The ACCC commences Federal Court proceedings in respect of possible breaches of the pyramid scheme and referral sale prohibitions contained in the Australian Consumer Law

On 28 August 2014, the Australian Competition and Consumer Commission (ACCC) commenced proceedings in the Federal Court against Lyoness Australia Pty Limited, Lyoness UK Limited and Lyoness International AG (collectively Lyoness) in respect of alleged breaches of the pyramid scheme and referral sales prohibitions contained in the Australian Consumer Law (ACL).1

This publication considers the Lyoness business model and the pyramid scheme and referral sales prohibitions contained in the ACL.

The Lyoness Business Model

Lyoness operates an Australian-facing website at www.lyoness.com/au (the Website) which offers consumers a range of different shopping “opportunities”, including:

  • receiving up to 5% of the purchase value of a product purchased from a Lyoness Loyalty Merchant as a cash back rebate;
  • ”Shopping Points”, accrued with every purchase made with Lyoness, which may be redeemed, for example, on Lyoness Loyalty Merchant Shopping Point deals or used to obtain discounts on products available to purchase in the Lyoness online “Loyalty Mall”;
  • a friendship bonus of 0.5%, payable when a friend referred by a Lyoness member registers with Lyoness and makes a down payment for shopping in the future; and
  • vouchers, which may be purchased in advance and redeemed at a range of Lyoness Loyalty Merchants. By purchasing vouchers, individuals receive cash back rebates and shopping points.

Lyoness Loyalty Merchants are retailers and service providers which have entered into an agreement with Lyoness to, for example, promote their products and services on the Website and provide discounts to Lyoness members. As at August 2014, there were 780 Loyalty Merchants in Australia, including Apple, Target, Dick Smith and Dymocks.

According to a Lyoness media release issued in response to the commencement of the proceedings by the ACCC, Lyoness has been operating for 10 years (currently in 46 markets), has 4 million members and 40,000 Loyalty Merchants worldwide.2  The media release states that Lyoness intends to “vigorously defend” the proceedings, that its daily business has not been affected, that the court action will have no effect on Lyoness members and that Lyoness has never been convicted for operating a pyramid scheme in any of the markets in which it operates.

What is a prohibited pyramid scheme?

Section 45 of the ACL sets out the two essential elements that signify a selling arrangement as an illegal pyramid scheme. For there to be an illegal pyramid scheme, there must be:

  • a participation payment; and
  • a recruitment payment.

A “participation payment” exists where new participants are required to make a “payment” to another participant(s) in the scheme. This participation payment may be either a financial or non-financial benefit. Further, it is not necessary that the entire benefit be paid to a participant in the scheme. A benefit paid partly to a participant, and partly to someone else not involved in the scheme, will still be considered a participation payment.

A “recruitment payment” exists where representations are made that new participants will be entitled to recruitment payments or benefits in return for recruiting further new participants, rather than for selling a legitimate and valuable product or service. Again, these promised benefits may be either financial or non-financial.

The maximum penalties in respect of a company or person who participates in a pyramid scheme, or attempts to persuade others to participate in a pyramid scheme, are $1.1 million for a company and $220,000 for an individual.In Australia, it is illegal not only to participate in a pyramid scheme but also to promote a pyramid scheme, or induce or attempt to induce, another person to participate in a pyramid scheme. It is quite possible that, if the Lyoness business model is found to be a pyramid scheme, its members and/or Loyalty Merchants will be considered to be participants.

Pyramid schemes can be distinguished from businesses that are legitimate multi-level marketing businesses (MLMs). In contrast to pyramid schemes, people involved in MLMs earn income by selling genuine products (of real value and at a reasonable price) to members of their downline or consumers, not from recruiting new members.

What is a prohibited referral sale?

Section 49 of the ACL provides that a person must not induce a consumer to acquire goods or services by representing that the consumer will, after the contract for the goods or service is made, receive a rebate, commission or other benefit in return for either of the following:

  • giving the person the names of prospective customers; or
  • otherwise assisting the person to supply goods or services to other consumers,

if the payment of the rebate, commission or other benefit is contingent on an event occurring after the contract is made.

In other words, a business must not make representations to consumers that, if they buy goods or services, they will then receive a rebate, commission or other benefit for assisting the business to supply goods or services to other consumers, when there is no assurance the relevant benefit etc will be paid (because it depends on the occurrence of another contingency or event). The relevant representations do not have to be the sole (or main) inducement for the consumer to acquire the goods and services.

The maximum civil and criminal penalties for referral selling are $1.1 million for a company and $220,000 for an individual.

What next?

Clearly, the Lyoness proceedings may have implications for the operation of business models where:

  • a payment or other benefit is paid to a member for signing up new members, where the payment is contingent on the new member making a purchase; and
  • the prospect of receiving a payment of this nature, namely for referring new customers, acts as an inducement for an individual to become a member.

The Federal Court proceedings are still at an early stage and any hearing will not take place until well into 2015. We will keep you up-to-date with any developments concerning the proceedings.