Appendix — Orkin Exterminating Co. v. Federal Trade Commission

a OCT 28 1988

N JOSEPH &. SPANTUL, IR,

“i ; CLERK

In the Supreme Court of the United States

OCTOBER TERM, 1988

ORKIN EXTERMINATING COMPANY, INC.,

Petitioner,

vs.

FEDERAL TRADE COMMISSION,

Respondent.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

FRANK C. JONES

(Counsel of Record)

MIcHAEL Eric Ross

CHARLES K. McKNIGHT

Kine & SPALDING

2500 Trust Company Tower

Atlanta, Georgia 30303

(404) 572-4600

Counsel for Petitioner

Orkin Exterminating Company, Inc.

E. L. MENDENHALL, INc., 926 Cherry Street, Kansas City, Mo. 64106, (816) 421-3030

_—

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TABLE OF CONTENTS

Appendix A—Orkin Exterminating Co., 108 F.T.C.

NE I ocssesinpalcsardvedteebaaciansisiac dentlveiivissscrlasncibdaeneiaieiens Al

Appendix B—Orkin Exterminating Co. v. FTC, 849

a IE I ee ED sisacsinciscencntnicennantvreniasinntanntins A211

Appendix C—Order of the United States Court of

Appeals for the Eleventh Circuit Denying Sugges-

tion for Rehearing In Banc (September 19, 1988) ....A250

Appendix D—Relevant Statute 200020020... A252

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APPENDIX A

In the Matter of

ORKIN EXTERMINATING COMPANY, INC.

Final Order, Opinion, Etc., in Regard to Alleged

Violation of Sec. 5 of the Federal Trade

Commission Act

Docket 9176. Complaint, May 8, 1984—Final Order,

Dec. 15, 1986

This Final Order requires an Atlanta, Georgia-based ex-

terminating company to roll back the “lifetime” an-

nual renewal fees on contracts signed prior to 1975

to the fixed fee established prior to a 1980 raise in

price. Respondent is also required to notify each

affected customer.

Appearances

For the Commission: Katharine B. Alphin and Chris

M. Couillou.

For the respondents: John C. Staton, Michael E.

Ross and Sylvia M. King, King & Spaulding, Atlanta, Ga.

COMPLAINT

Pursuant to the provisions of the Federal Trade Com-

mission Act, as amended, and by virtue of the authority

vested in it by said Act, the Federal Trade Commission,

having reason to believe that respondent Orkin Exter-

minating Company, Inc., a corporation, has violated the

provisions of Section 5(a) of the Federal Trade Com-

mission Act, and it appearing to the Commission that a

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proceeding by it in respect thereof would be in the pub-

lic interest, hereby issues its complaint, stating its charges

in that respect as follows:

Paragraph 1. Respondent Orkin Exterminating Com-

pany, Inc., is a Delaware corporation with its principal

place of business located at 2170 Piedmont Road, N.E.,

Atlanta, Georgia.

Par. 2. Respondent maintains, and at all times men-

tioned in this complaint has maintained, a substantial

course of business, including the acts and practices as

hereinafter set forth, in or affecting commerce, as “com-

merce” is defined in the Federal Trade Commission Act.

Par. 3. Among other services, respondent provides

to individuals and businesses (“consumers”) services to

treat houses, buildings, and other structures ( “structures” )

in order to destroy and protect against termites and other

wood-infesting organisms (“termite-control services” ).

Par. 4. In numerous instances, in the course of ad-

vertising, promoting, selling, and performing its termite-

control services, respondent agreed for the life of the

structure to reinspect the consumer’s structure annually

and, if necessary, to either retreat or retreat and repair

the structure, provided the consumer paid a specified fixed

annual renewal fee.

Par. 5. In contradiction of the agreements described

in Paragraph Four, in numerous instances beginning in

[2] 1980 and continuing to the present, respondent has

raised, or has attempted to raise, the agreed-upon annual

renewal fee for its termite-control services.

Par. 6. Respondent’s actions described above have

thus caused substantial and ongoing injury to respondent’s

etre ens ial

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customers that is not outweighed by countervailing ben-

efits to consumers or competition and is not reasonably

avoidable by consumers.

Par. 7. Respondent’s acts and practices as herein

alleged were and are to the prejudice and injury of the

public and constitute unfair acts or practices in or af-

fecting commerce in violation of Section 5(a) of the

Federal Trade Commission Act. .

INITIAL DECISION BY

ERNEST G. BARNES, ADMINISTRATIVE LAW JUDGE

APRIL 22, 1985

PRELIMINARY STATEMENT

The complaint herein issued on May 8, 1984, charging

Orkin Exterminating Company, Inc., (hereinafter “Orkin” )

with violation of Section 5(a) of the Federal Trade Com-

mission Act. The complaint alleges that respondent Orkin

provides to individuals and “businesses services to treat

houses, buildings, and other structures in order to destroy

and protect against termites and other wood-infesting

organisms. In numerous instances, in the course of ad-

vertising, promoting, selling and performing its termite-

control services, Orkin agreed to reinspect the consumer’s

structure annually for the life of the structure and, if

necessary, to either retreat or retreat and repair the

structure, provided the consumer paid a specified fixed

annual renewal fee.

In contradiction of the agreements described above,

in numerous instances beginning in 1980 and continuing

to the present, Orkin has raised, or has attempted to

raise, the agreed-upon annual renewal fee for its termite-

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control services. It is alleged that Orkin’s actions in

raising or attempting to raise [2] the fixed annual re-

newal fee have caused substantial and ongoing injury

to Orkin’s customers that is not outweighed by counter-

vailing benefits to consumers or competition and is not

reasonably avoidable by consumers, and were and are to

the prejudice and injury of the public and constitute

unfair acts or practices in or affecting commerce in vio-

lation of Section 5(a) of the Federal Trade Commission

Act.

Orkin filed an answer on June 18, 1984, generally

denying the charging allegations of the complaint and

asserting eleven defenses, including: a claim that the

complaint fails to state a violation of law; that the Com-

mission issued the complaint without reason to believe

that Orkin had violated the law, that the Commission vio-

lated its own policy set forth in its Operating Manual to

defer to state and local authorities to obtain corrective

action in matters primarily intrastate in nature or effect;

that the Commission lacks subject matter jurisdiction over

the complaint allegations; that the acts and practices of

Orkin as alleged in the complaint were and are not to the

prejudice and injury of the public and do not constitute

unfair acts or practices in or affecting commerce; that the

acts and practices alleged to have been committed by Orkin

have not caused substantial and ongoing injury to Orkin’s

customers; that the complaint is barred by applicable stat-

ute(s) of limitations; that the alleged unlawful acts and

practices have been encouraged, approved, and/or com-

pelled by federal and state regulatory authorities and law

and are therefore exempt from the Federal Trade Com-

mission Act; that the consumers alleged to have been in-

jured by Orkin’s acts and practices have recognized, ac-

A5

cepted, and acquiesced to the alleged misconduct under

doctrines of waiver, estoppel, ratification, accord and sat-

isfaction, limitations, and latches; and that the relief pro-

posed is inappropriate, not in the public interest, and is

not or would not be authorized by law.

In response to a motion by complaint counsel, not

objected to by respondent Orkin, Paragraph 3 of the

complaint was amended to add “and wood decay” as an

additional contract service falling within the category of

services alleged in the complaint as having the fixed an-

nual renewal fee raised in contradiction to agreements

with consumers. (Order Amending Complaint, November

15, 1984) Also, in response to a motion by complaint coun-

sel, respondent Orkin’s Second Defense (challenging the

Commission’s “reason to believe” Orkin had violated Sec-

tion 5(a) of the Federal Trade Commission Act), Third

Defense (stating that the Commission had violated its

policy stated in the Operating Manual to defer to state

and local authorities to obtain ccrrective action in matters

primarily intrastate in nature and effect), and the intro-

ductory paragraph to Orkin’s Twelfth Defense (challeng-

ing the Commission’s “reason to believe’ and “public in-

terest” determinations in issuing the complaint) were

stricken. ‘ Order Ruling On Complaint Counsel’s Motion

To Strike ..., August 7, 1984) [3]

A prehearing conference was held on August 9, 1984.

At the conference Orkin’s counsel was urged to stipulate

to the commerce allegations of the complaint. (Prehearing

Transcript, pp. 11-14, 60) Thereafter, during the course

of pretrial discovery, Orkin stipulated that it maintains,

and at all times mentioned in the complaint has maintained,

a substantial course of business, including the acts and

practices as set forth in the complaint, in or affecting com-

A6

merce, as ‘““commerce” is defined in the Federal Trade Com-

mission Act. (Finding 3, infra)

By motion dated January 30, 1985, complaint counsel

has moved for summary decision as to all issues to be re-

solved in this proceeding. Complaint counsel’s motion is

supported by the pleadings heretofore filed in this pro-

ceeding, depositions of respondent’s officials, documents

created, sent or received by respondent during the course

of its business operations and received by complaint counsel

from respondent during the investigation which preceded

issuance of the complaint herein or during pretrial discov-

ery, and some few third party documents received by com-

plaint counsel from state agencies and consumers which

have been adequately authenticated by complaint counsel

for purposes of ruling on this motion.

Respondent has filed an opposition, dated March 1,

1985, to complaint counsel’s motion. Respondent has also

filed a motion for summary decision in its favor, and has

submitted affidavits and depositions from its officials, com-

petitors, consumers, one economic expert, and certain of

its documents. Respondent also has submitted statements

of material fact which it contends either directly contra-

vene complaint counsel’s findings of fact, or raise genuine

issues of inference and legal significance that foreclose

any entry of summary decision in favor of complaint coun-

sel.

Respondent, additionally, has filed a supplemental

brief, dated March 8, 1985, and a reply and answer brief,

dated March 27, 1985, which additional briefing is or has

been authorized. Complaint counsel filed a reply to re-

spondent’s opposition and motion on March 16, 1985, which

also was authorized.

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Respondent’s submissions and arguments contend that:

Orkin’s alleged breach of contract is not actionable under

Section 5 of the Federal Trade Commission Act because

it is at most a non-deceptive alleged breach of a putative

contractual promise as to which the agreements in question

are entirely silent; that Orkin’s contracts in issue do not

provide for fixed annua] renewal premiums but are of an

indefinite duration and hence may be terminated after a

reasonable period of time; and, that the alleged breach of

contracts are not an “unfair act or practice” in violation of

Section 5 because there is no unjustified consumer injury.

Respondent also contends that any consideration of com-

plaint counsel’s requested relief is premature. [4]

Section 3.24 of the Commission’s Rules of Practice

authorizes any party to move with or without supporting

affidavits for a summary decision in his favor upon all

or any part of the issues being adjudicated. The granting

of such a motion is authorized where the affidavits and

other evidence reiied upon “show that there is no genuine

issue as to any material fact and that the moving party

is entitled to such a decision as a matter of law.” (Sec-

tion 3.24(a)(2)) Any such decision shall constitute the

initial decision of the Administrative Law Judge.

Section 3.24 closely parallels Rule 56 of the Federal

Rules of Civil Procedure. The Hearst Corporation, 80

F.T.C. 1011, 1014 (1972) Summary judgment under Rule

56 may be granted only if there is no genuine issue as

to any material fact or the inferences to be drawn from

the undisputed facts. United States v. Diebold, Inc., 369

U.S. 654 (1962): Winters v. Highlands Ins. 569 F.2d 297

(5th Cir. 1978); Handi Inv. Co. v. Mobil Oil Co., 550

F.2d 543 (9th Cir. 1977); Weiss v. Kay Jewelry Stores,

Inc., 470 F.2d 1259, 1261-62 (D.C. Cir. 1972) The moving

+

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party has the burden of establishing that no genuine

issue of material fact exists; all doubts and inferences

are resolved against the movant; and summary judgment

is improper if conflicting inferences may be drawn from

the same evidence. Exnicious v. United States, 563 F.2d

418 (10th Cir. 1977) This same standard has been ac-

cepted in Federal Trade Commission proceedings. The

Hearst Corporation, supra; American Medical Association,

Dkt. 9064, slip op. at 5 (Order Denying Motion of Re-

spondent The American Medical Association (“AMA”)

For Summary Decision Dismissing The Complaint For

Lack of Jurisdiction, Apr. 26, 1976) [94 F.T.C. 701 (1979) }.

Full consideration has been given to the findings of

fact and legal arguments presented by the parties. The

Findings of Fact which follow are based on reliable evi-

dence as to which there is no dispute as to its authen-

ticity or genuiness. A careful study of the evidence

relied upon by the parties reveals that there is no gen-

uine issue as to any of the material facts to be concluded

from such evidence, or as to the relevant inferences which

logically can be drawn from such facts. Therefore, sum-

mary decision is appropriate.

All motions not previously ruled upon are denied.

Based on the evidence presented by the parties hereto

in support of and in opposition to motions for summary

decision, the following Findings of Fact are without sub-

stantial dispute.

I. FINDINGS OF FACT

1. Orkin Exterminating Company, Inc., (“Orkin”)

is a Delaware corporation with its principal place of

business located at 2170 Piedmont Road, N-E., Atlanta,

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Georgia. (Complaint, {1; Answer, Twelfth Defense, Para-

graph 1) Orkin is a wholly-owned [5] subsidiary of Rol-

lins, Inc. (CX 142C) Rollins acquired Orkin on Sep-

tember 10, 1964, (RIR 30): [6]

1. The following abbreviations are used in citations in this

decision:

CX Complaint counsel’s exhibits as listed

on complaint counsel’s Preliminary

Document List and amendments and

filed in support of complaint counsel’s

Motion For Summary Decision.

RX Respondent’s exhibits as listed on its

Preliminary Document List and

amendments filed in support of re-

spondent’s Motion For Summary De-

cision and in opposition to complaint

counsel’s Motion For Summary De-

cision.

RIR Respondent’s Responses to Complaint

Counsel’s First Set of Interrogatories,

response to interrogatory #.

RA Respondent’s Answers and Objections

To Counsel’s First Request For Ad-

missions, response to request for ad-

mission #.

CRA Complaint counsel’s First Request for

Admissions, request #.

F Findings of Fact in this initial deci-

sion, finding #.

Respondent’s Motion Respondents motion for Issuance uf

for Access an Order Requiring Access to Docu-

ments, dated June 28, 1984.

(Name) Dep. Deposition of person identified.

(Name) Dep. Ex. Exhibit to deposition of person identi-

fied.

(Name) Aff. Affidavit of person identified.

The persons who depositions and affidavits are cited in this

decision are identified as follows:

Geiger Earl Geiger, Vice Chairman of Rollins, Inc.

(F 11).

(Continued on following page)

A10

2. Orkin provides pest-control and exterminating

_-services throughout the United States, but mostly in the

Kimbell

Raymond

Rollins

Russell

Schneider

Boudreaux

Bourgeois

Childs

Edwards

Goodman

Hoffman

Hromada

Jones

Landry

Nolen

Terrebonne

Thompson

Southeast. (Respondent’s Motion for Access, p. 2) In

1980, Orkin served customers located in 47 states and

Footnote continued—

Ron Kimbell, Orkin Commercial Branch Man-

ager (Kimbell Dep. p. 4), formerly Director

of Customer Services of Rollins, Inc. (F 47).

John Raymond, Director of Administrative

Operations of Orkin (F 54, 57).

Gary W. Rollins, President of Rollins, Inc. (F

38).

Robert M. Russell, Vice-President of Govern-

ment Relations of Orkin (F 61).

James M. Schneider, General Counsel of Rol-

lins, Inc. (F 55).

Dr. Kenneth J. Boudreaux, Professor of Eco-

nomics and Finance, Graduate School of Busi-

ness, Tulane University.

Ernest R. Bourgeois, owner and President, Mr.

B’s Services, Inc.

Janet Childs, Receivables Audit Supervisor,

Orkin.

Jack L. Edwards, retired, formerly President,

Ja-Roy Exterminating Co., Inc.

Bryant G. Goodman, Branch Manager, Orkin.

William S. Hoffman, an Orkin customer.

Charles Hromada, Senior Vice President of

Technical Services, Terminix International, Inc.

Joe Jones, Branch Manager, Orkin.

Ulysse G. Landry, Jr., owner and operator of

Houma Pest Control Company, Inc.

Truly D. Nolen, founder and President of Truly

Noien of America, Inc.

Ellis A. Terrebonne, an Orkin customer.

Helen R. Thompson, an Orkin customer.

Portions of depositions of some deponents appear in com-

plaint counsel’s motion, in Orkin’s motion and opposition, and

in complaint counsel’s answer submissions. [7]

All

the District of Columbia. (CX 142C) As of September 1,

1980, Orkin operated approximately 294 branch offices

and 44 district offices. (RIR 32) Branch offices are

supervised by the district offices. (CX 142Z9; Russell

Dep. p. 9; Raymond Dep. p. 32)

3. Orkin has stipulated that it maintains, and at

all times mentioned in the complaint has maintained, a

substantial course of business, including the acts and

practices as set forth in the complaint, in or affecting

commerce, as “commerce” is defined in the Federal Trade

Commission Act. (Letter to Katharine B. Alphin from

Michael Eric Ross dated August 17, 1984, at paragraph

10; one page letter to Katharine B. Alphin from Michael

Eric Ross dated August 24, 1984; RIR 66; compare letter

to John C. Staton, Jr. from Katharine B. Alphin dated

August 21, 1984, at paragraph 9, with two page letter

to Katharine B. Alphin from Michael Eric Ross dated

August 24, 1984)

4. Orkin is stated to be the world’s largest termite

and pest control company. (CX 142C; Rollins Dep. p. 202)

Even though Orkin is the largest termite and pest con-

trol company, it apparently has a small market share.

(Rollins Dep. p. 203; Geiger Dep. p. 16)

5. To be a provider of termite control services on

a small scale requires little capital. (Rollins Dep. pp. 204-

205) Chemicals used in termite control are commonly

available. (Rollins Dep. p. 205) The techniques used

in termite control services are widely known within the

industry and can be learned without difficulty. (Rollins

Dep. pp. 206-207)

6. Orkin has used a July 1 - June 30 fiscal year

for each of the years 1978 through 1984. (RIR 57) Orkin

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had total net revenues in the amounts indicated in the

following fiscal years:

Fiscal Year Ending Total Net Revenue

June, 1977 $138,613,108

June, 1978 148,362,959

June, 1979 164,826,769

June, 1980 181,582,829

June, 1981 193,568,292

June, 1983 212,333,107

June, 1984 228,898,037

(RA 4-10)

Orkin had the net profits indicated in the following

fiscal years: [8]

Fiscal Year Ending Net Profit

June, 1977 $22,428,534

June, 1978 19,258,821

June, 1979 17,140,842

June, 1980 23,744,000*

June, 1981 27,142,000*

June, 1983 30,127,691

June, 1984 31,548,071

(RA 11-17 [*Rounded to the nearest thousand] )

Orkin had a net worth of $65,949,714.89 on June 30,

1980 and a net worth of $68,659,753 on June 30, 1984.

