Petition for Writ of Certiorari — Brown & Williamson Tobacco Corp. v. Dixon

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NO pL Ee EEE SIND LOE NE OE I RN IIS

Supreme Court, U. &

ae | MAR LL 1976

NE COURT, U, @

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IN THE

Supreme Court of the United States

OctToBER TERM, 1975

Brown & WILLIAMSON TOBACCO CORPORATION, et al.,

Petitioners,

Vv.

Pavut Ranp Dixon, AcTING CHAIRMAN,

FEDERAL TRADE COMMISSION, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SECOND CIRCUIT AND APPLICATION FOR

STAY PENDING REVIEW BY THIS COURT

March, 1976

(Counsel Listed on Inside Cover)

Press or Byron S. ADAMS PRINTING, INC., WASHINGTON, D. C.

BiBrcreescre ce re eer ters cere

. FILED «:f

Ss |

ROLE IAL ALONE EAN LD POTEET RS TREAD EPO IE OIH o B as * ete DERE LEIS SRE PORN ASS

ERNEST PEPPLES

Brown & WILLIAMSON

Tosacco Corp.

Of Counsel

THOMAS F,. AHRENSFELD

ALEXANDER HOLTZMAN

PHILIP Morris INcoRPORATED

Of Counsel

MAX H. CROHN, JR.

R. J. REYNotps TosBacco CoMPANY

Of Counsel

ARTHUR STEVENS

LoRILLARD TOBACCO

Of Counsel

C. F. HETSKO

AMERICAN BRANDS, INC.

Of Counsel

JOSEPH GREER

Liccerr & MYERS INCORPORATED

Of Counsel

MARTIN LONDON

LEWIS A. KAPLAN

PavL, WEIss, RIFKIND, WHARTON

& GARRISON

345 Park Avenue

New York, New York 10022

Attorneys for

Brown § Williamson

Tobacco Corporation

ABE KRASH

JEROME I, CHAPMAN

ALBERT H. KRAMER

ARNOLD & PORTER

1229 Nineteenth Street, N.W.

Washington, D.C. 20036

DONALD FRIED

ConsBoy, HEWITT, O’BRIEN &

BOARDMAN

20 Exchange Plaza

New York, New York 10005

Attorneys for

Philip Morris Incorporated

PAUL C. WARNKE

JOHN F. KOVIN

HAROLD D. MURRY, JR.

CLIFFORD, WARNKE, GLAss,

McILWAIN & FINNEY

815 Connecticut Avenue, N.W.

Washington, D.C. 20006

Davis, PoLK & WARDWELL

One Chase Manhattan Plaza

New York, New York 10005

Attorneys for

R. J. Reynolds Tobacco

Company

IRVING SCHER

STANLEY A. ROTHSTEIN

WEIL, GorsHAL & MANGES

767 Fifth Avenue

New York, New York 10022

Attorneys for

Loew’s Theatres, Inc.

DANIEL J. O’NEILL

CHARLES K. O’NEILL

CHADBOURNE, PARKE, WHITESIDE

& WoLFr

30 Rockefeller Plaza

New York, New York 10020

EUGENE R. ANDERSON

ANDERSON, RUSSELL, KILL

& Ouick, P.C.

630 Fifth Avenue

New York, New York 10020

Attorneys for

American Brands, Inc.

LAWRENCE G. MEYER

LINDA E. BUCK

Patron, Boccs & BLow

1200 Seventeenth Street, N.W.

Washington, D.C. 20036

GRAINER R. BARRETT

75 Rockefeller Plaza

New York, New York 10020

Attorneys for

Liggett § Myers Incorporated

RALEED THF OU¢

TABLE OF CONTENTS

Page :

a ee ae 2

FSR Ze ile Cetin aa rt ea eek Sa ae ks On oe eae 2 :

ON FN 55-5 Fk ween Cadi cxvsus 2 :

CoNSTITUTIONAL AND Statutory Provisions INVOLVED... 3

PRELIMINARY STATEMENT .............ccccccccccccec 3

I a ee i le ce 4

1. The Consent Orders and Petitioners’ Compliance 4

2. The Commission’s Determination .............. 5

Pe ere 7

©; Fae ee I vv on wm oc eo hbkn wks hee 9

5. Related Enforcement Litigation .............. 10

Reasons FoR GRANTING THE WRIT ...............00e. 11

I. The Decision of the Court Below is in Conflict

with the Decisions of this Court. .............. 12

II. The Decision of the Court Below is in Conflict

with the Decisions of Other Federal Courts. .... 19

REASONS FOR GRANTING THE STAY .............-..... 20

Be POTS PO RS ON BUCA RENE 22

Aprenvix A: Constitutional and Statutory Provisions 1a

Aprenpix B: Opinion of United States Court of Ap-

peals for the Seeond Cireuit .......... 3a

AprEeNbDIX C: Opinion of the United States District

Court for the Southern District of New

BW fc aot vas ieee ee 16a

ARENT IAS REDO RR Md DOR TN ORL

PODR COPY

ish a oe

PA 9 OPE PIED TL at AOL, OPTRA LEI MBN

li Table of Contents Continued

Page

Aprenpix D: Order of United States Court of Ap-

peals for the Second Circuit Denying

NE iv keen cackncecedusescavns 21a

Aprrenpix E: Federal Trade Commission letter of Au-

gust 1, 1975 to American Brands Ine. .. 22a

TABLE OF AUTHORITIES

CAsEs:

Abbott Laboratories v. Gardner, 387 U.S. 136 (1967) .. 16

Brown & Williamson Tobacco Corp. v. Engman, 1975-2

CCH Trade Reg. Rep. { 60,607 (S.D.N.Y. 1975) .. 10

Columbia Broadcasting System v. United States, 316

i a ai no OA vie ema eat, S 400 49 e's 209s 16

Continental Baking Co. v. Dixon, 283 F. Supp. 285 (D.

RES a eee ee ee ee 19

Fr parte Young, 209 U.S. 123 (1908) ...... 2, 11, 12, 13, 15,

16, 17, 18, 19, 22

Floersheim v. Engman, 494 F.2d 949 (D.C. Cir. 1973)

14, 15, 19

Ford Motor Co. v. Coleman, 402 F. Supp. 475 (D.D. C.

1975), direct appeal pending, No. 75-870 ....... 11, 15,

18, 19, 20

FTC v. Dean Foods, 384 U.S. 597 (1966) ............ 21

Holloway vy. Bristol-Myers Corp., 485 F.2d 986 (D.C.

ee Nadia neabas hemes eV esse Ka eee ¢ 16

National Automatic Laundry & Cleaning Council v.

Shultz, 443 F.2d 689 (D.C. Cir. 1971) .......... 16

Natural Gas Pipeline Co. v. Slattery, 302 U.S. 300

cen Gks cea bangeeeunness av sraeKecuxes 18

Oklahoma Operating Co. v. Love, 252 U.S. 331 (1920)

12, 15, 18

St. Louis I. M. & So. Ry. v. Williams, 251 U.S. 63

ks canine 12, 18

St. Regis Paper Co. v. United States, 365 U.S. 858

hs IRE aa rey ane Pee 22

St. Regis Paper Co. v. United States, 368 U.S. 208

rere eT eer 13, 17, 18, 22

United States v. Beatrice Foods Co., 322 F. Supp. 139

eS: | eeererererererr rer rrr rrr

RLEED THFC

Table of Authorities Continued lil

Page

United States v. ITT Continental Baking Co., 420 U.S.

RE gle lah a wate Wows bitte nig hot sain oe 14,17

United States v. J. B. Williams Company Inc., 498 F.2d

TT I Ns ga 7

United States vy. Morton Salt Co., 338 U.S. 632 (1950) 22

United States vy. Pacific Coast European Conference,

oe ee Bk Ae: ) Eee men 13

Wadley So. Ry. Co. v. Georgia, 235 U.S. 651 (1915)

12, 17,18

STATUTES:

a ds orn Sig as oy buen urd header 8, 20, 21

on sc ola ba luic bbb Gia biw dw owreaee 1,3, 7,8, 37

ee os, nk haw owns nee akeweuene 3, 6

ae! Be Se arene eee oaae 4

ee I a va nin vn Woes eum anaes sae bes oe 2

ck I renee nee 8

Oe he Or ks bay x Ga ea's eau ae cnekivcacs 8

re Rd. os ge ne oo a en hs nk ke 8, 21

I hk bg bens ccu s'x wk come Ke ok Ge Skok 8

ee Pr OIE se 6o.5 cas. bie ociavasewseb secede 8

Oruer AUTHORITIES:

Federal Trade Commission, Report to Congress Pur-

suant to the Public Health Cigarette Smoking Act,

INE OE oh isk oi ad ke Sn Chek ecesvunes 5

Federal Trade Commission, Report to Congress Pur-

suant to the Public Health Cigarette Smoking Act,

IE OR EE oo io on vc cu wnwessanauvis suas 5

Senate Judiciary Committee Print, Reprinted in Ad-

ininistrative Procedure Act, Legislative History,

(3th Cong., 2d Sess. 38 (1946) ................. 21

; ‘ CF ON Ot PPE FTL TION REST pF a OE

———— ah OP SHEA PR ERASE ATE PPS ,

}GH

PODR COPY

IN THE

Supreme Court of the United States

OctoBER TERM, 1975

No.

Brown & WILLIAMSON ToBACco CORPORATION, et al.,

Petitioners,

PautL Ranp Drxon, AcTING CHAIRMAN,

FEDERAL TRADE COMMISSION, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SECOND CIRCUIT AND APPLICATION FOR

STAY PENDING REVIEW BY THIS COURT

Petitioners’ pray that a writ of certiorari issue to

review the judgment of the United States Court of

Appeals for the Second Circuit entered in these con-

solidated cases on December 22, 1975. Petitioners also

respectfully request an order of this Court staying the

accumulation of civil penalties under 15 U.S.C. § 45(1)

1 Petitioners are the major American cigarette manufacturing

companies: Brown & Williamson Tobacco Corp., Philip Morris Inc.,

R. J. Reynolds Tobacco Co., Loew’s Theatres, Ine. (of which

Lorillaid is a division), American Brands, Inc., and Liggett &

Myers, Ince.

—— iio ERE AES MERE OIR, EE ROREL ITAIR

‘'D THF OUGH

PODR COPY

(Supp. III, 1973), pending final judgment by this

Court in this proceeding.

OPINIONS BELOW

The opinion of the court of appeals (A. 3a) appears

at 1975-2 CCH Trade Reg. Rep. 160,649. The opinion

of the district court (A. 16a; App’l App. A294-301*)

appears at 1975-2 CCH Trade Reg. Rep. 160,473.

