INITIAL DECISION

In the Matter of the Complaint Against

UNIMAX, INC.,
1230 Remington Road,
Schaumburg, IL 60173-4896

and

WILLIAM L. ROOCK,
1208 Laurel Lane,
Schaumburg, IL 60193-4737

and

RICK J. DERN,
68 Lakeshore Drive,
Roselle, IL 60172-1414

and

TIM DERN,
631 Cutters Mill,
Schaumburg, IL 60194-4535

P.S. Docket No. 28/77
06/13/88

Grant, Quentin E. Chief Administrative Law Judge

APPEARANCES FOR COMPLAINANT:

Geoffrey A. Drucker, Esq.
Linden G. Davis, Esq.
Consumer Protection Division
Law Department
U. S. Postal Service
Washington, DC 20260-1144

APPEARANCES FOR RESPONDENT:

Stephanie W. Kanwit, Esq.
Lamet, Kanwit & Associates
600 South Federal Street Suite 201
Chicago, IL 60605-1842

Jeffrey A. Babener, Esq.
Joseph, Babener & Carpenter
One Main Place, Suite 600
101 S. W. Main
Portland, OR 97204-3235

 INITIAL DECISION

On August 21, 1987, the General Counsel of the Postal Service filed a Complaint alleging violation by Respondents of 39 U.S.C. 3005. The complaint contains three counts alleging (1) that Respondents falsely represent that each participant in the marketing program of UNIMAX, Inc. (UNIMAX) will earn substantial sums of money; (2) that Respondents urge and cause UNIMAX's marketers to make this false representation to third parties; (3) that Respondent's marketing program constitutes a lottery or scheme for the distribution of money by chance through the mails.

Respondents' answer to the complaint admits the solicitation of remittances of money through the mails for UNIMAX's buying service; admits the use of audio and visual tapes promoting the UNIMAX marketing program and the use of the promotional materials attached to the complaint as Exhibit 1; denies that such promotional materials make the false representation alleged in the complaint and deny that they are conducting a lottery or scheme for the distribution of money by chance through the mails.

A hearing was held in Chicago, Illinois on February 2 and 3, 1988. Complainant's witnesses were two former UNIMAX marketers, Becky Bottom and Ruth Denver-Barnes, and Professor David Gardner, an expert in marketing. Complainant also called as a witness, Tim Dern, president and chief executive officer of UNIMAX. Respondents' witnesses were Tim Dern; two experts in direct selling, Charles McBurney and Michael Whishaw; Doris Wood, an expert in multi-level marketing; and David Phillips, an independent marketer and trainer for UNIMAX.

The parties have filed proposed findings of fact, conclusions of law, and written argument all of which have been fully considered. To the extent indicated they have been adopted. Otherwise, they have been rejected as irrelevant or contrary to the evidence.

During the hearing, I reserved on the admission into evidence of Complainant's Exhibit 4, a transcript of a portion of a UNIMAX audio cassette describing the services offered by the company and promoting its multi-level marketing program. In accordance with permission granted at the hearing, Complainant filed, following the hearing, declarations establishing foundation for receipt of the exhibit. Accordingly, CX-4 is received in evidence.

FINDINGS OF FACT

1. UNIMAX, Inc. is an Illinois corporation with its principal office and place of business at 1230 Remington Road, Schaumburg, Illinois 60173 (Ans. 2). It was incorporated in March 1986 (Tr. 75).

2. Respondent William L. Roock is chairman of the board of UNIMAX and is responsible for its advertising practices (Cplt. 3; Ans. 3; Tr. 103).

3. Respondent Tim Dern is president and chief executive officer of UNIMAX and intimately involved in promotion of its multi-level marketing program (CX-4; RX-26, Tr. 75).

4. There is no evidence that Respondent Rick Dern is an official of UNIMAX or is responsible for the practices employed by UNIMAX in promoting the multi-level marketing program.

5. UNIMAX describes itself as a consumer benefit service offering a portfolio of services to subscribers. Such services include a buyers service, grocery coupons, insurance, travel, new car pricing and leasing, credit union, legal services and financial planning (RX-1).

