People v. Bestline Products, Inc. (61 Cal. App. 3d 879, 1976)

Opinion

POTTER, J.

Appellants Bestline Products, Inc. (hereinafter “Bestline Products”), Bestline Corporation (hereinafter “Bestline Corp.”), William E. Bailey, Robert W. Depew, David L. Eastis, James Rohn and Larry D. Huff appeal from a judgment dated December 21, 1973, in favor of plaintiff the People of the State of California. The judgment (1) permanently restrained defendants from operating or participating in a marketing program embodying proscribed features which the court found were in violation of Business and Professions Code section 17500 prohibiting “untrue or misleading” statements; (2) required defendants Bestline Products, Bestline Corp., and Bailey to offer to make restitution to victims of the Bestline marketing program, and (3) imposed civil penalties of $1 million jointly and severally, upon defendants Bestline Corp. and Bestline, Inc., $250,000 upon defendant Bailey, $100,000 upon defendant Eastis, and $50,000 each upon defendants Depew, Huff and Rohn.

The complaint which was filed May 12, 1971, included two causes of action. The first cause of action charged that defendants “have operated, and continue to operate, their marketing program by means of making numerous false and misleading representations at ‘opportunity meetings’ and at other meetings to which the members of the public are invited” and alleged that “[t]hese untrue misrepresentations include, but are not limited to, representations relating to the amount of income which can reasonably be anticipated .. . the ease with which persons can earn large amounts of money, . . . the number of successful persons in the marketing program, and . . . the guaranteed success based upon substantial retail sales of the product to the. public.” (Italics added.) Various specific false representations were described, allegedly made during the conduct of defendants’ marketing program from January 14, 1971, to the date of the complaint. The January 14, 1971 date was the date of a consent decree in action No. 952969 in the Superior Court of the State of California for the County of Los Angeles. This decree enjoined defendants Bestline Products, Bestline Corp., Bailey and Depew from operating a marketing program embodying features therein proscribed and from making certain categories of misrepresentations. It also required disclosure of its terms. The consent decree was attached to the complaint as an exhibit.

Among the specific misrepresentations charged were descriptions of the Bestline marketing program as offering to prospective distributors the expectation of a large annual income as a result of their recruiting additional distributors who would in like fashion bring in further recruits. The first cause of action further specified as misrepresentations the giving of nonrepresentative examples of income generated in various levels of distributorships, misstatements relating to the ease with which additional distributors could be obtained, and as to the level of retail sales.

The second cause of action charged that defendants were engaging in conduct “constituting acts of unfair competition” made enjoinable by Civil Code section 3369. As acts of unfair competition, the second cause of action specified defendants’ violations of the consent decree of January 14, 1971; plaintiff’s theory being that business practices prohibited by such injunction were thereby made “unlawful.” Also specified as unfair competition was defendants’ operation of their distribution program comprising an “endless chain” scheme prohibited by Penal Code section 327, the violation of this section being also relied upon to make defendants’ business practices “unlawful.” The unfair competition charges were stated as an alternative basis for injunctive relief, there being no provision for civil penalties for unfair competition at the time the complaint was filed.

The trial commenced October 27, 1972, and 39 court days were consumed in the presentation of evidence and argument. In the presentation of the People’s opening case, the 1971 consent decree was received in evidence and both documentary evidence and testimony were received, fully detailing the Bestline marketing program. This program entailed the distribution of household cleaning products manufactured and sold by Bestline Products through an organization comprising a very large number of distributors in three categories. The local distributors, whose function was to make direct sales to the consuming public, purchased Bestline products from direct distributors or general distributors. Generally, they worked part-time and sold through house-to-house or business-to-business canvassing and through giving parties in their homes. The basic discount of the local distributor was 30 percent. An additional discount in the form of a rebate based upon volume, over $149 per month, was also payable to local distributors.

The next level above the local distributor was the direct distributor. The direct distributor purchased products from Bestline Products and sold them either to local distributors or directly to the public. The direct distributor purchased from Bestline at a 52 percent discount. There was, therefore, a maximum of 22 percent profit on their sales to local distributors (depending upon the rebate earned by them) and 52 percent profit on their personal sales directly to the consumer. There were slight variations in the requirements to become a direct distributor, depending upon the time interval involved. One method was the “work-in.” By selling approximately $5,000 retail value of merchandise in one calendar month, a local distributor could become a direct distributor. Far more commonly, however, direct distributorship status was acquired by “pre-purchase” of an inventory of Bestline products, literature and sales aids for an investment of $3,000 or more.

The top position in the Bestline distribution system was the general distributor who was permitted to purchase Bestline products at a 60 percent discount. This allowed a profit up to 30 percent on resales to local distributors. The general distributor also received commissions and special incentive bonus credit for all sales made through the general distributors’ organization. To become a general distributor, a direct distributor was required to recruit another direct distributor, and to either (1) recruit a second new direct distributor, or (2) “create” an additional volume of $5,000 in one calendar month by selling to local distributors or to the consuming public at retail. No commission was paid to the direct distributor on account of his recruitment of the first or second additional direct distributor required to become a general distributor. In addition, to become a general distributor, the direct distributor was required to pay $600 to Bestline Products for a general distributor school which he was not required to attend. Once general distributorship status was attained, commissions were payable upon all prepurchase inventory sold to any additional direct distributors recruited by the general distributor and as well upon such sales to any new direct distributors recruited by any such recruit in order to become a general distributor. When a direct distributor recruited by a general distributor himself became a general distributor, the recruiting general distributor was entitled to a 3 percent overriding commission on the total volume produced by the new general distributor’s organization. Thus the recruitment of a direct distributor produced commissions both for the sponsoring general distributor and an overriding general distributor, should there be one. Since the general distributor’s discount was 8 percent more than that of the direct distributor, the sponsoring general distributor received an 8 percent commission on all the inventory purchased by new direct distributors.

