1106 FEDERAL TRADE COMMISSION DECISIONS
Complaint 86 F.T.C.
Appearances
For the Commission: Harold E. Kirtz, Karen G. Bokat and Charles W. Corddry, III.
For the respondent: Michael J. Henke, Vinson, Elkins, Searls, Connolly & Smith, Wash., D.C.
ORDER DENYING MOTION FOR RECONSIDERATION
Respondent American General Insurance Company and intervenor Fidelity and Deposit Company of Maryland move for reconsideration of an order by the Commission, dated Dec. 5, 1972 [81 F.T.C. 1052], vacating the administrative law judge’s initial decision and remanding the case for further proceedings. The administrative law judge filed an initial decision sustaining the complaint in this matter on Aug. 7, 1975.
Respondent and intervenor have failed to make a sufficient showing why the Commission should grant their motion for reconsideration, especially after the lapse of almost three years from the date of issuance of the order they seek to challenge. Accordingly,
It is ordered, That the aforesaid motion for reconsideration be, and it hereby is, denied.
IN THE MATTER OF
KOSCOT INTERPLANETARY, INC., ET AL.
ORDER, OPINION ETC., IN REGARD TO ALLEGED VIOLATION OF
THE FEDERAL TRADE COMMISSION ACT AND SEC. 2 OF THE CLAYTON ACT
Docket 8888. Complaint, May 24, 1972-Final Order, Nov. 18, 1975
Order requiring an Orlando, Fla., seller and distributor, of cosmetics and cosmetic distributorships, among other things to cease using its open-ended, multilevel marketing plan; engaging in illegal price fixing and price discrimination and imposing selling and purchasing restrictions on its distributors; and to cease making exaggerated earnings claims and other misrepresentations in an effort to recruit distributors.
COMPLAINT
Pursuant to the provisions of the Federal Trade Commission Act and the Clayton Act, and by virtue of the authority vested in it by said Acts, the Federal Trade Commission, having reason to believe that Koscot Interplanetary, Inc., and Glenn W. Turner Enterprises, Inc. corporations, and Glenn W. Turner, Terrell Jones, Malcolm Julian, Ben Bunting, Michael Delaney, Hobart Wilder, and Raleigh P. Mann, individually and as former officers, officers, or directors of said corporations, hereinafter referred to as respondents, have violated the provisions of said Acts, and it appearing to the Commission that a proceeding by it in respect thereof would be in the public interest, hereby issues its complaint stating its charges in that respect as follows:
PARAGRAPH 1. Respondent Koscot Interplanetary, Inc., and Glenn W. Turner Enterprises, Inc., are corporations organized, existing and doing business under and by virtue of the laws of the State of Florida, with their principal office and place of business located at 4805 Sand Lake Rd., Orlando, Fla.
Respondent Glenn W. Turner is chairman of the board of directors of Koscot Interplanetary, Inc., and is the sole stockholder of Glenn W. Turner Enterprises, Inc. Mr. Turner was the founder of Koscot Interplanetary, Inc., and instituted the marketing plan and distribution policies. He, with others named herein, has been and is responsible for establishing, supervising, directing and controlling the business activities and practices of corporate respondents Koscot Interplanetary, Inc., and Glenn W. Turner Enterprises, Inc., including the acts and practices hereinafter set forth. Mr. Turner’s address is the same as that of the corporate respondents.
Respondents Terrell Jones, Malcolm Julian, Ben Bunting, Michael Delaney, Hobart Wilder, and Raleigh P. Mann are officers, or directors of said corporate respondents. Together with others, said respondents have been and are responsible for the formulation, control and direction of the acts and practices hereinafter set forth. Their address is the same as that of the corporate respondents.
The aforementioned respondents cooperate and act together carrying out the acts and practices hereinafter set forth.
PAR. 2. In the conduct of their business, at all times mentioned herein, respondents have been in substantial competition in commerce with corporations, firms and individuals in the sale of cosmetics, toiletries and associated items of the same general kind and nature as those sold by respondents.
PAR. 3. Respondents are now, and for some time last past have, engaged in the advertising, offering for sale, sale and distribution of cosmetics, toiletries and associated items and distributorships and franchises to the public, and are inducing, and have induced, persons to invest substantial sums of money in respondents’ multilevel marketing program as hereinafter more fully described.
PAR. 4. In the course and conduct of their business, respondents now cause, and for some time last past have caused, their products, when sold, to be shipped from their places of business in various States to purchasers thereof located in various States of the United States other than the State of origination, and maintain, and at all times mentioned herein have maintained, a substantial course of trade in said products in commerce, as “commerce” is defined in the Federal Trade Commission Act and the Clayton Act.
PAR. 5. In the course and conduct of their business, respondents have used a multilevel marketing program having four levels of distributors and are presently using a multilevel marketing program which allows the potential participant to enter at any one of three levels, i.e., beauty advisor, supervisor or director. All participants are designated as independent contractors and except for the beauty advisors who sell primarily at retail through party plans and door-to-door methods, are permitted to, and do, sell or attempt to sell at both wholesale and retail. A description of these levels, in order of ascendency, follows:
1. Beauty advisor (retailer)- The beauty advisor purchases products from her sponsor (who may be a supervisor or director) at a 40 percent discount, for sale to the consuming public. The beauty advisor receives a refund bonus from her sponsor each month, based on the total retail volume ordered during the month. Entrant qualifies by investing $10 for a starter kit.