(RA 18, 19; Respondent’s Corrected Answer To Request

No. 18 Of First Request For Admissions)

7. Among other services, Orkin provides to individ-

uals and businesses services to treat houses, buildings, and

other structures in order to destroy or protect against

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termites, other wood-infesting organisms, moisture and

wood decay. (Complaint, { 3; Answer, Twelfth Defense,

Paragraph 3; RA 1; Raymond Dep. pp. 22-23; Rollins Dep.

pp. 15-16; Kimbell Dep. pp. 4, 6-7; Russell Dep. p. 13)

8. Orkin has entered into written agreements with

its customers concerning the rendering of services to de-

stroy or protect against termites, other wood-infesting

organisms, moisture and wood decay. These agreements

are hereinafter referred to as “termite contracts.” (Geiger

Dep. p. 11; CX 1-7, 9-14, 16, 27, 400, 414, 449, 473, 485; RA

2; RIR 59-60) The termite contracts charged a specified

sum for the initial treatment provided by Orkin. (CX

1-7, 9-14, 16, 27, 400, 414, 449, 473, 485)

9. Under certain conditions Orkin issued guarantees

of its services to destroy or protect against termites, other

wood-infesting organisms, moisture and wood decay. These

guarantees are hereinafter referred to as “termite guaran-

tees.” (Ray 10nd Dep. pp. 18-23; Rollins Dep. pp. 18-19;

Russell Dep. p. 13; CX 17-26; RA 3; RIR 61-62)

10. Since prior to 1956, Orkin has used preprinted

form contracts and guarantees prepared by Orkin. (Geiger

Dep. pp. 11, 21-22, 24-25; CX 1-14, 16, 27, 400, 414, 449, 473,

485: RX 129A-Z46, 685A-B) Orkin salesmen did not have

the authority to vary the terms of the preprinted form

contracts and guarantees. (Geiger Dep. p 11)

11. In general, prior to 1966, Orkin offered termite

guarantees for continued protection to the treated property

for a specified price which lasted for a term of from five

to fifteen years. (RIR 4; RX 129A-Z46; Geiger Aff. § 4)

On or about January 1, 1966, Orkin began using the term

“lifetime” in its [9] termite contracts and/or termite guar-

antees. (RIR 1) Earl F. Geiger, Vice Chairman of the

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Board of Rollins, Inc., who was Executive Vice-President

of Orkin from 1964 to 1976, originated the “lifetime” guar-

antee concept for Orkin and proposed its adoption by Orkin.

(RIR 2; Geiger Dep. pp. 4-5, 15) Mr. Truly D. Nolen,

founder, owner, and President of Truly Nolen of America,

Inc., claims to have originated the idea of the lifetime

guarantee on termite control services contracts in 1955.

(Nolen Aff. | 6) Other Orkin competitors use the lifetime

concept. (Hromada Aff. {| 5)

12. Concerning the purpose of the lifetime guaran-

tees, Mr. Geiger has given the following testimony:

Q. What was the purpose of these new lifetime

guarantees?

A. Well, Orkin at that time was the largest pest

control company in the country. We did 80% of the

advertising for the pest control industry, or roughly

that. We claimed just about 13% of the business.

The obvious strategy was to try to offer a distinctly

better service to the public than our smaller competi-

tors could offer. So any time you could enhance your

package, your marketing package, you did so.

Q. And that was the reason for the lifetime?

A. Yes. We were able to do it because the

primary termiticide at that time was proving to be

more successful and more effective than we ever

thought it would be.

(Geiger Dep. pp. 16-17)

13. Termite guarantees issued by Orkin include a

lifetime retreatment guarantee, a lifetime retreatment and

repair guarantee, and a lifetime guarantee on pretreatment

work on new construction. (Raymond Dep. p. 19-20)

Ald

14. The lifetime retreatment guarantee provides in

part that at no extra cost to the customer Orkin will apply

any necessary treatment to the premises if infestation

occurs during the duration of the guarantee. (Rollins Dep.

p. 18; CX 17-22; RIR 61) This type of guarantee is some-

times referred to as a “LC guarantee.” (Rollins Dep. p. 18;

Raymond Dep. p. 20)

15. The lifetime retreatment and repair guarantee

provides in part that at no extra cost to the customer, Orkin

will make repairs (up to a stated dollar maximum) to the

structure and its contents in order to remedy any new

damage caused by subterranean termites, provided that it

is established that the new damage occurred after the initial

treatment, and that at the time of [10] discovery of the

new damage, the damaged areas are infested with live sub-

terranean termites. (Rollins Dep. p. 18; CX 23-26; RIR

61) This type of guarantee is sometimes referred to as a

“LR guarantee.” (Rollins Dep. p. 19; Raymond Dep. p. 19)

16. Prior to 1969, Orkin’s LR guarantees had a lia-

bility limitation of $25,000. In 1969, Orkin adopted a policy

of issuing LR guarantees with a liability limitation of

$100,000. (RIR 63)

17. The lifetime guarantee on pretreatment work is

the same guarantee as the LR guarantee, except that

Orkin’s pretreatment guarantee is for new construction

and its LR guarantee covers existing structures. (RA 21;

CX 150A-B) The lifetime pretreatment guarantee is

sometimes referred to as a “PR guarantee.” (Raymond

Dep. pp. 19-20)

18. Orkin’s termite contracts and termite guarantees

provide for annual fees to be paid in order to continue the

protection that is guaranteed. If the customer abides by

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the contract, and pays Orkin the specified annual renewal

fee, the guarantee is to remain in effect. (CX 1A, 2A, 3,

4A, 5A, 6A, 7A, 9A, 10A, 11A, 12A, 13A, 14A, 16A, 27A,

400A, 414A, 449A, 473A, 485A; Respondent’s Motion for

Access, pp. 2-3)

19. Orkin’s termite contracts and termite guaran-

tees, including those entered into prior to February 1,

1975, that used the term “lifetime,” had a “structural

modification” clause providing that in the event the

premises were structurally modified, altered or otherwise

changed after the date of initial treatment, the agreement

would terminate, unless a prior written agreement was

entered into by the purchaser for Orkin to reinspect the

premises, provide additional treatment, and/or adjust the

annual renewal fee. (CX 1B, 2B, 4B, 5B, 6B, 7C, 9B,

10B, 11B, 12B, 13B, 14B, 16B, 17A, 18A, 19A-B, 20A-B,

21A-B, 22, 24A-B, 25A-B, 26A-B, 27B, 400B, 414B, 449B,

473B, 485B; RIR 20, 59-62)

20. Before February 1, 1975, Orkin’s termite con-

tracts and termite guarantees that included the term “life-

time” did not mention adjustments or increases of the

specified annual renewal fee necessary to continue the

lifetime guarantees issued with respect to those contracts,

absent the treated premises being structurally modified,

altered, or otherwise changed after the date of initial

treatment. (CX 1A-B, 2A-B, 3, 4A-B, 5A-B, 6A-B, 7A-C,

9A-B, 10A-B, 11A-B, 12A-B, 13A-B, 14A-B, 16A-B, 17A-B,

18A-B, 19A-B, 20A-B, 21A-B, 22, 24A-B, 25A-B, 26A-B,

27A-B, 400A-B, 414A-B, 449A-B, 473A-B, 485A-B; RIR 20,

59-62; Respondent’s Motion for Access, p. 3) These ter-

mite contracts are hereinafter referred to as “pre-1975

contracts.” Likewise, guarantees extended by Orkin to

lee

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a customer in connection with the execution of a pre-

1975 contract are referred to as “pre-1975 guarantees,”

and customers holding these contracts or guarantees are

often referred to as “pre-1975 customers.” [11]

21. Numerous pre-1975 contract forms contained a

clause stating that the contract, graph and specification

sheets, and upon issuance, the guarantee, constituted the

complete agreement between the parties, and that the

agreement could not be changed or altered in any man-

ner, oral or otherwise, by any representatives of Orkin,

unless alterations or changes were in writing and ex-

ecuted by a corporate officer of Orkin under the cor-

porate seal. (CX 400A-B [Form 225 Rev. 1-69]; CX 9A-B:

CX 473A-B; CX 10A-B [Form F-19-135 Rev. 11/70]; CX

414A-B; CX 485A-B [Form 225 Rev. 11/70]; CX 11A-B

[Form F-19-135 Rev. 9/72]; compare CX 449A-B [Form

F-19-135 Rev. 2/73], with CX 13A-B [Form F-19-135

Rev. 11/73]; CX 12A-B [Form F-21-316]; CX 14A-B

[Form F-21-316]; CX 16A-B [Form F-21-317]; RIR 59-60)

22. CX 1A is a contract (termed Service Order)

dated November 20, 1965, with a customer located in

Louisville, Kentucky. The contract provides for a Con-

trol and Repair guarantee to be issued. The Annual

Renewal Premium is specified as $17.00. This contract

has the following provision:

In addition to the initial term specified in Paragraph

1 above, the Guaranty may, at the sole option of

the undersigned, be renewed annually for Lifetime

additional years by making payment of the Annual

Renewal Premium on or before the renewal date of

each subsequent year and Orkin agrees to reinspect

the premises upon receipt of each Annual Renewal

Premium Payment.

eaten

Al8

(The word Lifetime, above, was handwritten in a

blank space provided in the contract.)

CX 2A is a contract (Service Order) dated Novem-

ber 30, 1966, with a customer located in Louisville, Ken-

tucky. The contract provides for a Lifetime Control and

Repair guarantee. The Annual Renewal Fee is specified

as $18.00. The contract has the following provision:

The Guaranty checked above will be issued and de-

livered to the Purchaser upon completion of initial

treatment. Guaranty will be effective as long as

payment is made in accordance with the Terms and

Conditions of this Service Order.

It is further agreed that Guaranty will provide for

an initial term of:

12 months. ORKIN wil] reinspect the premises upon

expiration of the initial term and upon receipt of the

Annual Renewal Fee.

Guaranty at the sole option of the Purchaser may

be renewed annually by making payment of the An-

nual [12] Renewal Fee on or before the renewal

date of each subsequent year.

CX 3 is a contract (Service Order) dated March 23,

1968 with a customer located in Norfolk, Virginia. This

contract provides for a Lifetime Control and Repair guar-

antee to be issued. The contract provides as follows:

ORKIN CONTINUOUS PROTECTION GUARANTY

Under Orkin’s Continuous Protection Plan, the above

named property will be reinspected in November

1968 upon prompt payment of $18.00 (plus tax where

applicable), and annually thereafter in November

Alg

upon payment of $18.00 (plus tax where applicable

sabia ), beginning in 1969.

(The italicized portions above were handwritten.)

The contract also provided:

Guaranty will be effective so long as payment is

made in accordance with the Terms and Conditions

of this Service Order.

CX 400A is a contract with a Bethesda, Maryland,

customer dated April, 1969, having basic terms identical

to CX 3, above.

CX 414A is a contract dated February 5, 1972, with

a customer located in Chesterfield, Missouri. This con-

tract provides for a Lifetime Control and Repair guar-

antee and states as follows:

ORKIN CONTINUOUS PROTECTION GUARANTY

Orkin’s Continuous Protection Guaranty will provide

protection for the above named property including

Annual Reinspections upon payment of the initial

charges and an Annual Renewal Payment of $37.00

starting February 1973 and each February thereafter.

See also CX 421A, an October, 1972, contract with provi-

sions similar to CX 414A, as does CX 439A, a May, 1972,

contract with a customer located in Surfside, South Caro-

lina.

CX 4A, a contract (Service Order) dated March 1969,

with a customer located in Petersburg, Virginia, provides

for a Lifetime Control and Repair guarantee. The Annual

Renewal Fee is specified as $18.00 . The contract further

provides that:

—————————

A20

ORKIN will, AT NO EXTRA COST, reinspect the

premises annually during said initial term and upon

receipt of the Renewal Fee thereafter. [13]

CX 6A, a contract (Service Order) dated September

25, 1968, with a Brownsville, Texas customer, provides for

a Lifetime Control guarantee, and for an Orkin Continuous

Protection Guarantee upon the payment of an annual fee

of $20.00.

CX 7A, a contract (Service Order) dated March, 1968,

with a W. Columbia, South Carolina customer, provides

for a Lifetime Control and Repair guarantee upon payment

of an annual renewal fee of $15.00.

CX 9A, a contract dated December 17, 1969, with a

Tulsa, Oklahoma customer, provides for a Lifetime Control

and Repair guarantee and an Orkin Continuous Protection

Guarantee upon payment of an annual renewal fee of

$30.00.

CX 10A, a blank contract bearing form number F-19-

135 REV. 11/70 has provisions for Lifetime Control and

for an ORKIN CONTINUOUS PROTECTION GUARAN-

TEE “so long as payments are made in accordance with

the Terms and Conditions of this Contract.” CX 11, a blank

contract bearing form number F-19-135 REV. 9/72 has pro-

visions similar to the provisions of CX 10A.

CX 13 is a blank contract with a form revision date

of 11/73, which provides for a Lifetime Control guarantee.

The Orkin Continuous Protection Guarantee states that:

Its coverage, including annual reinspection, will be

effective for a period of ........... years upon payment

of the initial charges and thereafter for a period of

slab years, so long as renewal payments of ......._ -

are made annually.

A21

CX 205G is a contract (Service Order) dated March

10, 1969, with a customer located in St. Francisville, Lou-

isiana, which provides for a Lifetime Control guarantee

- and for an Orkin Continuous Protection Guarantee upon

payment of $75.00 annually, to continue ‘“‘so long as pay-

ments are made in accordance with the Terms and Condi-

tions of this Service Order.” CX 205R is a 1969 contract

with a New Orleans, Louisiana, customer which is similar

to CX 205G, with a renewal fee of $30 annually.

CX 205W is a contract dated July 3, 1974 with a cus-

tomer named Percy Bullock located in St. Amant, Lou-

isiana. It has the following provision:

ORKIN CONTINUOUS PROTECTION GUARANTEE

The guarantee checked above will be issued to the

buyer upon competion of initial treatment. The Guar-

antee will cover the above named premises and will

be subject to the General Terms and Conditions on the

reverse side hereof. Its coverage, including annual

reinspection, will be effective for a period of 2 years

upon payment of the initial charges and thereafter for

a period of [14] LIFE years, so long as renewal pay-

ments of $20 are made annually.

(The italicized words were handwritten.)

CX 205Z3 is a contract with the same customer as

above, Percy Bullock, dated February 3, 1975. This con-

tract, entered into after Orkin changed its guarantee

provisions, has the following provision:

ORKIN CONTINUOUS PROTECTION GUARANTEE

The type Guarantee checked above will be issued

to the Buyer upon completion of initial treatment.

A22

The Guarantee will cover the treated premises and

will be subject to the General Terms and Conditions

on the reverse side hereof. The Guarantee will be

effective for a period of 2 years upon payment of

the initial charges and thereafter for a period of * * *

Life years, so long as renewal payments are made

annually. ORKIN guarantees that the first four re-

newal payments wil be $35.00. Thereafter, ORKIN

reserves the right to increase renewal payments by

giving written notice to the Buyer in advance of

the renewal date. During the effective period of

the Guarantee, ORKIN will reinspect the premises

at such time as ORKIN may deem necessary, or

annually upon the Buyer’s request. No failure on

the part of the Buyer to request reinspection shall,

in any way, affect the Buyer’s rights under this

contract. The Buyer agrees to make the premises

available for reinspection.

(The italicized words were handwritten.)

23. CX 205U is a form letter which Orkin issued

to a customer in New Orleans, Louisiana. The complete

~ Jetter reads as follows:

TREATMENT AND CORRECTIVE MEASURES

Date: April 23, 1967. Re: Property Located at:

785 Brehm Pl.

New Orleans, La. 70121

The treatment and corrective measures necessary to

assure you complete protection are described in the

detailed specifications which are keyed to the scale

drawing on the following pages.

A23

Upon completion of the work, and payment for our

services in the amount of $163.00, you will receive

ORKIN’S written $25,000.00 Lifetime Termite [15]

Damage Guarantee. This guarantee is backed by

our corporate assets of more than $50,000,000.00.

This sensational Guarantee provides for an annual

reinspection to assure that termites do not return.

As the owner of an Orkin-treated building, you may

continue protection from year to year thus assuring

virtually lifetime protection against reinfestation. In

addition, your property is protected up to $25,000.00

against repairs required as a result of subsequent

termite infestation in the treated areas.

The cost of Orkin’s Lifetime Guarantee is modest -

a nominal annual inspection renewal fee of only

$22.00 relieves you of all further termite worries.

Similar letters are in the record. RX 31 is a letter dated

September 26, 1968, concerning property located in Cayce,

South Carolina; RX 30 is a letter dated January 3, 1970

concerning property located in Tucson, Arizona; RX 581F

is a letter dated March 1, 1971 concerning property lo-

cated in Bethesda, Maryland; and RX 561F is a letter

dated October 27, 1971 concerning property located in

Summerville, South Carolina.

24. In approximately May of 1974, Orkin began re-

vising its termite contract form(s) by adding a term

or provision that provided for an increase of annual fees

that did not depend on whether the treated premises

were structurally modified, altered or otherwise changed

after the date of the initial treatment. (See CX 205Z3

quoted above.) The revised termite contract forms con-

taining such a provision were first used in each of Orkin’s

A24

sales districts on or about February 1, 1975. (RIR 20;

Raymond Dep. pp. 54-57, 81 and Dep. Ex. 8; Rollins Dep.

p. 51; RX 131A-B)

25. Prior to entering into pre-1975 contracts with

customers, in all states in which Orkin operated its ter-

mite control services business, Orkin had entered into

termite contracts that specifically provided for increases

in annual renewal fees, which increases did not depend

on whether the treated premises were structurally mod-

ified, altered, or otherwise changed after the date of

initial treatment. (RIR 22; Russell Dep. pp. 35-38 and

Dep. Ex. 8; F. 11)

26. The term “lifetime” in Orkin’s pre-1975 contracts

refers to the duration of the guarantee(s) given by Orkin

in the particular contract involved, subject to and as

limited by the terms and conditions thereof, including

without limitation the obligation of the buyer to pay an

annual renewal fee. Within this context, the term “life-

time” in the contracts refers to the lifetime of the prem-

ises initially treated under the contract involved as they

structurally existed on the date of such initial treatment.