The special incentive bonus, payable only to general distributors, was based upon the refund bonus value of the. sales made through the general distributor’s organization. The volume of sales of inventory to new direct distributors was included in calculating this bonus.

The evidence offered in the People’s direct case also showed that the method by which the recruitment of new distributors was accomplished included a regular schedule of so-called “Opportunity Meetings” and “D and G (Direct and General) Meetings” which were staged by Bestline Products, though they were financed in part by monthly charges made to direct and general distributors. The format for these meetings was established by Bestline Products and scripts were provided for the guidance of those conducting the meetings. In addition, sound-motion pictures and narrated still film strips were provided and employed in both types of meetings. The function of the Opportunity and D and G Meetings was to assist Bestline distributors at all levels to recruit new distributors.

The Opportunity Meetings were evening meetings. They included a general introductory narrated film strip presenting the Bestline product line and a like presentation by defendant Bailey explaining the “Golden Opportunities” which participation in the Bestline program offered. The Bailey film strip includes a general description of the three levels of distributors and the introduction of one distributor in each category. First, an attractive housewife describes her experience as a local distributor, telling of a party at which she sold an average of $8.75 in merchandise to each of 10 guests for a profit of $25. She also describes setting up routes to canvass homes and businesses, and tells of making about $100 per month. She introduces her direct distributor. He describes himself as having no college education or special training and states that he was just getting by before becoming a Bestline distributor. He claims that becoming a Bestline direct distributor was the greatest thing ever to happen to him and states that if a direct distributor has “just” 10 local distributors, each of which does “only” $700 volume per month, the resulting profit is $630 per month. The direct distributor then introduces a general distributor who explains that the general distributor receives an 8 percent commission for his services in training and supervising direct and local distributors. He asks the audience to assume that each of them is a general distributor who “only” has four direct distributors, each of which has an organization of 10 local distributors doing $700 volume per month, and points out that this produces $560 commissions with respect to each direct distributor’s volume, or $2,240 per month income to the general distributor. He opines that the earning capacity of a general distributor seems “unlimited.” Defendant Bailey represents that the testimonials of the distributors dramatize what has been done and can be done if the audience is willing to put the necessary effort into it, and indicates that the Bestline program needs hundreds of thousands of distributors; he closes by suggesting that Bestline has a place for anyone who is interested in prestige, independence and retirement.

The audience at the Opportunity Meeting was supplied generally by existing direct and general distributors desiring to benefit from the recruitment of additional local and direct distributors. A variety of methods for attracting prospects to these meetings were suggested by Bestline Products for use by distributors. Manuals detailing the most effective methods were circulated. These advocated the use of various high-pressure methods to entice prospects to the meetings, including distribution of fliers, direct phone calls and personal contact through purported “surveys.”

At the conclusion of the Opportunity Meeting, it was suggested that those who were interested in the “big money” should return the following morning for the D and G Meeting. The D and G Meeting included showing a sound-motion picture starring defendant Bailey and entitled “Growth to Greatness.” In that film Bailey is portrayed as addressing what appears to be an Opportunity or D and G Meeting like the one at which the film is shown. He proclaims that the meeting could be “your start to greatness.” The listener is invited to define in his own mind the “greatness” he seeks to achieve. He is challenged to have the courage to announce to doubters, and mean it, when he states that he is going to make $25,000 in the next 12 months. Bailey quotes Disraeli to the effect that no force in the world can resist the human will. Though he acknowledges that the results described cannot be achieved overnight and will require total commitment, Bailey assures the audience that “an amazing number” of people have achieved financial independence by becoming Bestline distributors. At this point, defendant Eastis is shown passing out the special incentive bonuses at which appears to be an annual Bestline meeting for the purpose. One couple announces that their $9,000 bonus check plus a Buick Riviera were the results of only nine months’ effort. Another recipient of a $9,000 bonus announces that it is the result of three months’ work, and a third bonus recipient receives a $12,000 check and announces that what Bestline has given to him it can give to all of you. Defendant Bailey then resumes the narrative and states that even the blindest should be able to see from the proof given that they too can achieve like results.

In addition to the representations contained in the film strips and sound-motion picture, the scripts, manuals and training packets disseminated by Bestline Products advocated additional recruiting techniques. Many of them recommended suggesting to recruitment prospects the setting of personal goals. For example, one such packet states: “Have your notebook available and just jot across the top of it $100,000 and then ask them what they would do if they had $100,000 in the next four to five years,” and “[i]f the figure is $40,000 or less tell them, as unbelievable as it is we will show you how to earn this amount by tomorrow morning’s meeting [referring to the D and G Meeting], If it is above $40,000, tell them we can show you how to make $40,000 part-time, but the rest will involve more work on your part. . . .” In the same packet, the recruiter is exhorted to memorize and give to the recruit on scratch paper, “as if it was his own plan,” a schedule by which to gauge the success of his future recruiting. This schedule includes recruiting a first and second direct distributor in the first month as well as five local distributors; for the second month, an' additional five local distributors and a third and fourth direct distributor; in the third month an additional five local distributors are shown as well as a fifth and sixth direct distributor and the first general distributor. In the fourth month, five more local distributors are shown, a seventh and eighth direct distributor, and the second, third and fourth general distributors.

