In the Matter of the Complaint Against

THE FEDERAL GROUP, INC. MARKETING INTERNATIONAL
at 1655 North Cherokee, Suite 410
and P. O. Box 997 Los Angeles, CA 90028

P.S. Docket No. 13/45;

08/20/82

Grant, Quentin E.

APPEARANCES FOR COMPLAINANT:
Sand ra C. McFeeley, Esq.
Consumer Protection Division
Law Department
United States Postal Service
Washington, DC 20260
James A. Harbin, Esq.
Regional Chief Inspector's Office
850 Cherry Avenue
San Bruno, CA 94908

APPEARANCES FOR RESPONDENT:
Eeugene C. Berchin, Esq.
Jerome J. Berchin, Esq.
Berchin & Berchin
8484 Wilshire Boulevard,
Suite 656
Beverly Hills, CA 90211

INITIAL DECISION

The Complaint filed by the Postal Service in this matter seeks a mail stop order, alleging that Respondent is violating 39 U.S.C. § 3005 by engaging in a scheme or device to obtain money or property through the mails by means of false representations and by means of a lottery or gift enterprise. Specific allegations of false representation are set forth in paragraph 27 of the findings of fact, below.

Respondent's Answer to the Complaint denies the principal allegations concerning scheme, device, false representation, lottery and gift enterprise. It admits that it conducts a telephone sales enterprise and that it ships through the mails, C.O.D., merchandise ordered as a result of Respondent's telephone solicitations.

On Respondent's motion the hearing was held in Los Angeles, California, on May 12, 13, 14, and 15, 1982.

The parties have filed proposed findings of fact and conclusions of law all of which have been considered and adopted to the extent indicated, and otherwise rejected as irrelevant, immaterial, or contrary to the evidence.

FINDINGS OF FACT

1. Respondent, using the names The Federal Group and Marketing International, at the addresses set forth in the caption, engages in the business of selling advertising specialty items by means of telephone solicitations for orders (Ans. § 2; Tr. 151, 584, 593, 675; CX-46). Respondent uses the mails to receive remittances of money from customers and for shipping merchandise ordered (Ans. § 2).

2. The Federal Group is a corporation. Its president is Don Gregory (Tr. 779).

3. Respondent's approximately 20 telephone solicitors are employees of Respondent who work together in a large toom in Respondent's offices, Suite 410, 1655 North Cherokee, Los Angeles, CA. These solicitors work under the supervision of Respondent's sales manager, Lowell Ellis (Tr. 157, 684, 685).

4. Respondent's telephone solicitors select from thousands of telephone directories covering most of the United States and Puerto Rico names of small businesses to be solicited for orders for Respondent's advertising specialty items (Tr. 714). A telephone solicitor for Respondent using the name Bob Johnson made a sale to Complainant's witness, Paul Trott, in December 1981 (Tr. 18-48, 54, 90, 103, 588, 599).

5. The solicitors are provided by Respondent with a printed, or xeroxed, script or "pitch" to be used by them in making such sales (Tr. 148, 155, 644, 754). This "pitch", entitled "Sweepstakes Presentation" was placed in evidence as CX-35. Minor variations of the "pitch" have been used from time to time (Tr. 347, 350, 754, 816-819, 851). The "pitch" opens with the prospect being advised "Your business has just been selected as a winner in the brand new, nationwide, million dollar sweepstakes; being promoted with Papermate and Husky products." The prospect is then congratulated and asked if he has seen the sweepstakes advertised on television and told that he must have heard about it. The solicitor then repeats and emphasizes that the prospect is "already a winner" in the "1982 Nationwide Million Dollar Sweepstakes" and that he has "actually won a prize worth up to 29 hundred dollars."

6. The prospect is then assured by the solicitor that he is "guaranteed" to receive one of five different prizes to be "chosen at random by our computer." The solicitor then reads a list of "prizes" in the following order:

1) AN RCA COLOR 19" T.V. WITH REMOTE CONTROL

2) A 58 FACET FULL CUT DIAMOND PENDANT IN A GOLD TIFFANY SETTING

3) A COMBINATION AM-FM RADIO CASSETTE RECORDER AND PLAYER BY SANYO

4) A SONY BETAMAX VIDEO RECORDER-PLAY BACK UNIT FOR YOUR T.V.

OR - 5) AN ALL EXPENSE PAID 7 DAY CARIBBEAN CRUISE FOR 2 ON A LUXURY LINER.

The solicitor then repeats that the prospect is a guaranteed winner of one of those prizes.

