In the Matter of the Complaint Against:

PAUL W. SCHUETTE
and
SUCCESS DYNAMICS, INC.,
2633 State Route 59, Suite E,
Ravenna, OH 44266-1645 and NWA,
c/o ADD VENTURER REPORT,
P.O. Box 3134,
Kent, OH 44240-8134

and
SUCCESS DYNAMICS

and
NWA

and
NEW CONCEPTS,
P.O. Box 785,
Kent, OH 44240-0016

P.S. Docket No. 29/117

Cohen, James A., Judicial Officer

APPEARANCES FOR COMPLAINANT: Geoffrey A. Drucker, Esq., W. Gary Claytor, Esq., Consumer Protection Division, Law Department, United States Postal Service, Washington, DC 20260-1144

APPEARANCE FOR RESPONDENTS: Paul W. Schuette, 2633 State Route 59, Suite E, Ravenna, OH 44266-1645

POSTAL SERVICE DECISION

Respondents have filed an appeal from the Initial Decision of an Administrative Law Judge holding that Respondents are engaged in the conduct of a lottery or scheme for the distribution of money or property by chance in violation of 39 U.S.C. § 3005.

Background

The Consumer Protection Division, Law Department, United States Postal Service (Complainant), initiated this proceeding by filing a Complaint alleging that Respondents' four multi-level marketing promotions contain the elements of prize, chance and consideration and therefore constitute a lottery within the meaning of 39 U.S.C. § 3005. In a timely-filed Answer, Respondents admitted conducting the multi-level marketing promotions described in the Complaint, but denied that these programs constitute a lottery within the meaning of § 3005. As an affirmative defense, Respondents argued that since Complainant selectively prosecutes certain multi-level marketing promotions but not others, the proposed orders sought in the Complaint are discriminatory.

At a hearing before the Administrative Law Judge, both parties presented documentary evidence in support of their respective positions. Paul W. Schuette represented Respondents at the hearing and testified on their behalf. Complainant called no witnesses.

After the conclusion of the hearing, Complainant filed a Motion to Amend Order in which it sought to substitute a lottery order for the false representation order originally attached to the Complaint as Exhibit A. The Administrative Law Judge granted the Motion and Respondents filed an Objection thereto. Following the filing of proposed findings of fact and conclusions of law, the Administrative Law Judge issued an Initial Decision in which he found that Respondents' multi-level marketing promotions incorporate the elements of prize, chance and consideration. Based on these findings the Administrative Law Judge concluded that Respondents are engaged in the conduct of a lottery enterprise in violation of 39 U.S.C. § 3005. Respondents have filed an appeal from this Initial Decision.

Respondents' Exceptions

Respondents have filed seven exceptions to the conclusions of law in the Initial Decision. All of Respondents' exceptions have been considered and are addressed below. None have been found to have merit.

Exception 1

Respondents take exception to Conclusion of Law No. 1 which states that the four promotions considered in this proceeding contain the elements of a lottery or scheme for the distribution of money or property by chance in violation of 39 U.S.C. § 3005. According to Respondents, § 3005 does not create a separate lottery offense but merely provides a means for enforcing 18 U.S.C. § 1302, the criminal statute that prohibits the use of the mail in furtherance of a lottery. Since the lottery offense is set forth in a criminal statute, Respondents argue that the rule of strict construction must apply and that the definition of a lottery cannot be expanded to include a multi-level marketing scheme.

While 39 U.S.C. § 3005 and 18 U.S.C. § 1302 both pertain to the conduct of lotteries, Respondents have cited no cases nor have any been found which support their contention that § 3005 was intended to provide a method for enforcing § 1302. Proceedings under § 3005 are separate civil proceedings with different standards of proof and remedies and are not a means for enforcing the criminal statute which provides its own penalties for violations. Furthermore, even assuming that § 3005 was intended to provide a means for enforcing § 1302, Respondents have failed to offer support for their argument that the rule of strict construction precludes the prosecution of multi-level marketing promotions under § 1302. Contrary to Respondents' contention, multi-level marketing promotions have been found to constitute lotteries under § 1302. See Zebelman v. United States, 339 F.2d. 484 (10th Cir. 1964).