6. UNIMAX subscribers pay an initial fee of $50.00, $36.00 for each subsequent month, and a $14.00 annual fee for literature (CX-7).

7. UNIMAX solicits the remittance of money through the mails covering the above mentioned fees to its 1230 Remington Road address (Ans. 6; CX-7).

8. UNIMAX is a direct selling company employing a multi-level marketing (MLM) program. Subscribers are obtained through word-of-mouth advertising and person-to-person presentations (RX-1, p. 1; RX-26; Tr. 280, 283).

9. A UNIMAX subscriber may elect to become a marketer, at no additional charge, by completing a UNIMAX Independent Marketer's Agreement (CX-8). Most subscribers elect to become marketers by filling out the application, but not all of them actually engage in marketing (Tr. 122). There is a current "set-up" charge of $29 for non-members to become marketers (Tr. 93), although according to Tim Dern, president and chief executive officer of the company, the "set-up" fee is waived and has never been actually charged (Tr. 252, 264). In view of Mr. Dern's earlier statements in the hearing and in answers to interrogatories, that the "set-up" fee is charged, (Tr. 93; CX-13, Ans. #14), I find his testimony as to waiver of such fee not credible.

The False Representation Issue

Count I

10. The representation alleged under Count I is that "each person who elects to participate in Respondents' program as a marketer will earn substantial sums of money (for example thousands of dollars)."

To prove the making of this representation, Complainant relies on many of the statements made in a promotional audio tape (introductory cassette) obtained by it from UNIMAX (CX-4). The tape extravagantly promotes the multi-level marketing program but falls short of making the broad representation alleged. While it stresses the ease with which subscriptions may be sold, even by persons who do not particularly like selling or have no selling experience, instead of promising rewards to all participants it speaks in terms of substantial earnings for "a lot of folks" (CX-4, p. 4) and "the great majority" of participants (CX-4, p. 14). Accordingly, I do not find in this exhibit the representation alleged in Count I.

11. Respondents introduced a video tape which is also used to promote the multi-level marketing program (RX-26). No representation is made in this tape that each participant will make substantial sums of money. Rather, it makes the point that this is a business opportunity from which participants who work to sell subscriptions to UNIMAX can make money with the greatest rewards going to those who put forth the most effort (Tr. 220-223). By exerting more effort, a downliner can make more commissions than his upline (Tr. 222).

12. Complainant introduced the August 1987 issue of Respondents' publication, The UNIMAX REPORT, (CX-11), in which an apology is made to marketers who complained that UNIMAX had exaggerated the benefits to be expected from the roll-down feature of the MLM program (See FOF 16-18, below). Although the apology acknowledges that as to the roll-down feature the earlier presentation of the program was misleading, it does not go as far as to admit the making of the representation alleged.

The Lottery Issue

Count III

(a) The Multi-Level System

13. UNIMAX marketers are independent contractors almost all of whom are subscribers to UNIMAX (CX-8; CX-13, Interrog. 4). They are compensated through commissions earned on subscription fees paid by new subscribers signed up by them or by other marketers in their downline.

14. In order to receive a commission, a UNIMAX marketer must personally sponsor at least three new subscribers, who are known as his spawns. If at any time a marketer has fewer than three spawns who have paid their monthly fee, he will receive no commission (RX-1, Marketing Tips, p. 9; RX-4, p. 10).

15. Commissions are based not on a marketer's total number of spawns but on the size and configuration of his multi-level network ("downline") which includes, but is not limited to, spawns. Persons in a given downline are called nodes, and they are positioned in a 3 x 9 matrix (RX-4, p. 10, 13).

16. The first level of this matrix has three positions, the second level has 9, the third has 27, and so forth down to the ninth level, which has 19,683 positions. Graphically, the first two levels of the matrix look like this:

	Marketer: 		  X
	Level One:	  X	  X	  X
	Level Two:	X X X	X X X	X X X 
    

New members of a matrix are added level by level from left to right (RX-1 (Business Opportunity)). When a marketer has filled a given level in his matrix, new subscribers sponsored by him are "rolled down" into positions on the next highest level, beginning at the extreme left (CX-4, p. 10; CX-11, p. 2).

