United States v. Reader's Digest Ass'n, Inc.
| Citation | 464 F. Supp. 1037 |
| Decision Date | 20 March 1979 |
| Docket Number | Civ. A. No. 75-184. |
| Parties | UNITED STATES of America, Plaintiff, v. READER'S DIGEST ASSOCIATION, INC., Defendant. |
| Court | U.S. District Court — District of Delaware |
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James W. Garvin, Jr., U. S. Atty., Wilmington, Del., and James A. Calderwood, Atty., Dept. of Justice, Washington, D. C., for plaintiff.
R. Franklin Balotti and Donald A. Bussard of Richards, Layton & Finger, Wilmington, Del., and John B. Kuhns of Williams & Connolly, Washington, D. C., for defendant.
This is an action brought by the United States of America (the "Government") against Reader's Digest Association, Inc. ("Reader's Digest") to obtain injunctive relief and recover civil penalties pursuant to sections 5(l) and 16(a)(1) of the Federal Trade Commission Act (the "Act"),1 for alleged violations of a consent order. The order required Reader's Digest, which regularly uses a promotional device known as a "sweepstakes" in its business of selling and distributing magazines, books and other products, to cease and desist from engaging in various practices in connection with any sweepstakes or other similar promotional device. Among the practices proscribed were the use or distribution of "simulated checks" or "any confusingly simulated item of value."2 The complaint alleges that Reader's Digest violated the order by distributing an item labeled a "TRAVEL CHECK" and another item labeled a "CASH-CONVERTIBLE BOND" in connection with two different sweepstakes.
The principal issues in a civil penalty action are whether the defendant violated the FTC order in question and, if so, what amount of money should be assessed as a penalty.3 This case is presently before the Court on Reader's Digest's motion for summary judgment and the Government's motion for partial summary judgment on the issue of liability and to strike two affirmative defenses raised by Reader's Digest in its answer.4 The challenged defenses are: (1) that the FTC violated Reader's Digest's constitutional right to substantive and procedural due process by implementing and interpreting the consent order in an arbitrary and capricious manner and (2) that the Government's claims are barred by laches, waiver and estoppel.5 The defendant also denies that it violated the consent order.
To the extent that Reader's Digest's affirmative defenses do not overlap with its more general denial of liability, the Court concludes that they do not provide a basis for avoiding liability in this case.6 The defendant has cited no authority for the proposition that the due process clause requires the FTC to afford those subject to a consent order notice and a hearing prior to instituting a civil penalty action, and the Court has found none. The courts that have addressed the issue have refused to impose such a requirement.7 The equitable defenses of laches, waiver and estoppel have no application here, because they are based on actions taken in the public interest by members of the Commission's staff. See FTC v. Algoma Lumber Co., 291 U.S. 67, 80, 54 S.Ct. 315, 78 L.Ed. 655 (1933); United States v. Vulcanized Rubber & Plastics Co., 178 F.Supp. 723, 726 (E.D.Pa.1959). Similarly, Reader's Digest's good faith or lack of intent has no bearing on the question of liability in this civil penalty action. United States v. Ancorp National Services, Inc., 516 F.2d 198, 202 (C.A.2, 1975); United States v. Vitasafe Corp., 212 F.Supp. 397 (S.D.N.Y.1962); United States v. Karns, 1963 Trade Cases ¶ 70,950 (S.D.N.Y.1963).
The Court will deny the motion to strike the affirmative defenses, however, for two reasons. First, the good faith of the defendant and the alleged lack of notice are among the factors to be considered by the Court in determining the penalty, if any, to be imposed. See United States v. Papercraft Corp., 540 F.2d 131, 141 (C.A.3, 1976); United States v. Ancorp National Services, Inc., supra, 516 F.2d at 202; United States v. Wilson Chemical Co., 1962 Trade Cases ¶ 70,478 (W.D.Pa.1962), aff'd, 319 F.2d 133 (C.A.3, 1963). Second, this case is not unduly complicated and the Government has not shown that it is prejudiced in any way by the presence of the challenged defenses. See Tivoli Realty, Inc. v. Paramount Pictures, Inc., 80 F.Supp. 800, 803 (D.Del.1948); 2A Moore's Federal Practice ¶ 12.21, p. 2431 & n. 30 (2d ed. 1975).
