In the Matter of the Complaint Against PAUL W. SCHUETTE and SUCCESS DYNAMICS, INC., 2633 State Route 59, Suite E, Ravenna, OH 44266-1645 and NWA c/o ADD VENTURER REPORT , P. O. Box 3134, Kent, OH 44240-8134 and SUCCESS DYNAMICS and NWA and NEW CONCEPTS, P. O. Box 785, Kent, OH 44240-0016 P.S. Docket No. 29/117 06/28/88 Grant, Quentin E. Chief Administrative Law Judge APPEARANCES FOR COMPLAINANT: Geoffrey Drucker, Esq. W. Gary Claytor, Esq. Consumer Protection Division Law Department U. S. Postal Service Washington, DC 20260-1112 APPEARANCE FOR RESPONDENTS: Paul W. Schuette, Pro Se 2633 State Route 59 Suite E Ravenna, OH 44266-1684
In a complaint filed on February 11, 1988, by the General Counsel of the Postal Service, Respondents are alleged to be in violation of the lottery provisions of 39 U.S.C. 3005 with respect to four multi-level marketing promotions. Remedial orders under this statute are requested.
Respondents admit the conduct of the promotions and the solicitation of remittances through the mails in connection therewith but deny that the multi-level marketing operations constitute lotteries or schemes for the distribution of money by chance in violation of the statute. As an affirmative defense, Respondents contend that since the Postal Service allows the operation of similar enterprises, the remedial orders sought against Respondents are discriminatory.
A hearing was held on March 15, 1988, in Washington, DC. Complainant introduced seven exhibits in evidence and rested. Respondent Paul W. Schuette presented the Respondents' case and was their sole witness. Complainant has filed proposed findings of fact and conclusions of law and both sides have filed written argument all of which has been considered in arriving at this initial decision. To the extent indicated they have been adopted. Otherwise, they have been rejected as irrelevant or contrary to the evidence.
FINDINGS OF FACT
General
1. Respondent Success Dynamics, Inc., is a corporation organized and doing business under the laws of the State of Ohio. (Answer 2; Tr. 31).
2. Respondent Paul W. Schuette is the president and principal owner of Success Dynamics, Inc. (Answer 2; Tr. 31).
3. Respondents NWA, Success Dynamics and New Concepts are trade names employed by Respondents Paul W. Schuette and Success Dynamics, Inc., in conducting the promotions involved in this proceeding (Answer 2; Tr. 31).
4. Respondents, by means of direct mail circulars highlighting multi-level sales opportunities, invite participation in the programs involved in these promotions and solicit remittances of money or property through the mail by mail to NWA c/o Add Venturer Report, P. O. Box 3134, Kent, OH 44240 and to Success Dynamics, NWA or New Concepts, P. O. Box 785, Kent, OH 44240 (CX-1, 2, 4, 5, 6, 7; Answer 6, 12, 18, 24; Tr. 31-32).
National Networking Association
(Count I)
5. Respondents' direct mail circular for the National Networking Association (NWA) solicits recipients, for a membership fee of $25 (formerly $12), to become members of the Coast to Coast Legal Referral Network through which they can receive legal services at discounts. The circular also offers the opportunity to become a distributor of the plan in a 4-level (formerly 8-level) multi-level marketing network, earning commissions of $5.00 per sale at the first level, plus a $4.00 override commission on second-level sales, $3.00 on third level, and $2.00 on the fourth level of the downline plus a bonus of $2.00 on the participant's most productive level. The circular states that there is an enormous market for the program and that participants should soon earn enough to cover their own cost plus a sizeable supplementary income as the downline expands (CX-1, 2).
6. The order form for membership provides space for a checkmark indicating enclosure of $25 for a one year membership and another space for checking election to participate in the NWA marketing plan. The order form states "there is no charge for this right to become a distributor" (CX-2, p. 2). Respondent Schuette acknowledged in testimony, however, that in most cases a person would have to become a member of NWA in order to become a distributor. The exceptions were people to whom Respondents gave free NWA memberships because they had paid for membership in another of Respondents' programs, Add Venturer Report, terminated by the Postal Service as a lottery (RX-A; Tr. 35-36).
