Leasing Corp. Once the plaintiff licensees forwarded a lease application to Adam, their duties with respect to that lease were essentially completed and if the lease were approved, they received the specified fee from Adam. The promotional material which Adam provided prospective licensees, such as the plaintiffs, describes the licensees as "commissioned salesmen". From a review of the documents it appears that such a characterization reflects the position of the plaintiff licensees except that they also were to be the operator and manager of the regional leasing facilities not just employees.
As consideration for the license granted by Adam, plaintiffs paid $1. In addition, plaintiffs paid a specified sum for training, management and consulting.
Plaintiffs' primary argument is that the license agreements in question place all "essential managerial functions" with the defendants and under the test of SEC v. Glen W. Turner Enterprises, Inc., supra, adopted by the Third Circuit in Lino v. City Investing, Co., supra, the agreements in question were investment contracts and thus securities within the meaning of the Act. We do not agree.
Plaintiffs point heavily to the allegation that the pricing structure was fixed by Adam and as a result of the prices set by Adam, the leases were not competitive in the local markets where plaintiffs operated, as a result plaintiffs lost substantial sums of money, primarily those paid to Adam under the agreement and expenses incurred in setting up their local offices. Here, it was intended that plaintiffs would open up an office as the authorized representative of Adam Leasing.
The plaintiffs were required to produce a certain number of leases under the agreement, and plaintiffs' success or failure was directly related to, among other things, its ability to produce prospective lessees.
Plaintiffs' argument is, in essence, that since the defendants retained enough control over the business to also determine the success or failure of the venture, this agreement is an investment contract. We do not agree. Admittedly this is a close case and it appears defendants have attempted to retain the maximum control without having the license agreement deemed an investment contract. In the case at bar, plaintiffs were obviously required to expend their best efforts. They had to open an office. They admit in paragraphs 17 and 64 of the complaint that they were informed in the promotional material that they would be required to devote their full time to the business and do not allege that this was not so. Plaintiff A.B.A.'s claim for actual damages of "not less than $29,530.63 (including the $8,000 initial fee)" clearly indicates that plaintiff expended significant sums to set up and operate the business in addition to the monies paid to defendant under the agreement. Similarly, plaintiff Ernst claims actual damages of "not less than $23,919.76 (including the $5,000 initial fee)". This indicates that plaintiffs were operating a business not merely turning their money over to others in hopes of making a profit from the efforts of others.
If they did not produce, they would not be rewarded.
In the Lino case, plaintiff was required:
". . . to open a sales center, staff it, and devote full time and best efforts to his business. He must recruit area distributors for FI programs and train them. The agreements demonstrate that his efforts are not nominal or insignificant. He must recruit area distributors to earn money and to remain as a FI representative."
While not as clearly stated in the agreements before us, as it was in the Lino case, the position of plaintiffs are not dissimilar to that of the plaintiff in Lino.
Plaintiffs argue that since they rely on the actual practices between the parties summary treatment is inappropriate. However, nowhere does plaintiff allege that the actual practice was inconsistent with the documents or contrary thereto. The allegations and arguments as to the actual practices in this case have been carefully considered and we conclude that they do not change the basic position of the parties or the nature of their relationship or the fact that plaintiffs were required to make significant efforts.
Plaintiffs further argue that since they were not the "masters of their own economic destiny" the agreements should be deemed investment contracts. This we think misconstrues and inverts the test of "significant efforts" espoused in Lino. Significant efforts does not mean controlling or primary efforts. So long as the efforts required of plaintiff were significant and not nominal, the agreement is not an investment contract. Lino v. City Investing Co., supra. Thus we hold that the license agreements in question are not investment contracts within the meaning of the Act. Accordingly, defendants' motion to dismiss counts 1 and 4 will be granted.
Defendant, Jerome S. Kutner, has moved to dismiss him as a defendant since there is no basis for an action against him. Plaintiffs' claim against Jerome S. Kutner was that of a controlling person within the meaning of the federal securities law.
Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t. Since we have held that the agreements in question do not constitute securities within the meaning of the Act, the motion of defendant, Jerome S. Kutner, to dismiss the complaint as to him will also be granted.
While this motion was pending, plaintiffs amended their complaint to include counts 7 and 8 based on the recently enacted Pennsylvania Securities Act of 1972. Act of December 5, 1972, P.L. No. 284, § 101 (eff. January 1, 1973), 70 P.S. § 1-101, et seq. Defendants by letter have asked that their motion to dismiss be amended to include these new counts stating that in their view the standard of what is a security would be the same as under the federal securities laws. Neither side has briefed this issue.
Section 102 of the Pennsylvania Securities Act (70 P.S. § 1-102) defines a security as, inter alia, an "investment contract". Since this new Act does not contain a definition of an investment contract we will assume that the Pennsylvania legislature intended this to mean the judicially evolved definition.
Thus our previous discussion also applies to counts 7 and 8 of the amended complaint and they will also be dismissed.
AND NOW, this 9th day of January, 1975, upon consideration of defendants' motion to dismiss and/or for summary judgment as to counts 1, 4, 7 and 8 of the complaint, it is hereby ORDERED that said motion to dismiss is GRANTED and counts 1, 4, 7 and 8 are dismissed from the complaint; also the motion to dismiss as to defendant Jerome S. Kutner is GRANTED.
BY THE COURT:
James H. Gorbey, U.S. District Judge