(RIR 5; Geiger Dep. pp. 15-17; Kimbell Dep. p. 130; [16]

see also Nolen Aff. § 5; Hromada Aff. { 5) The guar-

antee was transferable to the new owner of the treated

premises in the event the treated premises were sold.

(Raymond Dep. Exs. 5, 6) Contrary to Orkin’s inter-

pretation that the “lifetime” guarantee referred to the

lifetime of the treated premises, some state officials inter-

preted the term “lifetime” to refer to the lifetime of

the homeowner who entered into the contract, or to the

period the original homeowner held title to the original

treated premises. (RX 201A, 208B, 211A)

A25

27. During 1968, Orkin promoted its services for

protection against termites in a promotion called “Orkin

12,” developed by an outside advertising agency, Bearden

& Associates. (Raymond Dep. pp. 44-47 and Dep. Ex. 6;

Geiger Dep. pp. 28-29; RIR 49; RA 22) The Orkin 12

promotion was advertised in a pamphlet, on billboards,

in magazines, and on radio and television. (RIR 51)

Orkin spent approximately $1,157,000 advertising Orkin

12. (RIR 50) ‘The advertising program was discontinued

before its slated expiration date because it failed to pro-

duce the hoped-for results. (Geiger Dep. pp. 29-30, 34-35)

28. The pamphlet concerning Orkin 12 was issued

as point-of-sale material in presenting Orkin’s services

to its customers. (Raymond Dep. p. 46 and Dep. Ex. 6;

Kimbell Dep. pp. 39-41 and Dep. Ex. 9) The pamphlet

contained the following language as point 6 (hereinafter

“point 6”);

LIFETIME GUARANTEE. Orkin’s lifetime termite

protection plan includes annual reinspections and re-

treating when necessary. This protects the property

against termite reinfestation for the life of the struc-

- ture provided the lifetime guarantee is renewed an-

nually. The yearly premium for this lifetime pro-

tection is very modest and never increases. In case

of a sale, the guarantee is transferable.

(Kimbell Dep. Ex. 9; Raymond Dep. Ex. 6) (emphasis

in original)

29. The Orkin 12 promotion was used and adver-

tised in each of the following states plus the District

of Columbia during 1968: Alabama, Arkansas, Arizona.

California, Colorado, Delaware, Florida, Georgia, Illinois,

Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland,

A26

Michigan, Mississippi, Missouri, Nebraska, New Jersey,

New Mexico, North Carolina, Ohio, Oklahoma, Pennsyl-

vania, South Carolina, Tennessee, Texas, Virginia, West

Virginia, and Wisconsin. (RA 23; CX 650K-L) The Orkin

12 program was utilized in varying degrees by Orkin’s

branch offices and sales personnel. (Goodman Aff. {ff 4,

5; Bourgeois Dep. p. 8; Edwards Dep. pp. 12, 13; Jones

Aff. J 4)

30. Orkin promotional literature entitled Facts You

Should Know About Termites, with a revision date of

September, 1970, stated: [17]

Orkin Provides a

$100,000.00 Lifetime

Termite Repair

Guarantee

This guarantee provides for an annual reinspection

to guard against new termite attack. As the owner

of an Orkin-treated home, you may continue pro-

tection from year to year to assure virtual lifetime

protection against reinfestation. Orkin’s guarantee

covers your home for $100,000.00 against repairs as

a result of subsequent termite infestations. The cost

of Orkin’s “Lifetime Guarantee” is modest. Only a

nominal annual fee relieves you of all future termite

worries.

(CX 645A, Rev. 9/70)

31. Orkin’s promotional literature with a revision

date of November, 1970, stated:

Orkin guarantees effective pest control. Termite

control services are backed by a special $100,000

guarantee. *

Se

A27

The phrase noted by the asterisk was:

Remains in effect for the lifetime of the property

by payment of a low annual renewal fee.

(CX 648B, D)

32. In promotional literature with a revision date

of March, 1971, Orkin represented that its $100,000.00

Lifetime Termite Repair Guarantee was “Another Orkin

First.” It stated:

Only Orkin, the world’s largest in termite control,

could make such a sensational termite Guarantee

available to America’s property owners.

This guarantee protects your property up to $100,-

000.00 against repairs which might be required as a

result of subsequent termite infestations in the treated

areas.

(CX 646F, G, Rev. 3/71)

Orkin’s promotional literature with a revision date

of February, 1973, stated:

Orkin offers much more for your investment and

unmatched protection for your home. Our guarantee

plan means yearly checkups by trained re- [18] in-

spectors. For pennies a day, it can be renewed,

at your option, for the lifetime of your home and

retained by the new owners if you move.

(CX 39R, T) (emphasis in original)

34. In a form letter with a revision date of Sep-

tember, 1973, Orkin stated:

A28

We are pleased to render the following quotation to

cover termite control (chemical soil treatment) for

the above noted new construction:

* * *

Upon completion of the work as required Orkin Ex-

terminating Company shall furnish the owners with

a $100,000 termite damage guarantee, renewable an-

nually for the life of the building.

(CX 35)

35. Orkin attempted to implement uniform sales

techniques for its sales people. (Raymond Dep. pp. 26-41

and Dep. Ex. 1-5) It was Orkin’s company policy that

new salesmen should be given “Termite Sales Training

Lessons 1-6.” (Raymond Dep. p. 38 and Dep. Ex. 4) Com-

plaint counsel contend Lesson #4 was dated 1972. (See

Complaint Counsel’s Answer and Reply Brief, p. 14 n. 8.)

Lesson +5 has a copyright date 1973. (RX 677Z87) Termite

Sales Training Lesson #4 contained the following:

HOW DOES THE CUSTOMER BENEFIT FROM

ORKIN’S SUBTERRANEAN TERMITE

TREATMENT?

A. They receive a lifetime guarantee protection

which is non-cancellable by Orkin and renewable by

customer’s option.

B. Their cost of the renewal remains the same

so long as renewal payments are made annually.

* + *

E. The guarantee is transferable if they sell their

home.

au.

A29

(Raymond Dep. pp. 39-40 and Dep. Ex. 5) Termite Sales

Training Lesson #4 also instructed branch salesmen that

“(y)ou should always figure the price for Orkin Service

by the Termite Pricing Schedule.” (Raymond Dep. Ex. 5)

The Orkin training programs apparently were not uni-

formly utilized throughout the company. (Jones Aff. {|

6, 7; Goodman Aff. { 7, 8; Rollins Dep. pp. 10, 11, 20, 21)

Some sales representatives were instructed to inform [19]

prospective customers that the lifetime guarantee annual

renewal fee was fixed and did so; others never received

such instructions and did not so inform customers. (Good-

man Aff. {| 9; Jones Aff. { 8; Landry Dep. p. 63; Bourgeois

Dep. p. 23; Edwards Dep. p. 30; Hoffman Dep. p. 29; Thomp-

son Dep. pp. 20-21; Terrebonne Dep. pp. 20-21)

36. A pricing schedule with a revision date of Octo-

ber, 1971, for structures of conventional or slab construc-

tion, specified the following annual fees for new con-

tracts depending on the price of the original job and the

type of lifetime guarantee to be issued:

Original Annual Fee For Annual Fee For

Job Price LR Guarantee LC Guarantee

$130 25.00 23.00

140 26.00 24.00

150 27.00 25.00

160 28.00 26.00

170 29.00 27.00

180 30.00 28.00

190 31.00 29.00

200 32.00 30.00

210 32.00 30.00

220 33.00 31.00

230 34.00 32.00

A30

Original Annual Fee For Annual Fee For

Job Price LR Guarantee LC Guarantee

240 34.00 32.00

250 35.00 33.00

260 35.00 33.00

270 35.00 33.00

280 36.00 34.00

290 36.00 34.00

300 37.00 35.00

400 41.00 39.00 [20]

500 44.00 42.00

(CX 385C)

The pricing schedule states: “Important - You are selling

a non-cancelable, lifetime guarantee.” (CX 385C) (em-

phasis in original)

37. A pricing schedule with a revision date of May,

1973, for structures of conventional or slab construction,

specified the following annual fees for new contracts de-

pending on the price of the original job and the type of

lifetime guaramtee to be issued:

Original Annual Fee For Annual Fee For

Job Price LR Guarantee LC Guarantee

$130 25.00 25.00

140 26.00 25.00

150 27.00 25.00

160 28.00 26.00

170 29.00 27.00

180 30.00 28.00

190 31.00 29.00

200 32.00 30.00

210 32.00 30.00

A31

Original Annual Fee For Annual Fee For

Job Price LR Guarantee LC Guarantee

220 33.00 31.00

230 34.00 32.00

240 34.00 32.00

250 35.00 33.00

260 35.00 33.00

270 35.00 33.00

280 36.00 34.00

290 36.00 34.00

300 37.00 35.00

400 41.00 39.00 [21]

500 44.00 42.00

(CX 384A-B)

This pricing schedule also states: “Important - You are

selling a non-cancelable, lifetime guarantee.” (CX 384B)

(emphasis in original)

38. In 1980, Gary W. Rollins, then President of Orkin,

decided to increase the annual renewal fees of customers

holding pre-1975 contracts and pre-1975 guarantees above

the amount stated in the contracts and guarantees of those

customers. (Rollins Dep. pp. 6, 12, 55-56, 73) Gary W.

Rollins is currently President of Rollins, Inc. (Rollins

Dep. p. 5)

39. Prior to increasing the annual renewal fees on

pre-1975 contracts, Orkin requested that Arnall, Golden

& Gregory, an Atlanta law firm, provide Orkin with a

written legal opinion. The law firm prepared a legal

opinion dated December 6, 1978. The opinion concluded

that Orkin’s pre-1975 contracts appear to be of an indef-

inite duration and, as such, are terminable after a rea-

A32

sonable period of time. (Rollins Dep. pp. 60-62; Schneider

Dep. p. 64; RX 44A-F) James M. Schneider, General

Counsel of Rollins, Inc., reviewed the opinion given by

Arnall, Golden & Gregory, and confirmed to management

the conclusion reached in that opinion. (Schneider Dep.

p. 67; RX 170A-B) Mr. Gary Rollins reviewed these

legal opinions prior to making his decision to increase the

annual renewal fees for pre-1975 contracts. (Rollins Dep.

pp. 60-64, 73, 80-81; RX 43A-G; RX 170A-B)

40. The legal opinion rendered by Arnall, Golden &

Gregory assumed as the issue to be considered: “Are

there any grounds for the claim that a contract which

may be renewed or extended from year to year, indefi-

nitely, is unenforceable.” The author of the opinion also

stated: “I assume that the Orkin contract involves a

right to extend the term of the original contract and here

the issue would be two-fold: (1) possible failure as a

perpetual contract and (2) possible failure for indefi-

niteness of terms.” (RX 44A) (emphasis in original.)

41. At the time that James M. Schneider, General

Counsel of Rollins, Inc., confirmed to management the

conclusion reached by the law firm of Arnall, Golden &

Gregory, Mr. Schneider was not aware of Orkin’s sales

literature statements; i.e., the Orkin 12 promotion. Mr.

Schneider was the person at Rollins, Inc., who had con-

tact with the law firm of Arnall, Golden & Gregory and

requested the legal opinion from the firm (Schneider Dep.

pp. 62-63; Schneider Dep. [dated February 8, 1985] pp.

12, 22).

42. Between 1978 and 1980, Orkin undertook an ex-

tensive expense reduction program before deciding, in Feb-

ruary 1980, to increase the annual renewal fees on pre-

y

:

i

t

}

A33

1975 contracts. Also, [22] during February 1980, Orkin

increased by 40% the annual renewal fees on post-1975

customers whose contracts contained an express provision

permitting such increases. (RX 46A-D; RX 42A-E)

43. Prior to making his decision to increase the an-

nual renewal fees of customers holding pre-1975 contracts

and pre-1975 guarantees, Gary Rollins presented a synop-

sis of issues (dated February 7, 1980) on the subject of

the increase to R. Randall Rollins, who was then President

of Rollins. (Rollins Dep. pp. 73-80, 85, 86 and Dep. Ex. 12)

In part, the synopsis contained the following:

Please find below and attached my analysis of the

“pros and cons” regarding raising the renewal amount

of our pre-1975 termite customers.

PROS

1. Potential income increase of $2,286,614 (#232,-

969 accounts valued at $6,017,406 ~ 40% increase less

5% cancellations)

CONS

1. A few customers advised by salesmen and

literature that renewal amount would be fixed.

2. State regulatory agencies (Pest Control, Con-

sumer Protection, etc.) could interpret our contract

in some cases to imply the renewal amount is fixed.

Those who obtain old proposal Information will dis-

cover we put this in writing.

3. Our longer term employees might feel that

we are going back on our word.

4. There could be customer lawsuits and com-

plaints.

A34

OPTIONS

1. Leave as is.

2. Write customers and put on voluntary basis.

3. Meet with individual state regulatory and

consumer groups to obtain understanding and raise.

4. Raise and handle exceptions.

(Rollins Dep. Ex. 12) [23]

44. Gary Rollins’ recommendation to R. Randall

Rollins, with which R. Randall Rollins concurred, was

option 4 above, to raise the annual renewal fees and

handle the exceptions. (Rollins Dep. pp. 73, 78-79)

45. Gary Rollins was aware of the Orkin 12 promo-

tion at the time he wrote his synopsis to R. Randall

Rollins. Literature containing point 6 of the Orkin 12

promotion was an attachment to Gary Rollins’ synopsis

to R. Randall Rollins. (Rollins Dep. pp. 76-80 and Dep.

Ex. 12)

46. In 1980, Orkin sent notices to approximately

207,000 customers holding pre-1975 contracts or pre-1975

guarantees, that Orkin was increasing the annual re-

newal fees over the amount specified in those customers’

contracts or guarantees. (RIR 23; Raymond Dep. pp. 224,

239 and Dep. Ex. 46) All customers were notified of

the increase well prior to their respective renewal dates.

(Raymond Dep. Ex. 16 [Beginning in August - October

renewals]: RIR 25)

A35

47. The notice of the increase of annual fees stated:

Dear Customer:

Thank you for being an Orkin customer and allowing

us to protect your home against wood infesting or-

ganisms. We’re sure you agree this protection is

as important as homeowner and fire insurance, but

it is much less expensive.

Through the past few years we have improved pro-

ductivity to absorb our increased costs of gasoline,

petroleum products, labor and increased government

regulations. However, these increased operating ex-

penses can no longer be totally absorbed while main-

taining the high quality of service you deserve.

Therefore, to maintain this quality protection, we

now find it necessary to increase your annual re-

newal fee to the amount indicated on the enclosed

Termite Renewal Invoice. We hope you understand

we would not increase your renewal fee unless it

was absolutely necessary.

Again, thank you for your patronage and under-

standing. Should you have a question concerning

this matter, please contact your local branch manager

as he can best assist you.

Sincerely,

/s/ Ron Kimbell

Director of Customer Service [24]

(Raymond Dep. pp. 89, 94 and Dep. Ex. 16 [at A00974])

Ron Kimbell was never an officer of Orkin. (Kimbell

Dep. p. 53)

48. Notices reflecting increased annual renewal fees

were sent to customers holding pre-1975 contracts from

A36

Qrkin’s Home Office lerated at 217% Piedmont Road,

N.E., Atlanta, Georgia, and were transmitted by regular

mail, along with first renewal notices two months prior

to the renewal date. (RIR 25)

Orkin began sending

the notices concerning the increase of annual fees in

August, 1980, for customers whose renewal month was

October, 1980. (Raymond Dep. pp. 89, 252-54 and Dep.

Exs. 16, 49)

49. Customers holding pre-1975 contracts or pre-

1975 guarantees to whom notices were sent were located

in the following states:

Alaska

Alabama

Arkansas

Arizona

California

Colorado

Connecticut

District of Columbia

Delaware

Florida

Georgia

Iowa

Illinois

Indiana

Kansas

Kentucky

Louisiana

Maryland

Michigan

Minnesota

Missouri

(RIR 26)

Mississippi

Montana

Nebraska

North Carolina

New Jersey

New Mexico

New York

Nevada

Ohio

Oklahoma

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Virginia

Wisconsin

West Virginia

Wyoming

a

A37

D0. The annual fees for pre-1975 contracts were in-

creased to a minimum of $25.00 or by 40%, whichever

was greater. (Raymond Dep. pp. 89, 252-54 and Dep.

Exs. 16, 49)

51. Orkin received communications from customers

and customers’ attorneys that expressed their belief that

Orkin did not have the right to increase annual renewal

fees for pre-1975 contracts. (Kimbell Dep. pp. 42-45 and

Dep. Ex. 10; Raymond Dep. pp. 108-109; CX 291, 292A-B,

293, 294, 295A-B, 296A-B, 297-300, 302, 303A-C, 304-306,

307A-B, 308A-B, 309A-B) Orkin’s records indicate that

as of May, 1981, its Customer Service department had

received complaints about the increase in the annual re-

newal [25] fees on its pre-1975 contracts from less than

2% of its affected customers. This may not be a com-

plete total of complaints received by Orkin since those

complaints received by the branch offices may not be

included in this total. Additionally the total of 5700 cus-

tomers who had their increased annual renewal fees

rolled back had to complain to receive any action. (F.

