We have handled all these cease-and-desist orders in this type of case, but we have not stopped it. We have skimmed the surface. These things are still going on, and when they come to our attention, either on our own initative or by way of a complaint from a member of the public, we start another case. But I feel personally, if it were made a crime, under proper safeguards, there would be no harm, because it is already unlawful, and if it were made a crime, there are a lot of people who would not hesitate to violate a civil statute who might hesitate to violate a criminal statute, and it would thereby strike a more affective blow at a practice already deemed to be illegal. Mr. DOLLIVER. Now, to pursue the discussion further of the enforcement of the statute which you now have under your jurisdiction. Is it the normal practice for your organization, the Federal Trade Commission, to go into a community, and issue a cease-anddesist order against a local merchant, we will say.

Mr. MOREHOUSE. No; not at all.

Mr. DOLLIVER. What is your procedure?

Mr. MOREHOUSE. We tried to strike at the source; at the manufacturer; where it originates; at the person who places the merchandising or gambling device in the hands of others for the flow of goods in interstate commerce.

Mr. DOLLIVER. Can you do that only in interstate commerce or can you do it in intrastate commerce? That is, if a manufacturer in the State of Iowa manufactures these punchboard devices and does not ship them outside of the State, are you in a position to do anything about that?

Mr. MOREHOUSE. No, sir.

Mr. DOLLIVER. It is only when it goes into interstate commerce? Mr. MOREHOUSE. That is right.

Now, the Brewer case, however, did hold-I do not want to have any misunderstanding about that the Brewer case did hold that where the device itself was shipped in interstate commerce without any other merchandise at all, it goes into the State and was used there for the sale and distribution of goods and merchandise intrastate, the Brewer case is authority for holding that that is an unfair method of competition in interstate commerce; the only merchandise having crossed the State line having been the lottery device itself. Mr. DOLLIVER. In other words, you would have jurisdiction and authority in that kind of a case to issue a cease-and-desist order?

Mr. MOREHOUSE. According to the Brewer case we would, sir, and that is still good law so far as I know. Of course, the Commission does not attempt to exercise any jurisdiction except where there is interstate commerce involved.

Mr. DOLLIVER. Now, in most of the States, or in many of the States at least, there is already State legislation involving or prohibiting this kind of activity, namely, punchboards and push cards?

Mr. MOREHOUSE. Yes, sir.

Mr. DOLLIVER. Is that not true?

Mr. MOREHOUSE. I am not prepared to say absolutely. I know that from Mr. Preston's statement the other day that 43 States have laws against these slot machines. It is my understanding from the investigations made by the Commission in connection with the Keppel

case, when that was being investigated, that practically every State, if not all of them, even Nevada, had some kind of antigambling provision either in some law or in their constitution; but I do not know that a majority of the States make it illegal to dispose of and distribute merchandise through the means of punchboards or pull tabs, or other lottery devices in aid of local sale. I doubt whether most of the States have a law against it, or at least that is being enforced as to that.

Mr. DOLLIVER. In other words, the State laws have a criminal application rather than a civil application as to whether such a device is used or not?

Mr. MOREHOUSE. It is not an unfair-trade-practice issue. That is my understanding. In other words, it might be that they would have a law preventing money payments as a result of the use of punchboards or push cards and that would not be applicable to a punchboard that was used to draw trade and give the lucky person a set of dishes, or something like that.

Mr. DOLLIVER. Now the distinction you make hight there illustrates the difference between the law which you undertake to enforce and the local laws.

Mr. MOREHOUSE. That is right.

Mr. DOLLIVER. The local law probably or conceivably would probably provide that that kind of a gambling device could not be used. Mr. MOREHOUSE. Conceivably; yes, sir.

Mr. DOLLIVER. But that is not the kind of a device where it is used for money only which you would undertake to enforce, because that is not in violation of a fair-trade practice.

Mr. MOREHOUSE. That is correct; yes, sir.

Mr. DOLLIVER. I think that is all, Mr. Chairman. Thank you very much, Mr. Morehouse. Your discussion has been very enlightening. Mr. BENNETT. Mr. Chairman.

Mr. BECKWORTH. Mr. Bennett.

Mr. BENNETT. What does the language on page 2 of the bill mean, where it refers to the Federal Trade Commission?