Neither opinion is yet officially reported.

JURISDICTION

The judgment of the court of appeals was entered

on December 22, 1975. (A. 3a.) A timely petition for

rehearing filed by petitioner American Brands, Inc.,

was denied by order entered January 30, 1976. (A. 21a-

22a.) The jurisdiction of this Court is invoked pur-

suant to 28 U.S.C. § 1254(1).

QUESTION PRESENTED

In an unbroken line of cases starting with Ex parte

Young, 209 U.S. 123 (1908), this Court has held that

persons adversely affected by final administrative ac-

tions are entitled, as a matter of due process, to an

opportunity safely to test the validity of the admin-

istrative determination in court, unencumbered by the

inhibitory effects of overhanging, continually accruing y

monetary penalties during the litigation. This prin-

ciple has been held to have particular force where, as

here, both courts below found ‘‘that [petitioners] have

doubtless posed serious questions’’ as to the correctness

2**Apnp’l App.’’ refers to the Appendix filed in the court of

appeals, copies of which have been lodged with the Clerk of this

Court.

RPLEED THF OUGI

of the agency action. The question presented is whether

the court of appeals erred in holding that this prin-

ciple does not apply to requests for relief pendente lite

in any case challenging the validity of an administra-

tive determination that the affected parties had vio-

lated a Federal Trade Commission consent decree.

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

The pertinent provisions of the Fifth Amendment

to the Constitution of the United States, Section 16(a)

(1)of the Federal Trade Commission Act, 38 Stat. 717,

as added, 52 Stat. 11, as amended, 15 U.S.C. § 56(a) (1)

(Supp. IV, 1974), and Section 5(1) of the Federal

Trade Commission Act, 38 Stat. 719, as amended, 15

U.S.C. §45(7) (Supp. IIT, 1973), appear in the Ap-

pendix. (A. 1a.)

PRELIMINARY STATEMENT

This case arises out of a Federal Trade Commission

determination that petitioners have violated certain

FTC consent orders. The determination exposes peti-

tioners to the threat of enormous, daily-mounting civil

penalties. Petitioners strenuously dispute this deter-

mination, and both courts below explicitly acknowl-

edged that petitioners have raised ‘‘serious questions

on the merits.’’ (A. 14a, 17a.)

The Commission’s determination confronts petition-

ers with a serious dilemma. They must either forgo

their constitutional right to judicial review of an

agency action they believe to be illegal—and as to

which they have raised substantial questions—or they

may pursue their judicial remedy, but only at the in-

hibiting risk of massive accumulating monetary pen-

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CIMA aargeetenceenel. 5 oars

tO eines

alties. To resolve precisely this sort of dilemma and

to protect the due process right of judicial review, this

Court has repeatedly held that the party challenging

the agency action is entitled to a stay of penalties pénd-

ing judicial consideration of the issues.

Contrary to the controlling decisions of this Court

and the decisions of other federal courts, the court of

appeals in this case refused to stay the accumulation

of penalties pendente lite. It did so on the basis of a

narrowly restrictive and, we submit, erroneous read-

ing of this Court’s precedents. The court below held

that the right to a stay of penalties pendente lite ob-

tains in cases challenging the validity of an agency

order, but not in cases challenging the validity of an

agency determination that a consent order has been

violated. If allowed to stand, the decision below will

severely infringe the due process rights of parties

who, like petitioners, raise substantial questions as to

the validity of an administrative action and who seek

the opportunity to challenge the agency action in court,

free from the chilling effect of a ticking penalty meter.

STATEMENT

1. The Consent Orders and Petitioners’ Compliance

Beginning about April 15, 1971, some cigarette man-

ufacturers voluntarily included in certain of their ad-

vertisements the caution notice which Congress had

prescribed for all cigarette packages.’ On March 30,

® The text of the caution notice—‘‘ Warning: The Surgeon Gen-

eral Has Determined That Cigarette Smoking is Dangerous To Your

Health’’—is prescribed by the Public Health Cigarette Smoking Act

of 1969, Pub. L. No. 91-222, § 2, 84 Stat. 86, 15 U.S.C. § 1333 (1970).

The statute mandates the use of the caution notice only on cigarette

packs and cartons. The consent orders at issue here provide for the

use of the caution notice in various advertising and promotional

materials.

RLEED THF OU

—

1972, after extensive negotiations with petitioners—

the six major domestic cigarette manufacturers-—the

Federal Trade Commission issued six identical con-

sent orders spelling out in minute detail the manner

in which the caution notice was to be displayed on vari-

ous specified forms of cigarette advertising and pro-

motional material. (App’] App. A24-35.) All six com-

panies prciaptly began compliance with the decree.

Each company was informed by the Commission in

December 1972, after submitting the compliance re-

port required by the decree, that ‘‘no compliance ac-

tion by the Commission is indicated at this time.’’

(App’] App. A483.) Thereafter, the Commission twice

publicly reported to Congress—at year-end 1972 and

year-end 1973—that ‘‘all cigarette advertisements ob-

served by the Commission Staff were being published

in accordance with the terms of these orders.’’* All of

the companies have relied on these Commission pro-

nouncements, and all of them believe that their ad-

vertising has been and is in compliance with the con-

sent orders.

2. The Commission's Determination

In the spring of 1974, the Commission’s Compliance

Division informed petitioners that an investigation had

been instituted into their compliance with the consent

orders. Petitioners cooperated in the staff’s investiga-

tion, and in March 1975, petitioners submitted a mem-

orandum to the Commission in support of their posi-

tion that they were in compliance with the orders.

(App’] App. A315-497.)

* Federal Trade Commission, Report to Congress Pursuant to the

Public Health Cigarette Smoking Act, December 31, 1972, p. 2. See

also Federal Trade Commission, Report to Congress Pursuant to

the Public Health Cigarette Smoking Act, December 31, 1973, p. 1.

RARE EET IRM ON OD POY SEE LE NPE FOLGE

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unnenne

SET x

By separate but similar letters dated August 1, 1975,

addressed to each company, the Commission notified

the companies that it “thas determined’’ that each com-

pany had violated its consent order.’ With few excep-

tions, the letters neither identified particular advertise-

ments which the Commission deemed violative of the

consent orders, nor indicated specifie measures the

; manufacturers should take to ‘‘remedy’’ the alleged

violations.

Rather, the Commission’s letters referred to six gen-

eralized categories of alleged violations. With respect

to two of the categories, the Commission stated that it

would ‘hold a civil penalty action in abeyance for 180

days.’’ If at the expiration of that period the com-

panies had not ‘‘remedied”’ the alleged violations in

accordance with the Commission’s unarticulated de-

4 mands, the Commission threatened to seek ‘‘civil pen-

’ alties and other relief’’ for the alleged violations. (A.

25a.)

Feith:

As to the remaining four categories of alleged vio-

; lations, the Commission stated that it would notify

the Attorney General of its ‘‘intention to commence an

action for civil penalties and other relief,’ and pur-

suant to the FTC Act, as amended,’ would tender the

eases to him for prosecution. (A. 23a.) There was no

assurance when the Attorney General would commence

: suit, or, if he determined not to bring suit and accord-

> A copy of the letter sent to one of the companies, illustrative of

the letter sent to each, appears in the Appendix. (A. 23a.) The

letters appear in App’l App. at A36-38; A58-61; A79-81; A101-03 ;

A164-66 ; and A185-87.

® Federal Trade Commission: s\ct, Section 16(a)(1), 15 U.S.C.

§ 56(a)(1) (Supp. IV, 1974).

Ck GT RENT IS ET RT oO eee ed — “

aan Lea weak eX Mantas ah

SO RREO A AEE ING

FLEED THF OUGH

ingly remanded the matter to the Commission, when

the Commission would bring its own suit. The only

points made certain by the Commission’s letters of

August 1, 1975 were that the Commission had deter-

mined that each of the companies had violated the con-

sent orders and that, at some indefinite future time,

the government would institute actions for civil pen-

alties with respect to these alleged violations.

3. The Present Litigation

The Commission’s determination presented peti-

tioners with a grave dilemma. They could either con-

tinue their existing practices at the peril of massive

mounting civil penalties or change their advertising

in an effort to meet whatever demands the Commission

might make. The first alternative did not allow an un-

deterred opportunity for judicial review, since it re-

quired the companies, as the cost of such review, to

stand by each day while potential penalties continued

to mount.’ The second alternative entailed the incur-

ring of substantial costs without any assurance that

the revisions in advertising and promotional materials

would satisfy the Commission’s demands. More impor-

tantly, it would have compelled the companies to forgo

? Paragraph 8 of the 1972 Consent Order Agreement (¢.g., App’l

App. A26) provides that each petitioner ‘‘may be liable for a civil

penalty of up to $5,000 for each violation of the order after it

becomes final.’’ The statute, Section 5(/) of the Federal Trade

Commission Act, as amended, 15 U.S.C. § 45(1) (Supp. IIT, 1973),

provides that ‘‘[e]ach separate violation of such an order shall be

a separate offense ... .’’ As the court of appeals observed, the Com-

mission has in the past taken the position that each advertisement

amounts to a separate violation (A. 9a, n. 7), a position that has

been sanctioned by the same court of appeals. United States v. J. B.

Williams Company, Inc., 498 F.2d 414, 435-38 (2d Cir. 1974). Under

this theory, which the government has adopted in this ease, the

potential liability of one company for one ad in one edition of the

Sunday New York Daily News, with a circulation of three million,

could be $30,000,000,000. (A. 9a, n. 7.)

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their right to a judicial test of the validity of a Com-

mission determination they believe to be erroneous

and which both courts below agreed were subject to

serious question.

Faced with this Hobson’s choice, each petitioner

filed an action in the United States District Court for

the Southern District of New York on August 15,

1975—within days after receipt by each petitioner of

the Commission’s August 1 letter. The complaints

sought a declaratory judgment that the determinations

set forth in the FTC’s August 1 letter were inconsist-

ent with the consent orders and otherwise contrary to

law and that petitioners were not liable for civil pen-

alties.* Petitioners also requested a stay pendente lite

of the accumulation of penalties under Seetion 5(1).

They argued that the Constitution affords them the

right to contest judicially the validity of the FTC’s

determination without having to ineur the risk of

potentially massive penalties as the price of admission

to the courthouse.’

The government conceded in the district court that

the only basic difference between petitioners’ declara-

tory judgment action and the civil penalty action that

the government had determined to file was that the

former substantially advanced the time when a stay of

penalties could be sought. (App’] App. A257-58, A275-

76, A285-86.) It nonetheless argued that petitioners

* Named as defendants were the Federal Trade Commission, the

individual Commissioners, the United States, and the Attorney

General. Former Chairman Engman of the FTC was the lead de-

fendant. He has since resigned and, pursuant to Rule 48, petition-

ers have substituted Acting Chairman Dixon as the lead defendant.

