In the Matter of the Complaint Against

N. STIMPSON
225 S.W. 91st Street
at Gainesville, FL 32601

and

COLFAX PUBLICATIONS
Post Office Box
1135 at Newberry, FL 32669

P.S. Docket No. 11/80;

04/30/82

Cohen, James A.

APPEARANCE FOR COMPLAINANT:
H. Richard C C L U WHefner, Esq.
Clark C. Evans, Esq.
Consumer Protection Division
Law Department
U.S. Postal Service
Washington, DC 20260

APPEARANCE FOR RESPONDENT:
G S P G rafton B. Wilson, II, Esq.
Schwartz and Wilson
P.O. Box 1202
Gainesville, FL 32602

POSTAL SERVICE DECISION

Respondent* has filed an appeal from the Initial Decision of an Administrative Law Judge which holds that, with regard to its envelope stuffing enterprise, Respondent is engaged in a scheme for obtaining money through the mail by means of false representations in violation of 39 U.S.C § 3005.

BACKGROUND

On May 14, 1981, the Consumer Protection Division, Law Department, United States Postal Service, filed a Complaint alleging that Respondent, in connection with its envelope stuffing plan, false represents:

"III. . .

(a) Payment of a 'good faith deposit' of $25.00 will allow immediate participation in Respondent's promotion without further substantial financial investment by the homeworker.

(b) Only a limited number of persons will be selected to participate in Respondent's promotion.

(c) Principal requisites for participants to earn sizable monetary compensation from Respondent are:

1) payment of the $25.00 'deposit,' followed by

2) stuffing circulars into envelopes and forwarding said materials to Respondent.

(d) Amounts of earnings are primarily determined by whatever amount of time participants wish to devote or can devote to the stuffing of circulars into envelopes.

In a timely filed Answer to the Complaint, Respondent denied that it falsely represents its program. A hearing on the allegations of the Complaint was held before an Administrative Law Judge on July 30, 1981. At the hearing, Complainant presented the testimony of Roy H. Spradley, Jane Ruth Lee, and Roger H. Lourie. Complainant also introduced documentary evidence. Respondent presented no witnesses or exhibits but did cross-examine Complainant's witnesses. On the basis of the testimony presented and the exhibits in the record, the Administrative Law Judge concluded that Respondent makes the representations alleged in the Complaint and that those representations are materially false.

Accordingly, he concluded that Respondent is engaged in activities which are in violation of 39 U.S.C. § 3005.

RESPONDENT'S EXCEPTIONS TO THE INITIAL DECISION

Respondent has stated 5 exceptions to the Initial Decision, each of which is hereafter addressed.

I. COMPLAINANT HAS FAILED TO ESTABLISH THAT

RESPONDENTS WERE ENGAGED IN A SCHEME TO

OBTAIN MONEY BY FALSE PRETENSES.

Respondent argues that Complainant bears the burden of proof in this proceeding which it must sustain by a preponderance of the evidence. While conceding that false commercial representations are not protected by the freedom of speech guarantees of the First Amendment, Respondent argues that First Amendment rights are at stake and Complainant should be stringently held to its burden. According to Respondent, Complainant did not sustain it burden of proof in this proceeding by the evidence it presented at the hearing. In support of its argument that there is insufficient evidence to sustain the allegations of the Complaint, Respondent cites United States Postal Service v. Stimpson, 515 F.Supp. 1149 (N.D. Fla. 1981), in which the United States District Court for the Northern District of Florida refused to issue a preliminary injunction under 39 U.S.C. § 3007 because it concluded that Complainant had not established probable cause to believe that Respondent was in violation of 39 U.S.C. § 3005.

The question of whether Complainant sustained its burden of proof must be addressed on the basis of the evidence of record in this proceeding. A court determination in a proceeding under 39 U.S.C § 3007 does not affect or determine any fact at issue in a proceeding under 39 U.S.C. § 3005. See Standard Research Labs, P.S. Docket Nos. 9/63 and 9/64 (Aug. 31, 1981). In order to prevail Complainant must support the allegations of the Complaint by a preponderance of the credible evidence. In determining whether Complainant has satisfied its burden of proof the relationship of a parties' first amendment rights and the consequences of the remedy authorized by 39 U.S.C. § 3005, are taken into consideration.

