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:
"Once a month you will supervise carriers who
will deliver to each dwelling in your territory a
magnificent selection of products displayed in
"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
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
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 ...