Honorable Henry Wade          Opinion No. C-619
District Attorney
RecordsBuildIng               Be:   Whether a referral
I)B1186,Texas                       selling plan
                                    constitutes 8
Dear Sir:                           lottery.
     By your recent letter you request an opinion of this
office 8s to uhether 8 certrin referrsl selling plan
constitutes a lottery. The contract in question is cdlled
a "representative purchasing commission agreement" and the
facts and clrcumstsnces by which it is utilized are briefly
summ8rized from v8rious instruments, documents 8nd memoranda
furnished by your office. Its purpose is to promote s8les
through the seller's customers by promising them something
for nothing, as hereinaiter related. In substance, it Is
simpl)~a ch83.nreferral selling scheme by which a built-in
vaauum cle8ning system is sold to 8 purch8ser, cdlled the
sellerls "Bepresent8tlve," for a rtipulatod money considera-
tion md upon the further ccmslderatlon md Inducement that
the purchseer would make money and, in effect, acquire the
system for nothing through the use of a long term conditional
eelas contract.
     As part of the transaction, the representatives pur-
chasing commlsslon agreement is executed. By this, the
purchaser would furnish the selling comp8ny a list of
qualified prospective purchasers. For each s8le to 8ny
one so referred, the purch8ser would receive a commission
of $50. A further pyr8mldlng of $50 commission is evidenced
In paragraph four of the agreement, supra, whereby the selling
company sgrees not only to pay the initial purchaser represen-
tative $50 for each name submitted by him who becomes a pur-
chaser representative, but also to pay the initidl purchaser
representative 8n additional $50 for each name subsequently
submitted by the purchasers "at the time they too become 8n
equipment owning Representative Purchaser."
Hon. Henry Wade, page 2 (C-619)


     Such schemes operating on the referral plan appear
to be designed to lead gullible prospective purchasera to
believe that they can obtain the product sold without cost,
or for nominal cost, by receiving payments from the pro-
moters a6 commissions on Items Bold to referred customers
and customers of such referral customer8 8d infinitum.
     It further appears from the mode of operation of this
SCheIne?$8t the Selling COmpSny'S agent Bak?Sman, in con-
tacting purchasers, re$reeente that he could thereby 'make
some extra money" 8nd there will be no money out of your
pocket," Since under the plsn the purchaser was absolutely,
under all contingencies, obligsted to purchase the vacuum
clesner system, the purchaser is thus lead to believe that
the commissions to be earned by him in referring prospective
purchasers would be 8t least sufficient to cover his pur-
ch8se price.
     Under the contr(Lct,the purchasers h8ve no control
over the general operation 8fter they submit the names of
prospective referrals.   Their mere 8Ct of Supple    names
of home owners ls~.theonly initiative,~foresight or skill
contributed, 8nd the acts of subsequent purchasers In
submitting n8mes require no skill wh8tever 8nd is Bubject to
no control whstever by the initial purchpsers. The skill of
the selling comp8ny1s agent who 8&U-      pushes the sales is
not relev8nt under the 8uthor5.tleshereinriter cited. The
element of chance from 8 satursted m8rket through.the prinr
ciple of geometricsl progression appesrs to be inherent in
the plan. It is further made to appear that one of the
aggrieved purchasers performing the contractual agreement,
8nd vhoee name had been furnished to a e8lesman agent by a
previous purchaser, nevertheless received nothlng while
binding himself to pay $1,086.48 over 8 three year period
md complalne that   the scheme conetltuted 8 lottery.
     We 8re 8dvLsed that the Federsl Post Office Department
regsrds such 8 plan 8s 8n andless chain scheme, the Oper8tion
of which conflicts with the Portal Lottery 8nd Frsud Laws,
18 U,S.C. 1302, 1341, and all matters relstlng thereto being
non-mailable under those 18WS.
     The written agreement entered into and signed by both




                          -3m1-
Ron. Henry Wade, page 3 (C-619)


parties as a part of the transaction in selling the vacuum
cleaning system, which later iB attached to the purchaser's
home and upon which he also executes a mortgage for security,
a prerequisite to becoming a "qualified prospect," reads:
          1.   Company hereby retains the services of
               re resentative for a period of thirty-six
               (36  consecutive months from the date here-
               of in the capacity of equipment owning
               Representative upon the terms and conditions
               hereinafter set forth.
          2.   Representative shall submit to company
               the names of individuals considered by
               RepreSSSIt8tiVeto be qurlifled pros ec-
               tive pUrCh8SerB of (Mme of productP in
               active sales areas covered by Company.
               Each name so submitted shall be d8te
               stamped by Company when received.

