84 F.T.C. 748

IN THE MATTER OF

HOLIDAY MAGIC, INC., ET AL.

ORDER, ETC., IN REGARD TO ALLEGED VIOLATION OF SEC. 5 OF THE

FEDERAL TRADE COMMISSION ACT AND SEC. 2(a) OF THE CLAYTON ACT

Docket 8834.

Complaint, Jan. 18, 1971

Decision, Oct. 15, 1974 [FN*]

Order requiring a San Rafael, Calif., distributor of cosmetics, toiletries, cleaning products and associated items, among other things to cease engaging in illegal price fixing and price discrimination and imposing selling, purchasing and territorial restrictions on its distributors. Further, respondent is required to cease using its open­ended, multilevel marketing plan which the Commission found to be deceptive. Respondent is also ordered to make refunds to requesting distributors of monies unlawfully obtained in the event it ceases to be in compliance with an order of the District Court for the Northern District of California pertaining to repayment of funds to distributors.

Appearances

For the Commission: Joseph S. Broumman and D. Stuart Cameron.

For the respondents: Alvin H. Goldstein, Jr., Tuckman, Goldstein & Philips, San Francisco, Calif. Stein, Mitchell & Mezines, Wash., D. C.

COMPLAINT**

Pursuant to the provisions of the Federal Trade Commission Act (Title 15, U.S.C., Section 41, et seq.) and by virtue of the authority vested in it by said Act, the Federal Trade Commission having reason to believe that the parties listed in the caption hereof and more particularly described and referred to hereinafter as respondents, have violated the provisions of Section 5 of the Federal Trade Commission Act, and Section 2(a) of the Clayton Act, as amended, and it appearing to the Commission that a proceeding by it in respect thereof would be in the interest of the public, hereby issues its complaint, stating its charges as follows:

PARAGRAPH 1. Respondent Holiday Magic, Inc. is a corporation organized on or about Oct. 14, 1964, and is existing and doing business under and by virtue of the laws of the State of California. Respondent Holiday Magic, Inc. maintains its home office and principal place of business at 616 Canal Street, San Rafael, Calif.

PAR. 2. Respondent William Penn Patrick is chairman of the board of directors of said corporation, and was also its first president. Mr. Patrick was the founder of Holiday Magic, Inc. and together with others instituted the Holiday Magic marketing plan and distribution policies. Respondent William Penn Patrick, together with others, has been and is responsible for establishing, supervising, directing and controlling the business activities and practices of corporate respondent Holiday Magic. Mr. Patrick's office address is the same as that of said corporation.

In addition, respondent William Penn Patrick was formerly engaged in other marketing activities in commerce in a system of distribution involving applications and contracts, sales manuals and marketing plans, price lists and other literature similar to the present activities of respondent Holiday Magic, as alleged herein.

Respondent Fred Pape was president of corporate respondent Holiday Magic, Inc. Together with others, respondent Fred Pape was responsible for establishing, supervising, directing and controlling the business activities and practices of corporate respondent Holiday Magic. Mr. Pape's office address is 1790 E. Plum Lane, Reno, Nev.

Respondent Janet Gillespie was administrative vice president and a director of Holiday Magic, Inc. Together with others, respondent Janet Gillespie was responsible for establishing, supervising, directing and controlling the business activities and practices of corporate respondent Holiday Magic. Mrs. Gillespie's office address is 1790 E. Plum Lane, Reno, Nev.

PAR. 3. Respondents are engaged in the purchase, distribution, offering for sale and sale of cosmetics, toiletries, cleaning products and associated items which are marketed under the names Holiday Magic and Home Magic, to distributors located throughout the United States. The total monthly volume of sales of such products, using the retail list prices of said products has been in excess of 5 million dollars. Since distributors purchase at discount off list prices, actual sales are approximately 45 percent of this figure. In its short history the company has registered phenomenal growth. Comparable monthly figures are $16,000 for Dec. 1964, its first month of operation, $520,000 for July 1965, $1,500,000 for June 1966, $2,000,000 in Aug. 1966, and $1,700,000 in Feb. 1969.

PAR. 4. In the course and conduct of its business of distributing Holiday Magic and Home Magic products, the respondents ship or cause such products to be shipped from the state in which they are warehoused to distributors located in various other States throughout the United States who engage in resale to other distributors and to members of the general public. There is now and has been for several years last past a constant, substantial, and increasing flow of such products in 'commerce' as that term is defined in the Federal Trade Commission Act and in the Clayton Act.

PAR. 5. Except to the extent that actual and potential competition has been lessened, hampered, restricted and restrained by reason of the practices hereinafter alleged, respondents' distributors and dealers, in the course and conduct of their business in distributing, offering for sale, and selling of Holiday Magic and Home Magic products are in substantial competition in commerce with one another, and corporate respondent and their distributors are in substantial competition in commerce with other firms or persons engaged in the manufacture or distribution of similar products.

PAR. 6. Respondents have formulated a distribution system involving distributors at wholesale and retail levels and they have published their marketing plan or distribution policies which are set forth in respondents' price lists, discount schedules, marketing manuals, sales bulletins, order forms, pamphlets and other materials and literature. To effectuate and carry out the aforesaid distribution system, policies or plan, respondents, together with their distributors, have entered into certain contracts, agreements, combinations or common understandings pursuant to the universal acceptance by the distributors of said marketing plan and have adopted, placed in effect and carried out, by various methods and means, the marketing plan to hinder, frustrate, restrain, suppress and eliminate competition in the offering for sale, distribution and sale of cosmetics, toiletries, cleaning materials and associated products.

PAR. 7. Corporate respondent's marketing plan is a distribution network which allows a potential distributor to enter at any one of three levels, i.e., Holiday Girl, Organizer and Master, and may eventually qualify at a fourth level, that of General. All distributors are independent contractors and except for the Holiday Girls who sell primarily at retail through party plans and door­to­door methods, are permitted to, and do, sell or attempt to sell at both wholesale and retail. The distributors' gross profit is the difference between the price or prices at which he purchases Holiday Magic products and the price or prices at which he resells them.

a. Holiday Girls and Organizers.

All Holiday Girls and Organizers buy their products at 30 percent off the retail list price. At the end of the calendar month, they receive from their sponsoring distributor who sold them these products, i.e., a General, Master or Organizer, a refund varying from zero to 25 percent off list based upon the monthly volume purchased. Once a distributor purchases a volume of $5,000 ($6,666.66 as of Sept. 30, 1969) in terms of retail list price in any one calendar month, he remains at the 25 percent refund level, is thereafter classified as a Master and can buy directly from respondent Holiday Magic or his General at 55 percent off retail list price.

b. Master.

Master distributors may purchase their needs either from Holiday Magic, Inc., directly or through a General. There is no effective limit as to the number of distributors that may be recruited, nor is there a limit as to the size of any distributor's organization. A distributor's organization includes all persons whom he supplies with products either directly or indirectly, or upon whose purchases he receives an override.

Individuals who desire to start as Masters must purchase an inventory valued at $5,000 ($6,666.66 as of Sept. 30, 1969) retail list price. The actual cost is at 55 percent off. An additional charge of $250 for certain sales aids has also been an initial requirement. A Holiday Girl who recruits a Master will receive a Finder's Fee of $100 from her General distributor. Any Organizer recruiting a Master will receive a Finder's Fee of $100 plus a continuing override of 2 percent of all his purchases, based upon retail list price. Any organizer recruiting another Organizer who eventually qualifies for the Master position receives the same 2 percent override without the Finder's Fee. Masters recruited into the Holiday Magic program are denoted 'Work­in' or 'Buy­in.'

c. General.

General distributors purchase their product needs, as well as the needs of distributors in their organization, from respondent Holiday Magic, Inc. The General has the most advantageous discount, purchasing from respondent company at 65 percent off the retail list price.

All Holiday Girls, Organizers and Masters are part of a particular General's organization, and he receives an additional 10 percent override from respondent Holiday Magic, Inc. on all purchases from Masters in his organization. As an additional override, respondent Holiday Magic pays 1 percent of the retail list price purchase value to the old General of a Master who has been elevated to the General position. It is paid monthly, and is based on the purchases of the new General, and all of this General's organization.

A Master is eligible for the position of General only after he has completed the following:

1. He must introduce at least one other Master to his own General­­denoted a Replacement Master because the Master qualifying for the position of General will be taking all of his organization with him as his permanent organization when he becomes a General.

2. He must pay a Release Fee of $2500 ($3,000 as of Sept. 30, 1969) to his old General because the old General will have sustained a loss of the 10 percent override of the departing organization.

3. He must pay for, and complete, a course of instruction.

d. General's Council.

A General's Council is a voluntary association of General and Master distributors formed in a given geographical area, usually the metropolitan area of a city, to share in the costs of retailing, business training, recruiting, and joint participation in any Holiday Magic activity of mutual interest. The amount of the dues is fixed at the discretion of the council members but respondent Holiday Magic requires all Masters and Generals to pay the same amount.

The Senior General of the council is the position of an executive representing the body of local distributors. It is his function to act as liaison between the company and all local distributors. As compensation for his services, the Senior General receives a 1 percent override from Holiday Magic on all business produced by all distributors in his council.

Among the services performed by the Senior General is the reporting of various sales data to the respondent company for members of the council. This information is supplied to the Senior General by the various distributors. Some of the items reported upon at the specific request of respondent Holiday Magic may include the individual sales slips of the Holiday Girls.

Three of the General's Council's activities are the coordination and allocation of routes to be assigned to individual Holiday Girl distributors, the allocation of leads supplied by respondent Holiday Magic, Inc., and the holding of Opportunity Meetings.

e. Opportunity Meeting.

It is at the Opportunity Meetings conducted by the General's Council that additional distributors are recruited into the Holiday Magic program. These meetings are held throughout the United States, and have been attended by as many as hundreds of persons at a time. Both the script of the meeting and the film shown thereat concentrate upon the unlimited potential of money to be made in recruiting other distributors in a chain of distributors.

PAR. 8. Pursuant to, and in furtherance and effectuation of the aforesaid agreements and planned common course of action, respondents have done and performed and are doing and performing the following:

(1) Respondent Holiday Magic, Inc., its agents and officials, have advised all distributors that failure to adhere to the marketing plan is the basis for cancellation of their distributorship, and all distributors have actually or impliedly agreed to abide by all rules and regulations established by Holiday Magic in furtherance of the marketing plan, and to all subsequent changes.

(2) Respondent Holiday Magic, Inc. has entered into contracts, agreements, combinations or understandings with each of its distributors whereby said distributors agree to maintain the resale prices established and set forth by the company, notwithstanding that some of such distributors are located in states which do not have fair trade laws.

(3) Respondent Holiday Magic, Inc. has entered into contracts, agreements, combinations or understandings with each of its distributors whereby said distributors agree to maintain the discounts, overrides, rebates, bonus schedules, Finder's Fees and Release Fees, as established and set forth by the company.

(4) Respondent Holiday Magic, Inc. has entered into contracts, agreements, combinations or understandings with each of its distributors whereby said distributors are restricted as to whom they may purchase their products from, and to whom they may resell them. More specifically:

(a) The distributor agrees to purchase merchandise only from respondent company, or from his Sponsor, i.e., the distributor who introduced him to Holiday Magic, Inc.

(b) The sponsoring distributor agrees not to buy back any merchandise from his distributors.

(c) The distributor agrees not to make any consignment of the merchandise to any person, except in certain cases.

(d) The distributor agrees to restrict the retail sales and display of cosmetics to authorized retail markets, i.e., home service routes, beauty salons, wig shops, beauty schools, barber shops, health food stores, women's specialty stores, men's specialty stores, Holiday Magic retail salons, and temporary booths. No other commercial retail markets are authorized.

(5) Respondent Holiday Magic, Inc., in the course and conduct of its business in commerce, has been and now is discriminating in price, directly or indirectly, between different purchasers of its Holiday Magic products of like grade and guality by selling said products at higher prices to some purchasers than it sells said products to other purchasers, many of whom have been and now are in competition with the purchasers paying the higher prices. More specifically:

(a) For several years last past respondent has priced its line of products in terms of list prices. One class of respondent's customers purchases at said list prices less a discount of 65 percent while the other class of customers purchase at list prices less a discount of 55 percent. Various members of each class of customers compete with each other and with various members of each of the other classes. Said 10 percent differential is actually a net cost discount of 22.2 percent in favor of the favored class of customers.

