Villeneuve v. Advanced Business Concepts Corp. , 698 F.2d 1121 ( 1983 )

HATCHETT, Circuit Judge:

Under the unique facts of this case, we hold that an “area purchaser agreement,” i.e., a distributorship, is not an investment contract which constitutes a “security” under the Securities Act of 1933 and the Securities Exchange Act of 1934. We affirm.

BACKGROUND

Advanced Business Concepts Corp. (ABC) offers to the general public, “area purchaser agreements,” i.e., distributorships for the sale of self-watering planters. ABC advertises in local newspapers and utilizes booths at various business opportunity shows. Through the use of advertisements, prospects are invited to call ABC at a toll-free number for further information. Upon being contacted by a prospect, ABC explains its business opportunities and schedules appointments with a regional manager. The regional manager contacts the prospect and explains in detail, according to a standardized script, the business opportunities of ABC.

For an initial investment, ABC provides the purchaser with a supply of self-watering planters, display merchandise, and a display rack. Additionally, ABC acquires a particular display location which, in most cases, is an established store premise, and assigns the display location to the purchaser. The purchaser is expected to periodically check and restock the displays by reordering self-watering planters from ABC. Moreover, the purchaser’s profit is derived from one-half of the proceeds received for the self-watering planters sold by the store; the remaining profits belong to the store. The rights and obligations of the parties are stated in the area purchaser agreement. The agreement provides that the area purchaser is “not [to rely] on any oral or written expressions, promises, or warranties made by anyone to consummate this transaction except those expressly stated herein.” Stated in the area purchaser agreement are the following duties of ABC:

1. Shipment will be scheduled as soon as possible, but in no case later than forty-five (45) days from approval of agreement.

2. To warrant all merchandise and to offer processing of warranty claims in a prompt manner.

3. Company agrees to provide Area Purchaser with necessary business forms and other promotional items at no additional cost, such as T.V., radio and newspaper advertising.

4. To provide from time to time, at no additional cost, information and bulletins regarding the operation and management of his (her) business.

5. To provide protected accounts in the general area assigned to the Area Purchaser.

6. To provide, when available and properly marketable, as determined by the Company, the projected product term NATURE-MATIC, an automatic self-watering liner for the NATURE-MATIC planter.

7. To provide, as per Addendum “B”, one hundred percent (100%) return of initial investment.

8. To provide a unique correspondence training program for the benefit of the newly appointed Area Purchaser.

9. To offer Area Purchaser first right of refusal on all new products.

10. To provide all expense paid 7 day training for Area Purchaser (2 people) with 50 or more accounts, to be held in Dallas, Texas.

The duty of the area purchaser is enumerated as follows:

1. To regularly and properly call on each of his (her) outlets, restock displays and make cash settlement.

2. To maintain a sufficient inventory of Company’s products with each of his (her) retail outlets to assure maximum sales potential for the Company and Area Purchaser.

3. Area Purchaser agrees that any failure by the Company to make shipments under this Agreement, if caused by floods, strikes, fires, shortages of raw materials or conditions beyond the control of the Company shall not constitute either a default or the basis of a suit for damages.

4. To provide Company a monthly Progress Report due no later than the 5th day of each month following acceptance and approval of this Agreement, to determine gross movement of product.

Villeneuve, among others, signed such an agreement. After entering into the purchaser agreement, many of the area purchasers failed to realize the expected profits and returns on their investments.

Individually, and on behalf of the class of purchasers, Villeneuve brought this suit seeking restitution of $622,372.46. The complaint alleges that the purchaser agreement is a security as defined by section 2(1) of the Securities Act of 1933 and section 3(a)(10) of the Securities Exchange Act of 1934. According to Villeneuve, if the purchaser agreement is a security, ABC has violated the provisions of sections 12(1) and 12(2) of . the Securities Act of 1933 by selling unregistered securities, and that relief for the class exists under the securities law. If the purchaser agreement does not constitute a security, Villeneuve’s relief is limited to whatever common law causes of action may be available. The district court granted ABC’s motion for partial summary judgment by finding that the purchaser agreement was not a security as defined by section 2(1) of the Securities Act of 1933, nor a security under section 3(a)(10) of the Securities Exchange Act of 1934.¹

The crucial issue presented by this case is whether the purchaser exercised such control over the profit potential that the agreement fails to satisfy the definition of an investment contract.

Under the Securities Act of 1933, a “security” is defined as:

[A]ny note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warranty or right to subscribe to or purchase, any of the foregoing.

15 U.S.C.A. § 77b(l). A security is similarly defined in section 3(a)(10) of the Securities Exchange Act of 1934 (15 U.S.C.A. 78c(a)(10)). In fact, the Senate Report on the Securities Exchange Act indicates that the definition of a security under the 1934 Act was intended to be “substantially the same as [contained] in the Securities Act of 1933.” S.Rep. No. 792, 73d Cong., 2d Sess. 14 (1934). Included in the definition of a security under both Acts is the term “investment contract.”

