Guernsey v. Rich Plan of the Midwest, H 74-67.

• Decision Date: 02 February 1976
• Docket Number: No. H 74-67.,H 74-67.
• Citation: 408 F. Supp. 582
• Parties: Eugene and Jacqueline GUERNSEY et al., Plaintiffs, v. RICH PLAN OF THE MIDWEST (a Division of Freeze-Bank, Inc.) et al., Defendants.
• Court: U.S. District Court — Northern District of Indiana

408 F. Supp. 582

Eugene and Jacqueline GUERNSEY et al., Plaintiffs, v. RICH PLAN OF THE MIDWEST (a Division of Freeze-Bank, Inc.) et al., Defendants.

No. H 74-67.

United States District Court, N. D. Indiana, Hammond Division.

February 2, 1976.

COPYRIGHT MATERIAL OMITTED

Murphy, McAtee, Murphy & Costanza, East Chicago, Ind., for plaintiffs.

Samuel Goodman and Frederick Ball, Given, Dawson & Cappas, East Chicago, Ind., for Rich Plan.

W. Patrick Downes, Galvin, Galvin & Leeney, Hammond, Ind., for Konopiots.

Steve Enich, Milwaukee, Wis., for McMahons.

MEMORANDUM OPINION AND ORDER

ALLEN SHARP, District Judge.

The plaintiffs, Eugene and Jacqueline Guernsey, have instituted this action on behalf of themselves and all other similarly situated persons. The complaint reads in seven rhetorical counts — five "federal" counts and two "state law" counts. The plaintiffs pray for injunctive relief as well as compensatory and punitive damages. In the complaint, the plaintiffs allege violations of 15 U.S.C. § 45(a), 15 U.S.C. § 2, 15 U.S.C. § 77a et seq., 15 U.S.C. § 1640, and the common law torts of fraud and misrepresentation plus violations of the Indiana Deceptive Sales Practices Act, IC (1971) XX-X-X-XXX.

Defendant Rich Plan of the Midwest (hereinafter "Rich Plan"), filed a lengthy motion to dismiss based upon assertions that: (1) the court lacks subject matter jurisdiction, (2) that the plaintiffs' complaint fails to state a claim upon which relief can be granted under Rule 12(b)(6) and, (3) that the court should abstain.

On June 18, 1975 the court granted the plaintiffs' motion to strike paragraph number 5 of the defendant Rich Plan's motion to dismiss. Paragraph number 5 alleged that the requisite jurisdictional amount under 28 U.S.C. § 1332 was not present. Therefore, the question of the challenged jurisdictional amount is not at issue at this particular time and the court will now rule upon the other issues presented by Rich Plan's motion to dismiss.

JURISDICTION-COUNT I

Count I of the plaintiffs' amended complaint alleges that the plaintiffs have been victimized by "unfair and deceptive acts or practices in commerce" committed by the defendant Rich Plan all in violation of the Federal Trade Commission Act, 15 U.S.C. § 45. Jurisdiction is based upon 28 U.S.C. § 1337, which reads as follows:

"The district courts shall have original jurisdiction of any civil action or proceeding arising under any Act of Congress regulating commerce or protecting trade or commerce against restraints and monopolies" 28 U.S.C. § 1337

Under this section of the United States Code, no minimum dollar amount is necessary to invoke federal jurisdiction, but the basis for the jurisdiction must appear from the well-pleaded facts in the complaint standing alone and unaided. Springfield Television, Inc. v. City of Springfield, Missouri, 428 F.2d 1375 (8th Cir. 1970). The language of § 1337 applies to the Federal Trade Commission Act, 15 U.S.C. § 45. See Holloway v. Bristol-Myers Corp., 158 U.S.App.D.C. 207, 485 F.2d 986 at 988 n. 2 (1973).

Count I of the amended complaint is not plainly insubstantial nor frivolous, therefore, Count I of the complaint is sufficient to invoke subject matter jurisdiction pursuant to § 1337. The court now assumes jurisdiction over Count I of the amended complaint and declines to exercise its discretion in favor of abstention.

The next issue is whether Count I states a cause of action and can withstand a motion pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure. Whether a complaint states a cause of action upon which relief could be granted is a question of law and, just as issues of fact, it must be decided after and not before the court has assumed jurisdiction over the controversy. Bell v. Hood, 327 U.S. 678 at 682, 66 S.Ct. 773, 90 L.Ed. 939 (1945).

In Count I, the plaintiffs allege that defendant Rich Plan violated the FTC Act, 15 U.S.C. § 45, and these alleged violations form the sole basis for the relief sought in Count I. For the purposes of ruling upon a motion to dismiss, the court must accept all of the allegations in the complaint as true. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).

In pleading paragraph 40 of Count I of the amended complaint, plaintiffs have alleged that defendant Rich Plan has used sales practices which have been found and declared to be unlawful under 15 U.S.C. § 45(a)(1) by the Federal Trade Commission. See, In the Matter of Rich Plan Corporation et al., No. C-614, before the Federal Trade Commission, October 31, 1963 (Exhibit "C", Plaintiffs' Reply Brief).