          3.   Company shall p8y Representative as esrned
               commission the sum of Fifty Dollars for
               each individual, whose name is submitted
               by Representative, who thereafter becomes
               8 qualified equipment owning Representa-
               tive‘for (name of company).
          4.   (Name of company) shall pay Representative
               as earned commission the sum of $50*00 for
               each name subsequently submitted by the
               individuals referred to.in paragraph 3 at the
               the time they too become an equipment
               Owning RepreSent8tiVe PUrChaSer. Represen-
               tative Purchaser agrees to render assia-
               tance, time,skill and effort to Company by
               contacting the qudlified purchaser herein
               referred to.

          5.   A quali.fiedprospect is as follows:
               a.   Prospect must own or be buying the
                    home in which equipment will be
                    installed. No Renters or Lessors,
Hon. Henry Wade, page 4    (c-619)



               b.   Prospect must be acceptable
                    to (name of company).
          6.   In the event two Representatives submit
               the same prospective new purch8Ber's name,
               the Representative directly responsible
               for the appointment on which the enrollment
               iB made shall be entitled to the benefits,
               provided the prospective purchaser is
               accepted.
          7.   This Agreement shall become effective
               upon completion of the following conditions:
               a.   Signed by 8n authorized agent of
                    (name of company) and enrolled
                    purchaser;
                    Acceptable to home office of
               b-   (name of comp8ny).
         8.    The commission payments herein provided
               shall be the sole and only compensation
               due Representative Purchaser from .name
                                                 6er-
               of company) and it Is expressly tin
               stood that in accepting this contract
               Representative is acting as an indepen-
               dent contractor and shall pay 811 local,
               city, county, state and federal~taxes
               on any commission received by him and
               shall hold (name of company) harmless
               ,fOrany of these taxes.

         9.    Thls agreement shall be valid for three
               years from date hereof, but may be term&
               n8ted by reason Of fire, flood, strikes,
               lockouts, acts of God, war, rules and
               regulations by the Federal, State or
               local governments, repossesBion, con-
               version or other circumetencee beyond
               the control of (name of company).
        10.    It is Curther understood and agreed




                           -3003-
Bon. mm-y   Wade, page 5   (c-619)


               that payment of compenartlon hereunder
               shall not in any way affect the obliga-
               tion of the Representatives 8s Bet forth
               by the terms and condition8 of the con-
               tract for the purchase of equipment.
         ll.   That this agreement expresses   the
               complete understanding of the   parties here-
               to. 130authority is given to    any person to
               alter, amend or chenge 8ny of   provisions
               hereof,
     In Texas, the term "lottery" i8 said t0 have no technical
SignifiC8tiOn in the law, and since the prohibitory statute
(Art. 654, Vernon's Penal Code) fails to provide a definition,
its meaning must be determined from popular usage and the
common law, with due conSider8tion to the public policy under-
lying the 8uthOrities. 37 Tex.Jur.2d 493, Lotteries, Sec. 1.
     It is now settled in Texes that a lottery is composed
of three elements:
            (1) A prize or prizes
            (2) The award or dlstrlbution of the
                prize or prizes by chance; and
            (3) The payment either directly or
                indirectly by the participants
                of a consideration for the right
                or privilege of participating.
City of Wink v~.Griffith Amusement Company, 100 S.W.2d 695
                Brlce v: State, 136 T ex.Crim. 372, 242 S.W.2d
                  ate v. socony Mobil oil company, 386 S.W..2d
     Tex..Civ.App.19b4, error ref., n.r,e.).
     fa the fscts presented, it affirmatively ~appears that the
money to be received by the Representative as "an earned com-
mission" would constitute the prize, or the first element.
The third element, the payment of consideration by the parti-
cipants for the right to partlcipete, also clearly appears
8s a part of the referral Selling pkin agreement. The consi-
deration for the opportunity to receive the "prize" would be,
in part, the purchase price for the vacuum cleaning system.
The second element, the distribution Bf'the prize by chance,




                           -3004-
.