(b) A 1 percent commission on the list price value of the monthly sales volume of a new General is paid by respondent Holiday Magic to the old General of a Master who has been promoted to the General position. It is paid monthly and is based upon the purchases of the new General's Master distributors in his organization.

(c) For several years last past, respondent Holiday Magic, Inc. has entered into an agreement with each of its distributors whereby said distributors agree to maintain the discounts, rebates, and overrides when selling to, and purchasing from, one another. Said discounts result in price discrimination. More specifically:

1. A 2 percent commission on the list price value of the monthly sales volume of a new Master is paid by the General distributor to any Master or Organizer who recruits and sponsors said new Master distributor who may be either a 'Buy­in' or 'Work­in.' This is a continuing monthly payment and is paid to the day that either the new Master or the Sponsor becomes a General distributor.

2. Other discounts are based upon a sliding scale of volume. More specifically:

i. Organizer distributors purchase their products at 30 percent off list price and receive an additional bonus of up to 25 percent off list price based upon monthly sales volume, while Master distributors purchase at 55 percent off list price. Said zero to 25 percent differential is actually a net cost discount i n the range of zero to 35.7 percent in favor of the Master. Various members of each class compete with each other.

ii. Organizer distributors purchase their products at 30 percent off list priceand receive an additional bonus of up to 25 percent off list price based upon monthly sales volume, while General distributors purchase at 65 percent off list price. Said 10 percent to 35 percent differential is actually a net cost di scount in the range of 22.3 percent to 50 percent in favor of the General. Various members of each class compete with each other.

iii. Organizer and Holiday Girl distributors purchase their products at 30 per cent off list price and receive an additional bonus of up to 25 percent off list price based upon monthly sales volume. Said zero to 25 percent differential is actually a net cost discount in the range of zero to 35 percent in favor of the favored distributors. Various members of each class of customers compete with each other and with various members of each of the other classes.

(6) Respondent Holiday Magic, Inc. has instituted various rules and regulations designed to further the objectives of its marketing plan, such rules and regulations being contrary to the competitive interests of the independent distributors directly affected by them, and unreasonable in their overall support of and impact upon the entirety of the Holiday Magic Marketing plan and distribution practices. More specifically:

(a) The distributor is prohibited from using advertising that is either not supplied by respondent corporation, or not approved by respondent in advance.

(b) The distributor must agree not to transfer to another organization without a prior release from all distributors above him in the marketing chain. Such transfers are discouraged by respondent Holiday Magic.

(c) In the event a partnership­distributorship dissolves, the departing partner is required to revert back to his original Sponsor.

(d) In the event a General Distributorship dissolves, the principal or partner who is departing, should he continue with Holiday Magic, must requalify as a new Master Distributor under his original Sponsor, create a Replacement Master, and pay a $2500 Release Fee ($3,000 as of Sept. 30, 1969) to qualify for the General position again.

(e) The addition of partners to an existing General or Master distributorship or the sale of a General or Master distributorship must meet the same retail list price value purchase requirement as do Work­in Masters.

(f) A distributor may only own or have a financial interest in one Holiday Magic distributorship at a time, and may not simultaneously be a part of two separate distributorships.

(g) The distributor must agree not to enter into any agreement with a distributor in another Holiday Magic organization to make a division of profits, assets, or new recruits in violation of the marketing plan.

COUNT I

Alleging violation of Section 5 of the Federal Trade Commission Act, as amended, by respondents.

PAR. 9. The allegations of Paragraphs One through Eight are incorporated by reference in Count I as if fully set forth verbatim.

PAR. 10. Respondents' multilevel marketing program holds out to prospective distributors the lure of making large sums of money through a virtually endless chain of recruiting additional participants, from various fees, commissions, overrides or other compensation on the sales and/or further recruiting activities of their own recruited distributors, or distributors in their organizations.

The operation of the program contemplates geometrical increases in the number of distributors to insure participants the earnings represented and implicitly realizable from the program. However, because the overall number of potential participants remains relatively constant, the participants may be, and in a substantial number of instances will be, unable to find additional investors in a given community or geographical area by the time they enter respondents' merchandising program. This comes about because the recruiting of participants who came into the program at an earlier stage may have already exhausted the number of prospective participants. Based upon a geometrical progression of five additions per month per distributor, as demonstrated by respondents or their representatives at their Opportunity Meetings, the number of additional participants in their organizations at each monthly stage of growth would increase at such a rate that at the end of seven months, and giving effect to the continuing process of recruitment as contemplated under respondents' marketing plan, there would be an aggregate in excess of 97,000 participants in each distributor's organization. Thus, as to each of the individual participants therein, respondents' recruitment program must of necessity ultimately collapse when the number of potentially available distributors which can be recruited to serve a particular area is exhausted and/or the number of distributors theretofore recruited has so saturated the area with distributors as to render it virtually impossible to recruit any more.

Although some participants in respondents' multilevel merchandising program may realize a profit through recruitment, all participants do not have the potentiality of receiving equivalent sums of money, either through recruitment or compensation arising out of the retail sales of respondents' products, and the greater the number of distributors previously recruited, the lower the chances for such success. Some participants in the program receive little or no return on their investment.

For the foregoing reasons, respondents' multilevel merchandising program is operated in such a manner that the realization of financial gains is often predicated upon the exploitation of others who have been induced to participate therein, and who have virtually no chance of receiving the kind of return on their investment implicit in said merchandising program. Therefore, the use by respondents of the above­described multilevel merchandising program in connection with the sale of their merchandise was and is false, misleading and deceptive, and was and is an unfair act and practice within the intent and meaning of Section 5 of the Federal Trade Commission Act, as amended.

COUNT II

Alleging further violation of Section 5 of the Federal Trade Commission Act, as amended, by respondents.

PAR. 11. The allegations of Paragraphs One through Ten are incorporated by reference in Count II as if fully set forth verbatim.

PAR. 12. Respondents' merchandising program is in the nature of a lottery in that participants are induced to invest substantial sums of money on the possibility that by the activities and efforts of others, over whom they need exercise little or no control, they will receive substantial financial gains. The realization of such gains need not depend upon the skill and effort of the individual participants, but instead may result from predominant elements of chance, such as the number of prior participants in the program, the ability of their own recruits to recruit other distributors, and the ability of their own recruits to either sell merchandise or recruit other persons who may be successful in selling merchandise.

The use by respondents of their multilevel program, which is in the nature of a lottery, is contrary to the established public policy of the United States, is false, misleading and deceptive, and was and is an unfair act and practice and an act of unfair competition within the intent and meaning of Section 5 of the Federal Trade Commission Act, as amended.

COUNT III

Alleging further violation of Section 5 of the Federal Trade Commission Act, as amended, by respondents.

PAR. 13. The allegations of Paragraphs One through Fourteen are incorporated by reference in Count III as if fully set forth verbatim.

PAR. 14. In the course and conduct of their business, and for the purpose of inducing the participation by others in their marketing program and for selling their merchandise, by and through statements and oral representations, and by means of brochures and other written material, respondents or their representatives represent, and have represented, directly or by implication, that:

1. Through 'want ads' in classified advertising sections of newspapers, employment is being offered.

2. It is not difficult for distributors to recruit and retain persons who will invest or participate in the program as distributors and/or as sales personnel.

3. Respondents' products will be or are advertised widely and substantially in the community or geographic area in which such representations are made.

4. Participants in respondents' marketing program have the reasonable expectancy of receiving large profits or earnings.

PAR. 15. In truth and in fact:

1. Respondents, their representatives and distributors are, for the most part, not offering employment through the use of 'want ads,' but use said advertisements instead to obtain leads to prospective investors in their marketing program.

2. It is difficult, and becomes increasingly more difficult, under respondents' geometrically expanding multilevel marketing system, to recruit and retain persons who will invest in respondents' program as distributors and/or as sales personnel.

3. Respondents do not advertise their products to the extent that they or their representatives represent.

4. Most participants in respondents' multilevel marketing program do not have a reasonable expectancy of receiving large profits or financial gains.

Therefore, the above­described representations are false, misleading and deceptive, and are unfair acts or practices in commerce within the intent and meaning of Section 5 of the Federal Trade Commission Act, as amended.

COUNT IV

Alleging further violation of Section 5 of the Federal Trade Commission Act, as amended, by respondents.

PAR. 16. The allegations of Paragraphs One through Eight are incorporated by reference in Count IV as if fully set forth verbatim.

PAR. 17. The acts, practices, and methods of competition engaged in, followed, pursued or adopted by respondents, and the combination, conspiracy, agreement or common understanding entered into or reached between and among the respondents or others not parties hereto are unfair methods of competition and to the prejudice of the public because of their dangerous tendency to, and the actual practice of, fixing, maintaining or otherwise controlling the prices at which the Holiday Magic products are resold, in both the wholesale and retail markets; and fixing, maintaining or otherwise controlling the various fees, bonuses, rebates or overrides required to be paid by one distributor or class of distributors to another distributor or class of distributors.

Said acts, practices and methods of competition, and the adverse competitive effects resulting therefrom, constitute an unreasonable restraint of trade and an unfair method of competition in commerce within the intent and meaning of Section 5 of the Federal Trade Commission Act, as amended.

COUNT V

Alleging further violation of Section 5 of the Federal Trade Commission Act, as amended, by respondents.

PAR. 18. The allegations of Paragraphs One through Eight are incorporated by reference in Count V as if fully set forth verbatim.

PAR. 19. The acts, practices, and methods of competition engaged in, followed, pursued or adopted by respondents, and the combination, conspiracy, agreement or common understanding entered into or reached between and among the respondents or others not parties hereto are unfair methods of competition and to the prejudice of the public because of their dangerous tendency to, and the actual practice of, restricting the customers as to whom the Holiday Magic distributors may resell their products to; restricting their distributors as to whom they may purchase their products from; restricting their distributors to reselling their products in certain kinds of retail outlets only; restricting the advertising rights of distributors; and restricting distributors as to the financial and marketing arrangements which they may chose to enter into with businesses or individuals of their own choosing.

Said acts, practices, and methods of competition, and the adverse competitive effects resulting therefrom, constitute an unreasonable restraint of trade and an unfair method of competition in commerce within the intent and meaning of Section 5 of the Federal Trade Commission Act, as amended.

COUNT VI

Alleging further violation of Section 5 of the Federal Trade Commission Act, as amended, by respondents.

PAR. 20. The allegations of Paragraphs One through Eight are incorporated by reference in Count VI as if fully set forth verbatim.

PAR. 21. The acts, practices, and methods of competition engaged in, followed, pursued or adopted by respondents, and the combination, conspiracy, agreement or common understanding entered into or reached between and among the respondents or others not parties hereto are unfair methods of competition and to the prejudice of the public because of the practice of allocating the territories in which various Holiday Magic distributors may resell their products.

Said acts, practices, and methods of competition, and the adverse competitive effects resulting therefrom, constitute an unreasonable restraint of trade and an unfair method of competition in commerce within the intent and meaning of Section 5 of the Federal Trade Commission Act, as amended.

COUNT VII

Alleging violation of Section 2(a) of the Clayton Act, as amended, by respondents.

PAR. 22. The allegations of Paragraphs One through Seven and subparagraph (5) of Paragraph Eight are incorporated by reference in Count VII as if fully set forth verbatim.

PAR. 23. The difference in net cost between a General's purchases and a Master's purchases results in a substantial discrimination in the net price for products sold to non­favored direct and indirect Master distributor purchasers by respondent Holiday Magic.

In addition, various acts and practices of respondent Holiday Magic have resulted in further discriminations in the net price for products sold to other Holiday Magic distributors, who are indirect purchasers, and who are in competition with other direct and indirect purchasers of Holiday Magic cosmetic products.

In addition, the various fees, overrides, bonuses or other payments have resulted in discriminations among Holiday Magic's various direct and indirect purchasing distributors who are in competition with one another. These monies are direct and indirect payments by respondent Holiday Magic, and in effect are discriminations in the net price of Holiday Magic products to these various distributors.

The effect of respondent Holiday Magic's discrimination in net prices as alleged herein may be substantially to lessen competition or tend to create a monopoly in the line of commerce in which its favored purchasers are engaged, or to injure, destroy or prevent competition between the favored and non­ favored purchasers or with customers of either of them.

The aforesaid acts and practices of respondents constitute violations of the provisions of subsection (a) of Section 2 of the Clayton Act, as amended.

