Petition — American Aluminum Corp. v. Federal Trade Commission

Supreme Court brief1976

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OCTOBER TERM, 1975

AMERICAN ALUMINUM CORPORATION, et al.,

Petitioners,

Vv.

FEDERAL TRADE COMMISSION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT

JOSEPH J. LYMAN

1747 Pennsylvania Avenue, N.W.

Suite 300

Washington, D.C. 20006

Attorney for Petitioners

WiLeon - Eres Printing Co.. Inc. - Re 7-6002 - WASHINGTON. D. C. 20001

TABLE OF CONTENTS

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ERTIES HER ria RSet NOGA SN RN OE BRE AE

Reasons for Granting the Writ .....................-...-.----..-...--..

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Appendix:

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Motion for Subpoena Duces Tecum .........000000000......

Points and Authorities in Support of Motion for

Subpoena Duces Teeum .....................................00-.

Appendix-Specifications for Subpoenas Duces

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Appeal from Order of Hearing Examiner Denying

Request for Issuance of Subpoenas Duces Tecum

and for Adjournment of Hearing ......................

Order Denying Appeal and Request for Permission

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Initial Decision -...................... SARIS Shes Oe OO

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Opinion of the Commission _.....0......

Opinion—United States Court of Appeals for the

REL ERR OR See aL SSPE. i A

TABLE OF AUTHORITIES IN THE

Cases: Page Supreme Court of the United States

American Aluminum Corp. Vv. FTC, 522 F.2d 1278 P OcTOBER TERM, 1975

STII cciéniseiustdtieisasidapihaddagdiinceaieiiseetstadsaebaiaeaieabiareatelease ’

American Home Products Co. v. FTC, 402 F.2d

ey a iceeiteaeniednaiaia 14, 15, 16

Federated Wholesalers Service Vv. FTC, 398 F.2d

253 (2d Cir. 1968). eccccoseccccccococesssccccccccssessseeeee 16, 17 erEP

FTC v. Henry Broch & Co., 368 U.S. 360 (1962) _.. 17

FTC v. National Lead Co., 352 U.S. 419 (1957)... 7,14

FTC V. Pacific Paper Assn., 273 U.S. 52 (1927) -.. 8

FTC v. Universal-Rundle Corp., 387 U.S. 244 AMERICAN ALUMINUM CORPORATION, et al.,

RSTO StSe ALEVE. Sse amur oo Wegner ats 11 Petitioners,

Grove Laboratories V. FTC, 418 F.2d 489 (5th Cir. Vv.

eee oa ae 16

Marco Sales Co. v. FTC, 453 F.2d 1 (2d Cir. 1971). 11 FEDERAL TRADE COMMISSION,

Mary Carter Paint Co. v. FTC, 333 F.2d 654 (5th Respondent.

Cir. 1964), rev’d. on other grounds, 382 U.S.

gl a cee ee ee oe 11

Moog Industries, Inc. Vv. FTC, 355 U.S. 411 (1958). 10 PETITION FOR A WRIT OF CERTIORARI TO THE

Morgan V. United States, 304 U.S. 1 (1938)... 8 UNITED STATES COURT OF APPEALS FOR

Niresk Industries Vv. FTC, 278 F.2d 337 (7th Cir. THE FIFTH CIRCUIT

PME ES RR eS a e eS 9

Papercraft Corp. Vv. FTC, 472 F.2d 927 (7th Cir.

REESE SARS ARES EERE SE ae 10

Rayer Corp. Vv. FTC, 317 F.2d 290 (2d Cir. 1963) 10

Snap-On Tools v. FTC, 321 F.2d 825 (7th Cir.

RRP rere rete DATS Se Sa bs Ee 7

Spiegel, Inc. v. FTC, 411 F.2d 481 (7th Cir. 1969) 17

The petitioners, American Aluminum Corporation, a

corporation, and Norman J. Foucha and Bobby G. Smith,

individually and as officers of the corporation, pray that

a writ of certiorari issue to review ine decision of the

Statutes: United States Court of Appeals for the Fifth Circuit

Statutes-at-large: ordering enforcement against all petitioners of a prohib-

88 Stat. 719. e311 ° itory order entered against them by the Federal Trade

, , C. ea alia ae ae rn seal

United States Code:

2 eS). | eee mera 3,4

i’ | i) eae ieihelidgiaedanebbasaemenbedidat’a 15

15 U.S.C. § 1601, et seq. 4 * References: App. ——, refers to the attached appendix.

Be ID serentsenceciccsenseeniconnenieiincion 2 Note: All citations in App. -— are extractions from the printed

record.

Regulations:

16 C.F.R. § 3.34

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OPINIONS BELOW

The Federal Trade Commission issued a cease and de-

sist order against all petitioners on July 2, 1974, un-

officially reported at 3 Trade Regulation Reporter (CCH,

1975) 20,665. The Commission ruled that petitioners’

appeal from the initial decision of the administrative law

judge be denied in part and granted in part. (App.

79a-80a.) This order was appealed to the United States

Court of Appeals for the Fifth Circuit, which ordered

enforcement of the Federal Trade Commission’s final

order. American Aluminum Corp. Vv. FTC, 522 F.2d

1278 (1975). The Federal Trade Commission’s final or-

der and opinion are set out in full at App. 65a-80a. The

per curiam opinion of the Fifth Circuit Court of Appeals

dated October 15, 1975 enforcing the Federal Trade

Commission’s prohibitive order is set forth at App. 8la.

JURISDICTION

The judgment of the Fifth Circuit Court of Appeals

was entered on October 15, 1975. (App. 8la). Mr. Jus-

tice Powell extended the time for filing this Petition to

March 13, 1976. This Court’s jurisdiction is invoked

under 28 U.S.C. §$ 1254(1).

QUESTIONS PRESENTED

1. May the Federal Trade Comn‘ssion, by denying

petitioners’ pretrial motion for the issuance of subpoenas

duces tecum directed to a number of competing organi-

zations in petitioners’ marketing area deprive petitioners

of evidence which would bear on the nature and extent

of the order?

2. Is the order issued by the Commission overly broad

in directing its prohibitions to “all products” of any kind

which petitioners may ever sell, rather than limiting its

scope to those products of the kind involved in the evi-

dentiary hearing?

STATUTES AND REGULATIONS INVOLVED

Section 5(a)(1), Federal Trade Commission Act of

September 20, 1914, c. 311, 38 Stat. 719, as amended,

15 U.S.C. § 45(a) (1) (1973 ed.):

“Unfair methods of competition in commerce, and

unfair or deceptive acts and practices in commerce,

are declared unlawful”.

Procedures and Rules of Practice for the Federal] Trade

Commission. Subpart D—Discovery; Compulsory Process;

16 C.F.R. § 3.34 SUBPOENAS:

“(a) Subpoenas ad testificandum.

“(b) Subpoenas duces tecum. (1) Application for

issuance of a subpoena requiring a person to appear

and depose or testify and to produce specified docu-

ments, papers, books, or other physical exhibits at

the taking of a deposition, or at a prehearing con-

ference, or at an adjudicative hearing shall be made

in writing to the Administrative Law Judge, and

shall specify as exactly as possible the material to

be produced, showing the general relevancy of the

material and the reasonableness of the scope of the

subpoena. Any motion to limit or quash such sub-

poena shall be filed within ten (10) days after serv-

ice thereof, or within such other time as the Ad-

ministrative Law Judge may allow.

“(2) Subpoenas duces tecum may be used by any

party for purposes of discovery or for obtaining

documents, papers, books, or other physical exhibits

for use in evidence, or for both purposes. When

used for discovery purposes, a subpoena may require

a person to produce and permit the inspection and

copying of nonprivileged documents, papers, books,

or other physical exhibits which constitute or con-

tain evidence relevant to the subject matter involved

and which are in the possession, custody, or control

of such person.”

STATEMENT

The Federal Trade Commission brought a complaint

against the petitioners under Section 5(a)(1) of the

Federal Trade Commission Act, 15 U.S.C. § 45(a) (1) °*

(App. la).

The petitioners at all times herein were engaged in the

sale and installation of aluminum home repair and im-

provement products. The business was confined chiefly

to contractual relationships between petitioners and con-

sumer homeowners whose residences were in need of re-

pair or renovation.

The complaint alleged that petitioners engaged in un-

fair and deceptive acts and practices primarily by means

of their advertising formats (App. 2a-5a) and selling

methods respecting these aluminum products and services

(App. 5a-7a).

In the course of the Commission’s adjudicatory hearing

which followed, the Commission was permitted to offer

evidence that petitioners advertised their aluminum sid-

ing and remodeling products and services by sending out

“mailers” to local homeowners offering to install such

aluminum products for $189.50 to $219.50, a price that

was described as a saving of $431.00 (“lower priced”

siding) (App. 29a-32a; 73a); that the promotional mail-

‘The complaint was framed in two counts. Count | charged

violations of deceptive trade practices under Section 5(a) of the

Federal Trade Commission Act, 15 U.S.C. § 45(a); Count II charged

violations of the Federal Consumer Credit Protection Act, 15 U.S.C.

§ 1601, et seq. The issues under Count II are abandoned. Matters

in the record bearing on Count II issues are irrelevant to this

proceeding.

ers also promised that if the attached response card were

returned in seven days, a “free gift” of storm windows

would be thrown in; that the mailers implied that the

aluminum would last indefinitely; that homeowners who

returned these mailers were visited by petitioners’ sales-

men, who made every effort to switch the purchaser to a

higher priced, better quality aluminum product (“pre-

mium”); that the switching was accomplished by dis-

paraging the lower priced product; that to induce sales,

the salesmen would offer substantial reductions from a

purported “regular” price of the higher priced, premium

quality product, if the customer would permit the use of

his home for advertising petitioners’ products and serv-

ices (the “model home” pitch) (App. 32a; 7Sa-74a).

The Administrative Law Judge found that the adver-

tisements were unfair and deceptive practices in com-

merce, constituting Section 5 violations. As a consequence,

the salesmen’s selling methods following in the wake of

the petitioners’ advertisements were also held Section 5

unfair acts and practices.

The Administrative Law Judge’s initial decision (App.

25a), affirmed as modified by the full Commission (App.

73a-80a), resulted in a final order (App. 65a) barring

the petitioners from using the aforementioned advertis-

ing and selling methods in future business transactions.

In the course of the adjudicative hearing, the Admin-

istrative Law Judge barred the petitioners from obtain-

ing evidence of a like kind from area competitors, whose

notorious and longstanding advertising and selling meth-

? Subpoenas may be obtained only in application to the Adminis-

trative Law Judge. Rules of Practice of the Federal Trade Com-

mission, 16 C.F.R. § 3.34. The subpoenas were directed to the fol-

lowing corporations: National Siding Corp.; Universal Sidings;

Allied Aluminum Co.; Dixieland Construction Co.; Continental

Enterprises. All were located in the vicinity of Birmingham,

Alabama (App. 9a).

ods tracked the petitioners’ activities in all material re-

spects (App. 9a-24a).

Petitioners’ motion for subpoenas disclosed that the

competition’s mail-out advertisements used similar pric-

ing of low-grade materials to induce prospective pur-

chasers to return the mailers, permitting their salesmen

to visit them, who in all likelihood, switched the cus-

tomers to higher priced materials and services (App.

13a-18a).

Petitioners’ purpose in obtaining evidence from the

files of its competitors was to expose the Commission’s

inconsistent standards respecting “unfair methods of

competition” in the marketplace. Petitioners sought to

prove that where the petitioners and their competitors

beamed the same advertising and sales techniques to the

public, the Commission’s prohibitory order singled out the

petitioners for discrimination, while their competitors

seemingly enjoyed the Commission’s solicitude.

Petitioners intended further to prove through the evi-

dence obtained by the subpoenas that petitioners could

reasonably believe their conduct was permissible because

they made no different proposals in their advertisements

than those with whom they were in competition and who

were apparently under some kind of Commission regula-

tion.” The contention was never controverted, and the

search permitted by subpoenas would, at least, have

ascertained the Commission’s role. Appeals to the Com-

mission (App. 20a; 23a) and the Court of Appeals (App.

8la) were fruitless. No other means of obtaining the

evidence was available.

Arong other things, the Commission’s final order

sweepingly provided that petitioners be barred from

*The complaint alleged that petitioners’ acts and practices

prejudiced and injured their competitors (App. 7a, parag. 10).

The subpoenas may well have enabled petitioners to negate the

charge.

using any advertisement of the kind described in the

order “in connection with the offering for sale, sale, dis-

tribution or installation of aluminum siding, storm

windows, storm doors or any other products .. .” (App.

65a-66a). (Emphasis added)

REASONS FOR GRANTING THE WRIT

1. Rejecting the application for the subpoenas duces

tecum deprived petitioners of relevant evidence. In fash-

ioning prohibitive orders, the Commission must consider

the circumstances under which violative acts occur.* The

arbitrary bar to petitioners’ relevant evidence imposed

by the Commission and sanctioned by the Court of Ap-

peals has so far departed from the accepted and usual

course of judicial proceedings as to call for an exercise

of this Court’s power of supervision.

As the Court has stated in FTC vy. National Lead Co.,

352 U.S. 419, 429 (1957):

“Those in utter disregard of the law, as here ‘call

for repression by sterner measures than where the

steps could reasonably have been thought permis-

sible’.”

Petitioners intended te prove through the testimony

procured by the subpoenas that they could reasonably be-

lieve their conduct permissible because petitioners made

no different proposals in their mail-out advertisements

than those with whom they were in competition and ap-

parently under regulation. The unfair action of the Law

Judge precluded testimony on this point at the hearings.

To be sure, this Court has held that “the weight to

be given to the facts and circumstances admitted, as well

as the inferences reasonably to be drawn from them is

*See, Snap-On Tools Corp. v. FTC, 321 F.2d 825 (7th Cir.

1963), reversing the Commission’s prohibitive order and dismissing

the complaint.

for the Commission”. FTC v. Pacific Paper Ass’n., 273

U.S. 52, 63 (1927). (Emphasis added.) However, the

inferences drawn by the Commission, like all inferences

drawn from particular factual circumstances, are rebut-

table. The inferences drawn by the Commission here

could have been rebutted by the evidence which petition- ©

ers sought to introduce through the subpoenas duces

tecum concerning petitioners’ competitors.

Obviously there could have been no public or competi-

tive injury—actual or speculative—as alleged in the com-

plaint if, as petitioners sought to prove, petitioners gave

the public no different information than their competi-

tors. Yet petitioners were unable to proffer evidence

concerning their competitive situation because of the

arbitrary action of the Law Judge in denying petition-

ers’ motion for subpoenas.

The Court of Appeals’ affirmance of the Commission’s

arbitrary refusal of petitioners’ request for subpoenas

conflicted with the standards of fairness announced by

this Court in Morgan v. United States, 304 U.S. 1, 18-19

(1938) :

“The right to a hearing embraces not only the right

to present evidence but also a reasonable opportunity

to know the claims of the opposing parties and to

meet them. The right to submic argument implies

that opportunity; otherwise the right may be but a

barren one. Those who are brought into contest

with the government in a quasi-judicial proceeding

aimed at control of their activities are entitled to be

fairly advised of what the government proposes and

to be heard upon its proposals before it issues its

final command”, (Emphasis added.)

