People v. Bestline Products, Inc.

• Decision Date: 25 August 1976
• Citation: 61 Cal.App.3d 879,132 Cal.Rptr. 767
• Court: California Court of Appeals Court of Appeals
• Parties: The PEOPLE of the State of California, Plaintiff and Respondent, v. BESTLINE PRODUCTS, INC., a corporation, Bestline Corporation et al., Defendants and Appellants. Civ. 46034.

Page 767

132 Cal.Rptr. 767

61 Cal.App.3d 879

The PEOPLE of the State of California, Plaintiff and Respondent, v. BESTLINE PRODUCTS, INC., a corporation, Bestline Corporation et al., Defendants and Appellants.

Civ. 46034.

Court of Appeal, Second District, Division 3, California.

Aug. 25, 1976.

Evelle J. Younger, Atty. Gen., E. Clement Shute, Asst. Atty. Gen., Herschel T. Elkins and Michael R. Botwin, Deputy Attys. Gen., for plaintiff and respondent.

Humphreys, Berger & Pitto, P.C., and Donald A. Drumright, San Jose, for defendants and appellants Bestline Products, Inc., and Bestline Corp.

Cotchett, Hutchinson & Dyer and Joseph W. Cotchett, San Mateo, for defendant and appellant Bailey.

Meis & O'Donnell and Owen P. O'Donnell, San Francisco, for defendant and appellant Eastis.

Gallucci, White & Kelley, San Jose, and Thomas E. White, for defendant and appellant Depew.

Irving P. Reifman, Beverly Hills, for defendants and appellants Rohn and Huff.

POTTER, Associate Justice.

Appellants Bestline Products, Inc. (hereinafter 'Bestline Products'), Bestline Corporation (hereinafter 'Bestline Corp.'), William E. Bailey, Robert W. Depew, David L. Eastis, James Rohn and Larry D. Huff appeal from a judgment dated December 21, 1973, in favor of plaintiff The People of the State of California. The judgment (1) permanently restrained defendants from operating or participating in a marketing program embodying proscribed features which the court found were in violation of Business and Professions Code section 17500 ¹ prohibiting 'untrue or misleading' statements; (2) required defendants Bestline Products, Bestline Corp., and Bailey to offer to make restitution to victims of the Bestline marketing program, and (3) imposed civil penalties of $1,000,000 jointly and severally, upon, defendants Bestline Corp. and Bestline, Inc., $250,000 upon defendant Bailey, $100,000 upon defendant Eastis, and $50,000 each upon defendants Depew, Huff and Rohn.

The complaint which was filed May 12, 1971, included two causes of action. The first cause of action charged that defendants 'have operated, and continue to operate, their marketing program by means of making numerous false and misleading representations at 'opportunity meetings' and at other meetings to which the members of the public are invited' and alleged that '(t)hese untrue misrepresentations include, But are not limited to, representations relating to the amount of income which can reasonably be anticipated . . . the ease with which persons can earn large amounts of money, . . . the number of successful persons in the marketing program, and . . . the guaranteed success based upon substantial retail sales of the product to the public.' (Emphasis added.) Various specific false representations were described, allegedly made during the conduct of defendants' marketing program from January 14, 1971, to the date of the complaint. The January 14, 1971 date was the date of a consent decree in action No. 952969 in the Superior Court of the State of California for the County of Los Angeles. This decree enjoined defendants Bestline Products, Bestline Corp., Bailey and Depew from operating a marketing program embodying features therein proscribed and from making certain categories of misrepresentations. It also required disclosure of its terms. The consent decree was attached to the complaint as an exhibit.

Among the specific misrepresentations charged were descriptions of the Bestline marketing program as offering to prospective distributors the expectation of a large annual income as a result of their recruiting additional distributors who would in like fashion bring in further recruits. The first cause of action further specified as misrepresentations the giving of nonrepresentative examples of income generated in various levels of distributorships, misstatements relating to the ease with which additional distributors could be obtained, and as to the level of retail sales.

