In the Matter of the Petition by                                )
                                                                               )
THE DINERS' CLUB, INC.                                         )
                                                                               ) P.O.D. Docket No. 1/225
for a review of proposed annulment                     )
and denial of second-class mail                            )
privileges of "THE DINERS' CLUB                           )
MAGAZINE."                                                           )

APPEARANCES:                                                     Nathaniel Whitehorn, Esq.
                                                                               Joseph S. Hellman, Esq.
                                                                               Hays, Sklar & Herzberg
                                                                               579 Fifth Avenue
                                                                               New York 17, New York, and
                                                                               Roy C. Frank, Esq.
                                                                               717 Barr Building
                                                                               Washington 6, D. C.
                                                                               for the Petitioner

                                                                               Adam G. Wenchel, Esq., and
                                                                               Dean M. A. Murville, Esq.
                                                                               Office of the General Counsel
                                                                               Post Office Department
                                                                               for the Respondent

Kelly, Raymond J.

POST OFFICE DEPARTMENT Washington 25, D. C.

DEPARTMENTAL DECISION

This matter comes before the Judicial Officer upon exceptions and brief on appeal filed herein by Respondent on November 4, 1960, from the Initial Decision of the Hearing Examiner, dated October 20, 1960.

On February 1, 1960, the Petitioner herein filed a petition for review of proposed annulment of second-class entry and denial of second-class re-entry for the publication known as THE DINERS' CLUB MAGAZINE to which he attached as exhibit A, letter dated December 7, 1959 signed by the Director of Postal Services Division, Post Office Department, Bureau of Operations in which it was stated that it was the conclusion of the Department that:

"THE DINERS' CLUB MAGAZINE as prepared, published, and circulated, comes within the prohibition of Section 132.126b, Postal Manual, which reads:

'Those owned or controlled by individuals or business concerns and conducted as an auxiliary to and essentially for the advancement of the main business or calling of those who own or control them.'"

Respondent filed answer to the petition on February 16, 1960 alleging that the publication does not meet the requirements of the United States Code or the Postal Manual because it is designed primarily for advertising purposes and because it is circulated at nominal rates.

On March 15, 1960, the Petitioner filed a motion to dismiss paragraph 12(b) of the Respondent's answer herein and on April 1, 1960, the Petitioner filed amendments to the petition and on April 13, 1960, the Respondent filed an answer to the amended petition and to the motion to dismiss paragraph 12(b) of the answer. The hearing was held in New York City on Wednesday and Thursday, April 20 and 21, 1960 and on August 11, 1960, the Respondent submitted proposed findings of fact and conclusions of law. On August 12, 1960, the Petitioner filed proposed findings of fact and conclusions of law and supporting brief. On October 20, 1960, the Initial Decision of the Hearing Examiner was filed sustaining the appeal of the Petitioner. Timely appeal was taken from the Initial Decision by the Respondent by the filing of the exceptions and brief on appeal as above stated.

The Petitioner, The Diners' Club, Inc., has as its principal business the operation of a credit system under which members may make purchases from various establishments and charge the purchases to their Diners' Club accounts. The headquarters office of the Diners' Club pays bills so incurred and collects the amount from the members of The Diners' Club. The Diners' Club receives a commission of 7 to 10 percent on all accounts serviced by it.

The record discloses that the Petitioner also has owned and published THE DINERS' CLUB MAGAZINE since March 1955, when the magazine was accorded entry into the mails as second-class matter at New York, New York which entry was later transferred to Canton, Ohio. Additional second-class mail permits were granted for this magazine for Los Angeles, California on January 14, 1959 and at San Bernardino, California on May 13, 1959. On July 16, 1959 and again on July 31, 1959 the Petitioner filed applications for re-entry of the magazine because of a change of frequency of issuance and because of a change in the office of publication at Dayton, Ohio.

Respondent sets forth in his exceptions and brief on appeal the issue which is to be determined in the following language:

"The ground for the Director's challenge to the continuance of second-class mail privileges for this publication, insofar as here pertinent, is that the publication is one conducted essentially for the advancement of the credit card aspect of the publisher's business and is, therefore, designed primarily for advertising purposes within the meaning of the law and regulations."