INITIAL DECISION*** BY EDGAR A. BUTTLE, ADMINISTRATIVE LAW JUDGE

MAY 31, 1974

THE PROCEEDINGS

A complaint was issued herein on Jan. 18, 1971, generally charging violations of Section 5 of the Federal Trade Commission Act and Section 2(a) of the Clayton Act, as amended, involving unfair trade practices based on operating a marketing plan in the nature of a lottery, price discrimination, marketing and price control, deception and misrepresentations. After joinder of issue by the filing of an answer which essentially denied the allegations, four prehearing conferences were held as follows: Apr. 2, 1971, May 24, 1971, Aug. 10, 1971, and Oct. 8, 1971. Hearings were commenced on Nov. 1, 1971 and ended on Feb. 15, 1973, for a total of 75 hearing days. Intervening recesses were allowed for purposes of discovery and other justifiable reasons. Hearings were conducted in the following cities: San Francisco, Calif., Detroit, Mich., Chicago, Ill., Miami, Fla., New York, N.Y., and Wash., D.C. There are 10,708 pages of hearing transcript; 855 Commission exhibits and approximately 100 respondents' exhibits. Eighty­six witnesses testified for complaint counsel and approximately 140 witnesses testified for respondents. The record was reopened and closed on Mar. 28, 1973, to receive evidence not available heretofore, for which complaint counsel had previously made provision on the record.

THE COMPLAINT

Argument developed during the course of the hearings with regard to the interpretation of certain allegations of the complaint. Briefly stated, however, a reasonable construction thereof in entire context is clearly outlined as follows:

Count I

Allegedly respondents' multilevel marketing program holds out to prospective distributors the lure of making large sums of money through a virtually endless chain of recruiting additional participants, from various fees, commissions, overrides or other compensation on the sales and/or further recruiting activities of their own recruited distributors, or distributors in their organizations.

As also alleged although some participants in respondents' multilevel merchandising program may realize a profit through recruitment, all participants do not have the potentiality of receiving equivalent sums of money, either through recruitment or compensation arising out of the retail sales of respondents' products, and the greater the number of distributors previously recruited, the lower the chances for such success. Some participants in the program receive little or no return on their investment.

As further alleged for the foregoing reasons, respondents' multilevel merchandising program is operated in such a manner that the realization of financial gains is often predicated upon the exploitation of others who have been induced to participate therein, and who have virtually no chance of receiving the kind of return on their investment implicit in said merchandising program.

Count II

Allegedly the use by respondents of their multilevel unlimited distributor recruitment program of chance upon participant investment without the need for the exercise of business control thereafter or product marketing skill to acquire profit, if any, is in the nature of a lottery, is contrary to the established public policy of the United States, is false, misleading and deceptive, and was and is an unfair act and practice and an act of unfair competition within the intent and meaning of Section 5 of the Federal Trade Commission Act, as amended. [FN1]

Count III

Allegedly for the purpose of inducing the participation by others in their marketing program and for selling their merchandise, by and through statements and oral representations, and by means of brochures and other written material, respondents or their representatives misrepresent, and have misrepresented, directly or by implication, that:

1. The offering of employment through the use of want ads to obtain leads to prospective investors in the marketing program.

2. It is not difficult for distributors to recruit and retain persons who will invest or participate in the program as distributors and/or sales personnel.

3. Respondents' products will be or are advertised widely.

4. Participants in respondents' multilevel marketing program can reasonably expect to receive large profits or financial gains. (Count III refers to 'Most participants' but in context with complaint allegations in other Counts which are incorporated by reference omitting the word 'most' it would appear it cannot reasonably be construed quantitatively.) [FN1a]

Count IV

Allegedly fixing, maintaining or otherwise controlling the prices at which the Holiday Magic products are resold, in both the wholesale and retail markets; and fixing, maintaining or otherwise controlling the various fees, bonuses, rebates or overrides required to be paid by one distributor or class of distributors to another distributor or class of distributors constitute an unreasonable restraint of trade.

Count V

Allegedly restricting their distributors to reselling their products in certain kinds of retail outlets only; restricting the advertising rights of distributors; and restricting distributors as to the financial and marketing arrangements which they may choose to enter into with businesses or individuals of their own choosing constitute an unreasonable restraint of trade.

Count VI

Allegedly allocating the territories in which various Holiday Magic distributors may resell their products constitutes an unreasonable restraint of trade.

Count VII

Alleged violation of Section 2(a) of the Clayton Act, based on the following:

1. The difference in net cost between a General's purchases and a Master's purchases results in a substantial discrimination in the net price for products sold to non­favored direct and indirect Master distributor purchasers by respondent Holiday Magic.

2. Further discriminations in the net price for products sold to other Holiday Magic distributors, who are indirect purchasers, and who are in competition with other direct and indirect purchasers of Holiday Magic cosmetic products.

3. In addition, the various fees, overrides, bonuses or other payments have resulted in discriminations among Holiday Magic's various direct and indirect purchasing distributors who are in competition with one another.

The administrative law judge has carefully considered the proposed findings of fact, and conclusions supplemented by briefs, submitted by complaint counsel and counsel for respondents. The following findings and conclusions if not herein adopted either in the form proposed or in substance are rejected as not supported by the record or as involving immaterial matters. The findings of fact are categorically arranged to reflect the complete modus operandi of the corporate respondent's business and participation therein rather than categorically as related to particular counts of the complaint since this would result in an unreasonable number of repetitive findings. The conclusions, however, relate the evidenced facts as alleged to the specific counts of the complaint with cited law applicable thereto. Adoption of any of respondents' proposed findings of fact verbatim or otherwise has been difficult since they are essentially argumentative or proposed conclusions of fact as distinguished from findings as to evidentiary facts. On the other hand complaint counsel in submitting proposed findings has relied essentially upon specific and accurate although lengthy documentary excerpts with some transcript citations. Some of this evidence is somewhat remotely material, but it is responsive to respondent counsel's justifiable demand that all relevant facts related to the Holiday Magic plan should be considered and evaluated in view of the seriousness of the many charges. The following numerous evidentiary findings and extensive conclusions therefrom are therefore necessarily rendered with this in view. [FN2]

FINDINGS OF FACT

I. Scienter Re Investigation

1. The record reflects that respondent Holiday Magic, Inc. was first made aware of the Federal Trade Commission investigation in July, 1967 (Tr. 9341, 9701). Obviously this may have some bearing on evidentiary evaluation and issue of relief.

II. Jurisdiction of the Commission

2. Respondents are engaged in the purchase, distribution, offering for sale and sale of cosmetics, toiletries, cleaning products and associated items which are marketed under the names Holiday Magic and Home Magic, to distributors located throughout the United States (Answer, p. 3).

3. In the course and conduct of their business of distributing Holiday Magic and Home Magic products, the respondents ship or cause such products to be shipped from the state in which they are warehoused to distributors located in various other States throughout the United States who engage in resale to other distributors and to members of the general public (Answer, p. 3). There is now and has been for several years last past a constant, substantial, and increasing flow of such products in 'commerce' as that term is defined in the Federal Trade Commission Act and in the Clayton Act (Answer, p. 3).

4. Holiday Magic, Inc. is in substantial competition in commerce with other firms or persons engaged in the manufacture or distribution of cosmetics, toiletries and cleaning products (Answer, p. 3).

5. The vast majority of the products distributed by respondents are cosmetics; of Holiday Magic, Inc.'s total sales, 88 percent or more have been of cosmetics (RX 16).

III. Cosmetic Industry

6. The gross dollar amount of retail cosmetics sales in the country as of 1970 was estimated at approximately 4.5 billion dollars (Baumgarten­Tr. 9483).

7. Approximately 25 percent of the sales of cosmetics at retail is described as the direct door­to­door market (Baumgarten­Tr. 9884).

8. Although the record does not reflect the total number of cosmetic firms principally engaged in door­to­door marketing (see Tr. 9486, 6116), the record shows that the largest cosmetic firm is Avon Cosmetics (Baumgarten­Tr. 9485; Sherman­Tr. 6137, 6117), which has approximately 47 percent of the door­to­door cosmetics market (Baumgarten­Tr. 9487) or approximately 12 percent of the total market in cosmetics.

9. Although Avon's advertising expenditures do not appear in the record, Avon engages in national television advertising (Baumgarten­Tr. 9493) and Avon engages in a substantial amount of advertising (Baumgarten­Tr. 9487). Door­to­ door selling itself is not considered to be advertising (Baumgarten­Tr. 9491). Avon has been in business for between 70 and 100 years (Tr. 9502, 6117).

10. Another door­to­door cosmetic firm is 'Varda,' which was established in 1969 (Baumgarten­Tr. 9486­88). Varda's retail sales to consumers totaled approximately 25 million dollars in 1970 (Baumgarten­Tr. 9486). Varda's marketing plan is more similar to that of Avon than it is to the marketing plan of Holiday Magic, Inc. (Baumgarten­Tr. 9488).

11. The Avon sales representatives are assigned routes. Otherwise the controls are minimal and there are no inventory requirements (Baumgarten­Tr. 9489).

12. The wholesale market for cosmetics today is what may be termed a buyer's market; that is, a wholesaler is in a position to take his pick of the lines he chooses to carry (Sherman­Tr. 6138). Competition in the cosmetics industry is 'fierce' (Baumgarten­Tr. 6574).

IV. Respondents

A. Respondent Holiday Magic, Inc.

13. Respondent Holiday Magic, Inc. is a corporation organized on or about Oct. 14, 1964, and is existing and doing business under and by virtue of the laws of the State of California (Answer, p. 2). Respondent Holiday Magic, Inc. maintains its home office and principal place of business at 616 Canal Street, San Rafael, Calif. (Answer, p. 2).

14. To date, Holiday Magic, Inc. has reincorporated as a Nevada corporation, although it continues to maintain its principal place of business at 616 Canal Street, San Rafael, Calif. Marketing Enterprises, Inc. owns 100 percent of the stock of Holiday Magic, Inc. and U.S. Universal, Inc. owns Holiday Magic, Inc. Respondent William Penn Patrick is on the board of directors of U.S. Universal (Coultas­Tr. 9720­21).

15. A rented three bedroom home was Holiday Magic's first location, at San Jose, Calif. (CX 89B, CX 90C). In June 1965, Holiday Magic, Inc. moved to its San Rafael quarters (CX 90C).

16. Prior to Sept. 1968, Holiday Magic, Inc. purchased its cosmetics products from Synergistic Industries, Inc. but thereafter from a broad field of cosmetics manufacturers (CX 37A). At present, Holiday Magic, Inc. buys approximately 50 percent of its products from Commercia USA, a sister corporation (Coultas­Tr. 9685).

17. Holiday Magic, Inc. is a closely held corporation which employed approximately 90 persons in Apr. 1967 (CX 21E). Holiday Magic, Inc. sold to its distributors FOB San Rafael, Calif. as of Apr. 1967 (CX 21E). More recently, Holiday Magic, Inc. has utilized major distribution centers in N.J. and Ga. (Physical Exhibit A; Tr. 9792­93).

18. Holiday Magic, Inc.'s sales.

Monthly 'sales volume' figures for Holiday Magic, Inc. are $16,254.34 for Dec. 1964, its first month of operation; $520,658.10 for July 1965; $1,524,203.30 for June 1966; and $2,050,641.26 for Aug. 1966 (CX 15C).

Holiday Magic, Inc.'s 'cosmetic sales' for its fiscal year ending Sept. 1965 were $2,773,155; for Sept. 1966, $11,080,223; for Sept. 1967, $30,369,813; for Sept. 1968, $12,587,627; for Sept. 1969, $19,518,939; for Sept. 1970, $13,453,288; and for fiscal year ending Sept. 1971, $11,063,624 (RX 16).

Holiday Magic Inc.'s Home Magic sales for the fiscal years ending Sept. 1970 and Sept. 1971 were $1,881,542 and $673,746, respectively (RX 16).

The 'cosmetic sales' and 'sales volume' figures are in terms of the retail list prices of the said products sold to distributors (RX 16; Lipska­Tr. 9255, 9212; Pangerl­Tr. 10291).

19. Sales volume is not retail sales, and Holiday Magic, Inc. keeps no records with respect to the amount of products that actually are sold to consumers at retail (Tr. 9631, 9633, 9635, 9767­68, 5667).

20. The 'success' of the Holiday Magic program has been based upon the Marketing Plan.

(a) CX 78Z4 and CX 79Z4­'With our marketing plan we could be 75 percent as effective with another commodity.'

(b) CX 2B­­Wand­­Because of the marketing plan, holiday Magic could have experienced the same rapid growth with any product, or product of low quality.