67, 58-60; RX 73; Rollins Dep. p. 119) Orkin has taken

the position when customers have complained to it con-

cerning the increase of annual fees for pre-1975 contracts

that Orkin had a right to increase the annual renewal

fee. (Rollins Dep. p. 148 and Dep. Ex. 31; F. 51-53; Ray-

mond Dep. pp. 264-267 and Dep. Ex. 56)

52. Orkin had a policy of returning payments of

customers who paid the amount specified in their contracts

rather than the increased amount. (Kimbell Dep. pp. 68-

69 and Dep. Ex. 14; Raymond Dep. p. 210; EX 288, 289B,

292A, 308A, 309B)

53. Concerning the increase of annual renewal fees

for pre-1975 contracts, Ron Kimbell, Director of Rollins

A38

Customer Service, in a letter dated August 11, 1980, wrote

to Gary Rollins that:

Several of the customers’ phone calls and letters im-

plied some things that caused me to review the con-

tracts used from 1968 to present. Some of the con-

tracts said:

. including Annual Reinspections upon payment of

the initial charges and Annual Renewal payment of

Disveceasiatoans RNIN ces sts wet ceca and each ............... ahanice

thereafter.

form 225 Rev. 11/70

form F-19 135 Rev. 11,

.... Its coverage, including annual reinspections will

be effective for a period of ........ years upon payment

of the initial charges and thereafter so long as re-

newal payments of $................ are made annually. No

form +, approximately 1974.

. . will be reinspected in ........................ upon pay-

ment of $................ and annually thereafter in ........

upon payment of $................ weenie Wb

Rev 3/68

After reviewing these contracts (not the guarantees)

I have concluded that the pre-1975 increase is more

questionable than ever. Several of the statements

are leaning more towards the implication of no in-

crease ever, than a possible increase at a later date.

Based upon my experience I would say the decision

to increase these accounts (even though we [26] need

the revenue) will lead us down a path quite unpop-

ular with our customers, the media. and the consumer

groups. Angry comments from several customers,

LE

©

5)

A39

one of which was an attorney leads me to conclude

we could end up in court on this. One possibility

this could lead to would be one “pioneer” taking us

to court for all consumers that have been “damaged”

by this action. I fully understand the reason and

need for this increase, yet I request that this program

be suspended immediately until such time as all par-

ties involved (Legal, Public Relations, Customer

Service, Orkin, Finance, etc.) can meet and discuss

the repercussions of this program. I can support any

program Orkin decides on, yet I feel we should all

have a unified approach and understanding of this

most delicate matter. May I hear from you?

(Kimbell, Dep. pp. 17, 42-46 and Dep. Ex. 10; Raymond

Dep. p. 103 and Dep. Ex. 18) This letter was written at

the time the increase in annual renewal fees on pre-1975

contracts was being implemented. (F. 46, 47, supra.)

54. John Raymond, Orkin’s Director of Administra-

tive Operations, has testified that “Ron Kimbell’s job was

to be like an ombudsman for the customer. His job was

to make us aware of what the customers were saying, how

they felt about things. He did his job very well.” (Ray-

mond Dep. p. 103) Mr. Kimbell’s request for a suspension

of the increase of annual renewal fees for pre-1975 cus-

tomers was not granted. (Raymond Dep. pp. 103-104)

55. James M. Schneider, Rollins General Counsel,

testified on February 8, 1985, that during the fall of 1978

he was shown an Orkin contract and asked whether there

was a basis for increasing the renewal price. His reaction

was stated as follows:

Well, I looked at the contract, and I recall that my

reaction was the reaction that—or my initial reaction

A40

was that of most people that reviewed the contract,

I didn’t see offhand a basis for increasing the prices.

The provision concerning the renewal prices appeared

to be of indefinite duration using words like “here-

after” or “thereafter,” and my instant or immediate

reaction was there — was not a basis for increas-

ing the prices.

(James M. Schneider Dep. p. 19)

56. Orkin used a form letter in responding to nu=-

merous customers who inquired about the increase of the

annual renewal fee. The letter explained the rationale

behind the increase. (Kimbell Dep. pp. 27-29, 65-72 and

Dep. Exs. 6, 13-16; Rollins Dep. pp. 179-181 and Dep. Exs.

42-43; CX 264A-B, 266A-B, 267A-B, [27] 268A-B, 269A-B,

270A-B, 271A-B, 273A-B, 274A-B, 275A-B, 276A-B, 277A-B,

278A-B, 279A-B, 280A-B, 281A-B, 282A-B, 283A-B, 284A-B,

285A-B, 286A-B) In part, the form letter stated:

While our contracts prior to 1975 did not specifically

mention increases, we believe that following a rea-

sonable term of absorbing losses due to the impact

of inflation, this increase is both consistent with law

and reasonable business standards.

* * *

we appreciate your concern and hope that you

now understand our position and will submit your

renewal payment to keep your coverage in force.

(Kimbell Dep. Ex. 6)

This form letter made no mention of exceptions being

made to the increase of the annual renewal fees. (Ibid.)

57. John Raymond has been Orkin’s Director of Ad-

ministrative Operations since 1976. In that position he

A4l

has been responsible for the administrative procedures

used by Orkin, and for supervision of several depart-

ments, including Orkin’s Policy and Procedures Depart-

ment. (Raymond Dep. pp. 4-6) In a memorandum dated

August 13, 1980, John Raymond wrote to Orkin’s branch

managers concerning the increase of annual renewal fees

for pre-1975 contracts and the one exception to the in-

crease which customers could invoke. In part, he wrote:

If a customer tells you that our pre-1975 contract does

not allow for an increase, you should explain that

prior to the inflation spiral, practically no one had

this provision in the contracts. Recent legal rulings

interpret this as meaning that the renewal fee shall

remain unchanged for a reasonable period which we

interpret to be no more than five years.

+ n x

If the customer states they have sales literature that

‘specifically states there will not be an increase in

the renewal fee, you should ask them to read the

statement to you Some customers sold between 1967

and 1968 were given a pamphlet that stated the re-

newal fee would never increase. This statement was

in the “Orkin 12 Point Plan.” The statement, point

number 6 says:

6. Lifetime Guarantee. Orkin’s lifetime termite

protection plan includes annual [28] reinspections

and retreating when necessary. This protects the

property against termite reinfestation for the life

of the structure provided the lifetime guarantee is

renewed annually. The yearly premium for this life-

time protection is very modest and never increases.

In case of a sale, the guarantee is transferable.

A42

If any of your customers tell you they have a pam-

phlet in their possession that prohibits an increase

you should ask them to read to you the exact wording.

If the wording is not verbatum [sic] as stated in

“point 6” above they are, in fact, eligible for an in-

crease. If their material does have this statement,

and you confirm it, then tell the customer a computer

mistake was made and a corrected bill will be sent.

Ask them not to pay until a correct bill is received.

(Raymond Dep. pp. 4-5, 105-107 and Dep. Ex. 19) (em-

phasis in original)

58. In a memorandum dated December 11, 1980,

John Raymond wrote to branch managers that Orkin was

willing to make further exceptions to the increase of an-

nual renewal fees for pre-1975 contracts. In part, he

wrote:

It is not our desire to stand in judgment of the mo-

tives and memories of our customers. While we

believe most of our customers were little concerned

with the modest price of the renewal at this earlier

time, we are willing to maintain the old renewal price

for customers who state that at the time of pur-

chase they relied on either a sales presentation or

they construed the specific wording of the contract

to provide that the renewal price would not be in-

creased. We believe we are going beyond the letter

as well as the spirit of the law in this matter and are

willing to make this commitment provided that this

exception to the general price increase is not

abused... .

A43

We are willing to make exceptions to give certain

customers the benefit of the doubt. While we intend

to be flexible in our evaluations, you should be alert

to any abuses, particularly where complaints from

customers exceed 1% of the affected customer base.

You should be sensitive to potential abuses and discuss

the matter with your District Manager. This ex-

ception program should be [29] administered fairly

and consistently in the interest of all our customers

as well as the company.

(Rollins Dep. pp. 125-28 and Dep. Ex. 23)

59. Attached to Mr. Raymond’s memorandum of De-

cember 11, 1980, were procedures for granting this excep-

tion to the increase of annual renewal fees. These pro-

cedures contained the following:

PROCEDURES FOR HANDLING - RENEWAL

PRICE INCREASE EXCEPTIONS

1. The company will continue to bill for the

renewal increase.

2. In the event of any complaints, the Branch

will attempt to explain and justify this increase to

our customers.

3. However, if a customer will not accept the

rationale for the increase, we will honor their position

and hold the renewal at the original rate, provided

the customer will represent in writing his understand-

ing at the time his or her contract was made. This

is an exception and should be granted to those cus-

tomers who bought our termite contract with the

understanding that the renewal fee was set and not

subject to change.

:

:

A44

4. In such cases, the Branch Manager will advise

the customer that their case will be reviewed as an

exception, and will be submitted to the District Man-

ager for consideration. Whether the inquiry is by

phone or b: letter, the attached Letter +1 should be

prepared b» the Branch (each letter to be neatly

typed on your Branch Letterhead and signed by the

Branch Manager) and sent to the customer. Please

note that this letter requires a response from the cus-

tomer stating that as a condition of sale, he or she

believed that the renewal fee was not subject to change.

Include a return envelope with your letter for the cus-

tomer’s convenience.

5. The Branch should forward all written cus-

tomer responses to the District Manager. The District

Manager should evaluate the reasonableness of the

customer’s position. Assuming the District Manager

determines that the customer’s position is correct, he

will notify the Branch that the renewal price will be

returned to the old amount. The Branch [30] will so

advise the customer of the decision to maintain the

old renewal price with attached Letter #2....

(Rollins Dep. Ex. 23 [at A00075, A00077]) (emphasis in

original)

The letters +1 and +2 referred to in the foregoing

were as follows:

Letter #1

Dear Customer:

Thank you for your recent inquiry regarding our

termite renewal price increase. We understand your

feelings in this matter and as indicated below, we are

A45

willing to make exceptions for the benefit of our cus-

tomers from the general price increase previously

announced. Before we discuss such exceptions, please

allow us the opportunity to further explain our position.

At Orkin, as everywhere else, inflation meets us at

each turn. Over the years we have increased employee

productivity and reduced expenses, yet the inflation

rate has far overshadowed our own internal efforts

in fighting inflation. In 1975, we clearly recognized

the total effects inflation brings. Beginning in 1975

our service contracts clearly explained that the re-

newal fee could increase at some time in the future.

Of course, this is directly related to the inflation spiral

and no one knows when it will stop.

Prior to 1975, and even as early as the late 1960’s, few

people had any concern for inflation as we do now.

In those times no one had automatic rate increase fac-

tored in their contracts. While our service contracts

prior to 1975 did not specifically mention price in-

creases, we believe that, following a reasonable term,

this increase is a fair and reasonable business practice.

We further had our legal staff review this point and

they believe we are on sound legal ground in requesting

a price increase.

Since the late 1960’s we have maintained the price

line. Now, and only as a last resort, we decided to

increase these accounts. However, the increased re-

newal will still not bring us even with inflation and

is well below our current renewal charge. We cer-

tainly want to keep your business, and believe this

increase is reasonable in the light of today’s economic

condition. [31]

A46

As indicated above, we are willing to make certain

exceptions. If (1) at the time you entered into your

contract with Orkin you were advised by our sales

representative that your renewal price could not be

increased at any time in the future or (2) at the time

of purchase you reached the same conclusion based

on your reading of the materials supplied to you,

Orkin will maintain for you the fixed renewal price.

We are willing to take our customers at their word

and are relying on their honesty. Kindly write and

advise us as to whether you relied on either a state-

ment by our sales representative or the contractual

materials supplied to the affect [sic] that your renewal

price would not be increased as a condition of entering

into the contract with Orkin. Please address your let-

ter to me. Your letters will receive prompt review

and decision. It is important that you notify us in

writing so that a request for exception can be evalu-

ated and processed.

As our customer, we want to keep you satisfied.

Please let us hear from you in this matter.

Sincerely,

Branch Manager

- (Rollins Dep. Ex. 23 [at A00079])

Letter #2

Dear Customer:

Your letter regarding your renewal price increase has

been carefully considered.

As we mentioned earlier, we fee] that our contract

gives Orkin the right to increase your renewal amount;

A47

however, we want to be fair. Because of the condi-

tions in your case, we are willing to make an excep-

tion.

Your satisfaction as a customer is our most important

concern, so we will maintain your renewal fee at the

original rate. Enclosed is a corrected renewal state-

ment for your payment. As soon as we receive your

payment we will submit a change request to reduce

your renewal fee to the original amount. in the

meantime, if you receive a renewal statement at the

higher amount, please disregard. [32]

We appreciate your business and we look forward to

continuing to serve you.

Sincerely,

Branch Manager

(Rollins Dep. Ex. 23 [at A00080]) (emphasis in original)

60. In a memorandum dated April 28, 1981, Linda

Morton, Orkin’s Manager of Policy and Procedure, wrote

Orkin’s branch, district and regional offices and stated,

in part:

The increase of termite renewals for our older cus-

tomers sold from January 1940 through December

1974 will end with the billing of our September

renewal customers in July 1981.

Until then we will still need to address the problem

of decreasing those customers who have a legitimate

argument for not wanting to accept a price increase

The procedure for decreasing termite renewals was

sent out by John Raymond - Orkin Operations -

December 11, 1980.

A48

The following procedure is a revision of that memo

so please read it carefully. It is intended to simplify

the process.

A. Please be sure to follow the procedure care-

fully in order to be sure that the customer’s account

is handled properly.

NOTE: This does not apply to contracts sold in

1975 or later. Beginning in 1975 our contract gave

us the right to increase after five years. Those

renewals are not to be decreased.

1. When the customer calls, determine the year

of completion. If it is before 1975, attempt to explain

and justify the increase to the customer.

2. If the customer strongly objects to the in-

crease on the grounds that they were told at the

time of sale that the renewal fee would never in-

crease, explain that you will need to send them a

letter from your Branch Manager and that you can

decrease the renewal fee upon receipt of a written

request from them.

(Raymond Dep. pp. 170-172 and Dep. Ex. 27: RIR 54,

pp. 32-33) [33]

The letter from the branch manager referred to in

~ point 2 above was identical to letter +1 (Rollins Dep.

Ex. 23 at A00079) set forth in F. 59, supra. (Compare

Raymond Dep. Ex. 27, letter +1 [at A05280], with letter

#1, Rollins Dep. Ex. 23 [at A00079], as set forth in F. 59)

61. In a memorandum dated March 2, 1981, R. M.

Russell, Vice-President of Government Relations for Orkin.

suggested to Gary Rollins that customers whose contracts

hieeneeeeeeenemneineeemenaatill

A49

were entered into in 1968 should no longer be sent no-

tices for increased annual renewal fees. In part, he

wrote:

As we are now primarily through our renewal in-

crease program, I think it might be to our advan-

tage to consider dropping 1968 contracts towards re-

newal increase for the remainder of the program.

This would give us some base to show our good

intent in any future litigation regarding this program.

Even if we do stop now, all months will have re-

ceived two or more notices. In my opinion, the

possible reduction in renewal collections would be

worthwhile towards our future negotiations and pos-

sible litigation.

(Russell Dep. pp. 3-4, 75-78 and Dep. Ex. 17; see also

Russell Dep. pp. 71-75 and Dep. Ex. 16)

62. From August 1981 through July 1982, Orkin

rolled back the increase of annual renewal fees of cus-

tomers who had entered into their pre-1975 contracts

in 1968. (Raymond Dep. pp. 180-184 and Dep. Ex. 32)

Customers were notified of the rollback by an insert

included in the renewal notice that was sent two months

prior to the anniversary month of their contracts. Cus-

tomers who had previously paid an increased rate were

given credit for the amount of the increase. (Raymond

Dep. Ex. 32) In part, the insert stated:

Your annual renewal fee was increased last year

for the first time since you contracted for Orkin’s

services in 1968. The justification for the increase

was provided at that time.

We have subsequently learned that a marketing

progratn may have been used in your locality in

A50

1968 which could have led you to believe that the

amount of your termite renewal premium would

never increase. We do not know whether you were

aware of this program at the time you contracted

for Orkin’s services. However, we at Orkin believe

that the simplest and fairest course is to maintain

your renewal premium at the amount initially de-

scribed in your contract. You are receiving with

the current invoice, a credit equal to the increase

[34] that was posted last year. Your next year’s

renewal will be at the original rate.

(Ibid.) The “marketing program” referred to in the

insert discussed above was the “Orkin 12” promotion

(Raymond Dep. p. 181), which was known to Orkin

management at the time the decision to increase the

annual renewal fees was made. (F. 45)

63. Approximately 15,832 customers had their an-

nual renewal fees returned to the level specified in their

contracts because of the Orkin 12 promotion. (RIR 29b)

64. By May 25, 1981, Orkin had received payments

of annual renewal fees of $1,257,629 in excess of the

sum of the amounts specified in pre-1975 contracts of

customers who paid their increased annual renewal fees.

(Raymond Dep. pp. 216-224, 232-236 and Dep. Exs. 43,

44, 41 [at A00889] [“3. $ INCREASE PAID THROUGH

5/25/81 UPDATE $1,257,629] )

65. By May 25, 1981, Orkin had received payments

of annual renewal fees of $113,615 in excess of the sum

of the amounts specified in pre-1975 contracts of cus-

tomers who entered into their contracts in 1968 and

who paid their annual renewal fee. (Raymond Dep. Ex.

A51

44 [at A00175}) As of November, 1981, approximately

170,000 customers, or 82.1%, of pre-1975 customers had

paid the increased price or the frozen price. Other sta-

tistics indicate that as high as 87% of such customers

had paid. (Rollins Dep. Ex. 46) During its fiscal year

ending on June 30, 1983, by June 20, 1983, Orkin had

received payments of annual renewal fees of $959,158

in excess of the sum of the amounts specified in pre-

1975 contracts of customers who paid their annual re-

newal fees. (CX 138P) Orkin has estimated its increased

renewal revenue through 1984 from its pre-1975 customers

to be $7,515,764. (CX 195B)

66. By August 1, 1984, Orkin had approximately

164,402 customers with pre-1975 contracts or pre-1975

guarantees. (RA 20) Approximately 142,902 customers

were paying increased fees as of this date (164,402 less

21,500). Orkin’s cancellation rate on its termite contracts

is normally 5.8% overall and 5.2% on contracts that have

been in force over five years. (RX 40A) Orkin contends

that its cancellation rate on its pre-1975 contracts following

its 1980 increase in their annual renewal fees was approx-

imately 5.0%. (RX 135S) However, this percentage is

calculated by using only a five month period of cancella-

tions whereas the denominator was the total of all renew-

als. The exhibit relied upon by Orkin shows that there

were 10,739 cancellations during a five-month period,

October, 1980 through February 1981. (RX 135S). This

would be equivalent to a cancellation rate in excess of 12%.

