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Owen Laboratories Inc. v. Schroeder

November 28, 1960


Author: Hastings

Before HASTINGS, Chief Judge, SCHNACKENBERG, Circuit Judge, and PLATT, District Judge.

HASTINGS, Chief Judge.

This is an appeal from an order and judgment of the district court declaring a Post Office Department fraud order to be null and void and enjoining the Postmaster at Chicago, Illinois (Postmaster), defendant-appellant, from enforcing its terms.

The fraud order was based upon a determination by the Judicial Officer of the Post Office Department (Department) that Owen Laboratories, Inc. (Owen), plaintiff-appellee, was conducting a fraudulent enterprise through the mails. Under the terms of the order, mail addressed to Owen was to be returned to the sender stamped "fraudulent," and money orders drawn in its favor were not to be honored, with the exception of mail and money orders which could be shown to be unconnected with the fraudulent activity.

The district court held that the order was not supported by substantial evidence, in that the record before the Department did not warrant an inference of fraud under the standards of Reilly v. Pinkus, 1949, 338 U.S. 269, 70 S. Ct. 110, 94 L. Ed. 63. The error relied upon arises out of this ruling.

The Administrative Proceedings

A complaint was filed against Owen on August 15, 1957 by the Department, charging it with conducting a fraudulent enterprise through the mails in violation of Title 39, U.S.C.A. ยงยง 259 and 732, by offering for sale by mail order a product called "Enerjol." (H. E. Docket 5/143) Owen represented its product to be a vitamin and dietary supplement containing "royal bee jelly"*fn1 and "oyster concentrate."*fn2 Owen claimed unusual and extraordinary therapeutic powers for "Enerjol." The complaint alleged that the advertising claims made on behalf of this product materially misrepresented its value and efficacy.

On September 26, 1957, Owen, through H. L. Owen, executed and filed an affidavit of agreement to the effect that it would refrain from advertising the claims for its product "Enerjol" which were specified in the complaint as grounds for the charge of fraud. The agreement further provided for a hearing upon notice if the Department should receive evidence showing a violation of the agreement. There was another provision that the acceptance of the agreement should not be construed as an approval of any past or future business enterprise conducted by Owen. On the basis of this affidavit of agreement, further proceedings were indefinitely postponed.

On January 22, 1958, the Department filed a motion for reinstatement of the complaint, charging therein a breach of the settlement agreement. After a full hearing and consideration of all issues raised by the motion for reinstatement and the responsive pleadings filed thereto, the hearing examiner filed his written initial decision on July 1, 1958, holding that "Complainant has failed to establish breach by Respondents of said affidavit, [and] it is recommended that this proceeding be dismissed." Accordingly, an order was entered dismissing the proceeding without prejudice.

On August 20, 1958, a new proceeding was initiated by the Department (H.E. Docket 1/49), charging Owen with making fraudulent claims in its advertising for its product "Enerjol" in terms different from those proscribed by the earlier affidavit of agreement. The advertising material under attack in this second proceeding is the same material considered upon the Department's attempt to reinstate the first proceeding.*fn3 However, the complaint is not the same as the one filed in the earlier proceeding since it makes new charges. In its answer to the complaint, Owen stated that it would neither admit nor deny the allegations that the statements contained in its advertising were false; it specifically denied any fraud or intent to deceive. In addition, Owen filed an affirmative defense of res administrata based on the ground that the issues between the identical parties had been fully determined in the first proceeding culminating in the dismissal without prejudice of the motion for reinstatement of the first complaint.

Under Rule 201.8(c) of the Post Office Department Rules of Procedure (23 Fed. Reg. 2794), failure to deny an allegation in a complaint is deemed to be an admission of the matter alleged. In view of this rule, at the administrative hearing Owen did not deny the falsity of its advertising claims, and the factual issue tried was whether Owen made its false claims with an intent to deceive. To establish this intent to deceive, at the hearing the Department relied upon the advertising matter attached to its complaint and the testimony of its expert witness, Dr. Kenneth C. Campbell. At the conclusion of Dr. Campbell's testimony, both parties rested; Owen did not introduce any evidence at the hearing.

After considering the evidence of Dr. Campbell and the various contentions raised by Owen during the hearing, the hearing examiner filed his initial decision on December 24, 1958 concluding that Owen was conducting a fraudulent scheme as charged in the complaint and recommending the issuance of a fraud order. On appeal by Owen to the Department's Judicial Officer, this recommendation was affirmed on April 10, 1959, and the fraud order issued.

District Court Proceedings

Following the issuance of the fraud order, Owen brought this action in the district court on April 17, 1959 by filing a complaint for a permanent injunction to restrain the Postmaster at Chicago, Illinois, from enforcing the postal fraud order in question. The complaint charged, inter alia, that the fraud order was not supported by substantial evidence showing an intent to deceive; that material errors were committed in the administrative proceedings; and that such proceedings were conducted under Rules of Practice, Procedure and Organization which were in conflict with and violated provisions of the ...

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