Multi-level marketing is not always pyramid selling

Everyone knows that pyramid selling is unethical and illegal, but it is not always easy to identify an unlawful  pyramid selling scheme as defined by Section 65AAD of the Trade Practices Act.

In Australian Communications Network Pty Ltd v Australian Competition and Consumer Commission [2005] FCAFC 221 (25 October 2005) the Full Court of the Federal Court of Australia upheld an appeal by ACN against the Federal Court’s original finding that its multi-level scheme for the marketing of retail telephone services was pyramid selling which is an offence under Section 65AAC.

Some key quotes:

"ACN engages independent representatives (IRs) who sign
up customers for ACN’s services.  IRs are not employees of ACN.  Nor do
they acquire ACN’s phone services themselves for onsupply.  ACN bills its
customers direct and pays IRs a commission on billings.  IRs are not responsible
for a customer’s bad debts to ACN.  To become appointed as an IR a person
makes a payment, called a participation fee, of $499 plus GST (total $548.90) to
ACN.  There is an annual renewal fee of $163.90.

2 The multi-level aspect is an essential element of ACN’s system.  IRs
introduce other  IRs.  Those downstream IRs in turn introduce other downstream
IRs and so on.  The downstream IRs form part of an upstream IR’s
"organisation" for the purpose of calculating commissions on ACN’s
billings to customers introduced by the IRs.  All downstream IRs pay their
participation and annual renewal fees to ACN, not to the IR who recruited them.
Commission arrangements are complex, and will be explained in a little more
detail below, but in essence, IRs receive commissions not only for the billings
to customers they have signed up but also for ACN’s billings to customers
signed up by their downstream IRs.  However, no commission or other reward is
earned simply by recruiting a downstream IR; there has to be a billing by ACN to
a customer for telephone services…

The primary issue is whether Selway J was correct in holding
that some forms of compensation payable by ACN to IRs were "recruitment
payments".  This question turned on whether an IR’s entitlement to such
payments could be said to be "in relation to the introduction to the scheme of
further new participants"…

It is clear from the text of s 65AAD(1)(b) that a payment for
the introduction to the scheme of further new participants will be a payment
in relation to the introduction of the new participants.  Also, it is
clear from the Explanatory Memorandum that it was intended that a payment that
is, in substance, a payment for the introduction of new participants is an
aspect of the vice or mischief aimed at by the legislative scheme.  But the
question of whether payments made, for example, under a multi-level marketing
scheme as a result of post-introduction activities of the members introduced by
participants were also intended to be recruitment payments requires
consideration of whether such payments were also considered to be part of that
vice or mischief…

the vice inherent in pyramid selling schemes is the reward that, as a
matter substance, is given directly or indirectly, for the introduction of new
participants, rather than a reward based on sales or other such activities by a
participant or others introduced by participants.  In the present case, the ACCC
was not able to refer the Court to any material or cases that suggest that the
latter activities, which the ACCC itself described as a legitimate multi-level
marketing scheme, were an aspect of the vice or mischief aimed at by the
legislative prohibition of pyramid selling schemes.  Indeed, the ACCC was not
able to point to any economic or social vice or mischief involved in a
multi-level marketing scheme that would warrant such a scheme falling within the
prohibition of pyramid selling schemes proscribed by Div 1AAA…

44 True it is, the marketing of goods and services may be involved in a
pyramid selling scheme, as subs (3)(e) makes clear.  But the converse does not
follow; the fact that there is multi-level marketing of goods and services does
not necessarily mean there is
a "pyramid selling scheme"."

UPDATE: The Australian Competition and
Consumer Commission has filed an application for special leave to
appeal to the High Court from the judgment of the Full Federal Court in
relation to a scheme operated by Australian Communications Network Pty
Ltd. Media Release


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