In a proposed script for the D and G Meeting included in a general distributor’s school publication, the use of the following representation is proposed:

“Let me give you an example of the kind of income which can be earned if you’re willing to put in the effort. Let’s say you did this job that I’ve shown on the board, once a month. That is—helped create and develop one General Distributor each month in your organization. Your income for one year would be 12 x $1,200, or over $14,000 in commissions.”

The testimony of witnesses who attended specific Opportunity and D and G Meetings showed that numerous additional representations of like character were made by those who conducted the meetings and by individual distributors who participated in them. Tape recordings were also admitted in evidence of numerous such meetings at which like representations concerning the prospect of developing a distributor organization and producing large earnings were made.

According to the testimony of an assistant vice president of Bestline Products, there was a total of 10,259 distributors in California as of September 30, 1972. This included 844 general distributors, 2,660 direct distributors, and 6,755 local distributors. Further statistics as to the marketing organization and the financial returns to the distributors were developed as the result of a statewide survey of the Bestline direct and general distributors made pursuant to stipulation entered into in the course of the trial. A report of the results of the survey was admitted in evidence as a court exhibit. This report showed, that during the period January 15, 1971, through November 30, 1972, 3,189 new direct distributors were recruited in California. Of these, 426 (or 13 percent) became general distributors, while the remaining 2,763 (87 percent) remained direct distributors, that is, they failed to recruit two more direct distributors. The sales to the public of Bestline products accomplished by the surveyed distributors were insubstantial. The great majority of them failed to sell as much as the pre-purchase inventory acquired by them as a condition to becoming a direct distributor; 86.1 percent of them sold less than $5,000 retail value and the median was under $3,000. Sales to local distributors were equally insubstantial; 75.5 percent of all the general distributors sold less than $5,000 retail value to local distributors, whereas 98.5 percent of direct distributors sold less than $2,000 retail value to local distributors. This sales performance was apparently not atypical of the total California distribution picture. As pointed out in the reply brief of appellant Bailey, the estimated 1972 California retail sales were $3 million. Bearing in mind that at that time there was a total of 10,259 California distributors, that year the average retail sales per distributor was under $300. Taking into account only the direct and general distributors, of which there were 3,504, retail sales per direct and general distributor were less than $900.

The survey also reported upon the total bonuses and commissions received by general distributors in the group surveyed. The total special incentive bonus commissions and overriding commissions earned by the general distributors was equally disappointing; 80.7 percent received less than $5,000 in commissions and bonuses, and the median was less than $1,000. When only those who had an average of 16 months’ experience were considered, the median was $2,000. Taking into account the fact that direct distributors who did not become general distributors received no bonus or commission, and that 221 of the 426 general distributors received less than $1,000 in commissions and bonuses, it appears that 93.9 percent of all those who became direct distributors in order to participate in the “big money” made less than $1,000 in commissions and bonuses. It was thus apparent that rather than achieving the financial independence and high income which the defendants’ promotional material suggested would be their reward, most of the new direct and general distributors did not even recoup the investment they made to acquire the initial inventory.

As the trial progressed and during the People’s case in chief, counsel for the People explained on several occasions the posture in which Penal Code section 327 was raised in the second cause of action. He explained in this connection that the function of section 327 was to render unlawful the chain scheme, thereby making it an “unlawful . . . practice” within Civil Code section 3369 and enjoinable as such, and that the violation of section 327 was “not a separate cause of action,” and “[i]t is violation of [section] 3369 that we are talking about.” Counsel for the People further stated, “[W]e are also alleging violation of Section 327 and that is also only in the second cause of action and it is very important because that is unlawful, that is, violation of Penal Code section 327 is unlawful and based upon a company’s engagement in that practice they can be enjoined . . . .” None of counsel’s statements in this respect, however, suggested that the fact defendants’ marketing program constituted a chain scheme (independently of its constituting a violation of Pen. Code, § 327 as such) was not relied upon as justifying relief under the first cause of action. The fact that it was a chain scheme, without the statement of that conclusion, was fully alleged in detail in the first cause of action in which were set forth the representations allegedly made by defendants to prospective direct distributors to the effect that they would, as general distributors, earn $15,000 per year for part-time employment through recruiting additional direct and general distributors to whom inventory sales would be made. The complaint thus clearly stated that the chain scheme aspect of defendants’ marketing program contributed significantly to its deceptive character made actionable under section 17500 of the Business and Professions Code, regardless of whether the program was also rendered “unlawful” by virtue of its constituting a violation of Penal Code section 327.

After the People’s case in chief had been presented, defendant Eastis was called as a witness for defendants. Eastis, who was president of Bestline Products, was questioned concerning the existence of a draft of the proposed consent decree which was rejected by the defendants in the prior injunction suit. The apparent purpose of this line of questions was to attempt to establish that defendants interpreted the consent decree in a fashion which made their post-decree marketing practices in compliance therewith; in other words, that they had in good faith attempted to comply with it. Counsel for the People objected to this evidence, though he did not question the admissibility of the witness’ testimony as to how he understood the language of the decree. The objection was directed specifically to evidence of the settlement negotiations out of which the consent decree arose. The court ruled that the evidence was inadmissible. The reason given for the ruling was, however, obscure. The court stated that the basis for the ruling was his belief that the first injunction was no longer relevant, the court saying in this respect:

“Actually I don’t see where the language of the first injunction means something else. Actually I don’t see where the language of the first injunction has any relevance here at this time. It seems to me if the People sustain their case it is going to be a, there is going to be a new injunction and the old injunction would become moot. The People are not asking for any penalties for violating the first injunction. They are not asking for anybody to be held in contempt of the first injunction. They are asking for a new injunction and civil penalties. Actually I don’t see where the first injunction comes in here.”

