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03/29/88 the People Ex Rel. Neil F. v. Unimax

March 29, 1988

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

v.

UNIMAX, INC., ET AL., DEFENDANTS-APPELLEES



APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, SECOND DIVISION

523 N.E.2d 26, 168 Ill. App. 3d 718, 119 Ill. Dec. 558 1988.IL.442

Appeal from the Circuit Court of Cook County; the Hon. Anthony Scotillo, Judge, presiding.

APPELLATE Judges:

PRESIDING JUSTICE HARTMAN delivered the opinion of the court. STAMOS and BILANDIC, JJ., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE HARTMAN

Plaintiff appeals from entry of summary judgment (Ill. Rev. Stat. 1985, ch. 110, par. 2-1005) in favor of defendants. Defendant Unimax, Inc. (Unimax), is an Illinois corporation with its principal place of business in Schaumburg, Illinois. Co-defendant Tim Dern (Dern) is president and a cofounder of Unimax. It is comprised of two separate spheres of activity: Unimax Buyers' Service (Buyers' Service) and Unimax Matrix (Matrix), a multilevel marketing plan.

In approximately April 1986, Unimax instituted the Buyers' Service, which enables consumers to purchase products and services at a discount from 13 suppliers which have vendor agreements with Unimax. To participate in the Buyers' Service, a consumer must complete a subscriber application, submit it with an initial payment of $36 and pay thereafter a $36 monthly fee and a $14 annual literature fee. Subscribers are not obligated to buy any merchandise or services and may withdraw from the Buyers' Service at any time and receive a refund of any unused, prepaid fees.

Matrix is designed to sell memberships in the Buyers' Service. One becomes a Matrix "marketer" by signing an "Independent Marketer's Agreement," receiving Unimax training and viewing training tapes, or reading company-approved training materials. A marketer need not purchase any merchandise in order to earn commissions, but earns commissions on the $36 monthly subscription fees paid by new subscribers he sponsors. He must recruit at least three new subscribers and they, as well as the marketer, must be "active," or up to date on their fee payments. A marketer's monthly commission check increases according to a commission schedule on nine levels: the greater the number of subscribers in a marketer's "down-line" organization, the higher the commission the marketer will receive on monthly fee payments made by "his" subscribers. For example, at level 1, which involves only three subscribers in his down-line organization, the marketer earns only 1% of the $36 monthly fee paid by each of the subscribers or $1.08. At level 9, however, the marketer earns 6% of the $36 fee paid by each of the 19,683 down-line subscribers in his down-line organization, entitling him to earn $42,515.28 per month. The marketer is paid an additional 5% bonus in the ninth level, which could raise the amount payable to $77,944.68 per month.

There is no explicit requirement that an individual must be a subscriber in order to be a marketer or vice versa, although all 10,874 subscribers to the Buyers' Service have also signed marketer agreements, and no one currently participates solely as a marketer in the Unimax scheme. Approximately 10% of the signatories to marketer agreements are "active." Furthermore, a subscriber need not pay an additional fee to become a marketer, but anyone wishing to join Unimax as a marketer alone must pay a $52 "set-up charge."

The State's two-count complaint against Unimax and Dern, individually and as president of Unimax, alleged in count I, that Matrix, as part of the Unimax "plan," constituted a "pyramid sales scheme," in contravention of section 2A(2) of the Consumer Fraud and Deceptive Business Practices Act (the Act) (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 262A(2)). In count II, the State alleged that Matrix also violated section 2A(1) of the Act as a "chain referral sales technique." (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 262A(1).) Appointment of a receiver was sought and the court was asked that defendants be enjoined from selling the right to participate in the plan; provide an accounting; be forced to disgorge all profits obtained in connection with the plan; and be required to pay a $50,000 penalty for violating the Act. See Ill. Rev. Stat. 1985, ch. 121 1/2, par. 267.

In their answer, defendants denied these allegations and raised "affirmative defenses" that the State failed to state a cause of action upon which relief could be granted and the method by which Unimax conducts its business does not constitute a pyramid sales scheme or a chain referral sales technique as those terms are defined by the Act.

Defendants also filed, on March 31, 1987, a motion for summary judgment supported by affidavits, asserting that a "pyramid sales scheme" involves the sale of the right to sell new memberships in the pyramid, "so that investors must make their return not through the sale of products or services, but by encouraging others to invest" in the scheme. Unimax commissions, however, are based solely on the sale of subscriptions and are a percentage of the subscription fee and, unlike a traditional pyramid scheme, Unimax does not require its subscribers to retain inventories of merchandise for purposes of resale to consumers. Defendants further argued that Unimax is not a "chain referral sales technique." Ill. Rev. Stat. 1985, ch. 121 1/2, par. 262A(1).

The State filed a brief in opposition to defendants' motion for summary judgment on May 1, 1987, and moved the circuit court to strike: (1) all of a Unimax attorney's affidavit; and (2) portions of Unimax' president's affidavit, as well as the motion for summary judgment, as immaterial, conclusory and inadmissible for lack of foundation and as hearsay. Defendants filed a response thereto, accompanied by additional affidavits.

On May 7, 1987, the circuit court granted defendants' motion for summary judgment, finding that "the benefit . . . received by a person in the Unimax multi-level marketing plan is the membership in the Unimax [Buyers]' [Service], not the commission received on the sale of buyers club memberships by a person to subscribers," and "this benefit is not primarily based on the inducement of additional subscribers." The court further ordered any opinions of law contained in defendants' affidavits stricken. ...


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