Untitled Texas Attorney General Opinion

Honorable Henry Wade Opinion No. C-619 District Attorney RecordsBuildIng Be: Whether a referral I)B1186,Texas selling plan constitutes 8 Dear Sir: lottery. By your recent letter you request an opinion of this office 8s to uhether 8 certrin referrsl selling plan constitutes a lottery. The contract in question is cdlled a "representative purchasing commission agreement" and the facts and clrcumstsnces by which it is utilized are briefly summ8rized from v8rious instruments, documents 8nd memoranda furnished by your office. Its purpose is to promote s8les through the seller's customers by promising them something for nothing, as hereinaiter related. In substance, it Is simpl)~a ch83.nreferral selling scheme by which a built-in vaauum cle8ning system is sold to 8 purch8ser, cdlled the sellerls "Bepresent8tlve," for a rtipulatod money considera- tion md upon the further ccmslderatlon md Inducement that the purchseer would make money and, in effect, acquire the system for nothing through the use of a long term conditional eelas contract. As part of the transaction, the representatives pur- chasing commlsslon agreement is executed. By this, the purchaser would furnish the selling comp8ny a list of qualified prospective purchasers. For each s8le to 8ny one so referred, the purch8ser would receive a commission of $50. A further pyr8mldlng of $50 commission is evidenced In paragraph four of the agreement, supra, whereby the selling company sgrees not only to pay the initial purchaser represen- tative $50 for each name submitted by him who becomes a pur- chaser representative, but also to pay the initidl purchaser representative 8n additional $50 for each name subsequently submitted by the purchasers "at the time they too become 8n equipment owning Representative Purchaser." Hon. Henry Wade, page 2 (C-619) Such schemes operating on the referral plan appear to be designed to lead gullible prospective purchasera to believe that they can obtain the product sold without cost, or for nominal cost, by receiving payments from the pro- moters a6 commissions on Items Bold to referred customers and customers of such referral customer8 8d infinitum. It further appears from the mode of operation of this SCheIne?$8t the Selling COmpSny'S agent Bak?Sman, in con- tacting purchasers, re$reeente that he could thereby 'make some extra money" 8nd there will be no money out of your pocket," Since under the plsn the purchaser was absolutely, under all contingencies, obligsted to purchase the vacuum clesner system, the purchaser is thus lead to believe that the commissions to be earned by him in referring prospective purchasers would be 8t least sufficient to cover his pur- ch8se price. Under the contr(Lct,the purchasers h8ve no control over the general operation 8fter they submit the names of prospective referrals. Their mere 8Ct of Supple names of home owners ls~.theonly initiative,~foresight or skill contributed, 8nd the acts of subsequent purchasers In submitting n8mes require no skill wh8tever 8nd is Bubject to no control whstever by the initial purchpsers. The skill of the selling comp8ny1s agent who 8&U- pushes the sales is not relev8nt under the 8uthor5.tleshereinriter cited. The element of chance from 8 satursted m8rket through.the prinr ciple of geometricsl progression appesrs to be inherent in the plan. It is further made to appear that one of the aggrieved purchasers performing the contractual agreement, 8nd vhoee name had been furnished to a e8lesman agent by a previous purchaser, nevertheless received nothlng while binding himself to pay $1,086.48 over 8 three year period md complalne that the scheme conetltuted 8 lottery. We 8re 8dvLsed that the Federsl Post Office Department regsrds such 8 plan 8s 8n andless chain scheme, the Oper8tion of which conflicts with the Portal Lottery 8nd Frsud Laws, 18 U,S.C. 1302, 1341, and all matters relstlng thereto being non-mailable under those 18WS. The written agreement entered into and signed by both -3m1- Ron. Henry Wade, page 3 (C-619) parties as a part of the transaction in selling the vacuum cleaning system, which later iB attached to the purchaser's home and upon which he also executes a mortgage for security, a prerequisite to becoming a "qualified prospect," reads: 1. Company hereby retains the services of re resentative for a period of thirty-six (36 consecutive months from the date here- of in the capacity of equipment owning Representative upon the terms and conditions hereinafter set forth. 