State by Spannaus v. Mecca Enterprises, Inc.

• Decision Date: 04 November 1977
• Docket Number: 46346,Nos. 45799,s. 45799
• Citation: 262 N.W.2d 152
• Parties: STATE of Minnesota, By Its Attorney General, Warren SPANNAUS, Respondent, v. MECCA ENTERPRISES, INC., Appellant.
• Court: Minnesota Supreme Court

Page 152

262 N.W.2d 152

STATE of Minnesota, By Its Attorney General, Warren SPANNAUS, Respondent, v. MECCA ENTERPRISES, INC., Appellant.

Nos. 45799, 46346.

Supreme Court of Minnesota.

Nov. 4, 1977.

Rehearing Denied Jan. 13, 1978.

Syllabus by the Court

The trial court's finding that solicitors and contractors for a magazine and book clearinghouse were employees and not independent contractors was not clearly erroneous.

Collins & Buckley, Morley Friedman, St. Paul, for appellant.

Warren Spannaus, Atty. Gen., Richard B. Allyn, Sol. Gen., Alan A. Held, Paul A. Strandberg, and Jean E. Heilman, Sp. Asst. Attys. Gen., St. Paul, for respondent.

Heard before ROGOSHESKE, PETERSON, and KELLY, JJ., and considered and decided by the court en banc.

KELLY, Justice.

Defendant appeals from an order of the district court enjoining it from conducting business in Minnesota without first procuring a certificate of authority to transact business in Minnesota as a foreign corporation and paying a $500 fine for failure to obtain a certificate of authority, and from employing fraudulent and deceptive practices in connection with the sale of merchandise, recruitment of sales personnel, and advertisements. Defendant also appeals from a subsequent judgment awarding a penalty of $500 for failing to procure a certificate of authority to transact business in Minnesota as a foreign corporation, a civil penalty of $1,000 for consumer fraud and false advertising, and costs and disbursements. These appeals were consolidated in the instant proceeding. We affirm.

Defendant, Mecca Enterprises, Inc. (Mecca), is incorporated and has its principal offices in Texas. It is engaged as a clearinghouse for magazine and book publishers in the United States. The sale of books and magazine subscriptions are conducted exclusively through the use of "solicitors" who canvass door-to-door and work in sales crews of between 5 and 20 individuals. The 14 to 22 crews would be managed by "contractors," who contracted with Mecca. Sometimes a "subcontractor" would work for a contractor and manage his own crew of solicitors.

The state points to several deceptive and fraudulent practices utilized by solicitors to garner sales. A few were blatant. For example, misrepresentations would be made that a solicitor was a disabled veteran who had to sell a number of magazine subscriptions to obtain employment with the assistance of or in the Veteran's Administration. Others were more subtle. A solicitor would cast herself as a "contestant" rather than a "saleswoman" and urge the resident to vote for her by subscribing to one or more magazines. The solicitor would tell the resident that she was leading in the contest and needed only a few more votes to win a cash award or travel prize. Although a contest did exist, the contestant's proximity to victory usually did not. In addition, contractors misrepresented the method of compensation and the nature of the position of a solicitor in newspaper recruitment ads.

The state brought this civil action seeking an injunction and civil penalties for consumer fraud and false advertising, Minn.St. 325.79, subd. 1, 325.905, and 325.907, subd. 3; fraudulent recruiting practices, Minn.St. 181.64 and 181.65; and transacting business in the state without obtaining a certificate of authority, Minn.St. 303.03 and 303.20. The district court, sitting without a jury, found that the fraudulent activities of Mecca employees were attributable to Mecca under the doctrine of respondeat superior. On appeal, Mecca maintains that the contractors and solicitors were independent contractors not under its control. Both parties agree that the question of the status of Mecca's operatives also resolves the other issues raised by this appeal.