The Respondent in support of this contention excepts to the findings of facts and conclusions of law contained in the Initial Decision of the Hearing Examiner to the effect that:

1. The magazine is a separate business enterprise from the credit card business;

2. The purpose of the Petitioner is that the publishing and credit card facets of the business shall be independent of each other;

3. If the credit card facet should cease operating the publishing facet could and would remain in business;

4. The credit card business receives only an incidental benefit from advertisement in the publication carrying legend such as "charge to your Diners' Club Account";

5. The magazine has achieved wider circulation than the Diners' Club membership;

6. The magazine is not intended nor designed to promote the Petitioner's credit card business;

7. The publication conforms to the requirement of Section 226 of Title 39, U.S.C. and Sections 132.226(b) and 132.228 of the Postal Manual

Respondent introduced no testimony but relies upon an analysis of the contents of the copies of the magazine introduced as exhibits and contends that from this analysis it is clear that whatever the publisher may hope for the publication in the future, at present the overwhelming bulk of the advertisements are not of the institutional type but rather the type that directly stimulate the credit card business.

The Hearing Examiner in this proceeding adopted the statement of issues set forth in the Petitioner's brief as follows:

"A. Is The Diners' Club Magazine designed primarily for advertising purposes contrary to 39 U.S.C. sec. 226 and section 132.226b, Postal Manual, by virtue of the reasons set forth in respondent's initial ruling of December 7, 1960? (sic) (3-8)

B. Did respondent call to the attention of petitioner in writing before the institution of agency proceedings, all facts or conduct upon which he purports to base his denial of petitioner's second-class mails at Dayton, Ohio, and his annulment of the Magazine's existing second-class entries at Canton, Ohio, and San Bernardino, California, contrary to the provisions of the Administrative Procedure Act, 5 U.S.C. sec. 1001, et seq.? (Amendments to Petition, par. 2; 3)

C. At the time of respondent's ruling of December 7, 1959, purporting to deny petitioner's applications for re-entry of its Magazine to the second-class mails at Dayton, Ohio, and purporting to annul the Magazine's existing entries at Canton, Ohio, and San Bernardino, California, did there exist in the Federal Register the published 'procedures' of the Post Office Department to which petitioner was 'required to resort', as required by the Administrative Procedure Act, 5 U.S.C. sec. 1001, et seq.? (Amendments to Petition, par. 3; 3)

D. Is there a separation of functions between the adjudicating and prosecuting authorities of the Post Office Department with respect to the denial and annulment of second-class mail permits, as required by the Administrative Procedure Act, 5 U.S.C. sec. 1001, et seq.? (Amendments to Petition, par. 4; 3-4)

E. Is The Diners' Club Magazine a nominal rate publication within the meaning of 39 U.S.C. sec. 226, 39 C.F.R. 22.2(b)(8), 132.228 Postal Manual? (Amendment to Answer; 10-11)

F. Does the burden of proof with respect to all of the issues in this proceeding rest upon the respondent?"

Although it appears that at least some of these issues as outlined above may not be actually or properly before the Judicial Officer on appeal, in order to preclude any future controversy regarding the same it is deemed advisable to pass upon them here.

As to issue B above the Hearing Examiner correctly determined from the record that as of December 7, 1959, the sole basis in the mind of the Respondent for the denial of the application for re-entry and the revocation of existing second-class permits was that the Respondent believed that the publication was designed primarily for advertising purposes as set forth in said notice.

He likewise correctly concluded that the pleadings in the case could properly be amended to include other grounds for the proposed action so long as, as in this case, the Petitioner is not deprived of due process.

As to Issue C the Hearing Examiner correctly determined that as of December 7, 1959, there did exist in the Federal Register the published procedures of the Post Office Department to which Petitioner was required to resort as required by the Administrative Procedure Act, 5 U.S.C., Section 1001 et seq.

As to Issue D the Hearing Examiner correctly concluded that questions of this type are outside the scope of the jurisdiction of these proceedings.

