Stanley v. Commercial Courier Serv., Inc., Civ. No. 72-931.

• Court: U.S. District Court — District of Oregon
• Writing for the Court: Timothy L. Ryan, Goode, Goode, Decker & Hinson, P. C., Albany, Or., for plaintiff
• Citation: Stanley v. Commercial Courier Serv., Inc., 411 F. Supp. 818 (D. Or. 1975)
• Decision Date: 29 April 1975
• Docket Number: Civ. No. 72-931.
• Parties: Mary STANLEY, Plaintiff, v. COMMERCIAL COURIER SERVICE, INC., a Washington Corporation, et al., Defendants.

411 F. Supp. 818

Mary STANLEY, Plaintiff, v. COMMERCIAL COURIER SERVICE, INC., a Washington Corporation, et al., Defendants.

Civ. No. 72-931.

United States District Court, D. Oregon.

April 29, 1975.

Timothy L. Ryan, Goode, Goode, Decker & Hinson, P. C., Albany, Or., for plaintiff.

Brad Littlefield, Goldsmith, Siegel & Engel, Portland, Or., for defendants.

OPINION

SKOPIL, District Judge.

Plaintiff, Mary Stanley, an Oregon resident, brings this action against Commercial Courier Service, Inc. (Courier), a Washington corporation, and several of its employees. Plaintiff seeks damages and rescission of a purchase she made from defendants of an alleged security. 15 U.S.C. § 77v; 15 U.S.C. § 78aa; ORS Ch. 59. In the alternative, she seeks enforcement of a settlement agreement. 28 U.S.C. § 1332. Defendants, other than defendant H. Miller, have moved to dismiss on the grounds that there is no genuine issue of material fact, for failure to state a claim, and for lack of subject matter jurisdiction. Rule 12(b)(6) Fed.R.Civ.P. In the alternative, they move for summary judgment, as does the plaintiff. I will therefore consider the motions under Rule 56.

The amended complaint (complaint) alleges that Courier sold plaintiff a franchise designated a "Master-Distributor Agreement". Defendants are charged with inducing the purchase through representations which they knew were false and misleading and with failing to file a registration statement. Plaintiff advanced $25,000 cash toward the $50,000 agreed price and executed a non-interest bearing promissory note for the balance. The balance was to be paid from sales of "Sub-Distributor Agreements".

Courier was a proposed scheme to provide delivery of advertising matter and sample merchandise for businesses to residences through a franchise system. Master Distributorships were sold in consideration of the exclusive right to delivery within a designated area and for various services supplied by Courier. Master Distributors agreed to parcel out their territories to "Sub-Distributors" as they deemed necessary to "fully comply with all contracts made (with advertisers by Courier and by the Distributors)" in their respective areas.

Courier was careful to disclaim any responsibility for the Distributors' success or failure. The Master-Distributorship Agreement provided that:

"DISTRIBUTOR acknowledges that he is an independent contractor and will operate the territory as his own business, under his own control and authority, except as to the requirements of performance as may be herein contained, and is not and will never be construed as an employee, agent, representative, or have any other affiliation with the COMPANY. Further DISTRIBUTOR acknowledges that he is independent and not dependent upon the COMPANY for revenue, business nor services, nor does he look to the COMPANY for return of any investment made in connection with this MASTER DISTRIBUTOR AGREEMENT, but acknowledges that such return, if any, will be directly dependent upon his own services, performances and abilities." (emphasis added)

Other provisions indicate that the relationship between Company and Distributor was more symbiotic than that paragraph supposed. Courier agreed

"To furnish the DISTRIBUTOR with instructions to establish delivery routes, methods of selecting qualified carriers and delivery procedures, and to supply DISTRIBUTOR prepaid and delivered F.O.B. designate (courier bags and caps, at cost and all necessary COMPANY forms) in sufficient quantity to meet the needs of DISTRIBUTOR and his SUB-DISTRIBUTORS. The COMPANY further agrees to furnish a three week training program by using COMPANY personnel in the setting up, and operation of his advertising department and 3 weeks in setting up and organizing his route and distribution department.

"The COMPANY, however, shall have no continuing responsibilities for the business to be conducted by the DISTRIBUTOR."

The last sentence quoted is also misleading. Courier was to advertise its business in a manner designed to "enhance the successful operation of the COMPANY's business and the business of it's sic DISTRIBUTORS". (emphasis added) It also was to provide brochures, catalogues, stationery, and forms.

