Dynaquest Corp. v. United States Postal Service

12 F.3d 1144, 304 U.S. App. D.C. 279, 1994 U.S. App. LEXIS 962, 1994 WL 12372

• Court: Court of Appeals for the D.C. Circuit
• Decided: January 18, 1994
• Docket: 92-5165
• Status: Published

Opinions

Opinion for the Court filed by Circuit Judge SENTELLE.

Dissenting opinion filed by Circuit Judge WILLIAMS.

SENTELLE, Circuit Judge:

After an administrative hearing the Postal Service found that DynaQuest Corporation had engaged in a scheme to obtain money or property through the mails by means of false representations, in violation of the Postal Reorganization Act of 1970, 39 U.S.C. § 3005 (1988). The Service issued orders that enjoined further fraudulent mailings and prevented DynaQuest from receiving mail related to the scheme. DynaQuest brought suit in the district court to nullify the orders, but the court granted the, Service’s motion for summary judgment. DynaQuest now appeals. .

We find substantial evidence in the record to support the orders and reject DynaQuest’s claim of procedural error. We therefore affirm.

I.

DynaQuest, an Ohio corporation, mails unsolicited advertisements that offer a program of training in the liquidation of excess merchandise. In exchange for an initial fee of $164, purchasers of the program receive a manual and cassette tapes that describe tech-ñiques for locating and dealing in cut-price goods. The manual also describes supplemental goods and services that may be purchased as a package for $299 or separately for a total of $400: a book entitled “Where to Buy and Sell Merchandise” (price $80), a telephone consultation service (price $160 per annum), a self-administered examination for certification as a liquidator (price $70), and membership in .the Association of Certified Liquidators (price $90).

The Postal Service brought an administrative complaint charging that DynaQuest, doing business under the name A.C.L., had “conduct[ed] a scheme or device for obtaining money or property through' the mail by means of false representations” in violation of 39 U.S.C. § 3005 (1988). The complaint alleged that the mailings contained eleven false representations; after a hearing with full trial-type procedures the Associate Judicial Officer (“AJO”) found for the Service on four of the charges and issued two orders. See In re A.C.L., P.S. Docket No. 36190 (U.S. Postal Serv. Dec. 28, 1990). The first commanded DynaQuest and its agents to cease and desist from making the representations found false. The second charged the Postmaster at Columbus, Ohio to stop and return any mail addressed to DynaQuest and, its agents, except mail not related to the fraudulent scheme or mail that requests a refund or return of merchandise. DynaQuest moved for reconsideration, sought to reopen the hearings to introduce the testimony ’of two purported experts in the liquidation business, and requested that the Service release certain funds held in escrow. The AJO denied all the requests. See In re A.C.L., Decision on Motion for Reconsideration, P.S. Docket No. 36190 (U.S. Postal Serv. May 15, 1991).

DynaQuest then brought an action in the district court under the Administrative Procedure Act. DynaQuest sought a declaratory judgment that the orders were not supported by substantial evidence and an injunction against enforcement of the orders. On cross-motions for summary judgment, the court issued an .order that affirmed the AJO’s decision on three of the four representations, vacated the fourth, and sustained the Service’s orders. DynaQuest Corp. v. United States Postal Serv., No. 91-1582, slip op. at 20 (D.D.C. Mar. 5, 1993).

Of the three representations that the court found fraudulent, DynaQuest claims that two are unsupported by substantial evidence, but does not challenge the third. DynaQuest also claims that the AJO’s refusal to reopen the hearings amounted to an abuse of discretion.

II.

39 U.S.C. § 3005 provides:

(a) Upon evidence satisfactory to the Postal Service that any person is engaged in conducting a scheme or device for obtaining money or property through the mail by means of false representations ... the Postal Service may issue [curative orders].

This section forbids representations that are false or artfully designed to mislead. See Donaldson v. Read Magazine, Inc., 333 U.S. 178, 188, 68 S.Ct. 591, 597, 92 L.Ed. 628 (1948) (interpreting predecessor to § 3005). Whether the representation was made and whether it was false' must both be decided in light of the effect of the suppressed material on ordinary minds. See Peak Laboratories, Inc. v. United States Postal Serv., 556 F.2d 1387, 1390 (5th Cir.1977) (per curiam). Under § 706(2)(E) of the Administrative Procedure Act the Service’s findings prevail if supported by substantial evidence, see Silver v. United States Postal Serv., 951 F.2d 1033, 1042 (9th Cir.1991), by which is meant “such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206, 217, 83 L.Ed. 126 (1938). As the district court’s grant of summary judgment is subject to de novo review we will directly assess the administrative record.