7. Respondent Schuette testified that he reduced the number of levels in the marketing program from 8 to 4 because he felt the 8 level program raised a serious question as to the degree of control and training a distributor could exercise over his downline and believed that with 4 levels sufficient control could be achieved to avoid attack by the Postal Service as involving chance (Tr. 21).
8. Respondent Schuette, referred on cross-examination to the details of the opportunity for distributorship of the legal referral program described in its literature (CX-3), admitted that a distributor cannot control participants on his third level by telling them when, how often and how many circulars to mail, but can suggest, aid them, and encourage them (Tr. 37, 38). He also acknowledged that the amount of commissions a distributor can make depends on how many people he is able to recruit into the program, how many they are able to recruit and so on through 4 levels and that the degree of control achievable beyond the first level depends on how actively a distributor trains and encourages the people to whom he has sold the program (Tr. 39).
9. The principle of all the programs involved in this proceeding is the multiplying effect, or geometric progression, of recruitment from one level to another, similar to a chain letter (Tr. 41). Examples of possible matrixes set forth in Respondents' literature to potential distributors show anywhere from 81 to 20,736 distributors on a participant's fourth level (CX-3).
Stop Smoking
Count II)
10. Respondents' direct mail circular for their Stop Smoking program solicits recipients to remit $17.95 (formerly $14.95), plus shipping and handling, for a cassette tape containing the program. The circular prominently offers purchasers of the program, at no additional charge, the opportunity to engage in a four-level multi-level income opportunity in which participants receive commission by distributing copies of the circular to others who are ready to quit smoking (CX-4, 5). The commissions offered are $2.00 on each order Success Dynamics receives as a direct result of a distributor's efforts plus $2.00 on any orders received from his downline distributors and a bonus of $3.00 on each order received during each calendar quarter from those in the distributor's most productive level for that quarter. The circular states that these commissions and bonuses could build into very substantial earnings. It gives as an example a 12 x 12 x 12 x 12 matrix, or network, producing 22,620 orders and a theoretical income of more than $100,000 to the distributor at the top.
The order form contains a full refund offer exercisable within 30 days.
Doorway to Success
Count III
11. Respondents' "Doorway to Success" circular (CX-6) solicits recipients to remit $12.00 for an audio cassette program called "Doorway to Success" and the opportunity to market other audio cassettes and programs of Success Dynamics, Inc. in a multi-level dealership program. The circular says, "your dealership is free when you purchase one cassette from us at the $12 wholesale price... You can make a good profit from your own retail and mail order sales but you can earn greater profits, plus leadership bonuses, if you build a multi-level sales team by recruiting other dealers."
12. The circular explains the program as follows:
To qualify for leadership bonuses, you must have purchased one or more cassettes for resale, and have a minimum of three personally sponsored dealers who have each purchased one or more cassettes for resale. As soon as we receive their three paid orders we will send you a $15 cash bonus. At that point you will already have recovered your $12 investment plus a $3 profit. Three orders is all it takes to put yourself into a profit position in this program]
Each of the three personally sponsored dealers will then be encouraged to sponsor three dealers under them (3x3=9). Those nine dealers become your second downline level. This gives you a sales team of 12 dealers, all of whom will be working to help you build a successful business.
When you have a total of twelve dealers in the first and second levels of your downline, who have each purchased one or more cassettes for resale, we will send you a bonus of another $17.95 cassette, called "Abundant Life", and we will pay your way ($40) into a program which we call "Partners in Prosperity." That program entitles you to receive, and have resale rights for, the following ten reports:
1. Your Power to Become Rich.
2. A "Master Plan" for Success
3. Your Subconscious Goal Power
4. Learn to Use "Picture Power"
5. Establish a "Prosperity Bank" Account
6. Your Vital "Self-Image"
7. Positive Thinking for Better Health
8. Developing Creative Imagination
9. Mind Conditioners for Attracting Money
10. Forming a "Master Mind" Group
These reports can be worth thousands of dollars to anyone who uses the information they contain. They will also be sold by us to the dealers in your downline, for your account.