Indeed, the courts have been sharply critical of the Com-

mission’s refusal to permit the introduction of evidence

which would relent the Commission’s prima facie show-

ing of alleged illegal activities. As the court stated in

~> ee nt care wens

Niresk Industries v. FTC, 278 F.2d 337, 340-341 (7th

Cir. 1960) :

“the Commission must be reprimanded for its ap-

parent position in this case upon the pricing questions

that it would hear just enough evidence as would,

prima facie, sustain its findings as to the practices

narged in the complaint and no more. The Com-

mission, as other administrative agencies, occupies

a unique position which was unknown to common

law jurisprudence. The Commission wears all of the

hats involved in proceedings instituted under its

authority. It is, at once, the accuser, the prosecutor,

the judge and the jury. The wide scope of its dis-

cretion in the resolution of questions within its realm

is founded and sustained by the courts upon the fact

that its jurisdiction exists in a specialized field,

wherein expertise is felt to be a necessity. Under

those circumstances we feel that the Commission

should assume a wider responsibility than that nec-

essarily undertaken by a private litigant and sub-

stantiate its injunctive orders upon the concrete

basis of a thorough investigation and full presenta-

tion of evidence whenever the existence of unfair

or deceptive practices is charged against any re-

spondent.

“As we have indicated, we believe that the undis-

puted testimony of those witnesses, considered in the

light of the record as a whole, does form a substan-

tial basis upon which the Commission’s findings rest.

Upon that basis we sustain the Commission’s find-

ings, but it ill behooves the Commission to take the

position that it need adduce only enough evidence to

barely sustain its ultimate decision. Such a position

can only lead to a lessening of respect and confi-

dence in the Commission’s integrity and act.” (Em-

phasis added. )

In contrast to the Court of Appeals’ affirmance of the

Commission’s arbitrary stance respecting these petition-

ers, the court in Rayex Corp. v. FTC, 317 F.2d 290, 294-

295 (2d Cir. 1963), set aside an FTC order on the

ground, inter alia, that the Commission had made no

effort to explore seasonal price fluctuations regarding a

product susceptible to such variations, where the manu-

facturer was charged with deceptive preticketing of its

sunglasses, which other dealers habitually marketed at

substantially less than the preticketed price.

Again in contrast to the Court of Appeals’ per curiam

affirmance of the Commission’s arbitrary refusal of peti-

tioners’ request for five (5) subpoenas duces tecum, the

Seventh Circuit Court of Appeals in Papercraft Corp. Vv.

FTC, 472 F.2d 927 (1973), although sustaining the re-

jection of a request for 551 subpoenas, nevertheless

noted that:

“the Commission’s analysis, though it may justify

denial of a wholesale request for 551 subpoenas, does

not justify the denial of a more limited number

which might have demonstrated error in aspects of

the prima facie case. This argument is valid.” Id.,

472 F.2d at 429. (Emphasis added.)

The government’s argument asserts that “the FTC is

not precluded from stopping the law violations of a par-

ticular firm merely because some other firms may be en-

gaged in similar practices”, citing Moog Industries, Inc.

v. FTC, 355 U.S. 411 (1958). But this is no answer to

why the competition enjoys the solicitude of the Com-

mission by some means, while petitioners are being an-

nihilated. It is not that the Commission has simply

failed to act against the competitors, but rather it has

adopted some kind of regulatory approach to the com-

petitors totally inconsistent with its approach toward

the petitioners. It is a strange FTC which seeks to stamp

out deceptive advertising generally while wading through

numerous apparent violators to grab the petitioners,

claiming along the way that their competitors were not

visible. This tactic flies in the face of this Court’s ad-

monition in FTC v. Universal-Rundle Corp., 387 U.S.

244, 251 (1967):

“(T]he Federal Trade Commission does not have

unbridled powers to institute proceedings which will

arbitrarily destroy one of many law violators in an

industry.”

In short, the refusal to permit the introduction of any

evidence respecting the competitive situation in which

petitioners found themselves is unfair. It focuses on peti-

tioners for singularly onerous treatment. In conflict with

the action of the Court of Appeals below, the Second Cir-

cuit Court of Appeals, in Marco Sales Co. v. FTC, 453

F.2d 1, 6-7 (1971), criticized the Commission’s arbitrary

action:

“The arbitrary character of the Commission’s action

here consists of its total failure to even advert to,

much less explain, its reason for the rigid ad hoc

adjudicatory stance it adopted toward the petitioner

and the flexible tolerance its industry regulation dis-

played to those utilizing the same or similar devices.

As Circuit Judge John R. Brown pointed out in his

concurring opinion in Mary Carter Paint Co. v. FTC,

333 F.2d 654, 660 (5th Cir. 1964), rev’d. on other

grounds, 382 U.S. 46, 86 S.Ct. 219, 15 L.Ed.2d 128

(1965): ‘Our complex society now demands admin-

istrative agencies. The variety of problems dealt

with make absolute consistency, perfect symmetry,

impossible. And the law reflects its good sense by

not exacting it. But law does not permit an agency

to grant to one person the right to do that which it

denies to another similarly situated. There may not

be a rule for Monday, another for Tuesday, a rule

for general application, but denied outright in a

specific case.’” (Emphasis added and citations

omitted. )

;

The final order of the Commission, passed under cir-

cumstances where the agency shielded itself from the rele-

vant facts, is a denial of elementary due process.

The Commission’s conclusion that the testimony sought

by petitioners under subpoena was irrelevant, was a con-

tradiction in terms. How may relevance be determined

without first hearing the testimony? There would be

time enough then to rule on admissibility. Is the Com-

mission’s so-called “expertise” so pervasive that it may

attribute to itself occult powers permitting it to dis-

pense with the appearance and testimony of live wit-

nesses and relegate the evaluation of documentary evi-

dence to guesswork? What are the limits of the Com-

mission’s powers under Section 5 to declare acts “un-

fair” or “deceptive’? Unless this Court intervenes to

fix the parameters of Section 5 authority, the Commis-

sion will continue its sweeping arbitrary action.

It is strange indeed to hear the Commission’s spokes-

men elucidate its industry-wide enforcement programs

before Congressional committees ° and public symposiums,

on the one hand, and on the other, find in practice that

the Commission chooses to rack up its accomplishments

in this kind of selective, one-on-one adjudicatory hearing.

The pious statements of former Commissioner Jones °

ran:

“Industry-wide enforcement of the law is almost a

Constitutional imperative as a matter of both fair-

ness and equality before the law. It is clear we have

no right to and could not permit some violators to

go free while prosecuting others * * *.”

‘FTC Statement, Hearings before House subcommittees on Ap-

propriations, 89th Cong., 1st Sess., Book 3, pp. 408-409; also pp.

820-830.

* An address on February 25, 1965 before the District of Co-

lumbia Bar Association.

Former Chairman Paul Rand Dixon publicly stated: *

“It must be recognized that some illegal practices

are so widespread within an industry that to single

out a few of the sinners would be unfair. Simple

justice would dictate that the approach to the prob-

lem be of sufficient scope to give all violators an

opportunity to rid themselves of the illegality simul-

taneously and without suffering competitive injury

in the process.”

On another occasion Mr. Dixon said: *

“The man who is willing to comply with the law

simply cannot afford to if his competitor is allowed

to go on violating it.”

The two faces of the Commission, one of concern for

equality when gingerly approaching Congress for funds,

and the other fashioned as a sword to annihilate selec-

tively those denied its solicitude, require the spotlight

of this Court’s examination. The Federal Trade Commis-

sion’s unbridled power needs some “fencing in”.

2. The Commission’s “all products” order, affirmed

and enforced by the Fifth Circuit Court of Appeals be-

low, conflicts with other Fifth Circuit decisions and

those of the Sixth and Seventh Circuit Courts of Appeal

striking down “al] products” orders as excessive and be-

yond the power of the Federal Trade Commission.

The Commission’s complaint and adjudication proceed-

ings against the petitioners confined the charges and evi-

dence to issues of unfair and deceptive acts and practices

respecting their advertising and sale of aluminum home

improvement products and services. Nothing pointed to

*On June 15, 1965 before the Georgia Association of Broad-

casters, Inc., Pine Mountain, Georgia.

_* Voluntary Law Enforcement: “An Approach to Administra-

tive Delay”, briefing Conference on Restraint of Trade and Trade

Regulations, at Washington, D. C., March 17, 1965.

the petitioners as habitual violators or to even a single

prior contact with the Federal Trade Commission or any

other regulatory agency.

While petitioners must expect some “fencing in”,’ the

final prohibitory order tends rather to eradicate them

from the marketplace. The words, “er any other prod-

ucts”, without limitation, leave no doubt of the Commis-

sion’s zeal to annihilate the petitioners. The final order

directed the petitioners to cease and desist from a list of

acts and practices “in connection with the advertising,

offering for sale, sale, distribution or installation of

aluminum siding, storm windows, storm doors or any

other products, in commerce, as ‘commerce’ is defined in

the Federal Trade Commission Act . . .” (Emphasis

added). (App. 65a-66a).

Justification for the sweeping “all products” order

stemmed from the Commission’s undocumented, tea-leaf

prophecy of petitioners’ planned dishonesty for the rest

of their lives. The order’s sole support for the “all prod-

ucts” language is the following: (App. 78a-79a)

“Having systematically misrepresented their products

and their terms of trade for so many years ( the

firm was organized in 1965), it would be unrealis-

tic, we think, to expect them to voluntarily adopt a

program of honest business dealing when and if

they find it in their i:terest to begin selling some

new line of products.”

TF me

Recognition of the Commission’s vast and undefined ex-

pertise” has not, until now, embraced the oracle’s role.

The overreaching effect of the Commission’s order

should be harnessed and modified to conform to the deci-

sion and rationale limiting the scope of prohibitive orders

respecting the term “any products” in American Home

4 These words were contained in the Commission’s opinion, citing

FTC v. National Lead Co., 352 U.S. 914, 431 (1957). App. 79a).

are ws -

Products Corp. v. FTC, 402 F.2d 232 (6th Cir. 1968).

Modifying a sweeping Commission order, the court said

at 237:

“We are also of the opinion that the order must be

modified by striking the provision which prohibits

petitioners from disseminating any advertisement

‘in connection with the offering for sale, sale, or

distribution of any “drug” * * * which misrepresents

directly or by implication the efficacy of such drug’.

An order of the Commission must bear a reasonable

relationship to the unlawful practice found to ex-

ist * ¢4 o.

“The proceedings * * * in this case dealt exclusively

with Preparation H; no other drug was involved. It

was not established that petitioner was an habitual

violator of the Federal Trade Commission Act, even

though it is not a first offender. The effect of this

provision of the Commission’s order is to admonish

petitioner not te violate the law again. Such an

order would in practical effect, transfer the task of

enforcing the Federal Trade Commission Act, as

regards this petitioner, to the district courts under

15 U.S.C. § 56. This is not within the contemplation

of the Act.”

Unless this Court intervenes (at least to require modi-

fication of the existing order striking the terms “or any

other products”), limiting the prohibitions to products

and services of a like kind to aluminum home improve-

ments, these petitioners shall remain subject to civil pen-

alties in a district court proceeding under 15 U.S.C.

§ 56 *° despite the absence of a Section 5 administrative

*° 15 U.S.C. §56 provides: “Whenever the Federal Trade Com-

mission has reason to believe that any person, partnership, or

corporation is liable to a penalty under section 54 of this title or

under subsection (1) of section 45 of this title, it shall certify

the facts to the Attorney General, whose duty it shall be to cause

appropriate proceedings to be brought for the enforcement of the

provisions of such section or subsection.”

cease and desist order respecting a future business

wholly unrelated to the advertising and sale of aluminum

home improvement products and services.

Tracking the rationale of American Home Products,

supra, the Fifth Cireuit Court of Appeals in Grove La-

boratories Vv. FTC, 418 F.2d 489 (1969), held the Com-

mission’s order covering “any drug’, without limitation,

too broad. Striking the term “any drug’ from the order,

and limiting the prohibitions to hemorrhoidal ointments,

the court held, 418 F.2d at 496:

“It will be noted that this prohibition refers to any

and all drugs which may be sold by the petitioner

and not just to those confined to treatment of hem-

orrhoids. In other words it is an all-encompassing

prohibition that covers all drugs of every kind and

character. It would subject the petitioner to con-

tempt penalties as set forth in the Act should it be

violated with respect to any drug sold by the peti-

tioner”’.

Unless this Court intervenes to modify the outstand-

ing order by striking the terms “or any other products”,

absurd results may occur. As matters stand, these peti-

tioners, on the one hand, may be subjected to heavy pen-

alties and fines under their broad order for advertising

and selling drugs and ointments in violation of the Com-

mission’s notions of “fairness” under Section 5 of the

Act. On the other, Grove Laboratories and American

Home Products, under their respective limiting orders,

would be immune from such penalties for Section 5 vio-

lations in the advertising and sale of aluminum home

improvement products and services.

The Commission and the Court of Appeals below ad-

monished that “those caught violating the Act must ex-

pect some fencing in”. (App. 79a). But no court should

sanction a remedy which leaves no path on which a past

violator can “travel without anxiety”. Federated Whole-

men rT

seer

salers Service v. FTC, 398 F.2d 253, 260 (2d Cir. 1968).

The Commission and the court below have so far departed

from the usual course of judicial proceedings as to call

for an exercise of this Court’s power of supervision lest

the petitioners, through rank discrimination, be denied

their right to make a living in the community.

The Seventh Circuit Court of Appeals recognized this

kind of power abuse in Spiegel, Inc. v. FTC, 411 F.2d

481 (1969). Spiegel was charged under Section 5 of the

Act with promoting the sale of merchandise using false

and misleading claims. The overbroad prohibitory order

issued by the Commission recited:

“3. Misrepresenting, in any manner, the savings

available to purchasers of (petitioner’s) merchan-

dise.” (Jd., at 484.)

Holding the order too broad, it was modified “limiting it

to the type of sale found violative here. Paragraph 3

should be stricken.” Spiegel, Inc. v. FTC, supra, at 485.

On this score, the Spiegel court reasoned, 411 F.2d at 484:

“This provision is so broad and imprecise that Spie-

gel might well be fearful of advertising any kind of

sale of its merchandise in the future. * * * In any

event there is no justification for the imprecisely

drawn, excessively broad order entered by the Com-

mission.”

The broad scope of the final order below ignores this

Court’s warning to the Commission in FTC v. Henry

Broch & Co., 368 U.S. 360 (1962), respecting the neces-

sity for clarity in its orders. At 368 U.S. 367-368 this

Court said:

“The severity of possible penalties prescribed * * *

for violations of orders which have become final

underlies the necessity for sustaining orders which

are, at the outset, sufficiently clear and precise to

avoid raising serious questions as to their meaning

and application.”

So much of the final order reciting the words “or any

other products” should be stricken.

CONCLUSION

The Petition for a writ of certiorari should be granted.

Respectfully submitted,

JOSEPH J. LYMAN

1747 Pennsylvania Avenue, N.W.

Suite 300

Washington, D.C. 20006

Attorney for Petitioners

APPENDIX

[2]

UNITED STATES OF AMERICA

BEFORE FEDERAL TRADE COMMISSION

Docket No. 8865

In the Matter of

AMERICAN ALUMINUM CORPORATION,

a corporation, and

NORMAN J. FOUCHA and

Bossy G. SMITH, individually

and as officers of said

corporation.

COMPLAINT

Pursuant to the provisions of the Federal Trade Com-

mission Act and of the Truth in Lending Act and the

regulations promulgated thereunder, and by virtue of the

authority vested in it by said Acts, the Federal Trade

Commission, having reason to believe that American

Aluminum Corporation, a corporation, and Norman J.