Prior Postal Service decisions have repeatedly held that the necessary elements of a lottery under 39 U.S.C. § 3005 are prize, chance and consideration. Middle-Class American, Inc., P.S. Docket No. 16/65 (P.S.D. March 26, 1984); Collegedale Diversified Enterprises, Inc., P.S. Docket No. 14/29 (P.S.D. Oct. 25, 1983); Tenpen Sales Corp., P.O.D. Docket No. 2/35 (D.D. May 10, 1961). Multi-level marketing programs have previously been found to include these elements and to constitute a lottery within the meaning of § 3005. Unimax, Inc., P.S. Docket No. 28/77 (P.S.D. March 3, 1989); Middle-Class American, Inc., supra; Collegedale Diversified Enterprises, Inc., supra. Since the record supports the Administrative Law Judge's finding that the elements of a lottery are present in Respondents' four multi-level marketing promotions, the Administrative Law Judge was correct in concluding that Respondents are in violation of 39 U.S.C. § 3005.

Exception 2

Respondents take exception to the "fencing-in" provisions included in the recommended cease and desist order attached to the Initial Decision. Respondents argue that because they have not violated the law, there is no justification for the inclusion of these provisions in any order issued in this proceeding. As previously concluded, Respondents are engaged in the conduct of a lottery in violation of 39 U.S.C. § 3005. Thus, their argument that the "fencing-in" provisions are not justified because they have violated no law is without merit. "Fencing-in" provisions have been consistently upheld when (1) they are reasonably related to the unlawful act found to exist, Jacob Siegel Co. v. FTC, 327 U.S. 608, 613 (1946), and (2) there is a likelihood, based on the violator's past conduct, that he will commit additional violations. American Home Products Corp. v. FTC, 695 F.2d 681, 704-06 (3d Cir. 1982); see, e.g., FTC v. Mandel Bros., Inc., 359 U.S. 385, 392-93 (1959); FTC v. National Lead Co., 352 U.S. 419, 430 (1957); FTC v. Ruberoid Co., 343 U.S. 470, 473 (1952); Leo Daboub, P.S. Docket No. 19/185 (P.S.D. July 10, 1986). Both conditions exist in this case.

There is clearly a reasonable relationship between the unlawful acts involved in this proceeding and the prohibited future conduct. Both pertain to the conduct of a lottery or scheme for the distribution of money or property by chance through the mail. While the promotions in this proceeding involve specific multi-level marketing enterprises, it is not unreasonable to expand the scope of the prohibited future conduct to include the conduct of any multi-level marketing enterprise which constitutes a lottery or scheme for the distribution of money by chance through the United States mail.

The record also supports a finding that, in view of their past conduct, Respondents are likely to commit additional violations. One of Respondents' former promotions, AddVenturer Report, was terminated because the Postal Service contended it was a lottery (I.D., FOF 6; RX-A). Moreover, Respondent Schuette's knowledge, interest and extensive prior involvement in multi-level marketing enterprises support the likelihood of future additional lottery violations (Tr. 14-27). Accordingly, the "fencing-in" provisions recommended by the Administrative Law Judge are appropriate for inclusion in the cease and desist order issued with this Decision.

Exception 3

In their third exception, Respondents take issue with Conclusion of Law No. 3, which states that Respondents have not shown that a money-back guarantee is any more of a defense in a proceeding brought under the lottery portion of 39 U.S.C. § 3005 than it is in a proceeding brought under the false representation portion of the statute. Respondents contend that it is meaningless to conclude that a guarantee is either more or less of a defense in a lottery proceeding absent a determination that such a guarantee is a defense in a false representation proceeding. It is well established that a money-back guarantee is not a defense to an allegation of false representation under 39 U.S.C. § 3005. See Farley v. Heininger, 105 F.2d 79, 84 (D.C. Cir.), cert. denied, 308 U.S. 587 (1939); Borg-Johnson Electronics, Inc. v. Christenberry, 169 F. Supp. 746, 751 (S.D.N.Y. 1959); The Robertson-Taylor Co., P.S. Docket Nos. 16/98-102, 120 & 121 (P.S.D. March 31, 1986); George M. Ernst, Jr. d/b/a Many Interested Savers, Inc., P.S. Docket No. 13/88 (P.S.D. Aug. 4, 1982), aff'd, Many Interested Savers, Inc. v. United States Postal Service, No. 84-304, slip op. (E.D. Ky. Feb. 20, 1986). The rationale underlying this proposition is equally applicable to lottery proceedings under § 3005. Accordingly, the Administrative Law Judge was correct in concluding that a money-back guarantee is not a defense in a lottery proceeding.

