POSTAL SERVICE DECISION
In the Matter of the Complaint Against
WILLIAM L. ROOCK,
RICK J. DERN,
P.S. Docket No. 28/77
Grant, Quentin E. Chief Administrative Law Judge
APPEARANCES FOR COMPLAINANT:
Geoffrey A. Drucker, Esq.
APPEARANCES FOR RESPONDENT:
Stephanie W. Kanwit, Esq.
Jeffrey A. Babener, Esq.
POSTAL SERVICE DECISION
Respondents have appealed the Initial Decision of an Administrative Law Judge which holds that Respondents are in violation of 39 U.S.C. § 3005 by conducting a lottery or scheme for the distribution of money by chance. Complainant has appealed that part of the Initial Decision which holds that Respondents do not make the false representations alleged in Counts I and II of its Complaint.
The Consumer Protection Division, Law Department, United States Postal Service (Complainant), initiated this proceeding by filing a Complaint alleging that Respondents are engaged in a scheme or device to obtain money or property through the mail by means of false representations, as well as a lottery or scheme for the distribution of money by chance in violation of 39 U.S.C. $S3005. The Complaint contained three counts: Count I, that Respondents utilize promotional materials which falsely represent that "each person who elects to participate in Respondents' [multi-level marketing] program as a marketer will earn substantial sums of money (for example, thousands of dollars)," Complaint P8; Count II, that "Respondents . . . urge and cause participants to make the above misrepresentations to third parties . . .," Complaint P11; Count III, that "Respondents are conducting a lottery or scheme for the distribution of money by chance through the mails," Complaint P16. Respondents filed an Answer admitting the allegations of the Complaint that UNIMAX is an Illinois corporation that solicits the remittance of money through the mail for UNIMAX's buying service; that William Roock and Tim Dern are directors of UNIMAX and responsible for its advertising practices; that Tim Dern is also the president of UNIMAX and directs, formulates and controls its acts and practices; that they employ promotional audio and visual tapes as part of their operation; and that they use certain promotional material attached to the Complaint as Exhibit No. One. Respondents denied making the alleged false representations; denied that Rick Dern is a director of UNIMAX or responsible for its advertising practices; denied that they urge participants to make false representations to third parties; and denied that they are conducting a lottery or scheme for the distribution of money by chance through the mails.
At a hearing before an Administrative Law Judge Complainant presented the testimony of four witnesses: Becky Bottom and Ruth Denver Barnes, both of whom had been UNIMAX marketers; Dr. David Gardner, an expert on the general principles of marketing; and Tim Dern, president of UNIMAX. Respondents presented the testimony of David Phillips, a UNIMAX marketer and trainer; three expert witnesses, Charles McBurney and Michael Whishaw, experts in direct selling, and Doris Wood, an expert in multi-level marketing; and Tim Dern.
Following the hearing and after the parties filed proposed findings of fact and conclusions of law, the Administrative Law Judge issued an Initial Decision in which he found that the allegations alleged in Count III of the Complaint had been proven by Complainant; that Respondents are engaged in conducting a lottery or scheme for the distribution of money by chance in violation of 39 U.S.C. § 3005; and that Complainant had established the active involvement of Respondents Tim Dern and William L. Roock in the lottery or scheme. He further found that Complainant had failed to sustain its burden of proof as to the false representations alleged in Counts I and II of the Complaint or to the involvement of Respondent Rick Dern in the lottery or scheme. He recommended issuance of the orders authorized by 39 U.S.C. § 3005 pertaining only to Count III of the Complaint. Both parties have filed exceptions to the Initial Decision.
Complainant takes exception to Finding of Fact (FOF) No. 10 and related Conclusions of Law Nos. 2 and 3 of the Initial Decision. In FOF No. 10 and Conclusion of Law No. 2 the Administrative Law Judge found and held Respondents did not make the representation alleged in Count I of the Complaint, supra. Consequently, in Conclusion of Law No. 3 he dismissed Counts I and II of the Complaint. Complainant argues that FOF No. 10 is not supported by a preponderance of the evidence. In support of its contention Complainant quotes extensively from a transcript of a promotional audio cassette prepared by Respondent UNIMAX. Additionally, Complainant relies upon an excerpt from an article contained in an issue of Respondent's publication, The UNIMAX REPORT, which acknowledged that a portion of an earlier presentation of Respondents' promotional program pertaining to the amount of sales effort required of marketers may have been misleading.