*The jurisdiction of the district court was invoked under 28

U.S.C. §§ 1331, 1337, 28 U.S.C. §§ 2201-02, and 5 17.S.C. §§ 702-06.

In the court of appeals, see pp. 9-10, infra, petitioners also invoked

the All Writs Act, 28 U.S.C. § 1651, as an alternative basis of

jurisdiction to issue a stay of penalties. See 28 U.S.C. § 1653.

FLEED THF OUGI

should be required to await the enforcement suit. In

an affidavit, the government further conceded that

‘‘One purpose of these August 1, 1975 letters (espe-

cially that part of them that granted [petitioners] a

six-month grace period to cure some of their violations)

was to give [petitioners] an opportunity then to come

forward with a reasonable settlement proposal... .”’

(App’] App. A228.) In this way, the Commission ac-

knowledged its intentions to take advantage of the

dilemma its determination created for petitioners by

bringing pressure on them to forgo a court challenge

to the Commission’s action.

4 The Decisions Below

On August 28, 1975, the district court (Tenney, J.)

denied the stay pendente lite. Judge Tenney assumed

that the companies had ‘‘at least raised serious ques-

tions going to the merits.’’ (A. 17a.) He held that a

stay was not required because the penalty provisions

of the FTC Act only fixed the upper limits of the com-

panies’ liability for each violation, the amount of the

penalties ultimately to be assessed being within the

trial court’s discretion. (A. 19a.)

Following an expedited hearing, the court of appeals

affirmed Judge Tenney’s ruling. That court agreed that

the companies had ‘‘doubtless posed a serious question

on the merits.’’ (A. 14a.) Further, the court acknowl-

edged the general right under the due process clause of

the Fifth Amendment to test the validity of adminis-

trative action without facing substantial mounting

penalties as a consequence. But the court ruled that this

safeguard was not applicable here on the ground that

the companies sought to test not the ‘‘validity’’ of the

underlying orders, but the FTC’s ‘‘interpretation”’ of

those orders at the compliance stage. (A. 10a-1la.)

While noting that the ‘‘cumulative aspect of [the civil]

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STEAK ETD INTE FI EIEIO RE EOP OLE 16 ¥ RR ~ Deen”

... penalties is severe’”’ (A. 11a), the court concluded

that this deterrent to judicial review was neverthe-

less valid, because the penalties would ultimately be

‘‘subject to the limitation of judicial discretion.’’ " (A.

12a.)

It is this ruling denying a stay pendente lite which

petitioners now seek to have this Court review.

5. Related Enforcement Litigation

The government conceded before Judge Tenney that

it could bring its civil penalty actions as compulsory

counterclaims in the petitioners’ suits in New York.

Instead, however, the government moved to dismiss

the complaints, and on October 17, 1975—two and a

half months after the determination letters—it filed an

enforcement action against each petitioner in the

United States District Court for the District of Co-

lumbia.”

On November 5, 1975, Judge Tenney, while ‘‘not pre-

pared to... hold’’ that petitioners’ dilemma did not

present a case of ‘exceptional need and unfairness,”’ *

nonetheless granted the government’s motion to dis-

miss. The district judge recognized that there was a

1° Petitioners also sought a stay of penalties pending the de-

termination of the appeal. The court of appeals never explicitly

acted on petitioners’ motion.

11The complaint against each petitioner covers only the four

categories of alleged violations as to which the Commission’s Au-

gust 1 letters had stated its intention immediately to institute suit.

See p. 6, supra. The remaining two categories of alleged violations,

as to which the Commission stated it would hold civil actions in

abeyance for 180 days, are not involved in the enforcement pro-

ceedings. By contrast, all aspects of the Commission’s determina-

tion are involved in the instant proceeding.

12 Brown & Williamson Tobacco Corporation, et al. v. Engman,

1975-2 CCH Trade Reg. Rep. {| 60,607 at 67,674.

rene

FLEED THFOL

aes

jurisdictional basis for petitioners’ actions, but he de-

clined to exercise jurisdiction, as a matter of discre-

tion, in light of the pendency of the enforcement ac-

tions which had by that time been instituted in another

court.”®

On January 20, 1976, the United States District

Court for the District of Columbia (Bryant, J.)

granted the petitioners’ motions to transfer the gov-

ernment’s enforcement actions from that district to

the Southern District of New York. Noting that the

enforcement suits charged petitioners ‘‘with technical

violations of the Consent Decree, for which civil pen-

alties may be assessed,’’ the court ruled that transfer

of the proceedings to New York would best serve ‘‘the

convenience of the parties and witnesses and the in-

terests of justice... .”’

REASONS FOR GRANTING THE WRIT

This case raises an important and recurring ques-

tion relating to judicial review of administrative or-

ders. The right to effective judicial review is severely

inhibited if parties are subject to the risk of ongoing

civil penalties for alleged violations of an agency order

during the pendency of judicial proceedings. The novel

decision of the court of appeals improperly constricts

the scope of the procedural due process doctrine long

established by this Court in Ex parte Young, 209 U.S.

123 (1908), and the many cases which followed it. In

addition, the decision of the court below conflicts with

those of other federal courts, including the recent deci-

sion of the three-judge court in Ford Motor Co. v. Cole-

13 Petitioners’ appeals from Judge Tenney’s dismissal order are

currently pending in the United States Court of Appeals for the

Second Circuit.

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Pisa. Shh Ne

(Eas

man, 402 F. Supp. 475 (D.D.C. 1975), direct appeal

pending No. 75-870. The decision below deprives peti-

tioners of their right to an uninhibited judicial review

of the serious questions they have posed as to the valid-

ity of the FTC’s determination, and it casts serious

doubt upon the applicability of this Court’s established

due process doctrine in the expanding area of adminis-

trative enforcement proceedings. The writ should be

granted to clarify this important question of federal

constitutional and administrative law.

L The Decision of the Court Below is in Conflict with the

Decisions of This Court.

1. Ever since Ex parte Young, it has been the

accepted rule that whatever the genesis of an admin-

istrative order,

‘‘the right to a judicial review must be substan-

tial, adequate and safely available—but that right

is merely nominal and illusory if the party to be

affected can appeal to the courts only at the risk

of having to pay penalties so great that it is bet-

ter to yield to orders of uncertain legality rather

than to ask for the protection of the law.’’ Wadley

So. Ry. Co. v. Georgia, 235 U.S. 651, 661 (1915).

This right must be available ‘“‘before any liability for

penalties attaches.”’ St. Louis ILM. & So. Ry. v. Wil-

liams, 251 U.S. 63, 65 (1919). Where necessary to pre-

serve this right,

‘‘a permanent injunction should . . . issue to re-

strain enforcement of penalties accrued pendente

lite, provided that it also be found that the plain-

tiff had reasonable ground to contest [the admin-

istrative order in question].’’ Oklahoma Operating

v. Love, 252 U.S. 331, 338 (1920) (Brandeis,

“pe

FPLEED THFOL

_—_ a Sos

To the same effect is this Court’s decision in St.

Regis Paper Co. v. United States, 368 U.S. 208, 225-27

(1961), aff’g 285 F.2d 607 (2d Cir. 1960). See also

United States v. Pacific Coast European Conference,

451 F.2d 721 (9th Cir. 1971).

The court below recognized the continuing validity

of these decisions. But it erred when it found them

inapplicable on the theory that the present proceeding

deals with an agency’s ‘‘interpretation’’ of orders at

the compliance stage and not the validity of the orders

themselves. Petitioners respectfully submit that this

distinction is without a constitutional difference.

It is irrelevant for constitutional purposes whether

the issue in dispute is the validity of agency orders or,

as here, the validity of a final agency determination

that those orders have been violated. The crucial fac-

tors under the Ex parte Young line of cases are (i)

that the agency has taken adverse action and (ii) that

the affected party cannot obtain a bona fide judicial

test of the validity of that action except at the risk

of mounting, massive penalties. Both factors are pres-

ent in this case.

Petitioners’ right to a stay of penalties pendente lite

is buttressed by the substantiality of the questions they

have raised as to the correctness of the FTC’s deter-

mination. Both the district court and the court of ap-

peals recognized that ‘‘serious questions’’ on the merits

were raised. The threat of penalties is designed to force

petitioners to abandon their present lawful conduct and

to aequiesce in an interpretation of the decree that they

regard as erroneous. This is precisely the result that

Ex parte Young and related cases intended to foreclose.

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The three cases cited by the court below to support

its novel constitutional rule “ are inapposite. None of

them involve the situation, presented here, in which

parties could not challenge adverse agency action ex-

cept at the risk of accumulating penalties.

In ITT Continental Baking Co., a suit for penalties

for alleged violations of an FTC consent decree, the

government did not question the right of the respond-

ent to litigate the validity of the FTC’s determination

that it had violated the consent decree without facing

the risk of additional penalties. Unlike the Commis-

sion’s claims in the present case, penalties were sought

only from the date of the alleged violation ‘‘to the date

of filing of the complaint ....’’ 420 U.S. at 229. Sim-

ilarly, in Beatrice Foods Co., the government sought

penalties only to the date of the filing of its complaint

and no controversy existed as to the accumulation of

penalties from that date forward. Finally, Floersheim

involved a situation where the respondent had merely

been informed that a particular course of action ‘‘may

subject’? him to civil penalties.” 494 F.2d at 952-53.

14 United States v. ITT Continental Baking Co., 420 U.S. 223

(1974); Floersheim v. Engman, 494 F.2d 949 (D.C. Cir. 1973);

United States v. Beatrice Foods Co., 322 F. Supp. 139 (D. Minn.

1971).

15 In Floersheim the court declined to intervene in a dispute over

the FTC’s rejection of Floersheim’s report of compliance with a

litigated cease and desist order, which had been affirmed by the

court of appeals for another circuit. The court rejected Floer-

sheim’s contention that he was forced either to face prospective civil

penalties or acquiesce in an unlawful order. The court noted that

Floersheim’s remedy was first to take up the dispute with the Com-

mission. If no accommodation could be reached, then Floersheim

could have sought a clarification of mandate from the Ninth Cireuit

Court of Appeals, which had already reviewed the cease and desist

order at issue.

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Indeed, the opinion in Floersheim is inconsistent

with the holding of the court below that the Lx parte

Young principle is inapplicable to cases involving an

agency’s “‘interpretation”’ of its orders. The court of

appeals stated in Floersheim:

‘¢ | . a person may have relief in equity to avoid

invalid official action where the risk of penalties,

if he is remitted to defense of enforcement actions,

is so coercive as to be a denial of due process. Ex

parte Young, 209 U.S. 123, 28 S.Ct. 441, 52 L.Ed.

