APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE D.C. Civil No. 75-0184
Before Hunter, Van Dusen and Sloviter, Circuit Judges.
This is an appeal from a final order of the United States District Court for the District of Delaware, which assessed a penalty of $1,750,000 against the Reader's Digest Association, Inc. ("the Digest") for multiple violations of a Federal Trade Commission ("FTC") consent order, and also enjoined the company from further violations. We will affirm.
In 1970, the FTC initiated an investigation of the Digest's direct-mail solicitation campaigns. Characteristically, the solicitations involved the mass mailing of sweepstakes promising money or merchandise to a small percentage of those who returned the sweepstakes entry forms. At the conclusion of its investigation one year later, the FTC notified the Digest that it found the company's sweepstakes promotions to be unfair and deceptive, and that it intended to charge the Digest with violating section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45 (1976).*fn1
The FTC did issue an administrative complaint on November 2, 1971, but the complaint was contained within a settlement agreement between the agency and the Digest to enter into a cease and desist order. The agreement stated that the order was entered into for settlement purposes only, and did not constitute an admission that the Digest had violated any law. The parties also agreed that the consent order would be construed in light of the administrative complaint.
One of the allegations in the complaint stated that the Digest had represented that "(simulated) checks, "money' and other negotiable instruments and simulated "New Car Certificates' " were "valuable and (could) be cashed, redeemed, or exchanged for United States currency or a new car," when in fact the documents were not valuable, and could not be cashed, redeemed, or exchanged for currency or a new car. Appendix at 27a; 30a. The complaint included an example of one of the Digest's simulated checks, which is reprinted in appendix 1 of this opinion. The corresponding provision of the consent order required the Digest to cease and desist from "(u)sing or distributing simulated checks, currency, "new car certificates;' or using or distributing any confusingly simulated item of value." Appendix at 38a. (emphasis added).
In the first half of 1973, the Digest initiated a "Sweepstakes Passport" promotion. As part of the promotional pamphlet, the Digest mailed millions of "travel checks" which purported to pay a grand prize winner in the sweepstakes "one hundred dollars a month for life." A specimen check is reprinted in appendix 2 of this opinion.
On April 13, 1973, an FTC staff attorney informed the Digest that the travel checks were "clearly violative" of the portion of the consent order prohibiting the dissemination of simulated checks or confusingly simulated items of value. Appendix at 728a. The FTC met with the Digest's then associate general counsel, Mari Ann Blatch, on May 2, 1973, at which time the Commission's objections to the promotion were voiced. On May 7, 1973, Blatch informed the FTC that the Digest, "while not admitting that the "travel check' in any way violates C-2075 (the consent order)," would discontinue their use after June 30, 1973. Appendix at 763-64a. The company then proceeded to complete its mailing of the "Sweepstakes Passport" promotion, sending out over four million travel checks between May 7, and June 30, 1973.
In September and November, 1974, the Digest distributed approximately two million "cash-convertible bonds" as part of a new sweepstakes campaign. The Digest enclosed three different bonds in each packet, one purporting to award a grand prize winner "one hundred dollars a month for life," another for $24,000.00, and a third for "$2,000.00 a month for a year." The first of these bonds is reprinted in appendix 3 of this opinion. The FTC did not contact the Digest about the bonds at the time of the mailing.
On July 7, 1975, the Government filed a complaint in district court pursuant to sections 5(l ) and 16(a)(1) of the Federal Trade Commission Act, 15 U.S.C. §§ 45(l ) and 56(a)(1) (1976), to recover penalties for violations of the cease and desist order, and to secure injunctive relief.*fn2 Appendix at 7-10a. The complaint charged that the Digest had violated the consent order by distributing several million "simulated checks," and several million "confusingly simulated items of value."
Following discovery, the Digest moved for summary judgment, and the Government moved for partial summary judgment on the issue of liability. On November 28, 1978, the district court granted the Government's motion for summary judgment on liability. United States v. Reader's Digest Association, Inc., 464 F. Supp. 1037 (D.Del.1978). The court held that the consent order entered into between the FTC and the Digest "was meant to apply to advertising material that is similar to the items mentioned in the complaint and, on its face, could be said to have the same capacity to mislead consumers." Id. at 1047. Thus, the court rejected the Digest's contention that the Government had to prove that the travel checks and cash-convertible bonds had actually deceived consumers. Chief Judge Latchum also rejected the Digest's argument that the challenged documents were commercial speech protected by the first amendment. The district court then examined the travel checks and bonds, and concluded that, in terms of their tendency to deceive consumers, they were indistinguishable from the original check giving rise to the consent order.