17. When a new member joins UNIMAX he becomes part of his sponsor's downline and may also begin to develop his own downline. If the sponsor has already filled his first level, the new member will be rolled down into the sponsor's second level; thus, he will also be in the downline of someone in the sponsor's first level. Following this pattern, a new member whose sponsor has already filled eight levels would become part of his sponsor's downline and the downline of the marketers in the eight levels above him, and he will begin his downline (RX-1, Bus. Opp.).

18. The marketers in whose downline a member is placed are called his upline. If these upline marketers generate more spawns, some of them will be rolled down under this member, adding to his downline (RX-1 (Bus. Opp., p. 11).

19. Persons who elect to become marketers enter into an Independent Marketers Agreement with Unimax (Tr. 122; CX-8). Pursuant to this agreement, marketers promise to attend a company training session or view a company training videotape or read company approved training materials. Marketers also promise to maintain an ongoing supervisory relationship with their subscribers and/or marketers.

20. The concept of marketing used by UNIMAX is networking. It relies on word-of-mouth advertising to spread information about UNIMAX, its products and services (Tr. 228).

21. The training offered marketers by UNIMAX consists of free meetings in the field, a workbook training course called TNT (Total Network Training), or a classroom training course called MIT (Marketers Intensive Training) (Tr. 229-234; Respondents' Exhibit 4). In addition, some marketers sponsor their own training sessions or send out newsletters (Tr. 233-234).

22. The UNIMAX marketing system provides for reporting of violations from marketers in the field and follow up from UNIMAX headquarters through telephone calls and letters (Tr. 237-238). UNIMAX reserves the right to terminate marketers for violating the Independent Marketers Agreement (CX-8, 14).

23. For a fee, marketers may obtain from UNIMAX genealogy reports which list their downline, or subscriber base, through nine levels of a matrix (Tr. 239-243; RX-5, 7). The genealogies introduced by Respondent, presumably as typical, show that there is a very wide geographical separation between marketers in a matrix.

24. Tracking reports are used by marketers as a visual aid and consist of the names of all persons in the downline in hierarchical form (Tr. 241-242; RX-6).

(b) Expert Witnesses

For Complainant

David Gardner

25. David M. Gardner, Complainant's expert, has been a professor of business administration at the University of Illinois since 1975. He holds a doctorate and a masters degree in business administration from the University of Minnesota and a bachelor of science degree in business administration from the University of Iowa (CX-1; Tr. 131).

26. Dr. Gardner is an expert in general principles of marketing. He teaches graduate-level classes in marketing strategy, marketing theory, and promotion management, and he has received numerous honors for his teaching (CX-1; Tr. 131). His textbooks are used in business schools, and he has written numerous articles on marketing (CX-1; Tr. 133). He has also been a consultant to large businesses, such as the Bank of Illinois, and many small firms (CX-1, p. 10).

27. Dr. Gardner keeps current on marketing thought through extensive reading and through his contact with the business community (Tr. 134).

28. Dr. Gardner has a limited familiarity with multi-level marketing. He used a Harvard case study on a multi-level firm, Mary Kay Cosmetics, in his teaching (Tr. 134, 166, 167). In preparation for testifying, Dr. Gardner conducted a search of computer data bases throughout the country for academic literature on multi-level marketing. He found very little literature of substance and discovered that there are no leading scholars on multi-level marketing (Tr. 134, 135).

29. Complainant focused Dr. Gardner's testimony on control as applied to a distribution system. He defined control as the set of management activities used to see that an organization achieves its goals (Tr. 143). He categorized such activities as follows: (a) setting objectives to be achieved, (b) setting performance standards to measure achievement, (c) implementation of the system, and (d) ability and willingness to act on the information that comes back from the control system (Tr. 144). Under objectives, he listed factors such as sales, number of products to be sold, market share, growth rate, number of clients called, and training seminars attended (Tr. 145). Under performance standards, he listed a minimum total dollar or unit sales, a minimum number of prospects contacted, number of training seminars attended ("things in that general area") (Tr. 146), establishment of qualifications for sales persons and accepted promotional practices. He stated that an organization implements its performance standards through a systematic plan of acquiring information by way of reports (Tr. 149). Finally, effective methods of discipline are required in response to information received relative to performance (Tr. 150, 151).