714 (1908). Equitable doctrine has . . . been ex-

tended, with certain limitations, to an agency ac-

tion that constitutes a general interpretation on

the highest level, presenting a controversy fully

ripe for review. National Automatic Laundry &

Cleaning Council v. Schultz, 143 U.S. App. D.C.

974, 443 F.2d 689 (1971).” Floersheim v. Engman,

supra, 494 F.2d at 954 (emphasis supplied).

In the present case, there has been final agency ac-

tion at the highest level, by way of a formal ‘‘deter-

mination,” affecting an entire industry. The realistic

practical effect, if not the stated purpose of the admin-

istrative action at issue here—whether labeled an ‘‘in-

terpretation” or a ‘‘determination’’—is to put peti-

tioners to the choice either of complying with an agency

directive of dubious legality or of incurring the risk of

substantial penalties as the cost of a good faith judicial

test of that action.

Due process prohibits the threat of coercive penal-

ties that undermine the opportunity for ‘‘substantial,

adequate, and safely available’’ judicial review of

questionable regulatory conduct. See Oklahoma Op-

erating Co. v. Love, supra, 252 U.S. at 336; Ford Motor

Co. v. Coleman, supra, 402 F. Supp. at 502-03 (Hart,

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_ _—

J., dissenting). Labeling that conduct as an “‘interpre-

tation’’ does not alter this basie principle."

2. The principle of Ex parte Young also cannot be

avoided on the ground, emphasized by the court below,

that by entering into the consent decrees, petitioners

“‘waived the right further to challenge [the decrees’ ]

validity.’’ (A. 10a.) Petitioners did not waive their

right to challenge, without running the risk of over-

whelming penalties, the validity of any interpretations

the Commission might choose to place on the decrees.

Petitioners are entitled to an independent review of

this final agency action, and to the attendant due proc-

ess safeguards, apart from any review of the validity

of the underlying order. Cf. Abbott Laboratories v.

Gardner, 387 U.S. 136 (1967); National Automatic

Laundry & Cleaning Council v. Shultz, 443 F.2d 689

(D.C. Cir. 1971).

If this right is deemed waived by entering into a

consent decree, there will be a serious impairment of

the utility of consent decrees in the administration of

the Federal Trade Commission Act, a result at odds

with the purposes of the Act. The plan of regulation

inherent in the FTC Act, as the government argued

below, places primary reliance on the voluntary settle-

ment of trade regulation disputes between the Com-

mission and the business community. See //olloway v.

Bristol-Myers Corp., 485 F.2d 986, 998 (D.C. Cir.

1973). But if a respondent to an FTC complaint knows

that due process will afford no relief from the threat

of penalties pendente lite even where, as here, serious

questions are raised regarding the correctness of a

16 See Columbia Broadcasting System vy. United States, 316 U.S.

407, 416 (1942) (‘‘it is the substance’’ of agency action ‘“‘which is

decisive,’’ not the ‘‘particular label placed upon it’’).

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subsequent Commission interpretation, the incentive to

enter into a consent decree is significantly reduced.

Moreover, the chilling effect on litigation contesting

the agency’s ‘‘interpretation’’, fostered by the decision

below, increases the danger that the Commission could

with impunity effect a ‘ ‘substantial modification of

the original decree’... . disguised as construction,”

United States v. ITT Continental Baking Co., supra,

420 U.S. at 236, n. 9 (citations omitted, emphasis in

original), a practice which this Court sharply criti-

cized.

3. The attempt of the courts below to distinguish

this case from this Court’s controlling precedents on

the ground that the trial court has discretion under

Section 5(/7) as to the ultimate magnitude of any pen-

alties that might be imposed here must also be re-

jected.” Whether the penaity involved is ‘t*manda-

tory,” asin St. Regis Paper Co. v. United States, supra,

or ‘‘diseretionary’’ is irrelevant under the Ex parte

Young line of cases.

In terms of the objective of preserving a ‘‘substan-

tial, adequate, and safely available’’ right of review,

some ‘‘mandatory’’ penalties may be far less inhibit-

ing than ‘‘discretionary”’’ penalties that expose a liti-

gant to far greater risk. In St. Regis Paper Co., supra,

the penalty for noncompliance was $100 per day. By

contrast, in Wadley So. Ry. Co. v. Georgia, supra, non-

compliance with the order exposed the company to pen-

alties of up to $5,000 for each offense. It cannot be

realistically asserted that the greater ‘‘discretionary”’

penalties obtainable in Wadley had less of a chilling

17 This was the sole basis for the district court’s refusal to adopt

petitioners’ due process arguments. (A. 18a-19a.) The court of ap-

peals also referred to this purported distinction, but with less

emphasis. (A. 12a.)

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MESA a A Re AAR

effect than the smaller ‘‘mandatory”’’ penalties in St.

Regis.**

Moreover, prospective litigants must assess their po-

tential exposure to liability at the outset of suit, when

they are deciding whether to insist on their right to a

court test or to acquiesce in the agency demand. The

possibility that a trial or appellate court may someday

exercise leniency hardly cures the oppressive effect of

potentially massive, ever-mounting penalties. Indeed,

the very uncertainty which is alleged here to be the

saving virtue of ‘‘discretionary’’ penalties serves, as a

practical matter, only to strengthen the inhibitory ef-

fect on the right to seek full judicial review.

Finally, the court below overlooked the daily nature

of the penalty, which necessarily entails that the party

seeking judicial review must undergo a steadily mount-

ing exposure simply by litigating. In Ford Motor Co.

v. Coleman, supra, the court indicated that where pen-

alties are ‘‘a direct impost inflating ... because of the

time required for the very exercise of the right of

judicial review,” they would run afoul of Fz parte

Young and Wadley So. Ry. Co. v. Georgia. 402 F. Supp.

at 485 (footnote omitted). This principle is fully ap-

plicable here.

In both Wadley and St. Regis, the litigant failed to follow

available review procedures during the pendency of which the

penalty provisions could have been stayed. Compare Oklahoma

Operating Co. v. Love, supra, where the remedies were properly

pursued and a stay of a discretionary penalty was held to be

mandated by the Constitution, See also Natural Gas Pipeline Co. v.

Slattery, 302 U.S. 300, 310 (1987) and St. Lowis, 1. M. & So. Ry.

Co. v. Williams, supra (penalties would be stayed during challenge

to statutory scheme setting minimum and maximum monetary

penalties).

RLEED THF

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Il. The Decision of the Court Below is in Conflict with the

Decisions of Other Federal Courts.

We know of no ease which has held, as did the court

below, that the Ex parte Young line of cases is not

applicable to agency ‘‘interpretations”’ that its orders

have been violated. See the dicussion of Floersheim v.

Engman at p. 15, supra. On the contrary, the district

court in Continental Baking Co. v. Dizon, 283 F. Supp.

285 (D. Del. 1968), clearly stated that it would grant

a stay of penalties under Ex parte Young in the situa-

tion where the FTC had determined that a respondent

was in violation of a Commission cease and desist

order.

That such an agency determination should give rise

to a stay of penalties is illustrated by the recent deci-

sion in Ford Motor Co. v. Coleman, supra. An auto-

mobile manufacturer was directed to recall and repair

certain automobiles after the Administrator of the

National Highway and Traffic Safety Administration

had made a ‘‘determination’’ that they had a safety

related defect. The applicable statute provided that the

manufacturer could contest the agency action in a

judicial trial de novo where all due process rights may

be exercised, but that the manufacturer would be sub-

ject to penalties if he sought judicial relief.

A divided three-judge court upheld the constitution-

ality of the statute. The majority reasoned that the con-

stitutional right to a ‘‘substantial, adequate, and safely

available”? right of judicial review would be satisfied

if the statute allowed the manufacturer ‘‘who has

a substantial, nonfrivolous challenge to the validity of

the Administrator’s determination to obtain a prelim-

inary injunction”’ staying the accrual of penalties until

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Lv a Co

the validity of the determination is litigated in a judi-

cial forum. 402 F. Supp. at 482-83. The dissenting

judge strongly supported the principle that due proe-

ess requires an opportunity to challenge any adverse

administrative action without incurring substantial

penalties, but he concluded that the statute at issue did

not adequately protect this due process right.

Here, as in Ford, the petitioners’ conduct has been

the subject of an agency ‘‘determination,”’ with no op-

portunity for fair hearing before the agency on the

question of compliance ; here, as in Ford, the companies

can escape penalties only by acquiescing in the ‘‘deter-

mination” and forgoing their right to judicial review.

But the court of appeals has held, contrary to both the

majority and the dissenting opinions in Ford, that the

petitioners here cannot obtain a stay pending judicial

review of the agency ‘‘determination’’—even though

both courts below recognized that the companies’

claims raise serious questions going to the merits of

the FTC’s determination. (A. 14a, 17a.) That judgment

eannot stand consistent with the mandates of due

process.

REASONS FOR GRANTING THE STAY

The considerations noted above which warrant re-

view of the decision of the court of appeals also war-

rant granting a stay of the accrual of penalties pend-

ing final action by this Court.

This conclusion is underscored by the language and

history of Section 10(d) of the Administrative Pro-

RLEED THF OU:

cedure Act, 60 Stat. 243 (1946), 5 U.S.C. § 705 (1970).

That section provides that

‘*On such conditions as may be required, and to the

extent necessary to prevent irreparable injury, the

reviewing court, including the court to which a

case may be taken .. . on application for certiorari

. .. May issue all necessary and appropriate proc-

ess to postpone the effective date of an agency

action or to preserve status or rights pending con-

clusion of the review proceedings.’’

In an ‘‘explanation”’ of this section, the Senate Judi-

ciary Committee stated that the sentence quoted above

‘‘authorizes courts to postpone the effective dates

of administrative judgments or rules in eases in

which, as by subjection to criminal penalties, par-

ties could otherwise have no real opportunity to

seek judicial review except at their peril. There

is no reason why such a rule should not be recog-

nized as to administrative agencies, since it is ap-

plied in the case of legislation of Congress itself.

[Citing, among other cases, Ex parte Young,

supra, Wadley So. Ry. v. Georgia, supra, St. Louis

I. M. & So. Ry. v. Williams, supra, and Oklahoma

Operating Co. v. Love, supra.]’’ Senate Judiciary

Committee Print, Reprinted in Administrative

Procedure Act, Legislative History, 79th Cong.,

2d Sess. 38 (1946).

