Art National Manufacturers Distributing Co., Inc.

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IN THE J\IA TTEH OF ART NATIONAL :\L\XL;FACTCRERS DISTRIBUTING CO., INC., ET AL.

OJmEr., ETC.. IX REGARD TO THE ,,\ALLEGED VIOLATIOK OF TI- I'LDEIL\L 'nude CD::nnssIOX "'CT Docket "1286. Complaint, Oct. 24, 1958-Decision, May 10, 1961 Order requiring two associated concerns with common offcers-a catalog mail order h011se and a watch manufacturer which made a substantial part of its sales through the former s catalog-to cease misrepresenting the size and extent of their business quarters, or the length of time in business; representing falsely that their "Louis" watches \'were shockproof, had been awarded a Gold Medal, were jeweled with rubies, and were guaranteed; and to cease preticketing their watches with excessive prices represented thereby as the usual retail prices.

Mr. Harty E. Middleton IT. for the Commission. ilfr. B. Pa"l Noble of 1Vashington, D. C. , for respondents. IKITI "'L DECISION BY Euw AIm CREEL , I-IEARING EXAMINER This proceeding is based upon a complaint brought undet Sf) of the Federal Trade Commission Act charging respondents ''with the use of unfair and c1e.ceptive acts and practices and unfair methods of competition in commerce in connection with thc sale and distribution of ynrions items of merclumc1ise, including watches. This proceeding is now before the IIearing Examiner for Iinal consideration l!Poll the complaint, nn wers thereto: test.imony and other evidence: propm:e(l findings of fact. ancl concll1 ions of 1f\\ jlled by aJl part ies. The IIE'flring E. xnmincr has gi'iTen consideration to thc proposed flllclings of fact and conclusions submitted, flld an find- , Findings 58 F.'l.

ings of fact and conclusions proposed by the parties, not hereinafter specifically found or concluded, are herewith rejected. The motion to dismiss the complaint fied by the respondents is denied. The IIearing Examiner', ha.ving considered the entire record herein makes the following findings as to the fa,ets anll cOJlclusions clra',l1 therefrom, and issues Lhe following order: FIX DINGS OF FACT 1. Respondents Art K ational )ianufacturcl's Distrilmting Cu., Inc., hereinafter referred to as "Art Xational, and l-,louis \Yatch Company, Inc. , hereinafter referred to as " Louis \Vatch" , are corporations organized, existing and doing business under' and by i1'tue of the h,, s of the State of ew York. Their offces and princi pal places of business are, respectively, 58-40 Borden Avenue, Mas peth, N e,w York, and 580 Fifth A ve,Hue, N ewYork, )Jew York. 2. Respondents Louis Friedman, :Martil1 Friedman and Albert Friedman are offcers of said corporations. The individual respondents hase participaJec1 in the formulation, diredion and control 01 the policies, acts and practices of the corporate respondents, and have cooperated in carrying on the practices hereinafter found, except that respondent J\lrutin Friedman has not been ShOlVll to lUlve participated in the conduct of the affairs of Louis \11 atch, although he was nominally an offcer of that corporation. 3. The respondents are engaged in interstate commerce. 4. Hespondents are in competition 'Iyith other cat.along merdwndiscI's and wat.ch importers.

5. Art National publishes catalogs, circulars and other printed material, and such material is disseminated in commerce. 6. Art ational represented that it has been in business for thirtytwo years. Art National, however, was organized and incorporat.ed in 1951.

hut 7. Louis .Watch reprcsentecl that it was established in 1904, this firm was not organized and incorporated until 1932. 8. The corporate respondents impliedly represented that the builcl ings depicted in their advertising were entirely occupied by them when in fact each of them occupied only a srmLll portion of the buildings depicted in their advertising.

9. Art ational represented that it sold its merchandise at Amer ica s lowest prices. However, competitors of Art National sold many of the same items of merchandise at prices as low as those of this respondent lnd respondent, in many instances, did not sen at wh01csale prices.