Foucha and Bobby G. Smith, individually and as officers

of said corporation, hereinafter referred to as respond-

ents, have violated the provisions of said Acts and of the

regulations promulgated under the Truth in Lending

Act, and it appearing to the Commission that a proceed-

ing by it in respect thereof would be in the public

interest, hereby issues its complaint stating its charges

in that respect as follows:

PARAGRAPH ONE: Respondent American Aluminum

Corporation is a corporation organized, existing and

doing business under and by virtue of the laws of the

State of Alabama, with its principal office and place of

business located at 1624 6th Avenue North, Birmingham,

Alabama.

Respondents Norman J. Foucha and Bobby G. Smith

are the principal officers of the said corporate respond-

ent. They formulate, direct and control the acts and

practices of the corporate respondent, including the acts

and practices hereinafter set forth. Their business ad-

dress is the same as that of the corporate respondent.

[3]

PARAGRAPH TWO: Respondents are now, and for

some time iast past have been, engaged in the advertis-

ing, offering for sale, sale and distribution of residential

aluminum siding, storm windows, storm doors and var-

ious other home improvement products to the public and

in the installation thereof.

COUNT I

Alleging violations of Section 5 of the Federal Trade

Commission Act, the allegations of Paragraphs One and

Two hereof are incorporated by reference in Count | as

if fully set forth verbatim.

PARAGRAPH THREE: In the course and conduct

of their business, respondents now cause, and for some

time last past have caused, their said products, advertis-

ing and promotional material, contracts, and other busi-

ness papers and documents to be shipped and trans-

mitted from and to their place of business, located as

aforesaid in the State of Alabama and from the suppliers

of said products, located in various states of the United

States to their prospective purchasers and purchasers

thereof, located in various other states of the United

States, other than the State of Alabama and the states

in which said suppliers are located, and maintain, and

at all times mentioned herein have maintained, a sub-

stantial course of trade in said products, in commerce,

as “commerce” is defined in the Federal Trade Commis-

sion Act.

PARAGRAPH FOUR: In the course and conduct of

their business, as aforesaid, and for the purpose of in-

ducing the purchase and installation of their home im-

provement products, respondents have made numerous

statements and representations, in their advertising, pro-

motional material, direct mail advertising and through

oral statements and representations made by their s+‘es-

men or representatives to prospective purchasers, respect-

ing the nature of their offer and the price, time limita-

tions, guarantee and the quality of their products.

Typical and illustrative of respondents’ published ad-

vertising representations, but not all inclusive thereof,

are the following:

“ALL-ALUMINUM SIDING SALE

MANY MONTHS TO PAY—LOW MONTHLY

PAYMENT

PAY NOTHING FOR MONTHS AFTER IN-

STALLATION

$199.50

[4]

FREE BONUS

Special offer to you—If you act promptly we will

include Storm Windows for every window in your

home as a FREE bonus with the purchase of our

All Aluminum or Siding Special.

100% Guaranteed Genuine Aluminum , Siding

Completely installed by our expert home finishers

Absolutely no extras to pay

One lifetime installation protects forever

THIS CARD IS WORTH $431.00 TO YOU AND

YOU GET A BONUS GIFT FREE WITH PUR-

CHASE

THIS IS A LIMITED OFFER!!

Mail this card within 7 days to become eligible

for this savings, plus FREE Storm Windows for

every window in your home with the purchase of

this Aluminum Siding for your home.”

PARAGRAPH FIVE: By and through the use of the

aforesaid statements and representations and others of

similar import and meaning not specifically set out here-

in, and through oral statements made by their sales-

men or representatives, respondents represent, and have

represented, directly or by implication, that:

The offer set forth in said advertisements is a

bona fide offer to sell the advertised products at

the prices and on the terms and conditions stated.

Respondents’ products are being offered for sale

at special or reduced prices, and that savings are

thereby afforded to purchasers from respondents’

regular selling price.

Respondents’ advertised offer is made for a limited

time only.

That purchasers of respondents’ products would

receive a Free Bonus or gift in the form of free

storm windows.

After the installation of respondents’ aluminum

siding is completed, the homes of purchasers will

be used for demonstration and advertising purposes

by the respondents; and, as a result of allowing

[5]

their homes to be used as models, purchasers will

be granted reduced prices or will receive allow-

ances, discounts or commissions.

6. Certain of respondents’ home improvement products

are unconditionally guaranteed or guaranteed for

life.

7. Respondents’ siding materials will never require

painting.

PARAGRAPH SIX: In truth and in fact:

i. Respondents’ said advertised offers are not genuine

or bona fide offers but are made for the purpose

of obtaiuing leads as to persons interested in the

purchase of respondents’ products. After obtain-

ing such leads, respondents’ salesmen or representa-

tives call upon such persons at their homes and,

according to their established mode of operation,

respondents’ salesmen or representatives disparage

the advertised product and otherwise discourage

the purchase thereof and attempt to sell and fre-

quently do sell a different and more expensive prod-

uct instead of the advertised product for which

the customer was originally solicited.

2. Respondents’ products are not being offered for

sale at special or reduced prices, and savings are

not thereby afforded purchasers because of reduc-

tions from respondents’ regular selling prices. In

fact, respondents do not have regular selling prices

but the prices at which respondents’ products are

sold vary from customer to customer depending on

the resistance of the prospective purchaser.

3. Respondents’ advertised offer is not made for a

limited time only. Said merchandise is advertised

regularly at the represented prices and on the

terms and conditions therein stated.

4. Purchasers of respondents’ products do not receive

a Free Bonus gift in the form of free storm win-

dows.

5. After installation of respondents’ aluminum sid-

ing is completed, homes of purchasers are not used

for demonstration or advertising purposes; and pur-

[6]

chasers, as a result of allowing their homes to

be used as models, are not granted reduced prices,

nor do they receive allowances, discounts or com-

missions.

6. Respondents’ home improvement products are not

unconditionally guaranteed or guaranteed for life.

Such guarantee as may be provided is subject to

numerous terms, conditions and limitations respect-

ing the duration of the guarantee and the extent

and manner of performance thereunder. Further-

more, in a substantial number of cases, respondents

or their salesmen or representatives fail to furnish

any written guarantee to the customer and fail to

disclose the life during which said guarantee ap-

plies.

7. Respondents’ siding materials will require painting.

Therefore, the statements and representations set forth

in Paragraphs Four and Five hereof were and are false,

misleading and deceptive.

PARAGRAPH SEVEN: In a substantial number of

instances and in the usual course of their business, re-

spondents sell and transfer their customers’ obligations,

procured by the aforesaid unfair, false, misleading and

deceptive means, to various financial institutions. In any

subsequent legal action to collect on such obligations,

these financial institutions or other third parties, as a

—

ee Ee OY Oem ee nee oe

general rule, have available and can interpose various

defenses which may cut off certain valid claims customers

may have against respondents for their failure to per-

form or for certain other unfair, false, misleading or

deceptive acts and practices.

PARAGRAPH EIGHT: In the conduct of their afore-

said business, at all times mentioned herein, respondents

have been in substantial competition, in commerce, with

corporations, firms and individuals in the sale of alumi-

num siding and other home improvement products of

the same general kind and nature as those sold by re-

spondents.

[7]

PARAGRAPH NINE: The use by respondents of the

aforesaid false, misleading and deceptive statements, rep-

resentations and practices has had, and now has, the

capacity and tendency to mislead members of the pur-

chasing public into the erroneous and mistaken belief

that said statements and representations were and are

true and into the purchase of substantial quantities of

respondents’ products by reason of said erroneous and

mistaken belief.

PARAGRAPH TEN: The aforesaid acts and practices

of respondents, as herein alleged, were and are all to the

prejudice and injury of the public and of respondents’

competitors and constituted, and now constitute, unfair

methods of competition in commerce and unfair and de-

ceptive acts and practices in commerce, in violation of

Section 5 of the Federal Trade Commission Act.

COUNT II

(Count II Not Material to the Petition.)

WHEREFORE, THE PREMISES CONSIDERED, the

Federal Trade Commission on this 4th day of October,

A.D. 1971, issues its complaint against said respondent.

=~ 23 enews ae

[63]

MOTION FOR SUBPOENA DUCES TECUM

To: Honorable Edward Creel,

Director, Hearing Examiners

Respondents herein move the Hearing Examiner for

issuance of subpoenas directed to the following named

entities:

National Siding Corp.

Universal Sidings

Allied Aluminum Co.

Dixieland Construction Co.

Continental Enterprises

Attached hereto are points and authorities in support

of this Motion. There is also attached an aopendix setting

[64]

forth the specificatio s for the subpoenas with respect

to each entity.

Respectfully submitted,

/s/ Joseph J. Lyman

Joseph J. Lyman

1200 18th Street, N.W.

Washington, D.C. 20036

{Attorney for Respondents]

10a

[65]

POINTS AND AUTHORITIES IN SUPPORT

OF MOTION FOR SUBPOENA DUCES TECUM

The Complaint charges the respondents with making

false, misleading and deceptive representations with re-

spect to the sale of certain home improvement products.

The Complaint further alleges that respondents are in

substantial competition with other entities in the sale of

similar products inferring that respondents’ selling

methods injure competition.

The respondents’ advertising techniques are extensively

used hy its competitors in the market place where re-

spondents do business. Nevertheless, the Complaint al-

leges that respondents injure their competitors in the

course of its business (paragraph 8 of the Complaint).

[66] -

In order to determine what effects respondents’ ad-

vertising have had on its competitors, it is necessary to

look into the actual practices of these competitors. At-

tached are sample advertisements (collected within the

period of the Complaint) by a selected group of highly

visible competitors of the respondents. These ads offer

the same inducements for purchase in almost the same

language as that used by respondents. The respondents,

the butt of this Complaint, insert no materially different

qualifications with respect to sales than that of their

competitors, who apparently move free in the competi-

tive market without restraint.

Therefore it is relevant to examine in detail the prac-

tices of respondents’ competitors in order to deter-

mine in what respect their advertisements and selling

practices conform to the Commission’s rules while re-

spondents’ appear to be in violation. Respondents rea-

ek ne ee

lla

sonably believe that no vendor gives merchandise away

and they further believe that their offers of bonuses

and the like are a common place selling practice to

stimulate selling activity for home improvement prod-

ucts. We have a situation where the allegations of de-

ception are so tenuous that respondents are entitled to

(67)

develop fully either the activity of their competitors, as

a matter of reality, different from theirs so as to war-

rant the apparent solicitude of the Commission, while

respondents become subjected to penal sanctions.

Without specified evidence from its competitors, any

record made against respondents should remain specula-

tive with respect to what is the fact regarding false and

deceptive statements in all of the advertisements, re-

spondents and competitors alike.

The similitude of respondents’ and their competitors’

advertisements, in the light of the charges of deception

set out in the Complaint, requires that respondents’ mo-

tion for the issuance of subpoenae be granted so that

respondents will be afforded due process with respect to

its defenses.

If this issue were tried pursuant to the Federal Rules

of Civil Procedure, parties defendant in the position of

these respondents would have an uninhibited right to

explore and develop evidence in aid of their defenses.

No reason presents itself why these respondents should

have limitations placed on their development of their

defenses in an administrative hearing.

[68]

Wherefore, the respondents move the Hearing Exam-

12a 13a

iner for issuance of subpoenae duces tecwm directed to

each of the corporations listed in the motion attached.

Respectfully submitted, . O

. Stes i

/s/ Joseph J. Lyman ; ener oe. |

Joseph J. Lyman ) i sae SBS a

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No. 72438

LUCKY NUMBER

You have been chosen to receive a gift award

in the new

SALE OF ALUMINUM SIDING

Thousands of dollars could be spent in edver-

tising on radio, TV, and in the news r.

However, we feel that the best posgible aver-

tising ts to get some of our Aluminum Siding

- into each neighborhood and let word of ite

excellence be spread through the endorsement

of a satisfied family. You must be a home-

owner to qualify for this savings. Rental.

property will not be accepted. Since this

8 an advertising ~~ —.. the timy limit

on this offer is five daye.. Please fill cut

the enclosed card, postage paid, and mail

today. You must accept or reject this offer

upon showing.

Here's an example of your savings. The reg-

wler price of this Aluminum Sid ie $499.00

which includes all material, taxes, and ladon

ep to 1200 sq. ft. of wall space. You have

three chances of winning du this sale.

If your serial number, located at the top of

this page appears in group #1, you will get

$100.00 off the regular price. If your

serial number appears in group #2, you will

get $150.90 off the regular price. If your

serial number appears in the GRAND PRIZE

group #3, you 1 receive $260.00 off tne

regular price,

If you have ever thought about having _

home remodeled on the outeide, now is

time.

THIS IS A LIMITED OFFER!!

BEST COPY AVAILABLE

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[74]

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NAME PHONE,

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[75]

APPENDIX

SPECIFICATIONS FOR SUBPOENAE DUCES TECUM

Bring with you all records, documents, memoranda

and writings of any kind relating to and in connection

with the following:

1. The firms’ rules, procedures and practices with

respect to the handling of responses to advertising, either

as a result of mail-outs or newspaper advertising.

2. Specimen copies of advertising by:

a. mail;

b. newspaper ads;

ce. radio or * vision transcripts.

3. Furnish any “canned” or prepared sales speeches

or pitches used by the firms or furnished to their sales-

men.

[76]

4. Produce twenty-five (25) completed job files dis-

closing contracts between the firm and its customers,

cost sheets for construction or re-construction work, cred-

it applications, credit investigation reports, correspond-

ence between the firm and financial institutions extending

credit for the performance of the work.

20a

[86]

ORDER * * * DENYING REQUEST FOR ISSUANCE

OF SUBPOENAS

* a * &

By an undated motion received by the Commission on

March 10, 1972, respondents move for the issuance of

subpoenas duces tecum directed to the following parties:

National Siding Corp.

Universe Sidings

Allied Aluminum Co.

Dixieland Construction Co.

Continental Enterprises

The specifications for the subpoenas duces tecum are

as follows:

“Bring with you all records, documents, memoran-

da and writings of any kind relating to and in con-

nection with the following:

“1. The firms’ rules, procedures and practices

with respect to the handling of responses to adver-

tising, either as a result of mail-outs or newspaper

advertising.

[88]

“2. Specimen copies of advertising by:

a. mail;

b. newspaper ads;

ce. radio or television transcripts.

“3. Furnish any ‘canned’ or prepared sales speech-

es or pitches used by the firms or furnished to their

salesmen.

“4. Produce twenty-five (25) completed job files

disclosing contracts between the firm and its cus-

tomers, cost sheets for construction or reconstruc-

tion work, credit applications, credit investigation re-

ports, correspondence between the firm and financial

institutions extending credit for the performance of

the work.”

2la

Respondents claim that under the Federa! Rules of

Civil Procedure they “would have an uninhibited right to

explore and develop evidence in aid of their defenses.”

The respondents’ claim appears to be misplaced. The

Commission’s Rule 3.31, like the Federal Rules of Civil

Procedure, contemplates that any matter, not privileged

is discoverable if it is relevant to the subject matter

of the proceeding. Here, it would appear that even if the

evidence were discovered to show that respondents’ al-

leged competitors in the marketplace use the same or even

similar advertising techniques, these discovered facts

would have no relevancy on the truth, falsity or tendency

to deceive with regard to respondents’ advertisements.