As of August 1, 1984, the actual cancellation rate of pre-

1975 customers was approximately 5% per year (207,000

customers as of August 1980 less 164,402 customers as of

August 1, 1984 equals 42,600 cancellations—42,600 divided

by 207,000 equals 205%). [35]

A52

67. By June of 1984, respondent had approximately

9700 customers with pre-1975 contracts or pre-1975 guar-

antees whose annual renewal fees had been rolled back

to the amount indicated in their contract or guarantee, not

including those customers who had entered into their pre-

1975 contracts in 1968. (See F. 58-60; Respondent’s Motion

for Access, pp. 1-5 [filed June 28, 1984]; Raymond Dep.

pp. 210-211, 105-108 and Dep. Exs. 19, 22) As of August

1984, a total of approximately 21,500 pre-1975 customers

had their annual renewal fees returned to the amount

specified in their contracts under Orkin’s “accommodation”’

programs. (Childs’ Aff. { 8)

68. After Orkin had raised the annual renewal fees

for pre-1975 contracts, Orkin considered making additional

increases in the annual renewal fees of pre-1975 contracts.

These latter increases did not occur. (Raymond Dep. pp.

187-192, 262-264 and Dep. Exs. 33, 34, 55; Rollins Dep. pp.

171-76 and Dep. Exs. 38, 39)

69. After Orkin had raised the annual renewal fees

for pre-1975 contracts, Gary Rollins asked John Raymond

to consider ways to convert pre-1975 customers to a new

contract that would permit Orkin to raise the renewal fees

again in the future. (Raymond Dep. pp. 239-240 and Dep.

Ex. 46; Rollins Dep. pp. 197-201 and Dep. Ex. 46)

70. Orkin has comprehensive guidelines and proce-

dures covering virtually every aspect and phase of its

termite control services business. (RIR 46) (Orkin’s guide-

lines and standards for the quality of services rendered

under its termite guarantees have not differed depending

on whether or not the consumer’s termite contract was a

pre-1975 contract. (RIR 46) Orkin has never considered

a plan or proposal to reduce the quality of services ren-

Sella ee mga

PB Ate Ltr S2We

ee ee ee ee eS ee er ae

A53

dered under its pre-1975-guarantees. (RIR 47; Rollins

Dep. pp. 72-73; Raymond Dep. p. 121)

71. Concerning the feasibility of a pre-1975 customer

switching to another termite control company for the same

guarantee as Orkin provided, Gary Rollins testified as

follows:

Do you have an opinion as to the feasibility of a pre-

1975 customer switching to another termite control

company and that company providing the same guar-

antee as Orkin for the annual fee stated in the cus-

tomer’s Orkin guarantee?

MR. STATON: The original annual fee?

MS. ALPHIN: The original annual fee stated in

the Orkin guarantee.

THE WITNESS: I would doubt that. [36]

BY MS. ALPHIN:

Q. You would doubt that a company would do

that for a customer; is that correct?

A. That’s right.

(Rollins Dep. p. 210)

72. According to the Consumer Price Index, between

1966 and 1980, the cumulative inflation rate was over

170%. (RX 686) Costs of providing termite protection

services rose constantly between 1966 and 1980. (Hrormada

Aff. { 6; Nolen Aff. [ 9) During the period June 30, 1975

to June 30, 1979, Orkin’s termite related costs increased

48.4%. (RX 45A, 46A, 48B, 650C; Rollins Dep. p. 51)

However, Orkin has continued to realize a profit on its

renewal business. (RX 650C) Based on the costs of pro-

A54

viding termité renewal service in 1984, if Orkin were re-

quired to roll back all its pre-1975 customers to their

initial annual renewal price, Orkin would experience an

average loss per pre-1975 account per year of $10.93. (RX

649) Based on the costs of providing termite renewal

service in 1984, even with the increased annual renewal

price, Orkin lost an average of $2.91 per pre-1975 contract.

(RX 649) If inflation continues and Orkin is prohibited

from increasing its annual renewal fees on pre-1975 con-

tracts, its losses on these accounts will continue to increase.

(Boudreaux Aff. {| 4) Orkin’s pre-1975 customers repre-

sent approximately one-third of its termite control services

customers, but account for only one-fourth of its termite

renewal revenues. These proportions will drop naturally

over the years through attrition. (RX 94C)

73. Officials of at least seventeen states have ques-

tioned the legality of Orkin’s increase of the annual

renewal fees for pre-1975 contracts and pre-1975 guaran-

tees. These states are Arkansas, Arizona, California,

Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana,

Maryland, Minnesota, Missouri, North Carolina, South Car-

olina, Texas, Virginia, and West Virginia. (RX 201A, 208B,

211A, 560, 579, 657A, 658, 659, 660A, 661A-E, 662A-C,

663A-C, 664, 665A-D, 666A-E, 667A-B, 668A-C, 669A-B,

670A-F; CX 200A, 203A-B, 228A-B, 248A-E, 388)

74. In a letter dated January 15, 1981, Roger W.

Giles, Assistant Attorney General of Arkansas (CX 200

A-B), wrote to Orkin:

The Arkansas State Plant Board has forwarded to

this office information relating to several complaints

against Orkin Exterminating Company as a result of

the company’s failure to comply with the terms of

A55

NE hn ae

Orkin’s Lifetime Guarantee. Several individuals have

complained to the State Plant Board that Orkin has

refused to accept the annual renewal fee stated in

the Lifetime Guarantee [37] Contract and that the

company has increased the annual fee, thereby

breaching the original agreement.

Se aa A ea i ad ial ap PC

In addition to these complaints, this office has also

received information concerning your attempt to in-

crease annual fees on Lifetime Guarantee Contracts

in North Carolina and the correspondence with the

North Carolina Attorney General’s Office. This office

is in agreement with their opinion that the Lifetime

Guarantee Contracts are valid, and that any contract

modification can only be accomplished with the con-

sent of both parties.

Therefore, this office must insist that the contracts

2 entered into with the residents of the State of Ar-

kansas be performed in accordance with their original

of this date in which Rollins Inc. and the Arkansas

State Plant Board agreed as follows:

| terms.

) (CX 200A)

In a letter dated March 9, 1981, Mr. Giles wrote

; to Orkin:

) This letter will confirm our phone conversation

1. Orkin Lifetime Guarantee contracts entered

into prior to 1975 which did not specifically state

that the annual renewal would increase will continue

to be serviced at the rate stated on the contract if

a representation was made to the purchaser at the

06 Egy

ee ee ee eens Jae J

i we

A56

time of sale that the annual renewal fee would not

be increased.

2. Any individual who did receive the repre-

sentation can continue to receive service from Orkin

at the same rate by furnishing Orkin with a signed

statement so stating.

The Arkansas State Plant Board and this office

will be advising everyone who has made an inquiry

or who makes an inquiry in the future of this under-

standing with your Company.

(RX 658)

75. Ina letter dated April 13, 1981, to Orkin, Annette

M. Lassalle, Staff Attorney, Louisiana Department of

Justice, stated, in part:

It is the opinion of this office that Orkin is bound

by the renewal fees as stipulated in each client’s

contract. Hence, if any client has paid [38] a fee

over that stipulated in his contract, he has overpaid

and is due a refund by Orkin.

At this time we ask that you review your rec-

ords and make the necessary adjustments or refunds

to Louisiana clients.

(CX 203A)

76. Enclosed with Ms. Lassalle’s letter of April 13,

1981, was a copy of Louisiana Attorney General’s Opin-

ion Number 81-03, which stated, in part:

The facts are as follows: Orkin has entered into a

number of individual contracts with customers pro-

viding pest control service on an annual basis. These

A57

contracts stipulate that they may be renewed yearly

for a renewal fee specified in each contract. Orkin

now seeks to increase the stated renewal fee on the

basis that their operating costs have increased. The

contracts in question have absolutely no provisions

for escalation of renewal fees.

Considering Louisiana Civil Code articles and case

law, it is the opinion of this office that Orkin is

bound by their stipulated contract renewal fee and

may not escalate that rate in contracts which do

not have a rate escalation clause.

(CX 203B)

77. The State of Louisiana has brought suit against

Orkin as a result of Orkin’s increasing the annual re-

newal fees of pre-1975 contracts. In part, the suit seeks

reinstatement of the annual renewal fees stated in the

contracts and refunds of annual renewal fees collected

by Orkin from customers whose fees were in excess of

those stated in their contracts. (CX 205A-Z16)

78. In a letter dated April 10, 1981, Jay Laurence

Lenrow, Assistant Attorney General of the State of Mary-

land, wrote to James M. Schneider, General Counsel of

Rollins (Schneider Dep. p. 4), about Orkin’s obligations

under its pre-1975 contracts. Mr. Lenrow wrote:

It is the opinion of this office that the contracts

used by Orkin create a duty on the part of Orkin

to renew its guaranty and inspect the home of any

person tendering the pre-established Annual Renewal

Fee.

A58

[39]

This letter shall serve as notice pursuant to Md.

Com. Law Code Ann. § 13-402 (1975) that the State

of Maryland is offering your client the opportunity

to conciliate this matter. Your failure to conciliate

will force this office to seek injunctive and other

relief pursuant to Md. Com. Law Code Ann. § 13-406

(1975).

(CX 211A-C)

In a letter dated May 18, 1981, John Henry Lewin,

Jr., of Venable, Baetjer and Howard in Baltimore, wrote

to Mr. Lenrow the following:

This will respond to your request for a statement

of position by our client, Rollins Exterminating Co.,

known here as Orkin. .

The jurisdiction of the Attorney General is limited

to those practices covered by the Consumer Protec-

tion Act, Md. Ann. Code, Com’l Law Art. § 13-101

et seq. This legislation was enacted in response to

the “mounting concern over the increase of deceptive

practices in connection with sales of merchandise

and services and the extension of credit.” Section

13-102(a). Further, the prohibited practices are de-

fined as the “sale . . . of any consumer goods or

consumer services:” and the “extension of consumer

.. eredit ... or the collection of consumer debts.”

Section 13-303. The unfair or deceptive trade prac-

tices, listed in some detail in § 13-301, enumerate

those practices which would wrongfully induce a

person to enter a contract—situations where, had the

consumer known what the seller meant or intended.

he would have had a different view of the deal.

Pe es OT

Et Rat tited si er

3

:

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:

,

A59

In the Orkin situation, however, there has been no

violation of the Act. There have been no unfair or

deceptive trade practices. Orkin fully intended to

provide exactly the services sold at the price stated

at the time of entering the contract. Orkin in no way

misled or deceived any customer. Both parties to each

contract had exactly the same view of the agreement—

annual service at a fixed price.

(CX 212A-C)

In a letter dated October 3, 1984, Roger C. Wolf, Spe-

cial Assistant Attorney General of the State of Maryland,

wrote to Mr. Christian Achstetter [apparently an Orkin

customer]: [40]

The Federal Trade Commission has brought an action

against Orkin and rather than duplicate efforts we

are waiting the results of their action.

(CX 410)

79. In a letter dated October 23, 1980, Rebecca R.

Bevacqua, Assistant Attorney General of the State of North

Carolina, wrote to Mr. Schneider of Orkin that:

The contract between Orkin and Mr. Schrimper is one

for a Lifetime Control and Repair Guaranty which

calls for annual reinspections upon payment of a set

fee. The contract is neither perpetual nor indefinite

in duration, being clearly limited by the term “Life-

time.” Thus, the general rules you cited regarding

contracts of indefinite duration are inapplicable.

With regard to the fundamental equities involved, you

have failed to take note of one very important con-

sideration; Orkin used the set annual inspection fee as

a key selling point for these pre-1974 contracts. The

A60

fact that they could continue to pay only $20 a year

was a material consideration justifiably relied on by

Mr. Schrimper and other pre-1974 customers when

they chose to contract with Orkin. We think a court

would find it highly inequitable for Orkin to now

claim that the contract does not mean what it led

customers to believe it meant at the time it was

signed.

We are not unsympathetic with the problems your

company faces as a result of inflation. However, the

fact that a party to a contract later discovers he made

a bad bargain has never been grounds for rescission

of the contract or unilateral changing of its terms.

Therefore, our position in this matter is that Orkin

cannot increase its renewal prices on pre-1974 con-

tracts unless the increase is agreed to by the customer.

(CX 218A-B)

In a letter dated December 9, 1980, the Office of the

North Carolina Attorney General wrote:

We agree that all pre-1974 [sic] customers who

(whether because of the wording of their contracts,

statements in other documents furnished to them by

Orkin, or statements made by Orkin personnel) relied

on the fact that their annual renewal fees [41] would

remain set and who objected to the increase would

be allowed to continue paying the renewal fee stipu-

lated in their contract.

(RX 667A-B)

In a letter dated April 13, 1981, Alan S. Hirsch, Assis-

tant Attorney General of the State of North Carolina.

—————————

A61

wrote to Jay Laurence Lenrow, Assistant Attorney Gen-

eral of the State of Maryland, which was carbon copied

to James Schneider, Rollins’ Genera] Counsel:

This is in response to your letter of April 8, concerning

Orkin Exterminating Company. Enclosed you will

find two letters, one dated October 23 and the other

December 9, 1980, concerning this matter. The first

letter indicates our position in regard to the legal justi-

fication of increasing Orkin contract rates. The sec-

ond letter indicates an enforcement decision on our

part not to pursue the matter in regard to those in-

dividuals that do not affirmatively object to the in-

crease in rates. That we have made this enforcement

decision in no way changes our view that Orkin is

probably required to live by the letter of those con-

tracts.

I spoke to Jim Schneider of Orkin today and reaf-

firmed this position. I also informed Mr. Schneider

that we in North Carolina reserved the right to re-

evaluate our enforcement decision should litigation

in other states indicate our legal opinion is correct

(CX 222, 351A-F)

In a letter dated April 14, 1981, James Schneider

wrote to Alan Hirsch:

Thank you very much for giving me the courtesy of

a telephone call yesterday concerning your communi-

cations with Mr. Lenrow of the Maryland Attorney

General's Office. Frankly. I was extremely upset

concerning Mr. Lenrow’s comments that I had advised

him that North Carolina had approved my legal inter-

pretation concerning Orkin’s pre-1975 contracts. As

A62

we discussed yesterday, this statement simply is not

the least bit accurate, and I would not be so foolish

as to misrepresent the same.

I am enclosing a copy of my letter to Mr. Lenrow

dated April 3, 1981 which sets forth our accommoda-

tion program which was decided upon in concept prior

to the written settlement with North [42] Carolina.

As you will observe from the next to last paragraph,

I am indicating that the modification has been accepted

as a basis for resolving the issue with North Carolina

as well as other jurisdictions. I am including a copy

of a typical letter utilized with various jurisdictions

to describe our modification program. I certainly hope

that you will believe me when I say that at no time

in the course of any communications, written or oral,

with the State of Maryland or any other jurisdiction

did I state that North Carolina or any other state had

accepted our opinion as to the duration or meaning of

Orkin’s contracts.

(CX 220A-B)

80. In a letter dated January 27, 1981, the Office

of Pima County (Arizona) Attorney, Consumer Protection-

Economic Crime Division, wrote.

As your letter indicates that Orkin will treat its

pre-1974 Arizona customers on the same basis as its

North Carolina customers pursuant to an agreement

with the Attorney General of the State of North

Carolina, the above-referenced matter is deemed to

have been settled in the public interest, and we will,

therefore, close our file.

(RX 659)

ee

A63

81. In a letter dated December 11, 1980, Phillip L.

Fairbanks, Assistant Attorney General of the State of

South Carolina, wrote Mr. Schneider that:

Simplv stated, I believe the contracts we are concerned

with are not perpetual. While the durational ele-

ment is not fixed in terms of a particular number of

years, it is clear that what the parties intended was a

| “lifetime guarantee,” the lifetime being that of the

home. This interpretation is borne out by explicit

language contained in various of the documents in-

volved. Given this conclusion, the case law relating

to the enforceability of perpetual contracts is inap-

posite.

eee eo ee 4.

On the basis of the foregoing considerations, the

position of this office is that Orkin’s unilateral altera-

tion of the price term in its Lifetime [43] Guarantee

Contracts violates the South Carolina Unfair Prac-

tices Act.

| (CX 228A-B)

| 82. In a letter dated Febrvary 24, 1981, George W.

Stokes, Assistant Attorney General of the State of West

Virginia, wrote Orkin that:

The Consumer Protection Division of the Attorney

General’s Office has under investigation your increase

in annual inspection renewal fees under your termite

agreements.

a eres AS

We have received complaints from different geo-

graphical areas of our State concerning your increase

in such fees. The following allegations have been

made against Orkin:

A64

On or about May 6, 1968, you executed a “Termite

Agreement” with one Mildred White, 1533 Smith

Street, Milton, West Virginia 25541. The property

was later acquired by Ernest R. Wheeler. The con- }

tract provided for “a nominal annual inspection fee

of only $17.00.” This fee was paid annually until the

year 1981, at which time you increased the fee to

$25.75.

On or about October 21, 1974, you executed a

termite agreement with Mr. Frank Ruble, 816 Mul-

berry, Elizabeth, West Virginia 26143, which pro-

vided for an annual renewal fee of $30.00. This fee

was paid each year. In the year 1981, you increased

this annual fee to $43.26.

On or about October 10, 1974, you executed a

termite agreement with Barry Wood, Post Office Box

53, Paw Paw, West Virginia 25434, which provided

for an annual renewal fee of $41.00. This fee was

paid until the year 1981. In the year 1981, you in-

creased the annual fee to $57.68.

ee ee ry

The above increases in annual renewal fees were

made unilaterally by you and contrary to the express

written contract you had with the consumers. The

law is well settled in the State of West Virginia that

a written contract is not subject to unilateral modifica-

tion.

The above allegations, if found to be credible, con-

stitute an unfair method of competition and a decep-

tive act and practice which is unlawful under [44] the

West Virginia Consumer Credit and Protection Act.

