The opinion
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
I