488 S.W.2d 844
WESWARE, INCORPORATED, Appellant,
v.
STATE of Texas, Appellee.
No. 12011.
Court of Civil Appeals of Texas,
Austin.
Dec. 20, 1972.
PHILLIPS, Chief Justice.
This case was brought by the Attorney
General of Texas on behalf of the State of
Texas wherein both permanent and temporary
injunctive relief were sought against
Wesware, Incorporated for violation of
Article 5069--10.01 et seq., Vernon's
Ann.Civ.St., The Texas Deceptive Trade
Practices Act, for operating a 'pyramid selling
scheme'.
The district court issued a temporary
injunction enjoining Wesware from the
operation of a 'pyramid selling scheme' in
violation of the Texas Deceptive Trade
Practices Act. It is from this interlocutory
order that Wesware has perfected its appeal to
this Court.
We affirm.
[1][2][3][4] In reviewing the facts of this case
we are ever mindful that in order to obtain
relief by temporary injunction, a party need
not adduce proof that he will prevail on a final
hearing on the merits. Sun Oil Company v.
Whitaker, 424 S.W.2d 216 (Tex.1968). The
trial court's judgment in either granting or
denying an application for temporary
injunction should not be reversed unless it is
clearly shown to be an abuse of discretion.
Thus the trial court may grant an order of
temporary injunction where the petition
alleges a cause of action and the evidence
adduced tends to sustain it. Texas Foundries,
Inc. v. International Moulders & Foundry
Workers Union, 151 Tex. 239, 248 S.W.2d
460 (1952); Southwestern Greyhound Lines,
Inc. v. Railroad Commission, 128 Tex. 560,
99 S.W.2d 263 (1936). The trial court is
endowed with broad discretion to grant or
deny an application for temporary injunction,
and the issue on appeal is limited to the
narrow question of whether or not the trial
court's action constitutes a clear abuse of that
discretion. Janus Films, Inc. v. City of Ft.
Worth, 163 Tex. 616, 358 S.W.2d 589 (1962).
The facts before us are these: Appellant
offers a set of stainless steel cookware for sale
at $1000. Included in this price is a
motivational kit containing twelve cassette
tapes and a cassette tape recorder along with
various printed matter. It should be noted
here that the temporary injunction before us
does not prohibit any dealer from selling the
cookware nor is the value of the cookware
questioned in any way.
In order to become a 'dealer' for Appellant, a
person must secure three qualifying sales for
the dealer who sponsored him into the plan,
one of which qualifying sales can be to
himself. Once these qualifying sales have
been obtained, the person becomes a dealer
and is entitled to receive a $400 commission
on each sale thereafter. However, he receives
no commission on the qualifying sales. These
go to his sponsoring dealer. The persons to
whom these qualifying sales are made can
also become dealers by securing three
qualifying sales, the commission on which
sales goes to the original sponsoring dealer
(not to the person who recruited them) and so
on down the line. There is no limitation on
where persons may be recruited. There is no
limitation upon how many sales can be made.
Hence, the result of this scheme was
summarized by one witness as follows:
'Q Under the plan as you understand it, was
it conceivable that after a period *847 of
time, you might begin to receive
commission checks, or commissions for
sales made by people in other states whom
you might not even know?
'A Yes. It was mentioned by Mr.
Mendenthal that he was receiving checks
from Washington State where he had
originally entered the program, but he didn't
know the people and didn't know the people
that sold them and so on. These checks
were coming in regularly, and this is where
he is making his money.'
Appellant's first two points of error are
evidentiary and to the effect that the trial
court erred in granting the temporary
injunction because there was either
insufficient evidence or no evidence to sustain
a finding of a violation of the Texas
Deceptive Trade Practices Act. Its third point
is that a temporary injunction, as granted, is
not authorized under the Act. We cannot
agree with appellant here and must overrule
these points.
The Texas Deceptive Trade Practices Act,
Article 5069 in Section 10.04(b) authorizes
the Attorney General to bring such actions as
follows:
'(b) Whenever the Attorney General has
reason to believe that any person is
engaging in, has engaged in, or is about to
engage in any act or practice declared by
Article 10.02 of this Chapter to be unlawful,
and that proceedings would be in the public
interest, he may bring an action in the name
of the state against the person to restrain by
temporary or permanent injunction the use
of such method, act, or practice. Venue in
such an action shall be as provided in
Section (a) of this Article. The court is
authorized to issue temporary or permanent
injunctions to restrain and prevent
violations of this chapter, and such
injunctions shall be issued without bond.'
The basis of the State's suit rests upon two
grounds, first, the marketing plan of Appellant
is a chain-referral or pyramid selling scheme
which is inherently fraudulent, unworkable,
and patently impossible, and, hence, is
deceptive per se; and, secondly, that the
scheme is in the nature of a lottery, is contrary
to public policy, and, as such, constitutes a
deceptive trade practice. The state contends
that appellant's scheme of operation is
enjoinable under the Act on either or both of
these grounds.