As each dealer in your downline qualifies for membership in Partners in Prosperity, we will sell one of the ten reports to that dealer, on your behalf, for $4 (there are ten reports in the $40 package). We supply and ship that report for you for just $1, leaving you a net profit of $3 for each report we sell for you. We will sell one to each qualifying dealer through ten levels of your downline. As your downline grows so do your profits.
If every dealer sponsors three more dealers, you will have a downline of 88,572 dealers in ten levels, which would give you a net profit of more than a quarter of a million dollars. And if you and others in your downline sponsor more than three, the results could be even better. (If everyone sponsored 4, there would theoretically be more than one million dealers in the ten levels of your downline).
Remember, you don't receive any bonuses or profit-sharing until you have personally sponsored three or more dealers. This is intended to motivate every dealer to work at sponsoring until they succeed in bringing at least three more dealers into the program, and to work with those three to help them do the same. It is essential to your prosperity that those in your downline do their part to keep it growing at every level. If everyone does their part, everyone will prosper. We will all become PARTNERS IN PROSPERITY.
13. As Respondent Schuette explained in testimony, a dealer, by recruiting 12 people in the first and second levels of his downline in "Doorway to Success", earns his way into the "Partners in Prosperity" program which involves 10 levels from which he can derive not commissions but a share of the profits of sales made by Success Dynamics (Tr. 46-48).
Partners in Prosperity
Count IV
14. Respondents' direct mail circular in the Partners in Prosperity program (CX-7) solicits recipients to remit $40.00 for the prosperity package consisting of ten "prosperity reports," two bonus audio cassette programs, and the right to participate in a 10-level multi-level sales program. Participants in that program are encouraged to distribute the same circular, to sponsor three or more people into the program, and to encourage each of them to do the same and so on down to 10 levels.
15. The circular describes the details of the marketing program as follows: In addition, we also provide extensive services, at no charge to you, including a computerized networking system designed to create substantial sales for you with almost no effort on your part. We act as your sales agent, and collect and account for all monies received for you. We'll also send you a complete listing of those to whom we sell the reports for you - a valuable mailing list for any other programs you may be in.
When you join our program you will be assigned your own account number, and you may then reproduce and distribute copies of this circular. We'll send you a camera ready copy with your number listed as seller of Report No. 1. The other sellers will each be moved down one line.
Here's how it can pay off for you. Sponsor three (or more) people into the program, and encourage each of them to do the same. That starts your downline, which hopefully will grow larger at each successive level. Our computer will keep track of your downline as it expands. We will sell Report No. 1 on your behalf to each of those on the first level of your downline, and we will sell Report No. 2 on your behalf to each of those on the second level of your downline, and so on for the ten lessons and ten levels of your downline. We will credit your account with $4 for each sale we make for you. There will be a $1 charge for the cost of each report we supply and mail for you. Your net profit is therefore $3 on each sale.
If you and everyone in your downline each bring three people into the program, it would result in 88,572 customers in the ten levels of your downline. If you and others in your downline sponsor more than three, the results could be dramatic. Here's how it grows if each sponsors four:
First Level 4 Sixth Level 4,096
Second Level 16 Seventh Level 16,384
Third Level 64 Eight Level 65,536
Fourth Level 256 Ninth Level 262,444
Fifth Level 1,024 Tenth Level 1,049,776
Total 1,399,600
These figures are for illustrative purposes only. Actual results will depend on how many members are brought in by you and your downline at each level. We do not guarantee any specific number of sales, but if you work at it the number could be large enough to provide you with a very good income during the next few years.