Petitioners have specifically invoked 5 U.S.C. § 705

and relied upon the iine of cases cited above through-

out this litigation.” Moreover, in seeking a stay pen-

1® Petitioners also rely on the All Writs Act, 28 U.S.C. § 1651,

and this court’s decision in FTC v. Dean Foods Co., 384 U.S. 597

(1966). Since the federal courts ultimately have jurisdiction to

review the merits of the FTC’s ‘‘determination’’, the All Writs

Act and Dean Foods require the conclusion that they are em-

powered to stay the accumulation of penalties to ensure that peti-

tioners’ right to seek that review is not rendered meaningless by an

onerous and unconstitutional penalty scheme.

ioe goers ay har ne pee Set ee dels a a ie Se 4

aad GD Se a eat Ge EL EAE Ree hse ee CTS ES

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Mellin ERO FS

SAR TROP OE ES Re

dente lite under these cases, petitioners are complying

with the procedures which this Court sanctioned in

St. Regis Paper Co., supra, as the appropriate vehicle

for seeking the constitutional protection aceorded by

Ex parte Young and its progeny.”

Unless the Court now grants a stay pending disposi- FE

tion of this petition for certiorari, petitioners will be

denied judicial review which meets the standards both

Congress and the Constitution have mandated. The

Court recognized this in St. Regis Paper Co., where it

did grant a stay of the accrual of penalties pending

disposition of the petition for certiorari. 365 U.S. 858

(1961). Similar relief is warranted here.

vt Snel

CONCLUSION

For the foregoing reasons, the petition for a writ

of certiorari should be granted, and an order should

be entered staying the accumulation of civil penalties

pending final action by this Court.

Respectfully submitted,

*° In St. Regis Paper Co., 368 U.S. at 226, the Court, in holding

that the petitioner was liable for penalties, stated that the peti-

tioner should have sought pre-enforeement review immediately

upon entry of the notices of default which started the acerual of

penalties rather than waiting for the Government to institute suit.

Citing United States v. Morton Salt Co., 338 U.S. 632, 654 (1950),

the Court stated,

“* “we are not prepared to say that courts would be powerless’

to act where such orders appear suspect and ruinous penalties

would be sustained pending a good faith test of their validity.”’

RLEED THF OUGI

ERNEST PEPPLES

Brown & WILLIAMSON

Topacco CorP.

Of Counsel

THOMAS F. AHRENSFELD

ALEXANDER HOLTZMAN

PuHILie Morris INCORPORATED

Of Counsel

MAX H. CROHN, JR.

R. J. REYNoLDs Topacco COMPANY

Of Counsel

ARTHUR STEVENS

LORILLARD TOBACCO

Of Counsel

Cc. F. HETSKO

AMERICAN BRANDS, INC.

Of Counsel

JOSEPH GREER

Liecetr & MYERS INCORPORATED

Of Counsel

March, 1976

A ie BE IPO.

ES RO TP DS 0 FED ene

345 Park Avenue

New York, New York 10022

Attorneys for

Brown & Williamson

Tobacco Corporation

ABE KRASH

JEROME I, CHAPMAN

ALBERT H. KRAMER

ARNOLD & PORTER

1229 Nineteenth Street, N.W.

Washington, D.C. 20036

DONALD FRIED

Conpoy, Hewitt, O'BRIEN &

BoaRDMAN

20 Exchange Plaza

New York, New York 10005

Attorneys for

Philip Morris Incorporated

PAUL C. WARNKE

JOHN F. KOVIN

HAROLD D. MURRY, JR.

CLIFFORD, WARNKE, GLASS,

McILwain & FINNEY

815 Connecticut Avenue, N.W.

Washington, D.C. 20006

Davis, PoLK & WARDWELL

One Chase Manhattan Plaza

New York, New York 10005

Attorneys for

R. J. Reynolds Tobacco

Company

IRVING SCHER

STANLEY A. ROTHSTEIN

Weil, GorsHAL & MANGES

767 Fifth Avenue

New York, New York 10022

Attorneys for

Loew’s Theatres, Inc.

DANIEL J. O’NEILL

CHARLES K. O’NEILL

CHADBOURNE, PARKE, WHITESIDE

& WOLFF

30 Rockefeller Plaza

New York, New York 10020

EUGENE R. ANDERSON

ANDERSON, RUSSELL, KILL

& Ovick, P.C.

630 Fifth Avenue

New York, New York 10020

Attorneys for

American Brands, Inc.

LAWRENCE G. MEYER

LINDA E. BUCK

Patron, Boces & BLow

1200 Seventeenth Street, N.W.

Washington, D.C. 20036

GRAINER R. BARRETT

75 Rockefeller Plaza

New York, New York 10020

Attorneys for

Liggett § Myers Incorporated

NA GTR, ep aor TE YD 9, «

ek MA a Lad ee

Po een

ey ese-;

OORT RTS REI MEU LID EKO

APPENDIX

RLEED THF

APPENDIX A

Constitutional and Statutory Provisions Involved

The Fifth Amendment to the Constitution of the United

States provides in pertinent part that

‘‘No person shall . . . be deprived of life, liberty, or

property, without due process of law. ..’’

Section 16(a)(1) of the Federal Trade Commission Act,

38 Stat. 714, as added, 52 Stat. 11, as amended 15 U.S.C.

§ 56(a)(1) (Supp. IV, 1974), 88 Stat. 2199 (Jan. 4, 1975),

provides in pertinent part that:

‘*(A) before commencing, defending or intervening

in, any civil action involving this chapter ( including an

action to collect a civil penalty) which the Commission,

or the Attorney General on behalf the Commission, is

authorized to commerce, defend, or intervene in, the

Commission give written notification and undertakes

to consult with the Attorney General with respect to

such action; and

‘*(B) the Attorney General fails within 45 days af.

ter receipt of such notification to commence, defend,

or intervene in, such action;

the Commission may commence, defend, or intervene

in and supervise the litigation of, such action and any

appeal of such action in its own name by any of its

attorneys designated by it for such purpose.”’

Section 5(/) of the Federal Trade Commission Act, 38

Stat. 719, as amended, 15 U.S.C. 45(1) (Supp. III, 1973)

provides that

‘*Any person, partnership, or corporation who vio-

lates an order of the Commission after it has become

final, and while such order is in effect, shall forfeit and

pay to the United States a civil penalty of not more

Ravens iPS OER LGR IRARSD RAED GS SNS LF RAE ER ARABI RNP OES TR EG

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UGH

than $10,000 for each violation ... . Each separate vio-

lation of such an order shall be a separate offense, ex-

cept that in the case of a violation through continuing

failure to obey or neglect to obey a final order of the

Commission, each day of continuance of such failure

or neglect shall be deemed a separate offense. In such

actions, the United States district courts are empow-

ered to grant mandatory injunctions and such other

and further equitable relief as they deem appropriate

in the enforcement of such final orders of the Com-

2a |

mission.’’

RALEED THRO

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Nos. 398-403—September Term, 1975

(Argued October 29,1970 Decided: December 22, 1975)

Docket Nos. 75-6081, -6084-85, -6087-88, -6090

Brown & Wiuiamson Tosacco Corp. et au., Appellants,

Lewis A. Eneman, CHarrMan, Fepera, Trape Commission,

et al., Appellees.

Before Mutuican, Oakes and Mesxu1, Circuit Judges.

Oakes, Circuit Judge:

This appeal is from the denial of appellants’ motion for

a stay of penalties under Section 5(l) of the Federal Trade

Commission Act, 15 U.S.C. § 45(l) (1975 Supp.). The mo-

tion for a stay was sought by the six appellants who col-

lectively produce about 99 per cent of the cigarettes manu-

factured in the United States. The have instituted declar-

atory judgment actions to obtain review of the Federal

Trade Commission’s interpretation of six cease and de-

sist consent orders previously entered against them. Ap-

pellants have sought review prior to any enforcement pro-

ceedings brought by the FTC. The United States District

Court for the Southern District of New York, Charles H.

Tenney, Judge, denied the motion for a stay. He concluded

that appellants were not entitled to a stay as a matter of

law and that they had failed to show that without the stay

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Rh ACORN MRS RNY! BE Are © ow

they will suffer irreparable injury or that the balance of

the equities tipped decidedly in their favor. We affirm.’

The consent orders here involved were formally issued

by the FTC on March 30, 1972. Essentially they require, in

very detailed terms as to size of print, location, color and

shape, that appellants include in their newspaper, maga-

zine and other periodical advertising the now famous Sur-

geon General’s warning reading ‘‘ Warning: The Surgeon

General has determined that cigarette smoking is danger-

ous to your health.’? The history underlying the consent

orders is not particularly relevant for present purposes,

so that it is set out only in the margin.’ Suffice it to say

1In the appellants’ reply brief it was brought to our attention

that the Government filed civil enforcement actions in the United

States District Court for the District of Columbia on October 17,

1975. We understand by correspondence from the parties that there

are motions by the appellants here and defendants therein to have

the civil enforcement action dismissed for lack of jurisdiction and

for improper venue, or to have the action transferred to the South-

ern District of New York. We also are aware that by order dated

November 5, 1975, Judge Tenney dismissed the complaints under-

lying the present appeal, on the basis that he would decline to

exercise jurisdiction in the light of the enforcement action in the

District of Columbia. Appellants have filed a notice of appeal there-

from and by letter have sought to consolidate that appeal with the

instant one. Consolidation is opposed by the Government.

We have considered whether Judge Tenney’s order dismissing

the action has rendered the present appeal moot. We have con-

cluded, however, that affirmance of the dismissal will not necessarily

make this appeal moot because still at issue is the question whether

penalties that possibly accrued prior to the commencement of the

District of Columbia action or the dismissal of the underlying

complaint here should be stayed. As to consolidation, since the

appeal herein has already been argued, the more orderly procedure

appears to be to consider the issue of pre-enforeement stay of

penalties separately as it has arisen.

2 As taken essentially from the affidavit of Eric M. Rubin, an

FTC staff attorney, the history was as follows: In June, 1964, after

the Surgeon General released the Report of his Advisory Com-

RALEED TH

that the orders were entered into after negotiations re-

sulting from the FTC’s serving appellants with proposed

complaints charging them with deceptive practices under

15 U.S.C. § 45(a) for the failure to disclose in their adver-

tising the hazards of using cigarettes. The important thing

for our purpose is that in the consent order each of the

appellants waived ‘‘any further procedural steps’’ and ‘‘all

rights to seek judicial review or otherwise to challenge or

contest the validity of the order entered pursuant to this

agreement.’’ It should also be mentioned that the consent

orders required the submission of compliance reports.

