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May 17, 1973


The opinion of the court was delivered by: Decker, District Judge.


Ernest Mitzner, Corinne Mitzner, Eugene Hoadley and Betty Hoadley filed this action on behalf of themselves and all other licensees of Cardet International, Inc. ("Cardet"), against Cardet, certain of its officers, employees and agents and M.L.C. Corporation, Inc. ("M.L.C."), a finance company. The amended verified complaint (hereinafter "the complaint") alleges that Cardet sold plaintiffs "investment contracts" called "franchises", in interstate commerce, in the form of "Distributor" and "Area Manager" licenses. Essentially, the allegations in the complaint charge that defendants induced plaintiffs to purchase the foregoing franchises through false and misleading representations, which defendants knew to be false and misleading, and further failed to file a registration statement, all in violation of the Securities Act of 1933 and the Illinois Securities Act of 1953. See, 15 U.S.C. § 77f et seq.; Ill.Rev.Stat. ch. 121 1/2, § 137.5 et seq. The liability of defendant M.L.C. is founded on the allegation that M.L.C. "directly or indirectly controlled or was controlled by" Cardet and directly or indirectly participated in the distribution of unregistered securities by Cardet. Defendant M.L.C. has moved to dismiss the complaint.

M.L.C. urges two grounds in support of its motion. First, it contends that the franchises or license agreements sold by Cardet are not "securities" under the federal securities act, and, therefore, the complaint fails to state a cause of action. Secondly, M.L.C. argues that even if the Cardet license agreements are "securities", the alleged activities of M.L.C. do not constitute violations of the securities acts.

At the outset, this court would reiterate the axiom that when ruling on a motion to dismiss, the court must accept all well-pleaded allegations of fact as being true. Hence, although the memoranda filed indicate a sharp dispute as to the actual facts, for purposes of this motion the court must accept as true the facts as they are stated.

The threshold question is whether the license or franchise agreements sold by Cardet to plaintiffs are "securities" under the Securities Act of 1933, § 2(1). See 15 U.S.C. § 77b(1). Before that question can be answered, it is necessary to examine in some detail the nature of the transactions alleged to constitute the sale of securities in this case.

According to the complaint and the attached exhibits, Cardet advertised for persons interested in becoming "distributors" and "area managers" for Cardet's "Marketing Plan". The plan supplied to prospective participants in a sales brochure is described therein as follows:

  "We offer to the consumer a magnificent selection
  of top quality products through a unique delivery
  service. Each month the residents in your area
  know that they can look forward to a new
  selection of products. They will find our
  brochures, delivered by you

  or your carriers, in a handy plastic container,
  hung on their front doorknob or handle. The
  residents in your area will be able to order
  these beautiful products right from the
  convenience of their own home, instead of the
  inconvenience of having to fight traffic, crowds,
  and the impersonal treatment they receive in the
  "Once a month you will supervise carriers who
  will deliver to each dwelling in your territory a
  magnificent selection of products displayed in
  attractive brochures.
  "Your customers will send their orders directly
  to you, and you will forward them to the Company.
  The Company will then ship to you, the products
  ordered, for delivery. At that time you will also
  receive your Earnings Check of 25%.
  "It will take 5 Hours of your time each week, to
  properly administrate and supervise your business

In accordance with the foregoing marketing plan, Cardet offered two types of license agreements to prospective investors, each at a cost of $5,000.00, with 100% financing available.

The Distributor Agreement provides that an exclusive territory will be assigned to the distributor in conjunction with the right to deliver product brochures to a given minimum number of residences in the territory "for a perpetual period" unless terminated by breach or default. It is further provided that Cardet will furnish all necessary training to the distributor, provide all carrier agreements, employment applications, order forms, brochures, business cards, accounting books, etc., promote good will and public relations and pay a 25% commission on the gross sales obtained by the distributor.

The distributor, in turn, must, in addition to paying a $5,000.00 license fee to Cardet, hire and train carriers to make deliveries, "comply with all rules and procedures of Company set forth in any manual of operations, and to obey all instructions and procedures adopted and from time to time amended by the Company", attend training seminars, file reports on company-provided forms, devote such time as is necessary to deliver all of the company brochures and to refrain from making any deliveries outside his area or delivering anything but Cardet products within his area. The distributor may not "compete" with Cardet within his area for a period of five years. There is a vague obligation to work with "civic and business groups to promote the good name of Cardet" and work with company representatives in promoting the business. The agreement states that the relationship of the distributor with Cardet is one of an "independent contractor".

The "Area Manager" Agreement is in all relevant respects similar to the distributor agreement, except that the "Area Manager's" principal responsibility is to recruit distributors, although Cardet agreed to advertise locally ...

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