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Peo. Ex Rel. Hartigan v. Dynasty Sys. Corp.

OPINION FILED NOVEMBER 15, 1984.

THE PEOPLE EX REL. NEIL F. HARTIGAN, ATTORNEY GENERAL, PLAINTIFF-APPELLEE,

v.

THE DYNASTY SYSTEM CORPORATION ET AL., DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Adams County; the Hon. Robert W. Cook, Judge, presiding.

PRESIDING JUSTICE MILLS DELIVERED THE OPINION OF THE COURT:

Rehearing denied December 12, 1984.

Pyramid sales scheme.

TRO and preliminary injunction issued.

Interlocutory appeal.

We affirm.

The Dynasty System Corporation (TDSC), R. Keith Julian, Pat Julian, and Rachel McClelland — defendants here — bring this interlocutory appeal from denial of their motion to vacate a temporary restraining order and to vacate a preliminary injunction enjoining them from marketing TDSC's products and services.

We affirm.

I. FACTS

The record discloses that TDSC is a Texas corporation, R. Keith Julian and Pat Julian are the founders and sole shareholders of TDSC, and Rachel McClelland is a TDSC distributor who resides in Quincy, Illinois.

TDSC is a multilevel sales corporation which markets its products and services throughout the United States. Its sales program is designed both to sell its products and services and to recruit new distributors. A TDSC distributor may purchase the products and services for personal consumption or for resale to third parties. A distributor earns commissions on products and services purchased by other TDSC distributors he recruits into the "Dynasty System" and by those his recruits in turn recruit.

Each distributor is thus encouraged to develop a "down-line" organization by sponsoring other distributors into the System. Ideally, each distributor would recruit four individuals into the System, and each of them would recruit four additional persons, until the original distributor has a down-line organization consisting of seven levels and comprising 16,384 persons. A distributor only receives commissions on purchases of products and services by those distributors within his down-line organization.

TDSC's marketing operation consists of five programs. Under the first program, a person becomes a "Dynasty distributor" and may sponsor other distributors. Under a second program — Dynasty System I — "free enterprise" — a person becomes a distributor in other multilevel sales companies recommended by TDSC. One of the two companies presently recommended by TDSC is a company wholly owned and operated by the Julians. These companies also pay commissions on products purchased by persons in the distributor's down-line organization.

A third program — Dynasty System II "The Master Achiever's Club" — offers a personal development course consisting of a series of 12 motivational tapes. The cost of this program is $70 per year. The fourth program — "Executive Management Information Service" — offers a monthly computer report of the recruitments and purchases of distributors in a participant's down-line organization. The fee for this service is $80 per month.

Upon sponsoring one additional participant, a distributor gains entry into the fifth program — Dynasty III, "The Millionaire's Circle." This entitles the entrant to enlist the aid of a computer service in filling their down-line organization with the System's extra recruits.

On April 24, 1984, the Attorney General of Illinois filed a multicount complaint against the defendants alleging that TDSC's multilevel sales program constituted common law fraud, an illegal lottery, a pyramid sales scheme, and a chain referral sales technique. The Attorney General requested a temporary restraining order (TRO), a preliminary injunction, a permanent injunction and civil penalties.

After an ex parte hearing at which the court heard the testimony of the Attorney General's witness, the trial court issued a TRO enjoining the defendants from "advertising for sale, offering for sale, or selling multi-level goods and services, by or through the Defendant `The Dynasty System Corporation.'" The TRO was to be effective for nine days, and the court set a hearing on the Attorney General's motion for a preliminary injunction on the day the TRO was to expire. On May 2, 1984, the defendants filed a motion to vacate the TRO.

An evidentiary hearing regarding the defendants' motion to vacate the TRO and the Attorney General's motion for a preliminary injunction was held on May 2, 1984. The evidence offered by the Attorney General indicated that the various programs offered by TDSC were marketed as an entire system. Each witness who testified had participated in all of the programs and had made an initial investment of $256. Several of the products ordered and paid for by the distributors had never been received. Testimony also indicated that some of the products were of inferior quality and that others were not competitively priced.

The primary emphasis in the Dynasty System was placed upon recruiting other participants into the System in order to build a down-line organization, and little emphasis was placed upon retail sales of the products and services. None of the distributors testifying for the Attorney General had recruited an additional participant, ...


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