610 F.2d 1306 (5th Cir. 1980), 76-3495, Piambino v. Bailey

Docket Nº:76-3495, 77-2045.
Citation:610 F.2d 1306
Party Name:Peter PIAMBINO et al., Plaintiffs-Appellees, v. William E. BAILEY et al., Defendants, Bestline Products, Inc., a California Corporation et al., Defendants-Appellants. In re BESTLINE PRODUCTS SECURITIES AND ANTITRUST LITIGATION. Peter PIAMBINO et al., Plaintiffs-Appellees, v. William E. BAILEY et al., Defendants, David SYLVA, Compliance Officer of t
Case Date:February 06, 1980
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 1306

610 F.2d 1306 (5th Cir. 1980)

Peter PIAMBINO et al., Plaintiffs-Appellees,

v.

William E. BAILEY et al., Defendants,

Bestline Products, Inc., a California Corporation et al.,

Defendants-Appellants.

In re BESTLINE PRODUCTS SECURITIES AND ANTITRUST LITIGATION.

Peter PIAMBINO et al., Plaintiffs-Appellees,

v.

William E. BAILEY et al., Defendants,

David SYLVA, Compliance Officer of the California

Restitutionary Fund, Intervenor-Appellant.

Nos. 76-3495, 77-2045.

United States Court of Appeals, Fifth Circuit

February 6, 1980

Page 1307

[Copyrighted Material Omitted]

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J. Russell Pitto, San Jose, Cal. and Marc M. Watson, Miami, Fla., for Bestline, Inc., et al.

Carl H. Hoffman, Miami, Fla., James H. Joseph, Pittsburgh, Pa., for Piambino, et al.

David Ferber, Sol., for amicus curiae. Ralph C. Ferrara, Gen. Counsel, S. Lee Terry, Jr., William A. Dietch, Attys., SEC., Washington, D.C.

Evelyn Langlieb Greer, Miami, Fla., for intervenor-appellant.

Michael R. Botwin, Deputy Atty. Gen., Dept. of Justice, Los Angeles, Cal., amicus curiae, for people of the State of California.

William C. Wolford, Asst. Atty. Gen., State of Wisconsin, Madison, Wis., amicus curiae, for State of Wis.

Appeals from the United States District Court for the Southern District of Florida.

Before COLEMAN, Chief Judge, GOLDBERG, and RUBIN, Circuit Judges.

COLEMAN, Chief Judge.

This litigation arose from the sale by Bestline Products, Inc., 1 a California corporation, of direct distributorship contracts (or agreements) for the sale and distribution to the consuming public of its line of personal and home care products. Bestline's direct distributorships were an integral part of its multi-level distributorship system, a species of pyramid sales schemes. 2

The complexities of this case remind us of the ancient Gordian Knot. Involved here are eleven lawsuits transferred to the Southern District of Florida for coordinated or consolidated pretrial proceedings with a suit previously filed in that district. 3 The

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two appeals taken to this Court from those proceedings, and now before us, have also been consolidated. 4

Included is a class of nearly 40,000 plaintiffs. There are several corporate defendants, a law firm defendant, and over 60 individual defendants. Swept up in the proceedings are scores of lawyers, the attorneys general of seven states, the Federal Trade Commission, and the Department of Justice. Various state and federal courts have decided related cases.

In this appeal, the parties have raised many issues, including: (1) the management of class actions and complex litigation; (2) the interpretation of 28 U.S.C. § 2283 (the "Anti-Injunction Act"); and (3) the definition of a "security" for purposes of the federal securities laws.

We hold that summary judgment declaring the distributorships to be securities was improvidently entered. After a consideration of all issues we reverse and remand for further proceedings not inconsistent herewith.

I.

BESTLINE'S ORGANIZATION AND HISTORY 5

Bestline Products, Inc. began its activities in August, 1966, when defendants William E. Bailey and Jerry G. Brassfield organized a multilevel direct sales organization to sell and distribute a line of biodegradable soap products. Bailey and Brassfield had previously been associated as distributors for Holiday Magic, Inc., a multilevel direct sales company which sold cosmetic products. Those men had additional experience with pyramid sales schemes resulting from their work with several other (ultimately unsuccessful) companies.

