Multi-Level Marketing and Pyramid Selling - Nutritional Supplements Distributor

A company that distributes and sells nutritional supplements 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 operator failed to make reasonable and timely disclosure of the earnings of typical participants as required by Section 55(2) of the Act, and that the plan appeared to constitute a scheme of pyramid selling as defined in section 55.1 of the Act.

• All product sales were tied to participation in the marketing plan. There was no provision in the marketing plan for sales to non-participants. Existing participants sold products to new participants thereby enrolling the purchaser as a new member. Compensation was paid to the existing participant for each of these sales. There was no way to separate the membership from the product purchase, and thus the plan offended both paragraphs 55.1(1)(a) and 55.1(1)(b) of the Act.
• Compensation was paid to the existing participants for the sale of products, suggesting that the initial product purchase was not sold at cost, nor was its purchase intended to facilitate sales. This is contrary to the requirements in paragraph 55.1(1)(b) of the Act.
• Furthermore, because of the direct link between these purchases and enrollment in the plan, existing participants receive compensation for the recruitment of new participants, offending paragraph 55.1(1)(a) of the Act.

The Competition Bureau provided a negative opinion on September 13, 2004.

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