Thaxton v. Com.

• Decision Date: 15 June 1970
• Citation: 211 Va. 38,175 S.E.2d 264
• Parties: Gordon L. THAXTON et al. v. COMMONWEALTH of Virginia ex rel., etc.
• Court: Virginia Supreme Court

Page 264

175 S.E.2d 264

211 Va. 38

Gordon L. THAXTON et al. v. COMMONWEALTH of Virginia ex rel., etc.

Supreme Court of Appeals of Virginia.

June 15, 1970.

L. Eldon James, Hampton (C. Donald Robertson, Charleston, W. Va., James, Richardson & James, Hampton, Braswell, Strikland, Merritt & Rouse, Goldsboro, N.C., on the brief), for appellants.

A. Grey Staples, Jr., Gen. Counsel, State Corporation Commission (Robert Y. Button, Atty. Gen., D. Gardiner Tyler, Asst. Atty. Gen., C. William Waechter, Jr., Asst. Gen. Counsel, State Corporation Commission, on the brief), for appellee.

Before SNEAD, C.J., and I'ANSON, CARRICO, GORDON, HARRISON, COCHRAN, and HARMAN, JJ.

CARRICO, Justice.

The question presented by this appeal is whether the State Corporation Commission properly ruled that Koscot Interplanetary, Inc., a foreign corporation, was transacting business in this state so as to require it to procure a certificate of authority pursuant to Code § 13.1--102 and so as to subject its alleged agent, Gordon L. Thaxton, to the penalty of a fine under Code § 13.1--119 for its failure to procure such certificate.

The record reveals and the briefs concede that Koscot's business is two-fold in nature. Koscot is engaged in the distribution and sale of cosmetics, an activity which was admitted by the Commonwealth from the outset to be 'exclusively interstate,' not requiring domestication in Virginia. This phase of the business is not in issue here. The other activity is what Koscot calls 'establishment of the wholesale sales network' and what was termed by the Commission in its opinion as 'the endless-chain money-making business.' This phase of the business is what is involved here.

The Commission ruled that Koscot had 'conducted locally' in Virginia its 'endless-chain business' without a certificate of authority. The Commission held that Thaxton was 'the agent of Koscot' and imposed upon him a fine of $250 for Koscot's failure to procure the certificate. Both Thaxton and Koscot have appealed.

Koscot, which means 'Kosmetics For the Communities of Tomorrow,' was incorporated in Florida in 1967 for the corporate purposes of selling and distributing cosmetics and engaging in 'all other lawful businesses' in Florida and elsewhere. It established a detailed corporate structure as shown on an 'Organizational Chart' published by it in a 'Distributor's Manual' and here reproduced:

NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT VIEWABLE

The 'Co-ordinators' and 'Advisors' shown at the bottom of the chart are the persons designated to carry on the local retail activities of Koscot. Their part in the Koscot program is not involved in this controversy.

At issue is the role in the 'endless-chain business' of Koscot's 'Directors' and 'Supervisors,' shown near the bottom of the chart. These categories represent persons holding on the local level non-exclusive, cancelable wholesale distributorships of Koscot's products.

An interested person becomes a director, the position held by Thaxton, by executing a 'Distributor Application and Agreement' under the sponsorship of an existing director and by paying Koscot $4,500 by cashier's check. The sponsoring director is paid $2,500 by Koscot for bringing the new director into the organization. As a director, the new man is entitled to recruit others to become directors, receiving from Koscot $2,500 for each new participant.

A supervisor enters the program by executing an application and agreement under the sponsorship of an existing director or supervisor and by paying Koscot $2,000 by cashier's check. The sponsoring party is paid by Koscot $500 as a 'finder's fee.' If the new supervisor is sponsored by an existing director, the latter is also paid by Koscot $250 as an 'override' on the merchandise furnished by Koscot to the supervisor upon his entry into the program. As a supervisor, the new entrant is entitled to recruit others to become supervisors, receiving from Koscot $500 for each new participant.

A supervisor works under the director who sponsored him. A supervisor may advance to director by paying Koscot $2,500 which is in turn paid to the sponsoring director as a 'release fee' to compensate for loss of the supervisor. The advancing supervisor must also secure a replacement for himself in the sponsoring director's organization, the new supervisor paying Koscot $2,000 to enter the program. From this amount, the old supervisor receives a 'finder's fee' of $500 and the old director receives a $250 'override' on the merchandise furnished the new man by Koscot. The old director also receives a 2% Dividend on the total volume of future business handled by the newly advanced director.

According to literature prepared by Koscot, a director 'will earn over $143,000 a year' from 'release fees,' 'finder's fees,' and 'overrides' if he uses the enlistment-replacement process and promotes one supervisor to director each month. The same literature states that in addition to the $143,000, the existing director 'can be receiving * * * $144,000 a year * * * in two years' time' from the 2% Sales dividend if he sponsors 'only five' new supervisors into the program each month and promotes the same number of supervisors to director in the same period.

Directors and supervisors in a given local area form, pursuant to the program set up by Koscot, an association for the recruitment and training of new participants. The primary part of the recruitment campaign for directors and supervisors is carried out in 'Golden Opportunity Meetings' where the advantages of becoming a wholesaler are stressed and prospects are encouraged to enter the program. If a prospect shows interest, the director or supervisor who invited him to the meeting attempts to secure his signature on a 'Distributor Application and Agreement' and his cashier's check for the required amount.

Training is required of all participants on both the wholesale and retail levels of Koscot's program. The training is carried out in schools conducted in the local area. One of the conditions for advancement by a supervisor to the director level is that he attend a four-day school for instruction 'in all of the facets from * * * setting up retail operations * * * to setting up additional wholesale operations.'

The Commonwealth contends that Koscot, in building its 'endless-chain business,' has, through its officers and agents, engaged in local activities constituting the doing of business in Virginia requiring it to domesticate under Code § 13.1--102. The activities of Koscot in Virginia relied upon by the Commonwealth are:

1. Conducting 'Golden Opportunity Meetings.'

2. Conducting training schools.

3. Making contracts for wholesale distributorships with persons who become directors and supervisors.

Koscot does not deny that recruitment meetings and training schools are conducted in Virginia or that there is solicitation in this state of persons to enter into agreements to become wholesale distributors. In fact, Koscot freely admits that these activities take place. It insists, however, that the activities are not carried on by it but by the local directors and supervisors who are independent contractors.

Koscot points to a provision of its 'Distributor Application and Agreement,' which directors and supervisors are required to execute, stating that the participant is an 'independent contractor' and 'not an employee, servant, agent, or legal representative' of Koscot. Koscot also relies on the testimony before the Commission of several distributors who described themselves as 'independent businessmen.'

Koscot admits that its corporate officers come into Virginia and take part in 'Golden Opportunity Meetings' and in training schools. It says, however, that on these occasions the officers are mere 'guest speakers' appearing at the invitation of the local directors and supervisors and that the officers do not conduct recruitment meetings or training schools.

But just because Koscot and its distributors contract that the latter shall bear a particular label and understand that in the jargon of the organization the corporate officers are called something else on certain occasions does not necessarily make all that legally so. Scripto, Inc. v. Carson, 362 U.S. 207, 211, 80 S.Ct. 619, 4 L.Ed.2d 660 (1960). Koscot agreed at the Commission hearing that it was ...