text:
    FEDERAL TRADE COMMISSION, Plaintiff, v. KITCO OF NEVADA, INC., d/b/a Kitco, Inc., d/b/a Krown Manufacturing Co., Duane F. Snelling, a/k/a Harvey Butterfield, John E. Farkas, Craig A. Jesinoski, and Jason Barton, a/k/a Jay Barton, Defendants.
    Civ. No. 4-83-467.
    United States District Court, D. Minnesota, Fourth Division.
    Jan. 25, 1985.
    Karen L. Egbert and David M. Malone, F.T.C., Washington, D.C., for plaintiff.
    Dennis J. Holisak, Minneapolis, Minn., for defendants Krown Mfg. Co. and John E. Farkas.
    Duane Snelling, Las Vegas, Nev., pro se.
   DIANA E. MURPHY, District Judge.

Plaintiff, the Federal Trade Commission (FTC), has brought this action pursuant to section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b), against defendants Kitco of Nevada, Inc., d/b/a Kitco, Inc. (Kitco), d/b/a Krown Manufacturing Co. (Krown), Duane F. Snelling, a/k/a Harvey Butterfield, John E. Farkas, Craig A. Jesinoski, and Jason Barton. The FTC seeks a permanent injunction and consumer redress for defendants’ alleged violations of Section 5 of the FTC Act, 15 U.S.C. § 45(a). FTC moved to strike the jury demand contained in the „ joint pleading of Krown and John Farkas filed on February 16, 1984. After carefully considering the record and the parties’ arguments, the court concluded on two separate grounds that the FTC’s motion should be granted.

First, there is no right to a jury trial in this essentially equitable matter. The FTC is suing under section 13(b) for a permanent injunction and for ancillary relief in the form of rescission of contracts and restitution for injured consumers. Section 13(b) does not provide for a jury trial, but defendants apparently claim a right to a jury under the seventh amendment. This right applies, however, to cases which are fundamentally legal in nature and not to matters which would have been characterized as equitable prior to the merger of law and equity under the Federal Rules of Civil Procedure. See, e.g., Ross v. Bernhard, 396 U.S. 531, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970); J. Moore, Federal Practice and Procedure § 22.01[4] (1981). Viewed in a historical light, the FTC’s request for rescission and restitution is equitable. Moreover, it is established that not all awards of monetary relief constitute legal relief for purposes of whether a jury right exists. See In re Vorpahl, 695 F.2d 318 (8th Cir.1982); Curtis v. Loether, 415 U.S. 189, 94 S.Ct. 1005, 39 L.Ed.2d 260 (1974).

The fundamentally equitable nature of an action for injunctive relief under section 13(b), and the ancillary relief sought, rescission and restitution, has been recognized by several courts. The Ninth Circuit stated in FTC v. H.N. Singer, Inc., 668 F.2d 1107 (9th Cir.1982):

We hold that Congress, when it gave the district court authority to grant a permanent injunction against violations of any provisions of law enforced by the Commission, also gave the district court authority to grant any ancillary relief necessary to accomplish complete justice because it did not limit that traditional equitable power explicitly or by necessary and inescapable inference. In particular, Congress thereby gave the district court power to order rescission of contracts ____

In a subsequent decision in the same case, the district court, after analyzing the jury trial issue, awarded restitution pursuant to the court’s equitable authority. See 1982-83 Trade Cases (CCH) ¶ 65,011 (N.D.Cal.1982). Moreover, several other courts have granted the FTC’s motion to strike defendant’s demand for a jury trial in § 13(b) cases. FTC v. Kimberly International Gem Corp., Civ. No. 83-5268 (C.D.Cal. Sept. 27, 1984); FTC v. International Diamond Corp., C-82-0878 (N.D.Cal. March 7, 1983) .

Second, the defendants Krown and Farkas did not make an effective timely jury demand. The record shows that a joint and separate answer of defendants Krown and Farkas was served on the FTC on July 21, 1983. That answer contained no demand for a jury trial and was not filed with the court. Another answer, titled the Joint Answer of Krown and Farkas, was filed with the court six months later, on February 16, 1984. This answer contained a new paragraph requesting a jury trial. A sworn affidavit attached to the February answer stated that it was the answer which had been served on the FTC on July 21, 1983. The record suggests, however, that the FTC never received a copy and had no knowledge that a formal jury demand had been made until it received the trial notice on November 13, 1984.

Under these circumstances, where defendants have not complied with federal rules, did not give plaintiff notice of their substituted answer, and represented that the second filed answer was identical to the one served on plaintiff in July 1983, the jury demand should be stricken.

ORDER

Accordingly, based upon the above and all the files, records, and proceedings herein,

IT IS HEREBY ORDERED that the motion of the Federal Trade Commission to strike the jury demand contained in the joint pleading of Krown and Farkas filed on February 16, 1984 is granted.

      . Courts have considered two other factors to determine whether an action is analogous to the traditional equity jurisdiction and both are satisfied here. First, this is a law enforcement action brought by a government agency in the public interest and not a private action for damages. See, e.g., SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90 (2d Cir.1978). Second, any award of restitution or rescission is not mandatory but is within the court's discretion. Id.; Slack v. Havens, 522 F.2d 1091 (9th Cir.1975).

      . Defendants Farkas and Krown assert that the FTC agreed to a jury trial at the January 30, 1984 pretrial conference held before Magistrate Floyd E. Boline. The magistrate’s notes indicate, however, that no jury demand had been made at that time. The magistrate noted that Farkas and Krown would make such a demand in their answer, but the FTC never received notice that a subsequent answer had been filed. Since the FTC did not receive a formal written demand as required by Fed.R.Civ.P. 38(b), it was not required to oppose such a demand.

      . Even if the substitute second answer had been filed in accordance with the federal rules, the right to trial by jury has still been waived. Untimely requests for jury trial should be denied unless some cause beyond mere inadvertence is shown. Mardesich v. Marciel, 538 F.2d 848 (9th Cir.1976); Bush v. Allstate Ins. Co., 425 F.2d 393 (5th Cir.1970), cert. denied, 400 U.S. 833, 91 S.Ct. 64, 27 L.Ed.2d 64 (1970). If the original pleadings effectively waive trial by jury, the right to trial by jury cannot be revived by subsequent amendment. See Walton v. Eaton Corp., 563 F.2d 66 (3d Cir.1977); Williams v. Farmers and Merchants Ins. Co., 457 F.2d 37 (8th Cir.1972).


source: Caselaw Access Project

license: Public Domain

text:
    FEDERAL TRADE COMMISSION, Plaintiff, v. KITCO OF NEVADA, INC., d/b/a Kitco, Inc., d/b/a Krown Manufacturing Co., Duane F. Snelling, a/k/a Harvey Butterfield, John E. Farkas, Craig A. Jesinoski, and Jason Barton, a/k/a Jay Barton, Defendants.
    Civ. No. 4-83-467.
    United States District Court, D. Minnesota, Fourth Division.
    June 7, 1985.

      Karen L. Egbert and David M. Malone, F.T.C., Washington, D.C., for plaintiff.
    Dennis J. Holisak, Minneapolis, Minn., for defendants Krown Mfg. Co. and John E. Farkas.
    Duane Snelling, Las Vegas, Nev., pro se.
   DIANA E. MURPHY, District Judge.

Plaintiff, the Federal Trade Commission (FTC), brought this action pursuant to section 13(b) of the Federal Trade Commission Act (FTC Act), 15 U.S.C. § 53(b), against defendants Kitco of Nevada, Inc., d/b/a Kitco, Inc. (Kitco), d/b/a Krown Manufacturing Co. (Krown), Duane F. Snelling, a/k/a Harvey Butterfield, John E. Farkas, Craig A. Jesinoski, and Jason Barton, a/k/a Jay Barton. The FTC seeks a permanent injunction, rescission of contracts, and consumer restitution for defendants’ alleged violations of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). Jurisdiction is based upon 28 U.S.C. §§ 1331(a), 1337(a) and 1345, as well as 15 U.S.C. §§ 45(a) and 53(b).

On June 10, 1983, the court issued a temporary restraining order (TRO) enjoining the defendants from misrepresenting various facts concerning business opportunities and freezing their assets. Later a preliminary injunction issued enjoining all of the defendants except Jesinoski and Barton from deception and fraud in violation of 15 U.S.C. § 45(a) and freezing their assets. The TRO issued against Jesinoski and Barton was dissolved at that time. Defendants John E. Farkas, and Krown, jointly, and Snelling, separately, filed answers denying the FTC’s allegations. Defendant Jesinoski, although properly served, failed to plead or otherwise defend. The clerk entered a default on September 4, 1984. The FTC seeks default judgment enjoining Jesinoski from engaging in specific violations of 15 U.S.C. 45(a) and ordering him to make restitution to injured Kitco purchasers. At trial, the FTC moved for a dismissal without prejudice against defendant Jason Barton because it was unable to locate him for service of the summons and complaint. The FTC also agreed to dismiss its claim against the corporate defendant Kit-co because the defendants had abandoned it in mid-1983. Accordingly, evidence presented at the trial pertained mainly to defendants Farkas and Snelling.