30. Having defined control, Dr. Gardner turned to UNIMAX and explained his understanding of how it operates. Dr. Gardner assumed that a UNIMAX marketer could not require members of his upline or downline to: (a) reach a minimum level of sales per period of time; (b) contact a minimum number of prospective customers per period of time; (c) use only promotional materials or practices he, the marketer, approves of; (d) attend education and training programs; or (e) have any qualification beyond those set by UNIMAX (Tr. 158-160). Dr. Gardner also assumed a marketer could not require members of his upline or downline to report to him and could not discipline them for failing to comply with UNIMAX's rules (Tr. 160, 161). I find these assumptions to be in accord with the facts.

31. Dr. Gardner then took the generally accepted definition of control and applied it to the facts of UNIMAX as he understood them. He concluded that a UNIMAX marketer does not have control over the amount of commissions he earns from the activities of members of his upline or down-line (Tr. 161, 162).

32. According to Dr. Gardner, opinions he expressed in his testimony are in accord with the consensus of experts in the field of marketing (Tr. 162).

For Respondent

Charles McBurney

33. One of Respondents' expert witnesses, Charles McBurney, is a consultant in management and marketing in the direct selling industry which includes multi-level marketing. The name of his company is Direct Selling Consultants. Mr. McBurney has worked in the direct selling industry for thirty five years (Tr. 265-266). He holds a masters degree from Columbia University in journalism, and an undergraduate degree, also from Columbia, in political science and journalism (Tr. 286-287).

34. Mr. McBurney is an associate of the Direct Selling Association (DSA) which is the leading organization in the world representing direct selling companies (Tr. 274-276). He attends the annual meetings and the annual sales conferences of that organization (Tr. 276).

35. In addition, Mr. McBurney is presently beginning a project to edit a collection of academic case studies for the Direct Selling Education Foundation (Tr. 277). Mr. McBurney has written four publications related to marketing and sales in the direct selling industry (Tr. 278). As a result of his knowledge and experience, Mr. McBurney was qualified to testify in this matter.

36. Mr. McBurney testified that direct selling is the use of individuals to tell other individuals about a product. It is a person-to-person presentation of a product and, thus, different from typical channels of marketing and distribution. This form of selling has been in existence in the United States for over a century (Tr. 280-281). At last count by DSA, the direct selling industry was comprised of 6,500,000 individuals and generated approximately $8.6 billion in sales (Tr. 281). The DSA is comprised of about 170 companies, the majority of which employ a multi-level compensation format (Tr. 283-284). Some representative companies include Amway, Shaklee, Mary Kay Cosmetics, and A. L. Williams (Tr. 284-285).

37. Mr. McBurney further testified that the direct selling industry has its own peculiar needs and demands for management techniques that differ from those in conventional marketing (Tr. 294). Because of the independent contractor status of its marketers, it is given special treatment by the Internal Revenue Service (Tr. 295, 296).

38. In direct selling companies, management and organizational success is achieved through development of leadership and training, according to Mr. McBurney. Because of the independent contractor status of the marketers or sales persons, management controls are limited. Reliance is placed primarily on communications, guidance, persuasion and motivation from leader to leader to leader on down the line (Tr. 301, 302). Firing is not an available option (Tr. 309).

39. The compensation incentives that exist in a multi-level compensation system are used to attract large numbers of people through word-of-mouth, person-to-person advertising and thus to gain larger exposure in a short period of time. Correspondingly, the expenses of screening and hiring employees and advertising are saved (Tr. 310, 311).

40. Based upon his review of the UNIMAX marketing program, Mr. McBurney was of the opinion that it is excellent compared to others he has reviewed (Tr. 312-315). He did not find it to be a get-rich-quick scheme, or a something-for-nothing scheme (Tr. 315). Instead Mr. McBurney was of the opinion that the impression a potential distributor would form is that UNIMAX provides him with all the product tools he needs, and that these tools must be put to work to earn money (Tr. 315-316, 326).

