Koscot Interplanetary, Inc. v. King

• Court: Texas Civil Court of Appeals
• Writing for the Court: HUGHES
• Citation: Koscot Interplanetary, Inc. v. King, 452 S.W.2d 531 (Tex. Ct. App. 1970)
• Decision Date: 11 March 1970
• Docket Number: No. 11741,11741
• Parties: Blue Sky L. Rep. P 70,862 KOSCOT INTERPLANETARY, INC., Appellant, v. William M. KING, Securities Commissioner of the State of Texas, Appellee. 1

Page 531

452 S.W.2d 531

Blue Sky L. Rep. P 70,862

KOSCOT INTERPLANETARY, INC., Appellant, v. William M. KING, Securities Commissioner of the State of Texas, Appellee. ¹ No. 11741.

Court of Civil Appeals of Texas Austin.

March 11, 1970.

Rehearing Denied April 1, 1970.

Mitchell, Gilbert & McLean, Arthur Mitchell, Phillip W. Gilbert, Austin, for appellant.

Crawford C. Martin, Atty. Gen., Nola White, 1st Asst. Atty. Gen., Pat Bailey, Exec. Asst. Atty. Gen., Edward Esquivel, Sam Kelley, Asst. Attys. Gen., Austin, for appellee.

HUGHES, Justice.

Koscot Interplanetary, Inc., appellant, filed suit in the court below against William M. King, Securities Commissioner of the State of Texas, such suit being in the nature of an appeal from a cease and desist order issued by the Commissioner ² respecting the use of unregistered marketing plans by Koscot. The basis of the order was in selling and offering to sell these plans Koscot was selling and offering to sell a 'security' as defined by Art. 581--4, subd. A, V.T.C.S., without registration as required by Art. 581--7, id.

The Commissioner, declining to agree with Koscot that only certain portions of the definition of a 'security' could be applicable to this case insists that the question presented here is whether Koscot's marketing plans are within the defining statute. For this reason, we quote the entire statutory definition of 'security' as contained in Art. 581--4, subd. A:

'A. The term 'security' or 'securities' shall include any share, stock, treasury stock, stock certificate under a voting trust agreement, collateral trust certificate, equipment trust certificate, preorganization certificate or receipt, subscription or reorganization certificate, note, bond, debenture, mortgage certificate or other evidence of indebtedness, any form of commercial paper, certificate in or under a profit sharing or participation agreement, certificate or any instrument representing any interest in or under an oil, gas or mining lease, fee or title, or any certificate or instrument representing or secured by an interest in any or all of the capital, property, assets, profits or earnings of any company, investment contract, or any other instrument commonly known as a security, whether similar to those herein referred to or not. Provided, however, that this definition shall not apply to any insurance policy, endowment policy, annuity contract, optional annuity contract, or any contract or agreement in relation to and in consequence of any such policy or contract, issued by an insurance company subject to the supervision or control of the Board of Insurance Commissioners when the form of such policy or contract has been duly filed with the Board as now or hereafter required by law.'

Koscot has two plans, the old and the new. The 'old' plan was in use prior to June 1969 when the 'new' plan was put into effect. These plans are essentially multi-level marketing programs for a cosmetic line produced by Koscot.

The basic facts in this case are not in dispute and the Commissioner has accepted Koscot's analysis of the 'old' and 'new' plans, which analysis we adopt.

Under Koscot's 'old' plan, a person could become a beauty advisor by paying $10.00 to a Koscot distributor, for which she would receive a 'starter kit' containing samples of Koscot products with a total retail value of $35.50; or, she could purchase a more complete sampling of Koscot products, in a much more elaborate display kit, known as the 'professional Koscot kit,' for $45.00, the total retail value of the kit and its contents being $112.00. The sole function of the beauty advisor was to sell Koscot products at retail. She received a bonus of $100.00 for each Supervisor that she was responsible for recruiting into her sponsor's organization. That bonus was paid to her by her sponsor. The Beauty Advisor had to complete a course of retail training provided for her by her Director. She was expected to service her customers every month, had to maintain a record of all of her customers and sales and submit a copy of her records to her sponsor. The Beauty Advisor received her products directly from her sponsor, buying the product at 35% Off of its recommended retail price. There were also provisions for refund bonuses based on the Beauty Advisor's total retail volume during each month.

