Hair v. United States, 240 F. 333 (7th Cir. 1917)

An indictment charging defendants with using the mails in the execution of an alleged scheme and artifice to defraud, after alleging their establishment of agencies for the sale of fire extinguishers, averred the falsity of defendants’ representations that the fire extinguisher tubes were worth the $2 paid for them by agents and would readily sell at an advance, as well as representations that the extinguishers would easily put out all kinds of fires. The article was made by a secret process. Held that, in such ease¿ the efficiency of the extinguisher was in issue, independent of its bearing on its value and salability, though obviously affectp. 334ing those questions; hence evidence that the extinguisher was practicable and. put out fires was admissible.

In 1909 defendants conceived the plan of marketing the product througn establishing agencies ; the agent to purchase and pay for an agreed quantity of the tubes at $2 per tube, and to sell them at $3. Advertisements were inserted in newspapers stating in substance that agents were wanted in an established business to handle an easy selling article, g.nd that a good salary would be paid, together with commissions and expenses, and stating that the applicant would have to invest from $500 to $1,000. In this manner, and. p. 335through solicitors who were sent out to place agencies, during the years 1909, and 1910, about 80 of such agents were secured, most of whom paid to the company sums from $100 to $1,000' each, receiving goods to represent the amount so paid at 'agreed prices, and entering into contracts in writing with the defendants’ company like those set out in the indictment and shown in evidence, the salient provisions of which are that the corporation engages the general sales agent to conduct the business of the corporation in the prescribed locality for the time fixed, at a stated monthly salary and 5 per cent, commission on sales in consideration of the agent’s performance a.nd fulfillment of his part of the agreement; the corporation to pay for rent of office, stationery, circulars, and the like; to instruct the agent in the merits and use of the dry extinguisher, and other materials and apparatus the corporation manufactures or deals in; to sell to agent the dry extinguishers at $24, cash per doz. and at expiration of term and fulfillment of the agreement to repurchase from agent at price charged, such as remain on his hands; the agent to devote all his time and efforts to the business, and to carry a stock of the extinguishers of not less than a stipulated amount at said price; to make weekly and monthly reports to the corporation; to make sales of an average stated monthly amount as the minimum of business to fulfill the agent’s contract; corporation reserves right to cancel contract at end of six months if sales are below the minimum, and, in case of such cancellation, to repurchase stock on hand at prices charged; at end of each month agent shall deduct from money collected his own remuheration, commission, and authorized expenses, and remit balance to company, which shall replace stock sold by agent, and, in case the minimum business required shall not be sufficient to pay the expenses of the office and cost of replacing stock, the corporation will each month make good the deficiency. In the procurement of the contracts, and the payment of the money which was paid by the agents to the company, the mails were employed as stated in the indictment.

[ 1 ] The defendants were charged with falsely representing that the product was worth what the agents paid for it, viz. $2 per tube, and that it would readily sell at $3, and that it would easily extinguish all p. 336kinds of fires however fierce and savage, when in fact the indictment charges the product was not worth to exceed $1 per tube and would not readily sell at $3 and would not put out fierce or savage fires. The article was made by a secret process, and even if the evidence revealed its ingredients, which it does not, its commercial value would not be determinable alone from the actual cost of such ingredients plus cost of manufacture. Its utility would be an important element bearing on its money value as a manufactured article. If useless and ineffective, it would doubtless be worth commercially less than the cost of the ingredients, since by thus compounding them into a useless product the original value of the ingredients would be impaired, if not wholly lost. If, on the other hand, the product was highly efficient, this fact would tend strongly' to have an opposite effect on its money value. Evidence of efficiency was competent as bearing on the value, desirability, and salability of the product. Under this charge of fraudulently representing the product to be capable of instantly extinguishing all kinds of fires, however fierce and savage, at least one of the government’s witnesses (Zieman) testified that in his experiments only once in a while could he put out a fire, and that he had complained that tire powder would not work. The efficiency of the product to put out fires was an issue, independent of its bearing on the valpe and salability, on which evidence of witnesses as to their experience with it, and as to the character and kind of fires which it would extinguish, was clearly admissible.