Opinion
47224 Record No. 901355
September 20, 1991
Present: Carrico, C.J., Compton, Stephenson, Russell, Whiting, Lacy, and Hassell, JJ.
Justice Russell participated in the hearing and decision of this case prior to the effective date of his retirement on July 1, 1991.
The trial judge erred in granting defendants' demurrer in a contract action because its promotional sales program is a pyramid promotional scheme that violates the provisions of Code Sec. 18.2-239. The contract made with plaintiff is against public policy and is rendered void and unenforceable by the provisions of that code section.
Contracts — Against Public Policy — Void and Unenforceable — Statutory Construction — Pyramid Schemes — Code Sec. 18.2-239
The plaintiff paid $5,000 to a pair of Virginia corporations for the contractual right to become an independent distributor of water purification stills, to enter a training program for distributors, and to receive a bonus for each new distributor she recruited to the program. Each new distributor was to acquire the same rights plaintiff acquired. The first two contract provisions were in writing but the third was an oral agreement. The plaintiff began, but did not complete the training program. She filed an action to recover her payment, punitive damages and reasonable attorney's fees. The trial court entered judgment for the defendants, finding that there was no possibility of a carry over of commissions to persons subsequently recruited by the plaintiff's recruits, and that the contract was not the type of pyramid or promotional scheme prohibited by Code Sec. 18.2-239. The plaintiff appeals.
1. A pyramid sales scheme is defined as a device, illegal in many states, in which a buyer of goods is promised a payment for each additional buyer procured by him. Neither the dictionary definition nor the statutory definition of Code Sec. 18.2-239(a) indicates that there must be a multi-layered vertical chain of compensation flowing to intermediate participants from the efforts of their recruits.
2. While penal statutes must be strictly construed, that rule of construction does not abrogate the well-recognized canon that a statute or ordinance should be read and applied so as to accord with the purpose intended and attain the objects desired if that may be accomplished without doing harm to its language.
3. In this scheme the law of diminishing returns begins to operate against later distributors, eventually depriving them of their purchased opportunity to receive compensation in return for inducing other persons to become participants in the program, which is an evil that Code Sec. 18.2-239(a) sought to suppress.
4. No harm is done to the language of the statutory definition by concluding that the intermediate parties need not receive compensation for the efforts of their recruits to establish a pyramid promotional scheme.
5. Therefore, the defendants' promotional sales program is a pyramid promotional scheme that violates the provisions of Code Sec. 18.2-239. The contract with the plaintiff is against public policy and made void and unenforceable by the provisions of the Code.
Appeal from a judgment of the Circuit Court of the City of Petersburg. Hon. Oliver A. Pollard, Jr., judge presiding.
Reversed and remanded.
Neil Kuchinsky for appellant.
Terrence K. Martin (Gibson, Martin, Overman, Fisher and Carpenter, on brief), for appellees.
In this case, we consider whether a particular sales promotion program is a "pyramid promotional scheme" as defined in Code Sec. 18.2-239(a).
Delores Love paid $5,000 to Durastill of Richmond, Inc. and Durastill of Virginia, Inc. (collectively Durastill) in return for certain contractual rights. First, Love became an "independent distributor" of water purification stills sold by Durastill; second, she was entitled to enter Durastill's training program for distributors; and third, Love was to receive $1,250 for each new distributor she recruited to Durastill's program. Upon paying $5,000 to Durastill, each new distributor would acquire the same rights as Love. The first two provisions were in writing, the third was an oral agreement.
Love entered, but did not complete, Durastill's training program. On June 1, 1989, Love filed this action at law to recover her $5,000 payment, $2,000 in punitive damages, and reasonable attorney's fees. Love claimed: (1) that the contract was void because (a) it was procured by fraudulent misrepresentations, and (b) it was a pyramid promotional scheme proscribed by Code Sec. 18.2-239; and (2) that Durastill breached its contract by failing "to provide her with materially-useful training."
After a non-jury trial, the trial court entered judgment for Durastill. The court found that Durastill's sales promotion program was "a process whereby part of the money paid by Mrs. Love was consideration for the opportunity to receive compensation in return for inducing other persons to become participants in the program." Nevertheless, because "there was no possibility of a carry over of commissions to persons subsequently recruited by [Love's] recruits," the court concluded that the contract was not "the type pyramid or promotional scheme prohibited by" Code Sec. 18.2-239. Love appeals only this holding.
The parties agree that the issue on appeal is whether the trial court's factual finding that Love's payment for the opportunity to be compensated for recruiting other program participants is sufficient to establish a "pyramid promotional scheme" within the statutory proscription.
