A business planning to sell and distribute privilege cards entitling the bearer to discounts at participating merchants and to participation in the compensation plan based on recruitment of new members sought an advisory opinion in May 2005. The business wanted to know whether the proposed multi-level marketing plan would raise concerns under the Competition Act.

The Competition Bureau issued a negative opinion because the operator had not made fair, reasonable and timely disclosure of information relating to compensation received by typical participants in the plan, as required by subsection 55(2) of the Act, and because the proposed arrangement seemed to constitute a scheme of pyramid selling, as prohibited by section 55.1 of the Act.

All card sales were linked to participation in the marketing plan, which did not make any provision for sales to non-participants. Participants sold cards to new participants, thus recruiting the purchasers as new members. The structure of the compensation plan strongly encouraged prospective participants to undertake recruitment so as to develop their own networks. There was no way to distinguish between membership in the plan and purchase of the product, which meant that the plan contravened paragraphs 55.1(1)(a) and 55.1(1)(b) of the Act.

Compensation, in the form of either cash or a premium, was paid to participants for the sale of the product, which suggested that the initial purchase was not made at the cost price and was not made for the purpose of facilitating sales. This practice contravened paragraph 55.1(1)(b) of the Act.

Furthermore, since there was a direct link between purchases and recruitment of participants in the plan, the participants were receiving compensation for recruiting new participants, which contravened paragraph 55.1(1)(a) of the Act.

The Competition Bureau issued a negative opinion on June 10, 2005.

(3098982)