Sherwood & Roberts — Yakima, Inc., (appellant), as assignee, sued Mr. and Mrs. Leach (respondents) for the unpaid purchase price of certain equipment sold on a conditional sale contract.
Lifetone Electronics, Inc. (hereinafter referred to as Lifetone), a corporation, sold radio intercoms and fire alarm systems in the Yakima area. In so doing, Lifetone represented itself to be connected with the advertising division of the General Electric Corporation. As part of an advertising promotion scheme, consumers, as the respondents, were to get the equipment for nothing under the following circumstances.
On September 30, 1963, respondents, with the thought of getting the equipment for nothing purchased a fire alarm system and a radio intercom on a conditional sale contract. At this time Mr. Leach gave the Lifetone salesman approximately 60 names. Respondents have never received a commission.
Respondents were to mail to the referrals a form letter which said that a "friend" would call about a "fabulous program." If the referrals questioned respondents, respondents' answers were to be taken from an instruction card. The card emphasized the money-making program, and instructed respondents not to talk about the product. In all cases, the salesman discouraged purchasers, like respondents, from contacting the people they referred until the salesman had a chance to contact such referrals first.
Respondents and Lifetone agreed to request financing for the conditional sale contract from appellant. After the conditional sale contract had been executed, it was offered to appellant for financing. This was the first knowledge appellant had of this particular transaction. Appellant, however, was fully aware of the general operation of Lifetone, and had months previously assured Lifetone that it would purchase such contracts. At the time appellant purchased the contract, respondents agreed with appellant to pay the amount of the sale contract plus carrying charges, regardless of any commissions paid under the commission agreements. Respondents are obligated to pay $1,187.28 (this includes
The number of sales made by Lifetone in the Yakima area was 137, totalling $129,947.04. The commissions paid to purchasers for referrals were $14,900. These sales transactions occurred between May 21st and October 22, 1963.
The trial court granted respondents' motion for summary judgment upon the depositions and affidavits submitted on the ground that the representative's commission agreement was illegal; it was a lottery under RCW 9.59.010; and the conditional sale contract, being an integral part of the same transaction, was tainted with such illegality, hence, unenforceable.
Appellant argues that (1) the referral agreement is not a lottery, and (2) if it is a lottery, appellant is entitled to maintain the action because it is not in pari delicto, or it can establish its case without relying on the illegal transaction. These arguments will be considered in their respective order.
A lottery is defined in RCW 9.59.010 as follows:
Here, as part of a general operation, respondents may obtain commissions (prize) and they have agreed to pay the purchase price of the equipment (consideration) in an effort to get that prize. The next question is whether that effort is based on chance.
In State v. Lipkin, 169 N.C. 265, 271, 84 S.E. 340 (1915), it was said:
The lack of control feature in referral selling is much broader than that designated by the trial court. It is inherent in referral selling that purchasers such as respondents be without control. Sooner or later, the market, unknowingly to the purchasers, will become saturated. This
The Lifetone salesman told respondents that they could get something for nothing through the referral selling scheme. Respondents are obligated to pay $1,187.28 for equipment costing $225.32. For ease of demonstration, respondents must earn 12 commissions of $100 each in order to get, as promised, something for nothing. This means that 12 of respondents' referrals must purchase as respondents did; they, in turn, to get something for nothing, must find 12 more people to purchase, and so forth, as follows:
Number of Purchasers 1 1st round 12 2d round 144 3d round 1,728 4th round 20,736 5th round 248,832
Soon the scheme will run itself out; the market will become saturated. Here, Lifetone made its first sale in May, 1963, and its last sale in October, 1963. The respondents entered the picture in September. They gave the Lifetone salesman approximately 60 names at that time, and they never received a commission. In fact, only $14,900 in commissions were paid in the Yakima area, while the total number of sales was 137, totalling $129,947.04 (without finance charges).
Respondents took a chance on whether they could get something for nothing. This chance permeates the entire scheme of referral selling. This court holds that the referral selling scheme is a lottery.
Here, the referral agreement and the conditional sale contract were all part of one transaction. The Lifetone salesman represented to respondents that the conditional sale contract obligation would easily be paid from "commissions earned" from the referral selling agreement, and Mr. Leach so intended to pay the conditional sale contract. It is clear respondents would have a good defense against Lifetone. It also appears that they have a good defense against appellant. The appellant, as assignee of a conditional sale contract, takes the contract subject to all defenses. See, RCW 4.08.080; and Doub v. Rawson, 142 Wn. 190, 252 Pac. 920 (1927).
Appellant, however, argues that it is entitled to maintain this action on either of two grounds: (1) it was not in pari delicto with respondents, or (2) it can establish its case without relying on an illegal transaction.
A person who is not in pari delicto can maintain an action based on an illegal contract. Miller v. Myers, supra. Appellant bases its argument on the facts that it was not a party to the transaction; it did not have knowledge of any agreement between respondents and Lifetone until after the agreements were made; and respondents have the equipment.
The fact that respondents have the equipment is not material. In an action to recover on an illegal contract, this court leaves the parties where it finds them whether or not the situation is unequal as to the parties. Sinnar v. LeRoy, supra; Hederman v. George, supra. The facts, that appellant was not a party to the transaction and that it did not have knowledge of any agreement between Lifetone and respondents until after the agreements were made, are material. However, they must be considered with all the undisputed facts and circumstances.
Appellant, understanding the referral selling scheme, required respondents to agree that the obligation to appellant would be paid notwithstanding whether any commissions were paid under the referral selling agreement. This is the basis of appellant's next argument, that it can establish its case without relying on the illegal transaction because either there was independent consideration or respondents are estopped.
Respondents' promise to pay appellant the conditional sale contract notwithstanding the payment of any commissions was not supported by consideration. It was a mere naked promise. The conditional sale contract and the referral selling agreement had been executed prior to this time and the personal property and equipment therein described had already been received and installed in respondents' home.
Accord, Cooper v. Baer, 59 Wn.2d 763, 370 P.2d 871 (1962).
The judgment is affirmed.
ROSELLINI, C.J., DONWORTH, FINLEY, and WEAVER, JJ., concur.
March 9, 1966. Petition for rehearing denied.