Universe Chemicals, Inc

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In THE Matrer oF UNIVERSE CHEMICALS, INC., ET AL.

ORDER, OPINION, ETC., IN REGARD TO THE ALLEGED VIOLATION OF THE FEDERAL TRADE COMMISSION ACT Docket 8752. Complaint, Dec. 5, 1967*—Decision, Sept. 23, 1971 Order adopting the initial decision of the hearing examiner which found respondent Jordan L. Lichtenstein, an officer of Universe Chemicals, Inc, a Chicago paint company, to be subject to the order to cease using misrepresentations to sell its products and recruit dealers. Fina Orpvrr This matter having been heard by the Commission upon respondent Jordan L. Lichtenstein’s appeal from the Initial Decision,’ and upon ‘briefs and oral argument in support thereof and in opposition thereto; and The Commission having concluded on this record and the facts and circumstances set forth therein, and for the reasons expressed in the accompanying opinion, that the initial decision and order issued by the examiner should be adopted as the decision and order of the Commission ;

It is ordered, That the Initial Decision and the order contained therein be, and they hereby are, adopted as the decision and order of the Commission.

*Reported in 77 F.T.C. 598 as amended by Hearing Examiner’s order of July 10, 1968. 1 See 77 F.T.C. 598.

Opinion 79 F.T.C.

lt is further ordered, That respondent Lichtenstein, within sixty (60) days after service upon him of this order, file with the Commission a report, in writing, setting forth in detail the manner and form. in which he has complied with the order to cease and desist. OriINIon oF THE COMMISSION SEPTEMBER 23, 1971 By Jonus, Commissioner:

On December 5, 1967, the Commission filed a complaint against Universe Chemicals, a corporation, and Raymond L. Rosen and Jordan L. Lichtenstein, as individuals and officers of said corporation, charging violations of Section 5 of the Federal Trade Commission Act, 15 U.S.C. §45 (1964), in the marketing of water repellent paints and coatings.? The complaint, as amended by July 10, 1968,? charged that respondents, in the course of their business, made numerous misrepresentations concerning the nature of their products and the benefits to be derived from their dealerships. More specifically, the complaint charged respondents with misrepresenting that the corporate respondent was alliliated with the Union Carbide Company and that their products were manufactured and tested by the Union Carbide Company (Compl. paras. 6(1)—(8), 7(1)-(8)). The complaint also charged that respondents misrepresented to prospective dealers the speed with which they could expect to sell respondents’ products, their right to return unsold products, and the expected profits to be earned through their dealerships (Compl. paras. 6(6)—(8), 7(6)—(8)). Further, the complaint charged that the respondents falsely represented their guarantees and the contents and qualities of their products (Compl. paras. 6(4), (5); (9)-(12) ;7(4), (5), (9) (12) ). An Initial Decision by Hearing Examiner Moore holding against the respondents was appealed to the Commission on the grounds that the hearing examiner had denied respondents due process of law by 1The following abbreviations will be used for citations: Transcript of proceedings, “Tr.” ; complaint counsel’s exhibits, “CX'; and Examiner’s Initial Decision, “ID”. Briefs of either the respondent (Res.) or complaint counsel (C.C.) will be cited as follows: Brief on appeal, “App. Br.” ; answering brief, “Ans. Br.” ; and reply brief, “Rep. Br.”. 2The hearing examiner amended the complaint during the proceedings in the first trial to expand the alleged misrepresentations concerning the qualities of respondents’ products. [The complaint as amended is reported in 77 F.T.C. 598.] 2The Commission remanded the case because of its. conclusion that the hearing examiner’s decision to schedule hearings at four different locations violated Section 3.41 (b) of the Commission’s Rules of Practice. The Commission directed that hearings in the second trial be held at a single location determined with regard to the convenience of the parties.

UNIVERSE CHEMICALS, INC., ET AL. 495 493 Opinion directing that hearings should be held in more than one city. After argument, the Commission agreed and remanded the case for a trial de novo.