Cf. Royal Oil Corporation v. F.T.C., 262 F.2d 741, 745

(4th Cir., 1959) ; Zenith Radio Corp. v. F.T.C., 143 F.2d

29, 31 (7th Cir., 1944). Moreover, recently in Docket

8752, Universal Chemical, Inc., F.T.C. —— (de-

cided September 23, 1971), the Commission emphasized

that “a litigant has no right to be free from prosecution

merely because his competitors are also alleged to be en-

gaged in the same challenged practices.” The examiner,

therefore, concludes that the fact that alleged competitors

are engaged in the same practices is not a defense rele-

vant to the central issue of deception and unfairness.

IT IS ORDERED that respondents’ request for exten-

sion of time is denied.

[89]

IT IS FURTHER ORDERED that respondents’ mo-

tion for issuance of subpoenas duces tecum to the parties

listed above be, and it hereby is, denied.

/s/ David H. Allard

Davip H. ALLARD

Hearing Examiner

March 13, 1972

22a

[97]

APPEAL FROM ORDER OF HEARING EXAMINER

DENYING REQUEST FOR ISSUANCE OF SUBPOENAS

DUCES TECUM AND FOR ADJOURNMENT OF

HEARING

To: The Commission

Respondents appeal to the Commission, pursuant to

Rule § 3.35(b) of the Rules of Practice, from the Order

of the Hearing Examiner served on respondents’ counsel

March 15, 1972, and dated March 13, 1972, denying a

request for issuance of subpoenas duces tecum and deny-

ing respondents’ request for adjournment of the hearing

for a period of 30 days.

Respectfully submitted,

/s/ Joseph J. Lyman

JOSEPH J. LYMAN

Attorney for Respondents

—— onan

23a

[138]

ORDER DENYING APPEAL AND REQUEST FOR

PERMISSION TO FILE APPEAL

This matter is before the Commission upon the filing

by respondents on March 21, 1972 of a document en-

titled “Appeal From Order Of Hearing Examiner Deny-

ing Request For Issuance Of Subpoenas Duces Tecum

* * *” which respondents state is made pursuant to

$ 3.35(b! of the Commission’s Rules of Practice; and

upon the answer of complaint counsel filed March 27,

1972 in opposition thereto.

There are two issues involved here: (The first issue is

irrelevant to the petition.)

The other issue concerns the hearing examiner’s de-

nial of respondents’ request for subpoenas duces tecum

to be issued to five companies which apparently are com-

petitors, seeking copies of advertisements and other

documents and information. Respondents have made no

showing to support their appeal on this issue, as required

by §3.35(b) of the Commission’s Rules of Practice.

Moreover, this is a matter of discovery and rulings

thereon are ordinarily left to the sound discretion of the

hearing examiner. Respondents here made no showing

of error. Thus, the appeal on this issue likewise will be

denied. According,

IT IS ORDERED that respondent’s appeal from the

hearing examiner’s order of March 13, 1972 to the ex-

tent such order denies a request for an extension of time

to comply with the pretrial order, treated herein as a

request for permission to file an interlocutory appeal, be,

and it hereby is, denied.

IT IS FURTHER ORDERED that respondents’ ap-

peal from the hearing examiner’s order of March 13,

24a

1972 to the extent such order denies respondents’ re-

quest for the issuance of subpoenas duces tecum be, and

it hereby is, denied.

By the Commission.

/s/ Charles A. Tobin

Charles A. Tobin

Secretary

ISSUED: April 7, 1972

25a

[355]

Filed: October 9, 1973

UNITED STATES OF AMERICA

BEFORE FEDERAL TRADE COMMISSION

IN THE MATTER OF

Docket No. 8865

AMERICAN ALUMINUM CORPORATION, a corporation, and

NORMAN J. FOUCHA and Bossy G. SMITH, individually

and as officers of said corporation.

INITIAL DECISION

By David H. Allard, Administrative Law Judge.

John H. Bedford and

W. Roland Campbell,

Counsel Supporting the Complaint.

Joseph J. Lyman,

Washington, D.C.,

Counsel for Respondents.

PRELIMINARY STATEMENT

This proceeding was commenced with the issuance of a

complaint on October 4, 1971,' charging the cciporate

respondent and Norman J. Foucha and Bobby G. Smith,

individually and as officers of the corporate respondent,

with violations of Section 5 of the Federal Trade Com-

mission

[356]

Act by committing unfair methods of competition and

unfair and deceptive acts and practices in commerce and

1On brief, complaint counsel erroneously maintain the date to

be April 3, 1971.

26a

violating the Truth in Lending Act and the implementing

regulations promulgated thereunder.

A pretrial conference was held on December 21, 1971;

a request for Admissions was filed by complaint coun-

sel on January 18, 1972, to which respondents timely

failed to answer. On March 9, 1972, the matter was

assigned to the undersigned. Hearings were held in

Birmingham, Alabama, on April 4, 1972, in Chat-

tanooga, Tennessee, on April 5, 6, and 7, 1972, and in

Birmingham, Alabama, on May 30, 1972. Thereafter,

hearings were held in abeyance to allow complaint coun-

sel to proceed with remedies, the net result of which

was to enforce the subpoenas issued by the Commission

against the named individual respondents as well as

several other individuals. When this matter was resolved,

the hearings were promptly set and concluded in Birming-

ham, Alabama, on July 10 and 11, 1973. Briefs were

filed on September 10, 1973.

At those hearings, testimony and documents were in-

corporated in the record in support of the complaint

as well as in opposition thereto. This proceeding, thus,

is before the Administrative Law Judge upon the com-

plaint, answer, admissions, testimony and other evidence,

propesed findings of fact and conclusions, and briefs

filed in support thereof submitted by the parties have been

carefully considered and those findings not adopted, either

in the form proposed or in substance, are rejected as

not supported by the evidence or as involving immaterial

matter.

Having heard and observed the witnesses and having

carefully reviewed the entire record® in this proceeding,

* References to the record are made in parenthesis, and certain

abbreviations are used as follows:

Comp.—Complaint

Ans. —Answer

Tr.—Transcript page

CX—Commission exhibit

RX —Respondents’ exhibit

-—"

27a

together with the proposed findings, conclusions, and

briefs submitced by the parties as well as replies, the

Administrative Law Judge makes the following findings

as to facts, conclusions, and order.

[357]

FINDINGS OF FACT

1. Respondent American Aluminum Corporation is a

corporation organized in 1965, under the laws of the

State of Alabama, with its principal office located at

1624 6th Avenue North, Birmingham, Alabama.’ (Comp.,

par. 1; Ans. par. 1).

2. Respondent American Aluminum Corporation also

does business under the trade name National Aluminum

Corporation. (Ans. par. 1).

3. Respondents Norman J. Foucha and Bobby G.

Smith served as the principal officers of the corporate

respondent. However, respondent Foucha sold his interest

in the corporation to Bobby G. Smith in January 1971,

and thereafter severed all relationships with the corporate

respondent.' (Comp. par. 1; Ans. par. 1; Tr. 606, 607).

4. Respondent Bobby G. Smith now formulates, di-

rects and controls the acts and practices of the cor-

* At some period of time, the principal office appears to have

been moved to 228 First Avenue North, Birmingham, Alabama.

(Tr. 697-98).

‘In their proposed findings, respondents admit that the corporate

respondents’ internal office affairs and fiscal policies were con-

ducted primarily by respondent Foucha as a corporate officer until

he sold his interest to Bobby G. Smith (Tr. 609, 690, 707). Re-

spondents also admit that during that time frame, respondent Bobby

G. Smith in his capacity as a corporate officer hired the salesmen

and generally was in charge of selling the corporate respondents’

products. (Tr. 619, 690-91, 699, 707, 714).

28a

porate respondent, including the acts and practices here-

inafter set forth. (Comp. par. 1; Tr. 751-52, 754, 762,

608, 611-12, 621-22, 700).

5. Smith hires and fires salesmen (Tr. 609), fur-

nishes leads to them (Tr. 706-07), approves and pays for

the mailers and advertisements (Tr. 707-08), determines

to whom mailers will be sent (Tr. 716), presides at sales

meetings (Tr. 711-12); resolves disputes with customers

(Tr. 705-06), assumes responsibility for installation (Tr.

699), and determines to which finance company to trans-

fer the customers’ retail installment contract (Tr. 704).

[358]

6. Respondents are now, and for some time last past

have been, engaged in the advertising, offering for sale,

and distribution of residential aluminum siding, storm

windows, storm doors and various other home improve-

ment products to the public and in the installation there-

of. (Comp. par. 2; Ans. par. 2).

COUNT I

Alleging violations of Section 5 of the Federal Trade

Commission Act,

7. Respondents, in the course and conduct of their

business, now cause, and for some time last past have

caused, their said products, advertising and promotional

material, contracts, and other business papers and docu-

ments to be shipped and transmitted from and to their.

place of business, located as aforesaid in the State of

Alabama and from the suppliers of said products, located

in various states of the United States, to their prospec-

tive purchasers and purchasers thereof, located in various

other states of the United States, other than the State

of Alabama and the states in which said suppliers are

nl ee

located, and maintain, and at all times mentioned herein

have maintained, a substantial course of trade in said

products, in commerce, as “commerce” is defined in the

Federal Trade Commission Act. (Comp. par. 3; Admitted

at prehearing conference, Tr. 5).°

8. Respondents’ gross sales during 1968, were $1,-

477,977 and in 1969, $1,664,867 (CX 10b). Since Smith

became president in January 1971, sales have not di-

minished appreciably and during 1972, were about $1,-

000,000 (Tr. 712-13).

[359]

RESPONDENTS’ ADVERTISEMENTS AND

REPRESENTATIONS THEREIN

9. Respondents’ principal method of advertising its

products is through mailouts to people in selected areas

where it plans to solicit business (Tr. 611, 616). Ap-

proximately 50,000 mailers were sent out each week

(Tr. 714) to different states (Tr. 616). CX la-8b are

typical mailouts. They represent formats of advertise-

ments used by respondents during the period of 1961-

1971 (Admission #2).

10. The mailouts most often sent out by American

offered aluminium siding installed for $189.50, $199.50

or $219.50 with free storm windows (CX 1la-7b).

a. A salesman testified that leads given him were

always from the mailers, with a price of $189.50,

$199.50 or $219.50.

b. All of the 20 public witnesses whose testi-

mony was adduced at the hearings had received

‘In their proposed finding No. 8, respondents also admit that

their business “was transacted under circumstances disclosing, they

were engaged ‘in commerce’ as that term is defined in the Federal

Trade Commission Act.”

30a

mailers similar to CX la-7b. The mailers featured

the cheaper grade siding at less than $219.50.

c. There was no evidence that the mailer featur-

ing the more expensive siding (CX 8a-8b) had ever

been used, except for the testimony of respondent

— who claimed some had been sent out (Tr.

16).

11. Typical and illustrative of the contents of re-

spondents’ mailouts, but not all-inclusive thereof, are

the following:

“ALL-ALUMINUM SIDING SALE

MANY MONTHS TO PAY—LOW MONTHLY

PAYMENTS

PAY NOTHING FOR MONTHS AFTER IN-

STALLATION

$199.50

(CX la, CX 2a, CX 4a)

ENJOY EVERLASTING HOME BEAUTY

FREE BONUS

Special Offer To You—If you act promptly we will

include Storm Windows for every window in your

home as a FREE Bonus with the purchase of our

ALL Aluminum or Siding Special.

[360]

*100°c Guaranteed Genuine Aluminum Siding

* Completely installed by our expert home finishers.

" Absolutely NO EXTRAS to pay.

* YOUR CHOICE of beautiful decorator colors.

* One lifetime installation protects forever!

(CX la, 2a, 3b, 4a, 5b, 6a, 38a, 35a).

_—S.

ate SS ——

Pe ee ae

3la

THIS CARD IS WORTH $431.00 TO YOU AND

YOU GET A BONUS GIFT FREE WITH PUR-

CHASE

THIS IS A LIMITED OFFER!!

MAIL THIS CARD TODAY AND GET YOUR

FREE GIFT

Mail this card within 7 days to become eligible

for this savings, plus FREE Storm Windows for

every window in your home with the purchase of

this Aluminum Siding for your home.”

(CX 1b, 2b, 7b, 33a, 35a)

12. Each of the mailouts sent out included a business

reply card and when prospective customers fill in the

reply cards and return them to respondents, the cards

then become leads and are turned over to salesmen (Tr.

400-01, 619, 707). Thereafter, the salesmen make ap-

pointments with the prospective customers and attempt

to sell them aluminum siding installed on their homes

(Tr. 619). The respondents generally have two grades

of aluminum siding that they offer to sell. The first is

what respondents call Imperial siding and the second

is referred to as cheaper siding (Tr. 704). The cheaper

siding was offered for sale in respondents’ mailers at

$199.50, $189.50, $219.50 and $199.00 completely in-

stalled (CX la-7b). The Imperial siding is advertised

in a mailer at a price of $199.50 (CX 8a-8b).

13. Respondent American furnished salesmen with its

contract forms, mortgage forms, and rescission notices,

and other forms necessary to make sales of aluminum

siding (Tr. 465, 468). The salesman would then, upon

making a sale, obtain the customer’s signature on a blank

retail installment contract which was later completed

by American (Tr. 474).

14. Respondent American furnished salesmen un-

painted samples of the cheaper grade aluminum siding

32a

and storm windows (CX 59) to show to customers (Tr.

434). These samples were used by salesmen to show the

siding advertised at less than $219.50, with a free storm

window (Tr. 434). ~

[361]

15. Through oral statements of its salesmen who called

on prospective customers in response to receiving a reply

from the mailouts, respondents made the following rep-

resentations with regard to the transactions:

a. The offer set forth in said advertisements is a

bona fide offer to sell the advertised products at

the prices and on the terms and conditions stated.

b. Respondents’ products are being offered for sale

at special or reduced prices, and that savings

are thereby afforded to purchasers from respond-

ents’ regular selling price.

ce. Respondents’ advertised offer is made for a

limited time only.

d. That purchasers of respondents’ products would

receive a Free Bonus or gift in the form of free

storm windows.

e. After the installation of respondents’ aluminum

siding is completed, the homes of purchasers will

be used for demonstration and advertising pur-

poses by the respondents; and, as a resu!t of

allowing their homes to be used as models, pur-

chasers will be granted reduced prices or will

receive allowances, discounts or commissions.

f. Certain of respondents’ home improvement prod-

ucts are unconditionally guaranteed for life.

g. Respondents’ siding materials will never require

painting.®

° A, b, e and d above were admitted by respondents at the pre-

trial conference (Prehearing Tr. 21-22). The representations e, f

Re a i ieee ii

33a

[362]

BAIT AND SWITCH SALES TACTICS

16. Respondents’ sales methods were described by one

respondent as “step up selling” which means “When you

go into a customer’s house and sell a product and after

you sell the product you show them something besides

what you’ve advertised.” (Foucha, Tr. 610-11). To ac-

complish this, the salesman sells the cheaper grade sid-

ing and obtains a signed contract for it. After obtaining

the signed contract, the salesman persuades the customer

to purchase the Imperial grade siding at a much higher

price (Smith, Tr. 733-34). Salesmen were told by re-

spondents to sell the better grade material to earn a

commission (Cameron, Tr. 410).

17. During the time period of March 12, 1969 through

December 31, 1969, respondents neither sold nor installed

any residential siding at the advertised prices of $189.50,

$199.00, $199.50 or $219.50 (Admission #3). No docu-

mentary evidence was presented to show that American

had ever sold residential siding at the above-mentioned

prices.