Mr. MOREHOUSE. I take it that that means, Mr. Bennett, that they did not want this bill to be construed as interfering with the kind of work which I have already testified that the Commission has been doing with reference to punchboards, push cards, and other lottery devices used in connection with the sale or distribution of merchandise in interstate commerce. It might be argued that there was something in this bill that did that, and this is put in, as I understand, just to protect the existing jurisdiction of the Commission, as upheld by the courts. That is my understanding.

Mr. BENNETT. That is all, Mr. Chairman.

Mr. ELLSWORTH. Mr. Chairman.

Mr. BECKWORTH. Mr. Ellsworth.

Mr. ELLSWORTH. Mr. Chairman, I have just one question. This is curiosity more than anything else. As to the basis of the Federal Trade Commission's action on these punchboard cases, as I understand, it is based on unfair competition.

Would you mind explaining the nature of unfair competition that a punchboard device produces?

Mr. MOREHOUSE. Not at all. Well, let us assume that there are two merchants competing in the sale of candy: One, for ethical reasons or

just as a matter of training and choice and preference, does not care to dispose of his candies in interstate commerce by means of chance. He wants to put out a high-grade product and sell it as he considers

ethical.

Now he comes in competition with one or more other candy vendors who want to sell usually inferior candy and take this method of merchandising it by chance in some way that is more attractive to most everybody. It has been said here that it is human nature to want to take a chance and to gamble. Naturally that makes it a much more attractive means of purchasing candy. The public, and particularly the children, will come into the store, and they would not think of going to the straight candy counter if there is a chance of gambling a little and maybe getting two for one, if they are lucky. There is one merchant in that case that I cited, the Brewer case, where it was stated that the merchant built up his business in 2 years 600 percent by using these methods, and the Commission considered that that was an unfair method of competition, that it was unsound for a man to be compelled to merchandise in that way if he did not want to, but he is really going to have to or be driven out of business, if he is subjected to that kind of competition.

Mr. ELLSWORTH. The point that I am wondering about-
Mr. MOREHOUSE (continuing). At least, he may be.

Mr. ELLSWORTH. The point that I am wondering about is this. Of course I do not think much of that punchboard way of selling merchandise, but does not anyone have a free choice to enter that type of business if he wants to? In other words, what is unfair about that sort of thing, in our system?

Mr. MOREHOUSE. Well, I might say this, Mr. Ellsworth, that the courts seemed to feel that it was unfair, because it was merchandising in a manner that was contrary to and in contravention of the general public policy of the United States, and the general policy of most of the States. Of course anybody can do it, if they want to, but an honest American businessman ought not to be forced to have to take his choice as to whether he would be satisfied with a little of the business or maybe driven out of business eventually, or adopt such methods, if he does not want to do so and, therefore, it is an unfair way of competing in my opinion, and I think the courts also are of the same opinion, and I know that the Commission is.

Mr. WOLVERTON. Mr. Chairman.

Mr. BECKWORTH. Mr. Wolverton.

Mr. WOLVERTON. Suppose that the punchboard is made in a single State and sold solely in that State, and it is only used in that State as a means of merchandising. Would your Commission have jurisdiction?

Mr. MOREHOUSE. No, sir.

Mr. WOLVERTON. What element then brings it within your jurisdiction?

Mr. MOREHOUSE. Two elements: interstate commerce, and merchandising.

Mr. WOLVERTON. What would the facts have to be to give you jurisdiction from the standpoint of interstate commerce?

Mr. MOREHOUSE. It would have to be a device which is intended and calculated to be used in connection with the sale and distribution of

merchandise and the device would have to be shipped in interstate commerce and put into use for that purpose.

Mr. WOLVERTON. What do you mean by merchandising?

Mr. MOREHOUSE. Dealing in commodities of one sort or another. The Federal Trade Commission deals with some intangible commodities, and we get into a little difficult field there, but mostly tangible commodities ordinarily traded in; things that are bought and sold.

Mr. WOLVERTON. Assuming that there is a case that you desire to proceed on, what does your proof consist of to sustain your cease-anddesist orders?

Mr. MOREHOUSE. Well, since the Wheeler-Lea Act, we are no longer under the necessity of proving existence of competition, because the Wheeler-Lea Act eliminated that necessity and we only have to prove an unfair act or practice, and the courts have held that that is an unfair act or practice and so we would simply have to prove that the punch board was sold and shipped in interstate commerce and was so designed that it was reasonably probable that that was its intended use and its actual use was in connection with the sale or distribution of merchandise.

