518 F.2d 33.

  
       GER-RO-MAR, INC., a corporation d/b/a Symbra'Ette, and Carl G.
Simonsen,
            Individually and as President of Ger-Ro-Mar, Inc.,
Petitioners,
                                         v.
                        FEDERAL TRADE COMMISSION, Respondent.
                              No. 1066, Docket 74-2343.
                           United States Court of Appeals,
                                   Second Circuit.
                                Argued May 19, 1975.
                               Decided June 16, 1975.
 Jack M. Wiseman, San Jose, Cal. (Clifton H. Stannage, New York City, of
counsel), for petitioners.

   W. Baldwin Ogden, Atty., Federal Trade Commission, Washington, D.C.
(Calvin J. Collier, Gen. Counsel, Gerald Harwood, Asst. Gen. Counsel), for
respondent.
  
   Before MULLIGAN, TIMBERS and GURFEIN, Circuit Judges.
  
   MULLIGAN, Circuit Judge:

   This is a petition to review a cease and desist order issued by the
Federal Trade Commission against Ger-Ro-Mar, Inc., a California
corporation doing business as Symbra'Ette, Inc., and Carl G. Simonsen,
individually and as President of the said corporation.
  
   Petitioners operate a family business which was organized in 1963 and
is engaged in the manufacture and sale of brassieres, girdles, swimwear
and lingerie.  Its sales have grown from $36,832.91 in 1965 to
$2,054,250.62 in 1969 but dropped to $1,195,465.75 in 1972.  The FTC
issued a complaint on November 24, 1971 which alleged that the
petitioners' marketing system constituted unfair and deceptive acts and
practices and unfair methods of competition in violation of section 5 of
the Federal Trade Commission Act, 15 U.S.C. s 45.[FN1]  The FTC complaint
contained five counts.  Count I charged that the petitioners'
merchandising program was in the nature of a lottery; Count II charged
that the program, which depended upon the ability of distributors to
recruit others, was an unfair method of competition as well as an unfair
and deceptive act and practice in commerce; Count III charged that the
representations and promotional materials of the petitioners were false,
misleading and deceptive; Count IV charged unlawful vertical price fixing;
and Count V claimed unlawful restrictions upon distributor resales.
  
    FN1. "(a)(1) Unfair methods of competition in commerce, and unfair or
deceptive acts or practices in commerce, are declared unlawful.
    "(6) The Commission is empowered and directed to prevent persons,
partnerships, or corporations, except banks, common carriers subject to
the Acts to regulate commerce, air carriers and foreign air carriers
subject to the Federal Aviation Act of 1958, and persons, partnerships, or
corporations insofar as they are subject to the Packers and Stockyards
Act, 1921, as amended, except as provided in section 406(b) of said Act,
from using unfair methods of competition in commerce and unfair or
deceptive acts or practices in commerce."
  
   After an answer and a hearing an administrative law judge rendered an
Initial Decision dated October 11, 1973 which upheld the charges of
violations contained in all five counts.  The Commission on July 23, 1974
issued a Final Order and Opinion which reversed the administrative judge
on the lottery count (Count I) and affirmed him on all the other counts.
A motion for reconsideration filed by petitioners was denied by the
Commission on October 1, 1974.  This petition for review followed.

...

                                         III

   The substantial questions before us are whether or not the Symbra'Ette
merchandising scheme is an unfair method of competition and an unfair and
deceptive practice, and the related question of whether or not
petitioners' promotion of the plan was inherently deceptive.  It is
necessary at the outset to note that March 16, 1973 Stipulation of Facts
(Para. 9) stated:

  There is no contention that any deception, fraud, unethical practice,
misrepresentation, or improper conduct is present in the presentation of
the products or their prices to customers.

   Therefore, according to the theory of the FTC complaint, it is not the
purchaser, actual or prospective, of Symbra'Ette garments who is being
gulled or put upon but rather the prospective distributor and his
recruits.  Since the Symbra'Ette merchandising scheme is elaborate, we
must set it forth, unfortunately in some detail, to understand the
Commission's misgivings.

                                 The Marketing Plan

   Petitioners, through their multi-level marketing program, seek to
enlist the services of men and women throughout the country to sell their
products at wholesale and retail, requiring distributors to buy an
inventory of varying size before they may participate in the program.  A
potential distributor (also called a "consultant") may enter at one of
three levels ("Key Distributor," "Senior Key," or "Supervisor"), and
eventually work up to a fourth and fifth level (District Manager and
Regional Manager).  Entry into the program is effected by means of a
non-refundable purchase of merchandise from the company or one of its
distributors.  All distributors except the lowest (Key) purchase directly
from the company; a Key Distributor purchases from his sponsor. Initial
purchase requirements for entry into the program are stated in terms of
"Retail Purchase Volume" (RPV), i. e., the volume of merchandise expressed
in terms of its suggested retail price.  The initial purchase requirement
for entry into the program is $300 in RPV for a Key, which at the allowed
discount of 35% amounts to an initial purchase requirement of around $215.

   The initial RPV required for a Senior Key is $1,000, which, at the
allowed discount of 40%, and including literature and sales aids, entails
an initial purchase of around $700.  The initial purchase required of a
Supervisor is around $1,950, resulting from a $3,000 RPV requirement at a
45% discount, plus sales aids.