[5] Appellant contends that since the plan is
fully explained there is no deception as to its
nature or the likelihood of market saturation
and that the only element of chance involved
is that which is common to any business
venture which depends on the sales of goods.
Appellant asserts that any person who sets out
to be a salesman of cookware under any plan
is to some extent taking a chance since he
may not be able to sell the product. In support
of this position, appellant contends that the
plan contemplates that no investment or
purchase of goods is required to become a
dealer; that the plan requires that dealers and
dealer-trainees put forth considerable effort in
selling cookware in order to make money;
that no claims are made that a profit will be
realized or cookware acquired without cost
merely by referring names to the company;
that it is made clear that the pots and pans
must be sold if a profit is to be gained; that
continued recruitment of persons as dealer-trainees is not necessary to everyone making
a profit; only sales of cookware are necessary.
We cannot agree with appellant here and
must hold that under the facts of this case
there was sufficient evidence of both
deceptive trade practices and of a lottery
before the trial court and that the court did not
abuse its discretion in issuing the temporary
injunction.
Article 5069--10.02 V.C.S. provides as
follows:
'(a) False, misleading, or deceptive acts or
practices in the conduct of any *848 trade or
commerce are hereby declared unlawful.
'(b) It is the intent of the legislature, that in
construing Section (a) of this Article, the
courts, to the extent possible, will be guided
by Section (b) of Article 10.01 of this
Chapter and the interpretations given by the
Federal Trade Commission and the Federal
Courts to Section 5(a)(1) of the Federal
Trade Commission Act (15 U.S.C.A.
45(a)(1) . . ..'
[6] The similarity of Section 10.02(a) to
Section 5(a)(1) of the Federal Trade
Commission Act is obvious. It is the intent of
the Legislature in Section 10.02(b) to rely on
the vast body of law heretofore promulgated
by the federal courts and the F.T.C. by
providing that existing interpretation by these
entities shall be used 'to the extent possible' in
construing Section 10. 02(a).
The criteria of 'deceptive acts or practices' is
settled under Section 5(a)(1) of the F.T.C. Act
and is stated in the terms of Capacity to
deceive rather than actual deception.
Goodman v. F.T.C., 244 F.2d 584 (9th Cir.
1957); American Life & Acc. Insurance
Company v. F.T.C., 255 F.2d 289 (8th Cir.
1958).
The plan or scheme before us contemplates
pyramiding one group of sales upon others in
a manner that has been roundly condemned
and held illegal by both the federal and state
courts. See Securities & Exchange
Commission v. W. J. Howey Co., 328 U.S.
293, 66 S.Ct. 1100, 90 L.Ed. 1244; Blachly v.
United States, 380 F.2d 665 (5th Cir. 1967);
Fabian v. United States, 358 F.2d 187 (8th
Cir. 1966); United States v. Armantrout, 41
F.2d 60 (2nd Cir. 1969); State ex rel. Turner
v. Koscot Interplanetary, Inc., 191 N.W.2d
624 (Iowa, 1971); State by Lefkowitz v.
I.T.M., Inc., 52 Misc.2d 39, 275 N.Y.S.2d 303
(1966).
The scheme has also been called a 'referral
sales' plan and consequently proscribed as
fraudulent conduct. State ex rel. Turner v.
Koscot Interplanetary, Inc., Supra, citing
numerous cases in support. It has been held
that the fact that the first few participants
could possibly earn something is immaterial
because, ultimately, the plan will be
impossible as a practical matter for the great
majority of the public. State v. Lefkowitz v.
I.T.M., Inc., Supra.
[7][8][9] We also hold that the scheme is
proscribed because it constitutes a lottery.
Article 654, Texas Penal Code, Vernon's
Ann., prohibits lotteries without defining the
term. Thus the common law and general
usage define the term. State v. Randle, 41
Tex. 292. Attorney General Opinion C--619
(1966); 37 Tex.Jr.2nd, Section 1, p. 493. A
lottery has three essential elements: a prize,
award of the prize by chance, and the payment
by the participants of consideration for the
privilege or right of participating. City of
Wink v. Griffith Amusement Co., 129 Tex.
40, 100 S.W. 695 (1936).
The elements of consideration and award are
present in the plan before this Court. The
element of chance is also present as the
sponsoring-participant gambles for the
recovery of his investment on the motivation,
success and efforts of each of his recruits over
whom he has no control in any real sense.
This fact by itself provides the essential
element of chance which condemns this
scheme as a lottery. Public Clearing House v.
Coyne, 194 U.S. 497, 24 S.Ct. 789, 48 L.Ed.
1092 (1904); People of the State of Michigan
v. Koscot Interplanetary, Inc., Supra;
Sherwood & Roberts-Yakima, Inc. v. Leach,
67 Wash.2d 630, 409 P.2d 160
(S.C.Wash.1965).