(c) CX 78Z45, CX 79Z42­­'Because of its sound marketing plan, Holiday Magic could have experienced nearly the same rapid growth and success with a mediocre product.'

After having completed the marketing plan, William Penn Patrick searched for a consumer product that would fit the plan (Physical Exhibit A; Tr. 7984­85).

B. Respondent William Penn Patrick

21. Respondent William Penn Patrick is chairman of the board of directors of Respondent Holiday Magic, Inc. and was its first president (Answer, p. 2). Respondent William Penn Patrick was the founder of respondent Holiday Magic, Inc., and together with others instituted the Holiday Magic marketing plan and distribution policies (Answer, p. 2).

22. Respondent William Penn Patrick was chairman of the board of directors of respondent Holiday Magic, Inc. until very recently (Coultas­Tr. 9655); Mr. Patrick first held the position of president of Holiday Magic, Inc. in the winter of 1965, but relinquished this post to respondent Fred Pape in 1967 (Coultas­Tr. 9654).

23. Mr. Patrick has described Holiday Magic, Inc. as his 'brain child' and 'first love' (CX P318A, B) and is the man responsible for developing the Holiday Magic marketing program singlehandedly (CX 61A, CX 90C).

24. At first, Mr. Patrick gave all the Holiday Magic Opportunity Meetings (CX 5G­Wand­ 12/65 ; see also Physical Exhibit A; Tr. 6874).

25. Respondent William Penn Patrick, together with others, has been responsible for establishing, supervising, directing and controlling the business activities and practices of corporate respondent Holiday Magic (Answer, p. 2).

(a) The board of directors directed the policy of Holiday Magic, Inc. (Coultas­Tr. 9657).

(b) It was the responsibility of the board of directors to terminate distributors for violating rules and regulations of Holiday Magic, Inc. (CX 79Z89­90, CX 78Z86­87).

(c) The president and the officers supervised the day­to­day activities of Holiday Magic, Inc. (Coultas­Tr. 9657).

26. Respondent William Penn Patrick, together with others, continues to be responsible for establishing, supervising, directing and controlling the business activities and practices of Holiday Magic, Inc. (Coultas­Tr. 9720­21).

C. Respondent Fred Pape

27. Respondent Fred Pape formerly was president of respondent Holiday Magic, Inc. (Answer, p. 2). Mr. Pape became president of Holiday Magic, Inc. in 1967 (Coultas­Tr. 9654) and retained the post through sometime in 1968 (Coultas­Tr. 9655).

28. Respondent Fred Pape was the first Master Distributor in Holiday Magic, Inc., and made $186,000 his first year in the business (CX 85P­Mark Evans notes which were approved by Pape; Tr. 939­40).

,29. Mr. Pape's office address at the time of the filing of the complaint was 1790 E. Plum Lane, Reno, Nev. (Answer, p. 2).

30. Together with others, respondent Fred Pape was responsible for establishing, supervising, directing and controlling the business activities and practices of corporate respondent Holiday Magic.

(a) 'As William Penn Patrick stumped the State of California in his bid for the gubernatorial nomination, Fred Pape took the reins of 'the fastest growing corporation in the nation' and raised Holiday Magic to even greater heights' (CX 1840L).

(b) According to former president Ben Gay, Fred Pape (and Janet Gillespie) ran the business when Patrick was running for nomination (Gay­Tr. 9931­32).

31. President and officers supervised the day­to­day activities of Holiday Magic, Inc. (Coultas­Tr. 9657).

32. When Fred Pape was president, his job was that of chief executive officer. He carried out the policies that has been established in the board meetings by the board and Mr. Patrick. He played the role of a company president (Coultas­ Tr. 9659).

D. Respondent Janet Gillespie

33. Respondent Janet Gillespie formerly was administrative vice president and a director of respondent Holiday Magic, Inc. (Answer, pp. 2­3).

34. Janet Gillespie was the first Organizer Distributor in Holiday Magic, Inc. (Gillespie­Tr. 9279; CX 5G). She became a member of the board of directors of Holiday Magic, Inc. in 1965 (Gillespie­Tr. 9286), was named vice president­ administration in Aug. 1965 (gillespie­Tr. 9283; CX 1F) and was international vice president as late as Nov. 1968 (CX 142C).

35. Janet Gillespie has been described as a member of the 'corporate team' as well as a charter member of Holiday Magic (CX 6H­Wand­Jan. 1966).

36. Together with others, respondent Janet Gillespie was responsible for establishing, supervising, directing and controlling the business activities and practices of corporate respondent Holiday Magic.

(a) Board of directors directed the policy of Holiday Magic, Inc. (Coultas­ Tr. 9657).

(b) Responsibility of board of directors to terminate distributors for violating rules and regulations of Holiday Magic, Inc. (CX 78Z86­87; CX 79Z89­ 90; Gay­Tr. 9928).

37. Presidents and officers supervised the day­to­day activities of Holiday Magic, Inc. (Coultas­Tr. 9657). Sherman Coultas, Holiday Magic's director of legal services (Tr. 9653) also testified that he had worked with Janet Gillespie daily and that she was involved 'in the overall facets of the business' (Tr. 9658). 'She did just about anything that had to be done insofar as running the business and coordinating the activities of secretaries and clerks and administrative people.'

V. Holiday Magic Publications

38. Respondents have formulated a distribution system involving distributors at wholesale and retail levels and they have published their marketing plan or distribution policies which are set forth in respondents' price lists, discount schedules, marketing manuals, sales bulletins, order forms, pamphlets and other materials and literature (Answer, p.3).

A. Holiday Magic Wands

39. Holiday Magic Wands appear in the record as CX 1 through CX 68. The Wands are in the format of a newspaper, and are published monthly by Holiday Magic, Inc., for distribution throughout the United States (CX 1A, CX 70Z­92).

40. The Holiday Magic Wand is designed as a valuable recruiting tool by Holiday Magic, Inc. for its distributors (See CX 1B, CX 1C, CX 6C, CX 7H, CX 12F, CX 17G, CX 18F, CX 27F, CX 79Z­92; Gillespie­Tr. 9356­57). A so­called 'Permanent Wand' which is undated appears in the record as CX 64A­H. The permanent Wand is used for recruiting purposes, and is sent to Holiday Magic Councils and handed out to prospective distributors (CX 155F; Alexander­­Tr. 5623).

41. The Wands are mailed by Holiday Magic, Inc. directly to Master and General Distributors (CX 1802C, CX 1800Z10­Z11; Gillespie­­Tr. 9291) and were also sent out indirectly to Organizers and Holiday Girls through a policy of distributing twenty copies of the Wand to Masters and Generals and 'urging' their distribution to Organizers and Holiday Girls in their organizations (Gillespie­ Tr. 9343­44, 9292; 9350; CX 1601, CX 532, CX 1800Z11) as well as to use for recruiting purposes (CX 533).

42. Holiday Magic has also at times distributed the Wands directly to Holiday Girls (CX 136H­Family News­5/31/68). The Holiday Girl Demonstration Kits also each contain one copy of the Wand (Gillespie­Tr. 9350).

43. Holiday Magic, Inc. describes the value of the Wands as follows:

What a wonderful training and recruiting tool the Wand is! It should always be carried and used for 'prospecting', explaining the progress and history of Holiday Magic, and 'closing the sale.' 'After all Joe, look at all these people and their wonderful success. Now, why not you, too?' The Magic Wand can be the greatest recruiting tool you have if you will only use it. Each month you receive your complimentary copies. * * * 'With all this in mind, the Master or General who does not take full advantage of this newspaper is losing more than he will ever knew' (CX 79Z92).

And again:

And don't forget that the Holiday Magic Wand is one of our best Direct Approach aids, it will always excite a potential prospect's curiosity to the point of wanting to attend one of the business opportunity meetings. (CX 1840Z60­Z61).

44. Early issues of the Wand also contained a 'Solution Box' column, designed to instruct distributors in the intricacies of the Holiday Magic Marketing Plan. At CX 8F­Wand­ 3/66:

All distributors who have any question regarding any phase of Holiday Magic should write the company. The authoritative answer to your question will appear in this column. This is YOUR column, so please use it to broaden your knowledge.

b. Holiday Magic Family News

45. Like the Wands, the Family News publications are designed to keep distributors up to date on the material covered therein (CX 28A). Family News appear in the record as CX 118­124, CX 127­CX 168, CX 170­172.

46. The Family News is distributed to employees and distributors of Holiday Magic, Inc. throughout the United States (Ruggles­Tr. 601).

C. Holiday Magic Bulletins

47. Holiday Magic, Inc. also utilizes a bulletin format to disseminate information to its distributors in the field. The bulletins are normally addressed to all Master and General Distributors (see CX 672, CX 665, CX 663, CX 630A­B, CX 609, CX 549). On occasion bulletins will be sent to 'All Distributors' (see CX 473). Information Bulletins that are sent to Masters and Generals only are intended, with 'discretion,' to be relayed to Holiday Girls as well (CX 78Z­9).

,48. Distributors are advised to place all bulletins received from Holiday Magic in a binder, as they will need to refer to them from time to time (CX 1800Z12).

D. Manuals

49. Holiday Magic Manuals appear in the record at CX 76­116, CX 1800, CX 1842, CX 1840, CX 1841; and elsewhere.

These manuals are published regularly by Holiday Magic, Inc. and deal with a variety of subjects, from the holding of Opportunity Meetings and the training of Master and General Distributors in the art of recruiting (CX 78, 79, CX 1840, CX 1841, 1842, cx 90, 96, 97, 98, 99) to the techniques for selling cosmetics (CX 91, 92, 107, 108) and the establishment of a cosmetic wholesale­ retail business (CX 106).

50. Although only one or two manuals are given to all distributors at no cost to them (Gillespie­Tr. 9347), it can be assumed that every Distributor at whatever level is cognizant and aware of what is in the manuals (Gillespie­ 9348, 9359).

51. The purpose of the manuals is to provide Masters and Generals with procedures and techniques to enable them to build and sustain an effective Holiday Magic program (CX 1800D­Masters' and Generals' Manual).

52. Distributors are told to 'Know and practice anything written in this manual and you will achieve every objective that you might set for yourself' (CX 1800R).

53. Distributors are advised that almost any question that they can conceive of regarding the Holiday Magic program will be answered by the written material provided by Holiday Magic (CX 1800Z13, CX 78Z101, CX 70Z101).

54. Manuals are available to prospects as well as distributors, who may read them over before joining Holiday Magic (see Tr. 2980).

55. The purpose of [the Masters' and Generals'] manual is to provide Masters and Generals with procedures and techniques which will save time, experimentation, and expensive errors. Holiday Magic, Inc. expects each Master and General to be thoroughly knowledgeable in the methods used to build and sustain an effective Holiday Magic Cosmetic Program. (CX 78F, CX 79F Masters' and Generals' manuals appear in the record as CX 78A­Z103, CX 79A­Z103, CX 1800.)

VI. The Marketing Plan Generally

56. Corporate respondent's marketing plan is a distribution network which allows a potential distributor to enter at any one of three levels, i.e., Holiday Girl, Organizer and Master, and may eventually qualify at a fourth level, that of General (Answer, p. 3). 'Distributor' refers to all levels in the Holiday Magic marketing plan (Gillespie­Tr. 9364) and refers to any wholesaler or retailer of Holiday Magic products (CX 104M).

57. The distributors' gross profit is the difference between the price or prices at which he purchases Holiday Magic products and the price or prices at which he resells them (Answer, p. 3).

58. All Distributors are independent contractors (Answer, p. 4).

59. Every position in Holiday Magic requires a different level of investment (Guard­Tr. 10404; CX 1842, CX 90P­S).

VII. Holiday Magic Distributors

A. Holiday Girl Distributor

60. Holiday Girls are required to invest $39 worth of product and sales aids in order to qualify for that position (CX 78Z48, CX 79Z45, CX 1842R, CX 90P) or purchase a 'mini­kit' for $11.99 (CX 90P).

61. Holiday Girls may be recruited and sponsored into Holiday Magic either by an Organizer, Master or General Distributor (CX 90P, CX 90Q; Tr. 2432, 2540, 3344; see also CX 90S).

62. Holiday Girls buy their product needs from their 'Sponsor' who would be either a General Distributor, Master Distributor, or Organizer Distributor (CX 78Z48, CX 79Z45; Tr. 9032­33, 3314, 2519, 2678, 5216, 2452, 2604).