The Court now turns to the sole issue presented by the pending cross-motions for summary judgment; that is, whether the distribution by Reader's Digest of the Travel Check or Cash-Convertible Bond or both violated the terms of the consent order.
Congress has directed the FTC "to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce."8 Acting pursuant to this mandate, the FTC conducted an investigation in 1970 of the practices employed by Reader's Digest and several other corporations in connection with various promotional sweepstakes. Ultimately, the Commission notified Reader's Digest that it intended to issue a complaint against the company alleging that some of its practices were unfair or deceptive and therefore in violation of section 5 of the Act. Settlement negotiations ensued and resulted in a consent order in which Reader's Digest agreed to cease and desist from most of the practices mentioned in the complaint. The consent order together with the proposed FTC complaint were issued on November 2, 1971.9 The order became final on January 15, 1972 and, except for a modification on March 5, 1974 in respects not material to this action, the order has been in full force from that date to the present time.10
Paragraph II.C(3) of the consent order provides:
The Government contends that two different items distributed by Reader's Digest in connection with the offering for sale of Reader's Digest magazine contravened Paragraph II.C(3). The first item, a "TRAVEL CHECK", was distributed during the first half of 1973 as part of a twelve-page promotional pamphlet called a "Sweepstakes Passport."11 The Travel Check is printed on light green and blue paper, is approximately the same size as a real traveler's check, has traditional check-style borders, and purports to be for "100 Dollars a Month for Life."12 The Government alleges that the Travel Check violates the proscription against the use of "simulated checks."
The second item is labeled a "CASH-CONVERTIBLE BOND" and it was part of a packet of sweepstakes literature distributed in November, 1973 and October, 1974.13 As with the Travel Check, the Bond is printed against an official looking background.14 The Government contends the Cash-Convertible Bond is a "confusingly simulated item of value" within the meaning of Paragraph II.C(3) of the consent order.
To decide whether the Travel Check or the Cash-Convertible Bond violated the order, the Court must engage in a two-step analysis: (1) determining what the order means and (2) deciding whether the challenged advertisements come within the order as construed. United States v. J. B. Williams Co., supra, 498 F.2d at 430-31. Furthermore, in an action to recover civil penalties the court's role is not to determine whether the challenged practice is deceptive, but merely to consider whether the practice falls within the order's proscription. United States v. Vulcanized Rubber & Plastics Co., 288 F.2d 257, 258 n. 2 (C.A.3, 1961); see United States v. Morton Salt Co., 334 U.S. 37, 54, 68 S.Ct. 822, 92 L.Ed. 420 (1948). A dispute exists in this case, however, as to whether Paragraph II.C(3) should be construed to require some proof that prohibited advertisements actually cause consumer confusion or deception. No evidence of actual confusion has been presented with respect to either of the items in question here.
Reader's Digest contends that the order should be construed to require at least some evidence of actual confusion or deception before an advertisement can be found to have violated the ban against using "simulated checks" or "confusingly simulated items of value." Reader's Digest points to two different sources for such an evidentiary requirement. First, it argues that the consent order by its own terms requires proof of confusion. In the alternative, it contends that the recently recognized right of commercial speech to First Amendment protection requires that the consent order be construed narrowly to require proof of confusion. The Court will consider these contentions in turn.
Paragraph II.C(3) requires Reader's Digest to cease and desist from:
(3) Using or distributing simulated checks, currency, "new car certificates;" or using or distributing any confusingly simulated item of value.
The prohibition is not a model of clarity and the word "confusingly" in the second clause accounts for much of the ambiguity. It is not clear from the face of the order whether the adjective "confusingly" was intended to modify the items mentioned in the first clause of Paragraph II.C(3) as well as the second. More importantly, the language of the order does not indicate whether or not the term "confusingly" was meant to impose upon the FTC the burden of...
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