State ex rel. Stratton v. Sinks

• Decision Date: 02 July 1987
• Docket Number: No. 9109,9109
• Citation: 1987 NMCA 92,741 P.2d 435,106 N.M. 213
• Parties: STATE of New Mexico, ex rel. Hal STRATTON, 1 Attorney General, Plaintiff-Appellee, v. Kenneth D. SINKS, Jr., d/b/a "Rocky Mountain Traders Future Millionaires Society," Defendant-Appellant.
• Court: Court of Appeals of New Mexico

Page 435

741 P.2d 435

106 N.M. 213

STATE of New Mexico, ex rel. Hal STRATTON,¹Attorney General, Plaintiff-Appellee, v.Kenneth D. SINKS, Jr., d/b/a "Rocky Mountain Traders Future Millionaires Society,"Defendant-Appellant.

No. 9109.

Court of Appeals of New Mexico.

July 2, 1987.

[106 NM 215] Hal Stratton, Atty. Gen., Arthur G. Olona, Stuart Bluestone, and Frank D. Weissbarth, Asst. Attys. Gen., Santa Fe, for plaintiff-appellee.

Kenneth D. Sinks, Jr., pro se.

OPINION

GARCIA, Judge.

Defendant appeals from a judgment rendered against him for injunctive relief, restitution and civil penalties under the Pyramid or Multilevel Sales Act (Act), NMSA 1978, Sections 57-13-1 to -18 and the Unfair Practices Act, NMSA 1978, Sections 57-12-1 to -20.Defendant raises numerous issues on appeal.We discuss: (1) whether the Act violates defendant's first amendment rights of freedom of expression, association and assembly; (2) whether the Act is unconstitutionally vague or overbroad; (3) whether jurisdiction was proper in this case; and (4) whether defendant's right of trial by jury was infringed.We have considered defendant's other issues and, finding them to be frivolous and without merit, decline to discuss them.We affirm.

FACTS

The State of New Mexico, through the Attorney General, instituted a civil suit under the Pyramid or Multilevel Sales Act and the Unfair Practices Act against defendant.The trial court issued a temporary restraining order and, later, a preliminary injunction, enjoining defendant from operating the Rocky Mountain Traders Future Millionaires Society.

Defendant first began soliciting membership into Rocky Mountain Traders sometime in 1983, both within and outside the State of New Mexico.As described in defendant's flyer, the total cost of joining Rocky Mountain Traders was $15.Of that amount, $5 went to defendant, $5 went to a so-called "Society Director"(the member's immediate sponsor) and $5 went to the purchase of a "handbook"(a one-page leaflet).

Each new member received three membership flyers and three registration forms with his name listed in the last, or No. 9 position.He was then instructed to solicit three new members and to assist them in doing the same.Once he sponsored three new members, his name was to move up the list to the No. 8 position.The more new members sponsored, the sooner he would move up the chain to the No. 1 position.For each new member sponsored, people were advised they would receive $5, and that by the time their name moved up to the No. 1 position (actually 29,523 new members later), they would have earned a "guaranteed" $98,415.By this time, defendant, who was the beneficiary of $5 for every new member sponsored, would have earned at least $147,615.

The jury in this case determined that Rocky Mountain Traders was a pyramid chain letter.While it was sold under the guise of being a multilevel sales program, no product was ever sold and no goods were ever placed in the stream of commerce.To the contrary, the entire "sales program" was dependent upon recruitment of fee-paying members who, in turn, would recruit other members.

The New Mexico Pyramid or Multilevel Sales Act requires each pyramid or multilevel sales company doing business in New Mexico to file initial and quarterly registration statements with the attorney general.SeeSec. 57-13-10.Defendant neither filed nor registered.After notification of the registration requirement by the attorney general's office, defendant attempted to register Rocky Mountain Traders as a multilevel sales company.Defendant was informed that Rocky Mountain Traders' proposed marketing program violated numerous provisions of New Mexico law, that it did not meet the statutory and regulatory requirements for registration as a pyramid or multilevel sales company and that any continued operation would constitute a willful violation of the Act.

Defendant continued to promote Rocky Mountain Traders and suit was instituted accordingly.The trial judge directed a verdict against defendant, finding that as of February 2, 1984, defendant was doing business in New Mexico in violation of the Act.The jury returned verdicts to special interrogatories finding that defendant was in violation of the Pyramid or Multilevel Sales Act and the Unfair Practices Act.The jury found that defendant was soliciting memberships and doing business in New Mexico subsequent to February 1984 and up to the trial date.

