State ex rel. Turner v. Koscot Interplanetary, Inc.

• Decision Date: 11 November 1971
• Docket Number: No. 54577,54577
• Parties: STATE of Iowa ex rel. Richard C. TURNER, Attorney General, Appellee, v. KOSCOT INTERPLANETARY, INC. et al., Appellants.
• Court: Iowa Supreme Court

Page 624

191 N.W.2d 624

STATE of Iowa ex rel. Richard C. TURNER, Attorney General, Appellee, v. KOSCOT INTERPLANETARY, INC. et al., Appellants.

No. 54577.

Supreme Court of Iowa.

Nov. 11, 1971.

Lawyer, Lawyer & Dunn, Des Moines, for appellants.

Richard C. Turner, Atty. Gen., and Douglas R. Carlson, Asst. Atty. Gen., for appellee.

RAWLINGS, Justice.

Plaintiff State, by Attorney General as relator, brought action June 5, 1970, under The Code 1966, Section 713.24, and amendment thereto by the Second Regular Session, Sixty-Third General Assembly, Chapter 1277 (The Code 1971, Section 713.24(2b)) seeking, Inter alia, to enjoin defendants from engaging in alleged consumer fraud sales practices. By answer defendants generally denied plaintiff's allegations and challenged constitutionality of the Act, claiming it violates United States Constitution, Amendment 14, and Iowa Constitution, article I, section 9. Trial court found permanent injunctive relief should be granted as prayed. Defendants take permissive interlocutory appeal. We affirm.

Only Divisions I and II of plaintiff's petition are here involved.

The first division asserts, in substance, defendants have been and are engaged in referral sales techniques which include promises not contained in any written contract, contrary to The Code 1966, Section 713.24(2b), which provides:

'The advertisement for sale, lease or rent, or the actual sale, lease, or rental of any merchandise at a price or with a rebate or payment to the purchaser which is contingent upon the procurement of prospective customers provided by the purchaser, or the procurement of sales, leases, or rentals to persons suggested by the purchaser, is declared to be an unlawful practice, Unless the agreement or promise of such contingent price, rebate, or payment, is in writing and made a part of the contract of such sale, lease or rental. The rights and obligations of the contract relating to such contingent price, rebate, or payment shall be interdependent and inseverable from the rights and obligations relating to the sale, lease, or rental.' (Emphasis supplied.)

Division II alleges, essentially, defendants' referral sales practices are proscribed by § 713.24(2b) as amended, Supra, effective July 1, 1970, now incorporated in the same section of the 1971 Code, which states:

'The advertisement for sale, lease or rent, or the actual sale, lease, or rental of any merchandise at a price or with a rebate or payment or other consideration to the purchaser which is contingent upon the procurement of prospective customers provided by the purchaser, or the procurement of sales, leases, or rentals to persons suggested by the purchaser, is declared to be an unlawful practice rendering any obligation incurred by the buyer in connection therewith, completely void and a nullity. The rights and obligations of any contract relating to such contingent price, rebate, or payment shall be interdependent and inseverable from the rights and obligations relating to the sale, lease, or rental.'

It is thus evident the amendment served, in effect, to per se make illegal any use of what is known as referral sales programs, rather than allowing their usage if attendant promises made were manifested in writing.

Trial commenced August 27, 1970, and at close of all evidence the Court, as aforesaid, entered an 'Order for Permanent Injunction.'

The record discloses defendant Koscot Interplanetary, Inc. of Orlando, Florida (Koscot), is a Florida corporation, representatives of which have apparently been doing business in Iowa since early 1969. Defendant Glenn W. Turner, a Florida resident, is the organizer and board chairman of Koscot. Defendant Eastern Iowa Distributors, Inc., of Betttendorf, is an Iowa corporation composed of distributors for Koscot, and acts as its local representative. Defendant Koscot Kosmetic Distributors, of Des Moines, is a voluntary association of distributors in that area, engaged in the sale of Koscot's consmetic products and the promotion of a distribution network.

An examination of the Koscot program discloses it is fundamentally a sugar coated merchandise sales plan.

A 'beauty advisor' initially pays $10 and for this receives her 'starter kit' of Koscot products to be refurbished as required. Any person buying in as a 'supervisor' remits $2000 for which he receives $1500 worth of cosmetics and $500 hair fashions, retail value. A distributor pays $5000 for which an opening Koscot inventory is supplied.

