716 F.2d 451 (7th Cir. 1983), 82-2601, United States v. JS & A Group, Inc.

Docket Nº:82-2601.
Citation:716 F.2d 451
Party Name:UNITED STATES of America, Plaintiff-Appellee, v. JS & A GROUP, INC. and Joseph Sugarman, Defendants-Appellants.
Case Date:August 30, 1983
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 451

716 F.2d 451 (7th Cir. 1983)

UNITED STATES of America, Plaintiff-Appellee,


JS & A GROUP, INC. and Joseph Sugarman, Defendants-Appellants.

No. 82-2601.

United States Court of Appeals, Seventh Circuit

August 30, 1983

Argued April 20, 1983.

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

David M. Fitzgerald, Federal Trade Commission, Washington, D.C., for plaintiff-appellee.

Page 452

Before BAUER, NICHOLS, [*] and WOOD, Circuit Judges.

NICHOLS, Circuit Judge.

This action was brought by the United States Department of Justice on behalf of the Federal Trade Commission (FTC or Commission) seeking civil penalties and injunctive relief for alleged violations of the Commission's trade regulation rule concerning mail order merchandise (Mail Order Rule). 16 C.F.R. Sec. 435. Here the alleged violations were failure to deliver merchandise paid for in advance or to pay refunds for merchandise not in inventory. The case is before us on interlocutory appeal from a district court order denying appellants' motion to dismiss. United States v. JS & A Group, Inc., 547 F.Supp. 20 (N.D.Ill.1982).

The district judge certified the case under 28 U.S.C. Sec. 1292(b) for us to consider it before he proceeded to adjudicate the merits. The questions thus certified are novel and important. The appellants raise questions that are by no means frivolous, though we differ with the district judge about ambiguity of the statute. We have granted leave to appeal. We are asked to determine whether the Commission may seek civil penalties pursuant to section 5(m)(1)(A) of the Federal Trade Commission Act (FTC Act), 15 U.S.C. Sec. 45(m)(1)(A) (1976) for alleged violations of its Mail Order Rule. We are also asked to determine whether the Commission may seek permanent injunctive relief pursuant to section 13(b) of the FTC Act, 15 U.S.C. Sec. 53(b) (1976) against future violations of this Rule by appellants. For reasons set forth below, we conclude that the Commission may seek both civil penalties and permanent injunctive relief in this case. The order of the district court denying dismissal of the Commission's complaint is therefore affirmed.


The Federal Trade Commission Act of 1914, 38 Stat. 717 et seq. (1914), created an administrative body "to carry into effect legislative policies embodied in the statute in accordance with the legislative standard therein prescribed, and to perform other specified duties as a legislative or as a judicial aid." Humphrey's Executor v. United States, 295 U.S. 602, 628, 55 S.Ct. 869, 874, 79 L.Ed. 1611 (1935). Pursuant to section 5 of this Act, 38 Stat. 719, as amended, 15 U.S.C. Sec. 45(a) (1976), Congress has empowered and directed the Commission to prevent persons, partnerships, and corporations from engaging in any unfair method of competition or unfair or deceptive act or practice in or affecting commerce. During the first 50 years of its existence, the Commission carried out this function by means of an administrative adjudicatory proceeding consisting of a complaint, a hearing, and, if a violation was found, findings of fact and issuance of a cease and desist order prohibiting future violations. The cease and desist order was reviewable upon petition to the appropriate court of appeals of the United States, and violation of a final order subjected the offender to a civil penalty. See 15 U.S.C. Sec. 45(b)-(m).

In the early 1960's, the Commission for the first time sought to enhance its effectiveness to prevent unfair methods of competition and other improper acts by promulgating substantive trade regulation rules. See 27 Fed.Reg. 4636 (1962). These rules, which defined specific practices the Commission considered to be illegal under the FTC Act before any adjudication, provided the standard upon which future cease and desist actions, in the manner described above, would be brought by the Commission. By combining substantive rulemaking with the adjudicative proceeding, the Commission had only to prove violation of an applicable trade regulation rule at the hearing; the more burdensome, inefficient, and sometime arbitrary case-by-case adjudication against each industry participant, in which the Commission had to prove that a specific practice was unfair or deceptive,

Page 453

was thereby curtailed. Moreover, substantive rulemaking provided the business community with greater certainty as to what practices the Commission deemed unacceptable, prior to adjudicatory action, and provided a means by which an industry participant could know when he should voluntarily abandon an act or practice. These trade regulation rules were promulgated in accordance with the notice and comment procedures under the Administrative Procedures Act, 5 U.S.C. Sec. 553, and any rule could be set aside upon judicial review if found to be arbitrary, capricious, an abuse of discretion, or otherwise contrary to law.

The Commission found its authority to engage in substantive rulemaking in section 6(g) of the FTC Act, 15 U.S.C. Sec. 46(g), which then provided that the Commission was empowered to "make rules and regulations for the purpose of carrying out the provisions of section 41 to 46 and 47 to 58 of this title." The authority of the Commission to promulgate trade regulation rules under section 6(g) was upheld in National Petroleum Refiners Association v. F.T.C., 482 F.2d 672 (D.C.Cir.1973), cert. denied, 415 U.S. 951, 94 S.Ct. 1475, 39 L.Ed.2d 567 (1974) (Octane Rating case).

Shortly after the Octane Rating case, Congress explicitly granted authority to the Commission to promulgate substantive trade regulation rules in section 202(a) of the Magnuson-Moss Warranty--Federal Trade Commission Improvement Act of 1975 (Magnuson-Moss Act), Pub.L. No. 93-637, 88 Stat. 2183, 2193 (codified as amended at 15 U.S.C. Sec. 57a (Supp. V 1981). The amendment read:

The Federal Trade Commission Act (15 U.S.C. 41 et seq.) is amended by redesignating...

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