63. Holiday Girls purchase their products at a 30 percent discount off of list retail list price (CX 78Z48, cx 79z45, cx 2065b, cx 2065d, cx 2080a, b, c; cx 2081a, b, c; cx 2083, cx 2084a, b; cx 2086, cx 2091a, cx 2093a, cx 2096a, cx 2099a, b; cx 2100, cx 2106, cx 2108A, CX 2112A­C).

See also Part XIX.

64. At the end of each calendar month, Holiday Girls receive a cash refund bonus from their sponsors based upon total retail volume ordered during that calendar month. The amount of the refund bonus is computed according to the following Refund Bonus Schedule:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

(CX 78Z48, CX 79Z46, CX 77F, CX 649, CX 78Z33, CX 27A; see also Part XIX.)

65. There is a substantial turnover of distributors at the Holiday Girl level (Christie­Tr. 5992; Dempsey­Tr. 6035; Habuary­Tr. 6082; Coultas­Tr. 9680, 9752).

66. Holiday Girls on the average are active from four to six weeks.

(a) Holiday Girls and Avon ladies do essentially the same kinds of work (Baumgaten­Tr. 9500). Avon has an exceedingly high turnover rate (Coultas­Tr. 9764) entimated to be as high as 1400 percent in the course of one year (Davis­ Tr. 6272).

(b) Dorothy Sovereign, who was with the Avon company for 7­ 1/2 years (Tr. 8688) as Avon's top selling Avon lady (Tr. 8710) as well as Holiday Magic's top retailer (Tr. 8707­8710) and who herself recruited approximately 100 Holiday Girls since she has been with the company, testified that Holiday Girls, on the average, last six weeks (Tr. 8695, 8701) about the same as Avon ladies (Tr. 8696).

67. Holiday Girls purchase cosmetics products for their personal use as well as for resale (Coultas­Tr. 9756, Semling ­Tr. 5875).

68. It can be reasonably presumed that the address of the Holiday Girl indicates the central area from which the Holiday Girl is doing business (see Tr. 4625, 7928).

69. Holiday Girls are retailers only under the Holiday Magic marketing plan and do not sell or attempt to sell at wholesale (CX 79Z98, CX 78Z65).

See CX 90U­­Once your prospect enrolls [as a Holiday Girl] try to upgrade him to the Organizer level. (Put an 'X' on Organizer position.) Kid him (with caution) by such comments as 'Of course you're not going to trot down the street with that Holiday Girl kit in your hand. Don't you really think that you ought to be an Organizer so you can sponsor other businessmen like yourself into the program right away?'

B. Organizer Distributor

70. Organizer Distributors were required to invest approximately $130.41 for one of every item in the Holiday Magic line (CX 1842R, CX 90P, CX 79Z98). As of approximately July 31, 1970, the required investment for the Organizer Distributor position jumped to $299, for which the new Organizer received a Holiday Magic one­pack of products, a Mini­Kit; a ten cassette library of recorded messages from motivational sales people, a one year subscription to 'Perception' magazine and a two day course taught by Instructor Generals (CX 165H­­Family News­­7/31/70).

71. Organizers may sponsor other Organizers into the business, who in turn may sponsor othr organizers into the business ad infinitum (CX 1842Y, CX 79Z29, CX 85S, CX 86B, CX 104N, CX 90P).

72. Organizer or Holiday Girls sponsored by other Organizer must buy their products from the sponsoring organizer (CX 79Z29, CX 104N, (CX 70Z99).

73. The Organizer serves as a sub­wholesaler and 'apprentice Master,' functions in the selection of personnel, hires, trains, and supervises Holiday Girls and other Organizers (CX 104N, CX 1802R, CX 90P, CX 79Z99).

74. There is no maximum number of other Organizer distributors that another Organizer may bring into the Holiday Magic program (Tr. 3702).

(a) The Holiday Magic Opportunity Meeting presentation shows a diagram of Organizers each having recruited five other organizers per month, in explaining the Holiday Magic opportunity. The diagrams look as follows:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

(b) Since the Opportunity Meeting script supposes that the Organizer Distributors will each on the average 'reproduce themselves five times' (CX 79Z31) an accurate pictorial of the opportunity meeting presentation with respect to the Holiday Magic marketing plan would look as follows after three months only:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

75. An Organizer Distributor buys and sells Holiday Magic products at the same 30 percent discount from list price, and is entitled to the refund as appears in the Refund Bonus Schedule, based upon cumulative monthly purchases in each calendar month (CX 77F, CX 649, CX 78Z48, CX79Z46, CX 78Z33, CX 104C, CX 105C).

See CX 4C­Wand: 11/65 ­­Solution Box Column:

Question: How do I explain to an Organizer why he doesn't get a bigger percentage in his monthly refund schedule?

Answer: If an Organizer, who is actually a Sub­Wholesaler, buys a Distributor Kit and a One­Pack, he has purchased $120.40 plus applicable taxes in his area. Thus, if his Holiday Girl sells any amount over $100, this means a 35% on our volume schedule. Obviously, then, the Organizer cannot have any override since they are both in the 35% area.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

76. An Organizer Distributor may 'earn' his way to the position of Master Distributor through creating $5,000 retail volume in one calendar month (CX 1842S, CX 79Z100). This is known as the 'Work­In Master' (CX 79Z100, CX 79Z95; Rule 23).

The Organizer will thereby receive credit for the total volume created, either through sales of product to Holiday Girls or to other Organizers (CX 1842T, CX 86B, CX 1840Z69, CX 90Q).

77. Examples given by Holiday Magic for work­in Masters are seventeen girls working part­time averaging three hundred dollars a month totaling $5100 or by sponsoring six sub­organizers into the wholesale end of the business who would purchase six one­packs each during a calendar month (presumably to recruit five others in turn and distribute a one­pack to each (CX 1842T, CX 1940Z72, CX 90Q).

78. Approximately 25 percent of the Organizers recruited will become Masters if 'properly trained' in the first 10 days in Holiday Magic (CX 1840Z48, CX 85B; see Part XII 4(a)).

79. Organizer Distributors sell or attempt to sell at retail as well as at wholesale to other Organizer Distributor or Holiday Girls whom they sponsored into the Holiday Magic program (CX 79Z98, CX 79Z99; Tr. 5181, 5176, 5478, 2437, 2679, 5025, 5478, 7873).

C. Master Distributor

80. A Master Distributor can attain his position either as a 'Buy­in' a 'Work­ in' or combination 'Buy­in/Work­in' (CX 79H, CX 784).

(a) Buy­in Master

1. A buy­in Master may be introduced to Holiday Magic, Inc. by a General Distributor, a Master Distributor, an Organizer Distributor or a Holiday Girl Distributor (CX 79H, CX 78H).

2. A buy­in Master is a person who becomes a Master Distributor by a lump sum capital investment for Holiday Magic products and sales aids (CX 79Z98, CX 79H; Tr. 2542).

3. The cost of the Master Distributorship has fluctuated from $2500 to $4500 (Tr. 9574, 9591­92, 2542).

(b) Work­in Master

1. A Distributor may become a 'work­in' Master by purchasing for resale from his sponsor the required volume, which has varied from $5,000 to $7,777.77 at the retail list price value (CX 79H, CX 79Z 100, Tr. 9606).

2. See Part VII B7.

(c) Work­in/Buy­in Master

A distributor may become a 'Work­in/Buy­in' Master by selling a portion of the required volume through his organization and purchasing from his sponsor or from Holiday Magic, Inc. the balance in one lump sum, which can be done in any one day of the month (CX 79H, CX 78H; Tr. 7183).

81. Master Distributors buy their Holiday Magic products at a discount of 55 percent off of retail list price (CX 79Z31, CX 70Z46, CX 78Z49).

82. Master Distributors buy directly from Holiday Magic, Inc.

(a) At CX 70Z31­­'As a Master Distributor you buy directly from Holiday Magic.'

(b) CX 78T­­A General Distributor 'can work wholesale or retail or both as he desires. Does not supply his Masters with product.' A Master Distributor 'Buys product directly from factory to supply his Organizers and Holiday Girls.'

(c) Stipulation of respondents' counsel at Tr. 2621­23):

Q. Mr. Lzzard, I show you a document marked CX 439 for identification and ask if you will be able to identify this, please.

(The document referred to was marked CX 439 for identification).

A. Yes, sir, this is a bulletin, one of many dozens I received as a master distributor from the company in San Rafael, California. This one pertains to new warehouses available.

MR. CAMERON: Your Honor, I would like to offer this into evidence at this time.

MR. WOLFSON: Objected to on the grounds that that couldn't possibly have any probative value to the issues involved in this case.

HEARING EXAMINER BUTTLE: What is the purpose?

MR. CAMERON: Your Honor, we have this under our price discrimination category in our allocation, and this will show where masters and generals purchased their product, and to show the chain of distribution.

MR. WOLFSON: What difference can it possibly make where they purchased it?

HEARING EXAMINER BUTTLE: You say this will show where the masters and generals purchased their product?

MR. WOLFSON: It doesn't even show that.

MR. CAMERON: Your Honor, it is part of the mosaic of the marketing operation.

MR. WOLFSON: Now, that is not original, Judge.

HEARING EXAMINER BUTTLE: No; I wish I'd never used the word.

Well, now the reason you are giving me is no reason for my receiving it, so what else do you have to say?

MR. CAMERON: Your Honor, I think it is important, especially in our price discrimination allegation in the complaint, to show where distributors purchased their product from.

HEARING EXAMINER BUTTLE: Well, they'll stipulate with you that the distributors purchased their product from Holiday Magic, won't they? Now, that is what you said you wanted to introduce it for, isn't it?

MR. CAMERON: Well, I'd like to­­O.K.

HEARING EXAMINER BUTTLE: I guess so. All right.

MR. WOLFSON: He gave up.

HEARING EXAMINER BUTTLE: They will stipulate with you that masters and generals purchased their product from Holiday Magic; am I correct?

MR. WOLFSON: Yes, Judge, they gave up, they said they are going to withdraw it anyway, Mr. Brownman.

HEARING EXAMINER BUTTLE: Mr. Mitchell do you stipulate to that?

MR. MITCHELL: Sure, Your Honor.

MR. CAMERON: I'll take it back.

HEARING EXAMINER BUTTLE: That doesn't even prove it.

MR. WOLFSON: That is right.

(The documents referred to, heretofore marked for identification CX 439, was withdrawn).

(d) CX 106C­­'Only Master and General Distributor's orders should be submitted to Holiday Magic. All other distributors purchase through their sponsor.'

(e) Testimony of former Administrative Vice President and Director Gillespie­­'[Holiday Magic adopted a numerical cross file for Masters and Generals but not for Holiday Girls] Because Holiday Magic did business with the Masters and Generals' (Tr. 9369); [O]bviously Masters and Generals normally purchased from the company * * *' (Tr. 9415, 9419).

(f) See also Part XLV 1.

83. Master Distributors sell or attempt to sell at retail as well as at wholesale to Organizers or Holiday Girls whom they sponsored into the Holiday Magic Program (CX 79Z99; Tr. 3077, 3458, 2452, 2604, 4187).

D. General Distributor

84. In order for a person to become a General Distributor, he must fulfill three qualifications:

(a) He must first be a Master Distributor (CX 1842U, CX 1940Z75, CX 90R).

(b) Submit a certified check for $2500 to Holiday Magic, Inc.­­which is called a General's release fee­­and will be held in escrow until the third requirement is met (CX 1842U­V, CX 1840Z75­76, CX 78M, CX 90R).

The 'release fee' has ranged from $2500 to $3000 to $4500, and has also been denoted by respondents as a 'contract settlement sum' and a 'general's performance fund' (Tr. 2534­35, 9530, 9918­19; CX 2000).

(c) He must 'recreate himself' by bringing in a replacement Master to his sponsoring General Distributor, before the sponsoring General Distributor will release him from Master Distributor to become a General Distributor (CX 1842V, CX 1840Z76, CX 78M, CX 90R­S).

(d) Formerly a fourth requirement was that the Master Distributor attend Instructor General class (IG) as a prerequisite to becoming a General (CX 1842U, CX 1840Z74, CX 90R). The requirement is now moot since Instructor General school is a requirement to become a Master Distributor as of Apr. 30, 1970 (CX 159F­­Family News­­4/10/70).

85. As a practical matter, Holiday Magic, Inc. recognizes only two requirements for a Generalship position­­the release fee and the replacement Master.

