In the Matter of the Complaint Against

MIDDLE-CLASS AMERICAN, INC.
1736 Gilsinn Avenue
P. O. Drawer AK
at Fenton, MO 63026-2004

P.S. Docket No. 16/65;

Dicus, Carroll C. Jr.

APPEARANCES FOR COMPLAINANT:
Thomas A. Ziebarth, Esq.
Steven B. Caver, Esq.
Consumer Protection Division
Law Department
United States Postal Service
Washington, DC 20260-1112

APPEARANCE FOR RESPONDENT:
Claude Hanks, Esq.
725 Old Ballas Road Foreway Building
Creve Coeur, MO 63141-7013

POSTAL SERVICE DECISION

Respondent has appealed from the Initial Decision of an Administrative Law Judge which holds that Respondent's multi-level sales plan is a lottery in violation of 39 U.S.C. § 3005.

Background

On March 29, 1983, Complainant filed a Complaint charging that Respondent made certain false representations, and that Respondent is conducting a lottery or scheme for the distribution of money by chance through the mails, both in violation of 39 U.S.C. § 3005. Respondent timely answered denying the allegations, including the allegation that its marketing program for the sale and distribution of a newsletter entitled "THE MIDDLE-CLASS AMERICAN" is a lottery.

Following a hearing, and upon consideration of the parties' Proposed Findings of Fact and Conclusions of Law, the Administrative Law Judge issued an Initial Decision on June 30, 1983, finding that Respondent's sales plan was a lottery. In view of that finding, he did not decide the false representation issues. Complainant has not cross-appealed or argued that they be decided. The Initial Decision findings and conclusions are stated in unnumbered paragraphs under a general heading, "FINDINGS OF FACT AND CONCLUSIONS OF LAW."

Respondent's Exceptions

Procedural Objections

Respondent in its first exception contends that the Administrative Law Judge's decision was not in accordance with 39 C.F.R. § 952.23(b) because the findings of fact were not set forth in serially numbered paragraphs, all evidentiary facts to support the findings were not stated with particularity, and each proposed conclusion was not stated separately. However, 39 C.F.R. § 952.23(b), applies to the parties' Proposed Findings of Fact and Conclusions of Law, not to the Administrative Law Judge's decision. Respondent's exception is without merit.

In its second exception Respondent also contends that the Administrative Law Judge was required to follow 39 C.F.R. § 952.23(b), and asserts that the failure to do so renders the findings and conclusions of the Initial Decision arbitrary, capricious, and an abuse of discretion in violation of 5 U.S.C. § 706(2)(A)-(E). As the cited statutory provision pertains to judicial review of agency actions, it does not govern a de novo review by the Judicial Officer. As noted above, Respondent's reliance on 39 C.F.R. § 952.23(b) to support its contentions is misplaced.

Respondent contends generally that the Administrative Law Judge made no specific findings of fact to support the conclusion that a lottery was being conducted, and that the decision must include Findings of Fact and Conclusions of Law separately stated.

The regulation pertaining to the Administrative Law Judge's Initial Decision, 39 C.F.R. § 952.24, states in part:

"A written initial decision shall be rendered with all due speed. The initial decision shall include findings and conclusions, with the reasons therefor, upon all the material issues of fact or law presented on the record, and the appropriate order or denial thereof . . ."

That regulation, and the pertinent provision of the Administrative Procedure Act, 5 U.S.C. § 557(c), simply require the decision to include a statement of "findings and conclusions" with reasons. There is no express requirement that the findings and conclusions be stated separately, although that is customary and preferred. The Initial Decision found that Respondent uses the mails in its sales and distribution plan, and described the plan, which includes commissions on direct sales and override commissions on sales made by down-line participants through four levels. It also gave the judicially defined legal elements for a lottery, and cited cases where "Arrangements involving override commissions have been held to be lotteries" (I.D. at 3). The decision also cited cases for the proposition that "the offering of something of value such as an override payment constitutes a prize" (I.D. at 4). The decision concluded that Respondent's sales plan constitutes a lottery in violation of the statute.

