The District Court of Appeals ruled that Universal Marketing Research was an illegal lottery, and that the promissory note should be nullified. Universal Marketing sold Childress a home central vacuum system for a promissory note and the names of 16 friends who might also be interested in the system. For each referral that purchased a vacuum system and also supplied the names of 16 friends, the Childress received a credit of $50 toward their vacuum system. They would also receive credit for those referrals of referrals and so on that purchased systems. Childress defaulted on the note, and the assignee sued for its value. Childress claimed that the note was void because it was issued to participate in an illegal lottery, activity that the assignee knew about when it took assignment of the note. Both sides disagreed if the Universal MLM program met all the common law terms of a lottery, consideration, chance and prize; or if the program was a legitimate referral sales program. The court held that a determination of the common law elements was unnecessary because the legislature had declared that pyramid clubs were lotteries as a matter of law. The structure of the compensation plan used by Universal was the same as a pyramid club. The court held that it was an illegal lottery as a matter of law and that the promissory note could not be enforced against Childress.
The case and case summary can also be viewed online at: http://www.mlmlegal.com/legal-cases/Lippincott_v_Childress.php
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