Civil Case (Tel Aviv) 17456-12-18 Yonit Werber v. Shmuel Froimovich

Judgment

A lawsuit and a counterclaim whose background is a venture initiated and developed by the defendants, which the plaintiffs joined as partners against a financial launch of half a million ILS. Shortly after joining the venture, the plaintiffs announced the cancellation of the engagement and demanded a refund of the investment. The defendants rejected the cancellation notice and claimed, on the other hand, that the plaintiffs had failed the venture and that they had suffered damages as a result. This is the subject of the mutual claims that are before me.

Factual background, summary of pleadings and the course of the hearing

About the Parties

1. The plaintiffs, Yonit and Tzachi Werber (hereinafter also - "Yonit" and "Tzachi" respectively, and together - "Werber" or "the plaintiffs") are a couple. They are engaged in providing personal and business consulting services, frontal and online lectures on the Internet, and selling various courses that they have developed. Both have experience in business. Tzachi has experience in money management. Yonit has a degree from the Technion in Information Systems Management. They lead, according to their testimony, a unique program they developed called "Unleashing the Millionaire Within," which is delivered as digital content and is designed to give people tools to live a life of financial and personal freedom; A program that sustains a large community of more than 1,000 families. As part of the program, information is transferred and counseling is provided.
2. The defendants, Shmulik and Keren Froimovich (hereinafter also - "Shmulik" and "Keren" respectively, and together "Froimovich" or "the defendants"), are also spouses. Shmulik is a software engineer by profession and a start-up entrepreneur, including, according to him, he worked in large high-tech companies, including Intel, and was involved in the development of advanced automation software. Shmulik is also involved in leveraged internet marketing and presents himself as an expert in this field. According to him, he also deals with artificial intelligence and quantum computing. Keren is a software engineer who has worked in large companies and became an entrepreneur together with Shmulik. A fund is certified, among other things, for building companies based on procedures and business coaching. Froimovich are the sole owners of defendant 3, KSI Advanced Entrepreneurship inTax Appeal (hereinafter also - "KSI"), whose main business is the development of systems and software, as well as the establishment of ventures and online courses.

The Parties' Relationship and the Dispute in Summary

3. The matter of the dispute that the parties brought before the court is a venture that Fromovich Schwerber entered into as partners (as shareholders in a joint company). The relevant period is mainly the first half of 2018. During this period, the project was presented to Lorber, and subsequent developments led to the partnership's relationships; Relationships that were severed after a period of a few months.
4. The relationship between Werber and Froimowitz began to form years earlier when Werber enrolled in a course taught by Shmulik. According to Werber, they were impressed by Shmulik's vast knowledge and abilities, and subsequently decided to learn from Shmulik personally. They testify that they received a great deal of knowledge from Shmulik in a variety of fields related to marketing and business development, when in 2012 Shmulik suggested that Yonit join as a "mentor" to participants in one of his courses and the relationship grew closer. According to Werber, they saw Shmulik as a mentor, trusted him fully and trusted his words. Shmulik even posted a video on his website in which Yonit speaks in praise of "a transformation in the business while working with Shmulik Froimovich" and "life before and after Shmulik."
5. The Ottoman Settlement [Old Version] 1916 and Werber say that the relationship with Froimowitz over the years was not continuous and was expressed in certain collaborations. This was the case until December 2017, when the parties met for a friendly meeting, during which Froimovich shared with Werber a new business venture they had developed. This was a business venture for the marketing of digital courses called "Biz Academy" (hereinafter also referred to as "The Venture" or "Biz Academy"). This venture, which will be discussed more later, is based on revenue from monthly subscription fees paid by subscribers for access to view the content of various courses on an internet platform, where the lecturers are the ones who upload the content, and in return they (and other marketers of the platform) are entitled to commissions from the company according to the number of subscribers associated with them in a model known as "affiliate marketing".