18. According to respondent Foucha, American kept

something like 100 squares of the cheaper grade siding

on hand in its warehouse (Tr. 625). The installation

manager testified that he had enough of the cheaper

grade siding in stock to do only five or six jobs (Tr. 762).

Even though it maintained this limited amount in stock,

American purchased none of the residential siding ad-

vertised in the mailouts for cheaper grade siding (CX

la-7b) during the years 1968 and 1969 (Admission #7).

Although the records of sales for the nine-month period

and g, which were not admtited, will be discussed fully hereinafter

under the headings “Representations Regarding Use of Home in

Advertising,” “Guarantee,” and “Never Requires Painting”.

34a

show no sales at $219.50 or less, there were sales at

much higher prices where it appears that the cheaper

grade siding was used (Tr. 643-46; CX 11Z228, 11Z268,

11Z269). In these instances, the price per square far

exceeded the price per square advertised in CX la-7b,

which would be $19.95 to $21.95.

19. American could not have operated profitably if it

had sold its aluminum siding at prices of $199.50 with

free storm windows.

a. According to respondent Foucha, the cost of the

siding, exclusive of any assessories needed to in-

stall it, was $10-12 per square and the installer

was paid $6.00 per square (Tr. 620). A square is

100 square feet.

[363]

Overhead expenses, including advertising, were

for the year 1969, 34.7% (CX 10b) and on a

$199.50 sale would amount to $69.23. On a

$199.50 job, the siding would cost a minimum

of $100, the installation cost would be $60.00

and overhead expense would be $69.23. This

would total $229.23.

b. This figure, however, does not take into con-

sideration any commission to the salesman or the

cost of storm windows which were supposed to

be given free with the job. Thus American, tak-

ing into consideration all costs and expenses of

doing business, would lose money on any job

done at less than $219.50.

20. Respondents discouraged their salesmen from sell-

ing the siding advertised for $219.50 or less by paying

salesmen a very small commission on it, and a much

better commission on the Imperial grade siding.

35a

a. The commission on the Imperial grade siding was

50% of all money charged over $65 per square

and thus depended on the price charged the cus-

tomer (Foucha, Tr. 621).

b. The commission on the siding advertised at less

than $219.50 was a couple of dollars (Cameron,

Tr. 412). This, according to a salesman otf

American, being practically nothing, induced you

to sell a better grade material (Tr. 412).

21. Respondents discouraged the purchase of alumi-

num siding advertised at a price of $219.50 or less by

salesmen showing customers unpainted samples which

were unattractive.

a. Fifteen public witnesses who had been switched

to the Imperial grade siding were shown unpainted

samples after they had first signed a contract for siding

at $199.50 (Parkerson, Tr. 141; Ellis, Tr. 171; Smith,

Tr. 247; Bryant Tr. 264, the testimony of 11 of these

witnesses was stipulated as being the same as that of

Woods Bryant, CX 60; hereinafter when reference is

made to Bryant’s testimony, it includes the 11 witnesses

whose testimony was stipulated).

[364]

b. These witnesses described the sample as looking

like tin (Tr. 141, 247, 264) or what you would

put on a barn (Tr. 140). One witness was told

he would have to paint it right after it was put

on to keep it from tarnishing (Ellis, Tr. 172).

After Bryant saw the unpainted sample, he told

the salesman he wouldn’t have it (Tr. 265).

22. Respondents, after binding the prospective cus-

tomer to a contract for the siding of $219.50 or less, im-

mediately proceeded to disparage it, claiming that it

36a

would require special maintenance and would not prove

satisfactory.

a. Witnesses who had been switched were told that

the $199.50 siding would require regular main-

tenance such as painting or treatment (Tr. 172,

247, 264).

b. Some were told it would rattle because of not

being interlocked (Tr. 173, 174, 268) and that

anything would dent it (Tr. 269).

ce. Four witnesses who contracted for siding adver-

tised in the CX la-7b mailers were told the

siding which they purchased would require some

maintenance. They were told such things as it

would have to be treated twice a year (Creel

Tr. 66), would have to be painted every 2 or

3 years (Winsett, Tr. 98), would have to be

waxed each year (Hatcher, Tr. 274), would

have to be painted (Whaley, Tr. 317). Two

of these witnesses were told the siding would

not interlock (Winsett, Tr. 97; Whaley, Tr. 317).

23. When a customer who had contracted for the sid-

ing offered at $219.50 or less would not be switched to

the Imperial grade siding, respondents failed to perform

under its contract to install the aluminum siding. Var-

ious reasons were given, such as the siding was not in

stock.

a. Five witnesses, who contracted for cheaper grade

siding between the years 1966-1971, were unable

to get performance by American (Creel, Tr. 57-

91; Winsett, Tr. 93-119; Cannon, Tr. 223-39;

Hatcher, Tr. 82-93; Whaley, Tr. 24-37). Joseph

W. Cannon spent

37a

[365]

$25.00 in telephone charges calling American

about installation of the cheaper siding job at

$259.00, to no avail (Tr. 230-32). He made at

least 15 calls to the company (Tr. 236) and was

told such things as the siding was not in stock

(Tr. 231). He paid $25.00 down on the contract

(CX 228) by check to American (CX 50a and

b). In spite of his many efforts in prodding

American, he never received performance or his

deposit back (Tr. 232). Even the Chattanooga

Better Business Bureau and the Birmingham

Better Business Bureau, whom he contacted, did

not get him his money back (Tr. 231-32).

. Martha Winsett, who had contracted with Ameri-

ean for a siding job at $259.00 in September of

1971 (Tr. 98), was promised installation within

two weeks (Tr. 100). When no one came to in-

stall the siding, she wrote the company but re-

ceived no answer (Tr. 109-02). Believing she

was bound to the contract and wanting siding

put on her house, she contacted the Birmingham

Better Business Bureau and finally, through their

efforts, received a letter from American canceling

the contract (Tr. 102-03; CX 46).

Mattie Creel signed a contract for the cheaper

grade siding at $297.00, paying $50.00 down

(Tr. 65; CX 45). Installation, which had been

promised in two weeks, was never done (Tr.

69-70). She called American several times and

was given various excuses why the job had not

been done, such as the company was out of sid-

ing (Tr. 69-70). She was finally told her money

for down payment was being mailed (Tr. 69-70).

When it was not received, she called again and

was told she could get “two lawyers” to collect

38a

her down payment and it would not do any good

(Tr. 70). Finally, after four months of trying to

get the job done or her money back, she con-

tacted the Better Business Bureau and finally

received a refund (Tr. 71).

[366]

c. Ben Whaley contracted with American for the

cheaper grade siding and paid $39.50 down in

1966 (Tr. 318). He was promised that the sid-

ing would be installed by December 15, 1966.

As a result of not hearing from them, he wrote

letter but received no reply ‘Tr. 321). His down

payment was not refunded until he went to the

Better Business Bureau (Tr. 320-21).

d. James Hatcher, who contracted with American

for the cheaper grade siding at $335.00 (CX

39c), also failed subsequently to hear from that

company (Tr. 276). He had been promised in-

stallation within sixty days (Tr. 274). He called

at least three times and on one occasion was told

it was not in stock (Tr. 276). Subsequently, he

answered a similar mailer and contracted with

Southern Aluminum Enterprise for a similar job

at $398.00 (Tr. 277, 279; CX 40). He never

again heard from this company (Tr. 280), which

actually is a trade name used by respondent

American) Foucha, Tr. 612).

PRICE SAVINGS REPRESENTATION

24. The representation in respondents’ mailers that

a customer saves $431.00 on the advertised special (CX

1b, 2b, 4b, 7b) clearly implies that the regular price

would be $630.50. Also, the representation that $189.50

is a “50° discount special” represents a regular price

of $379.00 for the cheaper grade siding. Respondents

39a

do not have a regular price of $630.50, $379.00 or any

other regular price for the cheaper grade siding. Re-

spondents admitted there is no regular price for its

products and the prices at which they are sold vary

from customer to customer, depending on the resistance

of the prospective customer (Prehearing Conference, Tr.

27).

25. In its mailer for the Imperial grade siding (CX

8a-b), respondents claim “if you act now save 20%

NOW ONLY $1999.00.” This clearly infers a regular

selling price for the Imperial grade siding of $2493.00

for ten squares, which would amount to $249.30 per

square. The amount is much in excess of the usual and

the highest price at which the Imperial grade siding

is actually sold.

[367]

a. According to respondent Foucha, the maximum

price which salesmen would be allowed to charge

a customer for Imperial siding is $100 to $150

per square (Tr. 618).

b. According to respondent Smith, the average price

of the Imperial siding is only $90 per square

(Smith, Tr. 739).

ec. Cameron, a salesman, testified the list price for

Imperial siding installed with ten squares would

be $1595 (Tr. 502). The normal price would

be based on $100 per square or $1000 for the

job advertised on the mailer CX 8a-b (Tr. 502,

503).

d. Thus, the highest price which a salesman would

be authorized to charge for the Imperial grade

siding on the mailer would be $1500 and the

average price on a job as advertised would be

$900-$1000.

40a

e. The claimed regular price is more than two times

this average price of a job and 60% in excess

of the highest possible price charged customers.

LIMITED TIME OFFER

26. The offer made in the mailers for siding at

$219.50 or less was not for a limited time only as

represented. The mailers with the offer proclaiming

“All American Siding Sale” were sent out to prospec-

tive customers each and every week (Smith, Tr. 707-08).

In fact, about 50,000 mailers were sent each week

(Smith, Tr. 714).

a. The so-called special offer was a continuing offer

even though it had the appearance of bait de-

signed to make sales at higher prices. The only

sense in which the offer was limited was that

American might not send a salesman to the area

for an isolated lead (Cameron, Tr. 530-31).

b. The mailer, however, clearly gives the impression

that the sale advertised was a limited offer and

not being continually made (CX 1la-7b).

[368]

ce. The prospective customer considered the price at

which the siding was advertised to be an excep-

tional bargain (Winsett, Tr. 94; Parkerson, Tr.

139; Ellis, Tr. 159; Bryant, Tr. 263).

d. Because it had the appearance of a bargain, the

prospective customer mailed it back right away

(Bryant, Tr. 263). Some customers sent the

card back shortly after receiving the mailer to

qualify for the free storm windows, which offer

they assumed to be limited (Creel, Tr. 63; Par-

kerson, Tr. 137).

4la

27. Respondents’ salesmen tell customers the reduced

price on the Imperial grade siding is a limited offer

(American, Tr. 458). As an example, one customer was

told the offer of Imperial siding at $995 was limited

(Smith, Tr. 251). The Imperial siding is offered con-

tinuously at similar prices (See Finding 25).

FREE GIFT REPRESENTATION

28. The mailers state “mail this card today and get

your free gift” (CX la-7b). Prospective customers do

not receive any gift for sending the mailer. In fact,

customers do not receive the free gift of storm windows

mentioned in is mailers for making a purchase.

a. None of the 20 customer witnesses received any

free gift or storm windows.

b. Mrs. Parkerson, who was promised storm win-

dows and doors by the salesman, did not receive

them (Tr. 141). The salesman entered “no

plastic windows” on her contract (CX 57) to

make her believe she would receive aluminum

storm windows.

c. The free storm windows are not given to cus-

tomers who purchase the Imperial grade siding

and they are only free with the cheaper material

(Campbell, Tr. 767).

d. Salesmen were told to tell customers “that they’re

plastic, and cost about a dollar each to manu-

facture” (Cameron, Tr. 433).

[369]

e. Mrs. Creel sent the reply card back in immedi-

ately in order to receive the free storm windows

offered (Tr. 63). She contracted to purchase

42a

the advertised special in the mailer and did not

receive either it or the storm windows (Tr. 68-

69).

REPRESENTATIONS REGARDING USE OF

HOME IN ADVERTISING

29. Respondents, through their salesmen, offer cus-

tomers a so-called reduced price if they will allow their

homes to be used for advertising and demonstration pur-

poses.

a. All of the customers who purchased the Imperial

grade siding were told that they were receiving

a price reduction for allowing their homes to

be used for advertising purposes (Ellis, Tr. 175;

Smith, Tr. 253; Parkerson, Tr. 143; Bryant Tr.

266).

b. In addition to this, James W. Smith was offered

$50 for every other job sold as the result of the

company using pictures taken of his home (Tr.

253).

30. Respondents, after installation of siding on the

homes of purchasers, do not use the homes for demonstra-

tion or advertising purposes (Admitted at Prehearing

Conference, Tr. 30).

GUARANTEE

31. Respondents, through their salesmen, represent

that their Imperial grade siding is guaranteed for life

and that customers will receive a written guarantee

to this effect.

a. Cameron, a salesman, testified that each and

every customer is told he will receive a lifetime

guarantee on the Imperial siding (Tr. 450, 456).

Te Se

een eee

Pe ee

43a

b. Customers were told that the expensive siding

was guaranteed “just as long as it was on the

house” (Bryant, Tr. 267). James W. Smith, who

[370]

was told it was guaranteed a lifetime (Tr. 251),

was also told “we’ll guarantee it not to blow off”

(Tr. 250).

32. Responents’ written guarantee on the Imperial

grade siding is as follows:

“Vendor guarantees this aluminum siding applied

on your home to be free from defects of workman-

ship and material, and shall replace any defective

part free of charge for the lifetime of your struc-

ture; however, the seller will not be responsible for

defects or damages arising through negligence of

purchaser or acts of anyone else.” (CX 9; Foucha,

Tr. 626-27).

33. Respondents do not furnish each customer the

written guarantee on the Imperial grade siding (Smith,

Tr. 251-52; Bryant, Tr. 268).

34. Respondents’ home improvement products are not

unconditionally guaranteed. Such guarantee as may be

provided is subject to numerous terms, conditions and

limitations respecting the duration of the guarantee and

the extent and manner of performance thereunder (Ad-

mitted, Prehearing Conference, Tr. 31).

35. Respondents do not fully honor the guarantee on

the Imperial grade siding.

Illustrative is the fact that the Imperial grade siding

which was installed by respondents on James W. Smith’s

home blew off and respondents refused to fix it, claiming

this was not covered by the guarantee (Tr. 250, 252).

44a

36. Respondents’ representations on its mailers for

cheaper grade siding “100% Guaranteed Genuine Alumi-

num Siding,” “One lifetime installation protects forever”

and “Enjoy Everlasting Home Beauty” infer that it is

guaranteed to last and protect one’s home indefinitely.

One witness expressed it this way, “I just took it from

the card that it was good aluminum and it was—I kind

of took it as a lifetime guarantee” (Ellis, Tr. 171).

37. There was no guarantee on the cheaper grade sid-

ing other than that it was 100% aluminum siding

(Foucha, Tr. 627). Salesmen told prospective customers

that the only guarantee on the cheaper grade siding was

that it would be installed properly (Cameron, Tr. 447).

[371]

NEVER REQUIRES PAINTING

38. Respondents, by the statements in their mailers

(CX la-7b), “Stop Unnecessary Home Problems” and

“Enjoy Everlasting Home Beauty”, imply that the siding

advertised will not require painting or other maintenance.

39. The cheaper grade siding advertised requires

maintenance including painting at regular intervals ac-

cording to what respondents’ salesmen tell prospective

customers (see Finding 22).