Stating its ruling, the court said:

“The Court: Well, I am going to rule at this time anything that is relating to the first injunction other than the fact it was or was not made known to the people or to Bestline or the people who attended the meetings of which testimony has already been received, that this will be inadmissible.”

At this point, counsel for defendant Eastis moved the court to dismiss the second cause of action. Argument ensued in which counsel for the People pointed out that defendant’s conduct with respect to the injunction was relevant as bearing upon the civil penalties and restitution which might be imposed under the first cause of action. When counsel for defendant Eastis then suggested that evidence other than testimony with respect to negotiations bearing upon defendant’s attempt to comply with the injunction would not be excluded, the court stated: “I don’t think that is material.” The court then commented further that it could see no purpose served by the second cause of action since it did not ask for any relief not available under the first cause of action. When pressed by defendants to dismiss the second cause of action, the court stated the motion to dismiss “will be granted on the grounds that the second cause of action fails to state facts sufficient to constitute a cause of action.” When counsel for the People attempted to clarify the order as being based upon the failure of the second cause of action to “state a cause of action which adds anything to the first cause of action in which relief can be granted,” the court merely added: “There is one cause of action and if you can sustain it I think you have got everything.” With this comment, the subject was closed.

The examination of defendant Eastis who, according to his counsel, was “the company officer who has the most direct information as to what was done in an attempt to comply with that judgment” shifted to other topics and no further effort was made by defendants in the course of the examination of defendant Eastis on that occasion to support any claim of a good faith effort to comply with the consent decree. During the course of that examination, however, defendants did place in evidence through defendant Eastis’ testimony the changes in the marketing plan made subsequent to the filing of the complaint, in spite of the fact that there was no amendment to the complaint covering such activities.

In this connection, the court advised that “in regard to the penalty,” “whatever goes into evidence even though it is not covered by an amendment to the pleadings and is considered by the court can be made part of the judgment.” Thereafter, defendant Eastis testified at some length concerning the Bestline marketing plan which was currently in effect at the time of the trial, and defendants rested.

During the course of the People’s rebuttal case, the report of the court-ordered survey of distributors was received in evidence as was the testimony of People’s witnesses detailing some of defendants’ business practices subsequent to the filing of the complaint. Danny Pierce, a Bestline general distributor, was one of these witnesses. Part of Pierce’s testimony related to his attendance at a meeting on January 29, 1973 (while the trial was in progress), conducted by defendant John Wolfe. This was a “special rally” to inform existing distributors of changes in the marketing plan. The witness testified that Wolfe mentioned the fact that some of them might be receiving questionnaires and requests for interviews from the firm conducting the court’s survey. He explained that this was part of a trial that was being brought by that “mealy mouth knock kneed Attorney General.” Concerning their responses to the inquiry, Wolfe allegedly advised:

“ ‘Since you are not accountants or bookkeepers I am sure you will not have that information at hand. You all know what they are trying to do to us, but I want you to keep your answers honest, but be sure they are on the high side when it comes to selling soap.’ ”

According to Pierce, Wolfe also assured the audience that the trial in progress was nothing to worry about. At the time this testimony was given, it was apparent that the witness had available to him and had made reference to notes in which he had recorded verbatim the comments made at the January 29, 1973 meeting.

Pierce also testified concerning various other meetings and the receipt from Bestline of instructional material including recommendations for use of deceptive practices. One such meeting occurred in August 1972, and was presided over by a Bestline vice president named Soto. The audience included 15 to 20 area coordinators and regional directors in Northern California and Southern California. Richard J. Grillo, Esquire, who was then acting as counsel for Bestline Products, warned that the use of dollar amounts in fliers seeking to attract prospects to Opportunity Meetings should be eliminated. After Mr. Grillo left, Soto allegedly said: “ ‘That son of a bitch’s job is to handle the legal fight. I run this area. I will do it my God damn way or we won’t do it at all.’ ” Soto then provided those present with a form of flier mentioning earnings from $100 to $800 per month.

The witness also testified that in late 1971 or early 1972 he was advised by Soto to make false representations as to the amount of his special incentive bonus when called upon by speakers at Opportunity or D and G Meetings which he attended.

During the cross-examination of Pierce, defense counsel requested examination of the notes to which the witness had referred in his testimony concerning the January 29, 1973 meeting. The witness was unable to locate them and though counsel for the People was able to account for all the other notes referred to by the witness, those relating to that particular meeting could not be found. Defendants moved to strike the testimony of the witness relating to what occurred at this particular meeting of January 29, 1973, pursuant to Evidence Code section 771, subdivisions (a) and (c).

The court noted that the documents had been produced at the trial by the witness, and that “when he was testifying about the January 29, 1973 meeting, he was refreshing his memory from notes.” The court observed that “counsel could have inquired on voir dire about the notes if they wanted to at that time, but apparently, although we don’t have a complete record, apparently they did not.” The court added:

“. . .Now two days later it turns out the notes are lost or missing, so under Section 771(c) (1) I don’t think the Court would be justified to strike his testimony at this time. If when we do have a complete record and something to the contrary shows up that would justify the Court in striking this testimony wer will again take it up, so the motion will be denied to strike his testimony without prejudice.”

In addition, the court noted the following:

“The Court: May I say that what Mr. Wolfe said at this meeting doesn’t have any great probative value as to misrepresenting or misleading statements made to the public. They do have some value to show Mr. Wolfe’s[ ]state of mind, but that is all.” (Italics added.)

The court’s reference to the incomplete record reflected the fact that the transcript of the proceedings relating to Pierce’s testimony was not available at that time. Defense counsel did not renew the motion.

