Peterson v. The Sunrider Corp.

• Decision Date: 26 April 2002
• Docket Number: No. 20000385.,20000385.
• Citation: 48 P.3d 918,2002 UT 43
• Parties: Janet PETERSON, Plaintiff and Appellant, v. THE SUNRIDER CORPORATION, dba Sunrider International and Tei Fu Chen, Defendants and Appellees.
• Court: Utah Supreme Court

48 P.3d 918

2002 UT 43

Janet PETERSON, Plaintiff and Appellant, v. THE SUNRIDER CORPORATION, dba Sunrider International and Tei Fu Chen, Defendants and Appellees.

No. 20000385.

Supreme Court of Utah.

April 26, 2002.

Thomas W. Seiler, Jared L. Anderson, D. Scott Davis, Provo, for plaintiff.

H. Thomas Stevenson, Brad C. Smith, Ogden, for defendant.

DURHAM, Chief Justice.

INTRODUCTION

¶ 1 This appeal arises from a breach of contract action. Appellant Janet Peterson (Peterson) claims the right to receive commissions from appellee, Sunrider Corporation (Sunrider), for sales made by a particular group of Sunrider distributors, pursuant to a contract executed in 1976. Commissions were paid from 1976 to 1994, but in 1994 Sunrider ceased making regular payments under the agreement and Peterson sued. On cross-motions for summary judgment, the trial court denied Peterson's motion for summary judgment and dismissed the claim, finding as a matter of law that the agreement constituted an illegal contract under the Pyramid Scheme Act, Utah Code Ann. §§ 76-6a-1 to -6 (2001), and was therefore unenforceable. We reverse the summary judgment order dismissing Peterson's claim, affirm the denial of her motion for summary judgment, and remand.

BACKGROUND

¶ 2 Sunrider¹ is a Utah corporation that sells herbs, dietary supplements, skin care products and beauty aids through a multi-level marketing plan. The plan includes several "levels of achievement" through which participants may receive compensation based both on their own sales of company products and on the sales of those whom participants have "sponsored," that is, those whom participants have brought into the company. Participants receive "overrides," or commissions, based on the sales of groups of distributors who are at a lower level in the hierarchy and who were personally sponsored by the participant. In addition, participants who achieve the level of associate director or higher are eligible for a "Leadership Development Bonus" (Bonus), based upon the cumulative sales of directors and associate directors sponsored by the participant.

¶ 3 A percentage of the company's overall sales volume is set aside to pay the bonuses. The precise method of calculating individual bonuses is changed regularly by the company. These changes are published in "business guides,"² which are made available to participants. The business guides also outline the prerequisites to becoming eligible for the Bonus. Although the specific requirements for director status change over time, participants are generally required to buy a certain amount of the company's products, called "personal purchase volume," and to make efforts to encourage distributors at lower levels to make sales.

¶ 4 In 1976, Ken Murdock, then president of the company, and Lloyd Peterson, the husband of the appellant, executed a written agreement designating Mrs. Peterson as the beneficiary of overrides resulting from a distributorship known as the John and Sharon Farnsworth organization. The agreement states that, in exchange for $1,500, the Farnsworth organization "will become first level distributors or directors as the case may be to . . . Janet S. Peterson" to function "as though [the Farnsworth organization] had been originally directly sponsored by Janet S. Peterson." In addition, the agreement provides that Peterson "will remain a director with the company for the purpose of receiving overrides from directors occurring to her organization regardless of her personal purchase volume (PV) level.... [H]owever, her personal group PV for those below director level will be paid at the scheduled rate for the PV level reached each month." The agreement was signed by Mr. Peterson and Murdock; Mrs. Peterson was not a party.

¶ 5 For 18 years, Peterson received monthly payments from Sunrider based upon the sales of the Farnsworth organization, the overall sales volume of Sunrider, and the scheduled rates established by Sunrider for the time period. The payments varied in amount, but were generally slightly more or less than $3,500 a month at the time the payments were stopped. During this time, Peterson received the Bonus without having to meet any of the performance requirements for directors. Peterson states that she was aware of the director requirements outlined in the business guides,³ but that she believed that the requirements had been waived for her by the 1976 agreement.