COUNT II

Alleging violations of the Truth in Lending Act and

the implementing regulation promulgated thereunder and

of the Federal Trade Commission Act,

40. Respondents regularly extended, and for some time

last past have regularly extended, consumer credit, as

“consumer credit” is defined in Regulation Z, the imple-

menting regulation of the Truth in Lending Act duly

45a

promulgated by the Board of Governors of the Federal

Reserve System (Corp. par. 11; Ans. par. 11; Admitted,

Prehearing Conference, Tr. 39):

41. Respondents, in their mailers advertising alumi-

num siding, state that it can be purchased with “no

down payment” without disclosing the other terms of

sales, such as:

a. The cash price;

b. The number, amount, and due dates or period

of payments scheduled to repay the indebtedness

if the credit is extended;

c. The amount of the finance charge expressed as

an annual percentage rate; and

d. The deferred payment price.

(Admitted, Prehearing Conference, Tr. 41).

[372]

42. Since the Truth in Lending Act went into effect

on July 1, 1969, respondents have caused the following

additional information and clause to appear in their con-

tracts with credit customers:

“The undersigned agree(s) that due to the custom

nature of the work called for herein (he) (they)

will pay as liquidated and agreed damages the sum

of 25% of the agreed price upon (his) (their) can-

cellation of this agreement . Mg

(CX 24¢, 25e, 37, 42, 57)

43. By and through the use of the above-quoted addi-

tional information and clause, respondents have and are

representing to their customers that they are liable for

damages in the event that these customers exercise their

right to rescind, and said additional information mis-

leads and confuses the customer and contradicts, ob-

46a

secures and detracts attention from the information re-

quired by Regulation Z to be disclosed.

a. The experience of Billy Ellis, who testified at

the hearings, illustrates how a prospective cus-

tomer can be confused about his right to re-

scind the contract under the Truth in Lending

Act.

b. Ellis contracted for the Imperial grade siding

on October 9, 1969 (CX 32; Tr. 182). He was

given a group of papers in an envelope, which

he was told by the salesman to keep and not do

anything with them until hearing from the com-

pany (Tr. 183). The next day after signing the

contract, Ellis decided he had made a bad deal

and would like to back out (Tr. 183). He did

not do anything about backing out of the contract

because the contract had the appearance of being

legally binding (Tr. 183-84).

HOLDER IN DUE COURSE

44. In a substantial number of instances and in the

usual course of their business, respondents sell and

transfer their customers’ obligations to various financial

institutions. In any subsequent legal action to collect

on such obligations, these financial institutions or other

third parties, as a

[373]

general rule, have available and can interpose various

defenses which may cut off certain valid claims cus-

tomers may have against respondents for their failure

to perform or for certain unfair, false, misleading or

deceptive acts and practices.

a. This was admitted by respondents at a prehear-

ing conference, Tr. 37-38.

ee ee

47a

b. The experience of James W. Smith illustrates

how a customer has no recourse against the

lending institution purchasing his contract with

respondents. Smith claimed that respondents

failed to honor their guarantee on the Imperial

grade siding installed on his home (Tr. 250,

252). Consequently, Smith complained to the

finance company to whom he was making pay-

ments, Aveo, that American had not completed

service on his house (Tr. 255). Smith testified

regarding Avco’s reply as follows: “They said

there wasn’t nothing they could do about it.

It was between me and the company, American

Aluminum Corporation.” (Tr. 255).

CONCLUSIONS

45. Respondents consistently employ “bait and switch”

tactics in selling their aluminum siding, which inherently

is a deceptive practice,

a. The offer in its mailers to sell aluminum sid-

ing fully installed with free storm windows for

a price of $219.50 or less is not a bona fide

offer but rather one used as bait to obtain leads

of prospective customers who can then be sold the

more expensive aluminum siding on which re-

spondents realize a more substantial profit (Find-

ings 15-19). The fact that this siding is not

generally sold is enough to draw an inference of

a switch.

b. To accomplish the switch, respondents disparage

the aluminum siding which it extensively ad-

vertises, by use of unpainted samples and run-

ning it down (Findings 20, 21). This

48a

[374]

method of selling, as employed by respondents,

presents a bait and switch scheme including most

all of the elements of that practice and clearly

fits the definition of this unfair practice set forth

in the Commission’s Guides Against Bait Adver-

tising. (CCH Trade Reg. Rep. § 39,011 Novem-

ber 24, 1959):

“Bait advertising is an alluring but in-

sincere offer to sell a product or service

which the advertiser in truth does not in-

tend or want to sell. Its purpose is to switch

consumers from buying the advertised mer-

chandise, in order to sell something else,

usually at a higher price or on a basis more

advantageous to the advertiser. The primary

aim of a bait advertisement is to obtain

leads as to persons interested in buying

merchandise of the type so advertised.”

The bait and switch nature of respondents’ op-

eration is evidence by practices condemned by

the Guides:

1. Respondents’ offer to sell advertised product

in advertisements is not a bona fide effort

to sell it (Guide 1).

2. The first contact or interview with the cus-

tomer is secured by deception in that the offer

in respondents’ advertisements does not truth-

fully represent the product and nature of the

offer (Guide 2).

3. Respondents refuse to sell the product offered

in accordance with the terms of the offer

(Guide 3/a)).

4. Respondents and their representatives dis-

parage the advertised product (Guide 3(b)).

49a

5. Respondents do not have a sufficient quantity

of the advertised product to meet reasonably

anticipated demands (Guide 3(c) ).

[375]

6. Respondents show or demonstrate a product

that is defective, unusable, or impractical

for the purpose represented in the advertise-

ment (Guide 3(e)).

7. Respondents use a sales plan or a method of

compensation for salesmen designed to pre-

vent or to discourage them from selling the

advertised product (Guide 3(f)).

8. Respondents fail to deliver the advertised

product and make refunds (Guide 4(b)).

d. The facts here are also almost identical to the

factual situation presented in All-State Indus-

tries of N. C., ine. v. FTC, 465, 423 F.2d 423

(4th Cir. 1970), cert. denied, 400 U.S. 828

(1970!. There, the Court of Appeals affirmed a

decision of the Federal Trade Commission hold-

ing bait and switch practices to be a deceptive

practice.’

7 The Commission described the practices in its All-State decision,

75 F.T.C. 465, 485, as follows:

“Respondents’ principal method of advertising is through

mail-outs which include return mail cards. These mail-out ad-

vertisements promote an inexpensive product within respond-

ents’ product line which they refer to as an “ADV” product.

The ADV product is ostensibly offered at a substantial reduc-

tion from a fictitious “regular” price for a fictitious “limited”

time. Respondents also sell a more expensive line of similar

products which they term “PRO” products. When prospective

customers return the mail cards to respondents, the cards are

turned over to salesmen who make appointments with the

prospective customers. Respondents’ sales approach is to

attempt to obtain a signed contract for sale of the ADV

50a

[376]

e. The only difference here and All-State, supra,

is that respondents herein do not install the

cheaper grade siding which they advertise (see

Finding 17), making this even a more obvious

example of bait and switch. See Royal Construc-

tion Company, 71 F.T.C. 762 (1967), where

similar sales methods were found to be bait and

switch practices.

46. Respondents have engaged in deceptive advertising

by claiming that their products are being offered at spe-

cial or reduced prices and for a limited time only.

a. Respondents misrepresent the savings to a pro-

spective customer on their siding advertised at

$219.50 or less and on their Imperial grade sid-

ing (Findings 24 and 25) and that the offers

on both grades siding are limited (Findings 26-

27).

b. In All-State Industries, supra, the respondents

therein also represented in their mailouts that

their prices were specials and reduced for a

limited time only. It was held therein that the

representations of price savings and that the

offer was limited were deceptive because “with

minor changes from time to time, respondents’

product along with a signed note for the price of the product

and a deed in blank. After obtaining the signed contract, the

salesman proceeds to disparage the ADV product by pointing

out a multitude of deficiencies in the product. The salesman

then produces a sample of the PRO product, embarks upon a

lengthy discussion of its virtues in contrast with the de-

ficiencies of the ADV and concludes, whenever possible, by

selling the PRO preduct to the customer in place of the ADV

product. Respondents do, however, install the ADV product

if a customer insists or demands its installation in accordance

with the ADV contract.”

5la

prices for their ADV products have always re-

mained substantially the same and do not rep-

resent any reduction from previously established

prices.” (75 FTC at p. 477).

(377]

ce. In Royal Construction Company, supra at 781,

the representation “limited time’ in connection

with their special offer of aluminum siding was

held to be a deceptive practice because “respond-

ents regularly advertised the so-called aluminum

siding over a period of two years.”

47. Respondents have engaged in deceptive advertis-

ing by misrepresenting that customers will receive a free

gift by sending in the mailout business reply card or

making a purchase. See Finding 28 and Royal Construc-

tion Company, supra at 782-85, where the same practice

was held to be deceptive.

48. Respondents have engaged in deceptive advertis-

ing and selling practices by advising prospective cus-

tomers that their homes may be used for advertising

purposes and thereby granting a reduction from prices

originally quoted. See Findings 29-30 and All-State In-

dustries, 75 F.T.C. 477, 478, wherein the same repre-

sentation was held to be a deceptive practice.

49. Respondents have engaged in a deceptive practice

by misrepresenting the guarantee on the products they

sell. See Findings 31-37 and All-State Industries, 75

F.T.C. 478, wherein it was held that the representation

“100°- Guaranteed Genuine Aluminum Siding” in mail-

outs was deceptive where the “Actual guarantee, when

presented to a customer, is not an unconditional 100%

guarantee.” Here, the siding advertised at $219.50, or

less, was not guaranteed at all, although it was rep-

resented to be “100% Guaranteed Genuine Aluminum

52a

Siding” in the mailouts. See Guide I of the FTC Guide

Against Deceptive Advertising of Guarantees, CCH Trade

Reg. Rep. § 39,014, April 26, 1960, which requires full

disclosure of all facts whenever a guarantee is advertised.

50. Respondents have engaged in a deceptive practice

by misrepresenting that its aluminum siding never re-

quires repainting (see Findings 38-39).

51. The use by respondents of the aforesaid false,

misleading and deceptive statements, representations and

practices has had and now has the capacity and ten-

dency to mislead members of the purchasing public into

the erroneous and mistaken belief that said statements

and representations were and are true and into the

purchase of substantial

[378]

quantities of respondents’ products by reason of said

erroneous and mistaken belief.

a. It long has been established that the Commis-

sion may utilize its accumulated expertise to de-

termine what direct and implied representations

are contained in such advertising. Pfizer, Inc.,

F.T.C. Docket No. 8819 (1972); FTC v. Col-

gate-Palmolive Co., 380 U.S. 374 (1965), and

its expertise may be similarly applied to de-

termine what facts are material to consumers

and whether such information has been withheld.

(Pfizer, supra). Moreover, in making such de-

terminations, the Commission may draw its own

inferences from the advertisements and need not

depend on testimony or exhibits, aside from the

advertisements themselves, introduced into the

record. Carter Products, Inc. v. FTC, 323 F.2d

523 (5th Cir. 1963).

b. A finding of actual deception is not prerequisite

to proof of a violation of the Federal Trade Com-

ae ie ei

> a '

53a

mission Act, and representations merely having

the capacity to deceive are unlawful. Charles of

the Ritz Dist. Corp. v. FTC, 143 F.2d 676, 680

(2nd Cir. 1944).

ce. “The important criterion in determining the

meaning of an advertisement is the net impres-

sion that it is likely to make on the general popu-

_ lace.” National Bakers Services, Inc. v. FTC,

329 F.2d 365, 367 (7th Cir. 1964). In determin-

ing the impression created by an advertisement,

the Commission need not look to the technical

interpretation of each phrase but must look to

the overall impression likely to be made on the

buying public. Murray Space Shoe Corporation

v. FTC, 304 F.2d 270, 272 (2nd Cir. 1962).

d. Although a statement “may be obviously false to

those who are trained and experienced |this]

does not change its character, nor take away its

power to deceive others less experienced.” FTC

v. Standard Education

[379]

Society, et al, 302 U.S. 112, 116 (1937). The

fact that the representation may be obviously

_ false to the more sophisicated is immaterial.

52. The aforesaid acts and practices of respondents,

as herein found, were and are all to the prejudice and

injury of the public and of respondents’ competitors and

constituted and now constitute unfair methods of com-

petition in commerce and unfair and deceptive acts and

practices in commerce, in violation of Section 5 of the

Federal Trade Commission Act.* This deception of pur-

* Respondents admit that they have been in substantial compe-

tition in commerce, with corporations, firms and individuals in the

sale of aluminum siding and other aluminum home improvement

products of the same kind. (Comp. par. 8; Ans. par. 8).

54a

chasers constitutes unfair competition. FTC v. Winsted

Hoisery Co., 258 U.S. 483 (1922). In reaching this con-

clusion, the Administrative Law Judge has evaluated re-

spondents’ practices in light of the capacity of the ad-

vertisements to deceive, and the inherent unfairness of

the advertisements and the practices, and not on the

basis of a demonstrated injury to purchasers. Mont-

gomery Ward & Co. v. FTC, 379 F.2d 666 (7th Cir.

1967); Charles of the Ritz, supra.

53. Moreover, by the acts described above, respond-

ents have failed to comply with the provisions of Regu-

lation Z, the implementing regulation of the Truth in

Lending Act duly promulgated by the Board of Gov-

ernors of the Federal Reserve System, which failure

constitutes a violation of the Federal Trade Commission

Act pursuant to Section 103(q) of the Truth in Lending

Act.

54. In their proposed findings and conclusions of law,

respondents urge the Administrative Law Judge to con-

clude that there “is no evidence to support the allega-

tions of the complaint that respondents Norman J. foucha

and Bobby G. Smith, in their individual capacities, vio-

lated the provisions of the Federal Trade Commission, or

the Truth-in-Lending Act.” However, the named indi-

vidual respondents admittedly were the persons responsi-

ble for the management, direction and control of the cor-

porate respondent. Effective administration of the Fed-

eral Trade Commission Act and the Truth in Lending

[380]

Act dictate that an outstanding order be directed against

the responsible individuals and not merely against a life-

less corporate entity. For respondents Norman J. Foucha

and Bobby G. Smith were, and Bobby G. Smith now is, in

fact, the alter ego of American Aluminum Corporation.

il APO a APN ae ek

55a

Cf. Fred Meyer, Inc., 63 F.T.C. 1; Pati-Port, Ine. v.

Federal Trade Commission, 313 F.2d 103, 105 (4th Cir.

1963).

55. Since one of the essential purposes of both the

Federal Trade Commission Act and the Truth in Lending

Act is the protection of the public, the Commission nec-

esSarily must “be allowed effectively to close all roads to

the prohibited goal, so that its order may not be by-

passed with impunity.” Federal Trade Commission v.

Ruberoid Co., 343 U.S. 470, 473 (1952). The remedy in

the accompanying order has a reasonable relationship to

the unlawful practice here found to exist. It is the only

action which reasonably could be calculated to preclude

a revival of the illegal practices.

56. The Federal Trade Commission has jurisdiction of

and over respondents and the subject matter of this pro-

ceeding.

57. The complaint herein states a cause of action and

this proceeding is in the public interest.

58. This decision is not a major Federal action sig-

nificantly affeciiig the quality of the human environment

within the meaning of the National Environmental Policy

Aci of 19069."

