In the Matter of the Complaint Against CLAUD KOCH d/b/a B.K. ENTERPRISES, INC., and FUN AND GAMES, P. O. Box 341028 at Memphis, TN 38184-1028 P.S. Docket No. 22/140 November 6, 1987 James A. Cohen Judicial Officer APPEARANCES FOR COMPLAINANT: H. Richard Hefner, Esq. K. F. Innes, Esq. Consumer Protection Division Law Department United States Postal Service Washington, DC 20260-1144 APPEARANCE FOR RESPONDENT: Claud A. Koch 1687 Shelby Oaks Drive North Memphis, TN 38184-1028
On September 28, 1987, Complainant filed a Petition alleging that Respondent has breached the terms of an Agreement Containing Consent Order to Cease and Desist (hereafter the Agreement) executed on October 25, 1985. Complainant contends that Claud Koch d/b/a Classica International, Inc., has resumed making false representations and conducting a lottery activity which, in the Agreement, he agreed to discontinue. According to Complainant the name and addresses to which Respondent is currently seeking remittances and against which a false representation order is requested to be issued are Classica International, Inc., at P. O. Box 341028, Memphis, TN 38184-1028 and 1687 Shelby Oaks Drive North, Memphis, TN 38134-7401.
On October 1, 1987, an Interim Detention Order as provided for in paragraph 6 of the Agreement was issued against Respondent. The Interim Detention Order granted Respondent a period of ten days in which to file a reply to the Petition. By letter dated October 9, 1987, a timely reply was filed on behalf of Respondent. This reply was later supplemented by letters dated October 12, 16, and 26, 1987, including attachments, all of which have been fully considered.
By the terms of the Agreement, Respondent agreed that:
"3. The use of the promotional activities and representations challenged in the complaint for obtaining money or property through the mails has been and will be permanently discontinued and abandoned, and will not hereafter be resumed by any means, directly or indirectly, under any name or names, or through any corporate or other device.
4. Respondents agree to promptly return to senders any and all remittances which include a sum for membership in the multi-level distributorship program. [We have no membership fee requirement and never did.] The provisions of this paragraph do not apply to remittances solely for the purchase of the product. [Or other means and methods of distribution of this product such as direct sales, advertising etc.]" (Agreement, paras. 3 and 4) Bracketed portions of paragraph 4 were penned in by Respondent.
The representations challenged in the Complaint which Respondent agreed to discontinue, either directly or indirectly, in substance and effect, were:
"(a) Persons sending the required remittance through the mails to Respondents will typically earn large sums of money in a relatively short period of time.
(b) The amount of income earned by the participant is limited only by the time and effort invested.
(c) Persons participating in Respondents' program may reasonably anticipate that persons whom they recruit will successfully recruit additional persons without breaking the chain of progression." (Comp., para. 4)
The promotional activities which Respondent agreed to discontinue were described in the Complaint as a multi-level distributorship program constituting a lottery or scheme for the distribution of money or property by chance. (Comp. para. 11)
Respondent, as president of Classica International, Inc., receives mail at both 1687 Shelby Oaks Drive North, Suites 1-4, Memphis, TN 38134, and P. O. Box 341028, Memphis, TN 38184-1028 (Petition (hereafter Pet.) Exh. 1-4). Subsequent to the execution of the Agreement, Respondent mailed out materials inviting recipients to participate in a multi-level marketing program. A participant in the marketing program receives commissions, "percentages," or "bonuses" from sales of the product made directly by him and from sales made by purchaser-distributors solicited by him, as well as subsequent purchaser-distributors in his chain through 10 levels (Pet. Exh. 2).
The materials state that the "cost to enter the plan is $38," which purportedly represents $30 for the product, $3 for freight, and $5 for "bookkeeping and computer fee." Although marketing brochures are provided with the product, a participant may also purchase a package of 10 additional brochures for $2.50. The product order form instructs the participant to mail or bring the remittance to Respondent. Each month thereafter in order to be able to receive downline sales commissions, a participant must continue to purchase products aggregating $30 (plus $3 freight) or have 17 representatives in his downline (Pet. Exh. 2).
