Rhodes v. CONSUMERS'BUYLINE, INC.

• Citation: 868 F. Supp. 368
• Decision Date: 10 May 1993
• Docket Number: Civ. A. No. 92-10877-K.
• Parties: Helen RHODES, on Behalf of Herself and All Others Similarly Situated, Plaintiff, v. CONSUMERS' BUYLINE, INC. and Keith Raniere, Defendants.
• Court: U.S. District Court — District of Massachusetts

868 F. Supp. 368

Helen RHODES, on Behalf of Herself and All Others Similarly Situated, Plaintiff, v. CONSUMERS' BUYLINE, INC. and Keith Raniere, Defendants.

Civ. A. No. 92-10877-K.

United States District Court, D. Massachusetts.

May 10, 1993.

COPYRIGHT MATERIAL OMITTED

Douglas M. Brooks, Martland & Brooks, Kenneth G. Gilman, Gilman & Pastor, Boston, MA, for plaintiff Helen Rhodes.

James D. Masterman, Mary E. O'Neal, Masterman, Culbert & Tully, Boston, MA, Garret G. Rasmussen, Jean V. MacHarg, Mark W. Porter, Patton, Boggs & Blow, Washington, DC, for defendant Consumers' Buyline, Inc. and Keith Raniere.

Memorandum and Order

KEETON, District Judge.

In this civil action, plaintiff has alleged that defendants violated various provisions of federal and state law, including federal securities law, RICO, and state consumer protection law. Plaintiff also seeks to represent a putative class of similarly situated individuals with similar claims against defendants. Now before the court are defendants' Motion to Dismiss First Amended Complaint or, in the Alternative, to Stay These Proceedings as to Any Remaining Claims, and to Deny Class Certification, together with Memorandum in Support (Docket Nos. 16 and 17, filed September 28, 1992), Plaintiff's Memorandum in Opposition (Docket No. 27, filed November 20, 1992), Defendants' Reply Memorandum (Docket No. 30, filed December 11, 1992), and Plaintiff's Motion for Leave to File Supplemental Memorandum in Opposition, together with Supplemental Memorandum in Opposition (Docket No. 31, filed January 4, 1993).

I. Background

Plaintiff Helen Rhodes is an individual who resides in Massachusetts. Defendant Consumers' Buyline, Inc. ("CBI") is a corporation organized under the laws of New York. Defendant Keith Raniere is the president of CBI. Plaintiff alleges that she invested and lost approximately $500.00 in CBI's marketing operation, which plaintiff alleges to be an illegal "pyramid" scheme.

According to CBI promotional literature supplied by plaintiff, CBI operates both as a consumer purchasing organization, through which members obtain the "lowest possible prices" for various products and services, and as a multilevel sales organization through which "affiliates" may earn profits on the sale of memberships to others, with greater profits accruing to affiliates whose recruits in turn sell further memberships. The more "downline" members—that is, members recruited by an affiliate or recruited by recruits of that affiliate—in an affiliate's matrix, the greater the profits earned by that affiliate. Theoretically, an affiliate need do no more than sell one additional "row" of two new members, who then each sell an additional row of members, and so forth, in order to earn ever increasing profits. CBI distinguishes between "members", who pay an initial fee to join and then a monthly fee to participate in various consumer purchasing programs, and "affiliates", who earn commissions on memberships sold and on the monthly fees paid by those members. Plaintiff alleges that the distinction between members and affiliates is artificial and is a disingenuous attempt to evade state and federal laws that would unavoidably be triggered if CBI required affiliates—that is, participants in the matrix sales operation—to make an initial investment. Plaintiff alleges that CBI's overall system creates a strong incentive—virtually a requirement—that affiliates also become members and that the vast majority of affiliates do become members.

