MULLIGAN, Circuit Judge:
This is a petition to review a cease and desist order issued by the Federal Trade
Petitioners operate a family business which was organized in 1963 and is engaged in the manufacture and sale of brassieres, girdles, swimwear and lingerie. Its sales have grown from $36,832.91 in 1965 to $2,054,250.62 in 1969 but dropped to $1,195,465.75 in 1972. The FTC issued a complaint on November 24, 1971 which alleged that the petitioners' marketing system constituted unfair and deceptive acts and practices and unfair methods of competition in violation of section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45.
After an answer and a hearing an administrative law judge rendered an Initial Decision dated October 11, 1973 which upheld the charges of violations contained in all five counts. The Commission on July 23, 1974 issued a Final Order and Opinion which reversed the administrative judge on the lottery count (Count I) and affirmed him on all the other counts. A motion for reconsideration filed by petitioners was denied by the Commission on October 1, 1974. This petition for review followed.
Since the Count I violation (lottery) was reversed below, that issue is not before us. Although the petitioners seek to have the order set aside in its entirety, no serious argument is made with respect to those parts of the Commission's order which require them to cease and desist from vertical price fixing (except in states having Fair Trade Laws) and from enforcing customer restrictions upon reselling. Petitioners have in any event agreed to discontinue such practices. Hence paragraphs 9, 10 and 11 of the Commission's order to cease and desist, which relate to these violations, are affirmed and enforced.
Before reaching the substance of this petition we should dispose of a major contention of the petitioners, namely, that the order be set aside because the Commission has acted arbitrarily and capriciously in taking action against them while taking none against their direct competitors who utilize comparable selling plans. Paragraph 10 of the Stipulation of Facts dated March 16, 1973 states:
The substantial questions before us are whether or not the Symbra'Ette merchandising scheme is an unfair method of competition and an unfair and deceptive practice, and the related question of whether or not petitioners' promotion of the plan was inherently deceptive. It is necessary at the outset to note that March 16, 1973 Stipulation of Facts (Para. 9) stated:
Therefore, according to the theory of the FTC complaint, it is not the purchaser, actual or prospective, of Symbra'Ette garments who is being gulled or put upon but rather the prospective distributor and his recruits. Since the Symbra'Ette merchandising scheme is elaborate, we must set it forth, unfortunately in some detail, to understand the Commission's misgivings.
The Marketing Plan
Petitioners, through their multi-level marketing program, seek to enlist the services of men and women throughout the country to sell their products at wholesale and retail, requiring distributors to buy an inventory of varying size before they may participate in the program. A potential distributor (also called a "consultant") may enter at one of three levels ("Key Distributor," "Senior Key," or "Supervisor"), and eventually work up to a fourth and fifth level (District Manager and Regional Manager). Entry into the program is effected by means of a non-refundable purchase of merchandise from the company or one of its distributors. All distributors except the lowest (Key) purchase directly from the company; a Key Distributor purchases from his sponsor. Initial purchase requirements for entry into the program are stated in terms of "Retail Purchase Volume" (RPV), i. e., the volume of merchandise expressed in terms of its suggested retail price. The initial purchase requirement for entry into the program is $300 in RPV for a Key, which at the allowed discount of 35%
The initial RPV required for a Senior Key is $1,000, which, at the allowed discount of 40%, and including literature and sales aids, entails an initial purchase of around $700. The initial purchase required of a Supervisor is around $1,950, resulting from a $3,000 RPV requirement at a 45% discount, plus sales aids.
A Key Distributor may engage in unlimited recruiting of other distributors, and advance to the level of Senior Key if his retail purchase volume and that of his recruits amount to $1,000 in one calendar month. Similarly, Senior Keys and Supervisors may rise to higher levels by achieving the requisite Retail Purchase Volume, through a combination of their own retail sales and those of their "personal group" (their recruits and recruits' recruits).
A Key Distributor's profit is the difference between the prices paid the Key's sponsor for products, and the prices at which the Key resells. The profit for consultants at higher levels in the program consists of the margin on the consultant's own retail sales, a percentage profit on purchases made by his recruits, and various commissions, overrides, and other compensation related to the purchase volume of directly and indirectly sponsored consultants.
To induce individuals to become consultants, petitioners distributed various promotional materials which recited the details of the marketing system, and illustrated, how, both by building a large personal group of salespeople via recruitment, and by selling at retail, an individual could earn large sums of money, ranging in the illustrations up to $56,400 per year for District Managers and $90,600 yearly for Regional Managers. Of the Regional Manager position, petitioners' promotional "flip chart" promised "ANYONE CAN ACHIEVE THIS LEVEL." According to the Commission, individuals were induced by these promotional materials, and the prospect of earning large amounts of money via retailing and recruiting activities, to purchase the requisite volume of Symbra'Ette products for the level at which they wished to enter.
