Health Product Distribution - Multi-level Marketing and Pyramid Selling

A multi-level marketing company distributing a health product sought an advisory opinion in August 2003 on whether its proposed business plan would raise concerns under the Competition Act.

The Competition Bureau examined the proposal under the multi-level marketing and pyramid selling provisions of the Act, sections 55 and 55.1. Based on its understanding of the facts, the Bureau determined that if the company implemented the plan as proposed the Commissioner would have sufficient grounds to commence an inquiry for the following reasons:

• While the proposal stated that there were no required product purchases to join the plan, the material submitted and the company's Web site clearly emphasized that for members to participate fully in the plan and achieve all its benefits they would have to purchase a minimum monthly amount of the company's product. Subsection 55.1 (1)(b) of the Act defines multi-level marketing plans which require participants to purchase a specific quantity of a product, other than a starter's kit at cost, in order to participate in the plan as illegal pyramid selling schemes.
  
• While the proposal stated that participants would not receive compensation for recruiting, the Bureau found that certain bonuses, available only when a participant initially sponsors a new member, coupled with compensation paid for meeting purchase requirements, would constitute recruitment bonuses. Subsection 55.1 (1)(a) of the Act states that an illegal pyramid selling scheme exists when participants in a multi-level marketing plan pay for the right to earn bonuses for recruiting new members who in turn pay for the same right.
  
• While the company's Web site included lifestyle representations relating to compensation a participant could obtain, it did not contain any reference to the compensation a typical participant would or would likely receive. Under subsection 55 (2) of the Act, a plan that includes representations relating to compensation must also disclose the amount of compensation actually or likely to be received by a typical participant.

For the above reasons, the Bureau provided the opinion on August 25, 2003, that the proposed plan if implemented would give the Commissioner grounds to commence an inquiry under both the multi-level marketing and pyramid selling scheme provisions of the Act.