At the close of the People’s rebuttal, defendants were permitted to recall defendant Eastis for further testimony. He became the concluding witness at the trial, and his testimony on that occasion consumed over 100 pages of transcript. The defendants were thereby accorded an opportunity to present substantial surrebuttal.

Early in defendant Eastis’ surrebuttal testimony, defense counsel asked him what steps had been taken to advise distributors of the terms of the consent decree. (Said decree required that “defendants shall disclose, orally and in writing, the terms of this final judgment to all participants and prospective participants . . . .”) Counsel for the People objected, and this objection was overruled. Thereupon the witness stated: “We put together what is commonly known as the Bestline Business Opportunity Booklet.” This booklet made no reference whatever to the terms of the consent decree, though arguably, certain provisions of the decree were thereby implemented. The witness explained that the decision to deal with the matter in this fashion was made by defendant Bailey, defendant Depew, defendant Eastis and Mr. Diel, “who was at that time our legal counsel.” Defendant Eastis was then asked, “What did Mr. Diel tell you that led to that decision?” Counsel for the People advised that if this question were answered, then full cross-examination as to all conversations between counsel and the company on other matters should be permitted. Counsel for defendant Eastis then explained his purpose as follows: “¡AJ11 I wish to do is establish for this Court the fact that with respect to the issue of intent, these individuals had a bona fide belief in the fact that they were entitled to and should have communicated the terms of the judgment in the way they did.” When counsel for defendant Eastis sought to limit the waiver of the privilege to the single item of advice concerning compliance with the disclosure provisions of the agreement, counsel for the People requested that the court set aside the dismissal of the second cause of action. In the course of argument in support of that request, counsel for the People referred to the fact that violations of the consent decree were relevant, “primarily in regard to intent and to show the necessity for the form of the injunction there should be now, . . .” The court denied the motion to reinstate the second cause of action and gave as a reason the following:

“Now, it seems to me that regardless of whether or not you have a second cause of action, this former case together with the judgment is before the Court and it is proper evidence that the Court may consider if indeed the defendants having been enjoined by the stipulated judgment actually did proceed to evade it and then it goes to a state of mind which exacerbates the fraudulent aspect that the People have been trying to prove.

“I think it is important on the basis of the state of mind. I think that is already before me. That is why I don’t think it is necessary to reinstate it.”

At this point, counsel for defendant Eastis withdrew the question, suggesting that the matter would be gone into on defendants’ pending motion for instructions in action No. 952969, the prior injunction suit. Then counsel for the People stated that he wished to make it clear that violations of the injunction were to be considered in connection with framing the second injunction and that defendants’ conduct of the chain marketing scheme and violation of section 327 of the Penal Code would also be taken into account. The court reiterated that the consent decree and defendants’ conduct with respect thereto were “still before the Court.” Counsel for the People then repeated his view that defendants’ conduct of a chain scheme in violation of Penal Code section 327 was also before the court to which the court responded: “I think that is all before the Court,...”

Despite this clear announcement that defendants’ violations of the 1971 consent decree were considered by the court relevant to the issue of defendants’ fraudulent intent, bearing upon the civil penalties to be imposed and the terms of an effective second injunction, defendants did not question defendant Eastis further on this subject. However, on cross-examination, counsel for the People examined defendant Eastis at length concerning defendants’ purported compliance with the 1971 consent decree. This examination included questions concerning several provisions of the decree in respect of which it appeared defendants had done little or nothing to comply.

A number of questions were asked concerning defendants’ failure to take any action to implement provisions of the consent decree requiring that distributors who failed to make reports of retail sales (as the consent decree required they be instructed to do) be suspended. Counsel for defendant Eastis objected to a question asking whether any distributor had been “placed on an inactive status” for failure to submit the reports.

Stating the objection as follows, counsel for defendant Eastis stated:

“Mr. Grillo: Your Honor, I am going to object for the purpose of the record, I think, because I think it is irrelevant. All we are concerned with is intent and good faith. If my objection is overruled, the problem is, your Honor, we are going right back into the difficulty we had before. There is no way the ambiguities created by some of these sections can be cleared up without referring to the prior judgment that was submitted and rejected. The witness testified. Counsel indicated he didn’t want to go into that, but if he wants to go into specific areas that are different between the two, I will be forced to introduce—... .”

Counsel was interrupted at this point by the court overruling the objection. It is apparent, however, that he was indicating that an unfavorable ruling would require him to reopen the line of inquiry which had precipitated the ruling excluding evidence of the negotiations and the form of rejected drafts of the consent decree. The witness quickly indicated his understanding of the matter by testifying, without objection, on that subject. When asked if he construed the decree as imposing “no responsibility whatsoever other than simply placing this notice in the Business Opportunity Booklet and if no one reported it, it made no difference to the company,” the witness responded as follows:

“A Are you interested in my interpretation on that, sir?

Q Yes, I am.

A Before we signed this order there was a proposed order which we reviewed and rejected. In the proposed order, your Honor, all three paragraphs starting on page 4, line 19, on line 21 and on line 29, all three of those items stated in the proposed order that we would be required to do this. In the order that we ultimately signed, the first two (i) and (ii) had been amended to so instruct.”

The cross-examination continued for some time. In the course of it, defendant Eastis was examined concerning violations of the prohibition in the consent decree against the use of “any examples” to demonstrate how earnings could be obtained by a participant in the marketing program which did not represent earnings of “a substantial (defined therein as ‘40 percent of the participants’) number of participants in the community or geographical area in which such representations are made....”

Confronted with one of the scripts for D and G Meetings in 1971 approved by him which contained a passage commencing, “Let me give you an example of the kind of income which can be earned,” the witness stated that this did not in his view qualify as an example used to demonstrate how earnings could be obtained and was merely a “mathematical computation.”