As the basic facts concerning Respondent's enterprise were not in controversy, the conclusory finding in the Initial Decision was adequate. Legal precedents were cited as reasons to support the conclusion. Even assuming arguendo a procedural defect in the decision due to an inadequate delineation of reasons, Respondent has not persuasively shown that it has been prejudiced by such defect. The basic issue is whether Respondent's sales plan constitutes a lottery within the meaning of 39 U.S.C. § 3005. Respondent has addressed that issue. The record has been reviewed de novo, findings and conclusions are contained in the following discussion, and there is no reason to remand the case for another decision.

Lottery Issue

In its third exception Respondent contends there is no factual basis for concluding that Respondent's operation was founded on chance, and that cases relied on in the Initial Decision are not specifically applicable to the facts in this case.

Respondent's newsletter is published twice a month at a basic subscription price of $200 a year (CX-7 and 8; RX-1-C; Tr. 40). Respondent markets the newsletter by encouraging subscribers to become approved independent marketing contractors (sales representatives). The subscriber receives a twenty-five percent commission on the direct first-level sales and "overrides" or "bonuses" on sales made by down-line subscriber marketing contractors through four levels (or "generations" as described by Respondent). The percentages in the chain are as follows:

1st level - 25 percent "commission"

2nd level - 2 percent "bonus"

3rd level - 3 percent "bonus"

4th level - 5 percent "bonus"

5th level - 15 percent "bonus"

(Tr. 41-42; CX-1; RX-1 and 1A)

The marketing contractor must maintain a current subscription to earn commissions and overrides (RX-1-A; Tr. 43, 55). The marketing contractor is also supposed to attend a meeting to learn about the company's program and policies (RX-1-A; Tr. 56-57, 77, 82-87, 89). If company rules are violated by the marketing contractor Respondent may6 terminate the right to sell and to receive commissions and bonuses even though the contractor's subscription has not expired (RX-1-A; Tr. 97). Advertising materials are to be approved by the company before being used and must be purchased from the company or through a company-approved registrar (RX-1-A; Tr. 42-43). Also, the company reserves the right to reject marketing contractor applicants (Tr. 45-47). None of the company's policies and practices provides for contact with or control over down-line participants by the company's first-level marketing contractors. Also, there is no evidence of any training or management programs for down-line marketing contractors by Respondent or its contractors. Therefore, the dominant element in the success of down-line contractors is chance, rather than the efforts and skill of the first contractor.

The requisite elements for a lottery within the meaning of 39 U.S.C. § 3005 are the furnishing of consideration, a prize, and distribution of a prize by chance. E.g., Collegedale Diversified Enterprises, Inc., P.S. Docket No. 14/29 (P.S.D. Oct. 25, 1983), at p. 3. The need for the marketing contractors to subscribe to the newsletter to receive sales commissions and bonuses constitutes adequate consideration. As will be discussed further, the down-line bonuses constitute prizes and are distributed by chance.

Respondent argued before the Administrative Law Judge that the bonuses for sales by down-line marketing contractors are not prizes distributed by chance. It now contends that the Administrative Law Judge ignored cases cited by it which have bearing on the issue of chance in the fact situation of this case. However, the Administrative Law Judge ruled that unless indicated, the proposed conclusions of law and memoranda were rejected as irrelevant or not supported by the evidence.

The cases cited by Respondent at pp. 9 and 10 of its Proposed Findings and Conclusions submitted to the Administrative Law Judge are distinguishable. Two of the cases, Eastman v. Armstrong-Byrd Music Co., 212 F. 662 (8th Cir. 1914), and Minges v. City of Birmingham, 36 So. 2d 93 (Ala. 1948), involved advertisements for products in which contests requiring some measurable skill were at issue. They were found not to be lotteries because the entries were judged by certain criteria which ruled out the element of chance. Neither of the factual situations have any relationship to Respondent's enterprise. Although a multi-level marketing program was involved in Ger-Ro-Mar, Inc. v. F.T.C., 518 F.2d 33 (2d Cir. 1975), the issue of whether the program was a lottery was not before the court.

In Amway Corp., 93 F.T.C. 618 (Docket No. 9023, May 8, 1979), the multi-level marketing program was substantially different from Respondent's, and there was no charge that the program was a lottery. A state statute was applied in Russell v. Equitable Loan & Security Co., 58 S.E. 881 (Ga. 1907), involving the sale of savings certificates which could be redeemed according to varying contingencies. The facts of that case are not similar to those here. Interestingly, the dissent in that case, at 888, noted that the "United States mails had been closed" to certificates like those before the court.

