In the Matter of the Complaint Against
COLLEGEDALE DIVERSIFIED ENTERPRISES, INC.
P. O. Box 1143
at Collegedale, TN 37315
P.S. Docket No. 14/29;
|Mason, Randolph D.
APPEARANCES FOR COMPLAINANT:
Thomas A. Ziebarth, Esq.
Consumer Protection Division
United States Postal Service
Washington, DC 20260
APPEARANCE FOR RESPONDENT:
James D. Purple, Esq.
428 McCallie Avenue
Chattanooga, TN 37402-2009
Findings of Fact
Conclusions of Law
This proceeding was initiated on August 5, 1982, when the Consumer Protection Division,
Law Department, U. S. Postal Service ("Complainant"), filed a Complaint which
alleges that Respondent is engaged in conducting (1) a scheme or device for obtaining
money or property through the mails by means of false representations and (2) a lottery or
scheme for the distribution of money by chance in violation of 39 U.S.C. § 3005.
Specifically, the Complaint alleges in Count I, paragraph 3 that Respondent falsely
(a) Each distributor participating in Respondent's program is likely to be able to
sponsor ten new distributors; and
(b) Each distributor participating in Respondent's program is likely to earn
substantial sums of money--as much as $44,000.
Count II of the Complaint alleges that Respondent knowingly seeks remittances of money
through the mails by means of false representations made by Respondent's distributors at
its express direction. Count III alleges that Respondent's "multi-level marketing
distributorship program" contains the elements of prize, chance, and consideration,
and therefore constitutes a lottery or scheme for the distribution of money by chance
through the mails. In its timely filed Answer, Respondent denied any violation of § 3005.
A hearing was held by the undersigned on September 22, 1982, in Knoxville, Tennessee.
Both parties were represented by Counsel and afforded full opportunity to be heard, adduce
relevant evidence and examine and cross-examine witnesses. Both parties filed proposed
findings of fact and conclusions of law on November 2, 1982, which have been duly
considered. To the extent indicated below, proposed findings and conclusions have been
adopted; otherwise they have been rejected as irrelevant or contrary to the evidence.
Based on the entire record herein, including my observation of the witnesses and their
demeanor, the exhibits and other relevant evidence adduced at the hearing, I make the
following findings of fact and conclusions of law:
Findings of Fact
Respondent is Collegedale Diversified Enterprises, Inc., P. O. Box
1143, Collegedale, TN 37315. Respondent obtains money through the mails at that address in
connection with its multi- level marketing plan for the sale of fire extinguishers and
burglar alarms (Tr. 17, 76; Exh. A; Exh. 1).
Respondent operates a mail-order business selling inexpensive fire
extinguishers and burglar alarms. Respondent markets its products by allowing each
purchaser to become a distributor for the company. A purchaser-distributor is provided
with brochures which he shows to prospective purchasers. The brochure describes how a
purchaser-distributor will receive commissions not only from sales made directly by him,
but also from sales made by his distributors and subsequent distributors in his chain
through five levels. In this regard, Respondent's brochure describes the manner in which
one becomes a distributor and earns commissions (Exh. 1):
Here's how the program works. When you order your product(s) you can enroll as a
distributor by signing the agreement at the top of the order form. Upon receipt of your
order, you'll be assigned a distributor number which you'll be sent along with your
product and 10 copies of the brochure you are now reading for each product you order.
Simply print your distributor number on each form and pass them out to your friends.
(Additional brochures may be ordered at $.10 each or $.05 each in quantities of 100 or
more and you may distribute as many as you wish.)
You will receive $.50 commission on each 20 oz. fire extinguisher, $.75 on each 40 oz.
fire extinguisher and $1.25 on each Automatic Alarm ordered by these people and $.50, $.75
or $1.25 commission on each order by the people they enroll and so on, through a total of
5 levels. When you order, you're enrolled under the person whose distributor number
appears on this form and he will earn $.50, $.75 or $1.25 commission as will the person
who sponsored him, and so on, through 5 levels up. This means we pay a total of $2.50,
$3.75 or $6.25 commission on each product.