Prior to trial, the court granted the FTC’s request to strike the jury demand contained in the joint pleading of Krown and Farkas. 612 F.Supp. 1280. The court also denied Snelling’s motion for a court-appointed lawyer and the FTC’s motion in limine requesting that 18 consumer affidavits be admitted into evidence in the upcoming trial.

Trial to the court took four days. Defendant Snelling appeared on the third and fourth day, but presented no evidence on his own behalf. At the conclusion of the trial, the parties received additional time in which to brief three legal issues: 1) whether testimony of defendant Farkas should be striken from the record; 2) the admissibility of 20 sworn consumer affidavits by Kitco purchasers who did not appear as witnesses at trial; and 3) whether Kitco purchasers who initiated private law suits against either Kitco or the individual defendants are barred from restitution under Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b). Submissions were received from plaintiff and defendant Farkas.

The court has carefully considered the testimony of the witnesses and evaluated their credibility. It has also considered the depositions, answers to interrogatories, and exhibits presented at trial and all arguments and memoranda of counsel. The court enters this Memorandum Opinion and Order for Judgment as its findings of fact and conclusions of law pursuant to Fed.R. Civ.P. 52(a).

I. FACTUAL BACKGROUND

Kitco began selling business opportunities for the manufacture of plastic specialty items in August 1981. Both of the individual defendants were associated with Kit-co. Snelling held himself out as Kitco’s president during the entire time it operated. Defendant Farkas claims that his role was limited to that of office manager. The FTC contends, however, that Farkas was a principal who directed, controlled and/or formulated Kitco’s business practices.

Beginning in August 1981, Kitco attracted prospective purchasers by placing advertisements in newspapers throughout the country stating “contract work provides nice income.” FTC Ex. 1A. Testimony at trial indicated that both Snelling and Farkas placed these ads. Respondents to the ads either were contacted directly by a Kitco sales agent or received a form letter signed by Jesinoski on Kitco letterhead. The letter stated that Kitco offered a “time proven, effective, and workable” business opportunity in the manufacture of plastic products. FTC Ex. 17. The letter noted that Kitco would furnish “all the necessary contract and retail outlets, so that no selling is required by you whatsoever other than customer relations and business management.” Id.

A number of sales agents were employed by Snelling to contact and arrange meetings with potential purchasers. One of these agents, Nancy Andrews, testified at trial. She stated that Snelling provided the agents with Kitco contracts and brochures entitled “Kitco—The Key to Your Future— Profit.” See FTC Ex. 2, 26, 39. According to the consumers who testified, the sales agents would present these brochures to potential purchasers at their first meeting.

The brochure stated that the business could be started immediately and could produce immediate income. It also stated that the business was highly profitable. The brochure included a cost breakdown sheet which indicated that the “gross profit” for making one pair of 12" by 24" signs was $32.20. The brochure claimed that the machine could produce 40-50 pairs of magnetic signs per hour. Id. The brochure also contained a list of Kitco references, which included at times J & J Distributing, located at 1419 E. Lake Street and Formaster, located at the same address. See FTC Ex. 2, 18, and 48. J & J Distributing apparently never existed. Formaster was owned by Farkas. FTC Ex. 7.

Farkas has admitted that he helped Kitco do approximately $15,000 worth of this printing between August and October of 1981. John E. Farkas’ Supplemental Answers to Plaintiff’s Second Set of Interrogatories. Rather than loaning Snelling actual money, Farkas lent Snelling $15,000 worth of “barter credits” which could be used for printing.

Each purchaser appearing at trial testified that the sales agents they dealt with stated that Kitco would provide ongoing contract work. Some were told that Kitco provided so much work that they could pay off the price of the business opportunity within one year. To bolster the claim of ongoing contract work, Snelling provided sales representative Andrews with orders Kitco received from J & J Distributing to produce 650,000 football signs and 300,000 religious plaques. FTC Ex. 9 and 10. Andrews was told to show these orders to prospective purchasers as examples of the type of work they would be doing for Kit-co. The orders were signed by a “Harvey Butterfield.” Snelling later admitted to Andrews that he was Harvey Butterfield.

Sales agents also represented that Kitco provided immediate payment for finished products and that investment in the business opportunity would be extremely profitable. Andrews was instructed by Snelling to tell prospective purchasers that they could earn $70,000 to $80,000 a year. Gross earnings claims ranged from $5,000/month, Hoch’s testimony, to $170,-000/year, Jensen’s testimony. Projected profits ranged from $30,000 to $50,-000/year. Testimony of McGree.

The purchasers and Andrews testified that the sales agents frequently encouraged prospective buyers to contact Snelling and/or Farkas to verify the sales representations. Daniel Jensen testified that Snelling verified the sales brochures and told him that he would have no problem receiving work and contracts. Jensen also testified that he spoke with Farkas in November 1981 about the business opportunity before he bought it, and that Farkas verified that continuous work would be provided by Kitco. June McKenzie, another Kit-co purchaser, testified that Farkas personally represented that Kitco would provide ongoing work contracts and give them all the work they wanted. At a meeting around August 31, 1981, Farkas and Snelling convinced McKenzie and her husband, Richard, to void a contract they had signed with Distinctive Products, a company for which Farkas had been sales manager. Farkas urged the McKenzies to sign a new contract with Kitco because it was a better company. McKenzie further testified that Farkas appeared to be in charge and that he did most of the talking at the meeting. Similarly, Dale Davis testified that he met with Farkas when he came to Minneapolis to view the Kitco premises before investing in the business opportunity. Davis testified that Farkas confirmed everything that the sales agent had told him, including potential earnings and a guaranteed supply of work.

Evidence also shows that Farkas used his company Formaster to solicit purchasers for Kitco. Farkas states that he pressured Kitco to pay him for his barter credits, but that he received nothing until he agreed to accept a used Vacu-Form machine in early 1982. With that machine he opened Formaster. Farkas claims that Formaster had no connection with Kitco other than to buy products from it. Several Kitco purchasers were given a brochure from Formaster, however, which was almost identical to the one used by Kitco sales agents. Compare FTC Ex. 19 and 23 with FTC Ex. 2 and 26. Additionally, a Kitco product brochure listed Kitco at the Formaster address. FTC Ex. 8.

In the fall of 1981, Steven Kocak answered an ad for a business opportunity with Distinctive Products. He received a For-master brochure, however, and ultimately signed a contract with “Co-op Plastics”. FTC Ex. 24. This contract is identical to the one used by Kitco, and the word Kitco appears several times. See Id. Co-op Plastics was listed at the same address as For-master and Farkas told Kocak that each of these companies was a part of Kitco. Kocak delivered his finished products to For-master. Farkas subsequently admitted to Kocak that he had personally received a good portion of the sale price of Kocak’s business opportunity.

Similarly, Richard Hoch visited Formaster before deciding to purchase the business opportunity. Farkas told Hoch that Kitco had set him up in business, supplied him with contract work, and that the business was very successful.

The FTC claims that Kitco paid Farkas or Formaster for these services and the record shows that approximately $8,000 exchanged hands in the two month period between December 1981 and January 1982. See FTC Ex. 87, and 89-91.

On the strength of the sales materials and representations, the purchasers signed a contract with Kitco. Several purchasers testified that they took out second mortgages to finance the business opportunity, while some used their life’s savings. Snelling signed most of the contracts but Jesinoski also signed several. Farkas initialed the McKenzies’ contract and signed the contract of James Cox above the designation “Executive Officer”. The purchase price for the business opportunity varied from approximately $18,500 to $256,000, but the general price was around $23,865. Defendant Farkas admitted on cross-examination that Kitco sold at least $400,000 in business opportunities from August 1981 to the middle of 1983 when Kitco ceased business. In addition to testimony heard in court, the FTC has submitted consumer affidavits to show that Kitco sold $568,-787.25 worth of business opportunities.

After paying an initial deposit, purchasers then came to Minneapolis to receive training and to finalize the contract. As mentioned above, several purchasers met with Snelling and/or Farkas before signing, and they were told that Kitco would provide immediate payment for finished products. Additionally, Steven Kocak testified that Farkas told him at a September 1981 meeting in Farkas’ Kitco office that he would assist him in obtaining a loan to purchase the business opportunity. After a brief training session, defendants provided the purchasers with an initial purchase order contract. The contracts were mainly for “OPEN” or “CLOSED” signs, paint tray liners, or freezer trays.

Purchasers testified that the performance of Kitco was unsatisfactory. Delays in obtaining supplies were frequent and many purchasers received only one or two work orders. Upon completion of these products, the purchasers were unable to secure new purchase orders. Several were given various excuses when they asked for more work, and several testified that it became difficult to contact the defendants at all. One purchaser, Dale Davis, testified that he called the defendants 51 times with no result.

The purchasers also testified that they were sporadically paid for their finished products. Some were not paid at all. McGree testimony. Jensen testified that Farkas told him he would not be paid for “OPEN” and “CLOSED” signs because the colors were wrong, although Jensen had received his instructions from Kitco’s personnel. Defendants represented that Kitco would pay cash for finished products, but it used a debit/credit accounting system to avoid payment. The record indicates that when defendants received a finished order, they often sent more plastic to the subcontractor than the person could use or did not enclose another purchase order. Thus, they could deduct the cost of plastic from the person’s account.

