Jones v. International Inventors Inc. East

• Decision Date: 03 February 1977
• Docket Number: Civ. A. No. 75-1978.
• Citation: 429 F. Supp. 119
• Parties: Eugene F. JONES v. INTERNATIONAL INVENTORS INCORPORATED EAST, d/b/a International Inventors, Incorporated, also d/b/a International Inventors of Ga., also d/b/a International Inventors of Ga., Inc.
• Court: U.S. District Court — Northern District of Georgia

429 F. Supp. 119

Eugene F. JONES v. INTERNATIONAL INVENTORS INCORPORATED EAST, d/b/a International Inventors, Incorporated, also d/b/a International Inventors of Ga., also d/b/a International Inventors of Ga., Inc.

Civ. A. No. 75-1978.

United States District Court, N. D. Georgia, Atlanta Division.

November 4, 1976.

On Motion For Reconsideration February 3, 1977.

COPYRIGHT MATERIAL OMITTED

Ralph E. Carlisle, William R. Carlisle, Decatur, Ga., for plaintiff.

Don G. Gaskill, Snellville, Ga., for defendant.

ORDER

RICHARD C. FREEMAN, District Judge.

This is an action for damages brought pursuant to § 10(b) of the Securities and Exchange Act of 1934 hereinafter the "34 Act", 15 U.S.C. § 78j, Rule 10b-5 of the Securities and Exchange Commission promulgated pursuant thereto, 17 C.F.R. § 240.10b-5, and § 12 of the Georgia Securities Act of 1973, Ga.Code Ann. § 97-112. Plaintiff also seeks damages for common law fraud and deceit. Jurisdiction is allegedly grounded upon § 27 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78aa. The action is presently before the court on defendant's motion to dismiss for lack of subject matter jurisdiction and/or for summary judgment.

Before turning to the merits of the motion sub judice, a brief review of the salient factual allegations contained in the complaint is warranted. In his complaint, plaintiff alleges that defendant utilized the means and instrumentalities of interstate commerce, including the mails and newspapers, in connection with the offering for purchase and sale of a "security." Plaintiff alleges that he responded to a newspaper advertisement contained in The Atlanta Journal and The Atlanta Constitution, and that he invested $250.00 in an investment scheme whereby defendant agreed to exercise all necessary managerial and sales efforts in connection with the marketing of an invention that plaintiff submitted, in return for which plaintiff and defendant would ultimately divide the proceeds from the sale and/or licensing of the invented device should the defendant decide to promote it. For the initial investment of $250.00, defendant agreed to investigate the potential marketability of the invention, and when plaintiff's invention received a positive evaluation, he was requested to submit an additional $956.00. Plaintiff further alleges that contrary to the defendant's representations, the defendant had neither the intention nor the capability of marketing the invention, and that the instant scheme was nothing more than an effort to defraud plaintiff of money in violation of state and federal securities laws that also constitutes actionable common law fraud and deceit.

Defendant's motion to dismiss for lack of subject matter jurisdiction is grounded upon its contention that the contract or agreement at issue did not constitute a "security" within the meaning of the relevant securities laws, since it constitutes nothing more than a "service contract" whereby defendant merely agreed to perform evaluative studies of inventions submitted to it. In sum, the defendant contends:

the services agreed to be performed by International Investors, Inc. were evaluative; there was no investment in a common enterprise. The Defendant only agreed to perform marketing services, not to produce profits for the Plaintiff in a common investment enterprise.

Defendant's characterization of the agreement and the evaluation and marketing schemes proposed by the defendant as a mere "service contract" and therefore not a "security" is somewhat overly simplistic in light of the fact that it is well settled that:

in searching for the meaning and scope of the word "security" in the Acts, form should be disregarded for substance and the emphasis should be on economic reality.

Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). See also SEC v. W. J. Howey Co., 328 U.S. 293, 298, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946)¹ hereinafter "Howey"; SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 352-353, 64 S.Ct. 120, 88 L.Ed. 88 (1943). Section 3(a)(10) of the '34 Act, 15 U.S.C. § 78c(a)(10), defines the term "security" in sufficiently broad and general terms to include within its definition various types of instruments that fall within the ordinary concept of a "security" in the commercial world and includes in relevant part:

any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, . . . investment contract, . . . certificate of deposit, for a security, or in general, any interest commonly known as a "security";

. . . . .

