Southwest Sunsites, Inc. v. F.T.C.

• Court: U.S. Court of Appeals — Ninth Circuit
• Writing for the Court: Before WRIGHT, KENNEDY and BEEZER; BEEZER
• Citation: Southwest Sunsites, Inc. v. F.T.C., 785 F.2d 1431 (9th Cir. 1986)
• Decision Date: 01 April 1986
• Docket Number: No. 85-7182,85-7182
• Parties: , 1986-1 Trade Cases 67,021 SOUTHWEST SUNSITES, INC., Green Valley Acres, Inc., a Texas Corporation, Green Valley Acres, Inc., II, a Texas Corporation, Sydney Gross and Edwin Kritzler, Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.

Page 1431

785 F.2d 1431

54 USLW 2558, 1986-1 Trade Cases 67,021

SOUTHWEST SUNSITES, INC., Green Valley Acres, Inc., a Texas Corporation, Green Valley Acres, Inc., II, a Texas Corporation, Sydney Gross and Edwin Kritzler, Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.

No. 85-7182.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Dec. 9, 1985.

Decided April 1, 1986.

Glenn A. Mitchell, Washington, D.C., for petitioners.

Leslie Rice Melman, F.T.C., Washington, D.C., for respondent.

Petition to Review an Order of the Federal Trade Commission.

Before WRIGHT, KENNEDY and BEEZER, Circuit Judges.

BEEZER, Circuit Judge:

Petitioners Southwest Sunsites, Inc. ("SWS"), Green Valley Acres, Inc. ("GVA"), Green Valley Acres, Inc. II ("GVA II"), Sidney Gross, and Edwin Kritzler, appeal the Federal Trade Commission's finding that their representations and failures to disclose, in connection with the sale of rural, undeveloped land, violated the Federal Trade Commission Act, 15 U.S.C. Sec. 45(a) (1982). Petitioners contend that application of a new deception standard violates their due process rights and the Administrative Procedures Act, that ex parte communications require reversal, that there is no substantial evidence to support the findings, and that the order is overly broad. We affirm.

FACTS

Petitioners SWS, GVA, and GVA II are land sales companies incorporated in Texas with corporate headquarters in California. Petitioners are engaged in the sale of undeveloped rural land in west Texas for use as farms, ranches, homesites, and commercial uses. Sales are primarily to out-of-state purchasers. Petitioner Kritzler is the general manager of each corporation, responsible for day-to-day corporate operations and general policy decisions. Petitioner Gross and members of his family own all the stock in each corporation. Gross was the exclusive sales agent for SWS, GVA and GVA II.

Between 1973 and 1977, petitioners acquired 40,000 acres of undeveloped land in west Texas. Petitioners used both their own employees and independent brokers to sell the land. Petitioners purchased a 17,647 acre tract (Southwest Sunsites) in 1973 at about $27 per acre and sold 5, 10, and 40 acre parcels from that tract for $600.00 to $700.00 per acre. Of the 1800 parcels in the tract, between 1300 and 1595 were sold to the public. Green Valley Acres, consisting of 1200 five-acre parcels, was acquired for about $50.00 per acre in 1976 and sold for $800.00 to $1,200.00 per acre.

The land was marketed through newspaper, television and radio advertisements. Radio and television ads appeared as often as 150 times a week. Petitioners maintained sales offices in Dallas, Houston, Atlanta and, for a brief time, Boston. Staff in the Houston and Dallas offices organized promotional dinners.

Brochures produced by petitioners touted the land as a good, safe investment. Buyers were told that the land was a good investment because industrial development was likely. Oil, rubber, nuclear and uranium interests were all potential developments. Petitioners also represented the land as suitable for homesites, subsistence farms, and non-commercial ranches.

Ultimately 80 percent of the land was sold by Porter Realty, an independent brokerage that worked for petitioners from 1974 until 1978. Porter Realty conducted a nationwide telephone campaign, using scripts approved by petitioners and mailed information packets supplied by petitioners to prospective purchasers.

An "Agents Agreement" with Porter Realty authorized it to solicit sales but forbade both acceptance of sales offers and representations inconsistent with materials supplied by petitioners. Porter Realty distributed an oil map ¹ which depicted ownership of parcels near GVA and GVA II by oil interests. Petitioners hired Jeffrey Elfont to contact customers who purchased from Porter Realty and to retract all oil development representations made by Porter Realty. Kritzler testified that he cancelled the contracts and refunded the money of persons who purchased the land as an investment in reliance upon Porter Realty's oil development representations. Some but not all such buyers were contacted.