Mr. WOLVERTON. Then you would prove its manufacture in one State and then you would prove that it went over the State lines. Mr. MOREHOUSE. Yes, sir.

Mr. WOLVERTON. And would you prove that it had been used for that purpose?

Mr. MOREHOUSE. Yes, sir.

Mr. WOLVERTON. Do you conceive of any difference of proof between that which enables your Commission to act and what would be required if it were a criminal offense?

Mr. MOREHOUSE. Certainly; yes, sir; there would be all of the difference in the world. There would be the same difference as between any civil case and criminal case, one requiring a preponderance of evidence and the other, evidence beyond a reasonable doubt.

Mr. WOLVERTON. Would the question of criminal intent enter into it from the standpoint of the transportation of it from one State to another? Would you have to prove that, or would that be assumed? Mr. MOREHOUSE. Of course, it would have to be proven. I think that the act would have to state that it was knowingly shipped and intended for that purpose.

Mr. WOLVERTON. How would you prove intent?

Mr. MOREHOUSE. Well, I suppose two ways would be helpful. One would be from the nature of the device itself and what it could and could not be used for, what was probably its use, plus the actual use when it reached its destination.

Now, if its use when it reached its destination was generally known and almost universally known, and the device was so constructed that it was obviously intended for the use to which it was actually put, I think that that might satisfy some juries. It would depend upon the jury. They would have to be satisfied, I think, that there was a criminal intent.

Mr. WOLVERTON. I think that this question of intent could be very readily determined by the use to which it is put; but I am assuming that it is manufactured in one State and transported into another State, so that that of itself would be sufficient to prove violation.

Mr. MOREHOUSE. I would think so.

Mr. WOLVERTON. I think that has already become apparent in the drafting of this legislation, but just how you would proceed under it seems to me presents a difficult question.

Mr. MOREHOUSE. It does present a difficult problem; yes, sir.

Mr. WOLVERTON. Especially with respect to the words "knowingly” or “intent.” That is all.

Mr. BECKWORTH. Mr. Morehouse, as I understand it generally, the Federal Trade Commission feels that it might be a good idea to try to prevent the shipping of these punchboards, when they are used incident to merchandising.

Mr. MOREHOUSE. That is right.

Mr. BECKWORTH. It is my understanding that the Justice Department has not recommended in this bill that punchboards be prevented from being shipped in interstate commerce when used for gambling. Would it be your opinion that if we make it illegal to ship punchboards to be used incident to merchandising that it would also be a good idea to prevent punchboards being shipped, which would be used for gambling?

Mr. MOREHOUSE. Certainly, Mr. Beckworth, I only meant to say, so far as the Commission is concerned, our interest is confined to merchandising.

From the gambling standpoint, if I may express my personal opinion, I think if you are going to stop one-armed bandits, and maybe pinball machines-I do not know-and if you did stop them, many of these smaller operators would certainly go into the money punchboard business and you would not have accomplished anything, unless you included them, but that is nothing that the Commission is interested in.

Mr. BECKWORTH. So once we embark on this punchboard road we would have to encompass more than what the Federal Trade Commission has an interest in, doubtless.

Mr. MOREHOUSE. I would think so; yes, sir; and, as I understand it, the bill as presently drawn would not include anything about punch

boards.

Mr. BECKWORTH. That would mean a general enlargement of the legislation's purview, in your opinion.

Mr. MOREHOUSE. Yes, sir.

Mr. BECKWORTH. Are there any further questions?

Mr. HESELTON. Mr. Chairman.

Mr. BECKWORTH. Mr. Heselton.

Mr. HESELTON. I would like to ask just two questions about these cases. Was the Brewer case carried to the Supreme Court?

Mr. MOREHOUSE. No, sir.

Mr. HESELTON. Has there been any change in the position of the Supreme Court subsequent to the Bunte Bros.' case?

Mr. MOREHOUSE. The Bunte Bros.' case is still good law, but is distinguishable from the Brewer case-involves a different proposition. In other words, they are not the same.

In the Bunte case, if you remember, the proposition was whether or not they were going to construe the Federal Trade Commission Act as though it read "in or affecting commerce" and the Supreme Court said no, that if it was to be construed that way, Congress would have to make it read that way.