Automotive products - Multi-level Marketing and Pyramid Selling

A company that distributes and sells automotive products sought an advisory opinion in August 2004 on whether its proposed multi-level marketing plan would raise concerns under the Competition Act.

The Competition Bureau provided a negative opinion on the basis that the plan appeared to constitute a scheme of pyramid selling for the following reasons:

• Bonuses were paid to participants in the plan when they recruited other prospective participants who paid to join the plan. Notwithstanding the existence of an option to join the plan without paying, the nature of the plan suggested that many, if not most, participants would in fact choose to pay to join the plan. Compensation was paid for recruiting each new participant who made this same choice, thereby meeting the definition of a pyramid selling scheme in paragraph 55.1(1)(a) of the Act.
• The plan required participants to make purchases as a condition of participating fully in the plan. In this case, minimum retail orders or thresholds were required in order to attain specific levels of compensation within the plan. Purchase requirements to participate in a plan or obtain the full benefits of a plan are considered by the Bureau to meet the definition of a pyramid selling scheme in paragraph 55.1(1)(b) of the Act.
• The plan’s buy-back guarantee did not appear to be exercisable on reasonable commercial terms. In this case, return of the product was conditional on the participants’ exit from the plan. This was considered not to be a commercially reasonable condition and as such the plan met the definition of a pyramid selling scheme under paragraph 55.1(1)(d). Furthermore, given the severity of these return policy conditions, when considered along with the plan’s minimum purchase thresholds, the plan potentially gave rise to a condition of inventory loading as defined by paragraph 55.1(1)(c).

For the above reasons, the Bureau provided a negative opinion on September 28, 2004, that the proposed plan, if implemented, would give the Commissioner grounds to commence an inquiry under the pyramid selling provision of the Act, section 55.1.

(3098143)