Before us is a motion for post-trial relief filed by the Commonwealth, acting by Attorney General Leroy S. Zimmerman, through the Bureau of Consumer Protection (Commonwealth) seeking to vacate a decree nisi entered by this Court which concluded that defendants First Financial Security, Inc. (FFS), James E. Farrior, President of FFS (Farrior) and Frank May, Chairman of the Board of FFS (May) have not violated any of the provisions of the Unfair Trade Practices and Consumer Protection Law (Consumer Law)
On July 1, 1988, the Commonwealth filed a complaint in equity seeking to restrain the methods, acts and practices of FFS and its principal officers, Farrior and May. On August 11, 1988, the Commonwealth and the defendants entered into a consent petition for a preliminary injunction which was approved by this Court.
This Court subsequently held a hearing on the Commonwealth's motion for a permanent injunction. On February 17, 1989, Senior Judge Lehman entered a decree nisi denying the Commonwealth's motion for a permanent injunction and dissolving the preliminary injunction which had been entered by mutual consent.
The Commonwealth filed a timely motion for post-trial relief alleging this Court erred in concluding that defendants FFS, Farrior and May did not violate the Consumer Law. Specifically, the Commonwealth contends that defendants have: 1) established and promoted a pyramid club in violation of Section 2(4)(xiii) of the Consumer Law;
In a decision accompanying the decree nisi, this Court, per Senior Judge Lehman made the following findings of fact:
Original Distributor 1 x 5 = 5 Level 1 5 x 5 = 25 Level 2 Downline 25 x 5 = 125 Level 3 " 125 x 5 = 625 Level 4 " 625 x 5 = 3,125 Level 5 " 3,125 x 5 = 15,625 ______ TOTAL PARTICIPANTS INVOLVED 19,531
Opinion of Senior Judge Lehman, filed February 17, 1989, at 2-6.
After making the above findings of fact, this Court stated that defendants' business resembles an illegal referral sales scheme in every aspect except for the requirement that an individual purchase something to become a distributor of the defendants' product. We reasoned that although distributors received compensation for selling memberships and thereby introducing additional persons into the scheme, a person need not pay a fee to become a distributor. Therefore the requirement in Section 2(4)(xiii) of the Consumer Law that a participant pay valuable consideration for an opportunity to receive compensation from introducing additional persons to participate in the scheme had not been met. Consequently, this Court held that FFS and its officers did not violate the Consumer Law.
The Commonwealth's first contention in their motion for post-trial relief is that defendants' program, as marketed, is a pyramid club despite defendants' attempt to separate the membership and distributorship aspects of their organization.
After further review of the language Section 2(4)(xiii) of the Consumer Law and the findings of fact made by this Court, we must conclude that defendants' program is in fact a pyramid or referral sales scheme as contemplated by the Consumer Law. As we interpret Section 2(4)(xiii), that provision would be violated if an individual pays valuable consideration for an opportunity to receive compensation for introducing additional persons into the scheme. In this case, an integral component of defendants' plan is the generation of income by establishing a down-line organization comprised of participants who join as member/distributors. (See Finding of Fact No. 16 herein.) If distributors joined FFS only as distributors and did not purchase memberships,
However, in addition to the $25.00 commission a distributor receives from each direct sale of a membership, each distributor receives another $5.00 "override" for each membership sold by that member when he becomes a distributor. Furthermore, at the hearing, May testified that if any member wanted to sell a membership, but was not a distributor he would be paid a commission if he wanted it. (Notes of Testimony, November 27, 1988, (N.T.) at 39.)
Clearly, FFS distributors may only receive the upward flow of $5.00 override commissions if distributors join the program as member/distributors which in turn requires the purchase of a $100.00 membership. The fact that participants who join FFS only as distributors are not covered by the Consumer Law is inconsequential because May also testified that if everyone became a distributor and no one became a member, FFS would be out of business. (N.T. at 40.)
In short, in order for a distributor to realize any of the potential income benefits resulting from his participation in the FFS plan beyond commissions from his direct sales, there is a de facto requirement that participants in his five level down-line organization join as both members and distributors which necessarily involves the purchase of a $100.00 membership in order to sell memberships. Also, the fact that a member can expect to receive a commission from selling memberships without becoming a distributor renders the member/distributor distinction meaningless for those participants who purchase memberships. Accordingly, we conclude that the sales of memberships as marketed by defendants whose members and/or distributors are compensated by an upward flow of commissions through multi-level down-line organizations is a violation of Section 2(4)(xiii) of the Consumer Law.
The decree nisi is vacated and defendants, their agents, successors, distributors, members and all other persons acting on defendants' behalf either directly or through any corporation are permanently enjoined from selling memberships in that the sale of said memberships violates Section 2(4)(xiii) of the Consumer Law for the reasons set forth herein.
AND NOW, this 26th day of September, 1989, the decree nisi entered in the above-captioned proceeding is vacated and defendant FFS, its principal officers James E. Farrior, and Frank May, their agents, successors, distributors, members and all other persons acting on defendants' behalf either directly or through any corporation are permanently enjoined under Section 2(4)(xiii) of the Consumer Law, 73 P.S. § 201-2(4)(xiii) from selling memberships in the Commonwealth of Pennsylvania for the reasons set forth in the foregoing opinion.