7. The next item in the telephone "pitch" is a statement that Papermate and Husky have always sold their products nation-wide through retail outlets. This is followed immediately by the statement, "What we are trying to do with this sweepstakes is break into the wholesale advertising field." The prospect is then told that it is only fair and reasonable, since he is being sent a valuable sweepstakes prize, that he should try a small box of one of "their" new products. He points out that the prospect must have used Papermate and Husky products before and is therefore familiar with their quality. The solicitor then reads the following list of products as those "we are promoting" as part of the sweepstakes:

"1) THE NEW PAPERMATE FINE LINE MARKER-IT'S THE MOST POPULAR WRITING INSTRUMENT IN THE WORLD TODAY,

2) THE EXECUTIVE RETRACTABLE, REFILLABLE BALL POINT PEN, BY HUSKY

3) THE NEW GENUINE COWHIDE LEATHER KEY TAG,

4) THE HUSKY ICE SCRAPER - THE ONE THAT CLIPS TO THE SUNVISOR OF YOUR CAR-

5) OR - THE ALL METAL GOLD FLORENTINE RETRACTABLE, REFILLABLE BALL POINT PEN.

ALL WITH FOUR OR FIVE LINES OF YOUR AD COPY PRINTED ON THEM AT NO EXTRA CHARGE.

The prospect is then asked which one of the items will do his business the most good.

8. If the prospect asks for detail on the pens he is told the following (CX-35):

"IT'S THE TOP OF THE LINE. IT'S CALLED THE HUSKY EXECUTIVE. A HIGH QUALITY RETRACTABLE, REFILLABLE BALL POINT PEN. IT HAS A CHROME POCKET CLIP, CHROME PLUNGER, CHROME CENTER BAND AND A BIG CHROME METAL TIP SO NO MATTER HOW HARD YOU WRITE IT CAN NEVER, NEVER BREAK. IT HAS THE FAMOUS HARTLEY INK CARTRIDGE THAT IS GUARANTEED FOR 5 YEARS."

. . .

"THEY ARE MADE BY PAPERMATE. THEY ARE THE TOP OF THE LINE, FINE LINE MARKER. THEY COME IN 4 ASSORTED COLORS AND COMES WITH YOUR AD-COPY HOT-STAMPED RIGHT INTO THE BARREL OF THE MARKER."

"THE ALL METAL BRUSHED GOLD FLORENTINE PENS-IT'S THE TOP OF THE LINE WE CARRY. IT'S 100% METAL, THERE'S NO PLASTIC ANYWHERE ON THIS PEN. IT'S RETRACTABLE AND REFILLABLE AND CARRIES A 5 YEAR UNCONDITIONAL GUARANTEE. WHEN YOU GIVE IT TO YOUR CUSTOMER HE WILL VALUE IT OVER THE YEARS FOR THE FINE PIECE OF JEWELRY IT IS. IT COMES WITH THE HARTLEY CARTRIDGE, THE FINEST MONEY CAN BUY IN YOUR CHOICE OF BLUE OR BLACK INK. YOUR AD-COPY IS BAKED INTO THE BARREL OF THE PEN SO IT CAN NEVER - NEVER COME OFF."

9. The next item on the "pitch" is a "TRIAL CLOSE" which goes as follows:

"NORMALLY A BOX OF ______OF THE ______ GO OUT OF HERE IN OUR WHOLESALE SPRING CATALOG AT $ ______.

BUT DURING THE SWEEPSTAKES PROMOTION WE'RE SENDING THEM TO YOU AT OUR COST---I'M TALKING ONLY $ ______ TO YOUR DOOR. IS THAT FAIR ENOUGH?"

(Tr. 688, 818, 819)

Respondent's telephone solicitors fill in the first price blank (the "wholesale spring catalog" price) in the "trial close" with a "made-up" price ranging from $3 to $11, each, for the gold metal pens (Tr. 31, 79, 80, 103, 186; CX-11). Using Respondent's price list, telephone solicitors have authority to sell these pens to customers for $1.29 to $2.49 depending on the solicitor's decision as to the commission he will settle for. Solicitors are compensated by Respondent on a sliding scale commission basis, the higher the price agreed to by a customer, the greater the percentage of that price the solicitor receives as a commission (Tr. 825, 826).

I don not believe the testimony of Respondent's president that this "TRIAL CLOSE" has not been used for the past year. His sales manager, Mr. Ellis, testified that the pitch with the "TRIAL CLOSE" has been used ever since he joined Respondent (Tr. 688). This confirmed the testimony of Complainant's witness Rochelau (Tr. 148, et seq.).

