Marco Sales Company v. FTC

• Decision Date: 16 December 1971
• Docket Number: Docket 71-1451.,No. 188,188
• Citation: 453 F.2d 1
• Parties: MARCO SALES COMPANY, a corporation, and Marvin O. Baer, individually and as an officer of said corporation, Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

453 F.2d 1 (1971)

MARCO SALES COMPANY, a corporation, and Marvin O. Baer, individually and as an officer of said corporation, Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.

No. 188, Docket 71-1451.

United States Court of Appeals, Second Circuit.

Argued November 15, 1971.

Decided December 16, 1971.

Willis Hagen and Charles Rowan, Milwaukee, Wis., for petitioners.

Nicholas S. Reynolds, Atty., Ronald M. Dietrich, Gen. Counsel, Harold D. Rhynedance, Jr., Asst. Gen. Counsel, Federal Trade Commission, Washington, D. C., for respondent.

Before MOORE, HAYS and MULLIGAN, Circuit Judges.

MULLIGAN, Circuit Judge:

This is a petition to review a cease and desist order issued by the Federal Trade Commission at the completion of an administrative proceeding initiated by a complaint charging petitioners with engaging in unfair acts and practices in violation of Section 5 of the Federal Trade Commission Act.¹ In April, 1967 the Commission held an investigational hearing and on November 27, 1968, issued its complaint against the petitioners, Marco Sales Company (Marco), an Illinois corporation and Marvin O. Baer, individually, as an officer controlling the acts and practices of the corporation. After a two-day evidentiary hearing in Chicago, Illinois, on April 15 and 16, 1969, the examiner issued his initial decision and order on June 30, 1969. Cross appeals were taken to the Commission, which heard oral argument on October 16, 1969 with four members sitting. No decision was rendered, and the Chairman of the Commission requested petitioners' permission to participate in the decision. The case was reargued before the full Commission on February 3, 1971 which issued a final order to cease and desist on February 25, 1971 in the form initially recommended by the examiner. The petition for review is granted. We reverse the order and remand to the Federal Trade Commission for further consideration consistent with this opinion.

Marco's method of conducting business is not in dispute. Marco sells articles by means of a lottery or game of chance in interstate commerce in various states including Connecticut, New York and Vermont. Marco sends literature through the mail to the public, describing merchandise which is sold through the device of push or punch cards. Typical merchandise includes such items as electric toasters, skillets, percolators, cameras, clocks, flower desk sets, Happy Twin dolls, Jack & Jill dolls, stuffed dogs and thermal blankets. A typical push card bears some 23 masculine and feminine names with columns on the back of the card for writing the name of the purchaser of the push corresponding to the masculine or feminine name selected. Each such card has 23 partially perforated disks which bear one of the names corresponding to those on the list. Concealed within each disk is a number which is disclosed only when the customer pushes the disk from the card. The card depicts a doll or stuffed dog or whatever the prize is, describes it and indicates the cost of each number punched out. The cost ranges from free to a maximum of 39 cents.

The push card also has a master seal under which is one of the names—this seal is not to be removed until the entire card is sold. The operator of the push cards sells the chances or pushes to his friends, family or fellow workers, and when all have been purchased, he remits the total amount to Marco which sends back two prizes—one for the lucky winner and the other for the operator. The amount received by Marco is equivalent to the selling price of the two articles. There is no claim at all that Marco is engaged in any skulduggery in its operation. The goods are delivered as represented. Marco culls its prospective customers from sales lists which it purchases. It concedes that infants may be on the list, but the Commission concedes that Marco is not deliberately cultivating the youth market. At the hearing the Commission was able to produce a 20 year old male who admitted taking one chance and winning a doll (sex not disclosed). He also confessed to selling a chance to his 13 year old sister-in-law. His wife also testified that she sold some of his chances to minors. There was other evidence to indicate that a few 13 to 15 year olds had been enticed to take pushes or punches.

