Chapman v. Rudd Paint & Varnish Company

• Decision Date: 20 March 1969
• Docket Number: No. 23448.,23448.
• Citation: 409 F.2d 635
• Parties: Allan V. CHAPMAN, Jr., Appellant, v. RUDD PAINT & VARNISH COMPANY, Dave Rivers and Alan Park, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

409 F.2d 635 (1969)

Allan V. CHAPMAN, Jr., Appellant, v. RUDD PAINT & VARNISH COMPANY, Dave Rivers and Alan Park, Appellees.

No. 23448.

United States Court of Appeals Ninth Circuit.

March 20, 1969.

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Nelson Christensen (argued), Seattle, Wash., for appellant.

Warren A. Doolittle (argued), of Schweppe, Doolittle, Krug & Tausend, Seattle, Wash., for appellees.

Before HAMLEY, MERRILL and HUFSTEDLER, Circuit Judges.

HAMLEY, Circuit Judge:

This action involves a distributorship agreement between Rudd Paint & Varnish Company (Rudd) and Allan V. Chapman, Jr. The distributorship was for a product known as "Run-Guard," a substance designed to prevent runs in nylon hosiery. The agreement granted Chapman an exclusive distributorship in Colorado and Alaska; however, this lawsuit relates only to the Colorado business. Difficulties arose between the two parties, and Chapman brought this action against Rudd, its president and its sales director, to recover damages and obtain injunctive relief.

In the posture of the case as it reaches us, Chapman asserts two claims against defendants. One is that, in entering into the agreement, defendants, in effect, sold to Chapman an unregistered security in violation of the Securities Act of 1933, 15 U.S.C. § 77a et seq. (1964) and The Securities Act of Washington, RCW 21.20.005 et seq. The other claim is that, in connection with this transaction, defendants acted concertedly among themselves and with others to accomplish ends which violate section 1 of the Sherman Act, 15 U.S.C. § 1 (1964), section 2(a) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13 (1964), and the Consumer Protection Act of the State of Washington, RCW 19.86.010 et seq.

During the course of the litigation the district court entered a summary judgment dismissing these claims with prejudice. Thereafter, a trial took place on other claims, relating to alleged fraud and breach of contract, which do not concern us. A judgment was ultimately entered dismissing the action. This judgment had the effect of finalizing the summary judgment referred to above. Plaintiff then took this appeal but complains only of the dismissal of the securities and antitrust claims described above.

Defendants moved initially to dismiss the appeal under Rule 3(a) of the Federal Rules of Appellate Procedure for failure to take necessary steps to perfect the appeal. The motion, which involves the failure to take steps outlined in Rule 10(b) of the Federal Rules of Appellate Procedure, is denied. Defendants' contention, made in their brief and on oral argument, that the appeal is untimely insofar as it relates to the summary judgment, is without merit.

Defendants also point out that plaintiff failed to include in the part of the record brought before this court, certain depositions which were considered by the district court in acting upon the motion for summary judgment. Defendants urge that this failure is "fatal" to a consideration of plaintiff's appeal from the summary judgment.

Such a failure is not automatically "fatal" to an appeal because, under Rule 10(a), all of the original papers and exhibits filed in the district court are a part of the record on appeal whether or not brought before this court. Following oral argument, and pursuant to Rule 10(e), this court directed plaintiff to file a supplemental transcript containing the missing depositions. This has been done.

On the merits, plaintiff first argues, in effect, that at the time the motion for summary judgment was under consideration, there were genuine issues as to material facts pertaining to plaintiff's claims based upon the above-cited federal and state securities acts. If this is true, then the district court should not have disposed of those claims by means of a summary judgment. See Rule 56(c), Federal Rules of Civil Procedure.

Section 12(1) of the Securities Act of 1933, 15 U.S.C. § 77l(1), provides that any person who offers or sells a security in violation of section 5 of that Act shall be civilly liable to the person purchasing such security from him. Section 5 of the Act, 15 U.S.C. § 77e, provides, in part, that it shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell a security through the use or medium of any prospectus or otherwise, unless a registration statement is in effect as to such security.