Prior to January 1982, Respondent's brochure offered only one type of
fire extinguisher, for which a commission of $.40 was paid for each order (Tr. 63; Exh.
A). The brochure described how a purchaser could make $44,444 in commissions simply by
sponsoring ten new distributors. It was explained that a purchaser would make $4 at level
one ($.40 x 10 distributors). Then, if his ten new distributors each enrolled an
additional ten, the brochure noted that there would be 100 new orders at level two and
that his commission would be $40. The brochure then described how a purchaser would make
$400 and $4,000 at levels three and four, respectively. Finally, the brochure indicated
that if every one of those distributors had enrolled ten new distributors, then the
original purchaser would be paid $40,000 in commissions for 100,000 new orders at level 5.
The brochure then stated " t hat is a total of $44,444 and your hardest work would be
giving our brochure to the original ten you enrolled" (Exh. A).
The brochure that has been in use since January of 1982 eliminates
the dollar amounts that a purchaser-distributor would make if every distributor in his
chain was able to make a certain number of sales. Instead, the new brochure (Exh. 1)
begins with the following bold-faced message: "IF YOU DON'T READ THIS YOU COULD BE A
REAL LOSER." It then states that Respondent "OFFERS YOU A RARE
OPPORTUNITY." It states that Respondent's multi-level distributor- ship "could
make you rich... and could provide you with income for the rest of your life."
Thereafter, the reader is told:
Your earnings grow rapidly. Get your pencil and calculator ready. Choose the number of
people you feel you could interest in ordering at least one of our products. Multiply this
number by the commission $.50, $.75 or $1.25 for each and the total will be your earnings
on level 1.
Thereafter, the brochure takes the reader step by step in a similar manner through each
of the remaining four levels so that he will get an idea of how much money he will make.
The new brochure then states:
...The program is simple, easily understood and it really works... No real selling
is involved. You just give the brochure to friends and the product and marketing program
practically sell themselves.
...We, quite honestly have a product and program where everyone wins, and that's
the way we like it. Order now and find out how well this program works for you.
We're expecting a long and profitable relationship together.
The final page of the brochure consists of an order form and the
following distributor enrollment agreement which must be signed by each prospective
I understand that as a nonexclusive distributor for Collegedale Diversified I am not an
employee, agent, or representative of Collegedale Diversified Enterprises or any other
distributor within the Collegedale network. I further understand that each distributor
will be operating as an independent contractor fully responsible for paying his own
expenses and that Collegedale Diversified Enterprises will not be responsible for any
claims made on behalf of the product or distribution program other than those set forth in
writing in company literature.
After setting forth the prices of the products offered, the order
form instructs the prospective purchaser-distributor to remit the price of the product and
add a certain amount for postage and handling. Although each product comes with ten sales
brochures, additional brochures can be purchased for $.10 each, or $.05 each for 100 or
more brochures (Exh. 1).
At least a portion of the money paid to Respondent by a purchaser
constitutes consideration for participation in Respondent's pyramid scheme. In this
regard, Respondent's brochure makes it clear that a participant who remits, for example,
$6.95 when ordering a 20 oz. fire extinguisher, receives not only the product, but a
distributor number and ten copies of the brochure to enable participation in the marketing
program (see first quoted paragraph in Finding of Fact No. 2, supra).
Respondent's president occasionally "allowed" a person to
become a distributor without buying a product (Tr. 75). This was clearly an exception to
his normal method of doing business, and the brochure did not even mention this
possibility. A distributor was expected to buy a product and use it as a sample. However,
even nonpurchasing distributors furnished valuable consideration to Respondent as a
prerequisite to receiving commissions; they had to execute a distributor's contract, buy
brochures, and secure additional buyer-distributors.
Respondent keeps a record of all distributors in each of the five
levels under each purchaser-distributor. A distributor may obtain a computer printout of
the names of the distributors in his chain for a $.50 charge (Exh. 1).
Since the degree of success of an individual distributor depends
largely upon the number of distributors in his chain, his chance of success necessarily
diminishes as the market becomes saturated with new distributors (Tr. 17).