After listening to several equally untenable explanations, the court indicated its evaluation of the witness’ testimony as follows:

“The Court: Do you believe that was compliance?

The Witness: Yes.

The Court: You really believed that?

The Witness: Yes sir.

The Court: All right.”

At the conclusion of the cross-examination by counsel for the People, counsel for defendant Eastis asked a question concerning a language change between the draft of the consent decree and the final form in addition to the one which the witness had previously described. This brought out the fact that the language had been changed from “can reasonably anticipate” to “will earn” in the paragraph of the decree prohibiting representations relating to earnings which did not represent earnings of a substantial number of participants. The remaining redirect examination related to the witness’ use of notes to refresh his recollection, and no further attempt was made by defendants to establish that defendants had in good faith endeavored to comply with the 1971 injunction.

At the conclusion of the oral argument, which consumed several days, the court orally announced his intended decision from the bench. He observed that the Opportunity and D and G Meetings “were all patterned on certain set lines” established by defendants, “carefully streamlined and polished to give the impression that those people who came into the program could make very high income; I mean, $30,000 a year or up, even in their spare time . . .” and that “[t]he impression was given, I am sure, to most people, that it was possible, quite probable, that anyone who joined the program could do this.” The court made oral reference to the consent decree and to the fact that after the consent decree was entered, “the corporation and its representatives and all the individual defendants continued practically as they had before in misrepresenting to these prospects who appeared at these meetings . . . and in numerous respects this injunction was either callously violated or callously ignored.”

The significance of such violations was indicated by the court as follows:

“The fact that the first judgment has been rendered in this case and has been so grossly violated, has convinced the Court that the defendants never intended to abide by it and that the acts which they committed after the injunction, in misleading and misrepresenting the program to their prospects, was far more—these acts were far more egregious than if they’d never had an injunction previously. In other words, their continued acts of defrauding, misrepresenting to the public, were exacerbated by reason of the fact that they already knew, by reason of the first judgment, how far they could go, but they completely ignored that and went on and continued their violations in the same manner that they had before.”

In its oral statement, the court also commented upon the chain scheme aspect of defendants’ marketing program. It said in this respect:

“[B]ut where the principal idea of a marketing plan is for the company to make money not by selling the product, but by inducing people to invest in the program and then to persuade them to recruit other persons, rather than to sell their product to the general public, the Court believes that that kind of action should be roundly condemned and punished, where found, and the Court finds that this is what occurred and has occurred during the past three years by all of the defendants here.”

Findings of fact and conclusions of law were requested by defendants and those submitted by the People were signed by the court. The court found generally as follows:

“. . . All of the defendants, corporate and individual, planned and participated in and furthered a common scheme by means of false, misleading, deceptive and fraudulent representations to induce members of the public to become Direct and General Distributors of Bestline Products, Inc.”

The findings recited the entry of the consent decree on January 14, 1971, and described its provisions. In finding No. 22, the court described the Bestline marketing program, including the element of prospects being encouraged to become general distributors by paying in excess of $3,000 for initial inventory, plus training sessions in return for which prospects were to be compensated when they sponsored new direct distributors or a direct distributor sponsored by them in turn sponsored a new direct distributor. Finding No. 22 included the conclusion that defendants’ marketing plans “were in violation of Penal Code section 327 and of paragraph 4 of the 1971 injunction in that the plans constituted endless chains as defined in Penal Code section 327 and were marketing programs which offered to a participant compensation which was not based upon sales made by the participant to non-participants or to .the consuming public. . . .”

Additional findings specified particular misrepresentations which defendants either disseminated or caused to be disseminated “to tens of thousands of members of the California public” (finding No. 23) as follows:

“A. That distributors could reasonably expect to make ‘big money;’ that distributors could reasonably expect to earn $250,000 or more in a 5 year period; that distributors could reasonably expect to earn $38,000 a year working part time; that distributors could double or triple their income working part time without interfering with their present employment; that distributors could reasonably expect to earn over $600 per month as Direct Distributors.

“B. That distributors could reasonably expect as General Distributors to recruit and promote one General Distributor per month.

“C. That distributors, if they sought a refund within 90 days, would receive all of their money paid for unsold products, less shipping charges.

“D. That if a distributor tried to succeed in the Bestline marketing program, he would be assured of success.”

Fraudulent nondisclosure was also found (finding No. 24) by the court in defendants’ failure to disclose the existence and terms of the 1971 consent decree and to disclose the fact that the Bestline marketing program was in violation of Penal Code section 327. Further specific reference to the 1971 consent decree was made in findings (finding No. 30) that defendants “willfully” violated the terms of the 1971 consent decree, “the terms of which they well knew.”

As a basis for calculating the amount of civil penalty appropriate to each defendant’s participation, the court made several findings relating to the number of victims to which misrepresentations were made by each defendant. With respect to defendants Bestline Products, Bestline Corp., Bailey and Fastis, each was found to have “made or caused to be made some or all of the misrepresentations set forth in paragraphs 23 and 24 to substantially more than 3,000 persons in California.” Defendants Depew, Huff, and Rohn were each found to have “made or caused to be made to some or all of the misrepresentations set forth in paragraphs 23 and 24 herein to substantially more than 20 persons in California.”

In the conclusions of law, the court concluded that defendants had violated Business and Professions Code section 17500 by the misrepresentations, the nondisclosure, and by the operation of a chain scheme. The court further concluded that a permanent injunction should be issued against defendants and that civil penalties should be assessed against the defendants in amounts specified. Finally, the court concluded that restitution should be ordered for all direct and general distributors who became such on or after January 15, 1971, and who requested it.