In the summer of 1982, Snelling instructed Kitco subcontractors to ship all finished paint can trays to North 10th Street in Minneapolis, a location which he stated was a Kitco warehouse. See FTC Ex. 32 and 42. The location is, however, the address of Shamrock Industries (Shamrock), a plastic recycling company. Charles Osterud, Custom Sales Engineer for Shamrock, testified that between June and August 1982, Shamrock received more than 30,000 pounds of plastic, some scrap, but most in the form of finished paint trays, from Kitco subcontractors. Osterud said that Snelling told him to go ahead and grind up the finished products. Snelling claimed that the paint can tray molds were improperly shaped and thus, useless. There is no evidence, however, that he notified any of the subcontractors of this deficiency or asked them to send the molds back. Nor was documentary evidence presented that Kitco demanded or received any sort of credit from the mold’s manufacturer. Shamrock continued to receive finished products during August 1982, the time when Farkas admitted that he was Kitco’s office manager. Osterud also testified that Snelling stated in August 1982 that ownership of Kitco was being passed to Farkas. It was Osterud’s impression that Farkas had control of the organization.

In October 1982, Farkas began to operate Krown. Richard Hoch testified that he received payments for products he made for Kitco on checks captioned “John Farkas d/b/a Krown Manufacturing. See FTC Ex. 37 and 38. In addition, the record shows that between December 1982 and April 1983, Kitco employees Barton and Jesinoski received money from Farkas drawn on a Farkas d/b/a Krown checking account. See FTC Ex. 133-139. Neither Barton nor Jesinoski are Krown employees, however. See FTC Ex. 98, ¶ 5.

II. DISCUSSION

A. Admissibility of Farkas’ Testimony

The FTC contends that the testimony of defendant Farkas should be stricken because he precluded its pretrial discovery by refusing to answer deposition questions based upon a claim of fifth amendment privilege. It argues that fairness requires that it be protected from surprise at trial from previously undisclosed information. The FTC also argues that, at the very least, an inference of wrongful conduct should be drawn in any areas formerly protected by Farkas’ fifth amendment privilege.

Farkas contends, on the other hand, that he invoked the privilege only in regard to certain areas of inquiry and that he offered to waive the privilege after the close of the grand jury investigation. He also charges that the FTC, after having received timely notice that he would testify, waited until trial began to bring a motion to bar his testimony.

After carefully considering the parties’ position, the court finds that the testimony of Farkas should be admitted. No one disputes that Farkas was entitled to assert his fifth amendment privilege in response to those deposition questions where there was a danger of self-incrimination. Rather, the FTC claims that Farkas should not be able to exploit the amendment’s protective shield by subsequently selectively testifying at trial. A complete bar of testimony seems unjustified in this instance, however, since the plaintiff did receive pretrial information from Farkas relating to certain areas of inquiry. Nor does a more limited ban on testimony seem appropriate. To be sure, the Federal Rules of Civil Procedure aim to prevent surprise, prejudice and perjury by ensuring full and fair mutual discovery before trial. Duffy v. Currier, 291 F.Supp. 810 (D.Minn.1968). The court has inherent power to monitor whether the assertion of a privilege causes unfair prejudice to the opposing litigant. See Lyons v. Johnson, 415 F.2d 540, 542 (9th Cir.1969), cert. denied, 397 U.S. 1027, 90 S.Ct. 1273, 25 L.Ed.2d 538 (1970); Duffy v. Currier, 291 F.Supp. 810 (D.Minn.1968). In the instant case the court finds that the FTC has not been unfairly surprised or prejudiced by Farkas’ assertion of privilege and subsequent decision to testify at trial. The FTC thoroughly prepared its case and seemed able to anticipate through other witnesses what Farkas’ testimony might be. It was not solely- dependent upon the testimony of Farkas for pertinent information. Therefore, the testimony of Farkas has been considered in setting forth the facts in the previous section.

Notwithstanding the above, the court finds that it is proper to consider Farkas’ previous invocation of privilege as circumstantial evidence in this civil matter. The policies underlying the fifth amendment protect criminal suspects from governmental coercion in the government’s attempt to receive criminal confessions. See Murphy v. Waterfront Comm’n, 378 U.S. 52, 55, 84 S.Ct. 1594, 1596, 12 L.Ed.2d 678 (1964); Rosebud Sioux Tribe v. A & P Steel, Inc., 733 F.2d 509, 520-521 (8th Cir.1984), cert. denied, — U.S.-, 105 S.Ct. 565, 83 L.Ed.2d 506 (1984). These policies apply with less force in a civil proceeding. See, e.g., Garner v. United States, 424 U.S. 648, 655-56, 96 S.Ct. 1178, 1182-83, 47 L.Ed.2d 370 (1976). In fact, the Supreme Court has held that the fifth amendment does not preclude an adverse inference when the privilege is claimed by a party to a civil case. Baxter v. Palmigiano, 425 U.S. 308, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976). See also Rosebud Sioux Tribe v. A & P Steel, Inc., 733 F.2d 509 (8th Cir.1984) (under certain circumstances, a party may call a witness even though witness has made known intention to invoke the fifth amendment). Where plaintiff’s trial preparation has been hampered to some extent by defendant’s assertion of privilege, the court finds it appropriate to consider evidence of Farkas’ fifth amendment invocations.

B. The FTC Act Claims

1. The Standard

Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), provides that the FTC, in a “proper case”, may seek a permanent injunction to enjoin violations of the Act. United States v. JS & A Group, Inc., 716 F.2d 451, 456-57 (7th Cir.1983); FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1110-1111 (9th Cir.1982); United States v. National Dynamics Corp., 525 F.Supp. 380, 380-381 (S.D.N.Y.1981); FTC v. Virginia Homes Manufacturing Corp., 509 F.Supp. 51, 54 (D.Md.1981). In FTC v. H.N. Singer, Inc., 668 F.2d 1107 (9th Cir.1982), the Ninth Circuit Court of Appeals held that consumer redress, including rescission of contracts, could be ordered in a routine fraud case under Section 13(b), 15 U.S.C. § 53(b). Conduct which violates Section 5 of the FTC Act, 15 U.S.C. § 45, is a proper case for consumer redress under Section 13(b).

Section 5,15 U.S.C. § 45, provides in pertinent part that “unfair or deceptive acts or practices in commerce, are hearby declared unlawful.” Misrepresentations of material facts made to induce the purchase of goods or services constitute unfair or deceptive acts or practices prohibited by Section 5(a). See, e.g., Beneficial Corp. v. FTC, 542 F.2d 611, 617 (3rd Cir.1976), cert. denied, 430 U.S. 983, 97 S.Ct. 1679, 52 L.Ed.2d 377 (1977); National Trade Publi cations Service, Inc. v. FTC, 300 F.2d 790, 792 (8th Cir.1962); Goodman v. FTC, 244 F.2d 584, 603-04 (9th Cir.1957); Charles of the Ritz Distributors Corp. v. FTC, 143 F.2d 676, 679-80 (2d Cir.1944). In particular, it is deceptive to misrepresent the benefits of a business opportunity. See, e.g., Windsor Distributing Co., 77 F.T.C. 204, 212, 220 (1970), aff'd, 437 F.2d 443 (3rd Cir.1971); Universal Electronics Corp., 78 F.T.C. 265, 271-272, 294 (1971). Misrepresentations concerning expected profits from a business or investment opportunity made to a prospective purchaser violate Section 5(a). See Goodman v. FTC, 244 F.2d 584, 596, 599 (9th Cir.1957); In re Amway Corp., 93 F.T.C. 618, 729-32 (1979); Universal Electronics Corp., 78 F.T.C. 265, 271-74 (1971).

To obtain the monetary equivalent of rescission from any individual defendant, the FTC must prove that the individual had knowledge that Kitco or one or more of its agents engaged in dishonest or fraudulent conduct. FTC v. International Diamond Corp., 1983-2 Trade Cas. (CCH) 1165, 725 (N.D.Ca.1983). The Commission may show actual knowledge of material misrepresentations, reckless indifference to the truth or falsity of such misrepresentations, or an awareness of a high probability of fraud along with an intentional avoidance of the truth. See United States v. Baumann, 614 F.2d 634 (9th Cir.1979), cert. denied, 447 U.S. 926, 100 S.Ct. 3022, 65 L.Ed.2d 1120 (1980); FTC v. International Diamond Corp., 1983-82 Trade Cas. (CCH) 1165,725, at 69,707 (N.D.Ca. 1983). In addition, the FTC must show that the defendants directly participated in the acts or had the authority to control the conduct. FTC v. H.N. Singer, Inc., 1982-83 Trade Cas. ¶ 65,011 at 70,618-19 (N.D.Ca.1982); FTC v. International Diamond Corp., 1983-82 Trade Cas. (CCH) 1165,725 at 69,707-69,708 (N.D.Ca.1983). Authority to control a company is evidenced by active involvement with business matters and corporate policy including assumption of officer duties. See, e.g., Consumer Sales Corp. v. FTC, 198 F.2d 404, 408 (2d Cir.1952), cert. denied, 344 U.S. 912, 73 S.Ct. 335, 97 L.Ed. 703 (1953). Finally, the Commission must show that the misrepresentations were the type upon which a reasonable and prudent person would rely and that consumer injury resulted. See, e.g., FTC v. Algoma Lumber Co., 291 U.S. 67 (1934); Beneficial Corp. v. FTC, 542 F.2d 611, 617 (3d Cir.1976), cert. denied, 430 U.S. 983, 97 S.Ct. 1679, 52 L.Ed.2d 377 (1977); Charles of the Ritz Dist. Corp. v. FTC, 143 F.2d 676, 679-80 (2d Cir.1944); FTC v. International Diamond Corp., 1983-82 Trade Cas. (CCH) ¶ 65,725 at 69,-709 (N.D.Ca.1983).