* Section 102 of the National Environmental Policy Act of 1969

(Public Law 91-190), specifically requires that all agencies of the

Federal Government shall, to the fullest extent possible,

“(C) include in every recommendation or report on proposals

for legislation and other major Federal actions significantly

effecting the quality of the human environment, a detailed

statement by the responsible official on—

(i) the environmental impact of the proposed action,

[381]

(ii) any adverse environmental effects which cannot

be avoided should the proposal be impleemnted,

[Footnote continued on page 56a]

56a

[382]

ORDER

IT IS ORDERED that respondents American Alumi-

num Corporation, a corporation, and its officers, and

Norman J. Foucha and Bobby G. Smith, individually and

as officers of said corporation, and respondents’ agents,

representatives and employees, directly or through any

® [Continued }

(iii) alternatives to the proposed action,

(iv) the relationship between local short-term uses of

man’s environment and the maintenance and enhancement

of long-term productivity, and

(v) any irreversible and irretrievable commitments of

resources which would be involved in the proposed action

should it be implemented.”

But see Harlem Valley Transportation Association v. George M.

Stafford, Civil No. 73-Civ. 1330, S.D.N.Y., June 21, 1973, where the

Court emphasized that the agency “should determine at the out-

set of * * * proceedings whether ‘major Federal actions signifi-

cantly affecting the quality of the human environment’ are in-

volved within the meaning of 42 U.S.C. § 4332(2)(C), and, if so,

(2) to require staff preparation of a draft impact statement for

circulation to the parties. . .”; and Hanly v. Kleindienst, 471 F.2d

823 (2nd Cir. 1972) where the Second Circuit Court of Appeals

held at p. 836 that:

“Notwithstanding the absence of statutory or administrative

provisions on (threshold determinations), this Court has al-

ready held in Hanly J * * * that federal agencies must ‘affirm-

atively develop a reviewable environmenta! record . . . even

for purposes of a threshold (NEPA) determination.’ We now

go further and hold that before a preliminary or threshold

determination of significance is made the responsible agency

must give notice to the public of the proposed major federal

action and an opportunity to submit relevant facts which might

bear upon the agency’s threshold decision. * * * The precise

procedural steps to be adopted are better left to the agency,

which should be in a better position to determine whether

solution of the problems with respect to a specific major fed-

eral action can better be achieved through a hearing or by in-

formal acceptance of relevant data.”

57a

corporate or other device, in connection with the adver-

tising, offering for sale, sale, distribution or installation

of aluminium siding, storm windows, storm doors or any

other products, in commerce, as “commerce” is defined

in the Federal Trade Commission Act, do forthwith cease

and desist from:

1. Using, in any manner, any advertising, sales

plan, scheme or device wherein false, misleading

or deceptive statements or representations are

made in order to obtain leads or prospects for

the sale of other merchandise or services.

2. Making representations purporting to offer mer-

chandise for sale when the purpose of the rep-

resentation is not to sell the offered merchandise

but to obtain leads or prospects for the sale of

other merchandise at higher prices.

[383]

3. Discouraging the purchase of or disparaging any

merchandise or services which are advertised or

offered for sale.

4. Representing, directly or by implication, that any

merchandise or services are offered for sale when

such offer is not a bona fide offer to sell such

merchandise or services.

Representing, directly or by implication, that any

price for respondents’ products and/or services is

a special or reduced price, unless such price con-

stitutes a significant reduction from an estab-

lished selling price at which such products and/or

services have been sold in substantial quantities

by respondents in the recent regular course of

their business; or misrepresenting, in any man-

ner, the savings available to purchasers.

10.

11.

58a

Representing, directly or by implication, that any

offer to sell products is limited as to time or is

limited in any other manner.

Representing, directly or by implication, that

persons will receive a gift of a specified article

of merchandise, or anything of value.

[384]

Representing, directly or by implication, that the

home of any of respondents’ customers or pros-

pective customers will be used as a model home,

or otherwise, for advertising, demonstration or

sales purposes.

Representing, directly or by implication, that any

allowance, discount or commission is granted by

respondents to purchasers in return for per-

mitting or agreeing to allow the premises on

which respondents’ products are installed to be

used for model homes or demonstration purposes.

Representing, directly or by implication, that any

of respondents’ products are guaranteed, unless

the nature and extent of the guarantee, the iden-

tity of the guarantor, and the manner in which

the guarantor will perform thereunder are clearly

and conspicuously disclosed; or making any direct

or implied representation that any of respond-

ents’ products are guaranteed unless in each in-

stance a written guarantee is given to the pur-

chaser containing provisions fully equivalent to

those contained in such representations.

[385]

Representing, directly or by implication, that any

product is guaranteed for life without clearly

ee es

12.

13.

14,

15.

59a

and conspicuou:ly disclosing the life to which

such reference is made; or misrepresenting, in

any manner, the duration, nature or extent of

any guarantee.

Representing, directly or by implication, that re-

spondents’ products will never require repainting;

or misrepresenting, in any manner, the durability

or efficacy of respondents’ products.

Failing to deliver a copy of this order to all

present and future salesmen or other persons

engaged in the sale of respondents’ products

and to secure from each salesman or person a

= statement acknowledging receipt of said

order.

Assigning, selling or othgrwise transferring re-

spondents’ notes, contracts or other documents

evidencing a purchaser’s indebtedness, unless any

rights or defenses which the purchaser has and

may assert against respondent are preserved and

may be asserted against any assignee or subse-

quent holder of such note,

[386]

contract or other documents evidencing the in-

debtedness.

Failing to include the following statement clearly

and conspicuously on the face of any note, con-

tract or other instrument of indebtedness exe-

cuted by or on behalf of respondents’ customers:

“NOTICE”

“Any holder takes this instrument subject

to the terms and conditions of the contract.

which gave rise to the debt evidenced here-

60a

by, any contractual provision or other agree-

ment to the contrary notwithstanding.”

16. Failing to maintain adequate records:

(a)

(b)

(¢c)

For a period of five (5) years which disclose

the factual basis for any representations or

statements as to special or reduced prices,

as to usual and customary retail prices, as

to savings afforded to purchasers, and as to

similar representations of the type described

in paragraph 5 of this order.

[387]

For a period of five (5) years, with regard

to each and every contract hereafter entered

into between respondents and their custom-

ers, which disclose, in itemized form, what

each customer was charged, exclusive of in-

terest or finance charges, for materials and

for labor, and for those contracts involving

siding, or the installation of siding, or both,

additional information as to the total amount

of siding materials and other materials in-

stalled or delivered to the customer, the type

and grade of said siding and other mate-

rials, a description of the installation per-

formed, the total amount of money paid to

salesmen, agents or representatives for the

solicitation of the said contracts, and what

each customer was charged exclusive of in-

terest or finance cherges per square foot for

the performance of the said contract. .

[388]

For a period of five (5) years invoices, no-

tices for payment and all similar documents

Oe ee ee ee eee °

6la

which respondents receive in the conduct of

their business from suppliers, subcontractors

and other persons, and for a period of five

(5) years copies of all contracts entered

into between respondents and their custom-

ers,

IT IS FURTHER ORDERED that respondents Amer-

ican Aluminum Corporation, a corporation, and its offi-

cers, and Norman J. Foucha and Bobby G. Smith, indi-

vidually and as officers of said corporation, and respond-

ents’ agents, representatives and employees, dir®ttly or

through any corporate or other device in connection with

any advertisement or consumer credit sale of home im-

provement products or services, or any other products or

services, as “advertisement” and “credit sale” are de-

fined in Regulation Z (12 CFR 226) of the Truth in

Lending Act (P.L. 90-321, 15 U.S.C. 1601 et seg.), forth-

with cease and desist from:

1. Representing, directly or by implication, in any

advertisement as “advertisement” is

[389]

defined in Regulation Z, the amount of the down-

payment required or that no downpayment is re-

quired, the amount of any installment payment,

the dollar amount of any finance charge, the num-

ber of installments or the period of repayment, or

that there is no charge for credit, unless all of

the following items are stated in terminology pre-

scribed under Section 226.8 of Regulation Z:

(i) the cash price;

62a

(ii) the amount of the downpayment required

or that no downpayment is required, as ap-

plicable;

(iii) the number, amount, and due dates or pe-

riod of payments scheduled to repay the

indebtedness if the credit is extended;

(iv) the amount of the finance charge expressed

as an annual percentage rate; and

(v) the deferred payment price.

[390]

. Representing, directly or by implication, on re-

tail installment contracts, promissory notes, or on

any written document or orally, that customers

will or may be liable for damages, penalties or

any other charges for exercising their right to

rescind that is provided by Section 226.9 of

Regulation Z.

Supplying any additiona! information, contract

clause or other statement about the customer’s

liability or obligations in the event that the cus-

tomer exercises his right to rescind except that

information furnished in accordance with Section

226.9 of Regulation Z.

Supplying any additional information, in writing

or orally, that is stated, utilized or placed so as

to mislead or confuse the customer or that con-

tradicts, obscures or detracts attention from the

information that is required to be disclosed by

Regulation Z, as prohibited by Section 226.6(c)

of Regulation Z.

Failing, in any consumer credit transaction or

advertisement, to make all disclosures,

63a

[391]

determined in accordance with Sections 226.4 and

226.5 of Regulation Z, in the manner, form and

amount required by Sections 226.6, 226.8, 226.9

and 226.10 of Regulation Z.

Ill

IT IS FURTHER ORDERED that the respondent cor-

poration shall forthwith distribute a copy of this order

to each of its operating divisions.

IT IS FURTHER ORDERED that respondents shall

forthwith deliver a copy of this order to cease and desist

to all present and future salesmen or other persons en-

gaged in the sale of respondents’ products or services,

and shall secure from each such salesman or other person

a signed statement acknowledging receipt of said order.

IT IS FURTHER ORDERED that respondents notify

the Commission at least thirty (30) days prior to any

proposed change in the corporate respondent such as dis-

solution, assignment or sale resulting in the emergence

of a successor corporation, the creation or dissolution of

subsidiaries or any other change in the corporation which

may affect compliance obligations arising out of the

order.

IT IS FURTHER ORDERED that the individual re-

spondents named herein promptly notify the Commission

of the

[392]

discontinuance of their present business or employment

and of their affiliation with a new business or employ-

ment. Such notice shall include respondents’ current

business address and a statement as to the nature of the

64a

business or employment in which they are engaged as

well as a description of their duties and responsibilities.

/s/ David H. Allard

DAvip H. ALLARD,

Administrative Law Judge.

65a

[482]

(Issued: July 2, 1974)

UNITED STATES OF AMERICA

BEFORE FEDERAL TRADE COMMISSION

COMMISSIONERS:

Lewis A. Engman, Chairman

Paul Rand Dixon

Mayo J. Thompson

M. Elizabeth Hanford

Stephen Nye

Docket No. 8865

In the Matter of

AMERICAN ALUMINUM CORPORATION,

a corporation, and

NORMAN J. FOUCHA and

Bossy G. SMITH, individually

and as officers of said corporation.

FINAL ORDER

This matter having been considered on respondents’

appeal from an initial decision of the administrative law

judge of October 9, 1973, and the Commission having

determined that said appeal should be granted in part

and denied in part in accordance with the accompanying

opinion of the Commission:

IT IS ORDERED that respondents American Alumi-

num Corporation, a corporation, and its officers, and

Norman J. Foucha and Bobby G. Smith, individually and

as officers of said corporation, and respondents’ agents

representatives and employees, directly or through any

corporate or other device, in connection with the adver-

66a

tising, offering for sale, sale, distribution or installation

of aluminium siding, storm windows, storm doors or any

other products, in commerce, as “commerce” is defined

in the Federal Trade Commission. Act, do forthwith cease

and desist from:

[483]

Using, in any manner, any advertising, sales

plan, scheme or device wherein false, misleading

or deceptive statements or representations are

made in order to obtain leads or prospects for

the sale of other merchandise or services. :

Making representations purporting to offer mer-

chandise for sale when the purpose of the repre-

sentation is not to sell the oeffred merchandise

but to obtain leads or prospects for the sale of

other merchandise at higher prices.

Discouraging the purchase of or disparaging any

merchandise or services which are advertised or

offered for sale.

Representing, directly or by implication, that any

merchandising or services are offered for sale

when such offer is not a bona fide offer to sell

such merchandise or services.

Representing, directly or by implication, that any

price for respcndents products and/or services is

a special or reduced price, unless such price con-

stitutes a significant reduction from an estab-

- lished selling price at which such products and/or

services have been sold in substantial quantities

by respondents in the recent regular course of

their business; or misrepresenting, in any man-

ner, the savings available to purchasers.

Representing, directly or by implication, that any

offer to sell products is limited as to time or is

10.

11.

67a

limited in any other manner, unless such repre-

sented limitations are actually in force and are

in good faith adhered to.

Falsely representing, directly or by implication,

that persons will receive a gift of a specified

article of merchandise, or anything of value.

Falsely representing, directly or by implication,

that the home of any of respondents’ customers

or prospective customers will be used as a model

home, or otherwise, for advertising, demonstra-

tion or sales purposes.

[484]

Falsely representing, directly or by implication,

that any allowance, discount or commission is

granted by respondents to purchasers in return

for permitting or agreeing to allow the premises

on which respondents’ products are installed to

be used for model homes or demonstration pur-

poses.

Representing, directly or by implication, that

any of respondents’ products are guaranteed, un-

less the nature and extent of the guarantee, the

identity of the gurantor, and the manner in

which the guarantor will perform thereunder

are clearly and conspicuously disciosed; or mak-

ing any direct or implied representation that

any of respondents’ products are guaranteed un-

less in each instance a written guarantee is

given to the purchaser containing provisions

fully equivalent to those contained in such rep-

resentations.

Representing, directly or by implication, that any

product is guaranteed for life without clearly and

12.

13.

14.

68a

conspicuously disclosing the life to which such

reference is made; or misrepresenting, in any

manner, the duration, nature or extent of any

guarantee.

Representing, directly or by implication, that

respondents’ products will never require repaint-

ing; or misrepresenting, in any manner, the dur-

ability or efficacy of respondents’ products.

Failing to deliver a copy of this order to all

present and future salesmen or other persons

engaged in the sale of respondents’ products and

to secure from each salesman or person a signed

statement acknowledging receipt of said order.

Failing to maintain adequate records:

ia) For a period of five (5) years which dis-

close the factual basis for any representa-

tions or statements as to special or reduced

prices, as to usual and customary retail

prices, as to savings afforded to purchasers,

and as to similar representations of the type

described in paragraph 5 of this order.

[485]

(b) For a period of five (5) years, with regard

to each and every contract hereafter entered

into between respondents and their custom-

ers, which disclose, in itemized form, what

each customer was charged, exclusive of in-

terest or finance charges, for materials and

fer labor, and for those contracts involving

siding, or the installation of siding, or both,

additional information as to the total amount

of siding materials and other materials in-

stalled or delivered to the csutomer, the type

69a

and grade of said siding and other materials,

a description of the installation performed,

the total amount of money paid to salesmen,

agents or representatives for the solicitation

of the said contracts, and what each cus-

tomer was charged exclusive of interest or

finance charges per square foo. for the per-

formance of the said contract.

tices for payment and all similar documents

which respondents receive in the conduct of

their business from suppliers, subcontractors

and other persons, and for a period of five

(5) years copies of all contracts entered into

between respondents and their customers.

iT IS FURTHER ORDERED, that respondents Ameri-

can Aluminum Corporation, a corporation, and its offi-

cers, and Norman J. Foucha and Bobby G. Smith, indi-

vidually and as officers of said corporation, and respond-

ents’ agents, representatives and employees, directly or

through any corporate or other device in connection with

any advertisement or consumer credit sale of home im-

provement products or services, or any other products

or services, as “advertisement” and “credit sale” are de-

fined in Regulation Z (12 CFR 226) of the Truth in

Lending Act (P.L. 90-321, 15 U.S.C. 1601 et seg.), forth-

with cease and desist from:

[486]

1. Representing, directly or by implication, in any

advertisement as “advertisement” is defined in.