In Securities and Exchange Commission v. W.J. Howey & Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), the Supreme Court stated that “an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party .... ” Howey, 328 U.S. at 298-99, 66 S.Ct. at 1102-1103. This test, for purposes of ascertaining whether an investment contract exists, consists of three elements: (1) an investment of money; (2) a common enterprise; and (3) the expectation of profits to be derived solely from the efforts of others. See Securities and Exchange Commission v. Koscot International, Inc., 497 F.2d 473, 477 (5 Cir.1974). Both parties concede that the first element, an investment of money, exists. ABC, however, does not concede the existence of the second and third elements.

COMMON ENTERPRISE

Villeneuve argues that the “common enterprise” element exists under the purchaser agreement. We agree. The common enterprise element is defined as “[o]ne in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties.” Securities and Exchange Commission v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 n. 7 (9th Cir.1973). Similarly, the former Fifth Circuit, in Securities and Exchange Commission v. Koscot International, Inc., 497 F.2d 473, 479 (5th Cir.1974), observed that “the fact that an investor’s return is independent of that of other investors in the scheme is not decisive. Rather, the requisite commonality is evidenced by the fact that the fortunes of all investors are inextricably tied to the efficacy of the [promoter].” After reviewing the record, we conclude that such commonality does exist and is evidenced by the obligation of ABC to provide advertisements, training, products, and to select the areas where products are sold. The failure to provide any of these services would definitely determine the success or failure of the scheme. For these reasons, we find the second element of commonality to exist.

SOLELY FROM THE EFFORTS OF OTHERS

This element has been the subject of much controversy, and this case does not prove to the exception. Villeneuve urges us to expand this element to include those advertising representations made by the promoters in determining whether this requirement has been met. The 1933 and 1934 Acts are remedial in nature. Koscot International, 497 F.2d at 479. They should be broadly construed. Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). With these principles in mind, we refuse to further broaden this element of the test to include advertising representations made by the promoters.

Howey provides that the third element is satisfied if the profits are “solely from the efforts of the promoter or third party.” Howey, 328 U.S. at 299, 66 S.Ct. at 1103. The former Fifth Circuit in Piambino v. Bailey, 610 F.2d 1306, 1317 (5th Cir.1980), observed that the Supreme Court in United Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975), “reaffirmed the test first enunciated in Howey, which had been on the books for thirty years.” Although the Supreme Court in Forman acknowledged the existence of a broader test enunciated in Securities and Exchange v. Glenn W. Turner Enterprises, Inc., the Court did not rule expressly on the validity of that test.² Forman, 421 U.S. at 852 n. 16, 95 S.Ct. at 2060 n. 16. We adhere to the standard articulated in Howey, reaffirmed in Forman, and adopted by the former Fifth Circuit in Piambino.³ In For-ma n, the Court emphasized that, “[i]n searching for the meaning and scope of the word ‘security’ in the Act[s], form should be disregarded for substance and the emphasis should be on economic reality.” 421 U.S. at 848, 95 S.Ct. at 2058.

In reviewing a summary judgment, we must do so in the light most favorable to the opposing party (Villeneuve). Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 468, 82 S.Ct. 486, 488, 7 L.Ed.2d 458 (1962); Cubbage v. Averett, 626 F.2d 1307, 1308 (5th Cir.1980). The facts reveal that Villeneuve was required to check and restock the displays, make cash settlements, maintain a sufficient inventory, and provide ABC with monthly progress reports. These actions do not appear to us to fit within the “solely” standard articulated in Howey as amplified in Forman and Piambino mentioned above. Villeneuve possesses such extensive control over the profit potential that it cannot be said that profits are solely through the efforts of ABC, the promoter. “Solely” obviously was intended to mean that the purchasers must depend upon the efforts of others in realizing the potential profits of the investment. Villeneuve and others were not solely dependent upon ABC’s efforts to maximize their profits; rather, they too had to make substantial efforts toward the profit. We find that because of these substantial efforts, total control of the profit potential did not rest with ABC.

CONCLUSION

We therefore conclude that the purchaser agreement was not an investment contract, and the district court was correct in granting summary judgment.

AFFIRMED.

1 . Although partial summary judgment was granted, since Villeneuve’s pendent claims had been previously dismissed, the trial court properly entered final judgment. Thus, jurisdiction exists.

2 . Under the Turner test, an investment contract existed if there was (1) an investment of money (2) in a common enterprise (3) with profits to come from the essential managerial efforts of others.

Since the trial court found against Villeneuve using the essential managerial efforts tests, it is obvious that the trial court would rule the same way using the “solely” test which we again re-affirm.

3 . Although we rely upon authority from the United States Supreme Court and Piambino v. Bailey from the Fifth Circuit, a split of authority exists in the circuit. Accord, Williamson v. Tucker, 645 F.2d 404 (5th Cir.), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981). Westchester Corp. v. Peat Marwick Mitchell & Co., 626 F.2d 1212 (5th Cir.1980); Cameron v. Outdoor Resorts of America, Inc., 608 F.2d 187 (5th Cir.1979). Harmonizing these holdings is a job for the en banc court.