State ex rel. Miller v. Hydro Mag, Ltd.
| Decision Date | 22 February 1989 |
| Docket Number | No. 87-1377,87-1377 |
| Citation | 436 N.W.2d 617 |
| Parties | STATE of Iowa, ex rel., Thomas J. MILLER, Attorney General of Iowa, Appellee, v. HYDRO MAG, LTD., and Donald Van Gorp, Appellants. |
| Court | Iowa Supreme Court |
Bert A. Bandstra, Knoxville, for appellants.
Thomas J. Miller, Atty. Gen., Susan Barnes and Steven Foritano, Asst. Attys. Gen., for appellee.
Considered by McGIVERIN, C.J., and LAVORATO, NEUMAN, SNELL and ANDREASEN, JJ.
In this appeal we interpret and apply Iowa's consumer fraud act, Iowa Code section 714.16 (1983). This case is before us on appeal from a district court order permanently enjoining Hydro Mag, Ltd. and Donald Van Gorp from making various claims concerning electromagnetic water-treatment devices. Hydro Mag and Van Gorp were also ordered to pay restoration of monies to several consumers. The State of Iowa cross appealed from the court's refusal to allow restoration to a customer whose claim had been denied in small claims court.
Donald Van Gorp resides in Pella, Iowa, and has been a long-time insurance and real estate agent. Van Gorp became interested in the electromagnetic treatment of water in 1977 when he moved into a new home and experienced difficulty with the water. He bought an electromagnetic water softner from a Florida company. The device initially improved the water condition, but the results soon disappeared. In May 1979, Van Gorp built his first prototype of this machine. Eventually he patented this device and formed Hydro Mag, Ltd. Van Gorp was the sole officer, director and shareholder of Hydro Mag, Ltd.
Hydro Mag's advertisements claimed:
When attached to your home or industrial water supply, the Hydro-Mag electromagnetically prevents the elements in your water from forming normal chemical reactions that cause hard-water scale, rust and corrosion. Instead of joining together to cause you problems, these elements remain dissolved and simply flow harmlessly out of the system.
The Hydro-Mag system [provides]
Clean Clothes Proper Pressure
Less Detergent Shiny Fixtures
Nice Skin Better Health
No Odors Sparkling Dishes
Clean Pipes
Hydro-Mag can make the following statement without reservation.
The system will stop the continued build-up of scale and rust and present scale and rust will be eliminated or greatly reduced.
Van Gorp admitted that these claims were not based on any scientific information. No scientific tests were conducted on any of the Hydro-Mag models prior to their sale. Van Gorp, a high school graduate, has no formal training in engineering, physics or chemistry.
The State produced five lay witnesses who testified as to their experiences with two models of the Hydro-Mag. Each was promised that the Hydro-Mag would reduce water hardness, take away scale and corrosion, and would provide the properties of soft water. They were told these results would occur immediately and that there would be no maintenance involved in the Hydro-Mag.
Each witness testified that the Hydro-Mag did not improve their water. In at least one situation the condition of the water worsened. Although Hydro Mag representatives were contacted, they were unable to make any improvements. In some cases, these representatives made no effort to take water samples, test the water, or inspect the source of the water. In one case, Van Gorp replaced the original "model '79" with a later model "SSAL." The newer model produced no difference. Each of these five consumers eventually discontinued their use of the Hydro-Mag.
The State produced evidence which demonstrated that there was no scientific basis for the claims made by Hydro-Mag. Dr. Douglas Finnemore, a physicist at Iowa State University, testified that the Hydro-Mag was incapable of producing enough energy to cause chemical changes in water by either preventing the bonding of certain elements or affecting the crystalization process. The State also offered the testimony of Dr. Edward R. Baumann, a professor of civil engineering at Iowa State University. Dr. Baumann has a Ph.D. in sanitary engineering and is a specialist in water treatment.
At the request of the State, Dr. Baumann conducted tests of the Hydro-Mag. Prior to conducting the tests, Dr. Baumann received the following claims in writing from Hydro-Mag.
Our company does not claim that this unit is the panacea for all water problems. For example, the Hydro-Mag does not kill bacteria. This unit does not remove any chemicals from the water, nor does it add any.