Since Respondent began its business in May of 1981, it has acquired
about 10,000 distributors (Tr. 66-68). During the time that the company has been in
business, Respondent has paid out a total of about $10,000 in commissions to its
distributors (Tr. 80-81). The most successful distributor has earned about $1,000, two
others have earned about $500 each, and ten others have earned about $250 each (Tr.
80-81). These 13 individuals account for about $4,500 of the total commissions paid. The
remaining $5,500 was disbursed by the company to the remaining 9,987 distributors earned
an average of only $.55 in total commissions from Respondent.
Respondent's marketing program constitutes a lottery or scheme for
the distribution of money by chance.
The first issue for consideration is whether Respondent violated 39
U.S.C. § 3005, which 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
The instant case is factually similar to Tenpen Sales Corporation,
supra. That case involved a scheme in which a typical purchaser, "A", buys a pen
from one of the company's distributors for $1 to be used as a sample. "A" then
becomes a distributor by purchasing five more pens from the company for $1 each which he
sells for the same price to five new purchasers. His purchasers then each become
distributors who follow the same procedure, i.e., each finds five more buyer-distributors.
This procedure is repeated through seven levels. "A" receives 5% commission, or
$.25 (5% x $5.00), for each sale made by any distributor in his chain within seven levels.
According to the brochure, if every distributor in "A's" chain followed the
instructions and arranged for the sale of five pens, a total of 97,655 orders would be
placed and "A" would earn $24,413.75. The Judicial Officer held that the three
elements of a lottery were present in Tenpen since "A" had paid a few dollars as
consideration for the chance to receive thousands of dollars in commissions for sales over
which he had no control.
Subsequent to the Judicial Officer's decision in Tenpen Sales
Corporation, supra, the Tenth Circuit held that a similar marketing scheme constituted a
lottery. Zebelman v. United States, 339 F.2d 484 (10th Cir. 1964). In that case, each
person who purchased an automobile from the company also became a distributor. He would
receive $100 for every new participant that he found who bought a car and became a
distributor. Each time these new participants found an additional buyer, the original
buyer-distributor received $50. The scheme was considered to be a lottery. The Court held
that the receipt of the $50 payments was a matter of chance since the original buyer could
not control whether the buyers he found would be able to find additional buyers.
In view of the above cases, it is clear that the amount of commissions that a
buyer-distributor will receive in Respondent's scheme is dependent upon chance. Like a
chain letter, a distributor's success depends upon the efforts of future distributors over
whom he has little or no control. Respondent seeks to distinguish Zebelman from the
instant case by arguing that Respondent's computer removes the element of chance. I
disagree. The fact that a participant is able to obtain a computer printout that will
identify all distributors in his chain does not enable him to control whether sales will
be made by those distributors. Those sales still remain a matter of chance.
Respondent also argues that the scheme does not contain the requisite
element of consideration. Again, I must disagree. Respondent's brochure makes it clear
that a participant must order a product, and after remitting money to Respondent, receives
not only the product, but a distributor number and ten copies of the brochure to enable
participation in the marketing scheme. Thus it is reasonable to conclude that a portion of
the price is paid for participation in the pyramid scheme. When determining the existence
of a lottery, the element of consideration is still considered to be present even though
the purchaser receives merchandise or other property in addition to his chance to win a
prize. Horner v. United States, 147 U. S. 449 (1893); Tenpen Sales Corporation, supra. The
same conclusion has been reached where the purchaser receives, in addition to the
merchandise or other property, a "free" chance in a drawing. F.C.C. v. American
Broadcasting Co., 347 U.S. 284, 290 n. 8 (1953). Moreover, in addition to the above
remittance, a person who desires to take advantage of the scheme also must furnish
valuable consideration to Respondent by executing a distributor's agreement and securing
additional buyer-distributors for Respondent's products.
In view of the foregoing, I must conclude and hold that Respondent's
scheme contains the elements of a lottery or scheme for the distribution of money by
chance in violation of 39 U.S.C. § 3005. Having reached this conclusion, it is
unnecessary for me to decide the false representation issues raised by Counts I and II of
The attached order should be issued against Respondent.
Complaint Against Collegedale Enterprises