Bounds v. Figurettes, Inc.

• Decision Date: 13 August 1982
• Citation: 135 Cal.App.3d 1,185 Cal.Rptr. 480
• Court: California Court of Appeals Court of Appeals
• Parties: Monroe BOUNDS, et al., Plaintiffs and Appellants, v. FIGURETTES, INC., et al., Defendants and Respondents. Civ. 24623.

Page 480

185 Cal.Rptr. 480 135 Cal.App.3d 1 Monroe BOUNDS, et al., Plaintiffs and Appellants,
v.
FIGURETTES, INC., et al., Defendants and Respondents. Civ. 24623. Court of Appeal, Fourth District, Division 1, California. Aug. 13, 1982.

[135 Cal.App.3d 3] Pray, Price, Williams & Russell and William C. Price, Long Beach, for plaintiffs and appellants.

Bucknum, LeVine & Smith, Daniel R. Bucknum and Jan Smith, Laguna Hills, for defendants and respondents.

Page 481

STANIFORTH, Associate Justice.

Plaintiffs Monroe and Eldra Bounds (Bounds) and Gene and Grace Hand (Hands) seek damages for fraud perpetrated [135 Cal.App.3d 4] upon them by the corporate defendants Figurettes, Inc., and Susan's of California, Inc., through individual defendants Hi Hand (no relation to the plaintiffs Hands), Angela Serritella, Del Remme and other individually named codefendants (collectively called Figurettes). The fraudulent acts recited are both of the common law variety, to wit, a fraudulent inducement to enter a contractual relationship and a "per se" fraudulent operation of a "endless chain" selling scheme or a "pyramid" marketing plan in violation of Penal Code section 327 and Business and Professions Code section 17500. ¹

As a proximate result of the unlawful scheme it is charged the Hands are saddled with lingerie--bras and girdles--costing $3,261.58 of which they cannot dispose. Similarly the Bounds assert they have an unsaleable inventory--bras, girdles, gowns and see through swimsuits--costing $51,465.99. Figurettes refuses to take back the merchandise. Other consequential damages as well as punitive damages are sought. Figurettes denies these charges.

After a lengthy nonjury trial, the court concluded the Figurettes marketing plan as operated between 1969 and 1973 was not an endless chain in violation of Penal Code section 327 nor was it an illegal pyramid scheme within the rules announced in People v. Bestline Products, Inc., 61 Cal.App.3d 879, 132 Cal.Rptr. 767. The court also found the marketing plan did not violate Business and Professions Code section 17500, the California franchise law (Corp. Code, § 31101 et seq.), nor the California Corporate Securities Act. Bounds and Hands appeal the judgment.

135 Cal.App.3d 5

FACTS

Susan's of California (Susan's) manufactures lingerie. Hi Hand and his family own all of Susan's stock. Figurettes, Inc., was incorporated as a sales organization to sell products manufactured by Susan's. Hi Hand is also the president of Figurettes, Inc., and owns 51 percent of its stock. Lingerie designer Angela Serritella is a 10 percent shareholder and vice president of Figurettes, Inc., as well as an employee of Susan's. The remaining 39 percent of the Figurettes, Inc., stock was owned by Del Remme, vice president for sales.

Monroe and Eldra Bounds applied for positions as "counselors" for Figurettes, Inc., on December 13, 1969. They purchased an original inventory for $607.89. The following February the Bounds became "senior counselors" by an inventory purchase of $5,000. The Bounds invited Gene and Grace Hand to a meeting at the Ambassador Hotel in Los Angeles on January 19, 1972, to learn about the Figurettes marketing plan. A month later the Hands applied for positions as "counselors" with Figurettes and purchased an inventory for $500.

New recruits begin with Figurettes by signing a contract to become a counselor for Figurettes with a required inventory purchase

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(minimum purchase is $300, maximum $1,000). For this the recruited counselors are provided a marketing plan which includes the right to use a trademark, service mark, trade name and local advertising. The first document signed by the Bounds and Hands recruiting them as counselors was termed a "counselor application." It contains an authorization to the "counselor" to buy Figurettes products and to sell at company determined prices ("I will sell them at said prices"). The counselor is termed an "independent contractor" not an employee or agent of Figurettes. Hidden in the body of the agreement was the requirement "all purchases from Figurettes ... will be final ...." (Italics added.) This agreement was in force and effect during the period of time the Bounds and Hands operated on behalf of Figurettes, Inc. until June 30, 1972, when the no return policy was changed allowing "applicants" to return merchandise within "72 hours from time of delivery" to obtain a refund. ² This change in company policy followed closely upon notification [135 Cal.App.3d 6] from the Office of the California Attorney General (Apr. 26, 1972) "[i]t appears from the program outlined in your April 17 [1972] letter that the company [Figurettes] is in violation of Penal Code section 327."

