided to make it financially Although the Commission concededly did not find that existing refund policies were either unfair or deceptive, See 43 Fed.Reg. at 60809, it directed that they be completely revised so as to make them financially more onerous for the schools. This the Rule accomplishes by requiring schools to make refunds on a strict pro rata basis, the percentage of the refund to be determined by matching the number of classes attended or lessons completed against the total of classes, hours, or lessons required to complete the course. See 16 C.F.R. § 438.4. Refunds on such a pro rata basis do not take into account those costs that are fixed at the time of enrollment, such as salaries for teachers and staff, classroom and boarding facilities, administration overhead, books, and supplies. The Rule does not require a student to return "records, tapes, slides, films, books or any other written course materials" as a condition of obtaining a refund. Id. § 438.1(u); See id. § 438.4. The cost of other equipment furnished a student must be prorated in the same manner as tuition, unless a separate equipment...