The Administrative Law Judge accurately described the promotional aspect of the audio tape (as well as a promotional video tape) as "vigorous, extravagant . . . [containing] some amount of puffery." Further, participants are assured in the tapes that many, most, or at least a majority will make money. But, the Administrative Law Judge correctly found that the tapes do not contain the broad representation alleged in Count I of the Complaint that each person who elects to participate in Respondents' program will earn substantial sums of money. The article excerpt does not acknowledge that Respondents made the false representations alleged in the Complaint. It merely states that Respondents' earlier promotional activities may have led marketers to believe their money making efforts would be easier than in actuality. It is evident from reading the article that it was not an apology or admission of false representation, but instead was intended to motivate unproductive marketers.
Complainant did not meet its burden of proving the alleged representation. Complainant's exception to the Initial Decision is denied. The Administrative Law Judge's dismissal of Counts I and II of the Complaint is affirmed.
Respondents have taken nine exceptions to the Initial Decision. One of the exceptions pertains to an evidentiary ruling. Five of the exceptions are to Findings of Fact, while three are taken to Conclusions of Law.
In this exception Respondents object to the admission into evidence of Complainant's Exhibit 4 (CX-4), the transcript of the UNIMAX promotional audio cassette, previously discussed. At the hearing, the Administrative Law Judge reserved judgment on the admission of CX-4 and allowed Complainant to make a post-hearing submittal of a declaration by a postal inspector authenticating CX-4. The Administrative Law Judge received the exhibit in evidence by Order dated March 14, 1988. Respondents did not make any objection to the ruling until July 14, 1988, when its Brief on Appeal was filed.
Respondents' Brief does not state any grounds for the objection, and no basis for excluding the exhibit is apparent. The exhibit is relevant, has been authenticated, and was properly received in evidence. Respondents' exception is found to be without merit.
Exceptions to Findings of Fact
Respondents first take exception to that portion of FOF No. 9 pertaining to Respondent Tim Dern's testimony. The Administrative Law Judge found the testimony on waiver of a marketing "set-up" fee for non-subscribers of UNIMAX not credible. The finding was based upon inconsistent statements made by Mr. Dern prior to and at the hearing. In response to interrogatories in an unrelated proceeding Mr. Dern provided a sworn statement that a one-time "set-up" charge was assessed against non-subscribers in order for them to become UNIMAX marketers (CX-13). Mr. Dern testified to the same effect at hearing in this matter upon examination by Complainant's counsel (Transcript (Tr.) 93). However, upon examination by Respondents' counsel, he stated his prior testimony was erroneous and that there was no "set-up" charge assessed to non-subscribers (Tr. 129). Upon cross-examination he testified that UNIMAX always waives the "set-up" charge (Tr. 251-54). Based upon the inconsistent testimony the Administrative Law Judge found the witness to lack credibility. Considering the obvious inconsistent statements by the witness it cannot be said that the Administrative Law Judge erred. The exception is without merit.
Respondents' second exception is to that portion of FOF No. 23 in which the Administrative Law Judge found that there is a very wide geographical separation between marketers in a market. The Administrative Law Judge relied on a member's matrix address list, Respondents' Exhibit 7 (RX-7), in making this determination. The list includes marketers from most sections of the United States. Additionally, Complainant's witness, Ms. Barnes, who was a UNIMAX marketer, testified that her matrix included people from Texas, Florida, and Nevada and that she herself lived in Illinois. Finally, Respondents' witness, Mr. Phillips, testified that his downline members live in 28 states across the country. The Administrative Law Judge's finding is thus supported by a preponderance of the evidence. Respondents' exception to FOF No. 23 is without merit.
Respondents' third exception is taken to that part of FOF No. 30 in which the Administrative Law Judge found as accurate Dr. Gardner's assumption that 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. The finding is supported by the preponderance of the evidence. Respondent Tim Dern specifically testified that the only disciplinary action available to a marketer is to notify the company in writing of rule violations by others, at which point the company would attempt to discipline the violators. Respondents' exception to FOF No. 30 is without merit.