(CX 238A-B)

A65

On October 20, 1981, Orkin entered into an “Assurance

of Discontinuance” with the State of West Virginia which

provided, inter alia, that Orkin will not increase the annual

renewal fees of customers in West Virginia who (1) have

objected to the increase on the basis that salesmen repre-

sented to the customers at the time the contract was

executed that the annual renewal fee would not be in-

creased during the life of the premises covered by the con-

tract, and (2) all [objecting] customers who believed by

reason of the contract and supporting documents that the

annual renewal fee would not be increased for the life-

time of the premises covered by the contract. (RX 670

A-F)

83. In a letter dated December 30, 1980, the Depart-

ment of Health & Rehabilitative Services of the State of

Florida wrote the following to Dudley J. Lamy (carbon

copied to Orkin) concerning Mr. Lamy’s complaint against

Orkin:

This department takes the position that since your

subterranean termite treatment contract makes no

reference to any change in renewal fee, and contains

no contract termination date, the ORKIN company

cannot increase the fee. Chapter 10D-55.105(2) “...

the contract shall clearly set forth the following in-

formation:

. (i) The total maximum price to be charged for

treatment service, the exact annual renewal fees to be

charged under the contract, if any... .”

Chapter 10D-55.142(1)(b): “Each licensee shall com-

ply with the terms of each pest control contract it

ussues [sic].”

A66

Therefore, your renewal fee, for the life of the con- 2

tract, is $30.00, and cannot be raised as long as you

keep the contract is force.

By copy of this letter we are advising the ORKIN Ex-

terminating Company, Inc., that to raise renewal fees,

full disclosure of this intention must be included in

the contract at the time of its issuance.

(CX 388)

84. In a letter dated January 28, 1981, the Office of

the Attorney General of the State of Minnesota wrote to

Mrs. C. W. Tousley, the holder of an Orkin pre-1975 con-

tract: [45]

Fetch wy tn sce te ie

Orkin has offered to honor its fixed ‘life control’

price, if a customer sends Orkin a letter indicating |

that at the time their services were sold, the sales {

people represented the renewal price would not be j

increased. The contact person at Orkin is James

Schneider, General Counsel, P. O. Box 647, Atlanta,

Georgia 30301, telephone (404) 873-2355.

(RX 665D) (emphasis in original)

85. In a letter dated July 9, 1981, the Office of the

Attorney General of the State of Missouri wrote:

According to prior correspondence that our office

had with you, concerning a complaint registered by

Mr. and Mrs. Johnny E. Russell, it was our under-

standing that you would maintain the constant renewal

rate for those customers who indicated that they con-

tracted for Orkin’s services on the basis of a fixed

renewal price.

(RX 666B)

A67

86. Six states, Arkansas, Arizona, Minnesota, Mis-

souri, North Carolina, and West Virginia, have indicated

an acceptance of some form of accommodation for those

Orkin customers who have complained about the increase

in annual renewal fees on pre-1975 contracts to either

Orkin or to state officials. (RX 658, 659, 665D, 666A-E,

667A-B, 670A-F) The North Carolina settlement with

Orkin also was accepted by Arizona and Missouri. The

North Carolina settlement provided as follows:

(1) “Customers who objected to the increase’”’

includes those who registered a complaint with our

office, those who contacted the Rollins or Orkin offices

in Atlanta by phone or mail to object, those who

wrote or called one of the Orkin branch offices in

North Carolina, and those who refused to send the

amount listed on the renewal notice but mailed in a

check for the amount they had paid in the past and

which was set forth in their pre-1974 contract.

(2) Our office will furnish you with a current

list of all individuals who have complained to us, and

either you or the Customer Service Department in

Atlanta will contact them and resolve their complaints

forthwith.

(3) The Customer Service Department in At-

lanta has records showing what individuals registered

a complaint directly with the home office in Atlanta

{46] and will contact these persons regarding their

objections.

(4) The branch office managers in North Caro-

lina will be advised as to the agreed-upon resolution

and will contact those customers who registered their

objections at the local level.

A68

(5) Orkin will furnish some written assurance

to those customers whose renewal fees are to be held

at the price stated in their pre-1974 contracts that no

additional increase will be attempted.

(RX 667A-B)

II. CONCLUSIONS

A. Summary Of The Facts

(1) Description of Orkin and its Customer Contracts

and Guarantees

The complaint in this matter was issued on May 8,

1984. It charged that Orkin Exterminating Company,

Inc. (“Orkin”), in advertising, promoting, selling, and

performing its termite-control services to consumers,

agreed for the life of the consumer’s structure, to rein-

spect the structure annually and, if necessary, to either

retreat, or retreat and repair the structure, provided the

consumer paid a specified annual renewal fee. In con-

tradiction of these agreements, beginning in 1980 and

continuing to the present, Orkin has raised, or attempted

to raise, the agreed-upon annual renewal fees for its

termite-control services. (Complaint "{ 4, 5) These ac-

tions by Orkin are alleged to have caused substantial

and ongoing injury to Orkin’s customers that is not out-

weighed by countervailing benefits to consumers or com-

petition and is not reasonably avoidable by consumers.

As such, Orkin’s acts and practices are alleged to con-

stitute unfair acts or practices in or affecting commerce

in violation of Section 5 of the Federal Trade Commission

Act. (Complaint {{ 6, 7)

Orkin has denied these allegations in its answer to

the complaint filed June 18, 1984, and has asserted nu-

A69

merous defenses, including that the Commission lacks

subject matter jurisdiction over the complaint allegations,

that the acts and practices complained of have not caused

substantial and ongoing injury to Orkin’s customers, that

the alleged unlawful acts and practices have been en-

couraged, approved, and/or compelled by state and fed-

eral regulatory authorities and are therefore exempt from

the Federal Trade Commission Act, and that the con-

sumers [47] alleged to have been injured have recog-

nized, accepted, and acquiesced to the alleged unlawful

conduct under doctrines of waiver, estoppel, ratification.

accord and satisfaction, limitations and latches. Orkin

further contends that the relief proposed in the complaint

is inappropriate, not in the public interest, and is not

or would not be authorized by law.

Complaint counsel has now filed a motion for sum-

mary decision. Orkin has responded to complaint coun-

sel’s motion and has filed a motion for summary deci-

sion in its favor. Orkin also has submitted statements

of material fact which Orkin contends either directly

contravene complaint counsel’s findings of fact or raise

genuine issues of inference arid legal significance that

foreclose any entry of summary decision in favor of com-

plaint counsel.

To the extent that there are factual disputes in this

record, they relate to peripheral matters not necessary

to a determination of the material issues to be decided

in this matter. It is concluded, therefore, that there

is no genuine dispute as to any material fact in issue

and that it is appropriate to issue an initial decision

based on the record as it has been submitted by the

parties in their motions seeking summary decision.

A70

Orkin provides pest-control and exterminating ser-

vices throughout the United States, but mostly in the

Southeast. In 1980, Orkin served customers located in

47 states and the District of Columbia. (CX 142C) As

of September 1, 1980, Orkin operated approximately 294

branch offices and 44 district offices. (F. 2) Orkin is

stated to be the world’s largest termite and pest-control

company, and has admitted that the acts and practices

alleged in the complaint are in or affecting commerce

(F. 3, 4)

Orkin has entered into written agreements with its

customers concerning the rendering of services to destroy

or protect against termites, other wood-infesting orga-

nisms, moisture and wood decay. Under certain condi-

tions Orkin has issued guarantees of its services. Only

an officer of Orkin is authorized to change or vary the

written terms of the pre-printed contracts and guaran-

tees. (F. 8, 9, 10, 21) In general, prior to 1966, Orkin

used pre-printed form contracts, and offered termite guar-

antees at a fixed price for continued protection to the

treated property for a specified period which lasted from

five to fifteen years. On or about January 1, 1966, Orkin

began using the term “lifetime” in its termite contracts

and/or termite guarantees. Earl F. Geiger, Vice Chair-

man of the Board of Rollins, Inc.. who was Executive

Vice-President of Orkin from 1964 to January 1976, intro-

duced the “lifetime” guarantee concept to Orkin and

proposed its adoption. (F. 11) [48]

Termite guarantees issued by Orkin include (1) a

lifetime retreatment guarantee (LC Guarantee), (2) a

lifetime retreatment and repair guarantee (LR Guaran-

tee), (3) and a lifetime guarantee on pretreatment work

on new construction (PR Guarantee). (F. 13)

2 ee ee oe ee Cah:

A7l

The lifetime retreatment guarantee provides in part

that at no extra cost to the customer Orkin will apply

any necessary treatment to the premises if infestation

occurs during the duration of the guarantee. The life-

time retreatment and repair guarantee provides in part

that at no extra cost to the customer, Orkin will make

repairs (up to a stated dollar maximum) to the struc-

ture and its contents in order to remedy any new dam-

age caused by subterranean termites, provided that it

is established that the new damage occurred after the

initial treatment, and that at the time of discovery of

the new damage, the damaged areas are infested with

live subterranean termites. (F. 14, 15)

The lifetime guarantee on pretreatment work is the

same as the LR Guarantee, except that Orkin’s pretreat-

ment guarantee is for new construction and its LR Guar-

antee covers existing structures. (F.17) Generally, prior

to 1969, Orkin’s LR guarantees had a liability limitation

of $25,000. In 1969, Orkin adopted a policy of issuing LR

guarantees with a liability limitation of $100,000. (F. 16)

Orkin’s termite contracts and termite guarantees pro-

vide for annual fees to be paid in order to continue the

protection that is guaranteed. If the customer abides by

the contract, and pays Orkin the specified annual renewal

fee, the guarantee is to remain in effect. (F. 18) Orkin’s

termite contracts and termite guarantees, including those

entered into prior to February 1, 1975, that used the term

“lifetime”, had a “structural modification” clause providing

that in the event the premises were structurally modified,

altered or otherwise changed after the date of initia] treat-

ment, the agreement would terminate unless a prior writ-

ten agreement was entered into by the purchaser for Orkin

A72

to reinspect the premises, provide additional treatment,

and/or adjust the annual renewal fee. (F. 19) Before

February 1, 1975, Orkin’s termite contracts and termite

guarantees that included the term “lifetime” did not men-

tion adjustments or increases of the specified annual re-

newal fee necessary to continue the lifetime guarantees

issued with respect to those contracts, absent the treated

premises being structurally modified, altered, or otherwise

changed after the date fe initial treatment. (F. 20)

In approximately May of 1974, Orkin began revising

its termite contract form(s) by adding a term or provision

that provided for an increase of annual renewal fees that

did not depend on whether the treated premises were

structurally modified, altered or otherwise changed after

the date of the initial treatment. The revised termite con-

tract forms containing such a provision were first used

in each of Orkin’s sales districts on or about February 1,

1975. (F.24) [49]

Thus, Orkin’s contracts can be divided into three

general categories which are relevant to this proceeding.

Prior to 1966, Orkin utilized contracts and guarantees that

provided for a guarantee for a fixed term of years, five

to fifteen years, provided the customer paid the annual

renewal fee specified in the contract. From 1966 to Feb-

ruary 1, 1975, Orkin utilized the lifetime protection

guarantee which provided for lifetime protection for

the designated premises upon the payment by the customer

of a specified annual renewal fee. These contracts did not

provide for an increase in the annual renewal fee absent

modification or structural change in the designated prem-

ises. Subsequent to February 1975, Orkin utilized con-

tracts which provided that the specified annual renewal

tate ety

Sais De Sohne erage

A73

fee could be increased after a five-year period. (RX 40A)

This proceeding is concerned with those customer contracts

and guarantees entered into during the period 1966-Feb-

ruary 1, 1975 (“pre-1975 contracts” and “pre-1975 guaran-

tees”), and Orkin’s increase in the specified annual renewal

fees in those contracts commencing August, 1980. (See

discussion infra.)

(2) The Increase in Pre-1975 Annual

Renewal Fees

In 1980, Gary W. Rollins, then President of Orkin,

decided to increase the annual renewal fees of customers

holding pre-1975 contracts and pre-1975 guarantees above

the amount stated in the contracts and guarantees of those

customers. (F. 38) Prior to increasing the annual re-

newal fees on pre-1975 contracts, Orkin requested that

Arnall, Golden & Gregory, an Atlanta law firm, provide a

legal opinion as to whether such an increase was permitted

under the terms of the contracts. On or about December

13, 1978, Arnall, Golden & Gregory provided Orkin with

a written legal opinion that its pre-1975 contracts appear

to be of an indefinite duration and, as such, are terminable

after a reasonable period of time. (F. 39) James M.

Schneider, General Counsel of Rollins, Inc., reviewed the

opinion given by Arnall, Golden & Gregory, and confirmed

to management the conclusion reached therein. (F. 41)

Mr. Gary Rollins reviewed the legal opinions prior to mak-

ing his decision to increase the annual renewal fees for

pre-1975 contracts. (F. 39)

Between 1978 and 1980, Orkin undertook an extensive

expense reduction program before deciding, in February

1980, to increase the annual renewal fees on pre-1975 con-

tracts. Also, during February 1980, Orkin increased by

A774

40% the annual renewal fees for post-1975 customers whose

contracts contained an express provision permitting such

increases. (F. 42)

Prior to making his decision to increase the annual

renewal fees of customers holding pre-1975 contracts and

pre-1975 guarantees, Gary Rollins presented a synopsis of

issues (dated February 7, 1980) on the subject of the in-

crease to R. Randall [50] Rollins, who was then President

of Rollins, Inc. In part, the synopsis states:

Please find below and attached my analysis of the “pros

and cons” regarding raising the renewal amount of

our pre-1975 termite customers.

PROS

1. Potential income increase of $2,286,614 (#232,-

969 accounts valued at $6,017,406 x 40% increase less

5% cancellations)

CONS

1. A few customers advised by salesmen and

literature that renewal amount would be fixed.

2. State regulatory agencies (Pest Control, Con-

sumer Protection, etc.) could interpret our contract

in some cases to imply the renewal amount is fixed.

Those who obtain old proposal information will dis-

cover we put this in writing.

3. Our longer term employees might feel that

we are going back on our word.

4. There could be customer lawsuits and com-

plaints.

A75

OPTIONS

1. Leave as is.

2. Write customers and put on voluntary basis.

3. Meet with individual state regulatory and

consumer groups to obtain understanding and raise.

4. Raise and handle exceptions.

(F. 43) Gary Rollins’ recommendation to R. Randall

Rollins, with which R. Randall Rollins concurred, was

option 4 above, to raise the annual fees and handle the

exceptions. (F. 44)

Beginning in August, 1980, Orkin began sending no-

tices to approximately 207,000 customers holding pre-

1975 contracts or pre-1975 guarantees, that Orkin was

increasing the annual renewal fees over the amount spec-

ified in those customers’ contracts or guarantees. All

customers were notified of the increase well prior to

their respective renewal dates. The notice of the in-

crease of annual fees stated, in part: [51]

Dear Customer:

Through the past few years we have improved pro-

ductivity to absorb our increased costs of gasoline.

petroleum products, labor and increased government

regulations. However, these increased operating ex-

penses can no longer be totally absorbed while main-

taining the high quality of service you deserve.

Therefore, to maintain this quality protection, we

now find it necessary to increase your annual re-

newal fee to the amount indicated on the enclosed

Termite Renewal Invoice. We hope you understand

A76

we would not increase your renewal fee unless it

was absolutely necessary.

. o >

Sincerely,

/s/

Ron Kimbell

Director of Customer Service

(F. 46, 47) The annual renewal fees for pre-1975 con-

tracts were increased to a minimum of $25.00 or by 40%,

whichever was greater. (F. 50)

Orkin received communications from customers and

customers’ attorneys expressing their belief that Orkin

did not have the right to increase annual renewal fees

for pre-1975 contracts. Orkin has taken the position

when customers have complained to it concerning the

increase that Orkin had a right to increase the annual

renewal fee, and Orkin had a policy of returning pay-

ments of customers who paid the amount specified in

their contracts rather than the increased amount. (F.

51, 52)

Orkin used a form letter in responding to numerous

customers who inquired about the increase of the annual

renewal fees. The letter explained the rationale behind

the increase. In part, the form letter stated:

While our contracts prior to 1975 did not specifically

mention increases, we believe that following a rea-

sonable term of absorbing losses due to the impact

of inflation, this increase is both consistent with law

and reasonable business standards.

* * *

AT77

[52]

We appreciate your concern and hope that you now

understand our position and will submit your re-

newal payment to keep your coverage in force.

(F. 56) This form letter made no mention of exceptions

being made to the increase of the annual renewal fees.

(See F. 56)

(3) Exceptions to the Pre-1975 Annual Renewal

Fee Increase

During 1968, Orkin promoted its services for pro-

tection against termites in a promotion called “Orkin 12.”

The Orkin 12 promotion was advertised in a pamphlet,

on billboards, in magazines, and on radio and television.

Orkin spent approximately $1,157,000 advertising Orkin

12. (F. 27)

The pamphlet concerning the Orkin 12 promotion was

issued as point-of-sale material in presenting Orkin’s

services to its customers. The pamphlet contained the

following language as point 6 (hereinafter “point 6”):

LIFETIME GUARANTEE Orkin’s lifetime termite

protection plan includes annual reinspections and

retreating when necessary. This protects the prop-

erty against termite reinfestation for the life of the

structure provided the lifetime guarantee is renewed

annually. The yearly premium for this lifetime pro-

tection is very modest and never increases. In case

of a sale, the guarantee is transferable.

(emphasis in original) (F. 28)

The Orkin 12 promotion was used and advertised in

each of the following states plus the District of Columbia

A78

during 1968: Alabama, Arkansas, Arizona, California,

Colorado, Delaware, Florida, Georgia, Iowa, Illinois, Indi-

ana, Kansas, Kentucky, Louisiana, Maryland, Michigan,

Missouri, Mississippi, Nebraska, North Carolina, New Jer-

sey, New Mexico, Ohio, Oklahoma, Pennsylvania, South

Carolina, Tennessee, Texas, Virginia, Wisconsin, and West

Virginia. The Orkin 12 program was utilized in varying

degrees by Orkin’s branch offices and sales personnel.

(F. 29) Literature containing point 6 of the Orkin 12

promotion was an attachment to Gary Rollins’ synopsis to

R. Randall Rollins, discussed above. Thus, Gary Rollins

was aware of the Orkin 12 promotion at the time he

wrote his synopsis to R. Randall Rollins. (F. 45)

On August 13, 1980, John Raymond, Orkin’s Director

of Administrative Operations, wrote to Orkin’s branch

managers concerning the increase of annual renewal fees

for pre-1975 [53] contracts and the one exception to the

increase which customers could invoke. In part, he

wrote:

If a customer tells you that our pre-1975 contract

does not allow for an increase, you should explain

that prior to the inflation spiral, practically no one

had this provision in the contracts. Recent legal

rulings interpret this as meaning that the renewal

fee shall remain unchanged for a reasonable period

which we interpret to be no more than five years.

