ORKIN EXTERMINATING COMPANY, INC., PETITIONER V. FEDERAL TRADE
COMMISSION
   No. 88-710
   In the Supreme Court of the United States
   October Term, 1988
   On Petition for a Writ of Certiorari to the United States Court of
Appeals for the Eleventh Circuit
   Brief for the Respondent in Opposition
            TABLE OF CONTENTS
   Question presented
   Opinions below
   Jurisdiction
   Statement
   Argument
   Conclusion
                            OPINIONS BELOW
   The opinion of the court of appeals (Pet. App. A211-A249) is
reported at 849 F.2d 1354.  The opinion and final order of the Federal
Trade Commission (Pet. App. A136-A210) and the initial decision of the
administrative law judge (Pet. App. A3-A135) are reported at 108
F.T.C. 263.
                             JURISDICTION
   The corrected judgment of the court of appeals was entered on July
15, 1988.  A petition for rehearing was denied on September 19, 1988
(Pet. App. A250).  The petition for a writ of certiorari was filed on
October 28, 1988.  The jurisdiction of this court is invoked under 28
U.S.C. 1254(1).
                          QUESTION PRESENTED
   Whether the Federal Trade Commission had authority under Section
5(a)(1) of the Federal Trade Commission Act, 15 U.S.C. 45(a)(1), to
condemn as an "unfair * * * act() or practice()" the refusal by
petitioner to honor more than 200,000 contracts with individual
consumers, promising those consumers that petitioner would provide
specified termite control services each year at a fixed annual fee.
                               STATEMENT
   1. Petitioner is a national provider of pest control and
exterminating services (Pet. App. A138, A216).  Petitioner typically
contracts with consumers to provide termite control services by means
of standard printed forms that are not subject to modification by
petitioner's agents or customers (id. at A216).
   In 1966, petitioner began to offer what it called "lifetime"
guarantees of continued protection for structures treated for termite
infestation.  Between January 1966 and February 1, 1975, petitioner's
contracts for termite protection and control (the pre-1975 contracts)
provided that a customer who had obtained initial inspection and (if
needed) treatment for termite infestation could obtain subsequent
annual reinspection (and necessary treatment) by paying a fixed annual
renewal fee, the amount of which was specified in the contract (Pet.
App. A217).
   Petitioner's contracts promised to provide that protection for the
"lifetime" of the treated structure, unless it was structurally
modified (Pet. App. A217-220).  Moreover, as petitioner indicated in a
1968 advertising campaign promoting the program, "(t)he yearly premium
for this lifetime protection is very modest and never increases" (id.
at A220 (emphasis in original)).
   In August 1980 petitioner began notifying more than 207,000 parties
to pre-1975 contracts that the company was going to increase its
annual renewal fees.  Annual fees were raised to a minimum of $25 or
by 40%, whichever was greater (Pet. App. A222).
   In the face of complaints by customers throughout the country and
officials in 17 states, who protested petitioner's attempt to alter
the terms of its contracts, petitioner developed what it called an
"accommodation program." In addition to rolling back increases for
customers who had entered into contracts in 1968, when petitoner's
advertising material specifically guaranteed that there would be no
price increases, the accommodation program also permitted
representatives of petitioner to rescind increases for other customers
who complained about the increases with sufficient precision and
tenacity.  See Pet. App. A222-224.
   As of August 1984, petitioner had, through its "accommodation
program," rolled back the renewal fees of 21,500 customers,
approximately 16,000 of whom were 1968 customers.  Also, more than
42,000 customers had canceled pre-1975 contracts for reasons the
record does not reveal.  Pet. App. A225.  As of August 1, 1984,
however, petitioner was still collecting increased annual renewal fees
from more than 140,000 customers with pre-1975 contracts and had
received increased revenues through 1984 of $7,515,674 (Pet. App. A51,
A222).
