On 23 October 2015, the Federal Court determined that the shopping scheme operated by various Lyoness companies was not in breach of the pyramid scheme and referral sale prohibitions contained in the Australian Consumer Law (ACL).1
The Australian Competition and Consumer Commission’s (ACCC) proceedings were dismissed and the ACCC was ordered to pay the Lyoness companies’ costs.
This decision is important for Australia’s direct selling sector because there has been little consideration by the Australian Courts as to what constitutes a pyramid scheme or referral sale, both of which are prohibited under the ACL.
In August 2014, the 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 ACL.2
The Lyoness Business Model
The Lyoness business operates in more than 40 counties and, as at 2015, has more than 3 million registered members world-wide.
Lyoness operates an Australian-facing website at www.lyoness.com/au (the Website) which offers consumers a range of different shopping “opportunities”, including:
- the ability for members to earn rebates and bonuses from shopping; and
- different ways to earn bonuses for introducing new members who also shop or make down payments towards future shopping.
Members of the shopping scheme were entitled to receive “Extended Member Benefits” (including various commissions and bonuses) depending on the number of units they held in the Lyoness Accounting Program.
The ACCC alleged that the only way a person could become a Member or a Premium Member (and entitled to receive Extended Member Benefits) was by making a down payment, which it characterised as a “participation payment” to join a pyramid scheme.
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. Further, it is not necessary that the entire benefit be paid to a participant in the scheme.
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.
The participation and recruitment payments may be either financial or non-financial benefits.
Maximum penalties for participating in a pyramid scheme, or attempting to persuade others to participate in a pyramid scheme, are $1.1 million for a company and $220,000 for an individual.
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, or having their downline sell, genuine products (of real value and at a reasonable price) to members of their downline or consumers, not from recruiting new members.
In finding that the Lyoness business model had not breached the pyramid scheme prohibitions, Justice Flick concluded that:
- The ACCC had failed to establish that the only way individuals could become a Member or Premium Member was by making a down payment, which the ACCC had contended was a “participation payment”.3
- Even if there was a “participation payment”, any “recruitment”-type payment was not a payment in relation to the introduction of further new participants into the scheme, a requirement under s45(i)(b).4
- It was not held out to individuals that they would be entitled to a recruitment payment for introducing further new participants, a requirement under s45(i)(b). Rather any entitlement to a benefit was a result of the shopping activity of the new Members, not their introduction.5
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. 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.
In finding that Lyoness had not breached the referral sales prohibition, Justice Flick determined that:
- There was not a real, sufficient or material connection or relationship between the giving of names of prospective customers and the receipt of a benefit6; and
- In interpreting section 49, the same principle that is relevant in interpreting section 45 applies, namely that the prohibition only applies where the real or substantial rewards held out are derived substantially from recruiting new participants, as distinct from rewards for making genuine sales of products or services.7
The ACCC is reviewing carefully Justice Flick’s decision. If it wishes to appeal, the ACCC has until 13 November 2015 to so do. We will keep you up-to-date with any further developments.