10. After a customer has reacted affirmatively to the "pitch" the solicitor reads the following which is captioned "THE FINAL CLOSE" and which, according to Respondent's instructions to the solicitor, is "the last thing your customer should hear:"

"NOW, (CUSTOMER'S NAME), TO MAKE SURE THERE ARE NO MISTAKES OR MISUNDERSTANDINGS, THIS IS WHAT YOU ARE GOING TO BE RECEIVING. WE ARE GOING TO BE SENDING OUT TO YOU (QUANTITY AND PRODUCT), AND THAT SWEEPSTAKES PRIZE. NOW, I'M GOING TO BE SENDING THIS OUT TO YOU U.S. MAIL C.O.D. INCLUDING C.O.D. CHARGES, INSURANCE, AND TAXES. THE TOTAL AMOUNT WILL BE ______. SO, (CUSTOMER'S NAME), IN ABOUT 7-10 DAYS, BE EXPECTING A C.O.D. PACKAGE IN THE AMOUNT OF (DOLLAR AMOUNT). JUST PAY THE POSTMAS WHEN HE PUTS THE PACKAGE IN YOUR HAND. HE WILL ASK FOR MONEY ORDER, CERTIFIED CHECK, OR CASH, WILL THAT BE ANY PROBLEM? THANK YOU VERY MUCH, AND I HOPE YOU WIN THE PRIZE OF YOUR CHOICE. BYE-BYE.........."

11. Respondent in fact has no "wholesale spring catalog." It uses only a one-sheet price list (Tr. 820).

12. When a customer requests written advice as to the value of the various prizes, he is given the following information, said by Respondent to be the approximate retail values (Tr. 766; CX-7):

(1) An RCA 19" color T.V. with remote controls. $900.

(2) A 58 faceted full cut diamond pendant in a gold Tiffany setting. $150.

(3) An AM-FM combination radio, cassette recorder, and player, - by Sanyo. $100.

(4) A Sony Betamax Video recorder, play-back unit, for your T.V. $1500.

(5) And an all expenses paid seven day Caribbean Cruise for two aboard a luxury ocean liner, including air fare from your home town to the boat and return. $2900.

13. Susan Fenyves, a witness for Respondent, testified that orders taken by solicitors are verified by her or other employees of Federal Group, and that such verification includes advice to the customer that he will be receiving two separate boxes; the first box to be sent C.O.D., covering the cost of the merchandise ordered and postage, and containing the prize and printed verification of the ad copy for imprinting the merchandise but not the merchandise itself; the second box to be shipped as much as two weeks later to contain the imprinted merchandise, at no extra charge (Tr. 733-735). However, I am persuaded by other evidence that the verification frequently does not include advice that the C.O.D. package will not include the merchandise or that such advice is not made clear to customers (Tr. 69, 70; CX-10-12, 16, 18, 23, 30). Mr. Paul Trott testified that the verification call included advice that everything, merchandise, prize, and another bonus gift, would come in one package (Tr. 69, 70).

14. If on occasion a customer gains an understanding that the C.O.D. box will not contain the imprinted merchandise and he objects to that procedure, he is told that he may avail himself of a pre-invoice procedure, i.e., prepaying on the basis of an invoice for the amount of the merchandise and postage on receipt of which by Respondent the merchandise and "computer selected sweepstakes prize" will be shipped at no further cost (Tr. 736-738; RX-11).

15. Ordinarily the pre-invoice procedure is not adopted.Instead Federal Group sends the customer a large box (just over 1 cu. ft.) containing a diamond pendant or radio-cassette player, as the "computer selected sweepstakes prize," and a 41-piece socket set or a domino set. Most of the space in the box is filled with styrofoam. The socket set and domino set are not specifically mentioned to customers during the telephone solicitation and verification. The do add significantly to the weight of the package, however, which could, together with the substantial size of the package, cause a customer to believe the package contains the imprinted merchandise (CX-1).

16. Several customers have paid the C.O.D. charges believing that the package delivered by the Postal Service contained the merchandise ordered (Tr. 36; CX-10, 11, 12, 18, 23, 30). A typical C.O.D. charge for a typical order of 60 gold florentine pens, including postage, averages about $160.00 (RX-4, 12).

17. There is no indication in this record of any customer receiving any of the five prizes except a diamond pendant (CX-2) and a radio cassette recorder and player (CX-23).