2. Direct Participation in Misrepresentations

In the instant case, the FTC has shown that defendants Snelling and Farkas directly misrepresented material facts to induce purchasers to invest in Kitco. Snelling and Farkas initially attracted potential purchasers by falsely advertising that Kitco offered contract work and a “nice income.” Additionally, Farkas helped to finance the deceptive brochure put out by Kitco. Both Snelling and Farkas met with potential purchasers and represented that Kitco provided ongoing contract work, paid its subcontractors immediately for their finished products and offered high earning profit and potentials. Profit claims ranged as high as $50,000/year while earnings claims were as high at $170,000/year. Defendants’ exaggerated profit and earning prediction cut to the core of the customer’s decision to invest in Kitco. Defendant Farkas also used his Formaster business to solicit purchasers for Kitco. These misrepresentations violate Section 5 of the FTC Act, 15 U.S.C. § 45. See, e.g., Resort Car Rental System, Inc. v. FTC, 518 F.2d 962, 964 (9th Cir.1975), cert. denied, 423 U.S. 827, 96 S.Ct. 41, 46 L.Ed.2d 42 (1975); The Raymond Lee Organization, 92 F.T.C. 489, 619 (1978), aff'd, 679 F.2d 905 (D.C.Cir.1980).

3. Liability as Principal

In addition to liability based on direct participation in the deceptive sale of business opportunities, Snelling and Farkas are also liable for their roles as principals in Kitco. Snelling clearly had authority to control the company and knowledge of its fraudulent practices. As president of Kit-co, Snelling hired Kitco sales representatives, provided them with Kitco contract forms and brochures to be used in sales transactions, signed company checks, and signed contracts with purchasers on behalf of the company.

Snelling’s knowledge of the fraudulent Kitco operation is equally apparent. Snelling provided Kitco sales agents with the brochure that misrepresented the business opportunity. In one instance, he provided a sales agent with bogus contracts for work to show to prospective purchasers as examples of the work they would be doing for Kitco. In addition, he negotiated an agreement with Shamrock where Shamrock would ship Kitco subcontractors plastic and receive from them scrap for recycling. Snelling subsequently instructed Kitco subcontractors to send finished paint can trays to Shamrock, telling them that this was another Kitco warehouse. Kitco purchasers were never told that their products were being ground up and no evidence was introduced to show that Kitco tried to seek reimbursement for the faulty molds.

John Farkas’ liability as a principal of Kitco from August 1981 is equally well-established. Farkas’ role as a principal was demonstrated by consumer testimony and by his own admissiosnwhich show he possessed and exercised authority to control the company and had knowledge of its fraudulent practices. Mr. Farkas admitted he was office manager of Kitco, that he placed ads for the company, that he financed the printing of the deceptive Kitco sales brochure, and that he spoke with potential purchasers who called Kitco with questions concerning the business opportunity. At trial, Farkas tried to downplay all of his activities in Kitco, but he was not a credible witness. In certain circumstances, for Farkas to be believed, the testimony of each consumer witness would have to be discredited. The court found the consumers’ testimony to be believable, and few were impeached even in a minor way. Moreover, Farkas admitted a certain level of involvement that is sufficient to hold him liable.

Farkas’ knowledge of the deceptive practices is demonstrated by the fact that he personally engaged in them. Additionally, the purchaser witnesses testified that they repeatedly complained to Kitco and Farkas concerning the company’s failure to meet the representations and perform on its promises. Farkas has admitted receiving complaints. He cannot then deny that he was aware of the problems that existed. These complaints should have put Farkas on notice. Moreover, Farkas knew that Kitco had a cash/flow problems as early as August 1981, yet he continued to represent that it was a reputable firm.

4. Consumer Reliance and Injury

Proof of reliance by the consumer upon the defendants’ misrepresentations is a traditional element of recovery under common law fraud actions. Section 13 of the FTC Act differs from a private suit for fraud, however. Section 13 serves a public purpose by authorizing the Commission to seek redress on behalf of injured consumers. Requiring proof of subjective reliance by each individual consumer would thwart effective prosecution of large consumer redress actions and frustrate the statutory goals of the section. Thus, the court is persuaded that the approach followed in another Section 13(b) case, FTC v. International Diamond Corp., 1983-82 Trade Cas. (CCH) ¶ 165,725 at 69,709 (N.D.Ca. 1983), is correct. There the court found that the FTC need only prove that the alleged fraudulent practices were the type of misrepresentation on which a reasonably prudent person would rely, that they were widely disseminated, and that the injured consumers actually purchased the product. The burden then shifts to the defendants to prove that the misrepresentations were not relied upon by the consumers.

In the instant case, the FTC has shown that these practices were the type upon which a reasonably prudent person would rely. Testimony at trial indicated that most of the eight purchasers checked Kitco’s business references, as well as organizations like the Better Business Bureau or the Chamber of Commerce before deciding to buy. Moreover, the FTC showed subjective reliance by these eight witnesses. Based upon the representations of ongoing contract work and a profitable business, many of these people made a substantial sacrifice to purchase the opportunity, sometimes investing their life savings. Furthermore, the FTC demonstrated that the misrepresentations were widespread and that the seven of the eight who testified in court actually bought the Kitco opportunity. The FTC also entered into evidence 17 contracts between non-witness purchasers and Kitco. Additionally, the Commission introduced FTC Ex. 86 which demonstrates that the 20 individuals listed are Kitco subcontractors. Defendants did not rebut this showing.

5. The Amount of Recovery

a. Admissibility of Consumer Affidavits

The Commission claims that evidence produced at trial provides the basis for admitting the 20 signed and sworn affidavits of Kitco purchasers who did not appear as witnesses. The FTC seeks to offer the affidavits as further proof of consumer purchase, subsequent injury and entitlement to restitution. Defendant Farkas attacks the consumer affidavits as untrustworthy and self-serving. He argues that the consumer contracts do not sufficiently guarantee the trustworthiness of the affidavits and are of little help in determining damages.

FRE 803(24) provides a residual exception to the hearsay rule where the proffered evidence has “circumstantial guarantees of trustworthiness” equivalent to those inherent in the other exceptions to the hearsay rule. In addition, the court must determine that: 1) the statement is offered as evidence of a material fact; 2) the statement is more probative on the point than any other evidence which the proponent can procure through reasonable efforts; and 3) the general purpose of the rules and the interests of justice are best served by admission of the statement into evidence. Finally, the proponent must provide sufficient notice to the adverse party in advance of trial. The FTC satisfied this last requirement by bringing a pretrial motion in limine which the court denied.

Notwithstanding the previous denial, the court finds that evidence given at trial establishes the trustworthiness of many of the consumer affidavits on the issue of consumer purchase and damages.

Eight Kitco purchasers testified at trial that defendants and their sales agents made material representations concerning the Kitco business opportunity and that these representations were false, deceptive and misleading. These eight witnesses also testified that they relied on the misrepresentations and were induced to enter contracts with Kitco. The Commission further offered proof that the Kitco sales brochure and Kitco ads were deceptive and that the defendants used a variety of corporate identities to induce the sales of the business opportunity. This cumulative testimony demonstrates that the defendants engaged in a widespread pattern and practice of deception. Each affiant sets forth facts relating to defendants’ misrepresentations which are consistent with the testimony and documentary evidence introduced at trial.

• Even more importantly, the Commission offered in evidence contracts between Kit-co and 17 non-witness consumer purchasers. While these contracts do not establish the amount actually paid by the purchasers, many of the subcontractors appear on Kiteo’s list it sent to Shamrock. This list, FTC Ex. 86, establishes that the subcontractors did pay the purchase price for the machine and business opportunity. Accordingly, the court will admit the affidavits of all but William Andrachuk, Janice Babbitt, Wayne Springer, Jayanti Solanki, and Jim Sullivan to prove total consumer injury and establish the amount of the monetary equivalent of rescission. These affidavits are more probative on the issue of total liability than any other reasonably obtainable evidence. It would be too expensive and time consuming to call witnesses from all parts of the United States merely to establish total consumer injury or even to take each consumer’s deposition. In this case, corporate records were unavailable. Thus, unless the affidavits are admitted into evidence, there will be only limited proof of total injury suffered by the innocent purchasers. Accordingly, the interests of justice are best served by admitting the 15 consumer affidavits into evidence.

