United States v. Reader's Digest Ass'n, Inc.

• Citation: 494 F. Supp. 770
• Decision Date: 02 July 1980
• Docket Number: Civ. A. No. 75-184.
• Parties: UNITED STATES of America, Plaintiff, v. The READER'S DIGEST ASSOCIATION, INC., Defendant.
• Court: U.S. District Court — District of Delaware

494 F. Supp. 770

UNITED STATES of America, Plaintiff, v. The READER'S DIGEST ASSOCIATION, INC., Defendant.

Civ. A. No. 75-184.

United States District Court, D. Delaware.

July 2, 1980.

James W. Garvin, Jr., U. S. Atty., Wilmington, Del., and Benjamin P. Schoen, Atty., Dept. of Justice, William Sanger and Terrence J. Boyle, Attys., Federal Trade Commission, Washington, D. C., of counsel, for plaintiff.

R. Franklin Balotti, Donald Bussard and Richard D. Kirk of Richards, Layton & Finger, Wilmington, Del., and John B. Kuhns of Williams & Connolly, Washington, D. C., of counsel, for defendant.

MEMORANDUM OPINION

LATCHUM, Chief Judge.

This action was brought on July 7, 1975, by the United States of America (the "Government") against Reader's Digest Association, Inc. ("Reader's Digest" or "defendant"), seeking injunctive relief and the recovery of civil penalties pursuant to sections 5(l) and 16(a)(1) of the Federal Trade Commission Act (the "Act"), 15 U.S.C. §§ 45(l) and 56(a)(1), for alleged violations of a consent order which became final on January 15, 1972.¹ The consent order required Reader's Digest, which regularly uses a promotional device known as a "sweepstake" 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 sweepstake or comparable promotional device. Among the practices proscribed was: "Using or distributing simulated checks, currency, `new car certificates', or using or distributing any confusingly simulated item of value."² The complaint alleged that in 1973 Reader's Digest, in violation of the consent order, mailed to consumers 13,898,521 "Travel Checks"³ and thereafter mailed to consumers 4,042,000 "Cash-Convertible Bonds" in connection with their promotional sales efforts.

In prior proceedings in this case, the Court granted the Government's motion for partial summary judgment on the liability issue, holding that the distribution by Reader's Digest of the Travel Checks and Cash-Convertible Bonds violated the consent order.⁴ United States v. Reader's Digest Association, Inc., 464 F.Supp. 1037, 1055 (D.Del.1978).

Following additional discovery, the Government on October 26, 1979, requested the Court to impose civil penalties in an amount not less than $1,750,000.⁵ On May 13, 1980, the Court held an evidentiary hearing on the civil penalty aspects of this case. Now after considering the sufficiency and weight of the testimony,⁶ the demeanor of the witnesses, the documentary evidence produced,⁷ and the pre-hearing and post-hearing briefs of the parties,⁸ the Court makes the following findings of fact and conclusions of law in accordance with Rule 52(a) of the Federal Rules of Civil Procedure.

In determining the size of civil penalties, the Court must consider a number of factors including: (1) the good or bad faith of the defendant; (2) the injury to the public; (3) the defendant's ability to pay; (4) the desire to eliminate the benefits derived by a violation; and (5) the necessity of vindicating the authority of the Federal Trade Commission ("FTC"). United States v. Papercraft Corp., 540 F.2d 131, 141 (C.A.3, 1976); United States v. J. B. Williams Company, Inc., 498 F.2d 414, 438 (C.A.2,1974); Federal Trade Commission v. Consolidated Foods Corp., 396 F.Supp. 1353, 1356-57 (S.D.N.Y.1975); United States v. Swingline, 371 F.Supp. 37, 46 (E.D.N.Y. 1974).

First, Reader's Digest contends that the Government seeks a penalty which exceeds the maximum penalty allowed by statute. This contention is based on the following two arguments: (1) since there were only six mass promotional mailings of Travel Checks and Cash Convertible Bonds in 1973 and 1974,⁹ there were only six violations of the consent order and (2) because five of the six mass mailings occurred at a time when the relevant statute provided for a $5,000 penalty per violation and only one mass mailing occurred when the amended statute provided for a $10,000 penalty per violation,¹⁰ the maximum penalty allowable in this case is $35,000.

The Government, on the other hand, contends that each individual mailing of a Travel Check or Cash Convertible Bond to an addressee constituted a separate violation of the consent order and therefore Reader's Digest, having distributed a total of 17,940,521 such items, is guilty of 17,940,521 separate violations of the order. Thus, according to the Government the allowable maximum penalty should be determined by multiplying the number of separate violations by $5000 or $10,000 whichever amount was applicable at the time of the distributions.¹¹

A determination of the proper number of violations depends upon the interplay of the penalty provisions of the applicable statute and the language of the consent order.