ART NATIONAL MAUFACTURERS DIST. CO., Dic., ET AL. 721 719 Order 10. Louis 'Vatch represented that its watches were Gold "fedal A ward winners, but its watches ha VB never been a warded a gold medal or any other kind of medal.

11. Louis 'Vatch represented that the jewels in its watches were rubies. The jewels in Louis watches were not rubies, but were made of synthetic material.

12. Louis 'Vatch represented that certain of its watches were shockproof, but they were not shockproof. 13. Louis Watch represented that its watches carried a "full year written guarantee, but the written guarantee furnished Louis 'Vatch purchasers, against "any original defects or workmanship, did not set out the manner in which the guarantor would perform not was such disclosure made in the Louis \Vatch advertisements. 14. The evidence does not establish whether or not the suggested resale prices with which respondent Louis Watch preticketed its watches were the prices at which such watches were us-a ally and customarily sold at retail. Those sold by Art ational through its catalog were sold for substantially less than Louis .Watch' s preticketed prices, and a number of peddlers, discount dealers and wholesalers sold them at retail for less than the preticketed prices; but all of the retailers who operated retail jewelry stores, who were called as witnesses, sold them at the suggested resale or preticketed prices. The evidence does not permit a determination that the usual or customary resale prices ,were less than the preticketed prices, nor does it permit a determination that the preticketed prices wen' fictitious.

COKCL1JSIOXS The allegations of the complaint relating to the preticketing of watches with fictitious retail prices have not been sustained by the evidence.

The other acts and practices of respondents: as hereinabove found were al1 to the prejudice and injury of the public and of respondents competitors, and constituted unfair and deceptive acts and practices and unfair methods of competition in commerce within t.he intent and meaning of the Federal Trade Commission Act. ORDER It is ordered That respondent Art Kational Manufacturers Distributing Co. Inc. , a corporation; jts offcers; respondents Louis Friedman, Martin Friedman and Albert Friedman, individually and as officers of said corporation; and their agents, representatives and 681-237- fJ3- 722 FEDERAL TRADE CQJLvrISSION DECISIONS Opinion 58 F, employees, directly or through any corporate or other device, in connection with the sale or distribution of merchandise in commerce as "commerce" is defined in the Federal Trade Commission Act, do forthwith cease and desist from representing, directly or indirectly: 1. That said corporation has been in existence, or that said corporation or individuals have been in business for any period or length of time that is not in accordance with the facts; 2. That respondents occupy any portion of buildings depicted that is not in accordance with the facts, or misrepresenting, in any manner, the size or extent of the buildings in which they carryon their business;

3. That respondent Art K ational Manufacturers Distributing Co. Inc. sells its merchandise at America s lowest prices, or misrepre scnting in any other manner its prices as compared to those of its competitors;

4. That Louis watches are shockproof.

It is further o1'dered That respondent Louis 'Watch Company, Inc. , a corpornt.ion; its oflcers: respondents Louis Friedman and Albert :Friedman, individually IHc1 as offcers of said corporation; and their representat.Yes agents and employees, directly or through any corporate or other device, in connection with the sale or distri bution of merchandise in commerce, as "coIImerce ' is defined in the Federa 1 Trade COlnmission Act, do forthwith cease anu. desist from representing, directly or indirectly:

1. That said corporation has been in existence, or that said corporation or individuals have been in business for any period or length of time that is not in accordance with the facts; 2. That they occupy any portion of buildings dcpicted that is not in accOrdtU1Ce with the facts, or misrepresenting, in any manner, the sizo or extent of the buildings in which they carryon their business; B. That Louis ,\"atches have been awarded a Gold j\Iedal or any other kind of medal;

4. That. the jewels in Louis ,vatches are rubies; G. That Louis watches are shockproof.

OPIXIOX OF TILE CO?DIISSIO:"

By Drxox Oommissio1Ler:

The complaint in this proceeding was issued October 24, 1858. In it the respondents are charged with having made false, misleading and deceptive stat.ements or representations in promotional material in connection with the interstate scalp of a ,,,ide variety of goods including watches. It is alleged that these practices violate Section 5 of the Federal Trade Commission Act. ART NATIONAL MAN,JFACTURERS DIST. CO. , INC. , ET AL. 723 719 Opinion After an answer had been filed the respondents changed counsel and upon request were granted permission to fie new and somewhat different answers. Issue having been joined the matter proceeded to hearing. After three days of hearings during which the test.imony of eight witnesses was heard, the hearing examiner became fatally in and on July 2, 1959, a substitute hearing examiner was appointed in his stead.

On July 28, 1959, we denied respondents' interlocutory appeal from the order replacing the hearing examiner on the ground that respondents had failed to show that their right to a fun and fair hearing had in any manner been prejudiced by the substitution. Hearings in support of and in opposition to the complaint were then held in several cities throughout the country culminating in Kew York City on .June 28 , 1960.

The hearing examiner s initial decision partially upholding and partially dismissing the complaint was filed on October 27, 1960. The proceeding is before us on cross-a.appeals by respondents and counsel supporting the complaint. The appeal of counsel supporting the complaint makes two assignments of error while respondents. plead that t.he hearing examiner erred in nine of his findings and charge further errors in five legal questions. Respondent Art K ational1\fanufacturers Distributing Co., Inc. , is a " catalog mail order house " seHing a sundry line of hard goods to consumers and occasionally to retailer.rs. This proceeding is almost entirely concerned "i1-h alleged false nnddeeeptive representat.ions made in the Art National catalog distributed to more than 400 000 addressees.

Louis ",Vatch Company, Inc., is a manufacturer and distributor of watcllEs. A- substantial part of its total sales arc made through the; medium of Art K ational. Several of the specific charges against this respondent involve its advertising appearing in the Art Kabanal catalog while others deal with practices engaged in whiledistributing watches through other media. The two corporate respondents are of a type commonly referred to as " famili: corporations. They are complete.ly owned and manage(l by the Friedman hmily and three of the members of that family, the father and t,,,o Sells, arc named as party respondents. The evidence clearly indicates interlocking control and management of the two corporations through the medium of cornman offcers. The respondents admit that respondent Louis Friedman "owns aud "runs" respondent Louis "Watch Company, Inc. , and th.t respondent Albert Friedman manages and formulates the policy of respondent Art National Manufacturers Distributing Co., Inc. They Opinion 58 F.

deny that respondent IRrtin Friedman has any authority or control in either corporation. The evidence shows that Martin Friedman owns 25% of the stock of Art National; that he was its vice-president when it was incorporated, and that his brother Albert was not too sure" that he was still the vice-president at the time of hearing. These might be rather tenuous grounds for holding Martin Friedman as a. party respondent but we do not have to rely on them alone. Mr. Louis Friedman. the father of Albert and :\iartin when asked whether he and his two sons owned and ran Art National testified: "Art National, yes. well, they actually run it, to be more specific. This statement allays any question of :Martin Friedman s responsibility for the operation of respondent Art N tional and with it any doubt: concerning his being a proper party to this proceeding.

Several of respondents' assignments of error can be disposed of without extended discussion since they have been met with such frequency in the past that their solution presents no problem for which a clear and controlling precedent has not been eSUlbl1shed. One such plea is respondents' claim that they have discontinued or abandoned several of the practices indicted by the complaint and have no intention to again engage in them. To TPsolve such questions we generally look to the timing and circumstances surrounding the alleged discontinuance. In this case it is admitted that the practices were not discontinued until the Commission attorney investigating this matter informed respondents of their questionable nature. Such discontinml.lice after the commencement of proceedings will not sup port a conclusion or give nSSUTfmce. that the practices will not be resumed, and under such circumstances 'Ye have consistently refused to dismiss complaints. E.g. lVa'i'd Baking Company, 54 F. C. 1919 (1958); Amold OonBtablB OO1'poration Docket No. 7657 (January 1961). Respollclents here have presented no grounds which would justify our departure from past holdings and we accordingly reject their plea of abandonment.