The second cause of action charged that defendants were engaging in conduct 'constituting acts of unfair competition' made enjoinable by Civil Code section 3369. ² As acts of unfair competition, the second cause of action specified defendants' violations of the consent decree of January 14, 1971, plaintiff's theory being that business practices prohibited by such injunction were thereby made 'unlawful.' Also specified as unfair competition was defendants' operation of their distribution program comprising an 'endless chain' scheme prohibited by Penal Code section 327, ³ the violation of this section being also relied upon to make defendants' business practices 'unlawful.' The unfair competition charges were stated as an alternative basis for injunctive relief, there being no provision for civil penalties for unfair competition at the time the complaint was filed. ⁴

The trial commenced October 27, 1972, and 39 court days were consumed in the presentation of evidence and argument. In the presentation of the People's opening case, the 1971 consent decree was received in evidence and both documentary evidence and testimony were received, fully detailing the Bestline marketing program. This program entailed the distribution of household cleaning products manufactured and sold by Bestline Products through an organization comprising a very large number of distributors in three categories. The local distributors, whose function was to make direct sales to the consuming public, purchased Bestline products from direct distributors or general distributors. Generally, they worked part-time and sold through house-to-house or business-to-business canvassing and through giving parties in their homes. The basic discount of the local distributor was 30 per cent. An additional discount in the form of a rebate based upon volume, over $149 per month, was also payable to local distributors.

The next level above the local distributor was the direct distributor. The direct distributor purchased products from Bestline Products and sold them either to local distributors or directly to the public. The direct distributor purchased from Bestline at a 52 per cent discount. There was, therefore, a maximum of 22 per cent profit on their sales to local distributors (depending upon the rebate earned by them) and 52 per cent profit on their personal sales directly to the consumer. There were slight variations in the requirements to become a direct distributor, depending upon the time interval involved. One method was the 'work-in.' By selling approximately $5,000 retail value of merchandise in one calendar month, a local distributor could become a direct distributor. Far more commonly, however, direct distributorship status was acquired by 'pre-purchase' of an inventory of Bestline products, literature and sales aids for an investment of $3,000 or more.

The top position in the Bestline distribution system was the general distributor who was permitted to purchase Bestline products at a 60 per cent discount. This allowed a profit up to 30 per cent on resales to local distributors. The general distributor also received commissions and special incentive bonus credit for all sales made through the general distributors' organization. To become a general distributor, a direct distributor was required to recruit another direct distributor, and to either (1) recruit a second new direct distributor, or (2) 'create' an additional volume of $5,000 in one calendar month by selling to local distributors or to the consuming public at retail. No commission was paid to the direct distributor on account of his recruitment of the first or second additional direct distributor required to become a general distributor. In addition, to become a general distributor, the direct distributor was required to pay $600 to Bestline Products for a general distributor school which he was not required to attend. Once general distributorship status was attained, commissions were payable upon all prepurchase inventory sold to any additional direct distributors recruited by the general distributor and as well upon such sales to any new direct distributors recruited by any such recruit in order to become a general distributor. When a direct distributor recruited by a general distributor himself became a general distributor, the recruiting general distributor was entitled to a 3 per cent overriding commission on the total volume produced by the new general distributor's organization. Thus the recruitment of a direct distributor produced commissions both for the sponsoring general distributor and an overriding general distributor, should there be one. Since the general distributor's discount was 8 per cent more than that of the direct distributor, the sponsoring general distributor received an 8 per cent commission on all the inventory purchased by new direct distributors.

The special incentive bonus, payable only to general distributors, was based upon the refund bonus value of the sales made through the general distributor's organization. The volume of sales of inventory to new direct distributors was included in calculating this bonus.

The evidence offered in the People's direct case also showed that the method by which the recruitment of new distributors was accomplished included a regular schedule of so-called 'Opportunity Meetings' and 'D and G (Direct and General) Meetings' which were staged by Bestline Products, though they were financed in part by monthly charges made to direct and general distributors. The format for these meetings was established by Bestline Products and scripts were provided for the guidance of those conducting the meetings. In addition, sound-motion pictures and narrated still film strips were provided and employed in both types of meetings. The function of the Opportunity and D and G Meetings was to assist Bestline distributors at all levels to recruit new distributors.

The Opportunity Meetings were evening meetings. They included a...