Thereafter, Hearing Examiner Bennett was designated to conduct the second trial which proceeded to hearing in August 1969. In his Initial Decision [77 F.T.C. 598], Examiner Bennett found that respondents had engaged in all the false and deceptive practices charged in the complaint and he also entered a proposed order requiring them to cease and desist from these practices. Counsel for respondents filed a notice of intention to appeal from the examiner’s decision but later withdrew it on the grounds that the corporate respondent had made an assignment for the benefit of creditors and would no longer continue in business.‘ The order has become final as respects the corporate respondent and one of the individual respondents, Raymond L. Rosen. Respondent Jordan L. Lichtenstein, however, notified the Commission that he wished to appeal from the Initial Decision but was financially unable to retain counsel.® Pursuant to its decision in American Chinchilla Corp., FTC Docket No. 8774 (Dec. 23, 1969) [76 F.T.C. 1016], and its Policy Statement of December 15, 1970,° the Commission assigned a hearing examiner to make findings on Mr. Lichtenstein’s financial status. On the basis of an affidavit filed by Mr. Lichtenstein concerning his financial resources,’ the hearing examiner found that he lacked sufficient funds to retain counsel to prosecute his appeal to the Commission. By order dated December 8, 1970, the Commission granted Mr. Lichtenstein leave to proceed in forma pauperis and referred the matter to the Committee on the Federal Trade Commission of the Antitrust Section of the American Bar Association for the designation of counsel to represent Mr. Lichtenstein.® Thereafter, Mr. Lee N. Abrams served as counsel for Mr. Lichtenstein in perfecting his appeal of this case. On the appeal which is now before us, respondent Lichtenstein does not challenge the hearing examiner’s specific and detailed findings of *Letter from Franklin M. Lazarus to the Secretary of the Federal Trade Commission, April 4, 1970.

'From the time an answer to the complaint was filed on Januay 10. 1968, until this Point in the proceedings, all of the respondents had been represented by Attorney Franklin M. Lazarus.

®The procedures for assessing indigency claims are set forth in the Commission’s Statement of Policy: Respondents Unable to Afford Counsel, 35 Fed. Reg. 18998 (Dec. 15, 1970).

7In his affidavit dated November 3, 1970, Mr. Lichtenstein indicated inter alia that he was unemployed, had no assets, and was “taking bankruptey.” ® Following the American Chinchitla decision, the Antitrust Section of the American Bar Association created a panel of lawyers willing and able to represent respondents who were found by a hearing examiner to be unable to afford counsel. Opinion 79 F.T.C.

fact and of law or any aspect of the cease and desist order. His sole claim of error is that the Commission denied him (as well as the other two respondents) due process of law by proceeding against him without taking any action against his competitor and former employer, Hydralum Industries, Inc., despite the fact that the marketing practices which the examiner found to be in violation of Section 5 of the Federal Trade Commission Act had been substantially copied from Hydralum (Res. App. Br. at 5).

The record shows that prior to organizing Universe Chemicals, both Lichtenstein and Rosen were employed by Hydralum which sells water repellent paints and coatings (Tr. 22, 82). In February 1965, they organized Universe Chemicals which also engaged in selling water repellent paints and coatings under the trade names, “Kleer- Kote” and “Kolor Kote” (Tr. 9, 121-22). Rosen and Lichtenstein were the stockholders, officers, and directors of the corporate respondent and formulated, directed, and controlled its practices and policies (Res. Ans. Br. 1; Tr. 111; ID 7).