In its defense, Marco produced two professors from the University of Wisconsin who testified generally that the punch board operation provided a psychological outlet or release from tension which accounted for the widespread popularity of games of chance as marketing devices employed by a great number of giant national corporations. Marco's answer urged that its practices were consistent with the standards of fair dealing of the contemporary economic environment of the United States and therefore not in violation of Section 5 of the Federal Trade Commission Act, that the Commission's action constituted an unreasonably discriminatory application of the Act, depriving them of their liberty and property without due process in violation of the fifth amendment of the Constitution of the United States and further that it constituted an invalid exercise of police power by the Commission in violation of the fifth, ninth and tenth amendments to the Constitution of the United States. Essentially, the same points are raised in this petition for review of the order of the Commission, which directed petitioner to cease and desist from:

"Supplying to or placing in the hands of others, push cards or any other device designed or intended to be used in the sale or distribution of merchandise to the public by means of a game of chance, gift enterprise, lottery scheme, chance, or gaming device.

"Selling or otherwise disposing of any merchandise by means of a game of chance, gift enterprise, lottery scheme, chance, or gaming device."

If this were a question of first impression we would be extremely reluctant to find that the distribution of punch boards as a method of selling dolls, skillets and blankets to teenagers, constitutes an unfair trade practice and is prejudicial to the public interest. In fact, one's faith in American youth is renewed when we find that some small segment at least is still titillated at the prospect of pushing or even punching a board where the maximum damage per punch is 39 cents and the prize is a percolator or even an electric blanket. With so many other profane, vulgar and addictive diversions made readily available to our youth, one finds it difficult to be dismayed at the survival of the bucolic pastime of punching cards. However, this is largely the business of the Federal Trade Commission, and it has pursued with relentless vigor this type of lottery over the years with the complete support of the federal bench. The basic case is FTC v. R. F. Keppel & Bro., Inc., 291 U.S. 304, 54 S.Ct. 423, 78 L.Ed.2d 814 (1934) where the Supreme Court found that a "break and take" candy operation was a lottery or gambling device and constituted an unfair practice. It should be noted that in this initial case the lottery was specifically directed to children, that some forty other candy manufacturers employed similar devices and the effects of the practice were felt throughout the "straight" penny candy industry. FTC v. R. F. Keppel & Bro., supra, 291 U.S. at 307-309, 54 S.Ct. 423, 78 L.Ed. 814. In any event, the basic proposition that selling merchandise by lottery constitutes an unfair practice has been supported by courts of appeals in every circuit² except the First where the issue has apparently not been raised.³ Cease and desist orders by the Federal Trade Commission, enjoining push card lotteries substantially similar to that in issue here, have been upheld by this court.⁴ It has also been held that the Commission need not establish any loss of business by competitors of the seller or public injury. Where an unfair practice is established the diversion of trade from competitors, who do not employ such practices, is inferred. Deer v. FTC, 152 F.2d 65, 66 (2d Cir. 1945).

The argument that public morals have changed, that public attitudes toward gambling particularly have radically altered with various state legislatures granting absolution for such public cathartic exercises as betting on dog and horse races, jai alai, bingo and lotto, has also failed to impress courts of appeals which have adhered rigidly to the Keppel proscription. Bear Sales Co. v. FTC, 362 F.2d 96 (7th Cir.), cert. denied, 385 U.S. 933, 87 S.Ct. 293, 17 L.Ed.2d 214 (1966); Dandy Products, Inc. v. FTC, 332 F.2d 985, 986 (7th Cir. 1964).

All of this would undoubtedly have ended the saga adversely to petitioners had not the Federal Trade Commission in October, 1966 embarked upon an investigation of games of chance in the food retail and gasoline industries which resulted in the publication of an Economic Report⁵ which, in turn, resulted in a Trade Regulation Rule Proceeding⁶ culminating in the promulgation of a Trade Regulation Rule (16 C.F.R. § 419.1 (1971)); it was adopted on July 29, 1969, and bore an effective date of October 17, 1969.⁷

The FTC Economic Report developed inter alia that in 1966 some 52 different types of games were used in 55 major grocery markets to attract customers; more than half the games were derivatives of some type of gambling, including "punch cards." In 1966 there were some 39 game promoters in action with combined billings of $37.2 million. (Marco had a gross business of $150,000 in 1968.) The principal users of games were food retailers ($28.5 million) and petroleum companies ($8.5 million). The investigation revealed numerous deceptive practices including misrepresentation of the odds of winning. Retail prices were increased in some cases at least, and in some others the use of games prevented declines. In some cases the games were rigged. Many retailers claimed that they were economically coerced to utilize the games in order to effectively compete. In the course of the rule making...