As to Issue F the Hearing Examiner correctly determined that since the Petitioner is the moving party insofar as the application for re-entry is concerned that the Petitioner has the burden of proof as to this phase of the proceeding (Section 7(c) of the Administrative Procedure Act (5 U.S.C. 1006(c)).

The question of "circulation at nominal rates" (Issue E) has been in and out of this hearing several times as set forth in the Initial Decision of the Hearing Examiner. It was first raised by and then stricken from the answer. It was raised again by amendment to the answer. At the hearing it was discussed and Counsel for Respondent stated that they would not urge that either the old subscription rate of .60 per year or the new rate of $1.00 per year which went into effect in May and June in 1960 is a nominal subscription rate, but that they would maintain that the conditions under which such subscriptions are taken render both these rates nominal (Tr. 146).

As the Hearing Examiner pointed out the record reveals that for the fiscal year ending March 31, 1959, publishing costs were $308,000 while revenues from subscriptions, alone, amounted to $420,000. Advertising revenues increased the margin of profit for this period. For the nine months ending December 31, 1959, publishing costs were $618,000 and subscription revenue was $400,000. The advertising income resulted in a profitable operation. In the latter period, costs were increased by increases in postage rates, increases in frequency of publication and increased printing costs. These cost increases were expected to be offset, in whole or in part, by the increase in the subscription rates (Tr. 42-44). These facts appear in uncontroverted testimony of an officer of the Petitioner, and upon the record herein the Hearing Examiner has correctly determined that the magazine, as a matter of fact, is not designed primarily for circulation at nominal rates.

The main issue on appeal (Issue A) as set forth by the Respondent is whether the publication DINERS' CLUB MAGAZINE is "conducted essentially for the advancement of the credit card aspect of the publisher's business and is therefore designed primarily for advertising purposes within the meaning of the law and regulations." Does it meet the test contained in Section 132.226(b) of the Postal Manual or is it being designed primarily for advertising purposes because it is "owned or controlled by individuals or business concerns and conducted as an auxiliary to and essentially for the advancement of the main business or calling of those who own or control them?"

The Respondent relies mainly upon the exhibits and their case is based upon the examination of the magazine and analysis of its contents.

On September 30, the Respondent herein wrote the Petitioner a letter (Exhibit 4) in which the following statements appear:

"The law (39 United States Code 226; Postal Manual, section 132.22) requires, among other things, that a publication to qualify for second-class mail privileges must have a 'legitimate list of subscribers' and prohibits the entry of publications 'designed primarily for advertising purposes, or for free circulation, or for circulation at nominal rates.' Some of the publications designed for advertising purposes are defined in section 132.226b, Postal Manual, as 'those owned and controlled by individuals or business concerns and conducted as an auxiliary to and essentially for the advancement of the main business or calling of those who own or control them.'"

"An examination of the copies which accompanied the applications for second-class reentry and a study of other issues of the publication shows that practically all of the advertisements and textual matter appearing therein are tied in some way by reference to Diners' Club Incorporated, and to its activities. A considerable percentage of the advertisements relate to the activities or functions of the Club itself.

As prepared and circulated 'Diners' Club Magazine' is designed primarily for advertising purposes, that is, as a house organ conducted as an auxiliary to and essentially for the advancement of Diners' Club, Inc., and its stockholders, and, therefore, comes within the prohibition of the law cited."

On December 7, 1959, the Respondent wrote the Petitioner the letter (exhibit 5) referred to on page 2, supra, which contained the following additional statements:

"On the other hand, we find that the circulation of 'The Diners' Club Magazine' is almost in its entirety to members of the Diners' Club who pay nothing additional for it other than their annual membership fee, there being no difference in the amount of such fee in case a member should not want the magazine. The purpose of 'The Diners' Club Magazine' is to create and maintain interest in the Diners' Club. Therefore, there is a tie in with the activities and functions of the Diners' Club. Thus the advertising is slanted to members of the Club and the clearing of their accounts in part of the business of the Club, as evidenced by statements appearing in connection with numerous advertisements, such as

'Send me the items as listed below and charge my Diners' Club Acct. $...........'

