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April 26, 1982


The opinion of the court was delivered by: Decker, District Judge.


Plaintiff, the United States of America, acting upon the notification of the Federal Trade Commission ("FTC" or "Commission"), brought this action against defendants, JS&A Group, Inc. ("JS&A"), and Joseph Sugarman, alleging that they violated a trade regulation rule concerning mail order merchandise ("mail order rule"), 16 C.F.R. § 435, promulgated by the FTC. Essentially, the complaint alleges that defendants solicited and processed orders for the sale of mail order merchandise in such a manner as to constitute an unfair or deceptive trade practice in violation of the mail order rule. Plaintiff seeks to recover civil penalties pursuant to 15 U.S.C. § 45(m)(1)(A) for the past violations and to obtain permanent injunctive relief against future violations. Currently before the court is defendants' motion to dismiss.

Defendants' motion is based on the claim that the FTC is not entitled to seek the two remedies that it requests in its complaint but rather is limited to seeking a cease and desist order in an administrative proceeding against violations of the mail order rule. Because the court believes that defendants' arguments concerning the civil penalties provision are the more significant, they will be considered first.

Prior to the enactment of the Magnuson-Moss Warranty — Federal Trade Commission Improvement Act ("Magnuson-Moss Act"), 88 Stat. 2183, which was effective on January 4, 1975, FTC enforcement of its substantive rules was limited to administrative proceedings in which the FTC was empowered to issue cease and desist orders prohibiting future rule violations. The FTC did not have the authority to directly impose fines or penalties for violations, or to seek them in the district courts.

Congress, in 1974, passed the Magnuson-Moss Act for the purpose of, inter alia, "provid[ing] the Federal Trade Commission (FTC) with means of better protecting consumers." H.R.Rep.No. 93-1107, 93rd Cong., 2d Sess., reprinted in [1974] U.S.Code Cong. & Ad.News 7702, 7702. For the first time, the FTC was expressly granted the authority to issue substantive rules.*fn1 As part of that authority, Congress included Section 202(a) of the Magnuson-Moss Act, which set up a more stringent method of rule-making than that contemplated by the general provisions of the Administrative Procedure Act ("APA"). Among other things, the Magnuson-Moss Act requires the FTC to make a more detailed notice of rule-making than it would under the APA, to hold an oral hearing where interested persons may present their evidence and conduct cross-examination, and to provide compensation for attorneys' fees and other costs to people who represent interests at the rule-making that would not otherwise be fairly represented. Also, the Magnuson-Moss Act provides for a more stringent judicial review of the factual basis underlying an FTC rule than does the APA.

In addition to setting up this new rule-making structure for FTC substantive rules, the Magnuson-Moss Act also provided new methods of enforcing the rules. Chief among the new enforcement mechanisms is Section 205(m)(1)(A) of the Act, 15 U.S.C. § 45(m)(1)(A). That provision states in relevant part:

  "The Commission may commence a civil action to
  recover a civil penalty in a district court of
  the United States against any person,
  partnership, or corporation which violates any
  rule under this chapter respecting unfair or
  deceptive acts or practices . . . with actual
  knowledge or knowledge fairly implied on the
  basis of objective circumstances that such act is
  unfair or deceptive and is prohibited by such
  rule. In such action, such person, partnership,
  or corporation shall be liable for a civil
  penalty of not more than $10,000 for each

Such civil penalties had previously been available for violations of a final cease and desist order; however, they could not be used to directly enforce a substantive rule.

The procedures leading up to the promulgation of the FTC's mail order rule were conducted before the Magnuson-Moss Act was adopted. All that remained after the effective date of the Act was the final announcement of the rule in the Federal Register, which was done on October 22, 1975, and publication of the statement of basis and purpose on November 5, 1975. In considering the rule, the FTC followed the procedures outlined in the APA, and did not follow the more stringent procedures of the Magnuson-Moss Act, which, of course, had not yet been enacted.

Defendants' position in their motion to dismiss is that, because the mail order rule proceedings were conducted prior to the adoption of the Magnuson-Moss Act and so did not follow the new stringent procedures provided by Congress, violations of the rule should not subject the defendants to the new penalties provided by that Act. Defendants' argument requires the court to consider the effect and purpose of three statutory provisions included in the Magnuson-Moss Act in an attempt to divine Congress' intent.*fn2

As an initial response, the FTC argues that the civil penalty section is clear on its face. Section 205(a) of the Magnuson-Moss Act allows the FTC to recover civil penalties for violations of "any rule under this Act" (emphasis added). Focusing on the phrase "any rule," the FTC suggests that Congress intended the civil penalty provision to apply to rules promulgated before the Magnuson-Moss Act was passed, as well as rules promulgated thereafter. The FTC's position is supported in an article written by an attorney on leave from the Commission, where the author states, "Section 5(m)(1)(A) clearly imposes civil liability for violations of `any' Commission trade regulation rule, whether adopted before or after January 4, 1975, the effective date of the Magnuson-Moss Act." Bickart, Civil Penalties under Section 5(m) of the Federal Trade Commission Act, 44 U.Chi.L.Rev. 761, 770 (1977).

The court is unable to accept that argument put forth by the FTC. It appears that, on this point, the Magnuson-Moss Act is ambiguous. When Congress refers to "any rule under this Act," it is not at all clear whether the act referred to is the Federal Trade Commission Act as a whole, or only the Magnuson-Moss Act. Nor does the quite sparse legislative history of the civil penalty provision itself provide any clues to how that ambiguity should be resolved.

Defendants argue that the legislative history of the Magnuson-Moss Act, as a whole, requires the court to find that Congress did not intend the civil penalty provision to apply to rules promulgated before the Act was passed. Defendants point particularly to Congress' concern about the procedures followed by the FTC in rule-making:

  "Because of the potentially pervasive and deep
  effect of rules defining what constitutes unfair
  or deceptive acts or practices and the broad
  standards which are set by the words `unfair or
  deceptive acts or practices', the committee
  believes greater procedural safeguards are
  necessary. Accordingly, it has fashioned the
  rulemaking procedures and judicial review
  provisions described below which we believe to be
  more ...

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