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Keppel v. Federal Trade Commission

January 25, 1933


Petition to Review an Order of the Federal Trade Commission.

Author: Thompson

Before WOOLLEY, DAVIS, and THOMPSON, Circuit Judges.

THOMPSON, Circuit Judge.

This is petition to review an order of the Federal Trade Commission requiring the petitioner to desist from certain of its trade practices. The petitioner manufactures, sells, and distributes in interstate commerce certain packages or assortments of candy. Each assortment is accompanied by a display card designed to be used by the retailer. One assortment known as "Chocolate Penny Men 120's" is composed of 120 chocolate covered candies, identical in appearance, four of which conceal pennies placed there by the petitioner at the time it manufactures and packs the assortment. The purchaser pays one cent for the individual pieces of candy. Four of the 120 purchasers regain their money by obtaining the pieces which contain the pennies. Another assortment bears the name "1, 2, 3 Big Chief 60's," and consists of peanut bars wrapped in paper. Inclosed in the wrapper is a ticket showing the retail price to be paid by the purchaser. This may be one, two, or three cents. It cannot be known, until the eandy is unwrapped, what price the purchaser must pay for the particular piece. The third assortment, "School Days 200's," consists of 200 chocolate covered creams of a uniform size and shape, which retail at one cent each. Of these the centers of eight are pink, four are chocolate, and the remainder are white. Packed with the creams are eight pieces of chocolate candy representing a boy or girl, and four double pieces representing twins. The package contains, in addition, a "school companion." For a cream with a pink center, the purchaser receives the chocolate boy or girl; for a chocolate center, the twins; and for the last piece in the box, the "school companion." This is a fairly complete outline of the three sales plans in use by the petitioner.

The Federal Trade Commission filed a complaint in which it charged the petitioner with selling and distributing its candy by means of a sales plan or method which constitutes a lottery. Testimony was taken, and the commission concluded that the sales plans which we have described are, in effect, games of chance, that they are against public policy, and that they constitute unfair competition in commerce. The Commission ordered the petitioner to cease and desist from the use of such practices.

Congress has exclusive control over the regulation of commerce among the states. The manner in which it exercises this constitutional power is not limited. It may regulate commerce by means designed to promote the public welfare, and in matters which are ordinarily within the police powers of the states. Lottery Case, 188 U.S. 321, 23 S. Ct. 321, 47 L. Ed. 492; Hoke v. United States, 227 U.S. 308, 33 S. Ct. 281, 57 L. Ed. 523, 43 L.R.A. (N.S.) 906, Ann. Cas. 1913E, 905; Caminetti v. United States, 242 U.S. 470, 37 S. Ct. 192, 61 L. Ed. 442, L.R.A. 1917F, 502, Ann. Cas. 1917B, 1168. Congress therefore had power, had it seen fit, to prohibit business methods such as are practiced by the petitioner. The contention of the respondent is that Congress has done so in section 5 of the Federal Trade Commission Act (15 USCA § 45), which provides:

"Unfair methods of competition in commerce are declared unlawful.

"Power to prohibit. The commission is empowered and directed to prevent persons, partnerships, or corporations, except banks, and common carriers subject to the Acts to regulate commerce, from using unfair methods of competition in commerce."

The act contains no definition of the words "unfair methods of competition in commerce," and their meaning must therefore be arrived at through a reasonable construction of the language used.

In a recent case in the Second Circuit [Northam Warren Corporation v. Federal Trade Commission, 59 F.2d 196, 198], compaint was made to the Federal Trade Commission by a trade competitor that the respondent was using testimonials for advertising purposes for which it had paid, and that that fact was not disclosed to its customers. The Commission, holding that this was an unfair method of competition in commerce, issued a "cease and desist" order, from which the respondent appealed. Although the acts of the respondent may have been unethical and deceptive, in that the purchasing public was not informed that the judgment of those giving the testimonials may have been influenced by a money consideration, we are in accord with the reasoning of the court in reversing the order of the Federal Trade Commission. We quote from Judge Manton's opinion: "The Federal Trade Commission Act (15 USCA §§ 41-51) does not purport to establish a decalogue of good business manners or morals. Its purpose is to strike down at their inception practices which are unfair and which, if permitted to run their full course, would result in the creation of a monopoly and an undue restraint of trade. Even if a practice may be regarded as unethical, it would still be beyond the purview of the act if it lacks the public interest necessary to support the Commission's jurisdiction. Federal Trade Comm. v. Klesner, 280 U.S. 19, 50 S. Ct. 1, 74 L. Ed. 138, 68 A.L.R. 838. The Commission does not suggest that these testimonials tend to create a monopoly; they do not have a tendency to create an undue restraint of trade.The strongest argument the respondent makes is that failure to state the price paid for the testimonial amounts to deception and misrepresentation concerning the petitioner's product and in that way the petitioner is able to deprive honest manufacturers of a market. Federal Trade Comm. v. Winsted Hosiery Co., 258 U.S. 483, 42 S. Ct. 384, 66 L. Ed. 729. But where unlawful restraint of trade has been ordered to be discontinued it has always appeared that there was some dishonesty in labeling or marketing the goods. Federal Trade Comm. v. Winsted Hosiery Co., supra; Guarantee Veterinary Co. v. Federal Trade Comm., 285 F. 853 (C.C.A. 2); Royal Baking Powder Co. v. Federal Trade Comm., 281 F. 744 (C.C.A. 2); Procter & Gamble [Co.] v. Federal Trade Comm., 11 F.2d 47 (C.C.A. 6). In order that the Commission proceed in the public interest, the courts have insisted not only upon a showing that the practice is unfair and disapproved, but also that the public are misled thereby. Federal Trade Comm. v. Klesner, supra."

Practices which tend to hinder competition or create monopoly are against public policy just as practices which are characterized by deception, bad faith, fraud, or oppression are against good morals; but not all practices which are opposed to good morals or public policy amount to unfair methods of competition within the meaning of the Federal Trade Commission Act (45 USCA § 41 et seq.). Federal Trade Comm. v. Gratz, 253 U.S. 421, 40 S. Ct. 572, 64 L. Ed. 993; Federal Trade Comm. v. Raladam Co., 283 U.S. 643, 51 S. Ct. 587, 75 L. Ed. 1324, 79 A.L.R. 1191.

The petitioner did nothing against public policy, within the restricted sense of the term, because its acts did not, of themselves, tend to hinder competition nor create monopoly. Whatever they did, their competitors could do. Other candy manufacturers were free to use the same sales methods as those of the petitioner, and to obtain their share of the penny candy trade on an equal footing with the petitioner. The testimony shows that a decided majority of candy manufacturers did in fact use similar methods. There is nothing in the petitioner's practices tending to hinder competition or create monopoly.

The answer to the contention that the petitioner's practices constitute a breach of good morals, and, in that respect, unfair methods of competition, is that there is nothing in the case to show deception, fraud, or bad faith affecting its competitors or the ultimate consumer. Display cards sent by the petitioner to accompany the merchandise contain a complete, fair, and accurate description of the sales plans. The consumer receives a piece of candy for his cent, and, although he knows that the quantity is relatively less than if no prize were given, he is satisfied to deprive himself of the difference in bulk in exchange for his opportunity to obtain a prize.

We conclude that, upon a reasonable construction of the Federal Trade Commission Act, the Commission was without jurisdiction to make the "cease and ...

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