At the hearing before the Administrative Law Judge, Complainant introduced evidence which was not presented to the District Court in the § 3007 proceeding. The evidence presented by Complainant supports the allegations of the Complaint by a preponderance of the credible evidence in the record.

Respondent argues at length that the Administrative Law Judge erred in allowing Complainant's witness, Mr. Lourie, to testify with regard to Respondent's motive. It correctly points out that "intent" is no longer a prerequisite to the issuance of an order under § 3005 and therefore argues that Mr. Lourie's testimony concerning motive was irrelevant. Further, it argues the testimony was incompetent to establish motive and prejudicial to Respondent's position.

The Initial Decision does not cite or rely on any of the testimony to which Respondent objects in this exception. Thus, regardless of whether the testimony should have been admitted, it was not prejudicial and does not serve as a basis for altering the findings of conclusions of the Initial Decision. A review of the

Initial Decision and the record establishes that the Administrative Law Judge correctly found on the basis of relevant and admissible evidence that Respondent is engaged in a scheme to obtain money by means of false representations as addressed hereinafter. Respondent's Exception I. is therefore without merit.

II. COMPLAINANT HAS NOT ESTABLISHED THAT

RESPONDENTS "OBTAIN" MONEY THROUGH THE

MAILS IN THE SENSE CONTEMPLATED UNDER THE STATUTE.

Respondent concedes that it solicits money through the mails. However, it argues that the money it solicits is only a good faith deposit of $25.00 which is refundable after participants in its program have submitted 200 envelopes. Since it is not entitled to keep the money received unless a participant fails to pursue the program with due diligence, Respondent contends it does not seek to "obtain" money through the mails in the sense contemplated by 39 U.S.C. § 3005(a). Respondent also seeks to distinguish its program from the typical "money back" guarantee which was addressed in Farley v. Heininger, 105 F.2d 79 (D.C. Cir. 1939), and found not to alter the effect of a false representation.

Respondent's argument, while novel, is not persuasive. An unqualified "money back" guarantee would provide a participant a greater likelihood of return of its $25.00 than Respondent's program. Under Respondent's program a participant is not entitled to the return of its remittance unless it submits 200 envelopes to Respondent. Based on the testimony of Mr. Lourie, participants without expertise in the mail order business would probably not succeed (Tr. 81-83). Thus, whether a participant proceeded with "due diligence" or not, the chance of succeeding without direct mail order experience is small. Under such circumstances, it seems reasonable to conclude that most participants, although working diligently and following Respondent's instructions, would never succeed to the extent of obtaining 200 envelopes to submit to Respondent. Respondent would therefore retain the participants' deposits. Moreover, evidence establishing that participants do in fact submit a sufficient number of envelopes to receive a return of their deposit is solely within the possession of Respondent, but was not produced at the hearing. See Standard Research Laboratories, P.S. Docket No. 7/48 (P.S.D. April 4, 1980). Furthermore, even if it had been established that all solicited funds were eventually refunded, it would have been concluded that Respondent had the use of the money while it was in its possession. Accordingly, it is concluded that Respondent solicits money through the mails as contemplated by 39 U.S.C. § 3005.

III. COMPLAINANT HAS FAILED TO ESTABLISH THAT

RESPONDENTS MADE THE REPRESENTATIONS ALLEGED

In the Initial Decision the Administrative Law Judge found that all of the representations alleged in paragraph III of the Complaint are made in Respondent's advertising. Respondent contends that the Administrative Law Judge erred in making this finding. Respondent reduces the multiple representations alleged in paragraph III of the Complaint into the following two basic allegations:

1. That Respondent represents that only a select few may participate in the program, and

2. That Respondent represents that it will pay individuals either 60 cents or 30 cents per envelope simply for stuffing envelopes.

Respondent argues that neither of the representations are contained in its classified advertisement or explicitly made in any of its advertising materials. To the extent they have been made Respondent asserts they are implicit in its "Dear Friend" letter which is sent to prospective participants who seek information based on the classified advertisement.