2. Representative shall submit to company the names of individuals considered by RepreSSSIt8tiVeto be qurlifled pros ec- tive pUrCh8SerB of (Mme of productP in active sales areas covered by Company. Each name so submitted shall be d8te stamped by Company when received. 3. Company shall p8y Representative as esrned commission the sum of Fifty Dollars for each individual, whose name is submitted by Representative, who thereafter becomes 8 qualified equipment owning Representa- tive‘for (name of company). 4. (Name of company) shall pay Representative as earned commission the sum of $50*00 for each name subsequently submitted by the individuals referred to.in paragraph 3 at the the time they too become an equipment Owning RepreSent8tiVe PUrChaSer. Represen- tative Purchaser agrees to render assia- tance, time,skill and effort to Company by contacting the qudlified purchaser herein referred to. 5. A quali.fiedprospect is as follows: a. Prospect must own or be buying the home in which equipment will be installed. No Renters or Lessors, Hon. Henry Wade, page 4 (c-619) b. Prospect must be acceptable to (name of company). 6. In the event two Representatives submit the same prospective new purch8Ber's name, the Representative directly responsible for the appointment on which the enrollment iB made shall be entitled to the benefits, provided the prospective purchaser is accepted. 7. This Agreement shall become effective upon completion of the following conditions: a. Signed by 8n authorized agent of (name of company) and enrolled purchaser; Acceptable to home office of b- (name of comp8ny). 8. The commission payments herein provided shall be the sole and only compensation due Representative Purchaser from .name 6er- of company) and it Is expressly tin stood that in accepting this contract Representative is acting as an indepen- dent contractor and shall pay 811 local, city, county, state and federal~taxes on any commission received by him and shall hold (name of company) harmless ,fOrany of these taxes. 9. Thls agreement shall be valid for three years from date hereof, but may be term& n8ted by reason Of fire, flood, strikes, lockouts, acts of God, war, rules and regulations by the Federal, State or local governments, repossesBion, con- version or other circumetencee beyond the control of (name of company). 10. It is Curther understood and agreed -3003- Bon. mm-y Wade, page 5 (c-619) that payment of compenartlon hereunder shall not in any way affect the obliga- tion of the Representatives 8s Bet forth by the terms and condition8 of the con- tract for the purchase of equipment. ll. That this agreement expresses the complete understanding of the parties here- to. 130authority is given to any person to alter, amend or chenge 8ny of provisions hereof, In Texas, the term "lottery" i8 said t0 have no technical SignifiC8tiOn in the law, and since the prohibitory statute (Art. 654, Vernon's Penal Code) fails to provide a definition, its meaning must be determined from popular usage and the common law, with due conSider8tion to the public policy under- lying the 8uthOrities. 37 Tex.Jur.2d 493, Lotteries, Sec. 1. It is now settled in Texes that a lottery is composed of three elements: (1) A prize or prizes (2) The award or dlstrlbution of the prize or prizes by chance; and (3) The payment either directly or indirectly by the participants of a consideration for the right or privilege of participating. City of Wink v~.Griffith Amusement Company, 100 S.W.2d 695 Brlce v: State, 136 T ex.Crim. 372, 242 S.W.2d ate v. socony Mobil oil company, 386 S.W..2d Tex..Civ.App.19b4, error ref., n.r,e.). fa the fscts presented, it affirmatively ~appears that the money to be received by the Representative as "an earned com- mission" would constitute the prize, or the first element. The third element, the payment of consideration by the parti- cipants for the right to partlcipete, also clearly appears 8s a part of the referral Selling pkin agreement. The consi- deration for the opportunity to receive the "prize" would be, in part, the purchase price for the vacuum cleaning system. The second element, the distribution Bf'the prize by chance, -3004- . Ron. Henry Wade, page 6 (C-619) requires a closer analysis in the light of the