Another of respondents' pleas which appears to fly in the face of established prececlent is the contention that the substitution of hearing examiners during the course of the hearing hfLd 1he effect of denying them a fair trial. They urge that the replacement hearing examiner did not hear the testimony of all \ylJnesses and may not make findings which are to any extent based upon testimony not offered in his presence. Hespondents cite no legal precedent for this proposition for indeed there is none. A leading case on this point is Ga-mble- Skogmo, Inc. v. Fer/emi Tmde 001)n,i88iOIl 211 F.2cl106 f5 S.&D. 6031 ART NATIONAL :val;TFACTuRERS DIST. CO. , INC. , ET AL. 725 719 Opinion (8th Cir. 1954). In that ease a substitute hearing examiner was appointed when his predeeessor became unavailable after al1 testimony had been received and briefs and oral argument received and heard. On appeal from the Commission s order to cease and desist the court of appeals lna,de a rather detailed analysis of the evidence and concluded that the initial decision of the substitute hearing examiner was: ,,: * * based in controlling measure upon the credibility evaluation which he made between the opposing witnesses in their irreconcilable testimony. (Id. at 117-118) The court set aside the order of the Commission holding that the Commission had not complied with the provisions of Section 5(c) of the Administrative Procedure Act (5 V. A. S 1004(c)), which provides in part:

The same offcers who preside at the reception of evidence'" '" '" shall make the recommended decision or initial decision"''' '" except where such offcers become unavailable to the agency.

In ruling against the Commission, the court decided that even when a hearing examiner hflcl become "ullavaihlble" a substitute hearing examiner could not clecide the case unless: , it fairly could be said that cI'cdibilty eyalnation from hearing' and seeing the witnesses testify was unnecessary, in the sense that a direct choice in personal credibilit:r as between them would not have to be made or would not from the nature of the situation be capable of being of material assistance In the attempt of the substitute examiner to arrive at the controllng facts. (Id. at 115) To bring themselves within tho. rule of the Gwrnule- Skogmo case respondents would lUlYe to show that the hearing examiner based his findings upon the contradicted testimony of witnesses which he had not observed testifying. ' While it is true that the substitute hearing examiner did not hear the testimony of eight witnesses (including two of the individual respondents) respondents do not challenge the credibility of these witnesses or point to any irreconcilable conflict between their testimony and other evidence. A further defect in respondents' plea is tho. failure to show that the findings and decision of the hearing examiner were based to any extent upon the testimony of the unobserved witnesses. Thus, 'H conclude that respondents have totally biled to show that the substitution of hearing examiners in any way prejudiced the.ir right to a fair trial. Both corporate respondents are charged with misrepresenting the time they have been in business. Louis W atch Company advertised that it has been in business since 1904 and there doesn t appear to be any question but that this representation is completely false. Opinion 58 F.

The situation with Art N ationa! is different. This company represented in its 1956-57 catalog as follows: For 32 years ART NATIONAL has been the choice of progressive dealers The complaint alleged that this statement was false and that respondent "* * * was not incorporated until 1951. The hearing examiner ordered respondent Art T atiana.l to cease representing that it had been in business for any period of time .* * ,* that is not in accordance with the facts; * * * " Let us briefly examine just what the record facts are with respect to this charge. The respondent in its answer freely admitted that it had represented that Art N atianal had been in business for thirty-two years and also admitted that it was not incorporated until 1951. It specifically denied that its representations as to the length of time which it had been in business were false. Absolutely the only evidence ndduced in support of the complaint on this point consists of the testimony of the principal offcer and founder of Art National, :Hr. Louis Friedman. This witness testified as follows: I formed Art Watch Company in 1927 and Art ::ational was reincorporated I believe, in ' 51 under the Art National Manufacturing and Distributing Company.