These affidavits plus evidence from the eight consumer witnesses at trial indicate that the total consumer injury is $531,949. This figure takes into account any amount which was already received as partial execution of judgment by any individual and deducts the small profit of the only person who made one. The breakdown is as follows:

SUBCONTRACTOR AMOUNT PAID
George Bañas $ 22,500.00
Duane Carver $ 23,865.00
Roger Christopherson $ 23,387.00
James Cox $ 7,500.00 ($10,000 paid less $2,500 received as partial execution of judgment)
Dale Davis $ 18,500.00
William Duff $ 23,865.00
John Fitzpatrick $ 23,385.00
William Gulick $ 23,865.00
Richard Hoch $ 22,085.00 ($3,000 profit deducted)
Daniel Jensen $ 23,387.00
Loren Jones $ 23,865.00
Ray Kerkstra $ 23,388.00
Steven Kocak $ 23,865.00
Dennis Krook $ 21,050.00
Mark McGree $ 23,387.00
Richard McKenzie $ 18,500.00
Dennis Mourning $ 23,865.00
Richard Payton $ 23,865.00
Thomas Redington $ 23,865.00
Paul Sabol $ 18,500.00
Phyllis S. Selig $ 23,865.00
Ralph Wasem $ 23,865.00
Deral Thiele $ 23,865.00
Carla Theines $ 23,865.00
TOTAL $531,949.00

FTC v. H.N. Singer, Inc., 1983-82 Trade Cas. (CCH) ¶ 65,011 (N.D.Ca.1982) and FTC v. International Diamond Corp., 1983-82 Trade Cas. (CCH) ¶ 65,725 (N.D.Ca.1983), establish that defendants may be liable for the full amount of the monetary equivalent of rescission, even though it may exceed the amount of a defendant’s unjust enrichment. The court finds that defendants Snelling and Farkas are jointly and severally liable for this amount.

b. Collateral Estoppel or Judicata

Effect of Private Law Suits

Defendant Farkas argues that two individual private lawsuits filed by Kitco purchasers against him bars these individuals from receiving restrictions under the FTC Act. It is questionable, however, whether Farkas may maintain the defense of res adjudicata or collateral estoppel at this late date. Fed.R.Civ.P. 8(c) provides that res judicata or collateral estoppel are affirmative defenses which must be pleaded by the defendants. Failure to do so in a reasonable manner results in waiver. Huffman v. Pursue, Ltd., 420 U.S. 592, 607 n. 19, 95 S.Ct. 1200, 1210 n. 19, 43 L.Ed.2d 482 (1975); Blonder-Tongue Lab., Inc. v. Univ. of Ill. Foundation, 402 U.S. 313, 350, 91 S.Ct. 1434, 1453, 28 L.Ed.2d 788 (1971). Farkas did not plead either of these defenses.

Even assuming that the court finds no waiver, the burden of establishing claims or issue preclusion is placed upon the party claiming it. See Blonder-Tongue Lab., Inc., 402 U.S. at 450, 91 S.Ct. at 1453. Defendant has failed to present proof of the claims or issues involved, of the causes of action under which the former proceedings were litigated, or on what basis suits were won or lost. Thus, there is insufficient evidence to even determine whether the requisite for res judicata or collateral estoppel are even present. See, e.g., Fed. Ins. Co. v. U.S., 618 F.2d 661, 663 (10th Cir.1980).

6. Injunctive Relief

District courts have discretion to model orders to fit the exigencies of the particular case and the power to enjoin related unlawful acts which may be fairly anticipated from defendant’s past conduct. See Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 132, 89 S.Ct. 1562, 1581, 23 L.Ed.2d 129 (1969); NLRB v. Express Publishing Co., 312 U.S. 426, 436-37, 61 S.Ct. .693, 699-700, 85 L.Ed. 930 (1941). See also Benrus Watch Co. v. FTC, 352 F.2d 313, 324 (8th Cir.1965), cert. denied, 384 U.S. 939, 86 S.Ct. 1457, 16 L.Ed.2d 538 (1966) (Commission order covering all products manufactured by company upheld); Guziak v. FTC, 361 F.2d 700, 705-06 (8th Cir.1966), cert. denied, 385 U.S. 1007, 87 S.Ct. 712, 17 L.Ed.2d 545 (1967). Even if the defendants have altered some of their deceptive practices, injunctive relief is still appropriate when there is a “cognizable danger of recurrent violation.” United States v. W.T. Grant Co., 345 U.S. 629, 633, 73 S.Ct. 894, 897, 97 L.Ed. 1303 (1953). See also CFTC v. Co Petro Marketing Group, Inc., 502 F.Supp. 806, 818 (C.D.Ca.1980), affd, 680 F.2d 573 (9th Cir. 1982). Past unlawful conduct is a critical element in determining the likelihood of future violations. See CFTC v. Hunt, 591 F.2d 1211, 1220 (7th Cir.1979); CFTC v. British American Commodity Options Corp., 560 F.2d 135, 141 (2d Cir.1977), cert. denied, 438 U.S. 905, 98 S.Ct. 3123, 57 L.Ed.2d 1147 (1978). Moreover, the egregious nature of past violations is a factor supporting the need for permanent injunctive relief of a broad nature. Cf. SEC v. Blatt, 583 F.2d 1325, 1334 at n. 29 (5th Cir.1978). In the instant case, the egregious nature of the defendants’ deceptive practices warrants an order prohibiting misrepresentations in the sale of any business opportunity, product, or service. Snelling and Farkas used various corporate entities to pursue their illegitimate business activities and an injunction restraining the now-defunct Kitco would have no effect. A broad injunction is necessary to protect the public from further violations of the FTC Act. Moreover, such an injunction does not unduly harm the defendants. It does not put them out of business, but simply ensures that they will conduct their business in a manner which does not violate Section 5 of the FTC Act, 15 U.S.C. § 45.

C. Default Judgment Against Defendant Jesinoski

Fed.R.Civ.P. 12 provides that a defendant shall file his or her answer or otherwise defend within 20 days of service. If a defendant fails to do so, a default judgment may be entered. Fed.R.Civ.P. 55(b)(2) commits the entry of a default judgment to the discretion of the trial court. FTC v. Packers Brand Meats, Inc., 562 F.2d 9, 10 (8th Cir.1977). See also 10 Wright, Miller & Kane Federal Practice and Procedure: Civil § 2685 at 420-421 (1983). The court may consider a number of factors including the amount of money potentially involved, whether issues of fact exist, whether the default is largely technical, and whether the grounds for default are clearly established. 10 Wright, Miller & Kane, Federal Practice and Procedure: Civil § 2685 at 423-426 (1983). Fed.R. Civ.P. 55 does not require a hearing before an entry of default. If the court determines that a defendant is in default, the factual allegations of the complaint will be taken as true. Thompson v. Wooster, 114 U.S. 104, 5 S.Ct. 788, 29 L.Ed. 105 (1885); Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61 (2d Cir.1981). This rule applies to cases seeking equitable as well as legal relief. Thompson v. Wooster, 114 U.S. 104, 110, 5 S.Ct. 788, 791, 29 L.Ed. 105 (1886).

In the instant case, the summons and complaint in the proceeding were served on defendant Jesinoski on July 31, 1984 by Deputy Sheriff Ernest Myer of the Sherburne County Sheriffs Department. Jesinoski has failed to respond in any manner since that time. At least eight months have elapsed since the FTC was entitled to Jesinoski’s responsive pleading. Almost five months have passed since the FTC moved for the court to enter a default judgment requiring Jesinoski to pay restitution and to enjoin him from future violations of the FTC Act. This is clearly not a case where defendant attempted to respond to plaintiff’s complaint after the time for responsive pleading expired. See, e.g., Dr. Ing. H.C.F. Porsche A.G. v. Zim, 481 F.Supp. 1247, 1248 at n. 1 (N.D.Texas 1979).

In addition, a court trial on the merits has been held concerning the Kitco operations. While Jesinoski was not being tried, credible evidence was produced at trial which suggested that Jesinoski played a direct role in misrepresenting Kitco’s business opportunity and that he held himself out as a principal in the organization.

Moreover, the FTC has established the propriety of restitution for Kitco purchasers in the amount of $531,949.00. Jesinoski has known for approximately five months that the FTC planned to seek consumer restitution upon default and he has not contested the amount of the claim. The court also finds that it is appropriate to enjoin Jesinoski from engaging in violations of Section 5 of the FTC Act, 15 U.S.C. § 45.

ORDER FOR JUDGMENT

Accordingly, based on the above and all the files, records, and proceedings herein,

IT IS HEREBY ORDERED that

1. The complaint is dismissed against defendant Jason Barton without prejudice.

2. The complaint is dismissed against defendant Kitco of Nevada, Inc., d/b/a Kit-co, Inc., d/b/a Krown Manufacturing Co., with prejudice.

3. Defendant Craig A. Jesinoski is in default for failure to plead or otherwise defend in this action.

4. Pursuant to Section 13(b) of the FTC Act, 15 U.S.C. 53(b), plaintiff is entitled to a permanent injunction enjoining defendants Duane F. Snelling, John E. Farkas, and Craig A. Jesinoski, their employees, agents, representatives, and all those acting in concert with them in connection with the advertising, marketing or selling of any business opportunity in or affecting commerce, from misrepresenting, orally, or in writing:

(a) the nature and extent of any service or other assistance to be provided to any person who purchases such business opportunity, including but not limited to, assistance in sales or marketing;
(b) the frequency or method of payment for any products manufactured or sold as part of such business opportunity;
(c) the performance, efficiency or production capacity of any machine sold as part of such business opportunity;
(d) the past, current, or likely future income or profits of any purchaser of such business opportunity; and
(e) the amount and duration of work that will be provided to the purchaser of such business opportunity.