    Ron. Henry Wade, page 6    (C-619)


    requires a closer analysis in the light of the decisions as
    to wheiher the dominating element of the entire scheme was
    that of chance, or that f kill judgment, or ingenuity,
    54 C.J.S. 846, Lotteries: Sic. 2;(2), and caeee.cited. If
    the plan or game depend8 entirely on skill, it Is not a
    lottery although prizes are offered for the best solution.
    Boatright v. State, 118 Tex.Ctim. 381, 38 s.w,2d87 (1931).
    If Ch8IICeDredOmln8teS over Skill or .iUdnmed and uermeates
    the whole plan, a lottery is established: Sherwood & Roberts-
    Yakima, Inc. v. Clyde 0. Leach, 67 W.D.2d 61U, 409 P.29.lb0,
    -(Wash.Sup.lgb5) .
         Under the authorities, the courts must look to the
    substance of the referral selling plan or scheme rather than
    to its form. In Wew v. Triband Sales Corporation, 19 F.2d
    671, the court, cognizant of the necessity to view substance
    rather than form, quoted the rule from an earlier decision
    with 8pprOVti 88 fOllOW8:
             "As w8s observed by the Supreme Court of
         Worth Carolina in State v. Llpkin, 169 R.C. 265,
         84 S.E. 340, L.R.A. 1915 F. 1018, Ann.C8S. 1917D,
         137, 'no sooner is 8 lottery defined, and the
         deftnltion applied t0 8 given State Of f8Ct8, than
         ingemdty i8 8t work t0 eVOlVe some scheme Of
         evasion which i8 wlthln the mischief, but not quite
         within the letter, of the definition . . . The-Court
         will mire,    not into the name, but into the game,
         however skillfully disguised, in order to ascertain
         If it is prohibited,    if it h8e the element of
         chance. . .I" (Rnpha%s added)
         The Court IZIthe Wew case, infra, then proceeded to
    hold that where one de=ded   upon the acts of others over
    whom the participant had no control, the necessary element
    of chance In the elusive referrel selling plan was supplied.
           ain, in Stat.   ex rel. Rvans v. Brotherhood) 41 Wn.2d
         A&
    133, 2 7 P.2d -2),
    stance of the plan:
                                the court looked Into the sub-

             "The scheme or plan Involved, rather than
         any mechanical devise employed, constitutes the
         gist of the question, and determines whether a
         particular operation constitutes 8 lottery."
.   .




        Ron. Henry Wade, page P   (C-619)


             The referral selling plan here presented iB substantially
        similar in all material reepects to the one passed upon by the
        Supreme Court of the St8te of UaBhi ton In Sherwood & Roberts-
                                           3 , 4OgFGW
        Yakima, Inc., v, Leach, 67 W.D.2d 61            lb0  (1963)
         hi h h ld'that'the plan constituted a lottery: Thi Court '
        Ldcno kfficulty finding the three essential elementa of a
        lottery present, and made 8 skillful analysis of the element
        of chance Inherently involved in the transaction, and which
        necessarily predominated over skill or judgment. We quote
        im part from pages 622-624 of the unanimous decision by the
        Supreme Court:
                "$ere, a8 part of 8 general operation
            raspondents may obtain commissions (prizeI and
            they here agreed to pay the   rch8se price of
            the equipment (COnSider8tiOnr in an effort to
            get that priz*. The next question 5.8whether
            that effort is based on chance.
                  '9.nstate v. Lipkin, 169 W.C. 265, 271, 84 S.E.
             90   (1915) it WM Said:
                     'The Court will inquire, not Into
                  the neme, but into the game, however
                  SkillfUllydiSgUiSed, in order to ascertain
                  If it is prohibited, or if it has the
                  element of chance. It is the one playing
                  at the game who Is influenced by the hope
                  enticingly held out, which is often false
                  or di88ppOinting, that he will, perhaps
                  and by good luck, get something for nothing,
                  or 8 great,deti for 8 very little outlay.
                  This is the lure that draws the credulous
                  and UnSuSpecting intO the deceptive Scheme,
                  8nd it is uh8t the law denounce8 as wrong
                  8nd deaorrlltlag. ’

                "(4) Chance rithin the lottery St8tUte
            is one which darinrte8 over skill or judgment.
            The me88ure is 8 qualitative one; that 18, the
            chance must be an integral psrt which influence8
            the result. The measure is not the quantitstive
            proportion of skill and chance in viewing the
            schemeas 8whoti.    State (IXI.&. NcKlttrlck v.




                                   -3006-
Hon. Henry Wede, page 8   (C-619)