(a) At CX 1842Z2­­

Now, that newly created master distributor will want to become a general distributor to earn the kind of money a General does! But, [in] order for a master distributor to become a General Distributor, there are two major qualifications that must be completed. The first is to post a $2500 dollar General release fee with the factory, and the second is to bring in a replacement master to your sponsoring General before he will release you to become a General Distributor!

(b) See also­­

1. Witness Davis was congratulated by Holiday Magic on having become a General Distributor only twelve days after having been congratulated for becoming a Master Distributor (CX 1391, 1393; Tr. 1358).

2. When Crosby was congratulated by Holiday Magic, Inc. on becoming a Master Distributor and the same day was congratulated by Holiday Magic, Inc. on becoming a General Distributor (CX 1349, CX 1350). Note that Crosby's 'Application' to become a General is dated 9/23/69, whereas the letter informing him of his Master status (and General status) was dated 9/24/69.

3. Other examples of Masters becoming Generals very quickly are: (CX 35F (2 weeks); CX 3D (10 days); CX 45G (2 weeks); CX 35C (7 days), Tr. 2067 (4­5 weeks); Tr. 3136 (3 days); Tr. 5311 (week or two); Tr. 4060­61 (next day).

4. See CX 18A; Gay­Tr. 9956.

86. General Distributors purchase Holiday Magic products directly from Holiday Magic, Inc. at a discount of 54 percent off of retail list price (Answer, p. 4; CX 104M; see also VIIC3).

87. General Distributors sell or attempt to sell at retail as well as at wholesale to Organizer Distributors and Holiday Girl Distributors whom they sponsored into the Holiday Magic Program (Tr. 4553, 7838­39, 5140, 2525, 5218, 2479).

E. Replacement Masters

88. The strength of the Holiday Magic Marketing Plan, as Holiday Magic describes it, lies in the replacement master requirement.

CX 1842V­­This means he must bring in a replacement Master Distributor to you, his sponsoring General Distributor, before you will release him from Master Distributor to become a General Distributor.

Herein lies the strength of the Holiday Magic marketing plan­­Why Holiday Magic has grown so rapidly because he must always replace himself with a working indian before he can become a chief. Your number of Masters will never decrease­­you will only grow in the number of Generals you have.

This replacement Master was brought into the sponsoring General Distributor which just caused another $5,000 in retail product to be purchased from the factory * * *

VIII. Holiday Magic Distributors Statistics­­Numbers and Geographic Areas

89. As of approximately Feb. 26, 1969, Holiday Magic Records indicate that 9252 persons had become Master Distributors throughout the country, of which 2940 became Generals. The Record further reflects that as of approximately Dec. 31, 1968, (only two months earlier) there had been a total of 43,713 Organizer Distributors and 41,918 Holiday Girl Distributors (CX 457A).

90. Inasmuch as Organizer, Master and General Distributors are all qualified to sponsor and recruit Holiday Girls into the Holiday Magic program, on the average, persons in their lifetime as Holiday Magic distributors actually recruited and sponsored less than one Holiday Girl each (CX 457A).

91. It can also be found that since 2940 persons became General distributors, an equal number were at one point in the program Replacement Masters (CX 457A).

92. A breakdown of Organizers and Holiday Girls by state reveals the following, as of 1/29/69:

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

CX 457A, B, C)

93. As of approximately Apr. 26, 1972, approximately 504 Masters had been recruited in the State of Florida, of whom 219 had become Generals and 285 remained as Masters (CX 2081A­Z21).

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

Fort Pierce­­Of the 34 Masters and Generals, 32 were recruited in calendar year 1966 as Masters (another one was recruited on 12/31/65!) and 23 of the 34 were recruited as Masters and Generals in just the first six months of 1966 (CX 2081A­Z21).

Okeechobee­­Of the total of 11 Masters and Generals all were recruited as Masters and Generals during a five month period from May to Sept. 1966 (CX 2081A­Z21).

94. As of approximately Nov. 1970, Holiday Magic had on record for the State of Illinois approximately 1918 Masters of whom 511 were able to qualify as General Distributors (CX 200A­Z177; Tr. 4738).

Of these Masters and Generals, the following can be gleaned in conjunction with Census figures in the record as RX 156­­

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

95. Through a process of addition, one can find that since Master Distributor numbering started on a sequential basis throughout the country as of May 1969 (Tr. 9989; CX 2081 Z12) with ID #20001, and that by the end of Apr. 1970, ID #022972 had been reached (CX 2081 Z16); therefore:

(a) 14 more Masters were recruited from Mt. Prospect during the period May 1969 through Apr. 1970; a total of 9 persons had already been recruited as Masters and Generals as of May 1969.

(b) Seven more Masters and three more Generals were first brought into the program in Skokie during the period May 1967 through Apr. 1970; a total of 31 persons had already been recruited as Masters and Generals as of May 1969.

(c) 14 more Masters and six more Generals were first brought into the program in Des Plaines during the period May 1969 through Apr. 1970; a total of 26 persons had already been recruited as Masters and Generals as of May 1969.

96. Chicago Metropolitan Area:

Approximately 1000 Masters and 600 Generals have been recruited in the Chicago metropolitan area, which for purposes of this finding is defined as including all of Cook County and DuPage County only. The population of these combined counties is approximately 6,000,000 people (RX 156; CX 200A­Z177).

As of approximately Dec. 1969, Holiday Magic figures indicate that a total of approximately 809 Masters and Generals had been recruited in the State of Michigan (Tr. 3892; CX 357B­Z52).

A comparison with Census figures for 1970 shows the following (RX 155):

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

97. As of approximately Jan. 1971, there were approximately 25,000 Masters and Generals that had been recruited in the country.

(a) This information was relayed to former Holiday Magic President Ben Gay III when he was in charge of Holiday Magic, Ltd. in Canada, by Harold Combs, the man in charge of the Customer Service Department (Tr. 8999­9900, 9984).

This information is possibly more reliable than the testimony of Sherman Coultas, who testified that since the beginning, 20,000 Masters and Generals had been recruited­­'probably' (Tr. 9759).

98. As of approximately the end of 1972, 168,000 Holiday Girls and Organizers had been recruited into the Holiday Magic program (Tr. 9762).

Although this information was also testified to by Mr. Coultas, it is considered more reliable than his estimate of the numbers of Masters and Generals since he at first stated he didn't know what the figure was and only after being shown a document was he able to 'refresh his recollection.' (Tr. 9762).

99. The ratio of Holiday Girls to Organizers, Masters and Generals is approximately 4 to 5 and the ratio of Holiday Girls to Organizers is less than 1 to 1 (CX 457 A). The ratio of Masters to Generals is approximately 2 to 1 (CX 457A).

100. Holiday Magic, Inc. does not know and keeps no records of the number of Masters and Generals that are actively pursuing their business.

(a) George Platsis, Assistant Attorney General, State of Michigan testified that he asked Holiday Magic, Inc. for a list of active and inactive distributors. Holiday Magic's response, in Dec. 1969, was that they have no way of knowing who is active and who is inactive (TR. 3892). The list of Masters and Generals supplied appears in the record as CX 357B­Z52 (TR. 3890, 3894).

(b) Sherman Coultas, Holiday Magic's Director of legal service, testified that Holiday Magic, Inc. has no records of turnover of Masters and Generals (TR. 9760).

(c) The only method Holiday Magic uses to determine which distributors are active and which are inactive, is to record as 'active' those distributors who reordered product from Holiday Magic in the preceding six month period (Coultas TR. 9699). However, a study of the lists in question testified to by Mr. Coultas (RX 159, RX 160 and RX 161) indicates that Distributors are considered active if they ordered in the previous 12­month period­­not six month period (see RX 159, RX 160, and RX 161; TR. 9699).

(This is an unreliable yardstick, since Distributors can be active and not have reordered from Holiday Magic, or can be purchasing for personal use only and not be active as a Distributor.)

(d) Another method of determining the number of active Masters and Generals today is to assume that active Masters and Generals belong to the CRS distribution centers. Testimony appears in the Record that 95 percent of 'active' people belong to CRS (TR. 9629­­Pangerl) and that there are 2700 members of CRS (TR. 5881­Semling). From this it can be determined that there are 2,842 active Masters and Generals throughout the country today.

101. Distributors whom Holiday Magic, Inc. considers to be 'inactive' continue to receive bulletins and Wands from Holiday Magic, inc. (Coultas­­TR. 9699; Coultas­­TR. 9743­44).

102. Holiday Magic, Inc. has a policy of not providing its distributors with the number of previously recruited Distributors in the geographic or market area in which the Distributors do business or are recruited and Distributors who seek such information are denied it. See following:

(a) CX 1881­­Wand­­Solution Box­­Jan. 1967:

Question: Can the company provide me with a list of Master and General Distributors in our area so we can participate in joint projects?

Answer: The company does not compile lists of distributors by area, but suggests that this data could be obtained through the council in your area. A list of councils can be obtained by writing the company.

Question: In the December issue of 'The Wand,' we read that 'Holiday Magic' now has 50,000 distributors. We find this almost as incredible as the monthly sales volume. Are these figures accurate?

Answer: The sales figure is indeed accurate. However, the number of Distributors was a misprint. After some deliberation, we have decided to keep the actual figure as to the number of distributors a well­guarded secret.

(b) TR. 9066­67­­At first denied because not in Distributor's interest­­then given to Council only when mailing initiated to get membership back up.

(c) Gay­­TR 9970.

103. Attached hereto are bar graphs picturing the Master and General Distributors recruited in the geographic areas noted by calendar year.

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

IX. Release Fee­­Procedures

104. When the release fee money comes into Holiday Magic, Inc. it is deposited in the Holiday Magic accounts, and when a Master Distributor qualifies for the General position by finding a replacement Master, the money is sent out to the old General. Holiday Magic maintains a record of the fees that are thereby sent out (Alexander­­TR. 5540).

105. The release fee sum rose from $2500 to $3000 approximately six weeks after the buy­in requirement for the Master Order went from $2500 to $3000 (Alexander­­TR 5559­60); and the buy­in requirement and release fee are both up to $4500 (CX 2069D; TR. 9574; CX 2000).

106. The Master Distributor who pays the release fee to become a General Distributor receives no additional product or inventory therefor. What he does receive is the right to purchase merchandise from Holiday Magic at a 65 percent discount off of list price rather than 55 percent, and receiving the release fee money from other Master Distributors who become Generals (STIPULATION OF RESPONDENTS AT TR. 2475­76) as well as to be entitled to obtain the 10 percent and 1 percent overrides available only to General Distributors (CX 79M; CX 90P; TR. 1090; 1228­1229; 1314­1315; 4843­4844; 4935; 4945­4946; 5199; 6058; 6061; 1232).

107. The release fee is paid automatically and without question when a replacement Master is introduced to Holiday Magic, Inc. by the Master desiring to become a General.

CX 90R­S­­When this replacement Master is brought into the business, an additional $5,000 in retail product is purchased from Holiday Magic and you, with your 10% override, would be paid another $5,000 in cash. But since the rules require you to pay out $200 in cash as a finder's fee to whomever brought in this Master, you net only $300, on replacement Masters. However, the moment that the replacement Master is officially recorded by the company, the $2,500 cash, being held in escrow, is released to you, the sponsoring General Distributor. Thus, you have earned a total of $3,300 cash each time you sponsor a new General Distributor.

X. Inventory Requirement and Draw Account

108. Persons who wish to start out in the Holiday Magic program as Master Distributors must purchase an 'inventory' of cosmetics valued at between $5,000 and $7,777.77 (CX 77K; CX 90P; TR. 9603).

109. Persons who are work­in/buy­in Masters must purchase an 'inventory' to qualify for the Master position equal to the difference between the Master calendar month purchase requirement of from $5,000 to $7,777.77 and the amount actually sold to his Organizers, Holiday Girls or retail customers during that same month (CX 78H; CX 79H).

110. Persons who are 'Work­in' Masters have no initial inventory requirement since all merchandise purchased from Holiday Magic during the Calendar month in which they are to qualify as Master Distributors are resold to Organizers, Holiday Girls or retail customers (CX 90Q; CX 1842S­T).

111. The new Master Distributor who qualifies either as a buy­in or work­ in/buy­in may either receive the merchandise ordered from Holiday Magic, Inc. or a credit for same which he may draw upon as he desires (CX 77K; Ruggles­TR. 651; CX 379).