In addition to her $50,000 license fee, plaintiff was obligated to hire and train carriers to make deliveries, "comply with all rules, procedures, policies and delivery price schedules . . . set forth in any written memorandum issued to its DISTRIBUTORS", establish and maintain office and storage facilities, pay overhead and expenses, allow Courier to audit her books whenever it pleased, indemnify Courier against any liability that might be incurred because of her conduct or that of her employees, and file weekly delivery and distributorship sales reports with Courier. She was forbidden to make deliveries outside her area, deliver anything but advertising material, or to compete with Courier in any similar business within one hundred miles of any Distributor's area for five years after termination of her Agreement.

She agreed to pay Courier ten percent of the gross sum she received from Sub-Distributorship license fees, as well as ten percent of the proceeds from advertising delivered within her territory. If advertising she solicited was delivered outside her territory, she was entitled to a commission.

Among the "GENERAL PROVISIONS" of the Agreement it was stated that Courier made no guarantee of the quantity of materials delivered nor the success of any distributorship.

Plaintiff seeks damages equal to the amount paid for the Distributorship, with interest from the date of purchase, costs paid pursuant to the Agreement, and for attorneys' fees.

The major issue is whether the sale of plaintiff's Distributorship was a security sale under federal or Oregon law. Plaintiff contends the Distributorship was an "investment contract" within the meaning of securities law.

The Howey test of an investment contract, which is generally applied, is

". . . whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." S.E.C. v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946).

Defendants argue that the terms of the Agreement, particularly those in which Courier explicitly disclaimed any guarantees of or responsibility for the success of the Distributorship and stressed that the welfare of the Distributorship depended entirely on the Distributor's own efforts, indicate that the franchise is not a security. Chapman v. Rudd Paint & Varnish Co., 409 F.2d 635 (9th Cir. 1969); Bitter v. Hoby's International Inc., 498 F.2d 183 (9th Cir. 1974). Defendants argue that the Courier franchise system did not place franchisees in a position which the securities laws propose to protect. The Agreement expressly obviates the possibility that plaintiff could expect a return of profits "solely from the efforts of others".

Defendants contend that even if a liberal construction of "solely" were applied, the Distributorship was not an investment contract. Under the interpretation of Howey adopted in S.E.C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973), whether a security exists depends upon

"Whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which effect the failure or success of the enterprise."

Judging from the terms of the Agreement, plaintiff obviously did not anticipate profits "solely" from the efforts of others. It is less clear from that document whether Courier or its franchisees were to render the "undeniably significant" efforts or whether plaintiff assumed real control over the destiny of her enterprise.

Courier was the brain child of Homer Brand, who conceived it as a type of independent postal service. A very unsophisticated businessman, he incorporated Courier with the help of some friends and began soliciting advertising in the Seattle area. A comrade, Mr. Miller, became excited about Brand's basic concept but considered his business methods ponderous. Mr. Miller felt that the key to success in the business was rapid expansion into a nationwide system, which required enfranchisement. He dazzled Brand with diagrams of his scheme for a growing empire. The "distributorship" system was born.

The growth plan for the system contemplated three stages. The first consisted of franchise sales; the second, of advertising sales; and the third, of delivery. Courier retained careful control of its distributors, particularly during the initial development of a Master Distributorship. Written guidelines dictated their formative structures. These guidelines were detailed. Even the dimensions of the buildings to be rented were specified. Later Courier would send in a man to sell Sub-Distributorships for the Master Distributors. After the delivery force was recruited, advertising men were sent in to hire and train advertising sales people.

Control over the franchises did not lapse after the development stages. Distributors were subject to any and all directives from Courier. Through the medium of their franchises they were also financially interdependent upon each other. The Distributors enjoyed a share of profits from deliveries made by them for advertising solicited elsewhere, or vice versa. The importance of regional or national expansion, which never actually materialized, is obvious.

The economic realities of this franchise should determine whether securities are involved. That context alone provides a reliable measure of the extent of the franchisee's participation under the franchise agreement. In Bitter v. Hoby's International, Inc., supra, for example, a realistic appraisal of a hot roast beef franchise convinced the Court that despite the strict contractual controls imposed by the franchisor, each franchisee was a ...