First, we consider the pertinent provisions of Code Sec. 18.2-239:
Every person who contrives, prepares, sets up, operates, advertises or promotes any pyramid promotional scheme shall be guilty of a Class 1 misdemeanor. For the purposes of this section:
(a) "Pyramid Promotional scheme" means any program utilizing a pyramid or chain process by which a participant gives a valuable consideration for the opportunity to receive compensation . . . in return for inducing other persons to become participants in the program.
Durastill contends that a necessary element of a pyramid promotional scheme is a multi-layered vertical integration between a distributor, the distributor's recruits, and the recruits of such recruits whereby each person in the pyramid receives compensation from the efforts of those in the pyramid beneath her or him. Thus, according to Durastill, because its program limits Love's commissions to those from her direct sales of Durastill distributorships and products, its program cannot be a pyramid promotional scheme within the purview of Code Sec. 18.2-239.
A "pyramid sales scheme" is defined as "[a] device, illegal in many states, in which a buyer of goods is promised a payment for each additional buyer procured by him." Black's Law Dictionary 1237 (6th ed. 1990). Neither that dictionary definition nor the statutory definition of Code Sec. 18.2-239(a) indicates that there must be a multi-layered vertical chain of compensation flowing to intermediate participants from the efforts of their recruits.
Nevertheless, Durastill implies that we have already adopted its construction of Code Sec. 18.2-239(a) in Bell v. Commonwealth, 236 Va. 298, 374 S.E.2d 13 (1988), and Thaxton v. Commonwealth, 211 Va. 38, 175 S.E.2d 264 (1970). We do not agree.
Although in both cases there were contractual provisions for the multi-layered vertical integration that Durastill claims to be an essential part of a statutory violation, neither case turned upon the definition of a "pyramid promotional scheme." In Bell, the issue was whether the participants gave the statutorily required "valuable consideration." 236 Va. at 302, 374 S.E.2d at 16. In Thaxton, the decision turned upon whether the participants were agents of the out-of-state promoter, thus requiring the promoter to domesticate in Virginia. 211 Va. at 39, 175 S.E.2d at 265.
Although we agree with Durastill that this penal statute must be construed strictly, "that rule of construction 'does not abrogate the well recognized canon that a statute or ordinance should be read and applied so as to accord with the purpose intended and attain the objects desired if that may be accomplished without doing harm to its language.' " Crone v. Richmond Newspapers, Inc., 238 Va. 248, 254, 384 S.E.2d 77, 80 (1989) (quoting Gough v. Shaner, 197 Va. 572, 575, 90 S.E.2d 171, 174 (1955)).
Bell makes plain one of the legislative purposes in enacting Code Sec. 18.2-239. In describing the effect of the promotional scheme, we said
[a]s the number in the chain of participants expands and the market for new recruits declines, the law of diminishing returns begins to operate against the interests of those who become participants late in the process. Once the market is exhausted, no participant . . . has an "opportunity to receive compensation . . . in return for inducing other persons to become participants in the program."
Code Sec. 18.2-239(a); Bell, 236 Va. at 303, 374 S.E.2d at 16.
The Bell rationale applies here. Durastill's program is designed to create an expanding chain of participants, each of whom pays Durastill $5,000 for the privilege of earning commissions by recruiting other participants. In order to recoup their $5,000 investments and to make additional profits, the distributors and their expanding chain of recruits are encouraged to sell as many distributorships as they can. As the base of the pyramid expands, there are fewer persons left to be potential distributors. Thus, the law of diminishing returns begins to operate against later recruits, eventually depriving them of their purchased "opportunity to receive compensation . . . in return for inducing other persons to become participants in the program." Code Sec. 18.2-239(a). Clearly, this is an evil that Code Sec. 18.2-239(a) sought to suppress.
Nor is harm done to the language of the statutory definition by concluding that the intermediate parties need not receive compensation from the efforts of their recruits to establish a pyramid promotional scheme. Durastill's scheme is within the language of the statutory definition of a pyramid promotional scheme because it "utiliz[es] a pyramid or chain process" that places Durastill at the apex of a pyramid resting upon a base of distributors who have been enticed into paying Durastill $5,000 for the ever-decreasing opportunity to recoup their investment by recruiting other distributors.
For these reasons, we conclude that Durastill's promotional sales program is a "pyramid promotional scheme" that violates the provisions of Code Sec. 18.2-239. Therefore, Durastill's contract with Love is "against public policy," and made "void and unenforceable" by the provisions of Code Sec. 18.2-239. Accordingly, we will reverse the judgment of the trial court and remand the case for further proceedings consistent with this opinion.
Reversed and remanded.