From its inception, Bestline was a successful venture, at least until the rising flood of lawsuits and regulatory actions began to overwhelm it. Bestline recruited other individuals with experience in multilevel direct sales and grew until it became an operation in all fifty states and several foreign countries. By March, 1972, its initial meager line of cleaning agents and home care products had expanded to sixteen in number. Six of the products were manufactured by Bestline in its own facilities in San Jose, California and Elk Grove Village, Illinois; various other companies manufactured the remaining items.

In order to share the ownership of the company with other loyal and devoted participants in its direct sales program, in 1968 Bailey and Brassfield organized the Bestline Corporation and sold their interest in Bestline Products, Inc. to the new corporation for $10 million. They sold some stock in the new corporation to others, but they retained the majority ownership for themselves. Bailey was the chief executive officer and chairman of the board until August 1973, when Brassfield returned to the organization he had left in 1970. As the business expanded, the officers and top executives of Bestline received ever-expanding compensation packages, including six-

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figure salaries and such perquisites as use of the corporate aircraft and yacht.

The most important factor in Bestline's success, and an equally important factor in its legal problems, was its "National Marketing Plan", a plan that was implemented through three levels of independent distributors. At the lowest level were the "Local Distributors", 6 who paid $5 annual dues and sold Bestline's products directly to the consuming public. At the second, or middle, level were the "Direct Distributors". The status of "Direct Distributor" could be achieved by a Local Distributor who sold approximately $5,000 worth of products in a month. The status could also be obtained by a prepurchase plan. A person could become a Direct Distributor by paying $3,400 in cash; for this sum, the purchaser received classification as a Direct Distributor and soap products having a retail price of $5,000 together with sales aids. Such a purchaser was required to serve as a Local Distributor for seven days and, while a Local Distributor, to buy $100 (later $500) worth of Bestline products. Unlike Local Distributors, Direct Distributors were not required to sell products to the consuming public or even to Local Distributors whom they sponsored. They could engage in recruiting Local Distributors to sell the products, but they could also recruit other persons to become prepurchase Direct Distributors. If a Direct Distributor successfully recruited two new Direct Distributors, he became qualified to move up to the third, and highest, level, that of "General Distributor". This level in the Bestline hierarchy could be attained only by persons who first qualified as Direct Distributors and then satisfied certain other requirements.

The district court certified as the class plaintiffs only repurchase Direct Distributors. Thus, the action does not involve Local Distributors, Local Distributors who earned the status of Direct Distributor by selling soap products or General Distributors.

Profits at the various levels were in part dependent on the volume of sales to lower levels and to the consuming public. A Local Distributor purchased the products from his sponsoring Direct Distributor at a discount that varied from 30% To 52% Off of the retail price, depending upon his monthly sales. A Direct Distributor purchased the products for resale to his Local Distributors and to the public at a 52% Discount. At the top of the pyramid, a General Distributor purchased the products for resale to his Director Distributors, his Local Distributors, and the public at a 60% Discount.

A person at any of the three levels could profit by selling Bestline's products to the public (which all levels were authorized to do) or by recruiting other distributors (which all levels were also authorized to do). In fact substantial sales of Bestline products were made, about $1,000,000 per month at one point. (The record is not clear, however, what part of these sales were made to consumers and what part remained in the hands of various classes of distributors.)

As is the case with most such pyramid sales schemes, however, the lure of big profits came not from the opportunity to sell Bestline's products to the consuming public but from the opportunity to recruit others who would in turn recruit or sell. The district court discussed four different methods by which Bestline Direct and General Distributors could profit from the recruitment of new distributors: (1) the release fee; (2) the standard commission; (3) the override commission; and (4) the special incentive bonus (SIB).

The release fee practice, which Bestline abandoned in 1970, was the simplest method by which a person in the top level profited from the recruitment aspect of the National Marketing Plan. Under this program, a Direct Distributor who wished to move up was required to pay Bestline a $2750 fee, of

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which Bestline paid $2250 to the Direct Distributor's sponsoring General Distributor (generally, the one who had initially recruited the Direct Distributor). Ostensibly, this fee was paid to release oneself from his General Distributor's organization and compensate the latter for the loss of commission which would be experienced when the Direct Distributor left that organization. This fee therefore provided General Distributors with an incentive to encourage their Direct Distributors to move up the pyramid. Equally as obvious, however, is the fact that the release fee provided no incentive for Direct Distributors. 7

The second method by which individuals profited from the recruitment of others was the standard commission. This resulted from the 8% Differential in discounts between General and Direct Distributors, and it was applied to all "product movement" between those two levels. This standard commission therefore provided an incentive for General Distributors to...

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