These reports were filed in September 1972, with the result

that the FTC reported to Congress in December 1972 and

January 1974 that industry practice was in substantial

mittee on Smoking and Health, the FTC issued a proposed rule

requiring the inclusion of a health warning in all cigarette labeling

and advertising. Congress, however, adopted the Cigarette Labeling

and Advertising Act of 1965, Pub. lL. No. 89-92, 79 Stat. 282,

requiring a health warning on all cigarette packages, but barring

until July 1, 1969, the FTC from requiring such a warning in

cigarette advertising. 1965 U.S. Code Cong. & Ad. News 2350, 2351.

When that time expired the FTC again announced its intention to

promulgate a trade regulation rule requiring a warning to be

included in all cigarette advertising. Congress again intervened to

enact the Public Health Cigarette Smoking Act of 1969, 15 U.S.C.

§§ 1331 et seq. This act prohibited radio and television advertising

of cigarette and little cigars after January 1, 1971, 15 U.S.C, § 1335,

and foreclosed any action by the FTC ‘‘with respect to its pending

trade regulation rule proceeding’’ before July 1, 1971, 15 U.S.C.

§ 1336(a). The Act also required that if the FTC planned to take

any action in this area after July 1, 1971, the Commission had to

give six months’ notification to Congress of its determination to

do so. But Congress specifically left untouched the FTC’s authority

with respect to unfair or deceptive cigarette advertising acts or

practices, 15 U.S.C, § 1336(b). On July 1, 1971, the FTC served

on each of the appellants individual complaints charging them with

failure to disclose the Surgeon General’s warning. Agreements

containing consent orders agreeing to such disclosure were negoti-

ated in January of 1972 and in March of 1972 the orders were

finally issued and thereafter served.

OU GH

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AORTA Crete PTE OIA 8D. SEN Sas PW RTA Soe AONE ML

compliance with the orders. Subsequently, however, the

FTC claimed that prior to and since September 1972 ap-

pellants had engaged in practices which did not comply

with the consent orders’ detailed requirements. Accord-

ingly the Commission initiated a compliance investigation.

From November 1974 through January 1975 attempts ap-

parently were made to settle the F'TC’s claims of viola-

tions of the orders, but the settlement negotiations broke

down. The companies claim that the FTC demanded too

high a sum as a penalty for past violations and the FTC

counters that such a sum was not a condition to further

negotiation, and that appellants had refused to accept the

staff’s interpretation of the consent orders. On March 17,

1975, appellants asked the FTC Commissioners to reject

the staff’s interpretation. On August 1, 1975, the Commis-

sion, by letters to the companies, formally indicated that

the Commissioners supported the staff’s interpretation and

that pursuant to the provisions of 15 U.S.C. § 56(a)® it

would notify the Attorney General of its intention to com-

mence an action for civil penalties and for other relief on

the basis of these violations. The letters of August 1 stated,

however, that for certain of the alleged violations of the

orders the Commission would hold the civil penalty action

in abeyance for 180 days.‘ Appellants thereafter, on Au-

815 U.S.C. § 56 provides in pertinent part :

Whenever the Federal Trade Commission has reason to

believe that any person, partnership, or corporation is liable

to a penalty under section 54 of this title or under subsection

(L) of section 45 of this title, it shall—

(a) 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

‘The alleged violations for which immediate notification of the

Department of Justice was to be made included omission of the

warnings in vending machine display panels; omission or under-

sizing in promotional materials such as counter racks and calendars ;

ERVIN IONE RT LLG ROLLERS PDO IT RI TE STE I TOE

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gust 14, 1975, commenced actions for a judgment declaring

that the ‘‘determinations’’ in the Commission’s letters of

August 1 are inconsistent with the provisions of the orders

and that the appellants are not liable for civil penalties.

They also sought an order staying pending final judgment

the accumulation of penalties for alleged violations of the

orders under Section 5 of the Act, 15 U.S.C. § 45.° The six

complaints were consolidated, since they contain identical

questions of law, and after a hearing the court denied the

undersizing or mispositioning of the warning in newspaper, maga-

zine and other periodical advertising; and, in connection with

foreign language advertising, mistranslation of the warning or

use of a different language therein.

515 U.S.C. § 45(a)(1) declares unfair or deceptive acts in com-

merce unlawful. The statute empowers and directs the Com-

mission to prevent such acts, 15 U.S.C. § 45(a) (6). It authorizes

the issuance of cease and desist complaints, provides for agency

hearings thereon and affords review of FTC orders in the court

of appeals. 15 U.S.C. § 45(b)-(d). The penalties for violation of

orders are set forth in 15 U.S.C. § 45(7) as follows:

Any person, partnership, or corporation who violates an

order of the Commission after it has become final, and while

such order is in effect, shall forfeit and pay to the United

States a civil penalty of not more than $10,000 for each viola-

tion, which shall acerue to the United States and may be

recovered in a civil action brought by the Attorney General

of the United States. Each separate violation of such an order

shall be a separate offense, except that in the case of a violation

through continuing failure to obey or neglect to obey a final

order of the Commission, each day of continuance of such fail-

ure or neglect shall be deemed a separate offense. In such

actions, the United States district courts are empowered to

grant mandatory injunctions and such other and further equi-

table relief as they deem appropriate in the enforcement of

such final orders of the Commission.

For a general discussion of the penalty mechanism, see United

States v. J. B. Williams Co., 498 F.2d 414 (2d Cir. 1974), noted in

41 Brooklyn L. Rev. 792 (1975), 43 Geo. Wash. LL. Rev. 307 (1975),

88 Harv. L. Rev. 1035 (1975).

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motion for a stay of penalties, treating it essentially as an

application for a preliminary injunction.

Appellants principally argue that they are entitled to a

stay of the accrual of civil penalties as a matter of law.

They do so on the basis of a series of Supreme Court de-

cisions which commenced with Ex parte Young, 209 U.S.

123 (1908), and include Wadley Southern Railway Co. v.

Georgia, 235 U.S. 651 (1915); Oklahoma Operating Co. v.

Love, 252 U.S. 331 (1920); and St. Regis Paper Co. v.

United States, 368 U.S. 208 (1961).° The argument is that

a party whose conduct is made subject to administrative

action must be given the opportunity to obtain a judicial

test of the validity of such action and, further, as a matter

of due process of law, cannot be subjected to the risk that

substantial penalties will accumulate during the course of

the judicial proceeding. This line of cases is based on the

* Ex parte Young, 209 U.S. 123 (1908), held that state statutes

establishing maximum rail rates and providing large penalties (in-

cluding imprisonment) for violation thereof were constitutionally

invalid since the parties had been given no opportunity to contest

validity of the rates and were effectively denied judicial review of

the rates by the magnitude of the penalties. Jd. at 147-48. Wadley

Southern Ry. v. Georgia, 235 U.S. 651, 669 (1915), held that where

a state railroad commission joint rate order was made after hearing

and where the carrier did not avail itself of a ‘‘safe, adequate, and

available’’ statutory judicial review to test the validity of the

order, the statute authorizing a $5,000 a day penalty for violation

was not invalid. Oklahoma Operating Co. v. Love, 252 U.S. 331

(1920), followed Young where there was no opportunity for judi-

cial review of a state agency order. St. Regis Paper Co. v. United

States, 368 U.S. 208 (1961), held that fixed statutory forfeitures

of $100 per day for failure to file special reports in compliance

with FTC orders were not invalid where ‘‘petitioner did not try

to obtain judicial review prior to the commencement’’ of the

Government's penalty action, and where the petitioner did not

‘‘seek a stay once the litigation had begun.’’ Jd. at 225. The Court

seemed to indicate that a declaratory judgment action would have

lain to contest the validity of the orders and pointed out that even

after the Government commenced the enforcement action a stay

of penalties could have been but was not sought. Jd. at 225-27.

-RLEED THF OUGH

reasoning that, regardless of the ultimate determination

on the merits, due process requires that some real oppor-

tunity to challenge administrative action be afforded, and

that such opportunity cannot exist where penalties are so

great that noncompliance and a judicial challenge cannot

be risked. The argument is the more compelling, the appel-

lants suggest, in connection with FTC statutory penalties

due to recent decisions, including our own United States v.

J. B. Williams Co., 498 F.2d 414, 435-36 (2d Cir. 1974),

note 5 supra, which hold that penalties imposed for non-

compliance with the Commission’s cease and desist order

may be computed on the basis of a separate violation for

each day and for each advertisement.’ Appellants thus

claim that the district court’s endorsement of the Govern-

ment’s position in this case is directly contrary to definitive

Supreme Court decisions which embody the rule that a stay

of penalties is required during a good faith judicial chal-

lenge to an agency determination.

Young, Wadley, Love and St. Regis, however, do not go

as far as appellants suggest. Rather, they establish that

one has a due process right to contest the validity of a leg-

islative or administrative order affecting his affairs with-

out necessarily having to face ruinous penalties if the suit

is lost. The constitutional requirement is satisfied by a

statutory scheme which provides an opportunity for test-

ing the validity of statutes or administrative orders with-

out incurring the prospect of debilitating or confiscatory

penalties. As stated in St. Louis, Iron Mountain & South-

ern Railway Co. v. Williams, 251 U.S. 63, 65 (1919),

* Appellants argue that in the complaints filed in the District of

Columbia enforcement action the FTC claims that each copy of

every advertisement constitutes a separate violation of the consent

order. On this basis, appellants urge that the potential liability for

an advertisement in the Sunday New York Daily News with a

circulation of 3 million is $30 billion. Their point that substantial

penalties may be involved is made even though we need not accept

their characterization of the FTC complaint.

OP en

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where such an opportunity [to contest the validity] is

afforded and the [statute or administrative order] is

adjudged valid, or the carrier fails to avail itself of the

opportunity [to contest the validity], it then is admis-

sible, so far as due process of law is concerned, for

the State to enforce adherence to the rate by imposing

substantial penalties for deviations from it.

See St. Regis, supra, 368 U.S. at 226-27; Wadley, supra,

235 U.S. at 667-69. See also Ford Motor Co. v. Coleman,

Civil No. 75-1340 (D.D.C. Sept. 22, 1975), slip op. at 8-10.

Here the penalties which the appellants seek to have

stayed did not attach prior to their opportunity to contest

the validity of the orders. Rather, the risk of penalties

began to accrue only after the appellants entered into con-

sent decrees which acknowledged the validity of the decrees

and waived the right further to challenge their validity.