12-34-56-78 Chekhov v. State of Israel, P.D. 51 (2)

6. Froimovich first suggested that Werber join as lecturers who upload courses to the platform in a way that would earn them commissions, and presented Werber with an Excel table that predicted that joining the project could yield Werber a monthly commission of more than ILS 1 million in the future.
7. Werber, who understood, according to them, from Froimovich's words that they had been working on the project for months, were impressed by the venture and its economic-business potential. They decided to accept Froimovich's offer and join as lecturers, while adding three of their courses to the project. At the same time, Yonit worked to recruit additional lecturers and create new content for the project and even entered into cooperation agreements with a number of lecturers for the purpose of developing joint courses. This was done while investing significant work over several months, according to her testimony.
8. Subsequently, as stated above and as detailed below, and Werber entered into agreements with Froimovich according to which they became partners in the venture (through a joint company).
9. The mutual claims before me derive, as stated, from disputes that arose between the parties in connection with the partnership relations in the venture. Werber's main argument is misleading or mistaken regarding the maturity of the venture and the technical system underlying it, as well as a fundamental breach of the agreements. For this, Werber petitions for the cancellation of the engagement, for the return of the sums they invested in the joint company and the venture, and for compensation for their alleged damages. Froimovich and KSA, for their part, claim in the statement of defense and counterclaim that they filed, inter alia, that Schwerber unlawfully terminated the engagement; They violated the obligations they undertook in connection with the venture and even damaged it - all while causing damage to Froimovich. In the counterclaim, Froimovich claims their alleged damages.

Description of the venture and business model

10. The name of the project is, as mentioned, "Biz Academy". The person who came up with it was Shmulik. The goal of the project is to bring together under one roof many courses by the best lecturers on a website in a way that allows the site's subscribers to view them in exchange for a monthly subscription fee at a nominal price (100 NIS). This is instead of purchasing courses individually from the lecturers and paying a high price for the purchase of a single course. The project was initially aimed at digital courses in the world of knowledge content for business owners, with the goal, as the evidence shows, to develop the project in the future into additional content areas.
11. Joining the site in order to access the content is done in one of two ways: as a subscriber to the site who receives access to all the courses offered on it in exchange for a monthly subscription fee, or as a lecturer in courses and a content creator, as was initially offered to Werber.
12. The venture was designed to operate in a business model of an "Affiliate Marketing Program", which allows lecturers and subscribers to take part in its marketing and distribution and receive compensation for this activity. According to the model, each marketing partner receives a personal link through which they can market the venture on various digital platforms such as mailing lists or social networks. Through this link, it is possible to identify subscribers who have joined the venture through the link of that "marketing partner", where the marketing partner is entitled to a commission for recruiting subscribers who came through it and enter under it in the "marketing tree".
13. The economic incentive for the marketing partners is, as mentioned, the payment of a commission for each subscriber who joins as a result of their marketing activity. In addition, marketing partners are entitled to commissions for additional registrants who come through the same subscribers who came through them, up to the "fifth generation" of registrants under the same primary marketer.
14. The model is described as a "marketing tree" headed by a chief marketer and underneath it is a hierarchical structure of five additional levels of marketers. To illustrate:

• First-generation resellers - This generation includes subscribers who signed up directly through the primary reseller's link. For example, if the primary reseller has added 5 subscribers, they will be entitled to a monthly commission for each of the subscribers they have recruited according to the set commission rate, and those subscriptions will be considered first-generation resellers.
• Second-generation resellers - This generation includes subscribers who signed up through subscribers who were recruited through first-generation resellers. Thus, for example, if out of five subscriptions recruited by the main reseller, one recruited 2 subscribers, and the other recruited 3 subscribers, another 5 new subscriptions were added, for which the main reseller is entitled to a commission, and for these subscriptions the first generation resellers are also entitled to a commission.
• Third-generation resellers - This generation includes subscribers who signed up through second-generation resellers. Thus, if one of the subscribers in the second generation recruits 3 additional subscribers, they become third-generation resellers, and the second-generation reseller, the first-generation reseller, and the main reseller will be entitled to a commission for them.

The same methodology applies to the fourth and fifth generations. As can be understood from the above example, the higher the marketer is at the top of the "marketing tree", the greater the number of subscribers accumulated under him, and accordingly the total commissions to which he will be entitled are expected to increase.