Those buying in at each of the above three levels are, of course, expected to sell Koscot products to others.

As a merchandise sales inducement, Koscot promotes a 'get rich quick' position scheme. Under this arrangement defendants have been and are selling merchandise and positions to many residents in Iowa.

Product sales and the selling of positions are effected via use of the aforesaid 'multilevel--distributorship--supervisor pyramid sales techniques' through which individuals considering position purchases are induced to buy upon the assurance that once 'bought in' they will have the right to bring or refer other prospective merchandise-position buyers to the company and receive payment from Koscot for each such referral.

Product and position sales are advanced through use of what defendants term 'Golden Opportunity Meetings' where local distributors present the Koscot sales and distributorship--supervisor program to individuals who have evidenced an interest in buying a merchandising job. The presentation procedure used at these meetings ordinarily follows quite closely that contained in the sales pitches set forth in Koscot's publication, identified as 'The Distributor's Training Manual.' (Plaintiff's Exhibit B).

Sales presentations are there usually made to prospective customers brought by other individuals who have already purchased, either as a 'supervisor' or 'distributor', because they have been orally promised payment, as aforesaid, for each like position sold on referral. Koscot strongly recommends all presentations at local 'Golden Opportunity Meetings' be in accord with the written procedures contained in the manual.

Under the sales program employed by defendants every new supervisor or distributor must be referred or sponsored by an existing position holder. When a prospect referred to Koscot later buys in, the referring party is promised a portion of the amount paid by such purchasing party. Newly obtained supervisors and distributors are required to initially pay $2000 and $5000 respectively.

More specifically, as best we can determine, the reimbursement to a supervisor referring another individual, who in turn buys a supervisor post, is $500 out of the new member's $2000 purchase price. Payment to a distributor who refers another buying individual into Koscot as a supervisor is $500 out of the new member's $2000 payment, plus a ten percent override commission, making a total of $700 to be received by a distributor for securing an additional supervisor. When a distributor has sponsored a supervisor into the company and the new supervisor later purchases a distributor's position for an additional $3000, the fee then paid to the referring distributor is $1950. Since a supervisor must replace himself before buying up to a distributorship, the referring party will receive an additional $200 whenever the sponsored supervisor finds a replacement.

There are other intricate referral payment incentives involved but the foregoing will instantly suffice.

In brief, the sales pitch employed by defendants discloses, individuals are induced to buy into their program through use of the foregoing presentation, with an attendant glowing assurance that the prospect can easily earn $34,000 each year merely by obtaining other Koscot merchandise and position purchasers.

The written contract between Koscot and those who buy does Not, as aforesaid, include any part of the promised payment for securing additional supervisors or distributors.

When an individual buys in as supervisor or distributor he must make payment by certified or bank check payable and always delivered to Koscot. All remittances to referring position holders, Supra, are made from Koscot's Florida office.

On appeal defendants contend trial court erred in holding the Act is not unconstitutional and their sales program is statutorily prohibited.

I. This declaratory judgment action was tried and determined in equity. Our review is accordingly de novo. Bjork v. Dairyland Insurance Company, 174 N.W.2d 379, 382 (Iowa). See Denning v. Denning, 185 N.W.2d 238, 239--240 (Iowa).

II. In undertaking an assault upon the constitutionality of § 713.24, Code 1966, defendants assume a heavy burden.

The legislature is free to enact any law provided it is not clearly prohibited by some provision of the Federal or State Constitution. It is not for the judicial branch of government to determine whether any legislative enactment is wise or unwise. And every reasonable presumption must be indulged in support of a controverted Act, any doubts being resolved against the challenging party. We must also look to the object to be accomplished, evils sought to be remedied, or purpose to be subserved in the interpretation of a statute, according to it that reasonable and liberal construction which will best serve to attain such object rather than one which will defeat it. See Farrell v. State Board of Regents, 179 N.W.2d 533, 537--538 (Iowa).

III. And as we have consistently held, the legislature may be its own lexicographer. E.g., State v. Social Hygiene, Inc., 156 N.W.2d 288, 292 (Iowa).

IV. Defendants contend, however, § 713.24(2b) of the 1966 Code, is penal in nature and must be strictly construed.

Admittedly the Act is editorially set forth in the criminal section of our Code, but that alone is not determinative. See General Mortgage Corp. of Iowa v. Campbell, 258 Iowa 143, 151, 138 N.W.2d 416; State v. Gute, 252 Iowa 294, 297, 106...