With respect to the first basic allegation, the limitation on participation in the program, the Administrative Law Judge, in finding the representation to be made, relied on the following language in Respondent's advertisements:

"Don't put off another minute because our quota for mailers may soon be filled." (CX-B and CX-M.) Respondent argues, in effect, that no one would take this statement seriously. It also argues that the statement was not found to be material by the Court in United States Postal Service v. Stimpson, supra.

Neither of Respondent's arguments relate to the issue of whether the representation is made. The language relied on by the Administrative Law Judge, on its face, constitutes a representation that there is some limitation on the number of persons who will be allowed to participate in Respondent's program. While this type of representation may commonly be used by advertisers, there is no basis for concluding that it would not be taken seriously by an ordinary reader. As stated in M.K.S. Enterprises, Inc. v. United States Postal Service, 459 F.Supp. 1180 at 1184 (E.D.N.Y. 1978), "Neither the literal accuracy nor the patent absurdity of particular claims made will preclude a finding of misrepresentation."

Respondent's argument concerning the materiality of this representation has some merit. While alone this representation would not be expected to induce a reader to participate in Respondent's program, and therefore would not be a material misrepresentation, nevertheless when considered with the additional representations alleged in the Complaint, it would lend support to the veracity of those representations and thereby have a tendency to induce participation. Thus, in the context of the entirety of the advertising and the other alleged misrepresentations, the limited participation representation is material. That it is false is not seriously contested by Respondent. As stated in its brief " R Respondents have never attempted to limit participation... even though there is a theoretical saturation point beyond which the market would not support more participants." (Respondent's Brief, pp. 11-12).

With regard to Respondent's second basic allegation which includes the three remaining allegations of the Complaint, Respondent argues that a person of average intelligence would not believe that anyone would be willing to pay them 30 cents or 60 cents per envelope merely for stuffing an envelope. However, the testimony of both Mr. Lourie and Mrs. Lee established that an ordinary reader would reach that conclusion (Tr. 36-37, 78). Furthermore, as previously stated, the patent absurdity of a claim does not preclude a finding of misrepresentation.

Respondent also argues that references in the advertisement to "special instructions" and qualifiers such as describing the activity as substantially consisting of stuffing envelopes, imply that there are aspects to the work other than envelope stuffing. Likewise, it is argued that references to "locally securing pre-addressed, stamped envelopes by mail" and "your small expense in receiving envelopes" are sufficiently explicit to advise prospective participants that they will be doing more than stuffing envelopes and that there will be expenses involved beyond the $25.00 "good faith" deposit.

The essence of these arguments is that a careful reading of the advertisements will lead the reader to conclude that there are elements to the program beyond envelope stuffing and costs beyond the $25.00 deposit. However, an analytical reading is not required. M.K.S. Enterprises, Inc. v. United States Postal Service, supra; Baslee Products Corp. v. United States Postal Service, 356 F.Supp. 841 (D.M.J. 1973). As stated in Donaldson v. Read, 333 U.S. 178, 189 (1948), "People have a right to assume that fraudulent advertising traps will not be laid to ensnare them. Laws are made to protect the trusting as well as the suspicious." In addition, consideration must be given to the original classified advertisement which states: "GOOD PAY working from home processing mail for us. No experience required. Part or full time. Start immediately." In Paul Harvey v. United States Postal Service, No. Civ. S-80-571 RAR (E.D. Cal. Feb. 23, 1981), the United States District Court for the Eastern District of California, in considering a similar classified advertisement, stated at pp. 6 & 7:

"To initiate interest, plaintiff used classified advertisements. While the advertisements did not directly solicit money, they clearly promised earnings from 'addressing envelopes in the comfort of your own home.' The advertisements gave no indication that anything more than addressing envelopes was required. The fact that the lead advertisement did not solicit money does not render it irrelevant to the creation of an overall impression on an ordinary mind."