On July 25, 1973, a judgment was entered in accordance with the court’s conclusions. The relief provided by the judgment included a permanent injunction comprehensively prohibiting defendants’ operation of a marketing program constituting a chain scheme, or engaging in any of the other deceptive practices which the court found to have existed. The judgment also ordered defendants Bestline Corp., Bestline Products, Bailey and Fastis jointly and severally to offer restitution, Bestline Products and Bestline Corp., to be primarily liable therefor. Provision was made for the appointment of a receiver to effectuate the restitution.

Civil penalties were assessed against defendant Bestline Corp. and Bestline Products, jointly and severally, in the sum of $1 million against defendant Bailey in the'sum of $250,000, against defendant Eastis in the sum of $100,000, and against defendants Depew, Huff and Rohn in the sum of $50,000 each.

By the time the judgment was entered, a chapter 11 proceeding had been filed by defendant Bestline Corp. in the United States District Court for the Northern District of California and a stay order issued restraining further prosecution of any action or proceeding against it. Shortly thereafter, motions to set aside and vacate the judgment and to enter a new and different judgment were filed in behalf of all of the defendants who are parties to this appeal. Due to the pendency of negotiations looking toward a stipulation for a modified judgment, determination of the motion to modify the judgment was continued from time to time until December 21, 1973. A motion for new trial made by said defendants was denied September 28, 1973.

Prior to the time the court finally acted upon the matter of modifying the judgment on December 21, 1971, a notice of appeal was filed for defendants Huff and Rohn on September 28, 1973, by their then counsel Richard J. Grillo. The last hearing relating to the modification at which Attorney Grillo appeared was the September 20, 1973 hearing at which a modification was made eliminating defendant Eastis from the provision of the judgment requiring restitution and the other modification matters were taken under submission. On November 12, 1973, defendants Huff and Rohn executed a substitution of attorneys whereby Grillo was replaced by Irving Reifman. The continuances after September 20, 1973, were in each case effected by notice to counsel in court at the time the continuance was made. Neither Attorney Grillo nor his replacement was present in court later than September 20, 1973, and neither of them was otherwise notified of the continuances which occurred subsequent to Grille’s filing of the notice of appeal.

On December 21, 1973, the court approved a modified judgment which adopted a plan for restitution that had been agreed upon between the People and defendants Bestline Products and Bestline Corp. Pursuant to the agreement for restitution, Bestline Products and Bestline Corp. transferred funds totaling $3,970,495.75 into an irrevocable trust for the benefit of distributors entitled to restitution and agreed to make further restitutory payments to the trustee in accordance with a schedule set forth in the agreement. The modified judgment deferred application of the provision for a receiver so long as there was no default in the making of the deposits for restitution, and further deferred the payment of civil penalties by Bestline Products and Bestline Corp. until completion of restitution.

Thereafter, appeals were filed by defendants Bestline Products, Bestline Corp., Bailey, Huff and Rohn (second notice) from the modified judgment. The remaining defendants relied upon the September 28, 1973, notice of appeal from the original judgment.

On January 4, 1974, a stipulation was entered into between the People and defendant Bailey, pursuant to which the People agreed to accept $750,000 in full accord and satisfaction of defendant’s liability for restitution and in return for such payment and the payment of the $250,000 civil penalty, the People waived costs against defendant Bailey. Said stipulation specifically provided that it, did not constitute an admission by defendant Bailey of the correctness of any findings of fact or conclusions of law and did not constitute a waiver of his right to appeal, except “that in no event will defendant Bailey be entitled to reimbursement of the $750,000 paid as restitution or the $250,000 paid as civil penalties.” Pursuant to the stipulation, Bailey paid a total of $1 million and received partial satisfaction of judgment as to the provisions of the modified judgment imposing liability for restitution and civil penalties upon defendant Bailey.

Contentions

In all, there are seven separate contentions raised by the various appealing defendants. Some of these contentions are urged by all the defendants, whereas other contentions relate to a single defendant or group of defendants. The contentions and the defendants raising them are as follows:

1. All defendants contend that in view of the trial court’s order made during the trial dismissing the second cause of action, the issue of violation of the 1971 consent decree was eliminated from the case and it was error for the court to make findings that said decree was violated, or to base any relief thereon.

2. All defendants contend that in view of the order dismissing the second cause of action, any issue as to violation of Penal Code section 327 was removed from the case, and it was error for the court to make findings that such violations occurred, or to base any relief thereon.

3. All defendants contend that the court erroneously denied the motion to strike the testimony of the witness Danny Pierce on the ground that his notes were not produced.

4. Defendants Bestline Corp., Bestline Products and Bailey each contend that they were erroneously held vicariously liable for the tortious acts (misrepresentations) of others who were not their agents. The other defendants simply adopted their contentions.

5. Defendant Bestline Corp. contends that it was improperly found to be a participant in the Bestline marketing program solely by virtue of its status as a holding company of Bestline Products.

6. Defendants Bestline Corp. and Bestline Products each contend that the findings do not support the imposition of the $1 million civil penalties against them.

7. Defendants Rohn and Huff contend that the court was without power to modify the judgment without their consent after the notice of appeal was filed.

The People contest all of the above contentions and maintain that the judgment is in all respects proper. We agree.