Whatever the total turns out to be, you can figure your potential income by multiplying that total by $3 (your net profit on each $4 sale). If your customer base reached the total shown in the above example, your net income would be more than four million dollars.
When your profits start to accrue, we'll send you a monthly list of the names and addresses of those to whom the reports have been sold on your behalf during the month, and a check in the amount of $3 for each report sold for you (your net profit). It will be your responsi- bility to report and pay taxes on your income.
DISCUSSION
39 U.S.C. 3005 provides for the issuance of a mail stop order when it is found that:
. . . any person is engaged in conducting a . . . lottery, gift enterprise, or scheme for the distribution of money or of real or personal property, by lottery, chance, or drawing of any kind . . .
The necessary elements of a "lottery" are the furnishing of a consideration, the offering of a prize, and the distribution of the prize by chance. Brooklyn Daily Eagle v. Voorhies, 181 F. 579, 581 (1910); Tenpen Sales Corporation, P.O.D. Docket No. 2/35 (May 10, 1961). Respondents contend that their program contains none of these elements.
(a) Consideration
Respondents argue that Complainant has not proved the element of consideration.
In all four programs, the direct mail circular solicits the payment of a fee or price for a membership or a product and, in conjunction therewith, the member or purchaser is given the opportunity to become a distributor of the program. In three of the programs it is clear that payment of the price of the product is required to acquire the right to become a distributor (Stop Smoking (CX-4); Doorway to Success (CX-6); Partners in Prosperity (CX-7)). The circulars for the legal referral network state that there is no charge for the right to become a distributor but the application form makes it clear that the opportunity is really extended only to those who elect to become members and pay the membership fee (CX-1, 2).
The wording of the circulars would give the ordinary reader the impression that he or she must pay the membership fee or purchase the product in order to become a distributor. The membership fee or purchase price is, therefore, at least in part, consideration for the distributorship opportunity. See Collegedale Diversified Enterprises, Inc., P.S. Docket No. 14/29 (P.S.D. Oct. 25, 1983 at pages 4 & 5 and cases cited therein).
Even if it were found that no part of the remittance solicited by Respondents' circulars was for the right to become a distributor, time and effort required to recruit new members in order to receive commissions would constitute consideration. N.E.S.T., Inc., P.S. Docket No. 14/89 (P.S.D. Aug. 7, 1984 at pages 11 & 12 and cases cited therein).
This conclusion as to the existence of consideration is not changed by the fact that Respondents gave free memberships in the legal referral network (NWA) to members of the terminated Add Venturers Report (FOF 6, supra). The wording of the direct mail circulars relating to the multi-level sales programs must govern this decision.
(b) Prize
It has been held that commissions and bonuses offered to participants in a multi-level marketing program constitute the distribution of a prize (N.E.S.T., Inc., supra; Collegedale Diversified Enterprises, Inc., supra).
(c) Chance
Respondents strenuously argue that the element of chance, as defined in their dictionary, has not been proved as to any of the four programs. They argue that since the amounts distributed to participants in the multi-level programs are commissions earned on sales they are not distributed by chance, defined as "the unknown or undefined cause of events; fortune; luck" in the 1977 edition of Funk & Wagnall's Standard College Dictionary. Respondents acknow- ledge that chance exists to the extent a person may or may not decide to purchase a product but is no longer present once the decision to purchase has been made. They argue that the Postal Service, in alleging the existence of chance in the distribution of commissions earned by multi-level distributors, is extending the meaning of chance for beyond its meaning as used in 39 U.S.C. 3005, strictly construed as it should be because of the penalties for violation attached thereto. Respondents argue that the far-fetched definition of chance applied by the Postal Service could be applied to any business that depends for its profits on the chance that people will buy its product or service.