18. Some customers were told one of the prizes would be a 1/4 carat diamond (Tr. 841; CX-10, 30).

19. The diamond pendants sent by Respondent as sweepstakes prizes were given a retail value by Mr. Bruce Faber, an expert in valuing diamonds, ranging from $2.00 to $5.00 each. Removed from the setting the diamonds are difficult to see with the naked eye, they are so small (Tr. 451, 462; CX-2, 20). They cost Respondent $6.00 to $12.00 each (Tr. 842, 843; CX-54, 55). They were no more than 1/100 of a carat (Tr. 449). There is no gold in the chain. The gold in the setting was from 10 to 12 karats (Tr. 450).

20. The papermate Division of the Gillette Company engages in the sale of writing instruments and related items. These pens bear the Papermate name and double heart trademark (Tr. 372). Papermate sells these items to three types of accounts: retail; office supply, commercial and industrial; and ad specialty. Neither Federal Group nor Marketing International has any account with Papermate. They are not franchisees of Papermate (Tr. 370). Papermate conducts its own promotional activities. It is not involved with Federal Group or Marketing International in sponsoring the "sweepstakes" promotion giving rise to this proceeding.

21. The Husky ball point pen (CX-17) and the all metal brushed gold Florentine pens (CX-9, 38) sold by Respondent are not Papermate products (Tr. 371-382). The refills furnished therewith are not Papermate refills. Papermate has not marketed a Husky pen (CX-41) since 1971 (Tr. 377). Husky is not a trade-marked name. It is a name used to identify a configuration, a fatter shape than the regular and slim configuration (Tr. 381). Papermate makes a pen called the Malibu (CX-42) roughly comparable in shape to Respondent's Husky. But it is not a close match. The Malibu is a "low-end" Papermate product based on price. Its recommended retail price is $1.89 and it is sold to ad specialty accounts, imprinted, in a quantity-based price range running from $.46 to $.79 (Tr. 381-383).

22. Papermate's archival Husky pen and its current Malibu pen are of higher quality, appearance, and feel than Respondent's Husky. Respondent's gold metal ball point pen (CX-9) is roughly similar in general configuration to Papermate's executive gold ball point pen (CX-40) but Respondent's product in detail appearance, feel, and general quality is markedly inferior to Papermate's comparable pen, the recommended retail price of which is $15.00. Respondent pays $.25 each for its printed gold metal pen and sells it from $1.29 to $2.49 each (Tr. 825).

23. The fine-line marker sold by Respondent (CX-39) is a Papermate product commonly referred to as the Flair pen. It is a porous point pen. Papermate's recommended retail price for this pen as an ad specialty item rangers from $.66 to $.53 depending on quantity (Tr. 385, 386; CX-37).

24. Respondent does not sell at discount or clearance prices its advertising specialty products through the telephone solicitations employed in this scheme. The prices are set to produce a profit of 9 to 13 percent over and above all costs of doing business, including commissions of telephone solicitors (Tr. 782-790).

25. Respondent does not send a "sweepstakes prize" to anyone unless an order is placed for one of the types of merchandise described in Nos. 7 and 8, supra. A customer is not told which of the sweepstakes prizes he will receive if he places an order for merchandise. He is obviously gambling that the prize will have a high value. Respondent asserts that prizes are selected by computer.

26. Sweepstakes is defined as "... 2. any of various lotteries or contests for a prize." A lottery is defined as ".. 1: a scheme for the distribution of prizes by lot or chance; esp: a scheme by which prizes are distributed to the winners among those persons who have paid for a chance to win them ..." (Webster's Third New International Dictionary).

CONCLUSORY FINDINGS

27. Applying to Respondent's telephone solicitations the standards of interpretation of advertising applicable in proceedings under 39 U.S.C. § 3005 as set forth in the Conclusions of Law herein, I find that Respondent expressly or impliedly makes the following representations alleged in paragraph 4 of the Complaint: facts on which these conclusory findings are based are found in the findings of fact cited under each representation

(a) Respondent's advertising specialty products are sold at promotional, discount or clearance prices.

(Findings of Fact No. 9)

(b) Each recipient of one of Respondent's telephone sales solicitations is one of a small number of businesses randomly selected by computer or otherwise as a sweepstakes winner.

(Findings of Fact No. 5)

(c) Respondent is affiliated with or is an authorized representative or distributor for the Paper-Mate Pen Company.