   2. In May 1984, the Federal Trade Commission (Commission) issued an
administrative complaint alleging that petitioner's unilateral breach
of scores of thousands of consumer contracts constituted an "unfair *
* * act() or practice()" in violation of Section 5 of the Federal
Trade Commission Act (FTC Act), 15 U.S.C. (& Supp. IV) 45.  Following
pretrial discovery, Commission "complaint counsel" moved for a summary
decision pursuant to Section 3.24 of the Commission's Rules of
Practice, 16 C.F.R. 3.24(a).  Petitioner filed a cross-motion for
summary decision.  Pet. App. A225.
   The administrative law judge (ALJ) ruled in the Commission's favor.
 He found that petitioner's pre-1975 contracts did provide for a fixed
renewal fee and that petitioner had breached those contracts by
increasing the renewal fees.  Pet. App. A225.  To determine whether
petitioner's conduct constituted an unfair act or practice, the ALJ
then applied the Commission's three-part test for finding unfairness.
/1/ He concluded (1) that petitioner's unilateral breach of thousands
of consumer contracts caused substantial consumer injury;  (2) that
consumers could not reasonably have avoided the injury;  and (3) that
there were no countervailing benefits to consumers or competition from
the challenged conduct.  The ALJ's order required petitioner to roll
back all fees in pre-1975 contracts to the levels specified in those
contracts.  Pet. App. A225-A226.  On appeal by petitioner, the
Commission affirmed the ALJ's decision in all respects (id. at A226).
   3. On petitioner's petition for review, the court of appeals
affirmed and enforced the Commission's order.  /2/ The court rejected
("petitioner's) suggestion that (its pre-1975 contracts) are silent as
to the duration of the stated annual renewal fees" (Pet. App. A230).
Rather, the court sustained the Commission's conclusion that
petitioner's pre-1975 contracts unambiguously promised lifetime
treatment of covered structures at a fixed renewal fee that would not
be increased (id. at A226-A233).
   The court of appeals next reviewed the Commission's application of
its three-part test for unfairness.  The court concluded that the
Commission had properly found that the undisputed facts of this case
amply satisfied that test.  First, the court noted that by
unilaterally breaching more than 200,000 consumer contracts, and
collecting amounts in excess of the specified rate on more than
140,000 of those contracts, petitioner had realized more than $7
million to which it was not contractually entitled.  Although the loss
to each individual consumer was small, the aggregate consumer injury
was substantial.  Pet. App. A238.
   The court also noted that the Commission had concluded that
petitioner's unilateral breach of contract provided no countervailing
benefits to consumers or competition, because the breach had been
unaccompanied by any increase in or enhancement of the services
provided to consumers.  Petitioner did not challenge that conclusion.
Pet. App. A239.
   Finally, the court affirmed the Commission's conclusion that
consumers could not reasonably avoid the substantial injury caused by
petitioner's conduct.  The court noted that "(a)nticipatory avoidance
through consumer choice was impossible because these contracts give no
indication that the company would raise the renewal fees as a result
of inflation, or for any other reason" (Pet. App. A240).  The court
also noted that mitigation of the injury was infeasible because the
company's "accommodation program" was not made known to consumers and
was available only to those who affirmatively complained about the
increase.  Likewise, consumers could not mitigate damages by
transferring their business to competitors of petitioner because such
competitors (who would not have received the economic benefit that
petitioner received from making the initial inspection and treatment
of a house) would not be willing to offer consumers renewal terms
equivalent to those in the contract with petitioner.  Id. at
A240-A241.
   Having found that the record supported the Commission's conclusion
that its test for unfairness was satisfied, the court then considered
petitioner's contention that application of the unfairness standard
was improper.  The court held that "(t)he Commission's conclusion * *
* that it was an 'unfair' practice to breach over 200,000 contracts *
* * was a reasonable application of the Commission's unfairness
standard" (Pet. App. A243).
   The court noted that the FTC Act expressly prohibits both "unfair"
and "deceptive" acts and practices, so that it was not necessary to
show deception in petitioner's conduct in order to establish a
statutory violation (Pet. App. A244, A246-A247).  The court concluded
that although this case, with its focus on non-deceptive contract
breaches, "may be unprecedented," denial of the Commission's authority
to stop the practice "given the extraordinary level of consumer injury
which (petitioner) has caused * * * would be inconsistent with the
broad mandate conferred upon the Commission by Congress" (id. at
A245-A246).