    .Globe-DemocratPublishing Co., 341 Ho. 862,
    110 S.W..w 705, 113~A.L.R. 1104 (1937).
        "(5) Appellant argues that skill or
    $uyent    is factually the dominant factor,
     - -9 the  factors determining i;tti?her
                                           a
    commission will be paid are the.'judgment of
    respondente used in selecting name6 they
    refer and the skill of the Lifetone s8le8msn.
    Rut we 8re only concerned with the skill or
    judgment of respondents; the skill of the
    Llfetone salesman is Irrelevant. Assuming
    that respondents in fact used skill or judg-
    ment in selecting the referrals, the trial
    court properly held that chance permeates the
    entire scheme. The court found that respondents
    took 8 chance th8t the referrals might not be
    Interested; thst the salesman night not sdequately
    make his presentation; that the referral might
    have already been referred by someone else; that
    the market might be 88tUr8ted; 8nd that the sales-
    man might not even contrct the referral. In
    sddltion, the trial court noted th8t respondents
    h8Ve no control over the general Oper8tion after
    they gave the names of referrals. . . . Appellant
    argue6 that the w8nt of control is not 8 legitimate
    fsctor to consider. This argument is tenuous.
        "The lack of control feature in referral
    sellfng is much brocrderth8n thst designsted by
    the trial court. It is Inherent In referral
    selling that pUrCh88erS such 88 respondents be
    without control. Sooner or later, the market,'
    unknowingly to the purchasers, till become
    erturated. This principle is the same 8s in the
    chain letter scheme. The case St hand is 8
    classic exrmple.
         "The Lifetone sslesman told reBpOnde&S
     that they could get something for nothing
     through the referral selling scheme. Respondents
                   to pay $1,187.28 for equipment
                       For ease of demonstretion,




                          -3007-
Eon. Henry Wade, page 9 (C-619)


     reSpOndent8 lUU8te8Z.n12 COnneiSSiOXlB Of $100
     each In order to get, as promised, something
     for nothing. This mean8 that 12 of reSpondent6'
     referrals InUStpurchase 88 respondents did; they,
     In turn, to get something for nothing, must find
     12 more people to purchase, and so forth, as
     fOllOw8:
                               Wumber of Purchasers
                                          1
          1st round
          2nd round                     1::
           rd round                   1,728
          3thround                   20 36
          5th round                    4 32
                                    248,
          "Soon the scheme will   ZTUI Itself OUti the
     market will become SatUr8ted. Here, Llfetone
     made Its first 88le in %y, 1963, and its last
     sale In October, 1963. The respondents entered
     the picture    in September. They gave the Lifetone
     88bSSlS8ll 8pprOXimete~   60 Xl8A#S8t that time,
     and the never received 8 commission. In fact,
     only $1k ,900 in commissions were paid in the
     Y8klnm 8re8, while the total number of sales
     was 137 totalling $129,*7.04 ~(wlthoutfinance
     chargesL
         "ReSpOndentS took 8 chance on whether they
     could get SOmething for nothing. This ch8nce
     permestes the entire scheme of referral selling.
     This court holds that the referral selling scheme
     Is a lottery."
     The Attorney General of Ma8sachUsett8,   in 8 1964 opinion
held that such 8 referral ee~ing  plan   as here Involved
constitutes~a lottery and contains the three eeeential ele-
ments above discussed. This opimion review8 the decisions
ln the light of public policy and hold that those who place
an order for an article in the hope of getting future com-
missions to orrset the purchase price, p8y 8 COnSider8tiOn
for 8 prize, the winning of which is bseed upon ch4nce.




                           -3008-
Bon. Henry Wade, page 10    (O-619)


The opinion holds:
        "Whoever sets up or promotes a plan by
    which goods or anything of value Is sold to
    a person for a consideration and upon the
    further izonslderatlonthat the purchaser
    agrees to secure one or more persons to
    participate In the plan by respectively
    making a similar purchase or purchase8
    and In turn agreeing to 8ecure one or more
    pereons likewise to join In the said plan,
    each purchaser being given the right to
    secure money, credits, goods or something
    of value, depandlng upon the number of
    persons joining the plan, shall be held
    to have set up and pr0moted.a lottery. . . ."
     We therefore hold that the referral selling plan in
question constitutes a lottery in Texas within the meaning
of the common law, popular usage and Article 654, Vernon's
Penal Code. Iloreal skill is contributed by the "Bepre-
sentatlve," but the element of chsnce predomL+ates and
permeates the plan as an Inherent component thereof.
                     SUMMARY
                     -------
          A cha&n referral selling plan, containing
     the elements of a prize, the award thereof by
     the element.of chance, predominates over skill
     and being inherent fromlbck of control by the
     participants taking the chance, and the giving
     of conelderatlon for the opporttiity to win a
     prize, constitutes a lottery In Texas within
     the meaning of the common law, popular usage,
     and Article 654, Vernon's Penal Code.
                            Yours very tuly,
                            WAwoHsm    CAEB
                            Attorney   General



                            By:4kd+&-
                               AsLeslstak


                           -3009-
Hon. Henry Wade, page 11    (C-619)



APPROVED:
OPINION COMMITTEE
W. V. Geppert, Chairamn
George Gray
Vlnce Taylor
Gordon Cars
H, Grady Chandler
APPROVED FOR THE ATTORNBY   Gmm
BY; Z..B. Wright




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