Holiday Magic, Inc. v. Warren

357 F. Supp. 20
CourtDistrict Court, E.D. Wisconsin
DecidedApril 3, 1973
DocketCiv. A. No. 71-C-659
StatusPublished
Cited by4 cases

This text of 357 F. Supp. 20 (Holiday Magic, Inc. v. Warren) is published on Counsel Stack Legal Research, covering District Court, E.D. Wisconsin primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Holiday Magic, Inc. v. Warren, 357 F. Supp. 20 (E.D. Wis. 1973).

Opinion

357 F.Supp. 20 (1973)

HOLIDAY MAGIC, INC., et al., Plaintiffs,
v.
Robert W. WARREN et al., Defendants.

Civ. A. No. 71-C-659.

United States District Court, E. D. Wisconsin.

April 3, 1973.

*21 *22 David L. Walther, Milwaukee, Wis., for plaintiffs.

Bruce A. Craig, Asst. Atty. Gen., Madison, Wis., for defendants Robert W. Warren and Donald E. Wilkinson.

Joseph E. Tesch, Asst. Dist. Atty., Milwaukee, Wis., for defendant E. Michael McCann.

OPINION AND ORDER

REYNOLDS, District Judge.

The question in this litigation is whether Wisconsin may prohibit the promotion of a chain distributor or "pyramid" scheme without running afoul of certain provisions of the federal Constitution. Jurisdiction arises under 28 U.S.C. §§ 1331 and 1343(3). The *23 plaintiff corporations are charged with employing such a scheme. Together with an individual plaintiff they have moved for the convening of a three-judge court to declare unconstitutional Ag 122, a general order of the Wisconsin Department of Agriculture, and to enjoin its further enforcement. Defendant state officials have opposed that request and have moved to dismiss. The motions for the convening of a three-judge court and to dismiss were briefed and argued together. I have concluded that the federal constitutional claims are insubstantial. This conclusion prohibits me from requesting the convening of a three-judge court and requires me to dismiss the complaint for want of jurisdiction. Ex parte Poresky, 290 U.S. 30, 54 S.Ct. 3, 78 L.Ed. 152 (1933).

The alleged constitutional defects in Ag 122 are that it violates freedom of speech, that it fails to give adequate notice of the conduct prohibited, that it constitutes an undue burden on interstate commerce, that it intrudes into an area pre-empted by the federal government, that it violates plaintiffs' right to work, that it impairs the obligation of contracts, that it bears no rational relation to a valid state purpose, and that it results in discriminatory enforcement. The general order provides:

"Ag 122.01 Unfair trade practice. The promotional use of a chain distributor scheme in connection with the solicitation of business investments from members of the public is an unfair trade practice under section 100.20, Wis.Stats. When so used the scheme serves as a lure to improvident and uneconomical investment. Many small investors lack commercial expertise and anticipate unrealistic profits through use of the chance to further perpetuate a chain of distributors, without regard to actual market conditions affecting further distribution and sale of the property purchased by them or its market acceptance by final users or consumers. Substantial economic losses to participating distributors have occurred and will inevitably occur by reason of their reliance on perpetuation of the chain distributor scheme as a source of profit.
"Ag 122.02 Definitions. (1) `Chain distributor scheme' is a sales device whereby a person, upon a condition that he make an investment, is granted a license or right to recruit for profit one or more additional persons who also are granted such license or right upon condition of making an investment and may further perpetuate the chain of persons who are granted such license or right upon such condition. A limitation as to the number of persons who may participate, or the presence of additional conditions affecting eligibility for the above license or right to recruit or the receipt of profits therefrom, does not change the identity of the scheme as a chain distributor scheme.
"(2) `Investment' is any acquisition, for a consideration other than personal services, of personal property, tangible or intangible, for profit or business purposes, and includes, without limitation, franchises, business opportunities and services. It does not include real estate, securities registered under chapter 551, Wis. Stats., or sales demonstration equipment and materials furnished at cost for use in making sales and not for resale.
"(3) `Person' includes partnerships, corporations and associations.
"Ag 122.03 Prohibition. No person shall promote, offer or grant participation in a chain distributor scheme.
"Ag 122.04 Statutory exemption. This chapter does not apply to banks, savings and loan associations, insurance companies and public utilities to the extent exempted from department regulations under section 93.01(13), Wis.Stats."

The general order was issued pursuant to authority vested in the Department of *24 Agriculture by § 100.20 of the Wisconsin Statutes which provides in part:

"Methods of competition and trade practices. (1) Methods of competition in business and trade practices in business shall be fair. Unfair methods of competition in business and unfair trade practices in business are hereby prohibited.
"(2) The department, after public hearing, may issue general orders forbidding methods of competition in business or trade practices in business which are determined by the department to be unfair. * * *
* * * * * *
"(6) The department may commence an action in circuit court in the name of the state to restrain by temporary or permanent injunction the violation of any order issued under this section. * * *"

Violating an order issued under § 100.20 subjects a person to a fine of not less than $25 nor more than $5,000 and to imprisonment of not more than one year. Wis.Stats. § 100.26(3). Violating an injunction issued pursuant to § 100.20(6) subjects a person to a civil forfeiture of not less than $100 nor more than $10,000. Wis.Stats. § 100.26(6).

THE FIRST AMENDMENT

The alleged First Amendment violation lies in prohibiting the mere "promotion" of a chain distributor scheme. Promotion alone, plaintiffs argue, may involve only speech. Consequently, the argument goes, the state may not restrict it without showing that it urges imminent lawless action of an extremely serious nature. Brandenburg v. Ohio, 395 U.S. 444, 89 S.Ct. 1827, 23 L.Ed.2d 430 (1969); Bridges v. California, 314 U.S. 252, 62 S.Ct. 190, 86 L.Ed. 192 (1941).

Past opinions of the United States Supreme Court make the decision of the First Amendment claim as easy to reach as it is difficult to justify. In an unbroken line of decisions the Supreme Court, and lower courts as well, have distinguished between the expression protected by the First Amendment and the use of speech, whether truthful or not, in a commercial context like that presented here. Valentine v. Chrestensen, 316 U.S. 52, 62 S.Ct. 920, 86 L.Ed. 1262 (1942). Compare Breard v. Alexandria, 341 U.S. 622, 71 S.Ct. 920, 95 L. Ed. 1233 (1951), with Martin v. Struthers, 319 U.S. 141, 63 S.Ct. 862, 87 L.Ed. 1313 (1943). See New York State Broadcasters Ass'n v. United States, 414 F.2d 990 (2d Cir. 1969), cert. denied, 396 U.S. 1061, 90 S.Ct.

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Bluebook (online)
357 F. Supp. 20, Counsel Stack Legal Research, https://law.counselstack.com/opinion/holiday-magic-inc-v-warren-wied-1973.