“Business opportunity” for the purposes of this Order for Judgment means any written or oral arrangement whereby defendants:

(a) provide or offer to provide to an investor, in connection with the establishment of a new business or the operation of an on-going business, either goods, commodities, services or assistances; or
(b) provide or offer to provide to an investor, permission to offer, sell or distribute goods, commodities or services which are identified by a trademark, service mark, trade name, advertising or other commercial symbol.

5. Pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), plaintiff is entitled to entry of judgment against defendants Duane F. Snelling, John E. Farkas, and Craig A. Jesinoski, jointly and severally, in the amount of $531,949.00 to redress the consumer injury which resulted from the defendants' violations of the FTC Act. Any amounts defendants contribute toward this sum shall be paid into an escrow account established by the Federal Trade Commission for distribution as restitution to the injured consumers. The FTC may submit a plan of allocation to this court for approval as is necessary.

6. Plaintiff is entitled to its costs.

      . The issue of the admissibility of Farkas’ testimony will be discussed infra.

      . Farkas testified that he had contributed products from his past businesses to a barter company and had run up approximately $15,000 worth of credits. Under the system, he could use these credits to obtain products or services from other companies who were members, and he transferred these to Snelling.

      . Upon cross examination, counsel for Farkas asked Jensen to read that portion of the affidavit he gave to the FTC which pertained to Farkas. See Farkas Ex. 35. Jensen did not allege any specific details of misrepresentation in the affidavit but merely stated that he and Farkas "discussed the business opportunity." Jensen specifically stated at trial, however, that Farkas verified that continuous work would be provided and that all orders would come from Kitco. The court found his testimony to be credible and believable.

      . In another instance, Farkas’ wife, Barbara, received a Kitco check for $610.00 in December 1981 (FTC Ex. 88). There is no evidence that she was a Kitco employee.

      . The admissibility of these affidavits will be discussed infra.

      . Richard Hoch testified that he was paid in full for the products he made for Kitco. He also testified that he received payment after visiting Farkas daily to demand money.

      . Kitco sent Shamrock a list of 19 subcontractors who would be sending in plastic. See FTC Ex. 86.

      . The following individuals appeared on the list: George Bañas, Duane Carver, Roger Christopherson, Dale Davis, William Duff, John Fitzpatrick, William Gulick, Daniel Jensen, Loren Jones, Ray Kerkstra, Stephen Kocak, Dennis Krook, Dennis Mourning, Richard Payton, Thomas Redington, Paul Sabol, James Selig, Deral Thiele, Carla Theines, and Ralph Wasem.

      . The affidavits of Solanti and Sullivan are unsupported by evidence of a contract or by Kit-co’s admission that they were subcontractors. There is therefore no circumstantial evidence that they even purchased the business opportunity. While the FTC has produced contracts for Andrachuk, Babbitt, and Springer, it has not produced any additional evidence suggesting that the purchase price was indeed fully paid.

      . Rule 55(b)(1) provides that a judgment by default may be entered in two ways: 1) by the Clerk if plaintiff’s claim "is for a sum certain or for a sum which can by computation be made certain" and 2) by the court in all other cases. Because plaintiff seeks a judgment that includes injunctive relief and restitution for injured consumers, plaintiffs claim against defendant Jesinoski in the case at bar is not for a sum certain. Default must then be entered by the court.

      . Thompson v. Wooster has been cited as the "venerable, but still definitive case” on this subject. See Trans World Airlines, Inc. v. Hughes, 449 F.2d 51, 63 (2d Cir.1971), rev’d on other grounds, 409 U.S. 363, 93 S.Ct. 647, 34 L.Ed.2d 577 (1973).

      . Defendants Duane Snelling and John Farkas each were served with a summons and complaint in this proceeding on June 9, 1983, a full year before Jesinoski was served. Jesinoski disappeared in an apparent effort to evade process.


author: DEBEYOISE, District Judge.

text:
    UNITED STATES of America, Plaintiff, v. CALMAR INCORPORATED and Realex Corporation, Defendants.
    Civ. A. No. 84-5271.
    United States District Court, D. New Jersey.
    Jan. 31, 1985.

      W. Hunt Dumont, U.S. Atty., Newark, N.J. by Seymour H. Dussman, Frank Seales, Jr., Richard S. Nicholson, U.S. Dept, of Justice, Antitrust Div., Washington, D.C., Wilentz, Goldman & Spitzer, Woodbridge, N.J., and Weil, Gotshal & Manges by Richard S. Taffet, Alan J. Weinschel, New York City, for defendant Calmar Inc.
    Shanley & Fisher by Arthur Schmauder, Morristown, N.J., and Gage & Tucker, Kansas City, Mo., for defendant Realex Corp.
   DEBEYOISE, District Judge.

This is an action which the United States instituted under Section 15 of the Clayton Act, 15 U.S.C. Section 25, as amended, seeking to enjoin the merger of defendants Calmar Incorporated and Realex Corporation. The government charges that the effect of implementation of an August 6, 1984 merger agreement between the defendants would be substantially to lessen competition in interstate trade and commerce in violation of Section 7 of the Clayton Act 15 U.S.C. Section 18, as amended. The government sought a preliminary injunction, and an evidentiary hearing was held from January 21—January 25, 1985. This opinion constitutes my findings of fact and conclusions of law.

I. The Complaint

The complaint defines two relevant product markets, each of which is subject of this action.

The first market consists of “regular sprayers.” The complaint defines a regular sprayer as “a plastic pump with a spray head that, when fully depressed, dispenses approximately one cubic centimeter of liquid from a container in the form of dense, ‘wet’ spray of large particles.”

The second market consists of “regular dispensers.” The complaint defines a regular dispenser as “a plastic pump with a spout that, when fully depressed, dispenses a steady stream of approximately one to two cubic centimeters of viscous liquid from a container.”

Further, the complaint alleges, and defendants do not deny, that the United States is the relevant geographic market in which both regular sprayers and regular dispensers are sold.

The complaint purports to measure the effects of the proposed merger by application of the Herfindahl-Hirschman Index (the “HHI”). The HHI measures market concentration by squaring the market share of each firm competing in the market and then summarizing the resulting numbers.

There are, according to the complaint, three domestic manufacturers of regular sprayers including Calmar with 60 percent of the market and Realex with 23 percent of the market. The HHI is now approximately 4,400. Calmar’s acquisition of Realex would increase the HHI by more than 2,700 to more than 7100.

There are, according to the complaint, five domestic manufacturers of regular dispensers including Calmar with 58 percent of the market and Realex with 21 percent of the market. The HHI for the market is now approximately 4,000. Calmar’s acquisition of Realex would increase the HHI by more than 2,400 to more than 6400.

The complaint charges that this dramatic increase in the HHI in each of the product markets defined in the complaint reflects the actual anticompetitive effect in the marketplace which would result from the merger, for example, the elimination of competition between Calmar and Realex, increased concentration in already highly concentrated markets and a substantial lessening of competition in the two markets.

II. The Applicable Legal Principles

To obtain a preliminary injunction a party must demonstrate (i) a reasonable likelihood of eventual success on the merits and (ii) the probability of irreparable injury if the relief is not granted. The Court must also consider the consequences which the decision would have upon other persons and it must consider the overall public interest. Freixenet, S.A. v. Admiral Wine & Liquor Co., 731 F.2d 148 (3d Cir.1984). In an action brought by the United States to enforce Section 7 of the Clayton Act irreparable injury is presumed once the government has established a reasonable likelihood of success on the merits. United States v. Ingersoll-Rand Co., 320 F.2d 509 (3d Cir.1963).

The substantive law which governs the determination whether the government has demonstrated a reasonable likelihood of eventual success on the merits is readily stated, though it is frequently less readily applied.

Section 7 of the Clayton Act, 15 U.S.C. Section 18, prohibits acquisitions that may substantially lessen competition in any line of commerce in any section of the United States. The determination of whether a particular acquisition, such as Calmar’s acquisition of Realex, may have the prohibited effect requires first that the line of commerce or product market in which competition might be effected be defined. Next it is necessary to define the area of the country or geographic market in which any anticompetitive effect of the merger would be felt. Having defined the relevant product in geographic markets, the structure of the market must be examined to determine the share of competitors and the degree of concentration and to evaluate all the market factors which could affect competition in the market. Allis-Chalmers Manufacturing Co. v. White Consolidated Industries, Inc., 414 F.2d 506 (3d Cir.1969) cert. denied, 396 U.S. 1009, 90 S.Ct. 567, 24 L.Ed.2d 501 (1970).

In the present case the parties agree that the relevant geographical market is the entire United States. Therefore, the market inquiry is addressed only to the appropriate product market, an issue on which the parties disagree profoundly.

To define the bounds of the product market it is necessary to determine what products are reasonably interchangeable with the product in question, that is to say, products to which consumers would switch if there were a small but significant non-transitory price increase. Brown Shoe Company v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962). SmithKline Corporation v. Eli Lilly and Co., 575 F.2d 1056 (3d Cir.) cert. denied, 439 U.S. 838, 99 S.Ct. 123, 58 L.Ed.2d 134 (1978).

Many factors have to be taken into account in measuring the so-called “cross-elasticity of demand,” for example, industry or consumer recognition of the products as a market, the peculiar uses and characteristics of the products, the kinds of production facilities, sensitivity to price change, specialized users and vendors.