Regulation Z, the amount of the downpayment

required or that no downpayment is required, the

70a

amount of any installment payment, the dollar

amount of any finance charge, the number of in-

stallments or the period of repayment, or that

there is no charge for credit, unless all of the

following items are stated in terminology pre-

scribed under Section 226.8 of Regulation Z:

(i) the cash price;

(ii) the amount of the downpayment required

or that no downpayment is required, as

applicable;

(iii) the number, amount, and due dates or

period of payments scheduled to repay the

indebtedness if the credit is extended ;

(iv) the amount of the finance charge expressed

as an annual percentage rate; and

iv) the deferred payment price.

. Representing directly or by implication, on re-

tail installment contracts, promissory notes, or

on any written document or orally, that custom-

ers will or may be liable for damages, penalties

or any other charges for exercising their right

to rescind that is provided by Section 226.9 of

Regulation Z.

. Supplying any additional information, contract

clause or other statement about the customer’s

liability or obligations in the event that the cus-

tomer exercises his right to rescind except that

information furnished in accordance with Sec-

tion 226.9 of Regulation Z.

. Supplying any additional information, in writ-

ing or orally, that is stated, utilized or placed

so as to mislead or confuse the

Tla

[487]

customer or that contradicts, obscures or detracts

attention from the information that is required

to be disclosed by Regulation Z, as prohibited by

Section 226.6(c) of Regulation Z.

5. Failing, in any consumer credit transaction or

advertisement, to make all disclosures, deter-

mined in accordance with Sections 226.4 and

226.5 of Regulation Z, in the manner, form and

amount required by Sections 226.6, 226.8, 226.9

and 226.10 of Regulation Z.

Ill

IT IS FURTHER ORDERED that the respondent cor-

poration shall forthwith distribute a copy of this order

to each of its operating divisions.

IT IS FURTHER ORDERED that respondents shall

forthwith deliver a copy of this order to cease and desist

to all present and future salesmen or other persons en-

gaged in the sale of respondents’ products or services,

and shall secure from each such salesman or other person

a signed statement acknowledging receipt of said order.

IT IS FURTHER ORDERED that respondents notify

the Commission at least thirty (30) days prior to any

proposed change in the corporate respondent such as

dissolution, assignment or sale resulting in the emer-

gence of a successor corporation, the creation or dis-

solution of subsidiaries or any other change in the cor-

poration which may affect compliance obligations arising

out of the order.

IT IS FURTHER ORDERED that the individual re-

spondents named herein promptly notify the Commission

of the discontinuance of their present business or em-

ployment and of their affiliation with a new business or

72a

employment. Such notice shall include respondents’ cur-

rent business address and a statement as to the nature

of the business or employment in which they are en-

gaged as well as a description of their duties and re-

sponsibilities.

[488]

IT IS FURTHER ORDERED that respondents, Amer-

ican Aluminum Corporation, Norman J. Foucha and

Bobby G. Smith shall, within sixty (60) days after serv-

ice upon them of this order, file with the Commission

a report, in writing, setting forth in detail the manner

and form in which they have complied with the order

to cease and desist.

By the Commission, Commissioner Nye not participat-

ing.

/s/ Charles A. Tobin

CHARLES A. TOBIN

Secretary

ISSUED: JULY 2, 1974

73a

[489]

OPINION OF THE COMMISSION

By Thompson, Commissioner :

This matter is before the Commission on appeal from

an initial decision of an administrative law judge find-

ing that American Aluminum and two of its officers have

failed to make certain credit disclosures required by the

Truth-in-Lending Act, 15 U.S.C. $$ 1601, et seqg., and

have engaged in certain deceptive acts and practices in

the advertising and sale of various home-improvement

products, particularly aluminum siding, all in violation

of Section 5 of the Federal Trade Commission Act, 15

U.S.C. 45(a). The order issued by the law judge would

require respondents to make the credit disclosures re-

quired by the former statute in their future contracts

and advertising and to cease and desist from the other

deceptive acts and practices in their future business

dealings. .

The law judge found, and respondents do not deny:

(1) That respondent American Aluminum advertises its

aluminum-siding business by sending out “mailers” to

local homeowners offering to install such aluminum sid-

ing for $189.50 to $219.50 (“low priced siding”), a price

that is

[490]

described as a “saving” of $431.00; (2) that these pro-

motional mailers also promise that, if the attached re-

sponse card is returned within seven days, a set of storm

windows will be thrown in as a “free gift’ or bonus;

(3) that these mailers also imply that the aluminum

siding in question will last indefinitely; (4) that home-

owners who return these mailers are visited by salesmen

who, after execution of the contract for the purchase of

the advertised low-priced siding, make every effort to

T4a

“switch” the purchaser to a higher-priced product (re-

spondents’ “Imperial” aluminium siding); (5) that this

“switching” of the customer to the higher-priced product

is accomplished by showing him an unpainted and unat-

tractive sample of the advertised low-priced siding, dis-

paraging its durability, and explaining that it would re-

quire periodic painting and other costly maintenance; (6)

that respondents’ salesmen also offer substantial reduc-

tions from a purported “regular” price of the higher-

priced “Imperial” siding if the customer will permit the

use of his home for advertising purposes and promise a

written guarantee that the siding will last indefinitely;

(7) that in fact all of these representations are false,

i.e., no such guarantees are provided, the product does

not last indefinitely, customers’ homes are never used

for advertising or demonstration purposes, and there are

no “regular” prices from which a discount could be given

(the salesmen charge whatever the individual customers

will pay, up to certain maxima that are well below the

purported “regular price); (8) that respondents have

rarely, if ever, actually installed the advertised low-

priced siding, even when it has been demanded by par-

ticular customers; and (9) that American Aluminum

has failed to make a number of credit disclosures re-

quired by the Truth-in-Lending Act and has used con-

tracts that tend to mislead the customer as to his right

to rescind under that statute.

Respondents contend on appeal, however: (a) That the

record does not support the law judge’s finding that the

two individual respondents, Smith and Foucha, are le-

gally responsible for the bait-and-switch practices of the

firm’s salesmen; (b) that their competitors are engaged

in similar practices and hence that the law judge and

the Commission committed prejudicial error in denying

respondents’ pretrial motion for the issuance of subpoenas

duces tecum directed to a

75a

[491]

number of such competing organizations; (c) that the

record does not support the law judge’s finding of injury

to the public; and (d) that the order issued by the law

judge is overly broad insofar as it (i) directs its prohi-

bitions to “all” products respondents might sell in the

future rather than to those involved in its past decep-

tions, (ii) prohibits certain representations without re-

gard to whether they might in fact be true, and (iii)

abrogates the “holder-in-due-course” doctrine on respond-

ents’ future credit sales. We agree that the order goes

too far in the last two particulars but otherwise affirm

and adopt the law judge’s decision.

It is a well-settled principle of law that the Federal

Trade Commission is not precluded from stopping the law

violations of a particular firm merely because some other

firms might be engaged in similar practices. Moog In-

dustries, Inc. v. Federal Trade Commission, 355 U.S. 411

(1958); United Biscuit Co. v. Federal Trade Commis-

sion, 350 F.2d 615, 624 (7th Cir. 1965), cert. denied, 383

U.S. 926 (1966). And since injury to competitors is not

a necessary element of a case charging deception of the

public, Federal Trade Commission v. Algoma Lumber,

291 U.S. 67, 81 (1934), the data respondents sought to

gather by the requested subpoenas duces tecum would

have been irrelevant to this proceeding. Nor is it a de-

fense in such a case to show that the public has not in

fact been injured' by the challenged deception. Section

5(b) of the Federal Trade Commission Act requires that,

as a condition to filing a complaint, (1) the Commission

must have “reason to believe’ an unfair or deceptive act

‘American Aluminum’s officials testified that its prices were

30% to 50° lower than those of a particular competitor. Tr. 516-

522, 661-664, 725-727. Since complaint counsel had not legal obliga-

tion to attempt a rebuttal of this irrelevant testimony, it naturally

stands “‘uncontroverted” in the record.

76a

or practice has occurred and (2) it must “appear” to

the Commission that a proceeding to stop that violation

“would be to the interest of the public .. .” 15 U.S.C.

45(b). Once such a complaint has been issued, however,

the courts will not review the mental processes of the

Commission in arriving at that decision nor permit the

[492]

charged party to litigate the adequacy of the data on

which the Commission acted.* The issue to be litigated,

rather, is “whether the alleged violation has in fact oc-

curred.” Exxon Corporation, Docket 8934 (Order of the

Commission, June 4, 1974).

The two corporate officers, Smith and Foucha, con-

cede their responsibility for the firm’s violations of the

Truth-in-Lending Act and the deceptive claims in their

printed advertisements, their denials of liability being

limited to the “bait-and-switch” practices of their sales-

men. The record is clear, however, that they knew about

and were involved in those practices. First, they admit

their responsibility for sending out the “bait,” the mailers

purporting to offer the product at a price ($189.50 to

$219.50, for an alleged “saving” of $431.00) they will

not in fact accept. In other words, the “offers” these two

men sent out to the local homeowners in such large quan-

2 This is not to imply, of course, that the Commission itself does

not have at least a duty to consider, in deciding whether a particular

proceeding is likely to be “to the interest of the public,” the issue

of consumer injury. Sensible resource allocation requires that,

other things being equal, the Commission focus its limited resources

on those matters in which the probable economic benefits to the

consuming public are likely to be the largest. These are internal

policy questions, however, not issues on which a law violator him-

self is entitled to be heard.

ED ee a a ES, A NA et St

—-s

ok, Ml eet es St ene ae a ee eee

ell

7Ta

tities ° were not, as the law judge correctly found, bona

fide offers.

Secondly, both of these men were clearly aware of the

“switching” operations practiced by their salesmen.

Foucha, president and sole stockholder of the firm until

January 1971, described the company’s sales plan as

“step-up selling,” i.e., persuading the customer to shift

to a higher-priced product after he has already been sold

a lower-priced one.‘ Smith, the man who supervised the

firm’s salesmen prior to his purchase of the company

from Foucha in 1971 and its president

[493]

and sole stockholder since that time, devised the sales-

man-compensation plan used to encourage customer

“switching.” (The salesman gets “a couple of dollars”

if he sells the low-priced siding, versus as much as $150

if he sells the higher-priced product.°) Third, both of

these men knew that the firm could not have been oper-

ated profitably if the product had actually been sold at

the advertised low prices.* Fourth, a former salesman

testified without contradiction that both men had told

him he had to sell the higher-priced product in order t:

2 Approximately 50,000 of these mailers were sent out each

week. Tr. 714.

* Tr. 610-611.

5 The salesman receives a commission of 50% on that part of

the sales price that exceeds $65 per “square” (a surface measuring

10 feet by 10 feet or a total of 100 square feet). Since the firm’s

average sales price is approximately $90 per square, the average

sales commission is some $12.50 per square or roughly $125 on a

somewhat below average 10-square (1,000 square feet) installation

or job. See tr. 412, 621, 678, 739.

® Initial Decision, pp. 8-9. “On a $199.50 job, the siding would

cost [respondents] a minimum of $100, the installation cost would

78a

get a commission.’ Fifth, the number of protests lodged

with the company by customers demanding performance

at the advertised low price or their money back is simply

inconsistent with any possibility that these men could

have been unaware of what was going on.*

[494]

These same considerations persuade us that any order

issued here, if it is to be effective, must extend to “all”

products these respondents might sell in the future. This

is not a case in which a relatively remote corporate offi-

cial is being charged with constructive responsibility for

an unlawful act committed by a couple of salesmen in

violation of an established and enforced company policy.

These men were the corporation—its “alter ego’”—and

their acts were its policies. Deception is a way of life

with these respondents, a major part of their stock-in-

trade. Having systematically misrepresented their prod-

ucts and their terms of trade for so many years (the firm

was organized in 1965), it would be unrealistic, we think,

to expect them to voluntarily adopt a program of honest

business dealing when and if they find it in their interest

to begin selling some new line of products. As modified

by us, the law judge’s proposed order will bar no legiti-

be $60.00 and overhead expense would be $69.23. This would total

$229.23.” Id., p. 9. Respondents would thus lose some $30 on each

installation at the advertised $199.50 price, even if they (a) paid

no commission to their salesmen and (b) omitted (as they did any-

way) the promised free storm windows. Id. (The prices quoted

are for a quantity sufficient to cover 10 squares, i.e., 1,000 square

feet. Id., p. 8; tr. 620.) In fact, respondents charge an average

price of $900 for a job of this size. See note 5, supra.

7Tr. 410.

‘Initial Decision, pp. 10-12. One such customer testified, for

example, to having made at least 15 telephone calls to the company

in an effort to get the lower-priced product installed or his money

back. Tr. 220-236. Despite his own and the efforts of the Chatta-

nooga and Birmingham Better Business Bureaus on his behalf, he

got neither. Id.

79a

mate business activity. It will serve, rather, to reinforce

those honest impulses that are said to survive to at least

some degree in the human breast after even the most

prolonged association with a fast branding iron, These

are precisely the kinds of respondents the courts had in

mind when they affirmed the principle that those caught

violating the law must expect some “fencing in.” Fed-

eral Trade Commission v. National Lead Company, 352

U.S. 419, 431 (1957).

The record is insufficient, however, to support the pro-

vision in the law judge’s order that would bar respond-

ents from future recourse to the holder-in-due-course doc-

trine. This is an appropriate remedy where there is

“some evidence of actual or imminent injury from the

operation of the doctrine.” Southern States Distributing

Company, Docket 8882 (December 26, 1973), at 13. The

respondents in the case before us do negotiate their cus-

tomer contracts but only one witness testified (and not

too clearly) that such negotiation had been used as a

bar to his claim against respondents.” The Commission

will require a more definite showing than this before

denying any individual respondent, on a case by case

basis, the right to negotiate his commercial paper.

[495]

We also agree that even these respondents should not

be prohibited from making a claim they can prove is

true. Again such a remedy is appropriate in the situa-

tion where the nature of the product dictates that a

certain representation, if made, will necessarily be a

false one. Lane v. Federal Trade Commission, 130 F.2d

48 (9th Cir. 1942). Such is not the case here. If re-

spondents should actually adopt the policy of giving away

additional “bonus” items, for example, to people who buy

* Tr. 255.

80a

their aluminium siding, we see nothing inherently unfair

or deceptive about their saying so in their advertise-

ments.

The decision and order of the administrative law judge

will be modified in accordance with this opinion and, as

so modified, adopted as the decision and order of the

Commission.

July 2, 1974

8la

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 74-3364

AMERICAN ALUMINUM CORPORATION,

NORMAN J. FOUCHA and Bonsy G. SMITH,

Petitioners,

versus

FEDERAL TRADE COMMISSION,

Respondent.

Petition for Review of an Order of the

Federal Trade Commission (Alabama Case)

(October 15, 1975)

Before GODBOLD, SIMPSON and CLARK, Circuit

Judges.

PER CURIAM: AFFIRM and ENFORCE. See Local

Rule 21.'

1See N.L.R.B. v. Amalgamated Clothing Workers of America,

5 Cir., 1970, 430 F.2d 966.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.