Kugler v. Koscot Interplanetary, Inc.

• Decision Date: 26 July 1972
• Citation: 293 A.2d 682,120 N.J.Super. 216
• Parties: , 1972 Trade Cases P 74,117 George F. KUGLER, Jr., Attorney General of New Jersey, Plaintiff, v. KOSCOT INTERPLANETARY, INC., a Florida corporation, and Glenn W. Turner, Defendants.
• Court: New Jersey Superior Court

Page 216

120 N.J.Super. 216

293 A.2d 682, 1972 Trade Cases P 74,117

George F. KUGLER, Jr., Attorney General of New Jersey, Plaintiff, v. KOSCOT INTERPLANETARY, INC., a Florida corporation, and Glenn W. Turner, Defendants.

Superior Court of New Jersey Chancery Division.

July 26, 1972.

Richard W. Grieves, Deputy Atty. Gen., and Elias Abelson, Asst. Atty. Gen., for plaintiff.

Gross, Demetrakis & Donohue, Hackensack (Richard J. Donohue, Hackensack), for defendants.

MEHLER, J.S.C.

This is an action brought by the Attorney General under the Consumer Fraud Act, N.J.S.A. 56:8--1 et seq., the New Jersey Antitrust Act, N.J.S.A. 56:9--1 et seq., and the Corporation Act, N.J.S.A. 14A:13--11.

The defendants are Koscot Interplanetary, Inc. (Koscot), a Florida corporation, which is engaged in the sale and distribution of cosmetics through non-exclusive distributorships throughout the United States, and Glenn W. Turner, who funded Koscot, and at all times relevant to this action was chairman of its Board of Directors and its principal, if not sole stockholder.

The Attorney General charges that defendants have employed fraudulent and deceptive practices in connection with the sale of Koscot distributorships to residents of New Jersey and that its multilevel distribution program is predicated upon a referral sales and pyramiding concept which is inherently fraudulent and deceptive within the meaning of N.J.S.A. 56:8--2. At the commencement of this action that section provided, in pertinent part, as follows: ¹

The act, use or employment by any person of any deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or with the subsequent performance of such person as aforesaid, whether or not any person has in fact been misled, deceived or damaged thereby, is declared to be an unlawful practice; * * *.

The Attorney General is specifically authorized to bring an action under the Consumer Fraud Act by N.J.S.A. 56:8--8, which at the time of the commencement of this action provided, in pertinent part, as follows: ²Whenever it shall appear to the Attorney General that a person has engaged in, is engaging in or is about to engage in any practice declared to be unlawful by this act he may seek and obtain in an action in the Superior Court an injunction prohibiting such person from continuing such practices or engaging therein or doing any acts in furtherance thereof. * * * In addition, the court may vacate or annul the charter of a corporation created by or under the laws of this State, revoke the certificate of authority to do business in this State of a foreign corporation, and revoke any other licenses, permits or certificates issued pursuant to law to such person which have been or may be used to further such unlawful practice. The court may make such orders or judgments as may be necessary to prevent the use or employment by a person of any prohibited practices, or which may be necessary to restore to any person in interest any moneys or property, real or personal which may have been acquired by means of any practice herein declared to be unlawful.

The charge that defendants have violated the New Jersey Antitrust Act is predicated on the allegation that the limitation which Koscot imposes on its distributors in contracts with them are unlawful restraints of trade, specifically in violation of N.J.S.A. 56:9--3, which declares that--

Every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce, in this State, shall be unlawful.

Authority to institute proceedings in this court to prevent and restrain violations of the Act is granted to the Attorney General by N.J.S.A. 56:9--10(a).

The charge under the Corporation Act, N.J.S.A. 14A:13--11, is predicated on the allegation, which is not disputed, that Koscot, a foreign corporation, did business in New Jersey in 1969 without a certificate of authority issued by the Secretary of State.