   In addition to affirming and enforcing the Commission's order, the
court of appeals entered an injunction pendente lite pursuant to
Section 5(c) of the FTC Act, 15 U.S.C. 45(c), requiring petitioner to
desist from implementing further fee increases in violation of the
Commission's order, until such time as the order becomes final.  /3/
                               ARGUMENT
   The decision of the court of appeals comports with the precedents
of this Court and other courts of appeals, recognizing that Congress
intended to accord the Commission broad flexibility in construing the
meaning of "unfair acts or practices." The Commission reasonably
applied its unfairness authority in this case to require that
petitioner honor a contractual promise it had made to more than
200,000 consumers.  There is no reason for this Court to review the
judgment of the court of appeals upholding the Commission's order.
   As this Court has repeatedly recognized, Congress deliberately cast
the prohibitions of Section 5 of the FTC Act in flexible terms so that
the Commission could address the "'many and variable unfair practices
which prevail in commerce.'" Atlantic Refining Co. v. FTC, 381 U.S.
357, 367 (1965) (quoting S. Rep. 597, 63d Cong., 2d Sess. 13 (1914));
see also FTC v. R.F. Keppel & Bro., 291 U.S. 304, 310-311 (1934).
Considering the deference that is due an agency's construction of its
statute (see, e.g., Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 843-844
(1984)), it is not surprising that the Court has cited with apparent
approval an earlier administrative definition of "unfair acts or
practices" (FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244-245 n.5
(1972)).  The Commission's current three-part test is simply a
refinement of that test.  /4/ It has been applied by other courts of
appeals.  See American Financial Services Ass'n v. FTC, supra;  Harry
& Bryant Co. v. FTC, 726 F.2d 993, 999-1000 (4th Cir.), cert. denied,
469 U.S. 820 (1984).  Neither Congress nor any court has suggested
that the test misinterprets the FTC Act.  /5/
   Although petitioner suggests that the three-part test applied by
both the Commission and the courts of appeals is improper insofar as
it results in condemnation of a company's breach of a consumer form
contract, petitioner cites no authority for that position.  In fact,
as the court of appeals observed (Pet. App. A244 (citation omitted)),
"(s)ome of the oldest 'unfairness' decisions involve sellers' refusals
to live up to the terms of their contract." And even if the Commission
has not previously considered the precise type of contractual breach
at issue here, petitioner does not even acknowledge the extensive
precedent supporting the Commission's authority to refine the concept
of "unfair practices" on an incremental basis to address the wide and
ever-changing array of potentially injurious trade practices.
   As the court of appeals recognized, in this case the Commission
"simply (held) that it was an 'unfair' practice to breach over 200,000
contracts" where most consumers were essentially remediless and
received no countervailing benefits (Pet. App. A243).  Insofar as the
court of appeals' opinion establishes that the Commission may act in
other instances where companies breach thousands of consumer form
contracts at a cost of millions of dollars to consumers, and where no
reasonable means exist by which consumers may avoid such injury, /6/
petitioner does not suggest why such a result is either legally wrong
or undesirable as a matter of policy.
   Finally, petitioner overstates matters considerably in contending
that the court's ruling "exposes all businesses which use consumer
form contracts to the threat of * * * severe penalties under federal
law for any breach of these contracts" (Pet. 9).  This case did not
involve just "any breach" of a consumer contract, and any precedent it
establishes is clearly qualified by the facts on which the factual
finding of unfairness was based.  Moreover, the order of which
petitioner seeks review requires only that it desist from further
overcharging its customers in violation of their contracts, and that
it rescind unilateral increases previously imposed in violation of
contract terms (Pet. App. A204-A210).  /7/ Such an order is hardly the
kind of precedent that requires this Court's intervention in the
absence of any decisional authority to support petitioner's position.