The examiner found that upon leaving the employment of Hydralum, respondents adopted methods of doing business similar to those which had been pursued by Hydralum (Tr. 38, 121, 122, 1101; ID 8, 37). Specially, respondent Lichtenstein testified that they used a similar method of product distribution and similar sales presentations (Tr. 121, 1101). Many of the promotional materials which the examiner found were used in violation of Section 5 of the Federal Trade Commission Act had been copied from those used by Hydralum, including several of Hydralum’s brochures, product labels and demonstration materials (Tr. 96-7, 102-108, 1101, 1133, 1146). Lichtenstein testified that on two occasions during his employment with Hydralum, in 1960 or 1961 and again around 1964, Hydralum was investigated by the Federal Trade Commission.® Mr. Lichtenstein gave virtually no testimony as to the events surrounding the first investigation but stated that during the second investigation officials examined and copied “hundreds and hundreds” of documents in Hydralum’s flies but that no action was taken by the Commission as a a result of this investigation (Tr. 1102-1104). When asked if one of Hydralum’s sales brochures which was later copied by Universe Chemicals was obtained during the FTC investigation, Mr. Lichtenstein replied that he did not know from his personal knowledge but he ® Lichtenstein testified that the first FTC investigation occurred about three or three and a half years before the second investigation, and that the latter took place about a year before he left Hydralum to establish Universe Chemicals (Tr. 11038-1104), Thus. the investigations must have occurred in 1960 or 1961, and again in 1968 or 1964. UNIVERSE CHEMICALS, INC., ET AL. 497 493 Opinion “assumed” it was (Tr. 1102). He testified that since the Commission did not proceed against Hydralum, he felt he would not be violating the law in copying the brochure (Tr. 1103). Mr. Lichtenstein also stated that during the Commission’s investigation of Universe Chemicals in 1967, a Commission representative told him that the Commission had “a little bit of evidence against Universe Chemicals and a whole room full of evidence against [Hydralum and its affiliates ]” (Tr. 1106). Respondent Lichtenstein now contends on appeal that the Commission should postpone the effective date of the hearing examiner’s order until the Commission concludes its investigation of Hydralum’s marketing practices which are similar to those found unlawful in the instant case. In support of this contention he argues that the Commission has denied him due process of law in two respects. First, he claims that he reasonably relied upon the Commission’s failure to take action against Hydralum as evidence that its marketing practices were law “ful, that he was thereby misled into believing that he could legally copy these practices, and that the Commission is, therefore, estopped from proceeding against him. Second, he claims it is unfair to permit his competitor, Hydralum, to continue operating its business in a manner denied to him. We will deal with these contentions seriatim.

ESTOPPEL ARGUMENT Respondent Lichtenstein’s contention that he was misled by the Commission is not borne out by the facts and circumstances upon which he seems to rely.

Mr. Lichtenstein does not contest the examiner’s findings that he engaged in a series of misrepresentations and deceptions concerning the origin, contents, qualities and guarantees of his products and the benefits of his dealerships. It is inconceivable that he can now seriously urge that while these statements were false—he makes no claims that they were not—he was of the view that in some way these deceptions had become immunized merely because a prior company for which he had worked had also engaged in some similar false and misleading sales promotions and had not been proceeded against by the Commission.

Certainly the Commission gave him no grounds for believing that those materials he copied from Hydralum were lawful. In his testimony Mr. Lichtenstein stated that he had observed that Hydralum was investigated by the Commission, but he admitted that he did not have firsthand knowledge of which documents or sales materials were Opinion 79 EVT.C.

uncovered (Tr. 1102). There was no evidence that the Commission investigators ever informed Mr. Lichtenstein that they approved the materials they discovered. He stated that he merely “assumed” they were lawful, although he further testified that “[o]f course, I didn’t have any knowledge of the way the Federal Trade Commission operated.” (Tr. 1103.) In short, Mr. Lichtenstein relied upon the Commission’s failure to proceed against Hydralum without any knowledge of the reasons for this inaction. Under such circumstances, we cannot find that Mr, Lichtenstein was misled by the Commission. The courts have frequently held that the principles of estoppel! shall not be applied against government agencies in suits to enforce a public right or protect a public interest. Wallace Corp. v. NERB. 323 US. 248, 258 (1944) : Utah Power and Light Co. v. United States, 245 U.S. 389, 408-09 (1917); P. Lorillard Co. v. FTC, 186 F. 2d 52, 55 (4th Cir. 1950); United States vy. Vulcanized Rubber & Plastics Co., 178 EF. Supp. 728, 726 (E.D. Pa. 1959), aff’d 288 F. 2d 257 (8rd Cir. 1961), cert, denied, 368 U.S. 821 (1961). In the instant case, the estoppel defense should similarly be denied Mr. Lichtenstein since to do otherwise would frustrate the aim of the Federal Trade Commission Act to prevent unfair and deceptive practices and would leave him free to cngage in such practices to the severe detriment of the public. CLAIM OF UNFAIRNESS Respondent Lichtenstein further argues that the Commission has deprived him of due process of law by unfairly preventing him and his corporation from operating a business in a certain manner. while permitting his competitor, Hvdralum, to conduct its operations in exactly the same manner.