The marketing plan thus described is characterized by the Commission as inherently unfair and deceptive because it had "the substantial tendency, capacity, and potential to mislead." It supposedly caused participants to invest their money in the hope of realizing income which was impossible for all to achieve: the laws of geometrical progression would make it impossible to recruit continually since inevitably a point of saturation would be reached which would defeat the plan and thwart the ambitions of those who had been promised profits.
It is unquestioned that under its own rules (Rule 3.43(a), Rules of Practice of the Federal Trade Commission, 16 C.F.R. § 3.43(a) (1974)) and pertinent cases (e. g., Montgomery Ward & Co. v. FTC, 379 F.2d 666, 670 (7th Cir. 1967); Carter Products, Inc. v. FTC, 268 F.2d 461, 487 (9th Cir.), cert. denied, 361 U.S. 884, 80 S.Ct. 155, 4 L.Ed.2d 120 (1959)), the Commission has the burden of establishing a section 5 violation. Petitioners urge that there is no showing of any actual deception or actual injury. The only witness produced by the Commission did not testify that he was misled or deceived and in fact testified that he and his wife had profited by the distributorship.
The sole evidence to support the Commission's holding that the plan is inherently unfair and deceptive is a mathematical formula,
As indicated by the record, the fact is that Symbra'Ette, which commenced business in 1963, did not reach its peak in distributorships until 1972 when it had attracted some 3,635 distributors. The record does not indicate the geographical distribution of these vendors, and we have no study or analysis in the record which would realistically establish that some recruiting saturation exists which would make the entry of additional distributors and the recruitment of others potentially impossible in any practical sense. While the Commission need not establish actual deception by the testimony of disappointed entrepreneurs, it has failed entirely to establish a potential threat. Not all Americans aspire to the calling in issue and not all who are attracted will continue indefinitely.
The cases relied upon by the Commission to establish that potential injury is sufficient to constitute a section 5 violation involve false advertising claims where the Commission has established by evidence that the claims made in the material are false and hence the courts have not required proof of actual deception.
The per se condemnation of the recruiting scheme disclosed here is not supported by substantial evidence or even a scintilla. Cf. Callaghan & Co. v. FTC, 163 F.2d 359, 372 (2d Cir. 1947). Hence, we vacate and set aside paragraphs 1 and 2 of the trial order of the Commission.
It does not follow of course that the failure of the Commission to establish that the plan in question is violative of section 5 means that the petitioners are free to advertise it in their promotional literature in deceptive terms. Here, the Commission did rely upon sales manuals and other specific representations made by the petitioners that ascension up the marketing ladder was rapid,
The order is modified by the deletion of paragraphs 1 and 2, and is enforced as modified.
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"(6) The Commission is empowered and directed to prevent persons, partnerships, or corporations, except banks, common carriers subject to the Acts to regulate commerce, air carriers and foreign air carriers subject to the Federal Aviation Act of 1958, and persons, partnerships, or corporations insofar as they are subject to the Packers and Stockyards Act, 1921, as amended, except as provided in section 406(b) of said Act, from using unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce."
"2. Offering, operating, or participating in, directly or indirectly, any marketing or sales plan or program wherein the financial gains to participants are, or are represented to be, based in any manner or to any degree upon their recruiting of other participants who obtain the right under the plan or program to recruit yet other participants, whose function during their first year in the plan or program includes, in any respect whatsoever, the recruitment of participants."
"4. Representing, directly or by implication, or by use of hypothetical examples or representations of past earnings of participants, that participants in any marketing or sales program will earn or receive, or have the reasonable expectancy of earning or receiving, any stated gross or net amounts, unless in fact, a majority of participants in the community or geographic area in which such representations are made, have achieved the stated gross or net amounts represented, and the representations accurately reflect the amount of time required by such participants to achieve such gross or net amounts.
"5. Misrepresenting in any manner, directly or by implication, or placing in the hands of others the means or instrumentalities for misrepresenting, the financial gains reasonably achievable by participants in any marketing or sales plan or program, of the commercial feasibility thereof.
"6. Failing to maintain adequate records (a) which disclose the facts upon which any claims of the type discussed in paragraphs 4 and 5 of this Order are based; and (b) from which the validity of any claim of the type discussed in paragraphs 4 and 5 of this Order can be determined.
"7. Requiring that an individual pay a valuable consideration in return for the right to participate in any marketing or sales program, without first disclosing to such prospective participant in writing the number of other participants in the marketing area in which such prospect plans to operate."
We note that paragraph 3 does not involve misrepresentation but rather imposes a repurchase obligation upon the petitioners. Since they indicated on the argument of this appeal that they have instituted this practice, there is no existing dispute about the matter.