* * * *

"While the circular does not specifically state that the work consists solely of addressing and stuffing envelopes, the combined effect of the advertisement and circular provides substantial evidence to support the judicial officer's finding that one of ordinary mind would probably think that such a representation is being made."

A similar analysis is appropriate here. The impression of work-at-home employment "processing mail" in the original classified advertisement, when combined with the overall tenor of the advertising circulars received by prospective participants in response to the classified advertising, clearly represents to the reader of ordinary mind an enterprise consistent with Complaint allegations III(a), (c), and (d). Accordingly, Respondent's Exception is without merit.

IV. COMPLAINANT HAS FAILED TO ESTABLISH THAT

THE REPRESENTATIONS ALLEGED, TO THE EXTENT

THAT THEY WERE MADE, WERE MATERIALLY FALSE.

Respondent argues that a comparison of the advertisements and the brochures which describe the program demonstrate that the program is as it is described in the advertising. It also argues that the testimony of Complainant's witnesses, Mrs. Lee and Mr. Lourie, to the effect that the advertising was misleading, is not credible. While conceding that a court decision in a § 3007 proceeding is not binding in this proceeding, Respondent cites Stimpson, supra, to support its argument that the evidence is insufficient to support a finding that its advertising representations are materially false. It also refers to Stimpson as establishing that the cost of placing advertisements is not a substantial expense and therefore even if its advertising is misleading, it contends such misrepresentations are not material.

The Administrative Law Judge found that all the representations were false. His findings are based primarily on Respondent's failure to disclose that the placement of advertisements soliciting other participants is the keystone of Respondent's program, and the testimony of Mr. Lourie to the effect that marketing expertise is necessary to achieve success in such an enterprise (Tr. 81-84). According to the Administrative Law Judge, Respondent's program consists of solicitation activities without which there would be no envelopes to stuff. Failure to disclose this information constituted a misrepresentation in the Administrative Law Judge's opinion.

A review of the advertising materials and the instruction booklet for which participants pay $25.00 leads to the conclusion that the Administrative Law Judge was correct. In addition to the documentary evidence that was before the Court in Stimpson, testimony was presented at the administrative hearing which was not presented to the court. The testimony was credible and supports the Administrative Law Judge's findings and conclusions. Complainant's witness, Mrs. Lee, testified that she expected to be working at home stuffing envelopes and she did not expect she would be involved with a program which would require her to place advertisements in newspapers to solicit other participants (Tr. 36-37; 42-43; 45). However, the program she received required her to solicit other participants in order for her to receive compensation from Respondent.

Complainant also presented the testimony of Mr. Lourie who was properly allowed to testify as an expert in the field of direct mail marketing. Mr. Lourie considered the advertisements of Respondent to be misleading (Tr. 84-85). Further, he testified that a certain level of expertise was necessary in order to obtain success in Respondent's program. It was his opinion that a person without experience would not succeed (Tr. 81-83). He testified that the failure to disclose that the program required advertising by participants was an omission that constituted a misrepresentation (Tr. 84-85). Such an omission did not constitute a "teaser" but was an omission of fact (Tr. 87). It was his further opinion that Respondent's advertisements do not comply with the ethical guidelines prescribed by the Direct Mail Marketing Association (Tr. 91-92). Mr. Lourie's testimony was not rebutted by contrary evidence or discredited on cross-examination.

As to the argument that the expense involved in placing advertisements is not substantial, the Court in Paul Harvey, supra, held at p. 8:

"In this regard, the judicial officer could reasonably assume that many subscribers had neither the resources or the energy to advertise and market a new product as a source of income, especially where those of ordinary mind expect to quietly address and stuff envelopes in the 'comfort of their own home.'"

Mr. Lourie testified that he believed disclosure of the requirement for an advertising investment would result in fewer responses to Respondent's advertisements (Tr. 122-123). Additionally, an investment of $10.00 per week in advertising, when compared to the only other expense mentioned in Respondent's advertisements - that of the $25.00 deposit - is substantial. A weekly investment amounting to 40% of the amount which the participant believed constituted no more than a returnable advance intended to show the participants good faith cannot be considered otherwise. This is particularly true when viewed in the context of the statement on the order blank that "I understand you are not selling me a business opportunity, but rather requiring a good faith deposit to show my sincerity." Under the circumstances, the advertising expense is substantial not only in amount when viewed against the deposit, but is substantially different in nature as well. Accordingly, Respondent's arguments are without merit.