¶ 6 In 1982, Tei Fu Chen (Mr. Chen) purchased all of the company stock. Mr. Chen claims that at the time of the sale he did not know of the agreement with Peterson. At some point after 1986, a random audit by Sunrider's accounting department revealed that Peterson was receiving Bonus payments without complying with the director requirements. Mr. Chen was informed that Peterson was not qualifying and decided to allow her a grace period to qualify; however, he states that he subsequently "forgot" about the situation. Some time after this, Oi-Lin Chen (Mrs. Chen), the current president of the company, became aware that Peterson was not qualifying and stopped the payments as of December 1994.

¶ 7 In her amended complaint, Peterson brought claims against both Sunrider and Mr. Chen ("defendants") for breach of contract and against Mr. Chen for intentional interference with contractual relations. After discovery, Peterson moved for partial summary judgment, asking the court to rule in her favor as a matter of law on the breach of contract claim. The defendants moved for summary judgment and dismissal of all the claims.

¶ 8 In denying Peterson's motion for partial summary judgment, the trial court cited Webb v. R.O.A. Gen. Inc., 804 P.2d 547 (Utah Ct.App.1991), and held that the terms of the contract were not "complete, clear, and unambiguous." Id. at 547 (quoting Colonial Leasing Co. v. Larsen Bros. Constr., 731 P.2d 483, 488 (Utah 1986)). The court identified two disputed questions of material fact. First, the court noted that the parties disagree about which business guides should be used to interpret the 1976 writing. The defendants argue that the agreement is not complete on its face and should be read to incorporate the terms included in each new business guide. In the alternative, they contend that because Peterson received both the benefits and detriments of changes to the business guides without complaint, she implicitly accepted the business guides as superseding the 1976 contract.⁴ Peterson admits that the agreement does not define the specific payment schedule to be used in determining her Bonus; however, she argues that the contract should be read with reference to the 1978 business guide, since that guide maintains the same payment schedule as existed when the contract was executed. She contends that there has been neither consideration nor a meeting of the minds to effect a modification of the agreement according to the more recent business guides.

¶ 9 Second, the court concluded that the parties dispute whether the 1976 agreement waived all director requirements or only the requirement of maintaining a specific personal purchase volume. Based on extrinsic evidence, Peterson argues that the parties to the contract intended the agreement to waive all director requirements. Defendants argue that the contract on its face waives only the one requirement. They argue that extrinsic evidence of the intent of the contracting parties is prohibited in this case by the parol evidence rule. In the alternative, defendants assert that the 1976 agreement was superseded by subsequent business guides, which affirm all requirements for director status.

¶ 10 The trial court then granted defendants' motion for summary judgment and dismissal. With regard to the intentional interference with contract claim, the court concluded that Peterson had failed to explain how Mr. Chen, by discussing with his employees the possibility of terminating Peterson's payments, had acted maliciously, outside the scope of his powers, or against the interests of the company. The court held that there were no material facts in dispute surrounding Mr. Chen's actions and the interests of the company. With regard to the breach of contract claim against Mr. Chen, the court held that Peterson had offered no evidence that Mr. Chen personally assumed liability for the 1976 contract. Peterson's assertion that Mr. Chen had become the sole shareholder of Sunrider was undisputed; however, the court stated, share ownership alone is insufficient cause to hold a stockholder liable for the actions of his company.

¶ 11 Finally, with regard to the breach of contract claim against Sunrider, the court held that the 1976 agreement serves an illegal purpose and is therefore unenforceable. Relying upon Utah Code section 76-6a-2 (2002) and federal case law, the court held as a matter of law that "receiving bonuses in a multi-level marketing business is illegal when the bonuses are based only upon sponsorship of an organization, rather than promoting a product, selling a product, or training and supervising down-line distributors." While acknowledging that Peterson did not personally recruit people into the Farnsworth organization and that Peterson's bonuses were based on sales rather than recruitment, the court found that the contract allowed Peterson to receive payments without making retail sales or fulfilling other obligations. If such a contract were enforced, the court stated, Peterson would reap the benefits of Sunrider's compliance with anti-pyramid scheme laws without having to comply with the law herself. Stating that "[t]he Court cannot enforce an illegal contract," the trial court dismissed Peterson's claim for breach of contract.

¶ 12 On appeal, Peterson argues that the trial court erred by denying her motion for summary judgment on the breach of contract claim against Sunrider and by granting the defendant's motion to summarily dismiss the same claim.⁵ She contends that (1) the trial...