Respondents' next exception is to FOF No. 32 in which the Administrative Law Judge found that "[a]ccording to Dr. Gardner, opinions he expressed in his testimony [described in FOF Nos. 29-31] are in accord with the consensus of experts in the field of marketing." Thus, in this exception, as in their exceptions to Conclusions of Law, infra, Respondents disagree with the Administrative Law Judge's acceptance of Dr. Gardner as an expert witness and his reliance on Dr. Gardner's opinions in formulating his decision.
Dr. Gardner's credentials are impressive. He is a university professor with a doctorate and masters degree in business administration from the University of Minnesota. He teaches graduate level courses in marketing strategy, theory and promotion management. He has authored textbooks which are used in business schools and also has authored numerous marketing articles. Additionally, Dr. Gardner has been a marketing consultant to both large and small businesses and has used a Harvard case study on a multi-level firm as part of his marketing course curricula. Further, his research revealed that there exist no leading scholars on multi-level marketing.
Respondents' experts did not possess the academic excellence of Dr. Gardner. None held a doctorate; none studied, nor taught in pursuit of a degree, graduate level courses related to marketing or promotion management. Although Respondents' experts possessed extensive experience in the direct selling industry it was no abuse of discretion for the Administrative Law Judge to rely more upon Dr. Gardner's opinions in reaching his conclusions. Dr. Gardner was fully apprised of the facts of the UNIMAX programs and his distinguished academic involvement in marketing fully qualified him to express his opinions. Respondents' exception is without merit.
Respondents take their final exception to FOF No. 38, which states that "[f]iring is not an available option. . . ." in controlling the activities of marketers within the program. The exception is not well taken. Respondents' expert witness, Mr. McBurney, testified under direct examination that management controls in programs such as Respondents' are limited and that firing is not an available control option (Tr. 301, 309).
Respondents' Exceptions to Conclusions of Law
Respondents have taken exception to Conclusions of Law Nos. 4, 5 and 6. In those conclusions the Administrative Law Judge found that Complainant proved by a preponderance of evidence that Respondents are engaged in conducting a lottery or scheme for distribution of money by chance in violation of 39 U.S.C. § 3005; that Respondent William L. Roock was actively involved in the operation of the lottery or scheme; and that a cease and desist order should be issued.
The elements of a lottery are the furnishing of consideration, the offering of a prize and the distribution of the prize by chance. National Conference on Legalizing Lotteries, Inc. v. Farley, 96 F.2d 861, 863 (D.C. Cir. 1938); Brooklyn Daily Eagle v. Voorhies, 181 F. 579, 581 (C.C.E.D.N.Y. 1910); Middle-Class American, Inc., P.S. Docket No. 15/65 (P.S.D. March 26, 1984). In challenging Conclusion of Law No. 4 Respondents initially contend that Complainant failed to prove that a consumer must pay consideration in order to market the UNIMAX program. Respondents' contention fails.
The Administrative Law Judge found three possible forms of consideration: the "set-up" charge, subscription fee, and time and effort. The existence of a set-up charge for marketers who do not wish to become subscribers has been discussed previously. By analogy to Collegedale Diversified Enterprises, Inc., P.S. Docket No. 14/29 (P.S.D. Oct. 25, 1983), in which it was determined that consideration was tendered as part of the purchase price in order to gain commissions from the sales made through a purchaser-distributor chain, the Administrative Law Judge properly concluded that a portion of the subscriber fee serves as consideration. Respondents argue that the conclusion is unreasonable since it is possible for a marketer to terminate the subscription and consequent fees, while still remaining able to market UNIMAX's services for commissions. Respondents' argument is not persuasive as the initial subscription fee would constitute sufficient consideration.