While supply alternatives might better be considered in connection with the case of entry evaluation which is mentioned below, it may be appropriate in determining the product market to identify alternative suppliers. That is to say, firms which can easily and quickly switch their current production to the product in question. Allis-Chalmers Manufacturing Co. v. White Consolidated Industrial, Inc., supra.

If the definition of the product and geographic market shows a high degree of concentration resulting from a merger, a prima facie case of illegality has been established. United States v. Philadelphia National Bank, 374 U.S. 321, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963). In that case the Court concluded that a merger resulting in a single firm controlling 30 percent of a market where the four-firm concentration ratio exceeded 70 percent was presumptively illegal. United States Department of Justice 1984 merger guidelines employ the Herfindahl-Hirschman Index to measure market concentration. The guidelines characterize a market as unconcentrated if the HHI is below 1,000, moderately concentrated if the HHI is between 1,000 and 1800, and highly concentrated if the HHI is above 1800. Here, of course, according to the government, the HHI in the regular sprayer market will be 7100 after the merger and the HHI in the regular dispenser market will be 6400 after the merger.

If a merger does not result in an impermissible degree of market concentration, no further inquiry is required. However, if a merger does result in a high degree of concentration, it still may be shown that the merger will not result in a substantial lessening of competition because factors at work in the market will make it unlikely that the remaining producers in the market will be able to exercise market control. An example of such a factor is ease of entry, a condition which defendants urge exists in this case. If ease of entry in the market is such that the producers in the market could not long sustain an unjustified price increase, then in spite of a high degree of concentration there has not been a substantial lessening of competition. United States v. Waste Management, Inc., 743 F.2d 976 (2d Cir.1984).

III. The Industry and Products

Calmar, a publicly held corporation, has a plant in Ohio and a plant in California at which it manufactures a wide variety of plastic dispensing devices—devices through or by which products are removed from their containers for use. The products include pump dispensers (which deliver lotions, liquids and viscous creams), pump sprayers (which deliver liquid in the form of a fine spray or a mist), trigger sprayers (which deliver liquids in the form of a mist, spray or stream through the use of a trigger type device), and closures (which in-elude a wide variety of caps and tops for bottles and other containers).

Realex operates a manufacturing plant in Missouri. It manufactures a variety of pump dispensers and pump sprayers. Another division of Realex not pertinent to this case manufactures various household products.

The pertinent products manufactured by Calmar and Realex consist primarily of injection molded plastic parts, along with some other parts such as springs and balls. These parts are assembled into finished products either by hand or by using machinery. The products contain from 6 to 13 parts.

The products to which the parties have referred in this case and which must be considered in determining the relevant market are the following, the figures being in most instances 1984 figures:

1. Regular Dispensers: These are mechanical pump devices which fit on the top of containers. They dispense liquid or viscous material in the container by use of the finger pressing on a pumping means.

The market for this product as shown on G-24 is 140 million units of which 75 million units were used for liquid soap, 45 million units were used for hand and body lotion, two million units were used for mustard and ketchup, and 18 million units were used for miscellaneous purposes.

The producers of regular dispensers are Calmar (57.9 percent), Realex (21.4 percent), Speciality Management Products, Inc. (10.7 percent), Chesebrough-Pond’s (8.6 percent) and Emson (1.4 percent). Chesebrough-Pond’s, which once purchased regular dispensers from Realex, now manufacturers its own dispensers under a license from Realex. It does not sell to outside users.

2. Regular Sprayers: These are mechanical pump devices which emit a fine spray or droplets of liquid. They, too, fit on the tops of containers and are activated by means of a finger pressing on the pumping means. The total market for this product as shown in G-25, is 195 million units of which 45 million units were used for hair set and conditioners, 30 million units were used for window cleaners, 45 million units were used for automotive products, 15 million units were used for plant care, ten million units were used for furniture wax, ten million units were used for insecticides, ten million units were used for mouthwash, ten million units were used for all purpose cleaners, five million units were used for bathroom cleaners, and 20 million units were used for miscellaneous purposes.

The producers of regular sprayers are Calmar (60 percent), Realex (20 percent) and Specialty (20 percent).

3. Fine Mist Sprayers: These mechanical pump devices, as their name implies, produce a much finer spray than the regular sprayers. They are used on products such as perfumes. The total market for this product as shown on D-702, is 235 million units produced by Specialty (15 million units), Emson (60 million units), Seaquist (15 million units), Risdon (10 million units) and Calmar (135 million units).

4. Large Dispensers: These mechanical pump devices, as their name implies, are enlarged versions of regular dispensers and are used when a large volume of liquid is required. The total market for this product as shown on D-702, is 20 million units produced by Calmar (five million units), Realex (8 million units) and Continental (7 million units).

5. Trigger Sprayers: This trigger-type structure dispenses liquids in varying quantities and kinds of sprays. It is generally used on larger size containers both for esthetic reasons because of its size and for cost reasons. Pump dispensers and sprayers cost 10 to 15 cents each, trigger sprayers cost 20 to 30 cents each. According to the C.H. Kline and Co., Inc. report which accompanied Barry C. Harris’ affidavit, 250 million units were sold in 1984. According to G-26, the producers of trigger sprayers are Calmar, Specialty, AFA, Continental, Texize and UDS.

6. Dispensing Closures: These items are also known as flip tops. They are used to close a container and are constructed so they can be flipped open upon the application of finger pressure allowing the liquid to be released by pouring or squeezing the container. Flip tops are employed on a wide variety of containers having many of the same uses as containers which employ regular sprayers or regular dispensers. They are relatively inexpensive, costing two or three cents each. According to D-704, total production is 5,600 million units and among the producers of dispensing closures are Calmar, Realex, Seaquist, U.S. Cap and Closure, Polytop, Product Design and Engineering, Stull Engineering, Gibson, Wheaton, Sunbeam Plastics and other smaller producers.

7. Aerosol Valves: This kind of dispenser is used for a wide variety of products, many of which also use the other kinds of dispensers described above. The manufacturing process is very different from that used to make the other dispensers, and aerosol valves are more expensive. According to D-706, the total annual production was 2,400 million.

IV. The Relevant Product Market

As noted above, it is the government’s contention that regular dispensers and regular sprayers each constitute a disrete product market. It argues that the fact that there is some cross-use between these products inter se and between these products and other types of sprayers or dispensers is insufficient to establish cross-elasticity of demand. In the light of the evidence, the government contends this limited interchangeability will not prevent Cal-mar, the corporation surviving the merger, from being in a position to make significant, long-term price increases not justified by costs.

The government points to Calmar’s own financial documents prepared over the years which subdivided products into various categories, including regular dispensers and regular sprayers, and analyzed separately the sales to competition in each of those product markets. Realex’ internal documents reflect similar analytical subdivisions.

The government produced as witnesses officials of seven users of regular dispensers and spray dispensers. They each testified generally to the same effect. Whether their company used a regular dispenser or a regular sprayer, it did so because the device produced the kind of output required for their product, because consumer preferences dictated its use, because it was necessary to use that kind of device to meet competitive products, because it was esthetically pleasing. For the same reasons that the particular device was used, the user would be reluctant to or refuse to shift to an alternative kind of dispensing device.

Faced with a one cent or two cent price increase, most of the seven witnesses testified that their company would probably not shift to another seller of dispensers; they would not seek a foreign supplier and they would not undertake to manufacture dispensers for their own use.

Those using finger pump dispensers were generally disinclined to use trigger pumps both because the large trigger device did not have an esthetic appeal and also because they cost significantly more. The relatively inexpensive dispensing closures or flip top devices were not used because customers were looking for the more convenient and better looking regular dispensers and sprayers.

None of the user-witnesses knew of any available foreign source of supply. A deterrent to changing suppliers would be the necessity for a new supplier to establish a track record and to provide assurance of the quality of the device and its ability to provide adequate service and continuing supply.

Aerosol valves were used to a small extent in connection with products which also used regular and spray dispensers. This reflects a definite consumer preference but not one which is of significant volume in most of these end use areas. There is very little likelihood that a significant price increase in other dispensers would result in a marked shift to aerosol valves.

The government’s economist, Dr. Kent W. Mikkelsen, gave an impressive presentation based upon an intensive analysis of the documentary material and upon interviews with users and suppliers. He concluded that a small but significant increase in the price of regular dispensers or regular sprayers would not cause a user to shift to an alternative product. Consequently he identified each product as a separate market.

Accepting these definitions of the product markets, after the merger Calmar would have approximately 80 percent of each, leaving Specialty as the only competitor (apart from Chesebrough which manufacturers its own regular dispenser and Emson which has only a 1.4 percent share of the regular dispenser market).

Persuasive as the government’s evidence and experts were, I conclude that the government has defined the product market too narrowly. There were exhibited to the Court and there has been testimony about a dizzying variety of combinations of end users and dispensing devices. For each use, such as window spray, liquid soap and hand lotion, more than one kind of dispensing device was used by one or another manufacturer. Some manufacturers of hand lotion use regular dispensers; others use flip top dispensers. The same was true of liquid soap. Some manufacturers use different dispensers on the same kind of product. For example, Drackett, the manufacturer of Windex, uses for that product an aerosol valve, a regular sprayer, a trigger sprayer and (for refill size containers) a cap. Drackett uses a finger pump on its eight-ounce container while one of its competitors uses a trigger pump on its eight-ounce container.