However, the number of units in the field at this time indicate a significant and noticeable effect in reducing many of the undesirable qualities of hard waters. Tests at locations both before and after installation disclose reductions in total hardness, calcium, magnesium, iron acidity (ph), carbon dioxide, alkalinity, sulfate, nitrate, chloride, sodium, and fluoride. Also, the system will stop the continued build of scale and rust, and present scale and rust will be eliminated or greatly reduced.
I know you fully realize the ramifications of a working unit of this type. The Hydro-Mag could truly revolutionize the water industry.
Our company is aware of your lofty credentials in the water purification field. A positive report from you and your colleagues would give us the technical support we lack at the present time.
Dr. Baumann's tests found no change in the overall hardness of water, no change in the water soap-consuming capacity and no change in the sodium content of the water. Dr. Baumann testified that the Hydro-Mag is worthless for the treatment of water used in a home.
In addition, the State offered evidence of several major studies conducted which indicated that there were no beneficial effects on the quality of water treated with magnetic water treatment devices. There have also been reports of beneficial uses of such devices, however, these reports did not involve situations found in a home or typical farming operation.
Dr. Leland Cole, a Ph.D. in physical chemistry testified on behalf of Hydro-Mag. Dr. Cole conducted a test concerning the Hydro-Mag's ability to reduce scaling. He concluded that the Hydro-Mag does reduce scaling. However, he did not test the Hydro-Mag to substantiate claims that Hydro-Mag would reduce the overall hardness of the water.
Hydro-Mag introduced testimony from five satisfied customers; a mink farmer, two chicken farmers, a dairy farmer, and a baker. Each of these individuals believed that the Hydro-Mag was successful in relieving their water problems. None of these situations involved controls or water testing procedures to determine whether the positive effects were caused by the Hydro-Mag. In each situation, there were other variables which may have accounted for the positive results.
The district court concluded that in order to obtain injunctive relief, the State must prove the following two elements: (1) a material misrepresentation, and (2) the intent to induce the purchaser to act or refrain from acting. The district court required two additional elements, justifiable reliance and damages, to be established for restoration of the purchase price to the customers. The court found that the State had established these elements in regard to an injunction and restoration for four of the consumers. The court held that the claim of a fifth consumer was precluded because the consumer's claim had been denied in small claims court.
Our review of this equity action is de novo. Iowa R.App.P. 4. We give weight to the findings of the trial court but are not bound by them. Iowa R.App.P. 14(f)(7). The State must establish each of the necessary elements by a preponderance of clear, convincing, and satisfactory evidence. See Wilden Clinic, Inc. v. City of Des Moines, 229 N.W.2d 286, 292 (Iowa 1975); Kelly Tire Serv., Inc. v. Kelly-Springfield Tire Co., 338 F.2d 248, 252 (8th Cir.1964).
Three issues are raised in this appeal. First, we must determine what elements must be established to maintain an action for injunction and restoration under Iowa Code section 714.16. Second, we must determine whether the State has established those elements in this case. Finally, we will review the district court's holding that a decision in small claims court precluded the restoration of monies to one of the consumers.
It was originally believed that a freely competitive economy was sufficient to protect buyers from fraudulent practices. See Note, Consumer Protection Under the Iowa Consumer Fraud Act, 54 Iowa L.Rev. 319, 326 (1968). A dominant theme in commercial law was caveat emptor, "let the buyer beware." Lovett, State Deceptive Trade Practice Legislation, 46 Tulane L.Rev. 724, 726-27 (1971-72). The consumer was assumed to be able to strike a fair bargain with any seller, and the customer was individually responsible to remedy any deficiencies. Defrauded customers were left with a common-law action for fraud against the seller as their primary recourse. See Note, Developments in the Law: Deceptive Advertising, 80 Harvard L.Rev. 1005, 1016-17 (1967). The protection afforded consumers by common-law remedies was generally ineffective. The burdens of a common-law action were "sufficient to dissuade all but the most persistent and most seriously injured customer." Id. In Iowa, an action for common-law
fraud required the purchaser to prove reasonable reliance, misrepresentation, knowledge of falsity, and intent to deceive. See Note, 54 Iowa L.Rev. at 321. The difficulties in proving these elements were summarized by one commentator:
The purchaser willing to seek recovery of the nominal sum usually involved was likely to be told by the court that scienter had not been adequately proved, that his reliance on the misrepresentation was unreasonable because he should have examined the goods or obtained the counsel of impartial and reliable persons, that...
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