41. Mr. McBurney was also of the opinion, based upon his review and experience, that UNIMAX does not misrepresent earnings potentials to distributors and that the direct sales multi-level marketing compensation format is presented as an effort-oriented opportunity, not a method of marketing in which the company or the distributor succeeds based upon chance (Tr. 316, 325-326).

42. With respect to the training materials for UNIMAX marketers, Mr. McBurney was of the opinion that they are better than adequate (Tr. 317-319). Mr. McBurney found that UNIMAX encourages people to work within their organization and to train each other and share information (Tr. 320).

Michael Whishaw

43. Michael Whishaw also testified as an expert witness for UNIMAX. He is a marketing consultant in the direct selling industry. The name of his company is Achievement Resources International. The company presently devotes approximately sixty percent of its efforts to the direct selling industry. Mr. Whishaw has been in this industry for over 20 years, both in the United States and abroad (Tr. 355-256). He has held responsible positions such as director of marketing and general manager with several direct selling companies including Tupperware, Oraflame, and Jaffra Cosmetics.

44. Mr. Whishaw testified that there are limitations on controls that a direct selling company can have over its independent contractor sales people. Nonetheless, the organization may be effectively managed through leadership, training and motivation (Tr. 371-374). Mr. Whishaw's review of the UNIMAX program revealed that the UNIMAX training materials are similar to those of major direct selling companies he has been associated with, and are better in some cases than others in the industry (Tr. 378).

45. In Mr. Wishaw's opinion, based upon his experience and his review of UNIMAX, the program is not a get-rich-quick or something- for-nothing scheme and the business opportunity is fairly presented. In fact, it is very similar to already established legitimate companies such as Amway (Tr. 382-85). According to Mr. Whishaw, " you have to work in all of them" (Tr. 283).

46. Mr. Whishaw also characterized the UNIMAX word-of-mouth form of management, made effective by leadership, training, and meetings, as being extraordinarily typical of leading direct selling companies. In his view, it is made more effective by and through the training and meetings that are proposed by the company and organized by the company and leaders in the field (Tr. 385, 386).

47. Mr. Whishaw testified that the following factors are generally associated with a legitimate multi-level enterprise: commission checks are paid on time, with monies for them set aside in advance in a separate bank account; distributors are required to make retail sales; commissions are paid on the sales of service; high quality products or services are offered; and prices are fair. He found all of these factors to be present in the UNIMAX program (Tr. 387-392). Further, Mr. Whishaw was of the opinion that the multi-level marketing compensation format used by Unimax was not a method by which the company or its distributors succeed by chance (Tr. 392).

Doris Wood

48. The President of the Multi-Level Marketing International Association, Ms. Doris Wood, also testified as an expert witness on behalf of UNIMAX (Tr. 419). Ms. Wood is also a consultant in multi-level marketing with respect to training and compensation (Tr. 422). The Multi-Level Marketing International Association is a trade organization for the members of the industry, including UNIMAX, which has as its purpose the education of consumers, distributors and corporate executives (Tr. 419, 420). Ms. Wood has an undergraduate degree in journalism from the University of Missouri and has taken courses in sales and marketing (Tr. 420- 421). She has been active in the industry since 1957, and has held both corporate and distributorship positions (Tr. 421-422). In her capacity as president, Ms. Wood now acts as a spokesperson for the industry and interrelates with various government agencies, including the state attorney general offices (Tr. 422-423).

49. Based upon her personal review of the UNIMAX program and her experience in the industry, Ms. Wood was of the opinion that the program is not a get-rich-quick scheme or a chance operation (Tr. 429, 434-435). Further, she did not note any deceptive practices (Tr. 429-430). Ms. Wood was impressed with the UNIMAX training materials which she believed to be very low in cost compared to others she has seen (Tr. 430).

Other Witnesses

David Phillips

50. One of the UNIMAX marketers, David Phillips, who is also a trainer for the company, testified for Respondents. Mr. Phillips was selected by UNIMAX to become an MIT trainer based upon his prior work and dedication (Tr. 339-340). He described his extensive travel for these training sessions which are held once a month (Tr. 340-342).