Of necessity, the government’s testimony was anecdotal in nature—the observations of a few of the many hundreds and perhaps many thousands of users of dispensing devices. The testimony reflected in part the inertia of any manufacturer to change its methods or source of supply. It did not reflect the choice which would be made by new users of dispensing devices entering the market for the first time, an event which must occur with great frequency, the fact that for planning and other purposes Calmar separated and reported on regular dispensers and regular sprayers while relevant, is not determinative for the purposes of defining the relevant market under the antitrust laws.

Defendants’ expert, Dr. Barry C. Harris, applied substantially the same methodology as Dr. Mikkelsen, and as can be expected, came to a different conclusion. The survey he caused to be conducted identifying end uses of sprayers and dispensers demonstrates further the potential for substitution of other closures for regular and spray dispensers.

Further, Dr. Harris analyzed the potential for supply substitution. Virtually identical procedures are used in making regular and spray dispensers, fine mist sprayers, large dispensers and trigger sprayers. Each of the manufacturers of any one of them could, without undue difficulty, commence production of any one of the other devices should a price increase induce it to do so.

A market cannot be defined with absolute certainty. In the present case I believe the government has drawn too tight a net. I believe the defendants would stretch it too far.

While there is a likelihood that users would move rather readily between the different kinds of pump dispensers and sprayers and that suppliers of these devices would shift from producing one to another in response to shifting prices and demand, there would be a lesser degree of shifting from pump dispensers and sprayers to aerosol valves and to dispensing (or flip top) closures. These latter two devices are quite different in style and principle from the pump devices, The costs are very different; at least in the case of the aerosol valve, the suppliers of pump devices could not as readily shift to or undertake the manufacture of such valves. The manufacturing techniques are quite different from those employed to make plastic pump dispensers.

I conclude, therefore, that the relevant market includes regular sprayers, regular dispensers, fine mist sprayers, large dispensers and trigger sprayers. Annual production in units per company in this market and the percent of market share of each is shown in D-707 and is as follows:

Calmar, 375 million units, 41 percent of the market.

Realex, 78 million units, 9 percent of the market.

Specialty, 160 million units, 18 percent of the market.

Emson, 62 million units, 7 percent of the market.

Seaquist, 15 million units, 2 percent of the market.

Risdon, 10 million units, one percent of the market.

Continental, 45 million units, 5 percent of the market.

Chesebrough-Pond’s, 12 million units, one percent of the market.

AFA, 50 million units, 6 percent of the market.

Texize, 95 million units, 10 percent of the market.

UDS, 2 million units, less than one percent of the market.

A total of 904 million units comprising the entire market.

Between them Calmar and Realex have 50 percent of the market, which would give Calmar 50 percent of the market after the merger. The four-firm concentration factor is now 78 percent. After the merger it would be 85 percent. The HHI is now 2,302. It would increase by 738 in the event of the proposed merger.

Thus the merger will result in a degree of concentration which establishes prima facie that it is likely to cause a substantial lessening of competition. It is therefore necessary to determine if the ease of entry overcomes this prima facie case.

Ease of Entry V.

The testimony of Karl J. Stringer, vice-president of logistics and information services of the Drackett Corporation, is instructive. Drackett purchases a substantial number of regular sprayers and trigger sprayers for its Windex product. Drackett has changed the type of dispensers it uses over the years and it carefully monitors the prices it pays for these devices. It requires that any price increase be justified on a cost basis. Mr. Stringer testified that if its supplier of regular sprayers and trigger sprayers, Calmar, increased its prices beyond cost, Drackett would refuse to pay the increase and would divert its business elsewhere. He doubted that Drackett would commence making its own sprayers, but it would consider entering into a joint venture with another company as it did with Emson when it sought an additional supply of trigger sprayers.

Other users undoubtedly also monitor prices and could be expected to look for new sources of supply if faced with an unjustified price increase. Suppliers of pump dispensers undoubtedly monitor prices being charged by their competitors and, if entry were feasible, could be expected to shift, increase or institute production of particular kinds of pump dispensers in response to unjustified price increases by competitors.

The evidence establishes that entry into the pump dispenser market would be relatively easy.

There are no patents which bar use of any of the devices or processes of manufacturing them. The products are inexpensive and simple in design.

The injection molding process used by those who make plastic dispensing devices is the same as the injection molding process used to make countless other small plastic products. There are many molders capable of duplicating any of the products in the relevant market. The assembly of the plastic parts does not differ significantly from the assembly of other plastic products and can be accomplished by many firms.

Calmar developed the first plastic sprayer in the early 1950’s. Since that time Realex and the other firms in the market defined above have entered the market with their own products. The cost to enter the market would not be substantial. Brian J. Armour, vice-president and general manager of a mold building firm, estimated how much it would cost to enter the market with a product identical to one of Calmar’s successful dispensing pumps. He concluded that it would require approximately half a million dollars to build the mold, arrange for custom molding and assembly and market. In six months he would expect to have a marketable product and in one year he would expect to have a profitable operation.

While Mr. Armour had a little difficulty with his arithmetic and with typographical errors in his report, his conclusions are unrebutted and appear to be sound. Other evidence generally supports his conclusion. Donald C. Kirk, production manager of Specialty, described the actual introduction of a product for about double the cost Armour estimated. However, unlike Armour’s hypothetical, which assumed that an existing successful product would be copied, Specialty developed an entirely new product, starting in May 1981 and making shipments by December 1982. Significantly, Specialty performs only 15 percent of its molding work, contracting out 85 percent. This points up the fact that an entrant need not have its own factory either to do the molding or assembly. Some existing suppliers of pump dispensers contract out this work and are little more than sales corporations. New entrants could do the same.

The history of the industry supports the conclusion that entry is not difficult.

Originally Calmar had a monopoly. Realex, which was in the insecticide business, decided to produce its own pump sprayer, which it successfully did. At first it manufactured sprayers for its own use only. Subsequently it expanded the product line and sold to others.

Specialty, originally an aerosol valve manufacturer, developed a fine mist sprayer in 1964 and since then has introduced regular sprayers and regular dispensers.

AFA, Continental, Texize and UDS entered the trigger sprayer market.

Emson, Risdon and Seaquist entered the fine mist pump field in the mid-1970’s in response to the ozone scare which adversely affected sales of aerosol valves. Emson later introduced a pump dispenser in 1982.

For many years Chesebrough-Ponds purchased pump dispensers from Realex. It decided to manufacture its own pump dispensers and now does so, paying a modest license fee to Realex.

The evidence leads to the conclusion that even after the proposed merger the ease of entry into the market would prevent any supplier from exercising market power. A significant sustained price increase most likely would result in a number of reactions in the market. Users either would commence manufacturing their own pump devices or would enter into a joint venture with someone else to do it or would find another source of supply. Present suppliers would increase production or institute production of the products whose price had been raised. New suppliers would come into the market. Surely Calmar is aware of the likely response to an unjustified price increase and would price its products accordingly.

An examination of the premerger market behavior confirms these observations. Even before merger there was a high degree of concentration. The four-firm competition factor was 78 percent; the HHI was 2302, well above the Department of Justice’s 1800 level for high concentration. Yet though Calmar had 41 percent of the market, its prices did not even keep pace with inflation. When its share rises to 50 percent, it is highly unlikely that the market dynamics will change. The reason for this is the ease of entry.

Therefore, I conclude that despite the high concentration of the combined market share of Calmar and Realex, the government is not likely to be able to establish at a final hearing that the merger will violate Section 7 of the Clayton Act. This is because it is likely that defendants will be able to prove that the potential entry by new or existing firms into the pump dispenser market as I’ve defined the market above will prevent sustained unjustified price increases by the merged firm. For example, United States v. Waste Management, Inc., supra.

I have pursued the usual step-by-step procedure of determining the relevant market, examining the market structure before and after the merger, and analyzing the mitigating factors. However, if one were to look at the totality of this particular market, one notes that it is so fluid and volatile both from the perspective of the product user and from the perspective of the product supplier, that it is unlikely that any firm, no matter how great its market share may be at any given time, could exercise market power very long. Let me note some of these factors.

1. The products themselves are simple, inexpensive, easily duplicated and easily modified or adapted to countless uses and esthetic tastes.

2. The use of these pump dispensers are as numerous as there are liquid products which must be extracted from containers.

3. There are a number of alternatives to pump dispensers which are or can be used.

4. Consumer tastes for the manner of dispensing liquids and for the appearance of the dispensing agent vary widely and shift. These shifts may appear to be spontaneous or they may be a response to promotional efforts of the sellers of liquid products.

5. There are alternative ways that a user can obtain pump dispensers—from various existing suppliers, by manufacturing them themselves, by assisting or joining with a new supplier to commence production.

6. A large number of firms have the capabilities of manufacturing any of the kinds of dispensing pumps which were in the market.

The degree of concentration of the pump dispenser market after the merger of Cal-mar and Realex would be so great that the Department of Justice had an obligation to challenge the merger on antitrust grounds. However, Calmar and Realex have sustained their burden of establishing, at least at this point in the case, that in this particular market the degree of concentration will not result in a substantial lessening of competition.

The government having failed to establish that it is likely to succeed on the merits, its application for a preliminary injunction will be denied.