The solicitations present examples showing monthly income from bonuses ranging up to $97,977 which can be earned through the recruitment of purchaser-distributors through the first six levels. The solicitation indicates that even higher levels of income will be earned when levels 7-10 are reached ( Id. ).
I. False Representation Issue
Complainant alleges in the Petition that Respondent has breached the terms of the Agreement by making the representations which he agreed to discontinue. Respondent argues that he does not falsely represent his current promotion.
The determinative issue in this proceeding is whether Respondent has resumed the representations or activities which he agreed to discontinue. Raymond Milo , P.S. Docket No. 12/168 (P.S.D. Dec. 31, 1981), and cases cited therein; see also , Hampartzoon Bazarian , P.S. Docket No. 20/103 (P.S.D. March 17, 1986). In determining whether Respondent has resumed making the representations he agreed to discontinue, the current advertising is to be considered in its totality and the impression it would most probably create in ordinary minds. Donaldson v. Read Magazine, Inc. , 333 U.S. 178 (1948); Vibra-Brush Corp. v. Schaffer , 152 F. Supp. 461 (S.D.N.Y. 1957); Borg-Johnson Electronics, Inc. v. Christenberry , 169 F. Supp. 746 (S.D.N.Y. 1959).
Considering Respondent's advertising of his multi-level marketing program in this light, it is concluded that Respondent has resumed making the representations he agreed to discontinue. The essence of the representation alleged in paragraph 4(a) of the Complaint is that large sums of money will typically be earned in a relatively short period of time. This representation is made in Respondent's brochure, which states, e.g. , "how easy and quickly you can start earning good money" and that a participant can become "rich" by participating in the plan (Pet. Exh. 2). Moreover, the examples of the monthly income multi-level matrix through various levels clearly represent that participants will typically earn large sums in a short period of time.
Likewise, Respondent's solicitations implicitly represent, as alleged in paragraph 4(b) of the Complaint, that income will be limited only by the amount of time and effort expended. The overall message is that one can become wealthy with the plan regardless of one's experience, education or background, and that "the more effort . . . that you put into this plan, the more money you will earn" (Pet. Exh. 2).
The new materials also make the representation alleged in Complaint paragraph 4(c), that participants may reasonably anticipate that persons whom they recruit will successfully recruit additional persons without breaking the chain of progression. The solicitation contains a chart stating that "as one's organization grows, so does your income" and showing that one can have 46,656 representatives at the sixth level of one's downline. Similarly, Respondent's newsletter states "[y]our organization should double every month. If you presently have only four people and double every month, in 12 months you will have 18,382 in your downline" ( Id .). Participants are also told that they can create a "lifetime income" for each member of their family who enters the program.
Thus, as alleged in the Petition, Respondent continues to make the representations which he agreed to discontinue.
II. Lottery Charge
Complainant contends that Respondent's current multi-level distributorship program is a lottery which Respondent, under the terms of the Agreement, agreed to discontinue. Respondent denies that his current promotion constitutes a lottery, arguing that he requires no membership fee and does not solicit participants. In addition, he argues that there is no chance involved in the program.
As with the false representation issue, the determinative question is whether Respondent has resumed the activity which he agreed to discontinue. In the Agreement and accompanying Cease and Desist Order, Respondent agreed to discontinue engaging in a multi-level distributorship program constituting a lottery. The exhibits attached to the Petition containing the materials which Respondent uses to promote his current program establish that Respondent has resumed engaging in a multi-level distributorship program which does not differ in any material respect from the program which was the subject of the original Complaint. Moreover, Respondent's current program, like his previous program, constitutes a lottery because it contains the elements of prize, chance and consideration. Brooklyn Daily Eagle v. Voorhies , 181 F. 579, 581 (E.D.N.Y. 1910); Opportunity Research Corp ., P.S. Docket No. 24/131 (P.S.D. Oct. 30, 1987); Middle-Class American, Inc. , P.S. Docket No. 16/65 (P.S.D. March 26, 1984); Collegedale Diversified Enterprises, Inc. , P.S. Docket No. 14/29 (P.S.D. Oct. 25, 1983); Tenpen Sales Corp. , P.O.D. Docket No. 2/35 (D.D. May 10, 1961).