The statutory scheme of the Federal Trade Commission

Act contemplates ample opportunity to the company ac-

cused of a deceptive practice to test the initial validity of

the order. It can do so by seeking a review in the United

States Court of Appeals. 15 U.S.C. § 45(c); note 5 supra;

see United States v. J. B. Williams Co., supra, 498 F.2d at

419 (majority opinion) and at 441 (dissenting opinion). In

the instant case, however, it is not the validity of the con-

sent orders that appellants contest; rather it is their inter-

pretation by the FTC. The question whether one is entitled

to a stay of penalties as a matter of law in a suit involving

the enforcement of an admittedly valid administrative

order is not concluded by the Young line of cases. Appel-

lants have pointed to no cases which support their propo-

sition that at the compliance or enforcement stage they are

still entitled to a stay. The only cases in which the argu-

ment has been made have not accepted it, although they

hardly have the weight here that the Commission would

attribute to them. See Floersheim v. Weinberger, 346 F.

Supp. 950, 956 (D.D.C. 1972), modified on other grounds

RFLEED THFOUGC

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and aff’d sub nom. Floersheim v. Engman, 494 F.2d 949

(D.C. Cir. 1973); United States v. Beatrice Foods Co., 322

F. Supp. 139, 141 n.1 (D. Minn. 1971).

We agree, of course, with the principle enunciated by

the Supreme Court in Wadley Southern Railway Co. v.

Georgia, supra, 235 U.S. at 661, that a right of judicial

review is merely ‘‘nominal and illusory’’ if it must be

exercised ‘‘only at the risk of having to pay penalties so

great that it is better to yield to orders of uncertain legal-

ity rather than to ask for the protection of the law.’’ But

the legality of the orders here is entirely certain. The pen-

alties are accruing in this ease, if at all, only by virtue of

noncompliance with perfectly valid administrative orders.

At this stage the right of the government to impose fines

and penalties for violation of the laws appears equally in-

disputable. As Wadley states, ‘‘there is no room to doubt

the power of the State to impose a punishment heavy

enough to seeure obedience to such orders after they have

been found to be lawful; nor to impose a penalty for acts

of disobedience, committed after the carrier had ample

opportunity to test the validity of administrative orders

and failed so to do.”’ 235 U.S. at 667. Cf. Calero-Toledo v.

Pierson Yacht Leasing Co., 416 U.S. 663, 684-85 n.24

(1974).

Appellants argue, of course, that it is the risk of huge

accumulating penalties during the course of the enforce-

ment proceedings in this ease which calls into play the

Supreme Court cases and requires the granting of the tem-

porary relief sought. But while the cumulative aspect of

Section 45(1) penalties is severe, see United States v. J. B.

Williams Co., supra, 498 F.2d at 435-36, it very plainly was

the view of Congress that such cumulative penalties might

be the only way to enforce FTC orders in the face of prof-

itable, repeated or continuing violations. See 96 Cong. Rec.

2974 (1950) (remarks of Congressman Cooley); id. at

2981 (remarks of Congressman Poage) ; id. at 3018-19 (re-

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hae SRE

MITES TT eke,

12a

marks of Senator George) ; id., at 3025 (remarks of Sena-

tor Aiken). The legislative history of the Act, according to

United States v. ITT Continental Baking Co., 420 U.S. 223,

231 (1975),

makes clear that Congress was concerned with avoid-

ing a situation in which the statutory penalty would be

regarded by potential violators of FTC orders as noth-

ing more than an acceptable cost of violation, rather

than as a deterrence to violation. For example, Sen-

ator Aiken, chief proponent of the 1950 amendment,

said that if daily penalties for certain violations of the

Federal Trade Commission Act were not permitted,

‘the fine would amount to a license in the amount of

$5,000 for misrepresentation, which would be a very

cheap fine, indeed.’’

The cumulative penalty sections of Section 45(/) were held

to be fair in ITT Continental Baking Co. because they were

reasonably related to deterring cumulative violations of

FTC orders in two situations: first, where detriment to the

public and the advantage to the violator increases with

delay of enforcement, and, second, where there exists a con-

tinuing ability on the part of the violator to eliminate the

effects of his violation if so motivated. 420 U.S. at 232-33.

We are satisfied, therefore, that § 45(1) cumulative penal-

ties are not violative of due process under the circum-

stances of this case and that appellants are not entitled to

a stay of penalties as a matter of law. We may point out

in passing that while § 45 penalties are cumulative, they

are also subject to the limitation of judicial discretion upon

the penalties imposed.* Moreover, our own decision in

8 Indicative of this are the following statements from the floor

which attended passage of the 1950 Amendment to 15 U.S.C.

§ 45(L):

[I]t is inconceivable to me that any Federal court would im-

pose penalties under this section which are not reasonably

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United States v. J. B. Williams Co., supra, held that in any

penalty action there is a right to jury trial on contested is-

sues of fact.

Appellants also argue that even under the district court’s

approach of treating the motion for a stay as an applica-

tion for preliminary injunction they are entitled to relief.

We need not again set forth our settled rule that to obtain

such relief the litigant must either demonstrate a combi-

nation of probable success on the merits and the possibility

of irreparable injury or, in the alternative, that he has

raised serious questions going to the merits and that the

balance of hardships tips ‘‘decidedly’’ in his favor. San

Filippo v. United Brotherhood of Carpenters and Joimers

of America, No. 75-7394 (2d Cir. Oct. 28, 1975), slip op.

6387, 6392; Stamicarbon, N.V. v. American Cyanamid Co.,

506 F.2d 532, 536 (2d Cir. 1974). Ultimately those motions

are addressed to the discretion of the district court and its

decision should not be disturbed unless an abuse of discre-

tion is shown. In this regard, and particularly in this type

related both to the seriousness of the offense charged and the

size and resources of the defendant.

96 Cong. Rec. 2974, 3026 (1950) (letter from W. T. Kelley, General

Counsel FTC, to Senator Fulbright).

In no event would the court sanction any unreasonable penalty,

or any such total penalty as would be destructive of legitimate

business. So, therefore, I do not think there is any real danger

here to legitimate business.

96 Cong. Ree. 3019 (1950) (remarks of Senator George).

The courts have recognized the limitation inherent in this section.

See United States v. ITT Continental Baking Co., 420 U.S. 223,

229 n.6 (1975) (‘‘. .. the statutes prescribe no minimum penalty,

and the District Court has discretion to determine the amount of

the penalty for each violation whether the transactions are construed

as single or as continuing violations’’). See also United States v.

J.B. Williams Co., 498 F.2d 414, 488 (2d Cir. 1974) ; Floersheim v.

Engman, 494 F.2d 949, 952-54 (D.C. Cir. 1973) ; Ford Motor Co. v.

Coleman, Civil No. 75-1340 (D.D.C. Sept. 22, 1975), slip op. at

17 n. 44.

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ORS LO INLET, AY PILES TIS I oN ag (ro ome RN RANI oyna

hal ed >

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of case, we must recall that courts of equity may go much

further both to give or to withhold relief in furtherance of

the public interest than where only private interests are

involved. See Abbott Laboratories v. Gardner, 387 U.S.

136, 156 (1967); Yakus v. United States, 321 U.S. 414, 441

(1944); Gulf & Western Industries, Inc. v. Great Atlantic

€ Pacific Tea Co., 476 F.2d 687, 699 (2d Cir. 1973).

We agree with Judge Tenney below that appellants have

doubtless posed a serious question on the merits. However,

the limitations on the imposition of Section 45(1) penalties

which we have discussed above, see, e.g., Floersheim v.

Engman, 494 F.2d 949, 953 (D.C. Cir. 1973) (‘‘There is

room for leniency by the court, if petitioner’s view of the

meaning of the order is plausible and not defiant’’), cou-

pled with the strong public interest militating against the

stay, preclude any finding that appellants have met their

burden of showing that the equities tipped decidedly in

their favor. We agree with the court in Floersheim v. Eng-

man, supra, that the ‘‘equitable limitations inherent in the

Government’s remedies are a substantial protection for

respondent with a reasonable and bona fide claim.’’ See

note 8 supra. We also are of the view that if appellants’

interpretation of the consent orders is incorrect, granting

the stay would infringe the public interest in receiving

adequate warnings on the hazards of cigarette smoking.

We put no stock in the intimation in the appellants’ brief

that the public interest is not involved because Congress

has specifically required warnings on cigarette packages

but not on advertising. See note 2 supra. Nowhere has Con-

gress suggested that the FTC should not continue to handle

the matter of cigarette advertising, and deceptive adver-

tising practices in general, within the confines of its existing

complaint procedures under Section 45. See note 2 supra.

It may be, as appellants claim, that the Commission’s views

on noncompliance relate to alleged ‘‘minuscule variations

in type size and type style’’ and ‘‘to technical aspects”’’ of

RE noe ne So te a RNS

15a

the consent orders, but the Surgeon General’s warning is a

serious message which substantially affects the public in-

terest. Noncompliance with the Commission’s order is not

a matter lightly to be endured.

Judgment affirmed.

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APPENDIX C

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

75 Civ. 4047 (CHT)

75 Civ. 4048 (KTD)

75 Civ. 4049 (KTD)

75 Civ. 4050 (CBM)

75 Civ. 4051 (CLB)

75 Civ. 4052 (CLB)

Brown & WiiuiaMson Topacco Corporation, et al.,

Plaintiff

—against—

Lewis A. Eneman, Chairman, Federal Trade Commission,

et al., Defendants.

MEMORANDUM

TENNEY, J.

Plaintiffs, the six major producers of cigarettes in this

country,’ have moved by order to show cause for an Order

of this Court granting them preliminary injunctive relief

staying, pending final judgment, the accumulation of civil

penalties for alleged violations of the identical consent or-

ders entered into by each of the companies with the Federal

Trade Commission in March of 1972. For the reasons stated

below, the request for a preliminary injunction is denied.

The purpose of a preliminary injunction is to preserve

the status quo pending a determination on the merits.

1Mr. Weisberg, the Assistant United States Attorney, made a

motion on the record in open court on August 25, 1975 for consoli-

dation of the six cases filed in this Court. The motion was granted

and the Assistant United States Attorney was directed to submit

an order to that effect.

a NE REA SIIEE EE REBLI ES LRES EE LONE ENED TELIA LEA SEPP ANS REELED ITE

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Checker Motors Corp. v. Chrysler Corp., 405 F.2d 319, 323

(2d Cir.), cert. denied, 394 U.S. 999 (1969) ; Hamilton Watch

Co. v. Benrus Watch Co., 206 F.2d 738, 742 (2d Cir. 1953).

Such an injunction may never be obtained as a matter of

right, but is clearly addressed to the diseretion of the dis-

trict court. Yakus v. United States, 321 U.S. 414 (1944);

Checker Motors Corp. v. Chrysler Corp., supra, 405 F.2d

at 323.