'Charge the car of your choice...anywhere in the world]'

'Bill my Diners' Club account.....'

'Liquor charged on your Diners' Club Card'

'Charge Diners Card No. ........'

'In conjunction with the Diners' Club DAVEGA presents fine gifts exclusively for Diners' Club Members.'

'Charge your Diners' Club account, give account number and authorized signature.'"

These communications indicate that Respondent's view that the magazine is designed primarily to advertise the credit card aspect of The Diners' Club is the real reason for the action taken by him on the denial and revocation of second-class entry.

The facts as revealed by the uncontroverted testimony of witnesses produced by the Petitioner at the hearing so far as same is pertinent are as follows:

The Diners' Club itself is a publicly held corporation with a membership of over one million (Tr. 18-19) which represents the financial elite of the country (Tr. 65, 106). Its main business is to create credit card holders and handle the charge purchases generated by them (Tr. 41). They also have member establishments such as hotels, restaurants and many types of other establishments where card holders can charge purchases (Tr. 19). These are located in the United States and Canada and some ninety other foreign countries.

The Diners' Club Magazine was originally started to take advantage of the potentiality of the high-type caliber of the members of the Diners' Club (Tr. 39). The income level of the subscribers to the magazine was higher than that for the subscribers of any other publication which the advertising agency handling the magazine's advertising account had encountered and was probably the best mail (sic) audience from the point of view of spending power (Tr. 65).

THE DINERS' CLUB MAGAZINE is published not to promote the credit card operation of the Diners' Club but to make money from the independent operation of a general interest magazine with very high class circulation (Tr. 39, 40, 71, 134). The credit card aspect of the business promotes the magazine (Tr. 72). It goes to a high income group who travel a lot, entertain, spend freely and purchase high priced products (104-106) and so afforded a good advertising medium for manufacturers of and dealers in quality merchandise (Tr. 69). It is the qualitative character of the readership which makes the magazine what it is (Tr. 72).

The magazine has nothing to do with the Diners' Club credit card business which is handled separately and most of the business in the magazine is from non-member establishments (Tr. 107).

The magazine is not essential to the credit card business of the Petitioner and only a nominal number of new credit card club members is obtained through the magazine (Tr. 39). Most of the subscribers to the magazine already are members of the Diners' Club. Advertising in the magazine is open to non-member business establishments and member establishments alike (Tr. 40, 102).

Between ninety percent and ninety-five percent of the advertising placed in THE DINERS' CLUB MAGAZINE is placed by independent advertising agencies (Tr. 99).

Various business concerns such as publishers, distillers and automobile manufacturers who have no connection with the Petitioner's credit card business have advertised in the magazine and this type of advertiser is increasing (Tr. 98-99).

The content of the advertisements in the magazine is prepared entirely by the advertiser and the magazine exercises no control whatever over the copy or the decision of the advertiser to use such legends as "charge to your Diners' Club account" in their copy (Tr. 100, 102, 136). Advertisers also insert such a legend in advertisements appearing in publications other than THE DINERS' CLUB MAGAZINE. Some member firms insert advertisements in the magazine without mentioning the Diners' Club (Tr. 102). The policy of the magazine is to permit advertisers to mention other credit card systems (Tr. 118, 179). The percentage of advertisements mentioning Diners' Club has decreased and will undoubtedly decrease further as the number of national advertisers increases. Members of the Diners' Club could obtain their memberships without being or becoming subscribers to the magazine and persons not members of the Diners' Club could subscribe to the magazine (Tr. 58-59).

The magazine has been carrying articles of general interest by well known authors and it is the policy of the magazine to continue this on a larger scale in the future. These articles are not related to the services offered by Diners' Club (Tr. 40, 105). Advertisers have an interest in the editorial content of a publication because a magazine should be of a general nature and should be of interest to its intended audience in order to be of value as an advertising medium. The expert witnesses point out that the magazine here involved is such a publication.