The FTC lodged a three count complaint contending that petitioners engaged in unfair and deceptive practices in violation of Sec. 5 of the Federal Trade Commission Act. The complaint alleged that petitioners (1) misrepresented that the parcels were a good investment involving little or no financial risk and deceptively failed to disclose material information regarding their financial risk, (2) misrepresented that the land was suitable for residential use, farming, and ranching, and deceptively failed to disclose material information regarding the suitability of the properties for these purposes, and (3) sold land that was of little or no value for the represented purposes and unfairly retained proceeds from the sales. An administrative law judge (ALJ) dismissed the complaint, the Commission reversed and issued a cease and desist order, from which petitioners timely appeal.

ANALYSIS

Standard of Review

The Commission's factual findings are conclusive if supported by evidence sufficient to permit a reasonable mind to accept the Commission's conclusion. Litton Industries, Inc. v. FTC, 676 F.2d 364, 368 (9th Cir.1982).

I. The Deception Standard

The ALJ dismissed the complaint under the deception standard that "any advertising representation that has the tendency and capacity to mislead or deceive a prospective purchaser is an unfair and deceptive practice." The Commission applied a "new" standard: "[T]he Commission will find deception if there is a representation, omission or practice that is likely to mislead the consumer acting reasonably in the circumstances, to the consumer's detriment." ²

Petitioners contend that application of the new deception standard violated the Administrative Procedures Act (APA), 5 U.S.C. Sec. 554(b) which requires that they be "timely informed of the matters of fact and law asserted." 5 U.S.C. Sec. 554(b)(3). Petitioners also contend that their due process rights were violated because the Commission "based its decision on a new theory of deception that was significantly different from the one litigated by the parties."

The purpose of the notice requirement in the Administrative Procedures Act is satisfied, and there is no due process violation, if the party proceeded against "understood the issue" and "was afforded full opportunity" to justify his conduct. Golden Grain Macaroni Co. v. FTC, 472 F.2d 882, 885 (9th Cir.1972), cert. denied, 412 U.S. 918, 93 S.Ct. 2730, 37 L.Ed.2d 144 (1973). ³

Each of the three elements of the new standard challenged by petitioner imposes a greater burden of proof on the FTC to show a violation of Section 5. First, the FTC must show probable, not possible, deception ("likely to mislead," not "tendency and capacity to mislead"). Second, the FTC must show potential deception of "consumers acting reasonably in the circumstances," not just any consumers. Third, the new standard considers as material only deceptions that are likely to cause injury to a reasonable relying consumer, whereas the old standard reached deceptions that a consumer might have considered important, whether or not there was reliance.

The Commission reversed the ALJ's findings on a theory more narrow than, but completely subsumed in, the prior theory. All evidence relevant to the old theory was necessarily relevant to the new. We cannot accept petitioners' argument that a "substantially different standard was applied, to which [they] had no opportunity to respond." This is not a case in which it was "readily apparent that different defenses and proofs would be used in defending against ... two theories" of liability. Bendix Corp. v. FTC, 450 F.2d 534, 541 (6th Cir.1971). The Commission did not violate the APA or the petitioners' due process rights.

II. Ex Parte Communications

Petitioners contend that the complaint should be dismissed because complaint counsel gave the Commission four written memoranda during adjudication of petitioners' case and was dilatory in placing copies in the public record. ⁴ The memoranda concerned consent agreement negotiations between the agency and petitioners' co-respondents, Porter Realty and Irvin Porter. Agency regulations explicitly permit internal communication concerning consent settlements. 16 C.F.R. Sec. 4.7(f) (1985). To the extent that such communication relates to a fact in issue in an ongoing adjudication, "such portion will be placed in the docket binder of the proceeding to which it pertains." Id. The regulations do not specify the time within which that must be done, but require that all adjudicative proceedings of the FTC be conducted "expeditiously." 16 C.F.R. Sec. 3.1 (1985). The proposed consent agreement and recommendations were forwarded to the Secretary on April 19, 1983, but were not placed on the record until August of 1984.

Ex parte communications do not void an agency decision. PATCO v. FLRA, 685 F.2d 547 (D.C.Cir.1982). The agency decision is voidable and the court will consider whether "the agency's decisionmaking process was irrevocably tainted so as to make the ultimate judgment of the agency unfair, either to an innocent party or to the public interest that the agency is obliged to protect." Id. at 564. Relevant considerations are the gravity of the ex parte communication, whether the communication may have influenced the decision, whether the party making the communication benefited from the decision, whether opposing parties knew of the communication and had an opportunity to rebut, and whether vacation and remand of the decision would serve a useful purpose. Id. The court is concerned primarily with the integrity of the process and the fairness of the result rather than adherence to mechanistic rules. Id.

Petitioners allegation must overcome a presumption of honesty and integrity on the part of...