Exception 4

Respondents contend that the Administrative Law Judge's substitution of a lottery order for the false representation order originally attached to the Complaint was untimely and in violation of the Rules of Practice. According to Respondents, 39 C.F.R. § 952.12 prohibits the amendment of orders subsequent to the conclusion of the hearing without the consent of both parties. Respondents further argue that if, in the alternative, the Rules of Practice do permit such a substitution, the concept of fundamental fairness prohibits the introduction of the new order. Respondents also dispute the Administrative Law Judge's characterization of the false representation order attached to the Complaint as an "obvious error" of which Respondents were fully aware.

Respondents are incorrect in their assertion that the Administrative Law Judge lacked authority to substitute one form of order for another. Under 39 C.F.R. § 952.5 of the Rules of Practice the orders attached to the complaint may be modified at any time during the proceedings. Also, § 952.23 authorizes the submission of proposed orders with the proposed findings of fact and conclusions of law which are filed subsequent to the hearing. Finally, under § 952.24(a) the Administrative Law Judge is to include in the Initial Decision the orders appropriate for issuance. The Administrative Law Judge's substitution of orders subsequent to the conclusion of the hearing was therefore appropriate and in accordance with the Rules of Practice. Even if the Administrative Law Judge had erred in allowing the substitution of orders, Respondents have failed to show they have been prejudiced. The substituted order differs only in the text of the notation which the Postmaster is instructed to place on envelopes returned to senders. The original order attached to the Complaint provided that mail returned to senders would include the notation "Returned to Sender Due to Addressee's Violation of Postal False Representation Law," whereas mail returned pursuant to the substituted order states that it is being returned "Due to Addressee's Violation of Postal Lottery Law." Since the issue presented by the pleadings and on which evidence was presented at the hearing pertained to a lottery enterprise, Respondents were neither misled, surprised nor otherwise prejudiced by the substitution of the lottery order for the false representation order. Accordingly, Respondents' fourth exception has no merit.

Exceptions 5, 6 & 7

Respondents take exception to Conclusion of Law No. 5 which recommends the issuance of the lottery order and the cease and desist order attached to the Initial Decision. Respondents also take issue with the form of both orders.

Respondents contest the issuance of the lottery order because it was substituted for the original false representation order after the close of the hearing. This argument has already been addressed and found to have no merit. Respondents further object to the lottery order on the grounds that it is vague, unenforceable and unreasonably burdensome on the Kent Postmaster and on Respondents. The order recommended by the Administrative Law Judge and issued with this Decision strictly conforms with the requirements of 39 U.S.C. § 3005(a)(1). It is neither vague nor unenforceable and while it does place a burden on the parties, it is a burden imposed by statute to deal with promotions found to be in violation of the Postal False Representation and Lottery law. Respondents also argue that the Lottery Order should not be issued because they have changed their promotions and are no longer engaged in illegal conduct. This argument is without merit since proceedings under 39 U.S.C. § 3005 are not rendered moot nor are orders thereunder precluded because the scheme has been modified or discontinued. CM/NA, Commission Mailers of North America, P.S. Docket No. 20/33 (P.S.D. Aug. 29, 1986); Electronic Development Lab, P.S. Docket No. 18/157 (P.S.D. Sept. 6, 1985); see United States v. W. T. Grant Co., 345 U.S. 629, 632 (1953). Accordingly, the proposed lottery order will be issued against Respondents.

Respondents contend that the proposed cease and desist order violates 39 C.F.R. § 952.23(c) of the Rules of Practice which requires orders to be set forth in serially numbered paragraphs and to state their statutory basis. This argument is without merit. The order is not serially numbered because there is only one paragraph. The statutory basis for the order is stated in the Complaint and in Complainant's proposed findings of fact and conclusions of law to which the proposed order was attached. Moreover, 39 U.S.C. § 3005(a)(3) specifically authorizes the Postal Service to issue a cease and desist order when it determines that a person is engaged in the conduct of a lottery. Since Respondents have been determined to be engaged in conducting a lottery, the cease and desist order recommended by the Administrative Law Judge will be issued.

Respondents once again assert that the cease and desist order should not contain the "fencing-in" provisions. Specifically, Respondents object to the fact that the order would prohibit other promotions not related to the multi-level enterprises which are the subject of this proceeding. This argument has been previously addressed and rejected.

Conclusion

After consideration of the entire record and Respondents' exceptions to the Initial Decision, it is concluded that Respondents are engaged in the conduct of a lottery or scheme for the distribution of money or property by chance in violation of 39 U.S.C. § 3005. Accordingly, Respondents' appeal is denied and the orders authorized by § 3005 are issued herewith.