51. Mr. Phillips also testified to the extent of his down-line organization, which currently numbers 547, and explained that he uses the company genealogy reports to track these persons (Tr. 343-345) who are widely scattered geographically from the East Coast to Hawaii (Tr. 353). Mr. Phillips testified that he provides free copies of his genealogy reports to his down-line. Mr. Phillips gave personal examples of the way in which he keeps in touch with his organization, including newsletters and telephone calls (Tr. 345- 346). He acknowledged that he had to rely on his downline marketers to do their jobs (Tr. 354).

52. UNIMAX has reprimanded Mr. Phillips for violation of the rules and regulations when persons in his down-line sent out unauthorized mailings or made representations about projected income. Mr. Phillips halted the violations by calling and reprimanding the offending member of his organization (Tr. 346- 348). He explained that he has also notified the UNIMAX office about persons who are violating the company rules and regulations (Tr. 348).

Becky Bottom

53. Complainant's witness Becky Bottom became a UNIMAX subscriber through a friend. Her main reason for joining was to take advantage of the discounts obtainable through the UNIMAX buying service but she was also interested making money in the marketing program because she was told by her sponsor that "all you had to get was three people under you and these three people got three people and eventually you would be making commission checks" (Tr. 23). Although she read the independent marketers agreement before signing it, she testified that she did not know that it contained an agreement to attend company training sessions or view company training tapes. She never attended any training sessions although her upline attempted, unsuccessfully, to organize them (Tr. 33, 39). She never ordered a genealogy, never asked for names and addresses of persons in her downline, and never made any inquiry of UNIMAX concerning her downline (Tr. 38). The only UNIMAX service she utilized was the catalog buying service which she used to do comparison shopping (Tr. 36). Her main reason for discontinuing her UNIMAX subscription after four months was disappointment with the discounts obtainable through the buying service. A secondary reason was lack of success in marketing UNIMAX subscriptions (Tr. 31, 32). The friends she tried to sign up thought it was too expensive (Tr. 32).

Ruth Denver-Barnes

54. Complainant's second lay witness was Ruth Denver-Barnes. She and her husband subscribed to UNIMAX in February 1987 under her husband's name, primarily to obtain insurance covering his life (Tr. 47). They were also interested in the marketing opportunity and the buying service (Tr. 45, 64). Mrs. Barnes in May, 1987, subscribed to UNIMAX in her own name, at the solicitation of a company called FINL, operated by American Marketing and Publishing, in order to be placed, by drawing, in what FINL represented to be a faster growing matrix in the UNIMAX marketing program (Tr. 50-53).

Mrs. Denver-Barnes attended one training session, bought and viewed a training tape, and read training literature. She signed up a few subscribers and tried to stay in touch with her downline but long distance calls cost too much. She did write to them, however (Tr. 60, 61). She called her upline quite a bit (Tr. 62) but was never contacted by her immediate upline person who lived in another state (Tr. 49). She believed that meetings were encouraged but not required (Tr. 64). She and her husband never made any commission in the marketing program (Tr. 67). They dropped out of UNIMAX because it was costing them continually, they were unable to obtain the insurance policy on his life that they wanted, the discounts through the buying service were not interesting and the business opportunity (marketing) was not growing), (Tr. 65, 66).

DISCUSSION

Counts I and II

Respondents' promotion of the UNIMAX multi-level marketing program as contained in audio and video tapes, is vigorous, extravagant, and includes some amount of puffery. Both its earlier and later forms (CX-4; RX-26) contain assurances that many, most, or a majority of participants will make money. But, as found above, it stops short of making the representation alleged in Count I, i.e., that each participant will make substantial amounts of money. Particularly in the later version, but also in the earlier, the point is made that substantial commissions will be made by those participants who apply effort.

As found above, Complainant's lay witnesses, neither of whom made any commissions, did not claim to have been deceived by UNIMAX promotional materials while Respondent's lay witness, David Phillips, who complied with the terms of the independent marketer's agreement and expended considerable effort in training and downline contact, did make substantial money as a result.