   A Key Distributor may engage in unlimited recruiting of other
distributors, and advance to the level of Senior Key if his retail
purchase volume and that of his recruits amount to $1,000 in one calendar
month.  Similarly, Senior Keys and Supervisors may rise to higher levels
by achieving the requisite Retail Purchase Volume, through a combination
of their own retail sales and those of their "personal group" (their
recruits and recruits' recruits).

   A Key Distributor's profit is the difference between the prices paid
the Key's sponsor for products, and the prices at which the Key resells.
The profit for consultants at higher levels in the program consists of the
margin on the consultant's own retail sales, a percentage profit on
purchases made by his recruits, and various commissions, overrides, and
other compensation related to the purchase volume of directly and
indirectly sponsored consultants.

   To induce individuals to become consultants, petitioners distributed
various promotional materials which recited the details of the marketing
system, and illustrated, how, both by building a large personal group of
salespeople via recruitment, and by selling at retail, an individual could
earn large sums of money, ranging in the illustrations up to $56,400 per
year for District Managers and $90,600 yearly for Regional Managers.  Of
the Regional Manager position, petitioners' promotional "flip chart"
promised "ANYONE CAN ACHIEVE THIS LEVEL."  According to the Commission,
individuals were induced by these promotional materials, and the prospect
of earning large amounts of money via retailing and recruiting activities,
to purchase the requisite volume of Symbra'Ette products for the level at
which they wished to enter.

                                         IV

   The marketing plan thus described is characterized by the Commission as
inherently unfair and deceptive because it had "the substantial tendency,
capacity, and potential to mislead."  It supposedly caused participants to
invest their money in the hope of realizing income which was impossible
for all to achieve: the laws of geometrical progression would make it
impossible to recruit continually since inevitably a point of saturation
would be reached which would defeat the plan and thwart the ambitions of
those who had been promised profits.

   It is unquestioned that under its own rules (Rule 3.43(a), Rules of
Practice of the Federal Trade Commission, 16 C.F.R. s 3.43(a) (1974)) and
pertinent cases (e. g., Montgomery Ward & Co. v. FTC, 379 F.2d 666, 670
(7th Cir. 1967); Carter Products, Inc. v. FTC, 268 F.2d 461, 487 (9th
Cir.), cert. denied, 361 U.S. 884, 80 S.Ct. 155, 4 L.Ed.2d 120 (1959)),
the Commission has the burden of establishing a section 5 violation.
Petitioners urge that there is no showing of any actual deception or
actual injury.  The only witness produced by the Commission did not
testify that he was misled or deceived and in fact testified that he and
his wife had profited by the distributorship.  However, it is settled that
the Commission need not show actual deception or actual damage; rather, a
business method having only the capacity to deceive can violate section 5.
E. g., FTC v. Algoma Lumber Co., 291 U.S. 67, 81, 54 S.Ct. 315, 78 L.Ed.
655 (1934); Charles of the Ritz Distributors Corp. v. FTC, 143 F.2d 676,
680 (2d Cir. 1944).  The theory upon which the Commission proceeds, then,
is that the plan had the capacity and potential for deception.  The
question before us becomes whether or not the finding of potential
deception is supported by substantial evidence in the record.  See
Universal Camera Corp. v. N.L.R.B., 340 U.S. 474, 487-88, 71 S.Ct. 456, 95
L.Ed. 456 (1951); cf. FTC v. Colgate-Palmolive Co., 380 U.S. 374, 385, 85
S.Ct. 1035, 13 L.Ed.2d 306 (1965).
  
    FN2. The Commission's witness testified that, during the first year of
their Symbra'Ette business, his wife's profit on the sale of merchandise
to ultimate consumers was approximately $1,500; he did so well he
reordered petitioners' merchandise over 50 times, although much of their
merchandise was sold to recruits.
  
   The sole evidence to support the Commission's holding that the plan is
inherently unfair and deceptive is a mathematical formula which shows that
if each participant in the plan recruited only five new recruits each
month and each of those in turn recruited five additional recruits in the
following month, and this process were allowed to continue, at the end of
only 12 months the number of participants would exceed 244 million,
including presumably the entire staff of the FTC.  The Commission
concludes that this, in effect, is the impossible dream and that the siren
song of Symbra'Ette must be stilled.  We find no flaw in the mathematics
or the extrapolation and agree that the prospect of a quarter of a billion
brassiere and girdle hawkers is not only impossible but frightening to
contemplate, particularly since it is in excess of the present population
of the Nation, only about half of whom hopefully are prospective lingerie
consumers.  However, we live in a real world and not fantasyland.
  
    FN3. For the mathematically curious, the formula for calculating the
number of participants at any level "n" is n$x i, where "x" is the number
of recruits per participant per level, and "i" is the level.  Because of
the exponential function, the number of recruits would, in theory at
least, expand quite rapidly.  For example, to use the Commission's
hypothetical figures of 5 for x  (the number of recruits per participant
per level) and 12 for i (the number of levels), the formula becomes n$5
12, or 244,140,625.
  

[remainder of decision omitted]