From 1969 until 1973 the Bounds and Hands were active in Figurettes directed activities. Early in 1973 they became disillusioned and withdrew from further participation. During this three-year period the Bounds recruited some 150 persons to be counselors for Figurettes. They attended numerous meetings at which, on occasion, they personally participated in touting the Figurettes program, thus inducing others to become counselors and buy inventory in Figurettes scheme. During the years of active participation the Bounds regularly sustained losses as shown by their tax returns. ³ The Bounds never disclosed this financial experience to others coming into the Figurettes organization. When the Bounds determined they should not engage further in Figurettes activities, they took back the unsold merchandise they had sold their recruited counselors. They ended up with a lingerie inventory of $51,465.99 cost price which according to the Bounds is unsaleable.

THE MARKETING PLAN OF FIGURETTES

The marketing plan of Figurettes is detailed in "The Figurette Counselor's Official Policy and Procedure" ("Counselor's Official Policy"). This document describes the multilevel marketing plan as follows:

Counselor Level

A counselor is defined as one who has purchased a sample inventory and has learned to fit and sell Figurettes products. The second sentence provides such counselor "may also sponsor other Counselors in the business,[135 Cal.App.3d 7] thereby building a foundation for their future." The second paragraph of the Counselor's Official Policy fixes the original purchase at a "maximum ... totalling $1,000 ... or even $300" in order to

Page 483

qualify for a five percent bonus. The purchase is to be made at 35 percent off retail plus a five percent bonus for a purchase of $300 or more. A logo with YOU encircled at the top of a pyramid follows. ⁴ The diagram, by not too subtle suggestion, tells the prospective counselor that sponsoring other counselors will build up a pyramid of financial support benefiting the counselor at the top.

NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT VIEWABLE

Senior Counselor Level

This status is reached by the purchases either individually or through group purchase volume (PV) ⁵ of counselors recruited and who are in [135 Cal.App.3d 8] the pyramid below, which total $5,000 in one calendar month. These purchases are also at 35 percent off retail. When the volume reaches $5,000, a 15 percent bonus is given to this senior counselor. Out of this 15 percent the senior counselor gives up 5 percent to any counselor beneath him in the pyramid who has purchased $300 during the month. He will still have left the guaranteed minimum 10 percent bonus on the purchase of all counselors in his group. The document then lists as one of his "responsibilities" the counselor must "carry a sufficient stock of merchandise to supply his people." A senior counselor may purchase $5,000 or more of merchandise and sell it all to counselors to whom he has paid a five percent bonus and thus retain the ten percent difference in the bonus. This bonus is obtainable by the sale of merchandise to counselors. There was no requirement for the sale of any merchandise at retail. ⁶

Major Counselor Level

The third level, is that of major counselor. This status is achieved by a PV of $20,000 in a calendar month, including cumulative purchases of senior counselors. With this PV the major counselor receives a 20 percent bonus. Those in the pyramid below the major counselor who purchase less than $300 worth in a month will not receive any bonus and hence the major counselor will make 20 percent upon the amounts of such sales. Those whose purchases exceed $300 will be entitled to a five percent bonus paid by the major counselor. This leaves the major counselor with 15 percent or three-fourths of the bonus allowed.

Those senior counselors who have purchased merchandise worth $5,000 in a month qualify for the 15 percent bonus paid by the major counselor, leaving the major counselor with a net 5 percent of the $20,000 PV. Again, such earnings were obtainable without a requirement for the sale of

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any merchandise at retail. The mere inventory purchase by counselors and senior counselors below the major counselor in the pyramid results in a bonus to the major counselor.

Inventory purchase must be from the level of the pyramid above. A counselor must deal directly with his senior or major counselor, "not with the home office." ⁷ The counselor cannot buy merchandise from [135 Cal.App.3d 9] anyone other than his sponsor. Each sales person is to recruit and sponsor other sales persons who in turn will be his customers at wholesale and purchase from him alone.

The document encourages recruiting by a variety of provisos. The counselor has the exclusive right to sell to his recruits. The rule is that "the person who first contacts" (defined as a personal visit, a telephone call or letter) a prospective customer or counselor "has the exclusive right to sell to or sponsor this person for thirty days." The exclusive right to sell to that contact is not continued after the 30 days, thus more recruiting is necessary.

"The right to sponsor other people in the business is a privilege. To...