Complainant has failed to sustain its burden of proof as to Count 1 and, consequently, also as to the third party misrepresentation alleged in Count II.

Count III

39 U. S.C. 3005 provides for 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, l961). Respondents contend that their program contains none of these elements.

(a) Consideration

Respondents argue that consideration necessary to support a lottery finding must have an economic value, i.e., it must be a contribution in kind to the fund to be distributed by chance, citing Garden City Chamber of Commerce, Inc. v. Wagner, 100 F. Supp. 769 (E.D.N.Y. 1951); Post Pub. Co. v. Murray, 230 F. Supp. 773 (1st Cir. 1916). They say that Complainant has failed to prove such consideration.

To become a marketer, one must pay the required fee for a subscription to UNIMAX or a "set up" charge if one is not a subscriber. A marketer subscriber must also continue to pay his monthly subscription fee in order to remain eligible as a marketer. Thus, it is reasonable to conclude that a portion of the subscription fee and "set up" charge is consideration paid in order to participate in marketing and to earn commissions therefrom. See, Collegedale Diversified Enterprises, Inc., P.S. 14/29 (P.S.D. Oct. 25, l983 at p. 4 & 5 and cases cited therein). Even if it were credible that nonsubscribers are not charged a fee to market (see FOF 9), consideration for participation can be found in the time and effort expended in securing new subscribers. N.E.S.T., Inc., P.S. 14/89 (P.S.D. Aug. 7, l984 at pages 11 & 12 and cases cited therein).

(b) Prize

Respondents contend that Complainant has not offered evidence that they offer a "prize" in connection with participation in the marketing program. However, it has been held that commissions and bonuses offered to participants in a multi-level marketing programs constitute the distribution of a prize. N.E.S.T., Inc., supra; Collegedale Diversified Enterprises, Inc., supra.

(c) Chance

Respondents argue that Complainant has failed to prove that the element of chance exists in the UNIMAX marketing program since commissions are paid based on sales of UNIMAX subscriptions by the marketer and his sales organization (downline or "team") over whom he exercises control through a form of management, unique to the direct selling industry, which uses independent contractor distributors rather than employees and achieves success and profits through leadership, training, persuasion, motivation and networking. Respondents say that UNIMAX employs a management structure, policies, procedure, training programs, and compensation structures similar to those used by leading members of the direct selling industry and, therefore, is engaged in a legitimate business enterprise, not a lottery.

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, l984); N.E.S.T., Inc., supra; Opportunity Research Corporation, P.S. 24/131 (P.S.D. Oct. 30, l987). Of these cases, the one most similar to the instant matter is Middle-Class American, Inc. in which it was held that Respondent's 5-level multi-level program violated the lottery provision of 39 U.S.C. 3005 because lack of direct connection or control between the first-level independent marketing contractor and those at third and lower levels made the success of the first level contractor a matter of chance, unrelated to his own efforts. In Middle Class, the determinative factual findings supporting the finding of chance were that none of the company's policies and practices provided for contact with or control over downline participants by the company's first-level marketing contractors and that there was no evidence of any training or management programs for downline marketing contractors by Respondent or its contractors.

The instant case differs from Middle-Class American in that UNIMAX's marketing contractors agree to maintain an "ongoing supervisory relationship" with their "subscribers and/or marketers" (CX-8, 7) and also agree to attend a company training session or view a company training video tape or read company approved training materials (CX-8, 5). There is also evidence that UNIMAX itself unlike Middle-Class American, does some amount of field training and that some marketers also engage voluntarily in training of at least part of their downline (see FOF 21). However, I construe the supervisory relationship provision as applying only to subscribers personally obtained by a marketer which, through the roll-down process, could mean some subscribers below his second level. The training requirement of the agreement applies only to the marketer signing the agreement. It does not require him to train his downline, although, as noted above, some do so on their own initiative.

Although the agreement provides for termination of marketer status by UNIMAX for violation of company rules and regulations, (CX-8, 14), there is no suggestion that this provision applies to a marketer's failure to supervise his subscribers and/or marketers at any level or to his failure to attend a training session or utilize UNIMAX training materials. Also there is clearly no disciplinary sanction available to UNIMAX or its marketers for failure to engage in marketing or to achieve any specified level of subscriptions.