Participants in Respondent's program furnish a consideration of $38.00 initially, plus $33 each month thereafter, for a product plus the chance to win prizes in the form of commissions. The amount of commissions that a participant will receive is dependent upon chance, because a participant's success depends upon the efforts of future distributors over whom he has little or no control. See Opportunity Research Corp., supra ; Middle-Class American, Inc. , supra ; Collegedale Diversified Enterprises, Inc. , supra . Participants are specifically encouraged to solicit and sponsor new members in order to expand their downline financial base. Such facts show that Respondent's current promotion is, in fact, a continuation of a multi-level distributorship program constituting a lottery activity which he agreed to discontinue.
The fact that Respondent may have recently changed his promotional literature does not relieve him from the consequences of his violation of the terms of the Agreement. Otherwise Respondent would be free to resume the promotion which is the subject of the Petition and frustrate the intent and purpose of the Agreement and 39 U.S.C. 3005. See , CM/NA , P.S. Docket No. 20/33 (P.S.D. Aug. 29, 1986).
III. Miscellaneous Arguments
Respondent argues that the detention of his mail violates his constitutional rights and the rights of the participants in his program. This argument has no merit. The Interim Detention Order was issued in accordance with paragraph 6(c) of the Agreement, which authorized the issuance of such Order based on a prima facie showing that the Agreement has been breached. Such a showing was made in this case. Orders of the type described in 39 U.S.C. 3005(a)(1) and (2) are also authorized by paragraph 6 of the Agreement which Respondent signed, and therefore do not violate Respondent's constitutional rights. In addition, the authority of the Postal Service and the statutory scheme for issuance of a False Representation Order where either false representations or a lottery has been found have also been held to be constitutional. E.g. , Public Clearing House v. Coyne , 194 U.S. 497 (1904); Donaldson v. Read Magazine, Inc. , supra. , United States Postal Service v. Athena Products, Ltd. , 654 F.2d 362 (5th Cir. 1981), cert. denied , 456 U.S. 915.
Respondent claims that he signed the Agreement because he could not afford an attorney. However, lack of legal advice, even if it is based on an inability to afford counsel, does not invalidate the terms of the Agreement.
Respondent further claims that the Agreement does not cover the activities of Classica International, Inc., since that corporation was not a party to the Agreement. However, under the terms of the Agreement, Respondent agreed to discontinue and not resume the promotional activities and representations challenged in the Complaint using any name or names, or through any corporate or other device (Agreement, para. 3). Since Respondent is president of Classica International, Inc., that corporation is clearly bound by the terms of the Agreement.
Respondent also argues that while the Interim Detention Order is based on the terms of the Agreement, the Petition addresses a violation of 39 U.S.C. 3005. The Petition alleges that Respondent has violated the terms of the Agreement by resuming the activities which he agreed to discontinue. References are appropriately made to 3005 because the proceeding was originally initiated and settled under that statutory provision, the activities which are the subject of the Agreement are those proscribed by that provision and the final Orders authorized to be issued are "of the type described in 39 U.S.C. 3005(a)(1) and (2)" (Agreement para. 6). Thus, there is no inconsistency between the Order issued and the allegations of the Petition.
Respondent further argues that he is being discriminated against because his program is no different from Avon, Amway, or other such programs. However, those programs are not the subject of this proceeding. Moreover, the fact that others may be engaged in similar activities does not serve as a defense to the allegations in this proceeding. Nutrition Headquarters, Inc. , P.S. Docket No. 12/156 (P.S.D. Aug. 31, 1987) and cases cited therein.
Finally, Respondent makes other arguments which were considered, but do not relate to the dispositive issue in this proceeding. For example, Respondent alleges that he was mistreated by local postal officials, that all of his mail was being detained, and that some of the mail had been improperly opened. Respondent's allegation that all of his mail is being detained has been resolved.1/ Respondent's other arguments, mistreatment by local postal officials and improperly opened mail 2/ are not matters to be considered in this proceeding.
Respondent has breached the terms of the Agreement in the manner alleged in the Petition. Accordingly, pursuant to the terms of that Agreement, an Order of the type described in 39 U.S.C. 3005(a) is being issued with this Decision.
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