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National Candy Co. v. Federal Trade Commission

June 2, 1939

NATIONAL CANDY CO.
v.
FEDERAL TRADE COMMISSION; MARCH OF TIME CANDIES, INC., V. SAME; DIETZ GUM CO. ET AL. V. SAME.



Petitions for Review of Orders of the Federal Trade Commission.

Author: Sparks

Before SPARKS, TREANOR, and KERNER, Circuit Judges.

SPARKS, Circuit Judge.

On motion of the parties, cause No. 6647, March of Time Candies, Inc., v. Federal Trade Commission; and No. 6648, Dietz Gum Company of Chicago, et al. v. Federal Trade Commission, were consolidated for hearing in this court, because the general subject matter in all of the cases is the same. The last two cases were considered upon the briefs submitted in the National Candy case, and we were requested to decide the last two cases in accordance with our disposition of the first. In our discussion, therefore, we shall refer to petitioner as the National Candy Company.

By this action petitioner seeks to review a cease and desist order issued by the Federal Trade Commission under 15 U.S.C.A. ยง 45. The order was based upon what is termed an amended and supplemental complaint issued by the Commission on April 22, 1937, which in substance contained the following allegations: The petitioner is a New Jersey corporation with its principal office and place of business in Saint Louis, and having another place of business and factories in Chicago. For several years last past it has engaged in the manufacture of candies and in the sale and distribution thereof to wholesale dealers and jobbers and to retail dealers located in various States of the United States. It causes its products when sold to be transported from Chicago to purchasers in other States of the Union to their respective places of business. During that time, and now, there is a course of trade and commerce by the petitioner in such candy between and among the States of the Union. In the conduct of this business, petitioner is in competition with other corporations, individuals and partnerships engaged in the sale and distribution of candy in commerce between and among the various States. In the conduct of this business, petitioner sells and has sold to wholesale dealers and jobbers and to retail dealers, assortments of candy so packed and assembled as to involve the use of a lottery scheme where sold and distributed to the consumers thereof.

One of the assortments thus sold is composed of a number of pieces of chocolate-covered candy, together with certain other articles of merchandise, which articles are to be given as prizes to purchasers of the candy, in the following manner: The pieces of candy are of uniform size and shape and the majority of them have centers of the same color. A small number of them have centers of a different color, and retail at a price of two for one cent. The purchaser who procures one of the candies having a center of a color different from the majority is entitled to receive, and is to be given free of charge, one of the articles of merchandise. The purchaser of the last piece of candy is likewise entitled to receive, and to be given free of charge, one of the articles of merchandise. The color of the center of each piece of candy is effectively concealed from the purchasers until a selection has been made and the piece of candy broken open. Thus the winners procure the articles of merchandise wholly by chance. With such assortment the petitioner furnishes to the wholesale dealers and jobbers and retail dealers a display card to be used by the retailer in offering the candies for sale to the public, which card bears a legend or statement informing the prospective purchasers that the candy is being displayed in accordance with the above plan.

Another assortment thus manufactured and displayed by petitioner is composed of a number of chocolate-covered candy malted milk balls, together with a device known as a "pushboard," by means of which the candy in this assortment is displayed to the consuming public in the following manner: The pushcard has a number of partially perforated disks which are arraned in four sections. Concealed within each of the disks is a legend. Each sale is for one cent, and the card has statements or legends at the top, stating that certain specified legends entitle the purchaser to one ball. Certain other specified legends entitle the purchaser to two balls; others respectively to three, five, six, eight, ten and twenty balls. The card also bears the legend that the last play in each of the three sections completed receives five balls. The last play on the card receives fifteen balls. The legends in the perforated disks are effectively concealed from purchasers until the selection has been made and the disk is separated from the card. The fact as to what number of balls a purchaser receives is thus determined wholly by chance.

The wholesale dealers and jobbers to whom petitioner sells its assortments resells the same to retail dealers and they, as well as those retail dealers who purchase directly from petitioner, offer the same for sale and sell them to the public by means of the plans referred to, thus placing in the hands of others the means of conducting lotteries in the sale of these products. Such plans have the tendency and capacity of inducing purchasers to purchase petitioner's candy in preference to that offered for sale and sold by petitioner's competitors

Petitioner's use of such methods is a practice of the sort which the common law and criminal statutes have long deemed contrary to public policy, and is contrary to the public policy of the Federal Government. The use of such methods has a tendency to hinder competition and create monopoly in trade and to exclude therefrom such competitors who do not adopt, or do not choose to adopt the use of the same or an equivalent method.

Many dealers and ultimate purchasers of candy are attracted by these methods and by the element of chance involved therein, and they are thereby induced to purchase petitioner's candy in preference to that offered for sale and sold by petitioner's competitors who do not use the same or equivalent methods.

Petitioner's use of these methods has the tendency and capacity, because of the element of chance, to divert trade to petitioner from its competitors who do not use such methods; to exclude such competitors from such trade; to restrain competition and create monopoly in such trade; to deprive the public of the benefit of other competition therein; and to exclude therefrom actual and potential competitors who do not adopt and use the same or equivalent methods.

The petitioner's methods, acts and purchases, as referred to, are to the prejudice of the public and of petitioner's competitors, and constitute unfair methods of competition in commerce within the intent and meaning of section 5 of the Federal Trade Commission Act.

On January 19, 1938, by permission of the Commission, the petitioner who was the respondent below, withdrew its answer theretofore filed, and substituted therefor and filed its amended answer dated June 18, 1937,*fn1 in which it failed to deny any allegation of the complaint, and expressly admitted all material allegations thereof, and it consented to the issuance of an order to cease and desist.

The Commission's findings of fact specifically cover every fact alleged in the complaint, and are within the issues tendered by the complaint. Rule VII of the Commission's Rules of Practice provides that the respondent shall specifically admit or deny or explain each of the facts alleged in the complaint, unless respondent is without knowledge, in which case respondent shall so state. The petitioner's failure to deny, and its express admission of the allegations of the complaint authorized and warranted the findings by the Commission of all the facts alleged. Under this rule it has been held that where an alleged fact is left without denial, any issue with respect to such allegation is foreclosed by the pleadings. Federal Trade Commission v. Standard Education Society, 2 Cir., 86 F.2d 692. Aside from rule VII, any allegation of the ...


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