Defendant Rich Plan's motion to dismiss is based upon the theory that the Federal Trade Commission Act itself contains no provisions for private enforcement because the Commission has original jurisdiction over the acts complained of. LaSalle Street Press, Inc. v. McCormick and Henderson, Inc., 293 F.Supp. 1004 (D.C.Ill.1968).

ANALYSIS OF ISSUES RAISED BY COUNT I

The theoretical framework for implying a private right of action from a federal regulatory statute is known as the "doctrine of implication". See, Holloway v. Bristol-Myers, supra. In order to imply a remedy under the doctrine, the court must determine that (1) the provision violated was designed to protect a class of persons including the plaintiffs from the harm of which the plaintiffs complain, and that (2) it is appropriate in light of the statute's purposes to afford plaintiffs the remedy sought. See, Bivens v. Six Unknown Named Agents of the Federal Bureau of Narcotics, 403 U.S. 388, 91 S.Ct. 1999, 29 L.Ed.2d 619 (1971); J. I. Case v. Borak, 377 U.S. 426, 81 S.Ct. 1555, 12 L.Ed.2d 423 (1964).

Federal Courts have historically found that no private action could be implied from the Federal Trade Commission Act. Holloway v. Bristol-Myers, supra, Carlson v. Coca-Cola Company, 483 F.2d 279 (9th Cir. 1973). Since 1914, the Federal Trade Commission has been responsible for enforcing the provisions of the act. See "FTC Rulemaking v. Private Enforcement", 69 Nw.U.L.Rev. 462 (1974).

However, the efficacy of the Federal Trade Commission in acting to deter consumer fraud is suspect. Most defrauded customers have no remedy at all because the Government cannot possibly act in more than a small fraction of all of the cases of deceit and overreaching against consumers. The Federal Trade Commission currently receives about 9,000 complaints a year and is only able to investigate one out of eight or nine of these, and, of the small fraction investigated, only one in ten results in a cease and desist order. Robert Eckhard, "Consumer Class Actions", 45 Notre Dame Lawyer, 663 at 640 (1970), citing E. Cox, R. Fellmeth, and J. Schultz, "The Nader Report on the Federal Trade Commission: (1969). Even then, the efficiency of a cease and desist order entered by the Federal Trade Commission has been severely criticized. The Chairman of the Federal Trade Commission, Mr. Lewis Engman, has stated that:

"From a purchaser's point of view, a cease and desist order entered by the Federal Trade Commission is far short of the mark." Engman, "New Consumer Standards", 40 Ins. Counsel J., 524 at 526.

As a case on point, the record of the Federal Trade Commission's proceedings against the Holland Furnace Company over a 29 year span bears mute testimony to the Commission's ability to protect consumers from ongoing fraud. Holland Furnace Co. v. FTC, 269 F.2d 203 (7th Cir. 1960); Eckhard, "Consumer Class Actions" supra, at 667. The Federal Trade Commission first issued a cease and desist order against Holland in 1936. Complaints against the company continued unabated, but the Federal Trade Commission did not institute enforcement proceedings until 1965 for violations of the cease and desist order. In Re Holland Furnace Co., 341 F.2d 548 (7th Cir. 1965). The ineffectiveness of the Federal Trade Commission was argued in the Holloway case. The court referred to the delay of over a decade in prosecuting the action as "extreme caution" on the part of the Federal Trade Commission. Holloway v. Bristol-Myers, supra at 1000. While complaints of this nature have become more frequent, Congress has not seen fit to alter the basic statutory plan as it was amended in 1938. See White, "FTC: Wrong Agency for the Job of Adjudication", 61 A.B.A.J. 1242 (1975). The Magnuson-Moss Warranty — Federal Trade Commission Improvement Act, 88 Stat. 2183 (1974) expanded consumer remedies but does not alter the Federal Trade Commission Act as it relates to suits of this type.

In this case, as in the Holloway case, the Federal Trade Commission is not a party in the suit and private litigants are attempting to establish a right of action under 15 U.S.C. § 45. However, the factual context of Holloway is significantly different from the case at bar. Until 1970, all attempts by private litigants to prevail in actions based on the Federal Trade Commission Act were undertaken by injured competitors. Holloway was the first case to deal with the problem of a private remedy for consumers under the Act. Mrs. Holloway, a housewife, filed a class action against Bristol-Myers Corporation on behalf of those persons who were induced to purchase the pain reliever "Excedrin" in reliance upon the manufacturer's advertising representations. The suit charged that the company violated the Act by misrepresenting the effectiveness of the product. The actual damages suffered by Mrs. Holloway were minimal — being the difference in price between six 50 tablet bottles of Excedrin and the same number of aspirin tablets. The District Court held that it had no jurisdiction over a private action brought under the Federal Trade Commission Act and that the plaintiffs failed to state a claim upon which relief could be granted. Holloway v. Bristol-Myers Corp., 327 F.Supp. 17 (D.D.C.1971). That ruling was upheld by the DC Circuit with dicta to the effect that private enforcement of the Federal Trade Commission Act would...