The Attorney General seeks the following relief: (1) A declaration that specific practices complained of are in violation of N.J.S.A. 56:8--2; (2) an accounting of all moneys received by Koscot from New Jersey residents in connection with the sale to them of distributorships; (3) a declaration that the contracts between Koscot and its New Jersey distributors are null and void as being violative of the public policy of New Jersey as embodied in N.J.S.A. 56:8--2, 56:8--2.2, and N.J.S.A. 56:9--3, 56:9--4(a); (4) restoration by defendants of all moneys acquired by practices violative of N.J.S.A. 56:8--2 or N.J.S.A. 56:8--2.2 from persons who entered into contracts with Koscot; (5) a declaration that defendants have engaged in contracts, combinations or conspiracies in restraint of trade or commerce in New Jersey in violation of N.J.S.A. 56:9--3 and have combined or conspired to monopolize trade or commerce in violation of N.J.S.A. 56:9--4(a); (6) injunctive relief barring the specific practices allegedly violative of N.J.S.A. 56:8--2, 56:8--2.2 and N.J.S.A. 56:9--3, 56:9--4(a); (7) imposition of civil penalties against defendants as provided in N.J.S.A. 56:8--13, N.J.S.A. 56:9--10, and N.J.S.A. 14A:13--11, and (8) revocation of Koscot's certificate of authority to transact business in New Jersey.

I.

Koscot, whose principal office is in Orlando, Florida, was incorporated in 1967. Although it began to do business in New Jersey in 1969, it did not obtain a certificate of authority to do so from the Secretary of State until November 10, 1971. From February 1969 to February 1971 Koscot offered for sale and sold distributorships in New Jersey, as it had been doing elsewhere, which entitled the purchaser to participate in the Koscot marketing plan in two capacities, namely, 'retail,' i.e., the sale of cosmetics, and 'wholesale,' i.e., the recruitment and sale of further distributorships. ³ Both segments of the marketing plan provided for the compensation of distributors through a system of commissions related either to the sale of the product or the sale of distributorship positions.

The marketing program which was in effect in New Jersey may be characterized as a multilevel distribution plan. During the initial period of operation here the program consisted of four positions, known as Director, Supervisor, Coordinator and Beauty Advisor. Persons on each of the levels were permitted to sell products at retail with buying discounts ranging from 35% For Beauty Advisors to 65% For Directors. Directors and Supervisors were encouraged to solicit investments from potential participants in order to earn finder's fees ranging from $500 to $2500.

Beginning in the fall of 1969, the marketing plan was modified both as to form and substance. The position of Co-ordinator, which was the second level retail position, was eliminated and the highest position became known as Distributor in lieu of Director. Under the new plan, the system worked essentially as follows: To become a Supervisor one paid $2,000 to Koscot, for which he was credited with inventory of a like dollar amount at retail value. To become a Distributor one paid $5,000 to Koscot and was credited with inventory of a like dollar amount at retail value. Both investment levels provided for company training courses. A Supervisor obtained a buying discount of 55% On future purchases of product and a Distributor obtained a 65% Buying discount. They could sell the product themselves and earn the full discount or engage Beauty Advisors, who sold product at a buying discount of 40% Obtained through their sponsoring Supervisor's or Distributor's account. Thus a Supervisor, on sales made by him, earned a commission of 55% And on the volume of retail sales made by this Beauty Advisor earned an override or commission of 15%. A Distributor earned a full commission of 65% On sales made by himself and an override or 25% Commission on the volume of retail sales made by his Beauty Advisor. Additionally, he became entitled to a 10% Commission on the volume of sales made by or through his Supervisor.

The 'wholesale' aspect of the new marketing plan operated as follows: A Supervisor was paid a finder's fee by Koscot when he obtained a new Supervisor. A Distributor who enrolled a new Supervisor received $700 from Koscot, $500 of which was paid as a finder's fee, the additional $200 representing a 10% Override on the new recruit's mandatory new product order of $2,000. A Supervisor could move up to the level of Distributor only by purchasing an additional inventory of $3,000 and by sponsoring another Supervisor as his replacement in this sponsoring Distributor's organization. Such a move-up produced for the sponsoring Distributor commissions totalling $2,850. Thus, finder's fees and commissions had no connection with retail sales made to the ultimate consumer, but were paid solely for bringing new investors into Koscot's marketing program.

Through the period of active solicitation of new distributors in New Jersey Koscot sold 624 Supervisor positions and 387 Distributor positions. The total investment by New Jersey residents in these positions exceeded three million dollars.

The principal, if not the sole, method of recruiting distributors was by means of a public presentation known as the Golden Opportunity meeting, supplemented by a charter flight program to Koscot's home office in Orlando, Florida, known as the GO (for Golden Opportunity) Tour. The form and substance of Golden Opportunity meetings were in all material respects uniform and in accordance with Koscot directives. The format for these meetings was set forth in a script prepared and published by Koscot. Those who conducted the meetings followed the script in accordance with Koscot training and policy.

Golden Opportunity...