The time and effort required of UNIMAX marketers also constitutes consideration. N.E.S.T., Inc., P.S. Docket No. 14/89 (P.S.D. Aug. 7, 1984). Respondents attempt to distinguish N.E.S.T. because of its reliance on F.C.C. v. American Broadcasting, 347 U.S. 284 (1954), a case that did not involve 39 U.S.C. § 3005, but instead interpreted a similar statute, 18 U.S.C. § 1304. The argument is not persuasive. American Broadcasting has previously been recognized as having precedential value. In this regard it was stated in N.E.S.T. at p. 11, "[i]t is concluded that F.C.C. v. American Broadcasting and other Federal cases are consistent with Complainant's contention that time and effort can constitute consideration in a lottery scheme."
Respondents next contend the UNIMAX program does not constitute a scheme for the distribution of money by chance and thus take exception to the holding of the Administrative Law Judge that the element of chance exists in Respondents' program. They contend that UNIMAX is a member of a legitimate direct selling industry and thus by implication does not conduct an illegal lottery. They next contend that the legislative history of the anti-lottery statute shows that it was never intended to be used against legitimate business enterprises, such as UNIMAX. In a related argument they contend the conclusion that UNIMAX conducts a lottery exceeds the jurisdiction and statutory authority of the Postal Service and that the Postal Service is engaged in selective prosecution. Finally, relying on two court decisions which distinguished between employees and independent contractors, and excepting to the Administrative Law Judge's reliance on Dr. Gardner's expert testimony, Respondents argue that UNIMAX marketers' commissions do not depend on the efforts of others over whom they have no control or connection.
None of Respondents' arguments have merit. That one is a member of a legitimate direct selling industry does not mean that all members are exempt from the anti-lottery statute or that a particular member's operation or structure of management cannot violate the statute. Respondents' arguments pertaining to the legislative history of the statute and authority of the Postal Service to determine the existence of a lottery have no basis in law. As stated in Collegedale Diversified Enterprises, Inc., supra at p.10:
In regard to the issue of selective prosecution the argument was raised for the first time on appeal. It consists of a broad allegation made without any supporting facts. Further, it is no defense in a § 3005 proceeding that others are conducting similar activities. Gottlieb v. Schaffer, 141 F. Supp. 7, 19 (S.D.N.Y. 1956); Universal Life Church, Inc., P.S. Docket No. 7/62 (P.S.D. Feb. 14, 1980); see FTC v. Universal-Rundle Corp., 387 U.S. 244 (1967). The agency has discretion in deciding whether to initiate proceedings and is not required to take action against all violators. Heckler, Secretary of Health and Human Services v. Chaney, 470 U.S. 821 (1985); Water Transport Association v. ICC, 715 F.2d 581 (D.C. Cir. 1983).
In his argument pertaining to the issue of control by marketers over their subscribers and/or marketers, Respondents rely upon Aparacor v. United States, 556 F.2d 1004 (Ct. Cl. 1977), and Gilmore v. United States, 443 F. Supp. 91 (D. Md. 1977). These decisions involved the determination of independent contractor or employee status in applying the Internal Revenue Code, issues unrelated to determining the existence of a lottery. The determinative factor in establishing the existence of the element of chance is the extent of control over others in attaining profits. Public Clearing House v. Coyne, 194 U.S. 497, 515 (1904). Here the Administrative Law Judge in a well reasoned discussion at pages 22-26 of the Initial Decision, found, utilizing Dr. Gardner's expert opinions, a lack of control in Respondents' program sufficient to establish the existence of chance and correctly concluded that Respondents operated a lottery or scheme within the prohibition of 39 U.S.C. § 3005. The Administrative Law Judge's reliance on Dr. Gardner's expert opinions has previously been discussed, and Respondents' exception to FOF No. 32 on this point has been denied. Respondents have offered no argument in support of their exception to Conclusion of Law No. 5, which found William L. Roock actively involved in the lottery or scheme. In fact, Respondents' Answer to the Complaint admitted Mr. Roock was a director of UNIMAX and responsible for its advertising practices. The exception has no merit.
Respondents' last exception is to Conclusion of Law No. 6, which found lottery and cease and desist orders should be issued. Inasmuch as Complainant has established by a preponderance of evidence that Respondents conduct a lottery there is no basis for the exception.
Both Complainant's and Respondents' exceptions are without merit. Both appeals are denied. The orders authorized by 39 U.S.C. § 3005 are issued with this decision.
|Jeffrey A. Babener
Babener & Associates
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|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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