* * *

If the customer states they have sales literature that

specifically states there will not be an increase in

the renewal fee, you should ask them to read the

statement to you. Some customers sold between 1967

and 1968 were given a pamphlet that stated the

ee er ere er ee Te a

ee ee

EP ee ee ae

an oe

Oe ee ee eee Te ye ee ee ee

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A79

renewal fee would never increase. This statement

was in the “Orkin 12 Point Plan.” The statement,

point number 6 says:

6. Lifetime Guarantee. Orkin’s lifetime termite

protection plan includes annual reinspections and re-

treating when necessary. This protects the property

against termite reinfestation for the life of the struc-

ture provided the lifetime guarantee is renewed an-

nually. The yearly premium for this lifetime pro-

tection is very modest and never increases. In case

of a sale, the guarantee is transferable.

If any of your customers tell you they have a pam-

phlet in their possession that prohibits an increase

you should ask them to read to you the exact wording.

If the wording is not verbatum [sic] as stated in

“point 6” above they are, in fact, eligible for an

increase. If their material does have this statement,

and you confirm it, then tell the customer a com-

puter mistake was made and a corrected bill will

be sent. Ask them not to pay until a correct bill

is received.

(emphasis in original) (F. 57)

In a memorandum dated December 11, 1980, John

Raymond wrote to branch managers that Orkin was

willing to make a further exception to the increase of

annual renewal fees for pre-1975 contracts. In part, he

wrote: [54]

It is not our desire to stand in judgment of the mo-

tives and memories of our customers. While we

believe most of our customers were little concerned

with the modest price of the renewal at this earlier

A80

time, we are willing to maintain the old renewal

price for customers who state that at the time of :

purchase they relied on either a sales presentation

or they construed the specific wording of the con-

tract to provide that the renewal price would not

be increased. We believe we are going beyond the

letter as well as the spirit of the law in this matter

and are willing to make this commitment provided

that this exception to the general price increase is

not abused... .

* * *

We are willing to make exceptions to give certain

customers the benefit of the doubt. While we in-

tend to be flexible in our evaluations, you should

be alert to any abuses, particularly where complaints

from customers exceed 1% of the affected customer

base. You should be sensitive to potential abuses

and discuss the matter with your District Manager.

This exception program should be administered fairly

and consistently in the interest of all our customers

as well as the company.

(F. 58)

Attached to Mr. Raymond’s memorandum of Decem-

ber 11, 1980, were procedures for granting an exception

to the increase of annual renewal fees. The procedures,

in part, were:

PROCEDURES FOR HANDLING - RENEWAL

PRICE INCREASE EXCEPTIONS

1. The company will continue to bill for the

renewal increase.

A8l1

2. In the event of any complaints, the Branch

will attempt to explain and justify this increase to

our customers.

3. However, if a customer will not accept the

rationale for the increase, we will honor their posi-

tion and hold the renewal at the original rate, pro-

vided the customer will represent in writing his

understanding at the time his or her contract was

made. This is an exception and should be granted

to those customers who bought our termite contract

with [55] the understanding that the renewal fee

was set and not subject to change.

(emphasis in original) (F. 59)

In a memorandum dated April 28, 1981, Linda Mor-

ton, Orkin’s Manager of Policy and Procedure, wrote

Orkin’s branch, district and regional offices and stated,

in part:

The increase of termite renewals for our older cus-

tomers sold from January 1940 through December

1974 will end with the billing of our September

renewal customers in July 1981.

Until then we will still need to address the problem

of decreasing those customers who have a legitimate

argument for not wanting to accept a price increase.

The procedure for decreasing termite renewals was

sent out by John Raymond - Orkin Operations - De-

cember 11, 1980 [referred to above].

The following procedure is a revision of that memo

so please read it carefully. It is intended to simplify

the process.

A82

A. Please be sure to follow the procedure care-

fully in order to be sure that the customer’s account

is handled properly.

NOTE: This does not apply to contracts sold in

1975 or later. Beginning in 1975 our contract gave

us the right to increase after five years. Those re-

newals are not to be decreased. =

1. When the customer calls, determine the year

of completion. If it is before 1975, attempt to ex-

plain and justify the increase to the customer.

2. If the customer strongly objects to the in-

crease on the grounds that they were told at the

time of sale that the renewal fee would never in-

crease, explain that you will need to send them a

letter from your Branch Manager and that you can

decrease the renewal fee upon receipt of a written

request from them.

(F. 60) [56]

In a memorandum dated March 2, 1981, R. M. Russell,

Vice-President of Government Relations for Orkin, sug-

gested to Gary Rollins that customers whose contracts

were entered into in 1968 should no longer be sent

notices for increased annual renewal fees. In part, he

wrote:

As we are now primarily through our renewal in-

crease program, I think it might be to our advan-

tage to consider dropping 1968 contracts towards re-

newal increase for the remainder of the program.

This would give us some base to show our good

intent in any future litigation regarding this pro-

gram. Even if we do stop now, all months will have

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A83

received two or more notices. In my opinion, the

possible reduction in renewal collections would be

worthwhile towards our future negotiations and pos-

sible litigation.

(F. 61)

From August 1981 through July 1982, Orkin rolled

back the increase of annual renewal fees of all customers

who had entered into their pre-1975 contracts in 1968.

Customers were notified of the rollback by an insert in-

cluded in the renewal notice that was sent two months

prior to the anniversary month of their contracts. Cus-

tomers who had paid an increased rate during the pre-

vious year were given credit for the amount of the

increase. (F. 62) Customers who qualified under Orkin’s

further exception to the fee increase also had their annual

renewal fees rolled back. The record is silent as to

whether this latter group of customers received credit

for any increased fees they may have paid.

(4) Results of the Increase in Pre-1975 Annual

Renewal Fees

By May 25, 1981, Orkin had received payments of

annual renewal fees of $1,257,629 in excess of the sum

of the amounts specified in pre-1975 contracts of cus-

tomers who paid their increased annual renewal fees.

(F. 64) As of that date Orkin had received payments

of annual renewal fees of $113,615 in excess of the sum

of the amounts specified in pre-1975 contracts of cus-

tomers who entered into their contracts in 1968 and who

paid their annual renewal fee. As of November, 1981,

approximately 170,000 customers, or 82.1%, of pre-1975

customers had paid the increased price or the frozen

A84

price. Other statistics indicated that as high as 87% of

such customers had paid. During its fiscal year ending

on June 30, 1983, by June 20, 1983, Orkin had received

payments of annual renewal fees of $959,158 in excess

of the sum of the amounts specified in pre-1975 con-

tracts of customers who paid their annual fees. Through

1984, Orkin has estimated that it received $7,515,764 from

the increase in pre-1975 customers’ annual renewal fees.

(F. 65) [57]

Approximately 15,832 customers had their annual re-

newal fees returned to the level specified in their con-

tracts because of the Orkin 12 promotion. (F. 63) Ap-

proximately 5,700 other pre-1975 customers had their

annual renewal fees rolled back in accordance with

Orkin’s accommodation program. Thus, as of August,

1984, a total of approximately 21,500 pre-1975 customers

had their annual renewal fees rolled back to the original

renewal fee specified in their contracts. (F. 67)

By August 1, 1984, Orkin had approximately 164,402

customers with pre-1975 contracts and pre-1975 guaran-

tees, of which 142,908 were paying the increased fee.

(F. 66) Approximately 80% of the pre-1975 customers

were making annual renewal fee payments as of Au-

gust 1, 1984. Orkin’s cancellation rate on its termite

contracts is normally 5.8% overall and 5.2% on con-

tracts that have been in force over five years. (RX 40A)

Orkin had cancellations on its pre-1975 contracts fol-

lowing its 1980 annual renewal fee increase of 10,739

through the renewal months of October 1980 through

February 1981. (RX 135S) Extrapolated over the entire

year would give Orkin a cancellation rate on pre-1975

contracts in excess of 12% during this first year of the

A85

fee increase. However, over a four-year period, 1981-

1984, the cancellation rate approximated 5% per year.

(F. 66)

According to the Consumer Price Index, between

1966 and 1980, the cumulative inflation rate was over

170%. (RX 686) Costs of providing termite protection

services rose constantly between 1966 and 1980. During

the period June 30, 1975 to June 30, 1979, Orkin’s ter-

mite renewal costs increased 48.4%. Based on the costs

of providing termite renewal service in 1984, if Orkin

were required to roll back all its pre-1975 customers to

their initial annual renewal fee, Orkin would experience

an average loss per pre-1975 account per year of $10.93.

Based on the costs of providing termite renewal service

in 1984, even with the increased annual renewal fee,

Orkin lost an average of $2.91 per pre-1975 contract.

If inflation continues and Orkin is prohibited from in-

creasing its annual renewal fees on pre-1975 contracts,

its losses per pre-1975 customer will continue to increase.

Orkin’s pre-1975 customers represent approximately one-

third of its termite control services customers, but ac-

count for only one-fourth of its termite renewal revenues.

This proportion will drop naturally over the years through

normal attrition. (F. 72)

B. Orkin’s Contract Terms

Commencing in 1966 and continuing through February

1, 1975. Orkin adopted a lifetime guarantee plan in con-

nection with its sales of termite control services. The

guarantee provided in the contracts would remain in effect

for the lifetime of the treated premises so long as the

customer paid a specified annual [58] renewal fee. These

A86

lifetime guarantees were designed to offer consumers addi-

tional services over existing contracts which limited the

guarantee to terms of 5 to 15 years if the customer paid

the annual renewal fee. (F. 12) These “pre-1975 con-

tracts” offered lifetime guarantees and were silent as to

any increase in annual renewal fees, with one exception.

If the treated premises were modified or structurally

changed, the contract would terminate unless a prior writ-

ten agreement were entered into providing for a reinspec-

tion of the premises by Orkin and an adjustment in the

annual renewal fee.

Numerous copies of Orkin’s contracts are in the record.

The terms and conditions of several of these contracts have

been set forth in the Findings of Fact. (See F. 22) Ex-

amples of these terms and conditions include:

CX 3, a contract dated March 23, 1968, offers a

“Lifetime Control and Repair (LR)” guarantee, and

has the following statement:

ORKIN CONTINUOUS PROTECTION

GUARANTY

Under Orkin’s Continuous Protection Plan, the above

named property will be reinspected in November 1968

upon prompt payment of $18.00 (plus tax where

applicable $........ ), and annually thereafter in Novem-

ber upon payment of-$18.00 (plus tax where applicable

Peenctens ). beginning in 1969.

RX 571A, a contract dated March 11, 1971, offers

a “Lifetime Control (LC)” guarantee, and has the fol-

lowing statement:

i

;

|

i

|

A87

ORKIN CONTINUOUS PROTECTION

GUARANTY

Under Orkin’s Continuous Protection Plan, the above

named property will be reinspected in Mar. 72 upon

payment of Paid (plus tax where applicable $........ ),

and annually thereafter in Mar. upon payment of $35.00

(plus tax where applicable $........ ) beginning in 1974.

CX 414A, a contract dated February 5, 1972, offers

a “Lifetime Control and Repair (LR)” guarantee, and

has the following statement:

ORKIN CONTINUOUS PROTECTION

GUARANTY

Orkin’s Continuous Protection Guaranty will provide

protection for the above named property including

Annual Reinspections upon payment of the initial

charges and an Annual Renewal Payment of $37.00

starting February 1973 and each February thereafter.

[59]

(See also CX 421A, [contract dated October 1972]; CX

439A [contract dated May 1972]; RX 562A [contract dated

October 1971]; all which have terms identical to those of

CX 414A, set forth above.)

CX 205W. a contract dated July 3, 1974, offers a

“Lifetime Control (LC)” guarantee, and has the following

provision:

ORKIN CONTINUOUS PROTECTION

GUARANTEE

The guarantee checked above will be issued to the

buyer upon completion of initial treatment. The Guar-

antee will cover the above named premises and will be

A88

subject to the General Terms and Conditions on the

reverse side hereof. Its coverage, including annual

reinspection, will be effective for a period of 2 years

upon payment of the initial charges and thereafter for

a period of LIFE years, so long as renewal payments

of $20 are made annually.

(The italicized words were handwritten. )

The only logical interpretation of this plain language in

the Orkin “pre-1975” contracts is that Orkin has contracted

to provide lifetime protection for the treated premises for

a fixed annual renewal fee. As long as the customer

paid the specified annual renewal fee, the guarantee would

continue, absent modification or structural changes in the

premises.* The words [60] used in the contracts are words

2. Ron Kimbell, Director of Rollins Customer Service, in a

letter dated August 11, 1980, wrote to Gary Rollins concerning

customer complaints about the annual renewal fee increase:

Several of the customers’ phone calls and letters implied

some things that caused me to review the contracts used

from 1968 to present.

After reviewing these contracts (not the guarantees) I have

concluded that the pre-1975 increase is more questionable

than ever. Several of the statements are leaning more to-

wards the implication of no increase ever, than a possible

increase at a later date.

(F. 53)

James M. Schneider, Rollins General Counsel, testified on

February 8, 1985, that during the fall of 1978 he was shown

an Orkin contract and asked whether there was a basis for

increasing the renewal price. His reaction was:

Well, I looked at the contract, and I recall that my reaction

was the reaction that—or my initial reaction was that of most

people that reviewed the contract, I didn’t see offhand a basis

for increasing the prices. The provision concerning the renewal

prices appeared to be of indefinite duration using words like

“hereafter” or “thereafter,” and my instant or immediate re-

— was there simply was not a basis for increasing the prices.

(F. 55)

a ae

A89

that Orkin itself originated, and they must be given their

customary and usual meaning, unless it is shown that the

parties used them in a different sense. 17A C.J.S., Con-

tracts Section 301. The contracts use ordinary English

words, not technical or scientific words, and it is not

necessary to have extrinsic evidence as to their meaning.

Restatement (Second) Contracts, 1979, Section 212, Com-

ment d. The interpretation and construction of contracts

or agreements is within the province of the administrative

law judge and the Commission. See Amrep Corp., 102

F.T.C. 1362, 1663-64 (1983); Horizon Corp., 97 F.T.C. 464,

842-846 (1981).

Respondent Orkin has admitted that the term “life-

time” as used in its contracts and guarantees is for the

lifetime of the treated premises. It is admitted that the

contracts contain a specified annual renewal fee in order

to maintain the lifetime guarantee in effect, and that there

is no provision for an increase in the annual renewal fee.

absent structural modification or change. Thus, the Orkin

contracts provide a lifetime guarantee at a set annual re-

newal fee. The contracts are neither indefinite nor per-

petual, being clearly limited by the term “lifetime.”

Orkin contends that the term “lifetime,” as used in

its pre-1975 contracts, does not refer to the time that the

annual renewal fee will be maintained at any particular

level. (Resp. Brief, p. 43) By this argument Orkin is

attempting to separate the analysis to be given the contract.

The contract must be interpreted as a whole; it offers

lifetime protection at a stated annual fee. See Restate-

ment (Second) of Contracts Section 202(2); Holmgren v.

Utah-Idaho Sugar Co., 582 P.2d 856, 860-61 (Utah 1978).

Orkin also argues that no one at Orkin who participated

in the decision to offer a “lifetime” guarantee on its pre-

A90

1975 contracts intended that the initially stated annual

renewal fee would never be increased for the lifetime of

the contracts (Resp. [61] F. 13, 14),* that its sales per-

sonnel were never instructed by anyone at Orkin that the

annual renewal fees on its pre-1975 contracts were fixed,

that they were never instructed to make such representa-

tions to customers, and that they never made such repre-

sentations to customers. (Resp. F. 13, 14, 29, 30)

The interpretation to be given Orkin’s contracts raises

a question of law, not fact. While the plain language of

the contracts does not require extrinsic evidence of the

intention of the parties to the contract, the record presents

undisputed evidence of Orkin’s interpretation of its con-

tracts at the time they were being utilized.

The Orkin 12 promotion is compelling evidence that

Orkin intended the contracts to provide for a lifetime guar-

antee at a fixed annual renewal fee. The Orkin 12 ad-

vertising campaign was directed at a lifetime fixed annual

renewal fee. The point-of-sale pamphlet stated:

LIFETIME GUARANTEE. Orkin’s lifetime termite

protection plan includes annual reinspections and re-

treating when necessary. This protects the property

against termite reinfestation for the life of the struc-

ture provided the lifetime guarantee is renewed

annually. The yearly premium for this lifetime pro-

tection is very modest and never increases. In case

of a sale, the guarantee is transferable.

(Kimbell Dep. Ex. 9; Raymond Dep. Ex. 6) (emphasis

in original )

3. “[{T]he intention of a party that is relevant to formula-

tion of a contract is the intention manifested by him rather

than any different undisclosed intention.” Restatement (Second)

of Contracts Section 200 Comment B.

= oe Rtas ee that?

A91

Orkin attempted to implement uniform sales tech-

niques for its sales people. (Raymond Dep. pp. 26-41 and

Ex. 1-5) It was Orkin’s company policy that new sales-

men should be given “Termite Sales Training Lessons

1-6." (Raymond Dep. p. 3? and Ex. 4) Termite Sales

Training Lesson #4 contained the following:

HOW DOES THE CUSTOMER BENEFIT FROM

ORKIN’S SUBTERRANEAN TERMITE

TREATMENT?

A. They receive a lifetime guarantee protection

which is non-cancellable by Orkin and renewable

by customer’s option. [62]

B. Their cost of the renewal remains the same so

long as renewal payments are made annually.

* * *

E. The guarantee is transferable if they sell their

home.

(Raymond Dep. pp. 39-40 and Dep. Ex. 5) Termite Sales

Training Lesson #5 also instructed branch salesmen that

“(y)ou should always figure the price for Orkin Service

by the Termite Pricing Schedule.” (Raymond Dep. Ex.

5) Two pricing schedules to be used by Orkin salesmen

in pricing annual renewal fees have the following state-

ment:

Important - You are selling a non-cancelable, life-

time guarantee. (SX 384B, 385C) (emphasis in orig-

inals)

4. “Termite Sales Training Lessons 1-6” apparently were

in use as late as 1973. (See F. 35)

A92

These pricing schedules have revision dates of October,

1971, and May, 1973.