A.

The first representation at issue reads:

Respondents will assist purchasers of respondents’ program to earn sums of money in the thousands of dollars without the need for purchasers to make any additional payments to respondents.

Postal Service Complaint at ¶ 10(d), In re A.C.L. (P.S. Docket No. 36190).

The AJO found that “[p]articipants in the program were not required to purchase the three supplemental services or book in order to act as a locator or liquidator for respondents” and that “[respondents did provide assistance to participants ... whether or not the participants purchased the supplemental services.” In re A.C.L. (P.S. Docket No. 36190) at 10. But the AJO also found that “the perception created by the manual in regard to the supplemental services is that they are a necessary adjunct to the manual and should be purchased in order for a participant to successfully operate as a locator or liquidator.” Id. at 10-11.

DynaQuest argues that the representation at issue was materially true. The testimony showed that use of the manual and tapes, without purchase of any supplemental services, brought success to at least a few customers. That greater success could be achieved with the supplements does not falsify the representation; after all many complete products are offered with the option to purchase some additional'feature that makes the product even more desirable.

But DynaQuest did more than offer enhancements to a complete product. The manual induced customers to believe that purchase of the supplemental services was necessary to even minimally adequate exploitation of the product. The contradiction between that impression and the promises in the initial mailing makes the mailing misleading and thus a valid object'of the administrative injunction. The mailing states that “[a]f-ter you locate an item ... you can contact our headquarters and we’ll take it from there”; the manual, however, belies the promise by announcing that “you need to be certified in order to join the Association of Certified Liquidators and sell merchandise to us.” The mailing announces that “it’s extremely easy with our proven copyrighted system to make a FORTUNE in this business, right from your kitchen table and without any money from your own pocket!”; but the manual then declares that the book Dy-naQuest sells for $80 “is a must for anyone wanting to make a fortune in liquidat-ing_” (emphasis in original). Other examples to the same effect need not be recited.

DynaQuest protests that it produced at least one witness who testified that she had achieved a degree of success before purchasing the supplemental services. See Joint Appendix at 249-56 (testimony of Janet Hunt). That some of the subjects of a misleading representation evade the harm produced by the deception is no excuse. “The decisive factor ... is not whether any one complains of fraud, or was in fact defrauded, but whether the mails are being used to project a [fraudulent] scheme.” Farley v. Heininger, 105 F.2d 79, 84 (D.C.Cir.) (internal quotations omitted), cert. denied, 308 U.S. 587, 60 S.Ct. 110, 84 L.Ed. 491 (1939). That question turns on the effect of the representation on the mind of the ordinary subject, and in view of the Service’s expertise in assessing that effect the AJO was entitled to conclude that the mailings would in fact mislead DynaQuest’s customers.. See Sean Michaels, Inc. v. United States Postal Serv., 653 F.2d 591, 594 n. 5 (D.C.Cir.1981) (per curiam) (even in the absence of consumer testimony the Service may determine falsity by reference to the natural and probable results of advertising expressions).

Nor is it relevant that some customers occasionally obtained telephone consultation and other assistance even though they had not paid the price for those services announced in the manual. DynaQuest’s stated policy was that the services must be bought and the testimony showed that in practice the policy was generally followed. We find substantial evidence to support the AJO’s finding that the representation alleged in ¶ 10(d) is false.

B.

The second representation reads:

Respondents will provide purchasers of the program with comprehensive training in the merchandise liquidation field.

Postal Service Complaint at ¶ 10(i) (emphasis added).

That the representation was actually made is manifest. The AJO found that the solicitation implied that purchasers would receive, for the initial $164 purchase price, a manual and two cassettes that would provide comprehensive training. The solicitation states that “you can start the same day you receive our package.” The package is described as an “exclusive copyrighted system” that “provides all the information you need to start MAKING BIG BUCKS!” Finally, the solicitation states that “[t]his money making program comes complete with a 3 ring binder crammed full of all the secrets you need, plus 2 cassette tapes so you can get going the same day.” The AJO rightly found an implied promise of comprehensive training.

DynaQuest’s principal argument is that the Service failed to carry its burden, imposed by the Administrative Procedure Act, of proving the falsity of the representation. See 5 U.S.C. § 566(d) (1988) (proponent of an order has the burden of proof). DynaQuest notes that in the district court the Service formally admitted the truth of paragraph 13 of DynaQuest’s statement of material facts, which read as follows:

In the administrative proceeding, the Postal Service offered no evidence, including no expert evidence, that the DynaQuest manual in and of itself (without reference to supplemental services) did not provide comprehensive training in the merchandise liquidation field.