2. Supervisor (sub-distributor)- The supervisor purchases products from the company at a 55 percent discount for distribution to his beauty advisors and direct sales to the consuming public. The supervisor receives a special commission for each new supervisor order he creates, $500 or 25 percent of the $2000 paid for the initial order. An entrant qualifies as a supervisor in any one of these ways:
a. By investing $2000 immediately;
b. By purchasing $5400 in Koscot cosmetics (at retail value) from his sponsor;
c. By selling a portion of the required $5400 volume through his organization and purchasing the balance in one lump sum.
3. Director (distributor)- The director purchases products from the company at a 65 percent discount for distribution to his direct distributors (supervisors and beauty advisors) and for direct sales to the consuming public. The director is entitled to a 10 percent special commission on all of his supervisor’s purchases. He receives $500 for each supervisor order that he sells. The director sponsoring a new director is also entitled to a 65 percent commission ($1,950) on the
$3,000 additional inventory which the new director is required to purchase. An entrant qualifies as a director by: a) becoming a supervisor, purchasing the additional $3000 director inventory and selling a new supervisor order in order to replace himself in his sponsoring director’s organization; or b) by initially investing $5000 and becoming known as an apprentice director until he fulfills all the necessary aforementioned requirements.
These positions are described more fully to the prospective investors at “Opportunity Meetings” held weekly in various locations across the country. At such a meeting, a movie is shown and speeches are made which concentrate upon the unlimited potential to earn large sums of money in a relatively short time by recruiting others into the Koscot program. In most instances, the opportunity meeting will closely follow the script provided by respondents as found in the distributor training manual. This meeting is run in such a manner as to excite those attending and to induce them into making an emotional decision to invest in the program.
PAR. 6. In the course and conduct of their business as aforesaid, respondents have done and performed and are doing and performing the following:
1. Respondent Koscot Interplanetary, Inc. has entered into con-tracts, agreements, combinations, or understandings with its distribu-tors whereby said distributors agree to maintain the resale prices established and set forth by respondent corporation, notwithstanding that some of such distributors are located in States which do not have Fair Trade laws.
2. Respondent Koscot Interplanetary, Inc. has entered into con-tracts, agreements, combinations, or understandings with its distribu-tors whereby said distributors agree to maintain the discounts, overrides, rebates, bonus schedules, finder’s fees and release fees, between and among all other distributors, as established and set forth by respondent corporation.
3. Respondent Koscot Interplanetary, Inc. has entered into con-tracts, agreements, combinations, or understandings with its distribu-tors whereby said distributors understand that a violation of any company rule or regulation is reason for immediate termination of their status as distributors by the company board of directors.
4. Respondent Koscot Interplanetary, Inc. has instituted certain rules and regulations, among which are those set out below, whereby its distributors:
(a) Agree to purchase merchandise only from respondent or his sponsor in accordance with Koscot’s marketing program,
(b) agree that all purchases of merchandise from respondent corporation or his sponsor constitutes a nonrefundable sale,
(c) agree not to engage in the sale of a competitive line of products or individual products which would be considered competitive to respon-dent corporation,
(d) agree never to make any consignment of merchandise to anyone without receiving written notice of approval by Koscot Interplanetary, Inc.,
(e) agree to restrict retail sales and display of cosmetics to home service routes and beauty forums, and to certain categories of retail outlets specified by respondent but only with Koscot’s approval,
(f) agree to obtain prior written approval from Koscot for any promotion or advertising of Koscot products or his distributorship,
(g) agree to maintain a record of the names and addresses of all his customers and to provide Koscot with such information through his supervisor or director,
(h) agree not to transfer to another organization without prior written consent of all distributors above him in his organization, including respondent corporation,
(i) agree to have a financial interest in only one Koscot distributor-ship at a time and that he cannot be part of two separate distributor-ships,
(j) agree not to enter into any agreement with a distributor in another Koscot organization to make a division of profits, assets, or new recruits in violation of the “Koscot Marketing Koncept.”
5. Respondent Koscot Interplanetary, Inc. has entered into con-tracts, agreements, combinations or understandings with its distribu-tors whereby respondent:
(a) Prohibits a corporation from becoming a Koscot distributor
(b) requires that the organization of a distributor, who quits or loses his status as a distributor, becomes a part of the organization of the distributor immediately preceding him on Koscot’s organizational chart.
6. Respondent Koscot Interplanetary, Inc. discriminates in price, directly or indirectly, between different purchasers of its products of like grade and quality by selling said products at lower prices to some purchasers than to other purchasers, many of whom have been and now are in competition with the purchasers paying the higher price. For example, director-distributor purchases his products directly from respondent corporation at approximately: (a) 22.2 percent discount as compared with the cost to a supervisor-distributor, (b) 41.7 percent discount as compared with the cost to a beauty advisor.
There are approximately 7,988 director-distributors and approxi-mately 10,726 supervisor-distributors in the program.
The supervisor-distributor who purchases his products directly or indirectly from respondent corporation, purchases at approximately a 25 percent discount as compared with the cost to a beauty advisor.
In addition, respondent corporation has agreed to pay the director-distributor a 2 percent override on the purchases of the entire organization of each supervisor-distributor, recruited by said director- distributor when such supervisor-distributor works up or buys in and becomes a director himself. Thereafter, although both director-distrib-utors buy from respondent corporation, only the first will receive the 2 percent override from respondent corporation.