The statute, 15 U.S.C. § 45(l), applicable to violations which occurred prior to November 16, 1973, provided:¹²

(1) Any person, partnership, or corporation who violates an order of the Commission to cease and desist after it has become final, and while such order is in effect, shall forfeit and pay to the United States a civil penalty of not more than $5,000 for each violation, which shall accrue to the United States and may be recovered in a civil action brought by the United States. Each separate violation of such an order shall be a separate offense, except that in the case of a violation through continuing failure or neglect to obey a final order of the Commission each day of continuance of such failure or neglect shall be deemed a separate offense.

The consent order reads in pertinent part as follows:

* * * * * *

IT IS ORDERED that Reader's Digest Association, Inc., a corporation, and its officers, agents, representatives and employees, directly or through any corporate or other device, in connection with the publication, advertising, offering for sale, sale, or distribution of magazines, books, or other products in commerce as "commerce" is defined in the Federal Trade Commission Act, cease and desist from:

* * * * * *

C. (3) Using or distributing simulated checks, currency, "new car certificates;" or using or distributing any confusingly simulated item of value.

It is quite clear that the Act provides that each violation of a cease and desist order is a separate offense. The language of the consent order is equally clear in prohibiting Reader's Digest from "distributing any confusingly simulated item of value." (Emphasis added). Thus, if Reader's Digest had distributed only a single Travel Check or Cash Convertible Bond in its promotional material, there plainly would have been a violation of the precise language of the order. The fact that Reader's Digest distributed millions of the proscribed items rather than just one does not lessen or reduce the seriousness of each individual violative distribution. Hence, the Court concludes that each individual distribution of a Travel Check or Cash Convertible Bond constituted a distinct and separate violation of the order, and since the evidence shows that 17,940,521 of the proscribed items were distributed by mail, there were that many separate violations.

This conclusion, based on the unequivocal language of the statute and consent order, also finds support in prior court decisions. In United States v. Wilson Chemical Co., Inc., 1962 CCH Trade Cases ¶ 70,478 (W.D. Pa.1962), aff'd, 319 F.2d 133 (C.A.3, 1963), the district court found that defendants' violative advertisements appeared in approximately 25 million comic books. However, the Government grouped the violations into nine categories depending upon the publisher and the month of publication and sought civil penalties based only on that basis. The court imposed the maximum penalty upon each of the nine categories of violations but noted in dicta "that each publication in each comic book, as shown by the evidence, is a separate and distinct violation."

Likewise, the court in United States v. Golden Fifty Pharmaceutical Co., Inc., 421 F.Supp. 1199 (N.D.Ill.1976), spoke directly to the number of violations that could be charged in the case of mass mailings. In that action, the Government, having charged the defendants with fourteen mass mailings of the proscribed material in Count I and with two individual mailings in Count III, maintained that the defendants were liable for sixteen violations. The court agreed stating at 421 F.Supp. at 1207:

Earlier cases offer little concrete guidance on the appropriate number of violations to be charged when an advertisement is disseminated through a mass mailing. Generally, the courts have accepted the FTC's breakdown with little comment. E. g., J. B. Williams, supra, 498 F.2d at 420-421; United States v. Ancorp National Services, Inc., 367 F.Supp. 1221 (S.D.N.Y.1973); aff'd, 516 F.2d 198 (2d Cir. 1975). A plausible explanation for the dearth of authority is that the FTC's estimates have been reasonable, if not conservative. For example, in United States v. Wilson Chemical Co., Inc., 1962 CCH Trade Cases ¶ 70,478 (W.D.Pa.1962), aff'd, 319 F.2d 133 (3d Cir. 1963) (mem.), the court found that defendants' advertisement appeared in approximately 25,000,000 comic books. The Government, however, grouped the violations into nine categories depending upon the publisher and the month of publication. The court imposed the maximum penalty upon each of the nine violations, noting in dicta that each individual comic book which reached a customer could be considered a separate violation.

Without straining, we could read the statute and order here to similar effect. The statute provides that each violation of a cease and desist order is a separate offense. The order prohibits defendants from mailing or causing to be mailed any advertisement which contains a proscribed representation. If defendants had mailed a single advertisement in Count I, we would have little trouble finding a violation. The fact that they mailed millions rather than one or two, as in

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