The argument is little more than an ingenious play on words. The Service maintains that the representation of comprehensive training was false precisely because Dyna-Quest led purchasers to believe that, in return for the initial payment of $164, they would receive all the training DynaQuest had to give; whereas the manual and tapes in fact provided only a partial disclosure of DynaQuest’s expertise in the field, and instead withheld valuable elements of training to be offered in the form of supplemental services. Thus it is true but irrelevant that the Service introduced no evidence to show that the manual was not comprehensive “without reference to the supplemental services.” The delayed offer of those services was part of the whole course of dealing against which the law judges the truth or falsity of the representation. See, e.g., Donaldson, 333 U.S. at 188-89, 68 S.Ct. at 597.

Taking the offer of supplemental services into account, the record contains substantial evidence to support the finding that the representation of comprehensive training was false. DynaQuest withheld desirable information and assistance to encourage purchase of the supplemental services. While the solicitation promised that the manual would itself contain “all the secrets you need,” the manual offers a book, priced at $80, entitled “Where To Buy And Sell Your Merchandise.” The manual states that the book contains “Secret Sources” for buying and selling and that “this book is a must for anyone wanting to make fortune in liquidating and turn deals very quickly.” In the same vein the manual urged purchasers, for a annual fee of $160, to become a member of the “Association of Certified Liquidators”; the manual promised that DynaQuest would “share additional secrets ” (emphasis in original) with those who joined the Association. Moreover members of the Association could enjoy business opportunities not available to other purchasers, such as arranged letters of credit and the chance to attend industry conventions. In all these respects DynaQuest broke its promise, implicit but fairly apparent, to give initial purchasers comprehensive training.¹

DynaQuest complains that the Service introduced no evidence on the question of comprehensiveness other than the manual itself; and that without such extrinsic evidence the AJO could not reject the testimony of DynaQuest’s witnesses, for the Service has no independent expertise in the field of merchandise liquidation. The law, however, is that the Service may draw upon its expert understanding of ordinary consumers not only to decide whether a representation was made but also to determine whether the representation was false or misleading, see Peak Laboratories, Inc., 556 F.2d at 1390, and indeed may do so even without consumer testimony. See Sean Michaels, 653 F.2d at 594 n. 5. In a different case the absence of such testimony might render the evidence of falsity inadequate, but here the manual supplies all the evidence that is needed. We affirm the AJO’s conclusion that the representation in ¶ 10(i) of the ■ Complaint was false.

C.

DynaQuest argues that the AJO erred by refusing to reopen the evidence to allow DynaQuest to submit the testimony of two experts in the field of merchandise liquidation. The experts’ affidavits showed that they would have testified that the DynaQuest program was comprehensive.

Refusal to reopen evidentiary hearings is a matter of agency discretion and will be sustained unless the discretion was abused. See Cities of Campbell v. FERC, 770 F.2d 1180, 1191 (D.C.Cir.1985). The AJO denied the motion because “[t]he evidence to be adduced is not newly discovered. Nor is there any other valid reason why it could not have been presented at the hearing.” In re A.C.L., Decision on Motion for Reconsideration at 3. DynaQuest argues that because, according to the admission described above, the Service introduced no evidence regarding the comprehensiveness of the manual, DynaQuest had no reason to think that expert testimony was needed on that issue until the AJO erroneously decided it against DynaQuest. The argument would be more persuasive had DynaQuest failed to advance any evidence of comprehensiveness; but as it purposely introduced lay testimony the decision not to produce experts appears simply as a decision, subsequently perceived as mistaken, that experts were unnecessary. Economy and finality require that parties bear the consequences of such decisions. We find no abuse of discretion in the refusal to reopen the hearings.

D.

Having found no errors of substance or procedure in the Postal Service’s proceedings against DynaQuest, we affirm the judgment of the district court.

It is so ordered.

1 . It was suggested at oral argument that the AJO offended the requirement of fair notice by construing “training” to encompass the secrets and opportunities that DynaQuest withheld. Whatever the abstract meaning of the term, we think it plain that training in a particular field of commerce includes the provision of the knowledge and savoir-faire that can only be obtained through long experience of the business. Moreover DynaQuest can hardly claim unfair surprise if training is understood to include services that DynaQuest itself promotes as peculiarly suited to the novice. The manual, for example, touts Dy-naQuest's telephone consultation service by stating that the service is "very helpful and is highly recommended for the beginning liquidator. We can help you over any rough areas you may encounter.”