V. THE TESTIMONY OF ROGER LOURIE WAS

INCOMPETENT AND IRRELEVANT, AND NO

FINDINGS MAY PROPERLY BE BASED ON

HIS TESTIMONY.

Respondent argues that Mr. Lourie's expertise is in the field of large scale marketing and that his lack of experience in small scale marketing makes his testimony unreliable. Mr. Lourie testified that approximately 80% of his time was spent with large corporations. However, he had owned his own small company which was involved in direct mail marketing and has dealt with a "lot of small companies" engaged in marketing by means of direct mail (Tr. 61-63). Further, he testified that large scale marketing begins with small numbers and grows (Tr. 66). Finally, as chairman of the industry's ethical practices committee he is constantly involved in the review of direct mail efforts of small firms (Tr. 67). Mr. Lourie's level of expertise and the relevancy of his experience makes him well qualified to testify as an expert in this proceeding.

Respondent relies on several cases in an attempt to discredit Mr. Lourie's testimony. Citing United States v. King, 532 F.2d 505 (5th Cir. 1976), Respondent argues that a threshold level of expertise is required before an expert can testify. However, that case holds that the decision whether to allow a witness to testify as an expert is within the sound discretion of the trial judge which, on appeal, was found to have been properly exercised. There is no basis for finding that the Administrative Law Judge improperly exercised his discretion in allowing Mr. Lourie to testify in this case.

Respondent also cites California Steel and Tube v. Kaiser Steel Corp., 469 F.Supp. 265 (C.D. Cal. 1979), and United States v. Hearst, 412 F.Supp. 893 (N.D. Cal. 1976), for the proposition that expertise must be related to the testimony presented. In the former case, the testimony of the expert went well beyond his field of expertise. In the latter case the state of the art, not the qualifications of the expert witness, served as the basis for excluding the testimony of the witness. In this case, Mr. Lourie was testifying about a field in which he has spent 15 years, and in which he has owned a business of a similar scale to that of Respondent. There is no indication in the record that the state of the art in the field of direct mail marketing is not sufficiently advanced to permit expert testimony. Thus, the cases cited do not provide a legal basis for rejection of Mr. Lourie's testimony.

Respondent also cites United States v. Webb, 625 F.2d 709 (5th Cir. 1980), for the proposition that expert testimony on matters within the competence of the trier of fact should be excluded. In this regard, Respondent points out that Mr. Lourie was permitted to testify on the truth or falsity of Respondent's representations. The Webb case is distinguishable because there the trial judge had excluded the testimony of the expert. Having exercised his judgment in that fashion, the Court held, on appeal, that the expert was properly excluded. In this case, the Administrative Law Judge in allowing the testimony of Mr. Lourie stated "I will accept his opinion but ... my decision will be the final decision on that point." (Tr. 82). Furthermore, under the Federal Rules of Evidence which are applicable to this proceeding, but may be relaxed to the extent deemed proper to assure a fair hearing, 39 C.F.R. § 952.18, opinion testimony "otherwise admissible is not objectionable because it embraces an ultimate issue to be decided by the trier of fact." Federal Rules of Evidence § 704. See Nail Builder and American Health Products, P.S. Docket No. 7/153 (Jan. 30, 1981). Thus it is concluded that Mr. Lourie was properly allowed to testify as an expert and to offer his opinion on the ultimate issues to be decided in this proceeding. Accordingly, there is no merit to Respondent's Exception.

CONCLUSION

After consideration of the entire record and Respondent's exceptions, it is concluded that Respondent is engaged in a scheme to obtain money through the mails by means of materially false representations. Accordingly, Respondent's appeal is denied and a remedial order under 39 U.S.C. § 3005 is being issued contemporaneously with this decision.

* The term "Respondent" has been used throughout to refer to both N. Stimpson and Colfax Publications.