The differentiating features of the UNIMAX program are, in fact, superficial and insignificant in terms of actual control especially given the broad geographical scattering of downline members as shown in the genealogies introduced by Respondent as RX-5 and 7, as described by independent marketer David Phillips (FOF 51), and as alluded to by marketer Ruth Denver-Barnes in her complaint about the excessive cost of long distance telephone calls to her downline (FOF 54).

Complainant's marketing expert, Dr. David Gardner, was of the opinion that UNIMAX marketers have no control over the amount of commissions earned from the activities of downline or upline marketers, an opinion in accord with the consensus of marketing experts as to factors providing management control of marketing distribution (FOF 31, 32). Although Dr. Gardner generally had limited knowledge of the direct selling field, his opinion, based on the facts of the UNIMAX programs, is persuasive on the matter of control.

I find that commissions received by UNIMAX marketers depend principally on the exertions of others over whom they have no control and no substantial connection. Therefore, following the decision of the Supreme Court in Public Clearing House v. Coyne, 194 U.S. 497 (1904) as applied in the postal service decisions cited above, I conclude that success of such marketers is determined by chance. See also Horner v. United States, 147 U.S. 449, 459 (1892); Zebelman v. United States, 339 F.2d 484 (10th Cir. 1964).

Respondents placed in evidence exhibits relating to the compensation structures of several major direct selling companies (RX-14 through RX-19). They show superficial similarity to the UNIMAX structure. However, this evidence does not show in detail the degree of control exercised by the companies over their distributors or by the individual marketers over their downlines. In any event, since the instant proceeding involves only the UNIMAX program and whether it is in violation of 39 U.S.C. 3005, this evidence lacks relevance.

Respondents' expert witnesses were well qualified to testify as to direct selling and multi-level marketing generally and as to the management techniques that have produced success for many companies, i.e., leadership, training, persuasion, motivation, and networking. However, their opinion that the success of UNIMAX and its marketers does not depend on chance is in conflict with the facts, found above, showing such lack of control over downline in the program as to require the application of Public Clearing House v. Coyne and the other cases cited above and to conclude that it is a lottery or scheme within the prohibition of 39 U.S.C. 3005.

CONCLUSIONS OF LAW

  1. An advertisement must be considered as a whole and its meaning determined in the light of its probable effect on persons of 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), rev'd on other grounds, 256 F.2d 681 (2nd Cir. 1958).
  2. Express misrepresentations are not required. It is the net impression that the advertisement as a whole is likely to make upon individuals to whom it is directed that is important. Even if a solicitation is so worded as to not make an express representation, but is artfully designed to mislead those responding to it, the false representation statute is applicable. G. J. Howard Co. v. Cassidy, 162 F. Supp. 568 (E.D.N.Y. 1958); See also, Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, 425 U. S. 748 (1976).

    Where an advertisement is ambiguous or capable of more than one meaning, if one of those meanings is false, the advertisement will be held to be misleading. Rhodes Pharmacal Co., Inc. v. F.T.C., 209 F.2d 382, 387 (7th Cir. l953); Ralph J. Galliano, P.S. Docket No. 19/15 (P.S.D. May 2, l985).

  3. Applying the foregoing principles, I conclude, for the reason stated in the discussion above that Respondents' promotional material for its multi-level marketing program does not make the false representation alleged in the complaint.
  4. Complainant has failed to sustain its burden of proof as to the false representation alleged in Counts I and II of the complaint. Counts I and II are, therefore, dismissed.
  5. Complainant has proved by a preponderance of the reliable and probative evidence of record the allegations contained in Count III of the complaint. Respondents are engaged in conducting a lottery or scheme for the distribution of money by chance in violation of 39 U.S.C. 3005.
  6. Complainant has established the active involvement of Tim Dern and William L. Roock in such lottery or scheme but the evidence does not show the active involvement of Rick Dern. The complaint is dismissed as to Respondent Rick Dern.
  7. In view of the above, the attached lottery and cease and desist orders should be issued against Respondents.
Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

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