The courts have held, however, that a litigant has no vigAt to be free from prosecution merely because his competitors, who are also alleged to be engaged in the same challenged practices, have not been similarly proceeded against. See FTC v. Universal-Rundle Corp. 887 U.S. 244 (1967): Moog Industries. Lie, v, FTC, 855 U.S. 411 (1958). If the law were otherwise and the Commission were required to proceed similarly against all competitors, “Commission erders would be forever pending and unlawful practices rarely, if ever, corrected.” United Biscuit Co. v. FTC. 850 F. 2d 615, 624 (7th Cir. 1965), cert. dented, 883 U.S. 926 (1966).

Thus, the courts have recognized that the Commission musi have broad discretion in selecting cases to proceed against so that it may: [D]evelop that enforcement policy best calculated to achieve the ends contemplated by Congress and * * * allocate its available funds and personnel UNIVERSE CHEMICALS, INC., ET AL. 499 493 Opinion in such a way to execute its policy efficiently and economically. Moog Industries, Ine. v. FTC, 355 U.S. 411, 413 (1958).

The Commission’s discretion in this area is limited, however, to the extent that its selective enforcement of the law cannot be “patently arbitrary and capricious.” F7'C vy. Universal-Rundle Corp., 887 U.S. 244, 250 (1967). The record of the instant case, however, is totally devoid of even a suggestion that would indicate or even imply that the Commission acted in an arbitrary or capricious manner in bringing the instant case. There is no evidence that the Commission singled out Mr. Lichtenstein for prosecution to the exclusion of others in the water repellent paint business. In fact, the opposite is true. Complaint counsel indicates that the Commission has been investigating and proceeding against a number of respondents’ competitors, and several of them are now under cease and desist. orders.*° Thus, we find no reason to conclude that the Commission has been unfair or arbitrary in also proceeding against Universe Chemicals and respondent Lichtenstein.

“We note that unlike the typical case in which a respondent seeks to stay prosecution on the grounds that he will suffer financial loss if he is prohibited from practices open to his competitors, Mr. Lichtenstein will incur no financial hardship if the cease and desist order against him takes immediate effect. Factually, the immediate entry of the order will not place him at a competitive disadvantage, since he states that he does not intend to establish a similar company in the water repellent paint business. It is difficult to see how the effectiveness of the order can in any way affect his ability to obtain and hold a job.

Finally, we point out that even if respondent, succeeded in demonstrating that he would suffer substantial injury through the enforcement of this order, the Commission would not be required to withhold its enforcement of the order. FTC v. Universal-Rundle Corp., 887 U.S. 244, 251 (1967). Our overriding concern must be to protect the public from illegal practices which we have found to exist, and in this case, the only means to assuring that the public will be adequately protected is to immediately put into effect the cease and desist order. Accordingly, we deny respondent Lichtenstein’s claim that the etffective date of the cease and desist order against him should be postponed and adopt the hearing examiner’s Initial Decision and the order contained therein.

10 The following companies, which were alluded to during Mr. Lichtenstein’s testimony (Tr. 117, 1104-05), are under Commission orders: Thermochemical Products, Inc., Docket No. $8725 (July 25, 1969) [76 I.T.C. 107]; Wilmington Chemical Corp., Docket No. 8648 (June 17, 1966) [69 F.T.C. 828]; and Excel Chemical Corp., Docket No. C-1482 (Sept. 30, 1968) [74 F.T.C. 880}.

Complaint 79 F.T.C.