The Issue of Defendants’ Violation of the 1971 Consent Decree Was Properly Tried and Determined Under the First Cause of Action

If the trial court’s ruling dismissing the second cause of action had eliminated from the case any issues as to violations of the 1971 consent decree, appellants would, of course, be correct in their assertion that it was error for the court to make findings and to base any relief upon findings that such injunction was violated. Where an issue is removed from a case, it is error even to receive evidence which is material solely to the excluded matter. (Fuentes v. Tucker, 31 Cal.2d 1, 5 [187 P.2d 752].) Further, if, as defendants contend, the ruling dismissing the second cause of action reasonably led them to believe there was no need to meet charges that they had violated said injunction, and in reliance upon such belief they had failed to do so, there would be a denial of due process. It does not, however, appear that the dismissal of the first cause of action did, in fact, remove the issue as to violation of the 1971 injunction nor does it appear that defendants were led to forego justification of their conduct in this respect on the basis of the court’s ruling.

Violation of the 1971 Consent Decree Was Properly in Issue Under the First Cause of Action

The first cause of action sought injunctive relief to prevent continuing violations of Business and Professions Code section 17500 by deceptive marketing practices of defendants which had been in effect both prior to and after the date of the 1971 consent decree. It also sought the imposition of civil penalties appropriate to deter future conduct of a like nature. Though violations of the 1971 decree were not specifically alleged therein as a basis for injunctive relief, the charging allegations did contain language indicating that the “untrue misrepresentations include, but are not limited to,” those specifically described, and the relief sought included imposition of the maximum penalty “for each false and misleading representation made,” and “such other and further relief as the nature of the case may require and the court deems proper to fully and successfully dissipate the effects of the false and misleading statements . . . .” Defendants’ conduct in respect of the 1971 injunction was, therefore, relevant (1) insofar as any of such conduct constituted misrepresentation, (2) to show what kind of injunctive relief was required to prevent deceptive practices in the future, and (3) to demonstrate defendants’ culpability, a factor legitimately considered by the court in assessing civil penalties. It was, therefore, proper and appropriate for the court to make findings as it did that some of defendants’ conduct in violation of the 1971 decree was deceptive, in that they did not advise prospective distributors of the existence of and the terms of the injunction as therein required, nor of their rights thereunder, and that in other respects defendants “willfully” violated the terms of said injunction.

Defendants’ argument that the 1971 injunction was void by reason of its uncertainty is not persuasive. Certain provisions of the injunction may, as defendants claim, not be models of legal draftsmanship. However, for defendants Bestline Corp., Bestline Products, and Bailey who entered into a stipulation for the entry of such injunction to claim that it is “so vague that men of common intelligence must necessarily guess at its meaning” (Pitchess v. Superior Court, 2 Cal.App.3d 644, 651 [83 Cal.Rptr. 35]) and, therefore, void seems wholly inappropriate. Further, those paragraphs of said injunction which the court found had been violated are clear enough that there can be no real question but that the defendants’ conduct was in violation thereof. We are not involved here with the requirements for establishing a contempt which, because of its quasi-criminal nature, demands that the terms of the injunction be sufficiently clear that it can be clearly established beyond a reasonable doubt that a violation has been committed. In Brunton v. Superior Court, 20 Cal.2d 202, 205 [124 P.2d 831], our Supreme Court said; “To hold a person guilty of contempt for violating an injunction, the acts constituting the contempt must be clearly and specifically prohibited by the terms of the injunction. (Mattos v. Superior Court, supra, at 649 and cases there cited; American Foundry & Mfg. Co. v. Josam Mfg. Co., 79 F. (2d) 116, 118; City of Campbell v. Arkansas-Missouri Power Co., 65 F. (2d) 425, 427-428.) The party bound by an injunction must'be able to determine from its terms what he may and may not do; he cannot be held guilty of contempt for violating an injunction that is uncertain or ambiguous (Ibid.), just as he may not be held guilty of violating a criminal statute that fails to give him adequate notice of the prohibited acts. (See cases cited in 7 Cal.Jur. 843.)”

The strictures of this rule, however, need not necessarily apply in the context of the case at bench. The question here presented is not whether defendants committed a contempt of the 1971 injunction but whether their conduct with respect thereto justified the imposition of a new injunction more effectively protecting the public against their misrepresentations and the imposition of civil penalties further to deter their misconduct.

Defendants Were Not Misled to Their Prejudice

At the time the court dismissed the second cause of action it contemporaneously sustained the People’s objection to the proffered testimony of defendant Eastis relating to the negotiations which proceeded the stipulation for the consent decree. Defendants did abandon that line of inquiry for the time being. Had that been the last word on the subject, there would be merit to defendants’ claim that they were misled to their prejudice and on this basis omitted justifying their allegedly violative conduct.

This, however, was not the end of the matter. After the People’s rebuttal, including the damaging evidence of the report of the court-appointed survey of distributors, was concluded defendants were permitted to recall defendant Eastis, who was their principal witness regarding this subject matter. Early in the direct examination of Eastis, defendants reopened the question of their alleged “bona fide belief’ that they were acting in accordance with the 1971 decree. It was brought out that defendants Eastis, Bailey and Depew had discussed the matter with Mr. Diel, corporate counsel, and had decided that the provision of the 1971 decree, requiring that defendants “disclose, orally and in writing, the terms of this final judgment to all Participants and prospective Participants . . .” and “make available on request a copy of this final judgment to any Participant or prospective Participant” was sufficiently complied with by the purported implementation of the substantive requirements of the decree in the Bestline Business Opportunity Booklet. Argument with respect to this line of questioning clearly brought out the court’s view that evidence of defendants’ state of mind with respect to the consent decree was relevant as bearing upon the form of injunction which should be issued, and because it “exacerbates the fraudulent aspect that the People have been trying to prove.”

In the ensuing cross-examination, Eastis testified at length concerning what defendants did or did not do in purported compliance with several provisions of the consent decree. At one point defense counsel threatened that this kind of cross-examination would require full-scale examination of the negotiations leading to the consent decree. The witness took the hint