Mecca asserts that the contractors had sufficient control of their operations to be independent contractors. A contractor would hire his solicitors, negotiate their commissions individually, determine where and when they would solicit, and bear expenses. At the close of each sales day, he would "check in" his solicitors, complete a daily report form, and send the orders received The state argues, and the district court found, many facts indicating control and direction by Mecca. For example, Mecca had the right to terminate contractors for reasonable cause and the right to require contractors to discharge solicitors with or without cause. It informed managers of complaints received from consumers or publishers and suggested when remedial action was required. It also sponsored sales contests among the solicitors. The contests had the effect of increasing or decreasing sales of certain magazines, depending on the points Mecca awarded for their sale. By furnishing the solicitor with an identification card verifying his participation in the contest and a magazine list indicating the points each magazine was worth in the contest, Mecca determined the form of sales pitch used by the solicitor. ¹ It also influenced the manner of payment through provision of order forms. The biweekly bulletin, "The Mecca," informed solicitors of their standing in contests and exhorted them to increase sales. Mecca forwarded mail to people in the field and also informed them of price or term changes in magazine subscriptions. It also prohibited them from soliciting magazines for other clearinghouses and attempted to collect amounts due from customers on mail-in orders.

and his remittance to Mecca. His compensation from Mecca was a commission. The contractor was required to pay for subscription order forms and to pay postage on a biweekly company publication entitled "The Mecca." The contract between Mecca and the individuals themselves by its terms referred to the managers as independent contractors.

In addition, the crews in the field did not lead isolated existences. Many were mutually interdependent and supportive, occasionally engaging in joint traveling, training, recruiting, lodging, planning, and allocation of sales territory. Mecca's president, Joe Edge, was himself a contractor and participated in these joint activities. There is some controversy about the significance to be attached to Edge's presence at intercrew meetings. Mecca asserts he participated as would any other contractor, but there was contrary testimony from former solicitors that the district court might credit. The vice-president of the corporation, Alma Laney, also participated in recruiting solicitors through classified advertisements.

Whether a salesman in a particular situation can be characterized as an independent contractor or agent is a question of fact. Primarily, courts will deem a salesperson an employee of one who has the right to exercise control over the manner of the sale and to direct the result to be accomplished. E. g., Singer Mfg. Co. v. Rahn, 132 U.S. 518, 10 S.Ct. 175, 33 L.Ed. 440 (1889); Angell v. White Eagle Oil & Ref. Co., 169 Minn. 183, 210 N.W. 1004 (1926). See, Annotation, 98 A.L.R.2d 335 (house-to-house salesman or canvassing crews); Annotation, 55 A.L.R.3d 1216 (news carriers); Annotation, 126 A.L.R. 1120 (subscription salesman on commission). See, generally, Restatement, Agency 2d, § 220. In Geerdes v. J. R. Watkins Co., 258 Minn. 254, 262, 103 N.W.2d 641, 646 (1960), we noted:

" * * * In a large measure each case must be determined on its own facts. The distinction between an employee and an independent contractor may be said to consist largely in the difference between one who undertakes to achieve a given result under an arrangement with another who has authoritative control over the manner and means in which and by which the result shall be accomplished and one who agrees to achieve a given result but is not subject to the orders of another as to the method or means to be used."

The instant fact situation presents a close question, and some courts might find that an independent contractor relationship inheres in Mecca's structure of operations. P. F. Collier & Son Co. v. Hartfeil, 72 F.2d 625 (8 Cir. 1934); Bond v. Harrel, 13 Wis.2d 369, 108 N.W.2d 552 (1961).

In the present case, the finding of the district court that the contractors and solicitors were employees may be reversed only if clearly erroneous. See, Rule 52.01, Rules of Civil Procedure; In re Estate of Balafas, 293 Minn. 94, 96, 198 N.W.2d 260, 261 (1972). Mecca maintains that our decision in Speaks, Inc. v. Jensen, Minn., 243 N.W.2d 142 (1976), is dispositive. There, the question was whether door-to-door vacuum cleaner dealers were employees for purposes of the Minnesota law governing unemployment compensation. The court in describing the dealer's occupation stated:

" * * * The dealer agreement may be terminated at any time by either party.

"The dealers are free to establish the principal incidents of their sales activities. They are not required to work specific hours or days or any number of hours or days. They are not assigned or limited to a particular territory. They are free to sell any other products including those of competitors. They may employ assistants but are solely responsible for their compensation.

"The dealers are compensated on a profit basis. They may sell the cleaners at any price but are obligated to Speaks for the wholesale price of the machines. * * *

"Dealers generally work out of their homes. Speaks does not provide offices, desk space, or business phones. It does not pay any of the dealers' expenses, nor does it make advances. It does not carry liability insurance on the automobiles used by the dealers or withhold social security or income tax for them." Minn., 243 N.W.2d 144. (Italics supplied.)

In that case, we affirmed the holding of the district court that the relationship between Speaks and its dealers...