The greatest source of revenue to any magazine is advertising (Tr. 70). Subscription rates are kept low for the purpose of obtaining a large circulation in order that the publication will be attractive to advertisers. Publications carrying a large amount of advertising relating to only one field are less attractive to advertisers in other businesses.

The magazine is not a house organ. If it was a house organ and if its chief purpose was to promote Petitioner's credit card business it would not be attractive to national advertisers not affiliated with the Diners' Club (Tr. 71, 107, 136, 158).

References to credit card privileges and to various seals of approval such as the Good Housekeeping seal are included in advertising copy as a matter of routine and for the benefit of the businesses in whose advertisements they appear (103, 190). It is common for other magazines to run credit card insertions in their ads (Tr. 104, Petitioner's Exhibits #43, 44, 45).

Some benefit may accrue to the credit card business from the appearance in the magazine of advertisements carrying the legend "charge to your Diners' Club account". This benefit is however incidental and is of little or no interest to the advertisers (Tr. 103). Advertisements are solicited and accepted from member establishments and non-member businesses and there is no discrimination as to advertising rates between the two groups of advertisers. Advertisers are free to and do advertise in the magazine the fact that they will honor credit cards other than those of the Diners' Club (Tr. 101-102).

The magazine is of little significance in informing the members of the Diners' Club of the available services (Tr. 47). The Diners' Club credit card is itself a directory listing the establishments at which a Diners' Club member can use his credit card. This is revised twice yearly (Tr. 29). A diners' Club member also has other means provided for him so that they might determine the establishments available to them. These include the Christmas gift catalog (Exhibit 13) (Tr. 36), supplemental directories, international directories, Canadian and other foreign directories, special directories, advertising inserts which are placed in the monthly billings, the signs, window decals, window plaques and other means of identification of the member establishments. (Tr. 29-38). It would certainly appear that these and not the magazine are the all important means of learning of the available services. The magazine would be merely repetitious (Tr. 47) and little used by members for this purpose.

I cannot see how from these facts it could possibly be held that THE DINERS' CLUB MAGAZINE is published primarily for advertising purposes since there is no support in the record for a finding that the magazine is published essentially for the advancement of the credit card business of the Diners' Club.

In the Respondent's proposed findings of fact and conclusions of law there is the suggestion of a desire to broaden the advertising issue of this proceeding and the Hearing Examiner correctly determined that from the pleadings, the testimony of the witnesses and a large number of the exhibits it is clearly demonstrated that the advertising issue was limited to advertising as that term is illustrated in Section 132.226(b) of the Postal Manual. When, as in this case, the Petitioner has predicated his preparation on notice that the case would be tried on a limited phase of the advertising question, matters presented for the first time in the proposed findings of fact and conclusions of law which would enlarge the scope of this issue are untimely raised.

I adopt the conclusions of law of the Hearing Examiner as set forth in the Initial Decision as follows:

1. The publication "The Diners' Club Magazine" conforms to the requirements of Section 226 of Title 39, United States Code, and Sections 132.226b and 132.228 of the Postal Manual.

2. The rulings of the Respondent set forth in letters to the Petitioner dated September 30, 1959, and December 7, 1959, are set aside and the application for re-entry into the mails as second-class matter of "The Diners' Club Magazine" is granted.

3. The Petitioner had sufficient notice of the bases upon which the Respondent proposed to revoke the second-class mail permit for "The Diners' Club Magazine" and to deny the re-entry application for said publication.

4. The published procedures of the Post Office Department to which the Petitioner was required to resort were in existence in the Federal Register at the time of the mailing of the Respondent's letters of September 30, 1959 and December 7, 1959.

5. The Petitioner had the burden of proof in that phase of this case involving the application for re-entry of the Magazine into the mails as second-class matter and the Respondent had the burden of proof with respect to that phase of the case involving the revocation of the second-class mail permit previously held by the Publisher for the Magazine.

Proposed findings of fact and conclusions of law as submitted by the parties hereto or the substance thereof have been fully considered and they are adopted to the extent herein indicated. Otherwise, such proposals are denied for the reasons stated or for immateriality.