(Findings of Fact Nos. 5, 7)

(d) Each customer purchasing merchandise from Respondent will receive a prize such as a Sony Betamax video recorder, an RCA color television, a Caribbean cruise, a 58-facet full cut diamond pendant in a gold tiffany setting, or a combination AM-FM radio cassette recorder and player by Sanyo.

(Findings of Fact Nos. 6, 12)

Note: Pursuant to § 952.12(c) of the Rules, the last two prizes are hereby added to paragraph 4(d) of the Complaint to conform to the proof. That paragraph is further amended to conform to the proof by deleting reference to a Winnebago camper which is no longer one of the prizes mentioned in the telephone "pitch"; by deleting the words "or a similar prize of comparable value" because the "pitch" does not refer to prizes other than those specifically mentioned above; and by adding the words "having values approximating those quoted by Respondent".

(e) The retail or usual sales price of each of Respondent's products is as stated by Respondent's telephone sales solicitor.

(Findings of Fact No. 9)

(f) The advertising specialty products ordered will be contained in the C.O.D. parcels mailed by Respondent.

(Findings of Fact Nos. 10, 13, 16)

(g) Winners of the diamond pendants will receive a valuable piece of jewelry containing a 1/4 carat jewelry or investment grade diamond.

(Findings of Fact No. 18)

28. The following findings are made with respect to Complainant's allegation that each of the representations found in No. 27, supra, is materially false as a matter of fact (lettering below corresponds with that in No. 27).

(a) The evidence shows that the products are not sold at discount or clearance prices. To that extent the representation is materially false. The term "promotional" prices is ambiguous. Complainant has not shown that such products are not sold at promotional prices.

(b) Complainant has not shown that this repre- sentation is false. The "sweepstakes winners" are randomly selected by telephone solicitors.

(c) This representation is materially false in fact (Findings of Fact No. 20).

(d) This representation is materially false in fact (Findings of Fact No.s 17, 19).

(e) This representation is materially false in fact (Findings of Fact Nos. 21, 22).

(f) This representation is materially false in fact (Findings of Fact Nos. 13, 15, 16).

(g) This representation is materially false in fact (Findings of Fact No. 19).

29. Respondent, in conducting the sweepstakes promotion giving rise to this proceeding, is engaged in conducting a lottery, gift enterprise, or scheme for distribution of personal property by lottery, chance, or drawing (Findings of Fact Nos. 4, 5, 6, 7, 10, 25, 26).

CONCLUSIONS OF LAW

1. The meaning of advertising representations is to be judged from a consideration of an advertisement in its totality and the impression it would most probably create in ordinary minds. Donaldson v. Read Magazine, 333 U.S. 178 (1948); Vibra-Brush Corp v. Schaffer, 152 F. Supp. 461 (S.D.N.Y. 1957); Borg-Johnson Electronics v. Christenberry, 169 F. Supp. 746 (S.D.N.Y. 1959). Express representations are not required. It is the net impression which the advertisement is likely to make upon purchasers to whom it is directed which is important, and even if an advertisement is so worded as not to make an express representation, if it is artfully designed to mislead those responding to it the mail fraud statutes are applicable. G. J. Howard v. Cassidy, 162 F. Supp. 568. See, also, Virginia State Board of Pharmacy v. Virginia Citizens Council, 425 U.S. 748 (1976).

The foregoing standards of interpretation have been applied to Respondent's advertising, conducted in the form of telephone solicitation and written quotation of prize values, in reaching the Conclusory findings set forth in paragraph 27, supra. The form of solicitation used by Respondent is replete with wording artfully designed to mislead prospective customers as to Respondent's affiliation with the Papermate Company, the quality and value of the marginal ad specialty items sold by Respondent, the contents of the C.O.D. packages mailed by Respondent, and the value of the cheap, shoddy diamond pendant sent to most customers as the "sweepstakes prize."

2. The representations found to be false are material in that their obvious purpose and tendency is to persuade "sweepstakes" winners to purchase a "pig in a poke", a fitting description of the merchandise Respondent is selling.

3. On the lottery issue, I find that placing an order for Respondent's merchandise is effectively the purchase of a chance to win one of Respondent's "sweepstakes" prizes.

4. Respondent, using the names and at the addresses set forth in the caption hereof, is engaged in a scheme to obtain money or property through the mails by means of materially false representations and by means of a lottery or gift enterprise in violation of 39 U.S.C. § 3005.

5. If Respondent is to continue this shabby scheme it should do so without using the mails to receive the remittances of its victims. A mail stop order in the form attached should be issued against Respondent.