The Federal Trade Commission takes the
position that such schemes are illegal as a
lottery and deceptive trade practice. F.T.C. v.
International Safe-T- Trac, 3 FTC Trade Reg.
Rptr. Para 19,226. The Supreme Court of the
United States long ago upheld that portion of
the F.T.C. ruling that the sale of merchandise
through the use of a lottery constituted a
'deceptive *849 trade practice.' F.T.C. v. R. F.
Keppel & Brothers, Inc., 291 U.S. 304, 54
S.Ct. 423, 78 L.Ed. 814 (1934).
[10] We also hold in reply to appellant's
points three, four and five that the order of
temporary injunction entered fully complies
with the requirements of Rule 683[FN1],
Texas Rules of Civil Procedure, in that the
acts prohibited therein are sufficiently stated
and are not described by reference to the
petition; do not go beyond the scope of the
Texas Deceptive Trade Practices Act; nor
destroy the status quo.
FN1. Rule 683. Form and Scope of
Injunction or Restraining Order
Every order granting an injunction and
every restraining order shall set forth
the reasons for its issuance; shall be
specific in terms; shall describe in
reasonable detail and not by reference
to the complaint or other document,
the act or acts sought to be restrained;
and is binding only upon the parties to
the action, their officers, agents,
servants, employees, and attorneys,
and upon those persons in active
concert or participation with them
who receive actual notice of the order
by personal service or otherwise.
The prohibitory paragraphs of the temporary
injunction in this case enjoin appellant, in
effect, from the operation of a lottery in
numbered paragraph (1), and from the
operation of a referral selling or pyramid sales
scheme in numbered paragraph (2). These
prohibitory provisions are drawn from
appropriate parts of Recent Federal Trade
Commission Decision and Orders in similar
cases. Bestline Products Corporation and
Bestline Products, Inc., FTC Dkt. No. C--1986
(July 22, 1972), 3 Trade Reg. Repts. Paras.
19,626, 19,761; International Safe-T-Trac,
Inc., FTC Dkt. No. 8823 (September 1, 1971),
3 Trade Reg. Repts. paragraphs 19,226,
19,501, 19,700 and 19,787; Koscot
Interplanetary, Inc., FTC File No. 6923102, 3
Trade Reg. Repts. paragraph 19,576.
The injunction before us prohibits any
marketing plan wherein compensation or
profit inuring to the participants therein is
dependent on the elements of chance
dominating over the skill or judgment of the
participants. It also prohibits the operation of
any plan wherein the financial gains to the
participants are dependent upon the
participant's successive recruitment of other
participants.
[11] As the Supreme Court held in San
Antonio Bar Assn. v. Guardian Abstract &
Title Co., 291 S.W.2d 697 (Tex.1956), the
injunction decree must be as definite, clear
and precise as possible and When practicable
it should inform the defendant of the acts he
is restrained from doing, without calling on
him for inferences or conclusions about which
persons might well differ and without leaving
anything for further hearing. But obviously
the injunction must be in broad enough terms
to prevent repetition of the evil sought to be
stopped. It should not be greatly concerned
with rights of the defendants that are asserted
largely in the abstract. Otherwise it would
probably take longer to write the decree than
it would to try the case and the injunction
might well become unintelligible and self-destructive. Also see this Court's opinion in
REI Industries, Inc. v. State, 477 S.W.2d 956
(Tex.Civ.App.1972, no writ).
The gravaman of this whole scheme is
chance and the pyramiding of chance upon
chance. This the injunction has sought to
quell and has done so with reasonable
certainty and clarity.
[12] There is no requirement that the
prohibitory language of an injunction under
the Texas Trade Practices Act must track any
of the statutory language of the Act. The Act
prohibits, generally, 'false, misleading and
deceptive' acts and practices in trade or
commerce. The prohibitory language of the
temporary injunction herein is clearly directed
at mischief within the terms of the statute.
We cannot agree with appellant's contention
that the order of temporary injunction herein
is contrary to the mandatory requirements of
Rule 683 T.R.C.P. because it *850 makes
reference to the petition in this cause. Here
reference was made to the petition in the
statement of reasons in the order for a more
detailed description of the illegal activities,
not in the prohibitory paragraphs themselves.
REI Industries, Inc. v. State, Supra.
[13][14] Finally, appellant contends that the
temporary injunction grants everything the
state could receive on a final hearing and does
more than to preserve the status quo, hence,
was improvidently granted. We overrule this
contention as it is well settled that the status
quo cannot be a condition of affairs in
violation of law. Rattikin Title Co. v.
Grievance Committee of State Bar of Texas,
272 S.W.2d 948 (Tex.Civ.App.1955, no writ).
Also see this Court's recent opinion in
Wesware, Incorporated v. Blackwell,
Tex.Civ.App., 486 S.W.2d 599 (1972),
decided October 25, 1972.
The judgment of the trial court is affirmed.
Affirmed.
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