Several proceedings have been initiated under the lottery provision of 39 U.S.C. 3005 against respondents operating multi-level marketing programs. They have uniformly been found to be in violation of the statute. See for example, Tenpen Sales Corp., supra; Collegedale Diversified Enterprises, Inc., supra; Middle-Class American, Inc., P.S. 16/65 (P.S.D. Mar. 26, 1984); N.E.S.T., Inc., supra; Opportunity Research Corporation, P.S. 24/131 (P.S.D. Oct. 30, 1987).
I find no differences of legal significance between the instant case and those cited above insofar as the element of chance is concerned. These decisions discerned chance not in the decision of potential purchasers to buy or not to buy the product or membership but, rather, in the dependence of the financial success of a marketer largely on the exertions of those in his downline over whom he had no control or substantial connection.
Respondent's programs, except for the revised legal referral network, involve 10 or more levels. They have reduced the legal referral network from 8 to 4 levels in an effort to assure sufficient control over downline to avoid attack by USPS under 39 U.S.C. 3005. In Middle-Class American, Inc., supra, a 5-level marketing program was held to involve chance based on a finding that lack of direct connection or control between the first-level marketers and those at third or lower levels made success of the first-level a matter of chance, unrelated to his own efforts. Respondents in the instant case have not shown direct connection or control between first-level distributors and those at third or lower levels in the legal referral network or the other three programs. Therefore, applying the rationale of the cited cases as to the element of chance, I find that the success of distributors or marketers in Respondents' programs is determined by chance in that receipt of commissions depends principally on the efforts of others over whom they have no control and no substantial connection. See Public Clearing House v. Coyne, 194 U. S. 497 (1904), applied in the cited Postal Service decisions. See also Horner v. United States, 147 U.S. 449, 459 (1892); Zebelman v. United States, 339 F.2d 484 (10th Cir. 1964).
Similar Programs
At the hearing, Respondents were allowed to introduce as RX-C a circular soliciting participation in The Financial Fitness Program, a multi-level program having no connection with Respondents but offered as evidence of a program similar to those at issue here which the attorney for the promoter of that program stated was in compliance with Postal Service regulations. There is no evidence that the Postal Service approved that program. RX-C therefore has no relevance to the issues in the instant proceeding.
CONCLUSIONS OF LAW
1. Based on the Findings of Fact and Discussion, supra, I must conclude that the four promotions conducted by Respondents which are the subject of this proceeding contain the elements of a lottery or scheme for the distribution of money or property by chance in violation of 39 U.S.C. 3005.
2. The proposed cease and desist order contains "fencing in" provisions which are appropriate because (1) they are reasonably related to the unlawful acts found to exist, supra, (Jacob Siegel Co. v. FTC, 327 U.S. 608, 611-614 (1946)) and (2) there is a likelihood, based on Respondents' past conduct, that they will commit additional violations, (American Home Products Corp. v. FTC, 695 F.2d 681, 705-709 (3rd Cir. 1983)).
3. Respondents have not shown that a money-back guarantee is any more of a defense to a lottery complaint under 39 U.S.C. 3005 than it is to a false representation complaint. See George M. Ernst, Jr. d/b/a Money-Interested Savers, Inc., P.S. Docket No. 13/88 (P.S.D. Aug. 4, 1982).
4. Respondents strongly oppose the proposed mail stop order substituted by my order of March 17, 1988, for the one originally attached to the Complaint on the ground that there is no authority to allow such a change after the close of the hearing. Respondents equate such a change with an amendment to the complaint and invoke 952.17(b) as limiting my authority.
The substitution of the lottery form of stop order for the inadvertently attached false representation order did not amend the complaint. It merely corrected an obvious error in the attachment of which Respondents were fully aware prior to the hearing and which they referred to in their trial brief and in oral argument during the hearing. The complaint alleged a violation of the lottery prohibition of the statute and was tried by both parties on that basis.
The allowance of the substitution was consistent with 952.23 of the Rules which authorizes submission of proposed orders as late as the filing of proposed findings and conclusions. Therefore, Respondents have shown no violation of the Rules and no prejudice.
5. The attached orders should be issued against Respondents.