                              CONCLUSION
   The petition for a writ of certiorari should be denied.
   Respectfully submitted.
   CHARLES FRIED
      Solicitor General
   KEVIN J. ARQUIT
      General Counsel
   JAY C. SHAFFER
      Deputy General Counsel
   ERNEST J. ISENSTADT
      Assistant General Counsel
   MELVIN H. ORLANS
      Attorney Federal Trade Commission
   DECEMBER 1988
   /1/ The test is as follows (Pet. App. A236):
         To justify a finding of unfairness the injury must satisfy
      three tests.  It must be substantial;  it must not be
      outweighted by any countervailing benefits to consumers or
      competition that the practice produces;  and it must be an
      injury that consumers themselves could not reasonably have
      avoided.
See also American Financial Services Ass'n v. FTC, 767 F.2d 957,
970-971 (D.C. Cir. 1985), cert. denied, 475 U.S. 1011 (1986).
   /2/ The court issued its opinion on April 19, 1988, and issued a
corrected opinion on July 15, 1988.  The court's opinion of July 15,
1988, is the one summarized below.
   /3/ Commission orders do not become final until all judicial review
is complete (see 15 U.S.C. 45(g)).
   /4/ The Commission's 1964 test for unfairness specified that a
practice must meet at least one (but not necessarily all) of the three
criteria.  Consumer injury was one of the criteria, but the test as
then formulated did not explicitly require a showing that the injury
was unavoidable, or explicitly require a weighing of the
countervailing benefits to competition.  It was to allay concern about
the potential breadth of the 1964 standard that the Commission
formulated the narrower test that was applied in this case.  See
American Financial Services Ass'n v. FTC, 767 F.2d at 970-971.
   /5/ Both Houses of Congress, in fact, have passed bills that would
have codified this test, but for reasons unrealted to their
definitions of "unfair acts or practices" those bills did not become
law.  See S. 1078, 99th Cong., 1st Sess. (1985);  131 Cong. Rec. 20765
(1985);  H.R. 2385, 99th Cong., 1st Sess. (1985);  131 Cong. Rec.
H7503 (daily ed. Sept. 17, 1985);  House Passes, With No Fanfare,
FTC's Authorization Bill With Legislative Veto, 49 Antitrust & Trade
Reg. Rep. (BNA), No. 1232, at 483, 485 (Sept. 19, 1985);  S. 677,
100th Cong., 1st Sess. (1987);  133 Cong. Rec. S4795 (daily ed. April
8, 1987);  H.R. 2897, 100th Cong., 1st Sess. (1987);  133 Cong. Rec.
H8276-H8277 (daily ed. October 7, 1987);  Hill Staffs Agree on Some
Issues in FTC Reauthorization Legislation, 54 Antitrust & Trade Reg.
Rep. (BNA), No. 1372, at 1143-1144 (June 30, 1988).
   /6/ According to petitioner, the Commission "close(d) its eyes"
(Pet. 9) to evidence that means of avoidance were available to
consumers.  In fact, the Commission carefully considered the evidence
(Pet. App. A180-A183).  Insofar as petitioner objects to the uniform
factual conclusions of the Commission and court of appeals on this
point, its request for certiorari contravenes the principle that this
Court "'will intervene only in what ought to be the rare instances
when the (substantial evidence) standard appears to have been
misapprehended or grossly misapplied.'" American Textile Mfrs. Inst.
v. Donovan, 452 U.S. 490, 523 (1981) (quoting Universal Camera Corp.
v. NLRB, 340 U.S. 474, 491 (1951)).
   /7/ Should the Commission wish to make petitioner pay back the more
than $7 million it has previously collected by dishonoring its
contracts or obtain any other relief in the nature of damages, it will
be required, as petitioner acknowledge (Pet. 9-10 n.3), to demonstrate
in a district court action that petitioner's conduct was that "which a
reasonable man would have known under the circumstances was dishonest
or fraudulent" (15 U.S.C. 57b(a)(2)).