Orkin Exterminating Co., Inc. v. F.T.C.
| Decision Date | 15 July 1988 |
| Docket Number | No. 87-8285,87-8285 |
| Citation | 849 F.2d 1354 |
| Parties | 1988-1 Trade Cases 67,969 ORKIN EXTERMINATING COMPANY, INC., Petitioner, v. FEDERAL TRADE COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Frank C. Jones, John C. Staton, Jr., Sylvia M. King, Michael Eric Ross, Atlanta, Ga., for petitioner.
Melvin H. Orlans, F.T.C., Office of Gen. Counsel, Washington, D.C., Katharine B. Alphin, Chris M. Couillou, F.T.C., Atlanta, Ga., for respondent.
CORRECTED OPINION
Petition for Review of an Order of the Federal Trade Commission.
Before VANCE and CLARK, Circuit Judges, and GARZA *, Senior Circuit Judge.
Orkin Exterminating Company ("Orkin" or "the company"), a wholly owned subsidiary of Rollins, Inc., ("Rollins") has petitioned this court for a review of an order issued by the Federal Trade Commission ("FTC" or "the Commission") which requires Orkin to cease and desist from conduct which the Commission found to constitute unfair acts or practices within the meaning of section 5 the Federal Trade Commission Act ("FTCA"), 15 U.S.C. Sec. 45(a)(1), (2) ("Section 5"). 1 The Commission found that Orkin violated section 5 by unilaterally breaching over 200,000 contracts with its customers. Having concluded that the Commission committed no errors, and that the Commission acted within its authority, we affirm and enforce the Commission's order. See 15 U.S.C. Sec. 45(c), (d) ().
According to its officers, Orkin is the largest termite and pest control company in the world. 2 Among the services which Orkin offers to its customers is the treatment of houses, buildings and other structures for the destruction of and protection against termites and other wood infesting organisms. Orkin's agreements with its customers to provide these services are typically embodied in standard printed forms which are not subject to modification by Orkin's agents or customers.
Prior to 1966, Orkin's customers could purchase guarantees for continued protection of a treated structure by paying a specified fee. These guarantees lasted for a stated period, typically between five and fifteen years. In 1966, Orkin began to offer similar guarantees that were, by the terms of its contracts, to last the "lifetime" of a treated structure. Between January 1966, when Orkin started to offer these "lifetime" guarantees, and February 1, 1975, Orkin's contracts for termite protection and control ("pre-1975 contracts") provided that a customer could renew the coverage of its "lifetime" guarantee by paying an annual renewal fee, the amount of which was specified in the contract. The contracts state that as long as a customer continues to pay this annual fee, the guarantee remains in effect for the lifetime of the treated structure, unless the structure is structurally modified after the initial treatment date.
Although these contracts varied slightly from time to time with regard to the types of guarantees available, 3 each contained a provision similar to those quoted below. For example, a contract dated November 30, 1966 contains this language:
GUARANTY
The Guaranty checked above will be issued and delivered to the Purchaser upon completion of initial treatment. Guaranty will be effective so long as payment is made in accordance with the Terms and Conditions of this Service Order.
It is further agreed that Guaranty will provide for an initial term of:
[X] 12 months. ORKIN will reinspect the premises upon expiration of the initial term and upon receipt of the Annual Renewal Fee [$18.00].
....
Guaranty at the sole option of the Purchaser may be renewed annually by making payment of the Annual Renewal Fee on or before the renewal date of each subsequent year.
Record, Vol. II at 385. A February 5, 1972 contract provides:
ORKIN'S CONTINUOUS PROTECTION GUARANTEE
Orkin's Continuous Protection Guarantee will provide protection of the above named property including Annual Reinspections upon payment of the initial charges and an Annual Renewal Payment of $37.00 starting February 1973 and each February thereafter. 4
The type of Guaranty checked above will be issued and delivered to the Purchaser upon completion of initial treatment. Guaranty will be effective for an initial period of 12 months and thereafter so long as payments are made in accordance with the Terms and Conditions of this Contract.
Record, Vol. II at 384. A November 2, 1973 agreement contains this variation:
ORKIN CONTINUOUS PROTECTION GUARANTEE
The guarantee checked above will be issued to the buyer upon completion of initial treatment. The Guarantee will cover the above named premises and will be subject to the General Terms and Conditions on the reverse side hereof. Its coverage, including annual reinspection, will be effective for a period of 1 years upon payment of the initial charges and thereafter for a period of Life years, so long as renewal payments of $15. are made annually.