The second level of Koscot's distribution system, under the old plan, was that of 'Co-ordinator,' who was otherwise known as a 'Retail Manager.' Persons became Co-ordinators by purchasing a 'display pack' of Koscot products for $98.48 and by paying an entrance fee of $25.00 (totaling $123.48). The display pack contained a very broad sampling of Koscot products, with a total retail value of $151.50. The Co-ordinator's functions were both retailing Koscot products and also recruiting Beauty Advisors and other distributors into the Koscot distribution system. The Co-ordinator had to complete a course of training which emphasized both the retail and wholesale aspects of Koscot. The Co-ordinator's main function was recruiting Beauty Advisors and supplying them with Koscot products for sale. The Co-ordinator purchased her products directly from her sponsor at a 35% Discount off of the recommended retail price. Her profits on retail sales consisted of the retail markup for those products she sold directly to consumers, and of refund bonuses based on her total monthly purchases, which would provide her a profit differential on selling the products to her Beauty Advisors, if her several Beauty Advisors had sufficient purchase volume each month. The Co-ordinator also earned a $25.00 finder's fee each time she sponsored a new Co-ordinator. She also received a finder's fee of $200.00 each time she sponsored a Supervisor into the Koscot distribution system. These finder's fees were paid directly by the Co-ordinator's immediate sponsor.

The third position under the old plan was that of Supervisor. Persons became Supervisors in one of three ways. The first method was by paying $2,000.00, for which the Supervisor received $2,500.00 worth of Koscot cosmetics, at their retail value, plus sales aids, and thorough training for himself in wholesaling Koscot cosmetics, plus extensive training for a woman manager of his choice to handle the retailing of Koscot cosmetics in his organization.

The second method for becoming a Supervisor was by purchasing for resale a total of $2,500.00 in retail value of Koscot cosmetics (while being a Beauty Advisor or Co-ordinator), plus then sending $800.00 to Koscot Interplanetary, Inc. to cover payment of finder's fees for his sponsor, and training for himself and a woman manager of his choice. This method was known as the 'work in' method since it was used by Koscot retailers who had attained sufficient retail volume to become wholesalers; and the third method for becoming a Supervisor was a combination of the buy in and work in methods. The Supervisor was considered a Supervisor of a group of Co-ordinators and Beauty Advisors, and his main functions were to recruit and train his distributors, provide his group with merchandise, and assist his organization in increasing the quality of their service to the consumer. The Supervisor was required to acquire necessary business licenses, retail tax permits and, to collect sales taxes based on retail prices. He was required to maintain an adequate inventory of Koscot products for resale to his Co-ordinators and Beauty Advisors. The Supervisor purchased Koscot products from his Director, at a 55% Discount from the recommended retail price for the products, and he sold those products at a 35% Discount off of recommended retail price, to his Co-ordinators and Beauty Advisors. The Supervisor also received a finder's fee of $500.00 directly from Koscot Interplanetary, Inc., upon selling a Supervisor's order (with a payment of $2,000.00 for $2,500.00 in retail value of products, etc.) to an incoming Supervisor. The Supervisor could also receive a finder's fee of $25.00 for each Co-ordinator that he sponsored into the Koscot distribution system.

Under the old plan, a person could not begin as a 'Director' in the Koscot distribution system. He had to first become a Supervisor (for which he would have paid $2,000.00 and received $2,500.00 in retail value of Koscot products, etc.). Further, since he would be taking all of his Co-ordinators and Beauty Advisors with him when he became a Director, it was necessary that he replace himself with a new Supervisor, to work under his Director, prior to his leaving the organization and setting up his own Director's organization. Further, since Directors purchased Koscot's products from Koscot at a 65% Discount off of the recommended retail price, and since he sold those products to his Supervisors at a 55% Discount, and since the sponsoring Director would lose that 10% Differential if his Supervisor left his organization and established a new directorship, the Director-to-be was required to pay a release fee of $2,500.00 to his Director once he had decided to establish his own directorship. Further, it was necessary that the would-be Director complete retail and wholesale training within sixty days of his advance to the Director's position. Also, to become a Director, he had to receive official written approval of his application from Koscot. The Director was responsible for business and cosmetic training meetings for his entire organization. He was responsible for supplying his Co-ordinators and Beauty Advisors, and if he did not have Supervisors under him, he was required to obtain any necessary business licenses and retail tax permits, and he collected sales taxes based on the retail value of products being sold by his Co-ordinators and Beauty Advisors. Like the Supervisor, the Director was supposed to have a woman manager trained to handle the retail portion of his organization. He also used his woman manager to train Beauty Advisors and Co...