Most persuasive in this case are interpretations of what constitutes a lottery and the element of chance under 39 U.S.C. § 3005 and predecessor and related postal statutes. The four cases cited in the Initial Decision involve postal statutes, although one of them is a criminal rather than civil statute. Respondent questions all of the cases cited as authority except the Supreme Court ruling in Public Clearing House v. Coyne, 194 U.S. 497 (1904), and it cites the quotation at 512 from Webster defining chance as:

"something that befalls, as the result of unknown or unconsidered forces; the issue of uncertain conditions; an event not calculated upon; an unexpected occurrence; a happening, accident, fortuity, casualty."

Respondent contends that the factual circumstances in that case are different from those here. While factual differences exist, the Court distinguished at 515 between enterprises contemplating "the personal exertions of the investor, or of his partners, agents or employees" and those where "profits depend principally upon the exertions of others, over whom the investor has no control and with whom he has no connection. It is in this sense the amount realized is determinable by chance." Marketing contractors in Respondent's program have no control or connection over down-line participants. Thus, their success, as in Coyne, is determined by chance.

This principle was applied in the other three cases cited in the Initial Decision which all involved multi-level marketing programs. They are: Zebelman v. United States, 339 F.2d 484 (10th Cir. 1964) involving a criminal statute; Tenpen Sales Corp., P.O.D. Docket No. 2/35 (D.D. May 10, 1961); and Collegedale Diversified Enterprises, Inc., P.S. Docket No. 14/29 (I.D. Dec. 10, 1982), affirmed on appeal after consideration of the Respondent's exceptions by Postal Service Decision of October 25, 1983, cited supra. Respondent's arguments attempting to distinguish those cases are not persuasive.

The facts in Collegedale are most similar to those in this case and the reasoning set forth in the Postal Service Decision of October 25, 1983, is applicable here. Although Respondent contends that the commissions and bonuses of its marketing contractors are dependent upon their own efforts, this can only be inferred for the first-level commissions based upon direct sales to a new subscriber. The testimony of Respondent's two witnesses has been considered along with Respondent's exhibits showing the company policies, and subscriber and application forms for independent marketing contractors (RX-A-E). However, there is no persuasive evidence that sales beyond the first-level result directly from the efforts of the first-level marketing contractor rather than being contingent upon the uncontrolled efforts of others. No connection has been shown in the marketing program between the first-level marketing contractor and especially those at the third through fifth levels. This lack of direct connection or control makes the success of contractors beyond the first level a matter of chance within the concept of Public Clearing House v. Coyne, supra.

Respondent's witnesses explained the increasingly larger bonuses from the second through fifth level as incentives because of the difficulties ot oversee and control and generate sales at the more remote levels (e.g., Tr. 66, 73). Increased efforts by the original subscriber which result in increased direct sales would, in theory, mathematically enhance the probability that bonuses beyond the direct sales might be attained because more potential marketing contractors are placed in the chain at the second level. However, this does not add control or contact beyond the second level and lessen the element of chance in receiving down-line bonuses. The larger bonuses at the remote end of the chain appear to be more of an inducement for the original investor to gamble upon the possibility that others in his chain will make sales than a legitimate reward related to managerial and other efforts which directly cause the down-line sales.

Furthermore, the down-line bonuses otherwise appear unrelated to the efforts and direct sales of the first-level contractor. The larger bonuses at the end of the chain do not represent any reward for increased volume of sales. It is possible, for example, for one marketing contractor to have 100 direct sales and never receive the 15% fifth-level bonus. Another marketing contractor conceivably could sell five subscriptions and by luck, rather than any effort on his/her part, receive all the down-line bonuses, including the fifth-level 15% bonus. In the absence of persuasive evidence showing the down-line bonuses are more directly related to efforts of the first-level marketing contractor than a mere theoretical mathematical possibility, it is concluded the possibility of receiving such bonuses is based on chance as that concept is understood under the mail lottery laws.

Conclusion

Accordingly, it is concluded from reviewing all of the evidence in the record that Respondent is engaged in the conduct of a lottery within the meaning of 39 U.S.C. § 3005. As Respondent is engaged in the conduct of a lottery or scheme for the distribution of money by chance in violation of 39 U.S.C. § 3005, an order under that statute is being issued with this decision.