Form letters issued by Orkin to customers reflect

Orkin’s interpretation of its contracts and guarantees, and

the representations made to consumers. CX 205U is a

form letter dated April 23, 1967, issued to a customer lo-

cated in New Orleans, Louisiana. RX 30 is a form letter

dated January 3, 1970, issued to a customer located in

Tucson, Arizona. RX 31 is a form letter dated September

26, 1968, issued to a customer located in Cayce, South

Carolina. RX 561F is a form letter dated October 27, 1971,

issued to a customer located in Summerville, South Caro-

lina. RX 581F is a form letter dated March 1, 1971, issued

to a customer located in Bethesda, Maryland. RX 30 has

a form revision date of February 1969; RX 561F has a

form revision date of January 1970. These form letters

state, in part:

As the owner of an Orkin-treated building, you may

continue protection from year to year thus assuring

virtually lifetime protection against reinfestation. . .

* > *

The cost of Orkin’s Lifetime Guarantee is modest - a

nominal annual inspection fee of only $31.00 relieves

you of all further termite worries.

(RX 30, see also CX 205U, RX 31, 561F, 581F; F. 23)

Significantly, when Gary Rollins made his recom-

mendation to R. Randall Rollins to increase the annual

renewal fees for all pre-1975 contracts, he specifically noted

that “a few customers’ were advised by salesmen and

literature “that the renewal amount would be fixed.” He

stated that “those who obtain old proposals [63] informa-

A93

tion will discover we put this in writing.” He also stated

that “our longer term employees might feel that we are

going back on our word.” (F. 43)

Based on the plain language of the Orkin pre-1975

contracts and the undisputed evidence set forth above,

it is concluded that the annual renewal fees were fixed

for the lifetime of the treated premises, that Orkin in-

tended that the annual renewal fees be fixed, and that

such representations were made to customers through

advertising and by sales representatives. This conclusion

is buttressed by the fact that Orkin rolled back the annual

renewal fee increases for all 1968 customers based on the

Orkin 12 promotion. (F. 62) Another 5700 pre-1975 cus-

tomers convinced Orkin to roll back their annual renewal

fee increase based on their understanding of the contracts

and the representations made by sales representatives.

(F. 67) Testimony also has confirmed that customers

believed, or were told, that the annual renewal fee was

fixed. (See Bourgeois Dep. p. 23; Edwards Dep. p. 30;

Landry Dep. p. 63; Hoffman Dep. p. 29; Thompson Dep.

pp. 20-21; Terrebonne Dep. pp. 19-20.)

Orkin’s contention that the pre-1975 contracts are of

an indefinite duration and terminable after a reasonable

time (Resp. Brief, p. 45) is unpersuasive. Orkin’s con-

tracts must be read in their entirety to determine if there

is any ambiguity. The contracts speak in terms of the

treated property. The type of guarantee to be issued is

“Lifetime.” The contracts provide that:

ORKIN CONTINUOUS PROTECTION GUARANTY

Under Orkin’s continuous Protection Plan, the above

named property will be inspected in Nov. 68 upon

A94

payment of $................ (plus tax where applicable

Rete. ), and annually thereafter in Nov., upon

payment of $15.00 (plus tax where applicable $........ ),

beginning in 1969.

(CX 429A)

The contract also states:

The Guaranty checked above |Lifetime Control and

Repair (LR)] will be issued and delivered to the pur-

chaser upon completion of initial treatment. Guaranty

will be effective so long as payment is made in ac-

cordance with the Terms and Conditions of this Service

Order.

(CX 429A)

Under the language of the contracts, quote sic above,

the duration of the guarantee is fixed; it is the lifetime

of the treated property. Orkin, one party to the rel-

evant contracts, [64] has admitted that the lifetime of

the treated property is the interpretation to be given

the duration of its contracts (see Resp. F. 6, 7), and

complaint counsel agrees with this interpretation. The

Irfetime guarantee is to continue ‘so long as payment

is made in accordance with the Terms and Conditions’’

of the contract.

Words which fix an ascertainable fact or event, by

which the term of a contract’s duration can be deter-

mined, make the contract definite and certain in that

particular.” 17 Am. Jur. 2d, Contracts Section 80 The

5. To the extent there is any ambiguity in the meaning of

the contracts, the ambiguity must be resolved against Orkin,

who prepared the form contracts. -Restatement (Second) Con-

(Continued on following page)

A95

payment of an annual renewal fee is a condition precedent

t» continuation of the contract. Payment of the annual

fee obligates Orkin to perform according to the terms

of the contract, which is to provide lifetime protection

against termite infestation to the designated property.

This is not only the interpretation which Orkin gives

its contracts, but it is obviously the manifest intent of

the parties to the contracts. Any interpretation of the

term “lifetime” to be anything less than the lifetime

of the treated property would be an injustice to the plain

meaning of the word and the intent of the parties ex-

pressed within the four corners of the contract.

The mere fact that an obligation under a contract

may continue for a very long time is no reason in itself

for declaring the contract to exist in perpetuity or for

giving it a construction which would do violence to the

expressed intent of the parties. Where it appears that

the parties did in fact intend that the obligation ter-

minate at an ascertainable time, the courts, in effect,

will supply the missing clause and construe the contract

accordingly. Warner-Lambert Pharm. Co. v. John J.

Reynolds, Inc., 178 F.Supp. 655, 661 (S.D.N.Y. 1959),

aff'd per curiam 280 F.2d 197 (2nd Cir. 1960) The

lifetime of the treated structure is sufficiently definite

to be enforceable.

Footnote continued-—

tracts Section 206; A. Corbin, Corbin on Contracts, 527 (One

Volume Edition 1952). This is especially true in the case

of Orkin, which had earlier utilized contracts which did pro-

vide for a definite number of years—five to fifteen—for its

guarantee to continue. (F. 11) Adopting the term “Lifetime”

and omitting the definite number of years previously used in its

contracts, indicates Orkin’s intentions were to offer a lifetime

guarantee.

A96

It is concluded that the Orkin contracts can be re-

newed annually at the option of the owner of the treated

premises for the life of the treated premises upon pay-

ment of the fixed annual renewal fee stated in the con-

tracts. [65]

C. Orkin’s Acts and Practices Violate Section 5

(1) Breach of Contract Can Constitute a Violation

of Section 5

Orkin asserts that a non-deceptive breach of contract

does not violate Section 5 of the FTC Act and that this

proceeding constitutes the first attempt by the Commis-

sion to apply Section 5 to such a practice.® This un-

precedented attempt to extend the scope of Section 5 is

wholly unauthorized and improper, according to Orkin.

Orkin relies on several decisions involving interpreta-

tions of “little FTC Acts” by the courts; namely, United

Roasters, Inc. v. Colgate-Palmolive Co., 649 F.2d 985 (4th

Cir. 1981); Stearns v. Genrad Inc., 1984-2 Trade Cas.

{ 66,294 at 67,266, 67,270; CF Industries, Inc. v. Conti-

nental Gas Pipe Line Corp., 448 F.Supp. 475, 485 (W.D.

N.C. 1978); Coble v. Richardson Corp. of Greensboro,

322 S.E.2d 817 (N.C.App. 1984), interpreting the North

Carolina Unfair Trade Practice Act, N.C. Gen. Stat. Sec-

tion 75-1.1(a) (1981); and Pepsi-Cola Metropolitan Bot-

6. There have been numerous Commission proceedings

where breach of contract has been held to be unfair, but usually

in the context of other challenged practices. See Jay Norris

Corp., 91 F.T.C. 751, 848 (1978), aff'd, 598 F.2d 1244 (2d Cir.

1979), cert. denied, 444 U.S. 980 (1979) (failure to consistently

meet guarantee claims of prompt delivery as well as money

back guarantees); Skylark Originals, Inc., 80 F.T.C. 337, 350

(1972), aff'd, 475 F.2d 1396 (3rd Cir. 1973) (failure to promptly

honor money back guarantee as represented in advertisements

and catalogs).

A97

tling Co. v. Checkers, Inc., No. 83-1422 (1st Cir. Jan. 28,

1985), interpreting the Massachusetts statute, Mass. Gen.

Laws ch. 93A.

The North Carolina Unfair Trade Practice Act tracks

the language of Section 5 of the FTC Act, and the North

Carolina courts look to the decisions of the Commission

and the federal courts under Section 5 in interpreting

the North Carolina statute. The Massachusetts statute

provides that the courts in construing the state statute

are to be guided by the decisions of the Federal Trade

Commission and the federal courts in construing the FTC

Act. Mass. Gen. Laws ch 93A Section 2(b) However,

the reverse is not true, the Commission does not look

to the interpretation of state statutes in interpreting its

organic Act. Indeed, the Commission can find a practice

unfair even where it is authorized under state law.

Spiegel, Inc. v. FEC, 540 F.2d 287, 292 (7th Cir. 1976).

In Peerless Products v. FTC, 284 F.2d 825, 827 (7th Cir.

1960), cert. denied, 365 U.S. 843 (1961), the court held:

Unless Congress specifically withdraws authority in

particular areas, the Commission, upon its general

grant of authority under 15 U.S.C.A. § 45(a) (6),

[66] can restrain unfair business practices in inter-

state commerce even if the activities or industries

have been the subject of legislation by a state or

even if the intrastate conduct is authorized by state

law.

The North Carolina courts, the Massachusetts courts.

and federal courts reviewing cases under the “little FTC”

statutes, have held that mere breaches of contract, with-

out more, do not violate the respective state statutes.

In State ex rel. Edminsten v. J.C. Penney Co., 292 N.C.

—_

A98

311, 233 S.E.2d 895 (1977), the North Carolina Supreme

Court held that the North Carolina statute is directed

only at the sale of products, and the debt collection

practices which were challenged in the proceeding fol-

lowed a sale and were not part of a sale, and not within

the statute.’ In a later case, Johnson v. Phoenix Mutual

Life Insurance Co., 300 N.C. 247, 266 S.E.2d 610 (1980),

the court broadened its interpretation of the statute to

include a contract between a mortgage broker and a

borrower. In Marshall v. Miller, 302 N.C. 539, 276 S.E.2d

397 (1981), the court repeatedly described the statute as

a protection for consumers.

In Coble v. Richardson Corp. of Greensboro, supra, a

purchaser brought suit against a real estate development

company for damages resulting from breach of warranty

and unfair and deceptive trade practices in connection

with the sale of a single-family residence. The purchaser

was awarded compensatory damages, but the North Car-

olina Court of Appeals refused to award treble damages

under the North Carolina Unfair Trade Practice Act. The

court, in rejecting a claim of unfairness, used language

somewhat similar to the language of the Commission

Statement of Policy on the Scope of the Consumer Un-

fairness Jurisdiction, letter to Senators Wendell H. Ford

and John C. Danforth, dated December 17, 1980. The

court, in Coble, stated:

Although unfair conduct that is neither deceptive nor

fraudulent may constitute an unfair trade practice, the

evidence at bar did not rise to the level of unfairness

as that concept has been defined by our courts. “A

7. There was a strong dissent in the case stating that the

majority decision read ‘‘unfair’’ out of the statute.

Agg

practice is unfair when it offends established public

policy as well as when the practice is immoral, un-

ethical, oppressive, unscrupulous, or substantially in-

jurious to consumers.” Johnson v. Insurance Co., 300

N.C. 247, 263, 266 S.E.2d 610, 621 (1980). “[A] party

is guilty of an unfair act or practice when it engages

in conduct that amounts to an inequitable assertion of

its power or position.” Libby Hill Seafood Restaurants,

Inc. v. Owens, 62 [67] N.C.App. 695, 700, 303 S.E.2d

565, 569, cert. denied, 309 N.C. 321, 307 S.E.2d 164

(1983).

The case before us involves a breach of contract

based on written warranties and oral representations

that were essentially restatements of what defendant

was already bound to do under the warranty. There

is nothing so oppressive or overreaching about defen-

dant’s behavior in breaching the contract that would

transform the case into one for an unfair trade prac-

tice.

The federal courts give credence to the North Carolina

courts’ interpretation of their own statute. In CF In-

dustries v. Transcontinental Gas Pipe Line Corp., 448

F.Supp. 475 (W.D.N.C. 1978), the district court considered

the J.C. Penney decision, referenced the dissent in the

case, and concluded that under J.C. Penney, the statute

provided a remedy where a contract is obtained as a result

of a violation of the statute, but no remedy where the

violation is unrelated to the contract’s formation. The

court stated, in respect to the breach of contract:

Whatever may be the case generally, the court con-

cluded that on the mere allegation of deliberate or in-

tentional refusal to procure and deliver natural gas,

A100

without any suggestion of deception or any claim

of injury to competition, plaintiffs have not stated

a claim under [the N.C. “little FTC Act”]. 448 F.

Supp. at 485

In United Roasters v. Colgate-Palmolive Co., 649 F.2d

985 (4th Cir. 1981), the Fourth Circuit Court of Appeals

considered an intentional breach of a contract, and con-

cluded:

Remaining to be determined, however, is whether

Colgate’s acts were unfair or deceptive within the

meaning of § 75-1.1. It is clear that the statute en-

compasses” such things as misrepresentation and a

wide variety of shady practices sometimes associated

with the marketing of consumer goods and services.

Whatever the limit of their reach, however, the words

must mean something more than an ordinary contract

breach. :

In a sense, unfairness inheres in every breach of

contract when one of the contracting parties is denied

the advantage for which he contracted but this is why

remedial damages are awarded on contract claims.

If such an award is to be trebled, the North Carolina

legislature must have intended that substantial ag-

gravating circumstances be present.

* * *

[68]

The contract here was carefully negotiated and drawn

by sophisticated parties. There is no hint of any un-

fairness to either party before Colgate’s cessation of

performance. It then broke the contract, but we can-

not conclude that unfairness inhered in the circum-

Al0l

stances of the breach within the meaning of the statute

simply because the breach was intentional and not

promptly disclosed.

In a very recent decision, the Fourth Circuit, in

Stearns v. Genrad, Inc., 1984-2 Trade Cas. {| 66,294 at

67,266 (4th Cir. Nov. 20, 1984), held:

The statute has been construed as directed against

deception in connection with the sale of goods. Id.

at 67,269

Even if there had been an intentional breach of the

distribution contract by Genrad, that would not have

been a violation of the North Carolina statute. Id. at

67,270

Thus, the present interpretation of the North Caro-

lina “little FTC Act” is that an intentional breach of a

contract, urithout more, is not actionable under that stat-

ute.” However, the interpretation of the North Carolina

statute offers little guidance as to the interpretation to

be given the FTC Act. The North Carolina statute differs

in a substantial way from the FTC Act; the North Carolina

statute grants standing to sue under Section 75-1.1 to

individuals, firms and corporations, and also provides for

treble damages where a violation has been found. Marshall

v. Miller, 302 N.C. 539, 276 S.E.2d 397, 402 (1981). In-

terpretations of the two statutes differ substantially; for

8. Massachusetts courts have reached similar conclusions.

Pepsi-Cola Metropolitan Bottling Co. v. Checkers, Inc., No. 83-

1422 (lst Cir. Jan. 28, 1985, slip op. at 10) These state prece-

dents, involving as they do the breach of a single consumer con-

tract, or a breach of contract between two commercial enter-

prises, offer no assurance as to how the state statutes would

be construed where the breach of contract affects the rights of

hundreds of consumers.

A102

example, debt collection practices, held not to be within

the scope of the North Carolina statute, J.C. Penney,

supra, have long been held to be within the ambit of

Section 5. See Floersheim v. FTC, 411 F.2d 874 (9th Cir.

1969); Spiegel v. FTC, 540 F.2d 287 (1976); Capaz, Inc.,

91 F.T.C. 1048 (1978). The FTC Act applies broadly to

deceptive acts and practices and to unfair acts and prac-

tices; it is in no way limited to practices connected di-

rectly to the sale of products, the interpretation given the

North Carolina statute. [69]

Orkin’s reliance on state court decisions has little

relevance in this proceeding, and in no event do state

court decisions foreclose a contrary FTC Section 5 deci-

sion.” FTC v. Sperry & Hutchison Co., 405 U.S. 233, 239

n. 4. Thus, Orkin’s breach of contract must be measured

against the Commission’s policy on unfairness, not court

interpretations of state statutes.

The Commission has stated:

Unjustified consumer injury is the primary focus of

the FTC Act, and the most important of the three S&H

criteria. By itself it can be sufficient to warrant a

finding of unfairness.

Commission Statement of Policy on the Scope of the Con-

sumer Unfairness Jurisdiction, p. 5 (“Unfairness State-

ment’).

9. There are two state proceedings against Orkin arising

out of facts similar to the facts in this proceeding. Orkin Ezx-

terminating Company v. Dept. of Health and Rehab. Services,

Case No. 81-389 (Fla.Cir.Ct. October 21, 1981), aff’d per curiam

(Fla.Dist.Ct.App. 1982). (Orkin enjoined from raising renewal

fees for customers holding form contracts in stipulated record—

CX 248A-E), and State of Louisiana v. Orkin Exterminating Co..

Case No. 83-2166 (Dist. Ct. for the Parish of Orleans) (Pending)

(CX 205A-Z16).

———e

A103

In International Harvester, the Commission set forth

three tests for determining whether consumer injury is

legally unfair. It must be:

(1) substantial; (2) not outweighed by any offsetting

consumer or competitive benefits that the practice

produces; and (3) one which consumers could not rea-

sonably have avoided.

International Harvester Co., 3 Trade Reg. Rep. (CCH)

‘| 22,217 at 23,181 (December 21, 1984).

If Orkin’s acts and practices violate Commission policy

on unfairness, a violation of Section 5 has been established.

(2) The Injury to Consumers was Substantial

Beginning in August, 1980, Orkin increased the annual

renewal fees of its pre-1975 customers by 40% or to a

minimum of $25.00, whichever was greater. The price

increase notice was sent to approximately 207,000 custom-

ers. (F. 46) Approximately 21,500 pre-1975 customers

had their renewal fees rolled back to [70] the original

contract level under programs initiated by Orkin after the

fee increase had become effective. (F. 67) As of August

1, 1984, Orkin had approximately 142,902 customers with

pre-1975 contracts whose annual renewal fees had been

increased. (F. 66) By May 25, 1981 Orkin had received

$1,257,629 in annual renewal fees in excess of the sums

of the amo

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