112. The draw account exists for Master Distributors and General Distributors (Gillespie­­TR. 9440).

113. The draw account device was initiated by Holiday Magic, Inc. in 1965 (Gillespie­­TR. 9441).

114. Some distributors take their entire draw balance on their first order. Some take half, and some take just a small amount Lipska­­TR. 10410).

115. If a Master Distributor becomes a General with a portion of his initial purchase requirement still on a draw account, he continues to order at the 55 percent discount until the draw balance is zero, even though he is already a General Distributor (CX 1415).

116. Other than the draw account and buy­in or work­in/buy­in requirements, there are no inventory requirements for Master Distributors and there are no inventory requirements for General Distributors imposed by Holiday Magic, Inc. (see CX 1302A, B; CX 90R­S; CX 78M­O; except when new partners are taken into the business­­See Part XXV).

117. An inventory requirement of the CRS Distribution Center which Master and General Distributors may utilize is $4,000 in retail value of product for Masters and Generals (See Part XXX).

XI. Finder's Fee

118. Holiday Magic, Inc. requires its General Distributors to pay a finder's fee of $100 to any Holiday Girl, Organizer or Master distributor who sponsors a 'Buy­in' Master Distributor (CX 79Z97, Rule 31); CX 79Z98; CX 78P; CX 79P; CX 78H; CX 104M; CX 78Z100 (Rule 31); CX 81Z52 (Rule 31); CX 82Z52 (Rule 31); CX 83Z52 (Rule 31); CX 104L (Rule 31); CX 105H (Rule 30); CX 404D (Rule 30); at CX 78P AND CX 79P:

This fee of $100 is a special bonus paid by the General * * * to the person who introduces a new 'Buy­In' Master Distributor to him.

It is paid only once and is paid on or before the fifth of the month. * * * Masters, Organizers and Holiday Girls may receive this special bonus for bringing in a Master Distributor at this initial level of commitment. It is only paid on persons who originally sign in as Master Distributor and is never paid on 'Work­in' Masters, who have previously executed an application and agreement as an Organizer or Holiday Girl.

119. In order to receive a finder's fee, the person must have been in the Holiday Magic business either as a Holiday Girl, Organizer or Master Distributor, 'which means they would have had to buy a kit to get started with' or 'the minimum inventory' for an Organizer or 'the Master's inventory.' (Pangerl­­TR. 9542).

120. The finder's fee payment is a requirement of Holiday Magic, Inc. It must be paid by the General Distributor. General Distributors have been terminated by Holiday Magic, Inc. for failure to pay the said fee (Gillespie­­TR. 9364; CX 658B; CX 686G­J; CX 655; CX 659; TR. 6952).

121. A Master Distributor who sponsors another Master Distributor into Holiday Magic, Inc. and who obtains the $100 finder's fee may also use this 'Buy­In' Master as a replacement Master to enable him to become a General Distributor (CX 1840Z59).

XII. The 2 Percent Override

122. Holiday Magic, Inc. requires its General Distributors to pay a sum of money to Organizers and Master Distributors equal to 2 percent of the retail list price value of products purchased by any Master Distributors, the Organizer Distributors or Master Distributors sponsored into the Holiday Magic program. The Organizer Distributors sponsored into the Holiday Magic program. The Organizer Distributor or Master Distributor receiving a finder's fee continues to be entitled to receive this 2 percent override until such time as the recruited Buy­In Master or the sponsoring distributor becomes a General Distributor (CX 78Z100 (Rule 31); CX 79Z97 (Rule 31); CX 81Z52 (Rule 31); CX 82Z52 (Rule 31); CX 83Z52 (Rule 31); CX 104L (Rule 31); CX 105H (Rule 30); CX 404D (Rule 30); CX 78P; CX 79P; CX 77K).

123. The 2 percent override could amount to a considerable sum each month.

At CX 78Z52:

Suppose that after you have been with the Company for several months you have caused to develop among your directs, five Master Distributors. You will receive 2% from each of their volumes. This 2% could amount to a considerable sum each month.

124. The 2 percent override is required to be paid by the General on or before the fifth day of the following month (CX 78H; CX 78H; CX 78P).

125. Distributors who receive the percent override are not required to sell product to the Masters doing the purchasing from Holiday Magic, Inc. and do not service them in any other way:

(a) at Cx 79Z31:

Now, let's look at the next 30 days in the business­­your third month.

Each one of these people will do the same thing that Mary had done and for the very same reason­­they will reproduce themselves five times. And now that that has happened, you have reproduced yourself five times.

Each one of your original five people is now moving the same volume that you moved last month­­$9,000. And now we have a bit of a problem.

If you will look back on that chart, [Refund Bonus Schedule] you will find that they are earning 55% and you are at 55% and there is nothing left over. You are not making anything.

Well, there was one thing that I didn't tell you about this plateau that you reached when you went above $5000 in volume.

At that time you became a Master Distributor. As a Master Distributor you buy directly from Holiday Magic, You receive as their sponsor an override. In this case that override is 2%.

2% of $9000 is $180.00. You have five people doing that and that's total of $900.00.

So, in your third month you have earned a total of $900.00 from your first five people. Again, all the new people in the business this month were sponsored by someone you sponsored in a prior month. As yet you haven't done anything.

(b) At Physical Exhibit B, TR. 9807:

At this point, you may desire to consider the possibility of working full time in your Holiday Magic cosmetic business. By the end of your third month with Holiday Magic, you will be pleased to discover that your first five outlets have reached the volume of $9,000 each and, as you have done, they, too, become Master Distributors. At this point, they begin to purchase directly from the company.

Although you are no longer required to service them with product and they no longer need your service or your help, you begin to receive 2 percent of their volume. Two percent of $9,000 is $180 times five, which equals $900. This 2 percent is a perpetual override for you each and every month so long as both remain a part of the Holiday Magic organization or until either of you or they become General Distributors.

Your total profit for the third month is calculated as follows: You receive $900 as an override from your first five outlets without lifting a finger.

126. The 2 percent override is an absolute requirement of Holiday Magic, Inc. It must be paid by the General Distributor. General Distributors have been terminated by Holiday Magic, Inc. for failure to pay the said money.

See CX 658A, B, where in Holiday Magic, Inc. terminated a Distributor for failure to pay a 2 percent override:

As you know, the payment of this 2% override is a definite requirement of our marketing plan and no deviations will be allowed.

XIII. The Ten Percent Override

127. General Distributors receive directly from Holiday Magic, Inc. a monthly payment equal to 10 percent of the retail list price value of products purchased by Master Distributors (CX 790; Physical Exhibit B­TR. 9808; CX 152B; CX 104N; CX 78M; CX 79M; CX 1842U).

128. Along with the 10 percent override, the General Distributor receives a copy of the Master Distributor's official monthly purchase record (CX 790; CX 780; CX 2053A­M; CX 2054A­L; TR. 5223­5227).

129. General Distributors also receive directly from Holiday Magic, Inc. a payment equal to 10 percent of the purchase volume of Master Distributors recruited by themselves or by Organizers or Holiday Girls to whom they sell, directly or indirectly:

CX90R:

For just a moment, put yourself in the position of a General Distributor working at 65%. Each time you create a new Master Distributor you receive a cash override of 10% of the total retail value of the merchandise which must be purchased from the company to establish that Master Distributor. Ten percent of $5,000 will earn you $500 cash.

When this replacement Master is brought into the business, an additional $5,000 in retail product is purchased from Holiday Magic and you, with your 10% override, would be paid another $500 in cash. But since the rules require you to pay out $200 in cash as a finder's fee to whomever brought in this Master, you net only $300 on replacement Masters.

130. All Master Distributors are assigned to a General Distributor who receives the 10 percent override on the Master Distributor's purchases. (CX 200AZ­177).

131. There are, however, General Distributors who have no Master Distributors assigned to them and over whom they collect a 10 percent override.

(a) Since there are more Masters than Generals this is inevitable. See Part VIII.

(b) Specific Examples at TR 4055­4069; TR. 1335­1409; TR. 1485­1625; TR. 1694­1822; TR. 4814; TR. 6947).

132. Replacement Masters are included in the group of Master Distributors who are assigned to a General Distributor who receives a 10 percent override on their purchases.

(a) This follows from XIII 3.

(b) For specific examples, See: TR. 9560, 9571).

(c) CX 1842V; CX 90R­S).

133. Replacement Masters of replacement Masters are included in the group of Master Distributors who are assigned to a General Distributor who receives a 10 percent override on their purchases.

(a) This follows from XIII 3.

(b) For specific examples, see: TR. 9560; 9571­72).

(c) At CX 1842: WHOLESALE ENROLLMENT­­For just a moment * * *, put yourself in the position of a General Distributor working at 65%. Each time you create a new Master Distributor you receive 10% of the total retail volume that must change hands. Ten percent of $5,000 has just earned you $500.00 cash!

This newly created Master Distributor that you have just enrolled will want to become a General Distributor like you so that he may earn the kind of money that you are earning here. * * *

* * * This means he must bring in a replacement Master Distributor to you, his Sponsoring General Distributor, before you will release him from Master Distributor to become a General Distributor.

Herein­­lies the strength of the Holiday Magic marketing plan­­why Holiday Magic has grown so rapidly because he must always replace himself with a working indian before he can become a chief. Your number of Masters will never decrease­­you will only grow in number of Generals you have.

This replacement Master was brought into the sponsoring General Distributor which just caused another $5,000 in retail product to be purchased from the factory and you, with you 10% overruled, have just been paid another your 10% override, have just been paid another

134. Holiday Girls and Organizers who become Master Distributors, who are not themselves replacement Masters, are included in the group of Master Distributors upon which the General Distributor in whose buying organization they had been, gets the 10 percent override (CX 90T).

135. Holiday Girls and Organizers who were in the buying organization of a Master Distributor upon which a General Distributor receives a 10 percent override, when becoming Masters themselves will also produce the 10 percent override for the General Distributor, unless the first Master became a General Distributor himself prior to the movement to Master. A Master Distributor takes his entire Organization with him when he moves into the General position (Wolfson Stipulation; TR. 4938; CX 90Z5).

136. Procedure for Paying 10 Percent override

(a) As soon as the Master order comes into Holiday Magic, Inc. checks are cut for the General's override. It is a routine office procedure. (Alexander TR. 5530­31.)

(b) There is an obligation on the part of Holiday Magic, Inc. to pay this Commission [override] the minute of Recruiter [general] takes a check from a Recruitee [New Master]. (Stipulation of Attorney Wolfson­­TR. 5659; Alexander­­ TR. 5699.)

(c) Holiday Magic, Inc. asks for no reports requires no reports, and receives no reports with respect to the payment of the 10 percent override in connection with 'services' performed. (Alexander­­TR. 5531; TR. 5537­38; 5539.)

(d) However, many reports are received that General Distributors perform no services; the response from Holiday Magic, Inc. is that all purchases are final (Ruggles­­TR. 555­556.)

See also Tr. 5351, 5350, 1842­44, 1589­90, 1679, 1546; CX 134­2 A, B, CX 1380, CX 1411, CX 1353, CX 1382A­B:

(e) General Distributors who in fact perform no services receive the 10 percent override. (Tr. 2046­47, 8852, 9072­75, 6978, 7016, 7110, 6320­21, 6344, 6978, 8962.)

(f) Holiday Magic President Al Pangerl testified that a Master of this went to California when he was the top producing General in the country, residing in New York, but continued to receive the 10 percent override because 'he knew what it was all about as a Master.' (Tr. 9649.)

137. General Distributors can live anywhere in the country and receive the 10 percent override on other Master Distributors living anywhere else in the country.

See Tr. 9649, 103391, 5349, 8852, 9118.

XIV. The One Percent Override

138. General Distributors receive directly from Holiday Magic, Inc. a monthly payment equal to 1% of the retail list price value of products purchased by other General Distributors, and by Master Distributors over whom the second General Distributor is receiving a 10 percent override (CX 79M, CX 790, CX 2053A­M, CX 2054A­L, CX 90­P; Tr. 5223­5227).

At CX 790­­

This [1%] override is paid by Holiday Magic to the old General of a Master who has been promoted to the General position. It is paid monthly by the Main Office and is based on the purchases of the new General, plus the purchases of all of this new General's Master Distributors.

139. All General Distributors are assigned to another General Distributor who receives the 1 percent override (CX 200A­­Z177).

140. There are, however, General Distributors who have no General Distributors assigned to them, and therefore they collect no 1 percent override.

(Since there are Generals without Masters, there are no Masters to become Generals (XIII4).)