In Howey, supra, the Supreme Court enunciated the landmark definition of an "investment contract", defining it to be:

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 a promoter or a third party . . .

328 U.S. at 298-99, 66 S.Ct. at 1103. Accord, Tcherepnin v. Knight, supra, 389 U.S. 332, 338, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). Thus, under Howey the sine qua non of an investment contract is the coalescence of three elements: (1) an investment of money, (2) a common enterprise, and (3) "a reasonable expectation of profits to be derived from the entrepreneurial or management efforts of others." United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975). The instant action presents the novel question of whether an inventor, who invests money in a company to evaluate the saleability of his invention, with the ultimate hope that the company will undertake to market the invention and split any profits from licensing or other sale of that invention with the investor, has purchased or been offered an "investment contract" within the meaning of the federal securities laws.

At the outset, we note that the agreement between the parties or at least the proposal offered the plaintiff, of course, contemplated an investment of money, whether it be the initial $250.00 for the evaluation of the invention and/or the additional $926.00 requested by the defendant as payment for such services as preparing the Manufacturer's Submission Brochure and Manufacturer's Presentation Manual, after plaintiff's invention received a positive evaluation.² The more difficult questions, and those which the parties have somewhat inadequately and only superficially addressed is (1) whether the scheme involved a common enterprise and (2) moreover, whether the inventor-plaintiff's expectation of profit was to come solely from the efforts of others, in light of the fact that he made the initial creative and inventive contribution, with the result that the ultimate success of defendant's efforts would at first blush appear to depend upon the relative merits of the invention.

Turning first to the "common enterprise" element, it is somewhat unsettled whether a "common enterprise" may exist within the meaning of Howey where the agreement or scheme involves only one investor and the promoter. Compare Sunshine Kitchens v. Alanthus Corp., 403 F.Supp. 719 (S.D.Fla.1975) with Huberman v. Denny's Restaurant, 337 F.Supp. 1249 (N.D.Cal.1972).³ On the other hand, it is well settled in this circuit that the fact that one investor's return is independent of that of other similar investors does not preclude satisfaction of the common enterprise element, if the fortunes of all the investors are, in the last analysis, dependent upon the efficacy of the promoter's efforts. See, e. g., SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974); SEC v. Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974). Thus, it is not significant whether the profits of the enterprise will be pooled and distributed among all the investors and the promoter, but rather the emphasis should be on "the uniformity of impact of the promoter's efforts" on the fate of all the investors. Id. at 479; SEC v. Continental Commodities Corp., supra, at 522; SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir. 1973), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53. See also Howey, supra, 328 U.S. at 300, 66 S.Ct. 1100. To illustrate, SEC v. Koscot Interplanetary, Inc., supra, involved the Koscot scheme of multi-level distributorships, wherein each investor's profit materialized only when the prospects he attracted to Opportunity Meetings were enlisted as distributors or sub-distributors. The Court of Appeals, nevertheless, deemed the commonality requirement to be present despite the fact that each investor's return was independent of the other, since the expectations and ultimate profit of all investors were "inextricably tied to the efficacy of the Koscot prospects and consummating a sale." Id. at 479. In sum, the absence of pooling or pro-rata sharing of profits is not critical to a finding of commonality. Id.; SEC v. Continental Commodities Corp., supra.⁴Accord, Blackwell v. Bentsen, 203 F.2d 690, 691-92 (5th Cir. 1953), cert. dismissed, 347 U.S. 925, 74 S.Ct. 528, 98 L.Ed. 1078. SEC v. Glenn W. Turner Enterprises, supra, at 482. Applying these principles to the instant action, it is evident that plaintiff has satisfied its burden with respect to the common enterprise requirement, since although plaintiff's expectation of profits was independent of those of other inventors who participated in the scheme, it is, nevertheless, clear that the fate of plaintiff and other investors was inextricably tied to the marketing and promotional efforts assumed and promised by the defendant in soliciting manufacturers to buy or license their inventions.

The second apparent deficiency in the scheme which may be fatal to the application of the Howey test is whether it can reasonably be concluded that plaintiff's ultimate chance for profits is dependent solely upon the efforts of others, in view of plaintiff's...