Historically this remedy has been viewed as drastic or

extraordinary in nature and, absent a clear showing that

movant has carried the burden of persuasion, the relief

will be denied. Dopp v. Franklin National Bank, 461 F.2d

873, 878 (2d Cir. 1972) ; Checker Motors Corp. v. Chrysler

Corp., supra, 405 F.2d at 323. That burden consists of show-

ing either a reasonable probability of success on the merits

and irreparable injury or that movants have raised serious

questions going to the merits and that the balancing of the

equities tips decidedly in their favor. Robert W. Stark,

Jr., Inc. v. New York Stock Exchange, Inc., 466 F.2d 743,

744 (2d Cir. 1972) ; Checker Motors Corp. v. Chrysler Corp.,

supra, 405 F.2d at 323; Crimmins v. American Stock Ex-

change, Inc., 346 F. Supp. 1256, 1258-59 (S.D.N.Y. 1972).

An additional factor of relevance to be considered is the

public interest. American Motorists Ins. Co. v. City Wide

Transportation Co., 308 F. Supp. 1080, 1084 (S.D.N.Y.

1969) ; 7 J. Moore, Federal Practice { 65.04[1], at 47 (2d ed.

1948).

Since the issues of irreparable harm, the balancing of

the equities, and the public interest will be dispositive of

the motion, the Court will move directly to a consideration

of those issues. Assuming, for the moment, that plaintiffs

have at least raised serious questions going to the merits,

they must then demonsrate that, on balance, the equities

in the present situation tip decidedly in their favor. In the

alternative, assuming that plaintiffs have demonstrated a

reasonable probability of success on the merits, then they

any Marg AOR n Rie Rane obese ERT EC OP POR eae ea ete See ee ea ae nae eee a

— SPIEL ERG EES FE SIS Re PIES

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must further demonstrate irreparable injury in the ab-

sence of the relief requested.

On the question of irreparable injury, plaintiffs allege

that they face a denial of due process should the stay be

denied. In the absence of this relief, plaintiffs feel that they

are placed in an impossible predicament, 1.e., they are faced

with a choice of acquiesing in the findings of the Federal

Trade Commission (regarding violations of the 1972 con-

sent order) which they consider to be erroneous, or of

awaiting the Commission’s enforcement proceeding in the

face of ever-mounting civil penalties. This dilemma, plain-

tiffs contend, would, in effect, deny them a forum in which

to protest the ruling and, in doing so, deny them due proc-

ess. In support of this argument they cite St. Regis Paper

Co. v. United States, 368 U.S. 208 (1961).

The St. Regis case, however, is distinguishable from the

instant case. The penalty provision applicable in St. Regis

was mandatory in nature. The penalty provision applicable

in the instant case, 15 U.S.C. § 45(1), reads as follows:

‘*(1) Any person, partnership, or corporation who

violates an order of the Commission after it has be-

come final, and while such order is in effect, shall for-

feit and pay to the United States a civil penalty of not

more than $10,000 for each violation, which shall ac-

crue to the United States and may be recovered in a

civil action brought by the Attorney General of the

United States. Each separate violation of such an or-

der shall be a separate offense, except that in the case

of a violation through continuing failure to obey or

neglect to obey a final order of the Commission, each

day of continuance of such failure or neglect shall be

deemed a separate offense. In such actions, the United

States district courts are empowered to grant manda-

tory injunctions and such other and further equitable

relief as they deem appropriate in the enforcement of

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19a

such final orders of the Commission.’’ (Supp. 1975)

(emphasis added).

As can clearly be seen, the penalty provision of § 45(1)

merely fixes the upper limit of the penalty and any pen-

alties to be ultimately assessed are discretionary with the

court. United States v. J. B. Williams Company, Inc., 498

F.2d 414, 438 (2d Cir. 1974); Wnited States v. Beatrice

Foods Co., 322 F. Supp. 139, 141 (D. Minn. 1971).

In reaching its decision as to the imposition of penalties,

the Court may consider, inter alia, the ability of the violator

to pay, the good or bad faith of the violator, the degree of

due care exercised, the injury to the public, and the delay on

the part of the Federal Trade Commission in initiating the

enforcement suit. United States v. J. B. Williams Company,

Inc., supra, 498 F.2d at 438; United States v. Ancorp Na-

tional Services, Inc., 367 F. Supp. 1221, 1224 (S.D.N.Y.

1973) ; United States v. Beatrice Foods Company, 351 F.

Supp. 969, 971 (D. Minn. 1972), aff’d, 493 F.2d 1259 (8th

Cir. 1974), cert. denied, 43 U.S.L.W. 3474 (U.S. March 4,

1975) ; United States v. H. M. Prince Textiles, Inc., 262 F.

Supp. 383, 388-89 (S.D.N.Y. 1966). Thus, penalties to be

assessed, if any, will be tempered by these considerations.

In addressing this question as well as the question of the

public interest involved in the request for a stay of an

assessment of penalties under § 45(1), the United States

District Court for the District of Columbia (per Parker, J.)

stated:

‘‘The strong public interest in this area requires that

possible penalties not be stayed pending such litigation

in order to avoid encouraging frivolous suits for pur-

poses of delay. Of course court administrative delays

and the plaintiff’s good faith on the one hand, and, as

in this case, the unreasonableness or frivolousness of

plaintiff’s grounds for review on the other hand, are

factors which a court may consider in assessing pen-

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alties. United States v. H. M. Prince Textiles, Inc., 262

F. Supp. 383 (S.D.N.Y. 1966).’’ Floersheim v. Weim-

burger, 346 F. Supp. 950, 956 (D.D.C. 1972).

This Court is in agreement with the views expressed by

Judge Parker in Floersheim and must conclude that plain-

tiffs have failed in their burden of showing either irrep-

arable injury or that the balancing of the equities tips de-

cidedly in their favor. Far from being subjected to a de-

nial of due process, plaintiffs’ risks here are no greater

than the risks attendant in any litigation. In the face of

these findings and in light of the remarks made by Judge

Parker in Floersheim, it seems unnecessary to comment

further on the quesion of the public interest.

Accordingly, plaintiffs’ motion for a preliminary injunc-

tion is denied.

So ordered.

Dated: New York, New York

August 28, 1975

/s/ Cuartes H. Tenney

Charles H. Tenney

U.S.D.J.

—_— SEAL

2la

APPENDIX D

UNITED STATES COURT OF APPEALS

SECOND CIRCUIT

At a Stated Term of the United States Court of Appeals,

in and for the Second Circuit, held at the United States

Court House, in the City of New York, on the twenty-ninth

day of January, one thousand nine hundred and seventy-six.

Present: Hon. Wim.1am H. Mutiican 75-6081

Hon. James L. Oaxes 75-6084-5

Hon. Tuomas J. Mesxru 75-6087-8

Circuit Judges 75-6090

Brown & Williamson Tobacco Corporation, et al., Plain-

tiff-Appellant, v. Lewis A. Engman, etc., et al., Defendants-

Appellees.

(Firep January 29, 1976)

A petition for a rehearing having been filed herein by

counsel for the appellant American Brands, Inc.

Upon consideration thereof, it is

Ordered that said petition be and hereby is denied.

/s/ A. Dante. Fusaro

A. Daniel Fusaro

Clerk

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FEDERAL TRADE COMMISSION

WASHINGTON, D.c. 20580

OFFICE OF THE SECRETARY

August 1, 1975

American Brands, Inc.

245 Park Avenue

New York, New York 10017

Attention: Cyril Hetsko, Esquire

General Counsel

Re: American Brands, Ine.

Docket No. C-2182

Dear Mr. Hetsko:

The Federal Trade Commission has determined that

American Brands has violated the above-captioned order

by failing in certain cigarette advertisements to disclose

the required health warning and by failing in other ciga-

rette advertisements to disclose the health warning in the

clear and conspicuous manner that is required by the order.

The Commission will, therefore, pursuant to the provi-

sions of 15 U.S.C. 56(a)(1), notify the Attorney General

of its intention to commence for these violations an action

for civil penalties and other relief. For certain other viola-

tions of the order, the Commission will hold a civil penalty

action in abeyance for 180 days. If, however, at the expira-

tion of that period, American Brands has not corrected

these other violations, the Commission will seek civil pen-

alties and other relief for them as well.

The Commission will immediately notify the Department

of Justice of its intention to file a complaint for the follow-

ing violations of the order:

1) The advertisement of cigarettes on display panels

inserted since July 1972 into vending machines

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which fail to disclose the required health warning

in violation of Section I-E of the order.

The advertisement of cigarettes on other promo-

tional materials exhibited to the public since July,

1972, such as counter racks and shopping bags

which fail to disclose the health warning or which

disclose the health warning in a type size smaller

than that required for the entire advertising dis-

play area in violation of Sections I-E or I-F of the

order.

The advertisement of cigarettes in newspapers,

magazines or other periodicals published and dis-

tributed in the United States since July, 1972, which

appeared to the public with a disclosure of the

health warning in a type style or type size smaller

than that required for the advertisement’s trim

size, in violation of Section I-C of the order.

Foreign language cigarette advertisements pub-

lished and distributed, or otherwise exhibited to

the public, since November 13, 1973, which violate

the order by disclosing the health warning in a

language different from that principally used by the

advertisement or in an inaccurate translation of

the statement prescribed by Congress in Section 4

of the Public Health Cigarette Smoking Act of

1969.

The Commission has also determined that American

Brands has failed to disclose the health warning on bill-

board and transit card advertisements clearly and con-

spicuously as required by the order. Section I-D of the

order specifies minimum type sizes for different sizes of

billboards and transit cards. Compliance with that provi-

sion, however, does not satisfy the overriding requirement

established by the order that in these media the disclosure

must be clear and conspicuous. Disclosures which conform

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to the minimum size provisions of Section I-D but which

nonetheless are not of sufficient size for the warning to be

read by those who view the advertisement cannot be deemed

to comply with the order.

Moreover, the Commission has also determined that the

typographic composition of the health warning utilized by

your company violates Sections I-C-2 and I-C-4 of the or-

der by measuring the requisite leading and spacing dis-

tances from the type faces and not from the type shoulders.

The Commission will not, however, immediately initiate

a civil penalty action regarding violations pertaining to

the size of the warning on billboards and trensit cards or

pertaining to the typographic requirements for the leading

and spacing of the warning if those violations are remedied

within 180 days from receipt of this order.

The Commission received and carefully considered your

company’s Statement of Position prior to making its de-

termination in this matter.

By direction of the Commission.

/s/ Cuartes A. Tosrn

Charles A. Tobin

Secretary

ec: H. THomas Avustern, Esquire

c/o Covincton & BuRLING

888 - 16th Street, N.W.

Washington, D.C. 20006

Horace R. Kornecay, Esquire

c/o Tue Tosacco Institute, Inc.

1776 K Street, N.W.

Washington, D.C. 20006

norirccn Teer

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