There can be no doubt that the above-quoted testimony and the admissions in the respondents' answer are an insuffcient basis upon which to prcdicate a finding that this respondent has not been in business for thirty two years. Findings of fact must be supported by "reliable, probative, and substantial evidence. (Section 7(c), Administrative Procedure Act. ) The evidence on this point does not fulfill any of these requirements. The burden was on complaint counsel to prove that this respondent had not been "in business" for 32 years. And this burden is not satisfied by a showing of incorporation (or "reincorporation ) in 1951. Therefore, on this point we find that the hearing examiner s finding and order are not sup ported by the record and must be vacated. The complaint charges and the examiner found that respondent Louis "\Vatch Company, Inc., represented that its watches carried a "fun years written guarantee" without disclosing in the advertisements or in the guarantee certificate furnished to purchasers the manner in which the guarantor wouJc1 perform. But the hearing examiner, after having made the finding, failed to include a prohibition of the practice within his order to cease and desist. Our -examination 01 the record indicates that the finding is based upon substantial evic1e 1ce and we ean only conclude that the omission of an appropriate prohibition in the order was an unintentional over- ART NATIONAL MANUFACT"CRERS DIST. CO., I , ET AL. 727 719 Opinion sight. Thus the appeal of complaint counsel on this point should be granted and an appropriate order wil issue. Although neither party has raised the point, it appears that numbered paragraph three of the order against Art X aHonal and its offcers is unsupported by a factual finding. This deficiency is not the result of a failure of proof since the amended answer of Art National admits making the representation that Louis watches are shockproof. The proposed findings submitted on behalf of all respondents admit that the watches are, in fact, not shockproof. Thus it appeals thflt here a.lso the absence of an appropriate finding the initial decision with respect to Art National is the result of an oversight. Therefore the initial decision will be modified by adding a finding that Art K ational has falsely represented that Louis watches are shockproof.

The hearing eXfuniner refused to find that the suggested retail prices with which respondent Louis ",Vatch Company preticketed its watches were fictitious and higher than the prices lt which the watches were usually sold at retail. As he points out, the evidence on this point is confl1acting but we do not agree with his further conclusion that the evidence as a ,,,hole docs not permit a determination that the preticketed prices were fictitious. As pointed out above a substantial number of Louis watches are sold to consumers through the medium of the Art X ational catalog. Louis Friedman, the president of both Art National and Louis Watch Company testified with respect to the Louis watches handled by Art ational: " Sure. They handle the same thing as any other customer." He further testified with respect to the manner in which he, as president of Louis 1Yatch Company, dealt with Art atianal :

Q. It is the only catalog distributor that Louis Watch sells to at the present time"! A. Right.

Q. And you do not furnish them with a separate price list? A. They are the same as anybody else.

Q. Do they carry the same price tags as the watches that are distributed to the- A. Yes. Everything is the same. Everything is uniform, no different. Q. They establish their own coded price? A. Yes.

The record clearly shows that the price lists furnished to Art Xational and others by Louis 'Vatch Company contain suggested retail prices; that these suggested prices correspond with the prices on the tickets attached to the watches and to the "retail" prices listed in the Art ation"l catalog. 728 FEDERAL TRADE COM:ISSIOK DECISIONS Order 58 F.

The evidence is uncontroverted that the prices charged consumers by Art National (the "coded" price referred to in the quote above) were substantially below the suggested retail list, and corresponding ticket, price fixed by Louis IYatch Company. In some cases the price regularly charged was equal t.o less than 25% of the suggested retail or preticketed price.

Under the circumstances of this matter, where one family owns and controls the entire operation, respondents are in a poor position to deny that Louis watches are not pre ticketed with fictitious prices when they themselves regularly sell the watches to all comers at prices which are only a fraction of said preticketecl prices. Thus we find that the hearing examiner s refusal to order all respondents to cease this practice. \"as in error. On our review of the entire record we find t.hat respondents have been afforded a fair hearing a.nd the findings of the hearing examiner except as vacated by this opinion arc supported by reliable and substantial evidence. An appropriate order to cease and desist, modified to conform with this opinion, will issue. Commissioner Elman did not participate in the decision of this matter.

