A company that distributes and sells beverages, sought an advisory opinion on whether its proposed plan would raise concerns under the Competition Act.

The Competition Bureau examined the proposal under the multi-level marketing and pyramid selling scheme provisions of the Act, sections 55 and 55.1. The Bureau provided a negative opinion in August 2006 on the basis that the plan appeared to raise an issue under the Act.

It is the Commissioner’s view that purchase requirements may contravene subsection 55.1(2) of the Act by creating a pyramid selling scheme as defined by paragraph 55.1(1)(b) of the Act. It indicates that if the products of the plan purchased by the participants are not at the seller’s cost price for the purpose only of facilitating sales. The plan imposed a sales requirement through a monthly sales quota for the participants and it had cancellation clauses as penalties for the failure to produce the quota. Participants that failed to produce the quota for two consecutive months faced the consequence of having their downline being rolled up. Further, the failure of a participant to produce personal volume in any amount, for six consecutive months resulted in cancellation of the agreement to participate in the plan due to inactivity.

The plan did not impose a purchase requirement on its participants. It permitted sales to individuals, who were not participants in the plan, in order to generate personal points and advance to the next level in the plan. Additionally, the plan made it possible for participants to purchase the plan’s product and receive the personal points associated with the sale of the product provided. The purchase itself was made directly from the company (the seller).

Based on the its understanding of the consequences of the plan’s cancellation clauses to the participant, the ability of participants to make personal purchases and generate points to remain in the plan, the Bureau formed the following opinion: the cancellation clauses create a potential de-facto purchase requirement for a participant faced with the prospect of not meeting the sales requirement imposed by the plan. A participant faced with the prospect of not meeting the sales quota, as imposed by the plan, had to purchase products directly from the seller in order to avoid expulsion. Further, under the circumstances, the purchase made by a participant directly from the seller (in order to achieve the personal points required and remain in the plan) could not be considered as a purchase at the sellers cost price.

(3100036)