Following further discovery, the district court held a penalty hearing in May, 1980. After considering the factors set forth by this court in United States v. Papercraft Corporation, 540 F.2d 131, 141 (3d Cir. 1976), the district court concluded that the Digest had been guilty of 17,940,521 violations of the consent order. In other words, the district court held that each letter distributed in the Digest's mass mailings constituted a separate violation. The court assessed a penalty of $1,750,000, and issued a permanent injunction against further violations of that portion of the consent order. United States v. Reader's Digest Association, Inc., 494 F. Supp. 770 (D.Del. 1980). The district court denied the Digest's post-trial motions. This appeal followed.*fn3
Four issues are presented in this appeal. First, did the district court err by granting the Government's motion for summary judgment on the issue of liability? Second, does the district court's finding that the travel checks and cash-convertible bonds violated the consent order impinge upon constitutionally protected commercial speech? Third, did the district court conclude correctly that each individual mailing constituted a separate violation of the consent order, and did it abuse its discretion by imposing a penalty of $1,750,000 upon the Digest? Finally, did the district court abuse its discretion by granting an injunction against future violations of the consent order? We will examine each of these issues separately.
The Digest maintains that the district court erred by granting the Government's motion for summary judgment on the issue of liability. Appellant challenges the district court's construction of the order, contending that the ban on dissemination of "confusingly simulated item(s) of value" required the government to offer proof of actual confusion of consumers, not just a tendency to confuse. The Digest also claims that the question of whether the travel check and cash-convertible bonds violated the consent order was not ripe for summary adjudication because of the existence of genuine issues of material fact. Specifically, the company argues that there was a genuine dispute as to whether the travel check was a "simulated check," and whether the bonds were "confusingly simulated item(s) of value" within the prohibition of the consent order.
In determining whether the travel check and cash-convertible bonds violated the consent order, the district court properly engaged in a two-step inquiry: (1) construction and interpretation of the consent order itself; and (2) whether the challenged documents fell within the order's proscription. United States v. J. B. Williams Company, Inc., 498 F.2d 414, 430-31 (2nd Cir. 1974). In construing the terms of the order, the lower court observed that the language was "not a model of clarity," and did "not indicate whether or not the term "confusingly' was meant to impose upon the FTC the burden of proving actual confusion to establish a violation." Reader's Digest, 464 F. Supp. at 1045-46. The district court concluded that the resolution of ambiguities in the order depended upon the intent of the FTC and the Digest at the time that they negotiated the order.
The Digest asserts that ambiguities in the terms of a consent order, like those in a contract, can be resolved only at trial, not by summary adjudication. See e.g., Landtect Corporation v. State Mutual Life Assurance Company of America, 605 F.2d 75, 79-80 (3d Cir. 1979). While appellant recites correctly an accepted principle of contract law, it is nonetheless undisputed that construing the meaning of a consent order, even an ambiguous one, is a question of law for the court, capable of resolution in summary judgment proceedings. Williams, 498 F.2d at 431 ("what the order means (is) concededly a task for the court"); United States v. Golden Fifty Pharmaceutical Co., Inc., 421 F. Supp. 1199, 1201-02 (N.D.Ill. 1976). See also Comment, The Right to a Jury Trial in FTCA Section 5(l ) Civil Penalty Actions, 60 Iowa L.Rev. 378, 390-91 (1974) ("Williams affirmed the general rule that the (interpretation of the consent order) is a question of law to be decided by the court sitting without a jury."). Thus, the district court properly undertook the task of interpreting the consent order.
In construing the consent order, the district court scrutinized the underlying administrative complaint issued by the FTC. Although a consent order must ordinarily be interpreted by examination of only the "four corners" of the document, United States v. Armour & Co., 402 U.S. 673, 91 S. Ct. 1752, 29 L. Ed. 2d 256 (1971), the complaint may be used as an aid in construction when the parties so provide. United States v. ITT Continental Baking Co., 420 U.S. 223, 238, 95 S. Ct. 926, 935, 43 L. Ed. 2d 148 (1975). The agreement containing the consent order at issue here expressly stated that the "complaint may be used in ...