II. Choice of Law

Because it is relevant to the effect of the arbitration provision contained in the alleged agreement between the parties, and hence to the jurisdiction of this court, the first issue that I address is the choice of law governing the alleged contract between plaintiff and defendants. The existence and interpretation of a contract are generally questions of state law. Here, plaintiff contends that New York law should govern the agreement between the parties. Defendants also contend that New York law governs the agreement, except where preempted by the Federal Arbitration Act. Plaintiff has provided copies of several CBI form agreements, including the form of Member And/Or Affiliate Application (the "Agreement") that the named plaintiff and defendant CBI allegedly signed and from which this dispute arises. Although plaintiff has not provided a signed copy of the alleged Agreement, defendants have not challenged the accuracy or authenticity of the forms supplied by plaintiff and indeed rely upon the choice of law and arbitration paragraph therein. Both the Member And/Or Affiliate Application and the separate Affiliate Application contain the following choice of law provision: "This agreement is governed under the laws of the state of New York." The same paragraph of the Agreement also provides for arbitration to be held in Clifton Park, New York. It is also undisputed that defendant Consumers' Buyline, Inc. is a corporation organized under the laws of the state of New York, with its principal place of business in Clifton Park, New York.

In addition, plaintiff's proposed class allegedly consists of thousands of persons throughout the United States who entered into agreements with CBI. Thus, for choice of law purposes, there is no persuasive reason to choose the state of residence of any particular plaintiff, including that of the named plaintiff (Massachusetts), as the jurisdiction whose law will govern the interpretation of any such agreement.

I conclude that the New York law governs the alleged Agreement between plaintiff and defendants because (1) the form of Agreement expressly so provides, and defendant implicitly admits that such a form was signed by the parties, (2) defendant CBI conducts its business as a New York corporation from its headquarters in the state of New York, (3) defendants contend that New York law should govern the Agreement (except where preempted by federal arbitration law), and (4) plaintiff assents to the application of New York law to govern the Agreement. See In re Newport Plaza Assocs., L.P., 985 F.2d 640, 644 (1st. Cir.1993) ("When opposing parties agree to the source of the substantive law that controls their rights and obligations, and no jurisdictional concerns are present, a court is at liberty to accept such an agreement without independent inquiry.")

III. Effect of Arbitration Provision

Defendants argue that proceedings on plaintiff's amended complaint should be dismissed, or, to the extent such proceedings are not disposed of on the merits of defendants' motion to dismiss, that proceedings should be stayed pending arbitration.

The alleged Agreement contains the following arbitration clause of extraordinary breadth, which purports to require the arbitration of any dispute between the parties, not limited by its terms to disputes arising out of the Agreement: "The parties agree that any claim, dispute or other difference between them shall be exclusively resolved by binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association with arbitration to occur in Clifton Park, New York." This case does not present, however, and the court does not reach, the issue of the valid application of such a broad arbitration provision beyond the scope of the underlying contract. Here, the dispute arises from the subject matter of the Agreement itself and thus does not raise the issue of the possible overbreadth of the arbitration clause.

Defendants rely principally upon § 3 of the Federal Arbitration Act (the "FAA"), 9 U.S.C. § 3, in arguing that claims not dismissed should be referred to arbitration. Section 3 of the FAA provides as follows:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

9 U.S.C.A. § 3 (West 1993).

The Agreement itself contains a New York choice of law provision, and, as explained above, I have concluded that the Agreement is to be governed by New York law. Plaintiff contends that the subject matter of the Agreement is illegal under New York law (as well as the law of most other U.S. Jurisdictions) and that the entire contract, along with the arbitration clause contained therein, is void. According to plaintiff's allegations—based in large part on information contained in CBI's own literature—the core of CBI's marketing program consists of "affiliates" of CBI selling the right to others to become "affiliates" or "members" of CBI. New affiliates, in turn, sell the right to still other persons to become affiliates or members. Greater profits accrue to affiliates who obtain more "downline" affiliates or members. Defendants do not deny the basic manner of operation of CBI, but deny that any aspect of CBI's system is illegal.

New York General Business Law § 359-fff bans so-called "chain distributor schemes." As is defined under the statute:

A "chain distributor scheme" is a sales device whereby a person, upon condition that he make an investment, is granted a license or right to solicit or recruit for profit or economic gain one or more additional persons who are also granted such license or right upon condition of making an investment and may further perpetuate the chain of persons who are granted such license or right upon such "condition."

N.Y.Gen.Bus.Law § 359-fff(2) (McKinney 1993). In State v. Phase II Systems, Inc., 109 Misc.2d 598, 440 N.Y.S.2d 454 (N.Y.Sup. Ct.1981), the court granted an injunction against a scheme where, as alleged here, the emphasis was not on sale of any...