DISCUSSION

WHETHER DEFENDANT'S FIRST AMENDMENT RIGHTS OF FREEDOM OF EXPRESSION, ASSOCIATION AND ASSEMBLY WERE INFRINGED

First, defendant contends that the judgment against him violates rights of expression and assembly.He raises this argument on behalf of the members of Rocky Mountain Traders and himself, individually.Defendant is not entitled to raise issues on behalf of members of Rocky Mountain Traders.He has no standing as an ordinary litigant to assert the constitutional rights of third-parties.SeeCraig v. Boren, 429 U.S. 190, 97 S.Ct. 451, 50 L.Ed.2d 397(1976).SeeState v. Casteneda, 97 N.M. 670, 642 P.2d 1129(Ct.App.1982).

As to defendant's own first amendment rights, any incidental impact on communication that results from the state's action against deceptive trade practices is not unconstitutional.SeeGeneral Stores, Inc. v. Bingaman, 695 F.2d 502(10th Cir.1982);Weiler v. Carpenter, 695 F.2d 1348(10th Cir.1982).New Mexico's Pyramid or Multilevel Sales Act pursues the legitimate state interest of preventing deceptive practices.Defendant's constitutionally protected speech is unfettered.In Giboney v. Empire Storage & Ice Co., 336 U.S. 490, 502, 69 S.Ct. 684, 691, 93 L.Ed. 834(1949), the Supreme Court explained that: "[I]t has never been deemed an abridgment of freedom of speech or press to make a course of conduct illegal merely because the conduct was in part initiated, evidenced, or carried out by means of language, either spoken, written, or printed."SeeState v. Lycett, 133 Ariz. 185, 650 P.2d 487(App.1982)(anti-pyramid statute does not encroach on constitutionally protected speech).

Likewise, defendant's right of association is not infringed by the Act.Defendant is free to contact or associate with any member of Rocky Mountain Traders; he is only enjoined from the further marketing of the pyramid scheme.

Furthermore, we note that the marketing of Rocky Mountain Traders constitutes commercial speech.While commercial speech is not excluded from first amendment considerations, it deserves a smaller degree of protection than noncommercial speech.SeeFriedman v. Rogers, 440 U.S. 1, 99 S.Ct. 887, 59 L.Ed.2d 100(1979);Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 98 S.Ct. 1912, 56 L.Ed.2d 444(1978).Consequently, the prohibition against prior restraint does not apply to commercial speech since it is less likely to be inhibited by regulation.SeeVirginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 96 S.Ct. 1817, 48 L.Ed.2d 346(1976).In Virginia State Bd. of Pharmacy, the Supreme Court stated:

Obviously, much commercial speech is not provably false, or even wholly false, but only deceptive or misleading.We foresee no obstacle to a State's dealing effectively with this problem.The First Amendment, as we construe it today, does not prohibit the State from insuring that the stream of commercial information flow cleanly as well as freely.

Id. at 771-72, 96 S.Ct. at 1830(footnote omitted).See also Friedman v. Rogers;Bates v. State Bar of Arizona, 433 U.S. 350, 97 S.Ct. 2691, 53 L.Ed.2d 810(1977).

While legislative approaches to the regulation of pyramid schemes have varied, courts in other jurisdictions have uniformly upheld statutes governing pyramid or multilevel sales regulation.See, e.g., State v. Lycett;People ex rel. Fahner v. Walsh, 122 Ill.App.3d 481, 77 Ill.Dec. 691, 461 N.E.2d 78(1984);Kugler v. Koscot Interplanetary, Inc., 120 N.J.Super. 216, 293 A.2d 682(1972);State by Lefkowitz v. ITM, Inc., 52 Misc.2d 39, 275 N.Y.S.2d 303(1966).See alsoIn re Holiday Magic, Inc., 84 F.T.C. 748(Oct. 15, 1974).In considering the welfare of its citizens, the state has good reason to look with disfavor and suspicion upon pyramid schemes such as the one in this case.Participants in pyramid sales are essentially being sold the right to sell new memberships in the pyramid.The investors make money not through the sale of the product, but through engaging others to invest in the scheme.The mathematical reality is that only early participants recoup their investment.

Under the pyramid scheme of Rocky Mountain Traders, the number of paying participants on the chart must be constantly tripled in order for a person to recover his or her original investment.Initial participants make no money until thousands of other people are recruited.For one person to make $98,415, which defendant's literature "guarantees", 19,683 recruits are needed at the bottom or ninth level.The entire pyramid at that time would have to consist of 29,523 people.According to the last New Mexico census, the population in the county where defendant resided while he promoted his "instant riches" scheme was 80,833.If defendant's theoretical pyramid continued beyond the ninth level, it would exceed the population of the entire United States by the eighteenth level.

In justifying its state's prohibition against pyramid sales, the New York Supreme Court noted:

"... The chain distributor scheme is an improvident promotion designed to lure persons in the lower income brackets, the young, the gullible, the unemployed or other persons in desperate need of a source of income into believing that through the magic of the chain distributor scheme, they can become one of the top 2 or 3% of the money earners in this country.Such representations usually result in a total financial loss to a person joining the chain distributor scheme.However, because the people to whom this approach...