decisions as to wheiher the dominating element of the entire scheme was that of chance, or that f kill judgment, or ingenuity, 54 C.J.S. 846, Lotteries: Sic. 2;(2), and caeee.cited. If the plan or game depend8 entirely on skill, it Is not a lottery although prizes are offered for the best solution. Boatright v. State, 118 Tex.Ctim. 381, 38 s.w,2d87 (1931). If Ch8IICeDredOmln8teS over Skill or .iUdnmed and uermeates the whole plan, a lottery is established: Sherwood & Roberts- Yakima, Inc. v. Clyde 0. Leach, 67 W.D.2d 61U, 409 P.29.lb0, -(Wash.Sup.lgb5) . Under the authorities, the courts must look to the substance of the referral selling plan or scheme rather than to its form. In Wew v. Triband Sales Corporation, 19 F.2d 671, the court, cognizant of the necessity to view substance rather than form, quoted the rule from an earlier decision with 8pprOVti 88 fOllOW8: "As w8s observed by the Supreme Court of Worth Carolina in State v. Llpkin, 169 R.C. 265, 84 S.E. 340, L.R.A. 1915 F. 1018, Ann.C8S. 1917D, 137, 'no sooner is 8 lottery defined, and the deftnltion applied t0 8 given State Of f8Ct8, than ingemdty i8 8t work t0 eVOlVe some scheme Of evasion which i8 wlthln the mischief, but not quite within the letter, of the definition . . . The-Court will mire, not into the name, but into the game, however skillfully disguised, in order to ascertain If it is prohibited, if it h8e the element of chance. . .I" (Rnpha%s added) The Court IZIthe Wew case, infra, then proceeded to hold that where one de=ded upon the acts of others over whom the participant had no control, the necessary element of chance In the elusive referrel selling plan was supplied. ain, in Stat. ex rel. Rvans v. Brotherhood) 41 Wn.2d A& 133, 2 7 P.2d -2), stance of the plan: the court looked Into the sub- "The scheme or plan Involved, rather than any mechanical devise employed, constitutes the gist of the question, and determines whether a particular operation constitutes 8 lottery." . . Ron. Henry Wade, page P (C-619) The referral selling plan here presented iB substantially similar in all material reepects to the one passed upon by the Supreme Court of the St8te of UaBhi ton In Sherwood & Roberts- 3 , 4OgFGW Yakima, Inc., v, Leach, 67 W.D.2d 61 lb0 (1963) hi h h ld'that'the plan constituted a lottery: Thi Court ' Ldcno kfficulty finding the three essential elementa of a lottery present, and made 8 skillful analysis of the element of chance Inherently involved in the transaction, and which necessarily predominated over skill or judgment. We quote im part from pages 622-624 of the unanimous decision by the Supreme Court: "$ere, a8 part of 8 general operation raspondents may obtain commissions (prizeI and they here agreed to pay the rch8se price of the equipment (COnSider8tiOnr in an effort to get that priz*. The next question 5.8whether that effort is based on chance. '9.nstate v. Lipkin, 169 W.C. 265, 271, 84 S.E. 90 (1915) it WM Said: 'The Court will inquire, not Into the neme, but into the game, however SkillfUllydiSgUiSed, in order to ascertain If it is prohibited, or if it has the element of chance. It is the one playing at the game who Is influenced by the hope enticingly held out, which is often false or di88ppOinting, that he will, perhaps and by good luck, get something for nothing, or 8 great,deti for 8 very little outlay. This is the lure that draws the credulous and UnSuSpecting intO the deceptive Scheme, 8nd it is uh8t the law denounce8 as wrong 8nd deaorrlltlag. ’ "(4) Chance rithin the lottery St8tUte is one which darinrte8 over skill or judgment. The me88ure is 8 qualitative one; that 18, the chance must be an integral psrt which influence8 the result. The measure is not the quantitstive proportion of skill and chance in viewing the schemeas 8whoti. State (IXI.