It is here undisputed that defendants made use of instrumentalities of interstate commerce and the mails, in negotiating the "Run-Guard" distributorship agreement with plaintiff. It is also undisputed that no registration statement was in effect as to the distributorship agreement in question, dated October 11, 1965. Defendants are therefore civilly liable to plaintiff if the distributorship agreement is a "security" within the meaning of the Securities Act of 1933.

The term "security" is defined in that Act to embrace a variety of instruments, including any "investment contract." See section 2(1), 15 U.S.C. § 77b (1) (1964). The parties are agreed that if the distributorship agreement is a "security" within the meaning of this Act, it is because it is an "investment contract." An investment contract, for purposes of the Securities Act of 1933, means "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party * * *" S. E. C. v. W. J. Howey Co., 328 U.S. 293, 298-299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244.

The distributorship agreement was before the district court. The pleadings, affidavits and depositions before the district court reveal no dispute as to the terms of that agreement. Plaintiff, however, contends, in effect, that the character and scope of the distributorship agreement are to be judged not alone by the express terms of the agreement, but also in light of a brochure which he received from defendants before he entered into the agreement.¹ But, assuming this to be true, the brochure is also in evidence, and there is no dispute as to its contents or its use in inducing Chapman to enter the distributorship agreement.²

We therefore conclude that, at the time the district court entertained the motion for summary judgment, there was no genuine issue as to any material fact pertaining to plaintiff's claim based upon the Securities Act of 1933.

However, summary judgment is not to be granted merely because there are no such issues of fact. It must also appear that, on the undisputed facts, the person making the motion "is entitled to a judgment as a matter of law." See Rule 56(c), Federal Rules of Civil Procedure. In his brief on appeal, plaintiff does not expressly contend that defendants were not entitled to judgment dismissing, as a matter of law, the claim based upon the Securities Act of 1933. Nevertheless we think this is the purport of much of his argument on this branch of the case and we shall so deal with it.

The distributorship agreement, considered by itself, neither expressly nor by implication provides that plaintiff will or may obtain profits solely from the efforts of defendants or others. Quite to the contrary, an initial recital and section 16 of the agreement make it clear that the distributor's function is to "carry on the sale and distribution of PRODUCT" in the specified area. And section 21 of the agreement provides, among other things, that the distributor "understands and agrees that the success of this DISTRIBUTORSHIP is directly related to the efforts of DISTRIBUTOR and therefore no guarantees of sales profits or volume can be made." (Emphasis in original) That plaintiff fully understood that he had an active role to play under the agreement is also demonstrated by the fact that, after the agreement was entered into, he returned to Colorado and, in the words of his own attorney, "vigorously commenced operations."³

Thus, applying the test of S. E. C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244, referred to above, the distributorship agreement, standing alone, is not an investment contract, and therefore not a security within the meaning of the Securities Act of 1933.

However, in determining whether a particular instrument is an investment contract and therefore a security, inquiry does not necessarily stop with an examination of the instrument.⁴ Where the terms of the instrument are reasonably subject to varying interpretations, the background facts, including the terms of the offer, the plan of distribution and the economic inducements held out to the prospect, are to be reviewed. S. E. C. v. United Benefit Life Ins. Co., 387 U.S. 202, 211, 87 S.Ct. 1557, 18 L.Ed. 2d 673; S. E. C. v. C. M. Joiner Leasing Corp., 320 U.S. 344, 352-353, 64 S.Ct. 120, 88 L.Ed. 88. Moreover, the brochure is here pertinent because the Securities Act of 1933 prohibits the offer as well as the sale of unregistered non-exempt securities. See Howey, at 301, 66 S.Ct. 1100.

The brochure, on the basis of which plaintiff was attracted to Rudd and its distributorship plan, and on the basis of which plaintiff made an initial five thousand dollar deposit, provides the only background factor of substance to be considered in this case.⁵ The brochure contains statements which seem to minimize the amount of effort which a distributor must exert, and maximize that which Rudd would contribute. Moreover, the brochure makes reference to terms which would be as appropriate in an investment contract as in an ordinary distributorship agreement.⁶

In addition, the brochure contains profit projections allegedly based on market tests and sales data, places emphasis on the past record, success and potential of Rudd, and makes reference to the assistance to be rendered the investor by that company. The brochure describes the...