FINAL ORDER This matter having been heard by the Commission on C1'OS8appeals by respondents and counsel supporting the complaint; and the Commission having rendered iis decision denying in part and granting in part both appeals and having determined, for the reasons stated in the accompanying opinion, that the initial decision should be modified:

1 t is o1ylc1'ed That the initial decision of the hearing examiner be modified by striking therefrom findings 6, 12 and 14 , and by substituting in place of the st.ricken findings 12 and 14 the following: 12. Art ational and Louis 'Vat.ch Company represent.ed that certain Louis watches were shockproof, but they were not shockproof.

14. All respondents have cooperated in the practice of misrepresenting by preticketing and by other means that the. regular retail prices of Louis watches are substantially higher than they in fact are.

It is JUTthe" O1'dered That the following order be substituted for the order contained in the initial decision: It is ordered That respondent Art Kational Manufacturers Distributing Co., Inc., a corporation, and re.spondents Louis Friedman, l\lartjn Friedman and Albert Friedman, individual.lly and as ART ATIONAL MA.l\UFACTURERS DIST. CO. , INC. , ET AL. 729 719 Order offcers of said corporation, and their agents, representatives and employees, directly or through any corporate or other device, in connection with the sale or distribution of merchandise in commerce as "commerce" is defined in the Federal Trade Commission Act, do forthwith cease and desist from:

(a) Representing, directly or indirectly: 1. That respondents occupy any portion of buildings depicted that is not in accordance with the facts, or misrepresenting, in any manner, the size or extent of the buildings in which they carryon their business;

2. That respondent Art ational Manufacturers Distributing Co. Inc., sells its merchandise at America s lowest prices, or misrepresenting in any other manner its prices as compared to those of its competitors;

3. That Louis watches are shockproof.

(b) Representing by means of prices on tickets attached to or accompanying merchandise, or by any other means, that any price is the retail price of merchandise when it is in excess of the price at which said merchandise is usually and customarily sold at retail. (c) Furnishing means and instrumentalities to dealers or others by and through which they may misrepresent the usual and customary retail prices of respondents' merchandise. It Vi furth r ordered That respondent Louis Watch Company, Inc., a corporation, and respondents Louis Friedman and Albert Friedman, individually and as offcers of said corporation, and their agents, representatives and employees, directly or through any corporate or other device, in connection with the sale or distribution of merchandise in commerce: as "commerce:' is defined in the Federal Trade Commission Act, do forthwith cease and desist from: (a) Representing directly or indirectly:

1. That said corporation has been in existence, or that said corporation or individuals have been in business for any period or length of time that is not in accordance with the facts; 2. That they occupy any portion of buildings depicted that is not in accordance with the facts, or misrepresenting, in any manner, the size or extent of the buildings in which they carry on their business; 3. That Louis watches have been awarded a Gold Medal or any other kind of medal;

4. That the jewels in Louis watches are rubies; 5. That Louis watches are shockproof;

o. That Louis watches arc guaranteed unless the nature and extent of the guarantee and the manner in which the guarantors wil perform are clearly set forth.

730 FEDERAL TRADE CO).VfISSION DECISIO Complaint 58 F.

(b) Representing by means of prices on tickets attached to or accompanying merchandise, or by any other means, that any price is the retail price of merchandise when it is in excess of the price at which said merchandise is usual11y and customarily sold at retail. (c) Furnishing means and instrumentalities to dealers or others by and through which they may misrepresent the usual and customary retail prices of respondents' merchandise. ' It is fwrther ordered That the initial decision, as so modified, be and it hereby is, adopted as the decision of the Commission. It is further ordered That the respondents shall, within sixty (60) days after service upon them of this order, file with the Commission a report, in writing, setting forth in detail the manner and form in which they have complied with the order to cease and desist. Commissioner Elman not participating.