141. Since replacement Masters and replacement Masters of replacement Masters may be assigned to a General over whom a 10 percent override is obtained, replacement Masters and replacement Masters of replacement Masters, upon becoming Generals, are assigned to that same General who now receives a 1 percent override instead of the 10 percent override.

(a) See XIII5, 6.

(b) See Tr. 6057, Testimony of Corporate Official Dempsey that Jim Hean was a replacement Master in his organization­­sponsored by a man Dempsey brought in the business­­and Dempsey received a 1 percent override in 1966 on Jim Hean's $300,000 volume, amounting to $3,000.

(c) See Tr. 6483.

142. The General receiving a 1 percent override on the purchase volume of another General is not required to have any business relationship with the second General, has no business relationship with the second General, and performs no services for either the second General or Holiday Magic, Inc. To this effect are the following sources:

(a) Stipulation of Attorney Wolfson at Tr. 4613: 'This man as a General doesn't have to have any business relationship with the General from whom he receives the one percent. That's a contract­settlement sum, Judge. He's not supposed to supervise the old General.'

(b) Instructor General and former National Field Director Christie, at Tr. 5955­­'A General Distributor should be able to run the business on his own.'

Mr. Christie continues to receive overrides from his New York Distributor Although no longer there (Tr. 5979).

(c) Tr. 6991­6992 of Respondent's witness Kobayaski; a General Distributor from California since 1965:

Q. Who was the General before you in your organization?

A. General before me, Keoshi Hagashi.

Q. Where is he?

A. He travels all over.

Q. When was the last time you saw him?

A. I haven't seen him recently.

Q. Well, when was the last time that you saw him?

A. I saw him last year. I saw him once.

Q. Let's take the calendar year 1971. How often did you see him in 1971?

A. I didn't see him. What for?

(d) Testimony of Holiday Magic president Al Pangerl at Tr. 9556­57:

Q. * * * Were you assigned another sponsoring General after [Mr. Birni] left [Holiday Magic]?

A. Yes.

Q. Who was he?

A. Tony Rubio.

Q. So Mr. Rubio had been Mr. Birni's sponsoring General?

A. Yes.

Q. Where did this Rubio conduct his business?

A. In California.

Q. Did you have any business relationship with this man?

A. No.

Q. As far as you know he received one percent override on all of your business?

A. Yes.

And at Tr. 9621:

Q. I ask you if Tony Rubio's profit from his business, namely the one percent he received from your volume, was determined by the effort that he, Mr. Rubio, put into the business.

A. If he was working with me then the answer to that would be 'yes.'

Q. And if the answer to that was that he was not working with you, the answer would be 'no'?

A. The answer would be 'no.'

Q. And he was not working with you?

A. No. I saw him on occasion when I was in California and he called me. I knew more than he did, so he couldn't help me much.

Mr. Pangerls' Sponsoring General received 1 percent of $400,000­­(Tr. 9557).

(e) A distributorship and the 1 percent override is inheritable, and in effect [Aug. 1967] is included in the estate of the deceased distributor (CX 25G­­Wand, Solution Box­­867).

(f) See also Tr. 9601­02, 6072, 6481, 6482, 9420, 9647, 7158­60.

General Distributors can live anywhere in the country and receive the 1 percent override on other General Distributors living anywhere else in the country (Tr. 9621, 5349, 8963, 8199, 8352, 8685).

XV. Distributor Contracts

143. The Holiday Magic Contract or 'Application and Agreement' is entered into by all three entering levels of distributors­­Holiday Girls, Organizers and Masters (Ruggles­Tr. 667; Pangerl­­Tr. 9514; Tr. 1929).

144. Contract forms appear in the record at CX 403, CX 402; CX 1925; CX 1880­ A, C; CX 1887).

145. All Holiday Magic rules and regulations either appear on the document itself, or the contract embraces all the rules and regulations of Holiday Magic, Inc. (Pangerl­Tr. 9514; CX 404; Wolfson­Tr. 5658, stipulation); or are specifically referred to in the face of the contract as being an integral part of the contract as set forth in the Holiday Magic Sales Manuals, and distributors agree to abide by all of rules and regulations of Holiday Magic, Inc. (CX 403).

146. Holiday Magic, Inc. maintains in its files a copy of contracts entered into with all levels of distributors (Tr. 9368; CX 405) and requires that this be done. See also the following sources:

(a) At CX 405, bulletin from Holiday Magic, Inc. to all Masters and General Distributors.

Company policy dictates that a distributor to be recognized by the company as an authorized distributor, his application and agreement must be on file in this office.

You Master and General Distributors * * * should forward to this office any such applications you may now be holding.

(b) CX 78Z98, Rule 17, CX 79Z94, CX 81Z48, CX82Z48, CX 83Z48:

For a person to have status with the company as an authorized Distributor, the Company must have in its records an Application and Agreement form signed by the Distributor.

147. The Holiday Magic rules and regulations apply to all four levels of distributor, i.e., Holiday Girls, Organizers, Masters and Generals, except to the extent that a rule may relate to a specific distributor level only (Gillespie­Tr. 9357­9364).

148. In 1967, Holiday Magic, Inc. paid out $2,721,092.19 in overrides to General Distributors (Tr. 9251) or approximately 9 percent of the company's gross sales at retail list price value. Since 1 percent of all the gross sales at retail list price value is payable to General Distributors, it can be determined that for 1967, $303,608.13 went to Generals on the 1 percent override, and the remainder, or $2,417,394 was based upon the 10 percent overrice, or purchases of Masters. Approximately 12 1/2 percent of the total override payments is based upon the 1 percent override.

149. The override payments for the years ending Sept. 1968, 1970, and 1971 can be determined in the same manner. Nine percent of the total of the figures appearing in RX 16 is the override payment to all Generals, and 12 1/2 percent of that figure is the 1 percent override payment 87 1/2 percent is the 10 percent override payment.

150. For the fiscal year ending Sept. 1970, Holiday Magic's gross sales at retail list price value was $15,334,830 (RX 16). Nine percent of this figure, or approximately $1,380,000 was the override payment, of which $172,500 was a payment on the 1 percent override and $1,207,500 on the 10 percent override.

151. For the month of June 1970, twenty­nine Holiday Magic General Distributors earned over $2,000 in overrides, for July 1970, 58 Holiday Magic General Distributors earned at least $2,000 in overrides, and in Aug. 1970, $2,000 or more in override checks were mailed out by Holiday Magic, Inc. to 61 General Distributors, some of whom received as much as $13,000 (CX 61D­E; CX 60F).

No applications for Organizers and Holiday Girls are refused (Coultas­Tr. 9762).

XVI. New Master Distributor­­Procedures

152. Applications come into the customer service department, accompanied by a certified check made out to Holiday Magic, Inc. (Ruggles­Tr. 653; Alexander­Tr. 5512, ,5560).

153. Holiday Magic, Inc. requires that only cashier's checks or certified checks should be sent with the Master order­­as well as with all orders (Tr. 1512; Tr. 5654; CX 28B; CX 155H; CX 79Z93 (Rules 7)).

154. A distributor who received the check couldn't cash it since it was made out to Holiday Magic, Inc. and even cash has been refused by recruiting distributors (Tr. 1512).

155. The reason for the certified check policy is that no one could stop payment on the check once it was turned over to the recruiting distributor (Alexander­Tr. 5654).

156. Once the check was in the Holiday Magic office, it was deposited (Alexander­Tr. 5652).

157. The new Master Distributor was then automatically assigned a number, the contract was time stamped, and a distributor file was set up (Ruggles­Tr. 653­ 654; Alexander­Tr. 5512).

158. New Master Distributor 'Applications' never reached anyone in Holiday Magic, Inc. at the executive level (Alexander­Tr. 5313; Gay­Tr. 956).

159. Money is the only 'qualification' to become a distributor in Holiday Magic.

(a) This follows from XVII­174.

(b) Witness Jane Alexander, former Executive Secretary to William Penn Patrick, related a story of how she pleaded with Patrick in 1968 or 1969 to refund the money to a boy who had borrowed money from his mother to become a Master, but had been drafted in the interim before the product inventory was shipped.

Patrick asked if product was sent, Mrs. Alexander said 'no' and Patrick replied 'Make sure it gets out of warehouse tonight.' (Tr. 5653, 5697, 5652).

(c) It is Holiday Magic, Inc. policy not to issue refunds on new Master orders (Alexander­Tr. 5652; CX 466D; CX 79Z93 (Rule 5)).

(d) At CX 78Z7 and CX 79Z7:

When a Distributor deliberately holds people back, the result is, at best, undesirable. The untrained and/or unthinking Distributor who discourages a ork­ in' Master or 'Qualifiying' Master from entering into the program until the Distributor is 'ready' will find that this type of greed will ultimately hinder and stop his own growth.

XVII. Inflexibility of Marketing Plan

160. Distributors at all levels, i.e., Holiday Girls, Organizers, Masters and Generals are required to abide by all rules and regulations of Holiday Magic, Inc., as well as all procedure contained in other company publications such as bulletins and sales manuals (CX 105H, Rule 1; CX 77L, Rule 1; CX 78Z96, Rule 1; CX 79Z93, Rule 1; CX 105H, Rule 1; CX 104H­K; CX 81Z48­51; CX 82Z48­51; Gillespie­Tr. 9357­9364).

161. Distributors at all levels, i.e., Holiday Girls, Organizers, Masters and Generals agree to abide by all rules and regulations of Holiday Magic, Inc. (CX 105H, Rule 1; CX 77L, Rule 1; CX 78Z96, Rule 1; CX 79Z93, Rule 1; CX 105H, Rule 1; CX 403A, B, Rule 1).

162. Violation of any Holiday Magic rule or regulation subjects the offending distributor to termination by Holiday Magic, Inc. (CX 78K; CX 104D; CX 105D; CX 77L; Rule 13 CX 78Z9, Rule 25; CX 78Z95; Rule 25; CX 81Z48; Rule 25; CX 82Z48; Rule 25; CX 104H­K, Rule 25; CX 105H, Rule 25 Tr. 5604).

163. Holiday Magic, inc. has terminated various distributors at all levels for violating certain of its rules, regulations and policies (CX 457 A; CX 656A­B; CX 657A­B; CX 658A­B; CX 659; CX 688A­C; CX 689).

164. Termination of any individual in Holiday Magic, Inc. is the responsibility of the Holiday Magic board of directors (CX 78Z86­89; CX 79Z89­ 90; CX 78Z9, Rule 25; CX 105H, Rule 25).

165. Other statements by corporate officials emphasizing the inflexibility of the Holiday Magic marketing plan are the following:

(a) Statement by John Hart, board of directors vice chairman, at CX 15C­­ Wand­­October 1966:

It's always amazing, and heartening to observe the rapid rise of members of our family of distributors.

However, this relation is tinged with disappointment when note some of our most successful distributors showing evidence that they feel the marketing plan­­which has been highly instrumental in their success­­is a flexible process.

My friends, such is not the case!

The Marketing process is a rigid plan, evolved after exhausting research, backbreaking experience, detailed analysis and brilliant planning.

The basic strength of the marketing plan lies in its rigidity!

You can find that which we all are seeking only by strick adherence to this most unique plan.

(b) Respondent Jan Gillespie, Holiday Magic administrative vice president and member of the board of directors advised Distributors to 'memorize' all rules and regulations (CX E­­Wand­­Jan. 1967).

(c) At CX 27C­Wand­Oct. 1967­­[H]aving the right to buy and sell the Holiday Magic cosmetics is conditioned on your adhering to the company trade rules and practices.'

(d) At CX 679, letter from respondent and then executive vice president of Holiday Magic, Inc., Fred Pape, dated 1/19/67.

There is absolutely no justification for tampering with any of our rules and regulations.

(e) Stipulation of respondents' counsel that distributors are subject to dismissal for violation of rules and regulations (Tr. 5604).

XVIII. Termination­­Procedures

166. In late 1969, witness Jackie Ruggles testified that respondent William Penn Patrick told her that it was her job to see to it that the Holiday Magic marketing plan was followed by distributors, and that she was to use the Holiday Magic rules and regulations as a guide (Ruggles­Tr. 673­674, 674­676; CX 79; CX 112; CX 113; CX 114; Alexander­Tr. 5496; Ruggles­Tr. 584­588).

167. Mrs Ruggles would receive letters from Master Distributors and General Distributors concerning alleged violation of the marketing plan. She would research the matter­­and point out to the offending distributor