15. As mentioned, Shmulik presented to Lorber the profit potential inherent in the venture through an Excel table even at the stage when he wanted to recruit them to the venture as lecturers. According to the table (Appendix 1 to the Werber evidence), if a primary reseller recruits 7 subscribers and each of the subscribers recruits 7 additional subscribers, and so on until the fifth generation, he is expected to be entitled to a commission of ILS 78,162 per month. If the marketer recruits 12 subscribers, for example, and each of the subscribers recruits 12 additional subscribers under him, and so on until the fifth generation, he will be entitled to a monthly commission of ILS 1,084,212.
16. In order to realize the venture, Froimovich has established a website designed to serve as an interface for subscribers and lecturers that will coordinate the venture's database of courses, with software operating behind the scenes designed to enable the operation of the venture and the realization of its business plan (hereinafter: the "System").
17. The project was eventually launched on May 7, 2018. Previously, on April 12, 2018, Shmulik held a "webinar" (a lecture delivered live on the Internet) for lecturers who planned to take part in the project, during which Shmulik explained, among other things, the vision of the venture, the system's technological capabilities, and how to compensate lecturers and marketers in accordance with the aforementioned business model. Shmulik presented the project as a "revolution" and as one in which a lot of time, energy and money were invested. Another webinar was held after the launch, on June 22, 2018.
18. Shmulik noted in the webinars, among other things, that the lecturers will be given the right to market the project first and that it will be possible to join the project only through a lecturer's link. He described various actions carried out by the system, including automatically associating subscribers for up to five generations with the marketer's "marketing tree," as detailed above, and calculating the fees for the marketers, accordingly. It was noted that the system also markets the project independently, and that the subscribers who come through it (these were called "leads") will be distributed, for the purpose of entitlement to commissions, among all the lecturers in a fixed and circular order, with each lecturer entitled to a "lead" according to the number of his courses in the initiative. It was also noted that if the course is shared by several lecturers, the commission will be divided proportionally between them (for example, if the course is shared by two lecturers, then each of them will be entitled to a commission for half the lead). It was explained that the advantage of distributing the "leads" is that if a lecturer chooses not to engage in marketing the venture but only to create content, he will still receive commissions from subscribers who joined through independent marketing of the system.

It was also noted in the webinars that in addition to the marketing fees, a certain percentage of the company's profits will be distributed among the lecturers according to the popularity index of the courses. At first, Shmulik noted that the popularity index would be determined according to the scope of consumption of the course, but after its launch, Shmulik said that additional considerations should be taken into account in this index. Shmulik also said that the lecturers will be entitled to an increased commission of 5% of their total fees. To illustrate, Shmulik presented the participants with an Excel file detailing how the fees were calculated.

19. The launch date of the project was postponed several times and was ultimately set for May 7, 2018, as mentioned.

Werber's Joining as Partners in the Venture and the Agreements between the Parties

20. On April 20, 2018, Shmulik sent an email to all the lecturers in which he wrote: "We are almost ready for the launch, a few more small things and we will be able to fly up," but "we expect that everyone's preparations will be completed much sooner, and thus we may be able to go live in just a week" (Appendix 13 to Werber's evidence).
21. Up until that point, Werber's role in the project was as a lecturer. According to them, the impression they got from the conversations with Shmulik was that the system was ready for launch and was carrying out all the actions required for the proper operation of the venture.
22. In a conversation (recorded) between the parties on April 25, 2018, it was said that Werber would also join the venture as partners, and that for this purpose Werber and Froimovich would establish a joint company. Froimovich, who conceived the idea of the venture and began its establishment, asked in the same conversation that Schwerber would pay for joining the venture for what existed in it at the time.
23. Later, Werber decided to join as partners in the venture and it was agreed that they would pay ILS 500,000 for the purchase of a 41% stake in the venture.
24. Subsequently, on May 3, 2018, Werber and Froimovich signed two agreements:

The first agreement is a founders' agreement between Froimovich and Werber. According to this agreement, a company jointly owned by the parties will be established under the name of "Wellness Group Advanced Entrepreneurship Ltd.", through which the venture will be managed (hereinafter - the "Company" or the "Joint Stock Company"). It was agreed that Froimovich would hold a share capital in the joint venture at a total rate of 59%, and Werber would hold a share capital in the company at a total rate of 41% (clause 5.1 of the agreement). It was also agreed that the signing rights in the company would be joint, so that in order to oblige the company, one signature of each of the parties was required (clause 9.1 of the agreement). It was also agreed that the company would purchase the "system", as defined in the agreement, from KSA (defendant 3), according to an agreement to be signed between them, and Schurber would provide the company with the sum of ILS 500,000 for the purpose of financing the purchase of the system (clauses 1.3, 1.4 and 7.1 of the agreement).