&. NcKlttrlck v. -3006- Hon. Henry Wede, page 8 (C-619) .Globe-DemocratPublishing Co., 341 Ho. 862, 110 S.W..w 705, 113~A.L.R. 1104 (1937). "(5) Appellant argues that skill or $uyent is factually the dominant factor, - -9 the factors determining i;tti?her a commission will be paid are the.'judgment of respondente used in selecting name6 they refer and the skill of the Lifetone s8le8msn. Rut we 8re only concerned with the skill or judgment of respondents; the skill of the Llfetone salesman is Irrelevant. Assuming that respondents in fact used skill or judg- ment in selecting the referrals, the trial court properly held that chance permeates the entire scheme. The court found that respondents took 8 chance th8t the referrals might not be Interested; thst the salesman night not sdequately make his presentation; that the referral might have already been referred by someone else; that the market might be 88tUr8ted; 8nd that the sales- man might not even contrct the referral. In sddltion, the trial court noted th8t respondents h8Ve no control over the general Oper8tion after they gave the names of referrals. . . . Appellant argue6 that the w8nt of control is not 8 legitimate fsctor to consider. This argument is tenuous. "The lack of control feature in referral sellfng is much brocrderth8n thst designsted by the trial court. It is Inherent In referral selling that pUrCh88erS such 88 respondents be without control. Sooner or later, the market,' unknowingly to the purchasers, till become erturated. This principle is the same 8s in the chain letter scheme. The case St hand is 8 classic exrmple. "The Lifetone sslesman told reBpOnde&S that they could get something for nothing through the referral selling scheme. Respondents to pay $1,187.28 for equipment For ease of demonstretion, -3007- Eon. Henry Wade, page 9 (C-619) reSpOndent8 lUU8te8Z.n12 COnneiSSiOXlB Of $100 each In order to get, as promised, something for nothing. This mean8 that 12 of reSpondent6' referrals InUStpurchase 88 respondents did; they, In turn, to get something for nothing, must find 12 more people to purchase, and so forth, as fOllOw8: Wumber of Purchasers 1 1st round 2nd round 1:: rd round 1,728 3thround 20 36 5th round 4 32 248, "Soon the scheme will ZTUI Itself OUti the market will become SatUr8ted. Here, Llfetone made Its first 88le in %y, 1963, and its last sale In October, 1963. The respondents entered the picture in September. They gave the Lifetone 88bSSlS8ll 8pprOXimete~ 60 Xl8A#S8t that time, and the never received 8 commission. In fact, only $1k ,900 in commissions were paid in the Y8klnm 8re8, while the total number of sales was 137 totalling $129,*7.04 ~(wlthoutfinance chargesL "ReSpOndentS took 8 chance on whether they could get SOmething for nothing. This ch8nce permestes the entire scheme of referral selling. This court holds that the referral selling scheme Is a lottery." The Attorney General of Ma8sachUsett8, in 8 1964 opinion held that such 8 referral ee~ing plan as here Involved constitutes~a lottery and contains the three eeeential ele- ments above discussed. This opimion review8 the decisions ln the light of public policy and hold that those who place an order for an article in the hope of getting future com- missions to orrset the purchase price, p8y 8 COnSider8tiOn for 8 prize, the winning of which is bseed upon ch4nce. -3008- Bon. Henry Wade, page 10 (O-619) The opinion holds: "Whoever sets up or promotes a plan by which goods or anything of value Is sold to a person for a consideration and upon the further izonslderatlonthat the purchaser agrees to secure one or more persons to participate In the plan by respectively making a similar purchase or purchase8 and In turn agreeing to 8ecure one or more pereons likewise to join In the said plan, each purchaser being given the right to secure money, credits, goods or something of value, depandlng upon the number of persons joining the plan, shall be held to have set up and pr0moted.a lottery. . . ." We therefore hold that the referral selling plan in question constitutes a lottery in Texas within the meaning of the common law, popular usage and Article 654, Vernon's Penal Code. Iloreal skill is contributed by the "Bepre- sentatlve," but the element of chsnce predomL+ates and permeates the plan as an Inherent component thereof. SUMMARY ------- A cha&n referral selling plan, containing the elements of a prize, the award thereof by the element.of chance, predominates over skill and being inherent fromlbck of control by the participants taking the chance, and the giving of conelderatlon for the opporttiity to win a prize, constitutes a lottery In Texas within the meaning of the common law, popular usage, and Article 654, Vernon's Penal Code. Yours very tuly, WAwoHsm CAEB Attorney General By:4kd+&- AsLeslstak -3009- Hon. Henry Wade, page 11 (C-619) APPROVED: OPINION COMMITTEE W. V. Geppert, Chairamn George Gray Vlnce Taylor Gordon Cars H, Grady Chandler APPROVED FOR THE ATTORNBY Gmm BY; Z..B. Wright I