Record, Vol. III at 422. In addition to these guarantee provisions, all of the contracts stated specifically that Orkin could adjust the annual renewal fee in the event of a structural modification to the treated premises. 5 No other provision in the contract indicates that these fees are subject to increases.
For six months during 1968, by way of billboards, magazines, and radio and television spots, Orkin promoted its termite control services through an advertising campaign which Orkin labelled the "Orkin 12 Point Plan." "Point 6" in this campaign, printed in a pamphlet issued to consumers, clearly indicated that annual renewal fees were not subject to increases:
LIFETIME GUARANTEE Orkin's lifetime termite protection plan includes annual reinspections and retreating when necessary. This protects the property against termite reinfestation for the life of the structure provided the lifetime guarantee is renewed annually. The yearly premium for this lifetime protection is very modest and never increases. In case of a sale, the guarantee is transferable.
Record, Vol. II at 351 (emphasis in original). The "Orkin 12" campaign was discontinued before its scheduled expiration date because it had not been effective. Orkin does not contend that the contracts it made during this period in 1968 are in any way materially different from all other pre-1975 contracts.
In 1978, Orkin began to consider increasing the annual renewal fees contained in the pre-1975 contracts. Rollins's general counsel concluded initially that there was no contractual basis for an increase. Yet convinced that Orkin could not have intended to lock the company into a perpetually fixed contract, he sought the advice of the company's law firm. A memorandum produced by the law firm considered the question whether "there [are] any grounds for the claim that a contract which may be renewed or extended from year to year, indefinitely, is unenforceable." It concluded that one unidentified Orkin contract appeared "to be of indefinite duration" and would therefore be "terminable by Orkin after a reasonable period of time." Record, Vol. II at 337 (emphasis in original). Rollins's general counsel endorsed the memorandum's legal conclusions to Orkin's management. Record, Vol. II at 343-44.
In early 1980, Gary W. Rollins, Orkin's president, prepared a memorandum for Rollins's president R.R. Rollins, outlining the " 'pros and cons' regarding raising the renewal amount" of the pre-1975 contracts. That memorandum reads as follows:
PROS
1. Potential income increase of $2,286,614 (# 232,969 accounts valued at $6,017,406 X 40% increase less 5% cancellations)
1. A few customers advised by salesmen and literature that renewal amount would be fixed.
2. State regulatory agencies (Pest Control, Consumer Protection, etc.) could interpret our contract in some cases to imply the renewal amount is fixed. Those who obtain old proposal information will discover we put this in writing.
3. Our longer term employees might feel that we are going back on our word.
4. There could be customer lawsuits and complaints.
1. Leave as is.
2. Write customers and put on voluntary basis.
3. Meet with individual state regulatory and consumer groups to obtain understanding and raise.
4. Raise and handle exceptions.
In August 1980, Orkin began notifying customers who were parties to pre-1975 contracts that the company was going to increase its annual renewal fees. Increase notices were sent to approximately 207,000 pre-1975 customers.
The annual fees were raised to a minimum of $25 or by 40%, whichever was greater.... By August 1, 1984, Orkin had increased the annual renewal fees of approximately 142,902 customers with pre-1975 contracts. By May 25, 1981, Orkin had received an additional $1,257,629 solely as a result of the fee increase to its pre-1975 customers, and [Orkin] estimates ... show that it had received increased revenues through 1984, from the same source, of $7,515,674.
108 F.T.C. at 347 (footnote omitted).
Many of Orkin's customers complained about the increase in their annual renewal fees. In addition, various officials in seventeen states questioned the lawfulness of Orkin's actions. But customers did not have any real alternative to paying the increased renewal fees. Although some of Orkin's competitors were willing to assume Orkin's obligations of the pre-1975 contracts, they apparently would not have done so "without imposing conditions that would have resulted in additional charges to Orkin's customers or subsequently raising the renewal fees as expressly permitted in their own contracts." 108 F.T.C. at 347 (footnote omitted).
In light of customer complaints, Orkin developed what it refers to as an "accommodation program." In a form letter sent to complaining customers, Orkin attributed the increase to inflation. It further explained that although the pre-1975 contracts ...
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