The U.S. and Canada prohibit product-based pyramid marketing schemes in different ways. This short article is intended to give multi-level marketing businesses a better understanding of the important legal asymmetries between the two countries.
The Canadian Competition Act specifically defines multi-level marketing (“MLM”) plans and prohibits pyramid schemes.
The Competition Act1 at s. 55(1) defines “multi-level marketing plan” as “a plan for the supply of a product whereby a participant in the plan receives compensation for the supply of the product to another participant in the plan who, in turn, receives compensation for the supply of the same or another product to other participants in the plan.” The Competition Act then provides that MLMs are legitimate, provided that the business follows the specific requirements under subsections 55(2) to (2.1).
Section 55.1(1) defines pyramid schemes as MLM plans that feature certain “fatal” characteristics. For example, an MLM plan becomes a Pyramid Scheme if there is a payment for recruiting people (and not the sale of a product) or if starter kits are sold above cost.
Section 55.1(2) prohibits pyramid schemes. In addition, paragraph 206(1)(e) of the Canadian Criminal Code prohibits pyramid schemes.
In short, the foundation of Canadian pyramid scheme law is primarily codified in legislation. This is not the case in the United States.
The U.S. statutory scheme only prohibits “unfair or deceptive acts or practices”.
Both the Federal and State governments have created a patchwork of laws that regulate MLM plans and pyramid schemes. Although there is no specific federal anti-pyramid scheme statute, a few states have enacted specific laws. Examples include Michigan’s Compiled Laws at §§ 445.2582(h) and 445.2583 and Texas’ Bus. & Com. Code at § 17.461(a).
Federally, 15 U.S.C. § 45(a)(1) states that “[u]nfair or deceptive acts or practices in or affecting commerce” are unlawful. in its seminal opinion of In re Koscot Interplanetary, Inc., the Federal Trade Commission (“FTC”) has defined pyramid schemes as being unfair or deceptive acts or practices.2 Subsequently, in another seminal opinion of In re Amway Corp.,3 the FTC listed safeguards that legitimate MLM companies can implement to limit pyramid scheme liability.
The Federal courts have deferred to the FTC’s opinions. For example, see the Ninth Circuit opinions of Webster v. Omnitrition International, Inc.4 and FTC v. BurnLounge, Inc.5 Both cases affirmed the FTC’s test for what constitutes a pyramid scheme, which is characterized by
the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the product to ultimate users.6
Main take away
U.S. federal law provides a general prohibition under § 45(a)(1), and then jurisprudence interprets activities that are prohibited under that section. Consequently, there is no precise statutory definition of what is legitimate. This contrasts with the Canadian method, where Parliament has enacted legislation that specifically defines which activities are legitimate and which activities are prohibited.
Although this article merely touched the surface on the differences between the Canadian and American legal regimes, there are countless other nuances. Every company thinking of expanding their MLM business into Canada or the United States should hire lawyers who know the nuances of Direct Selling law.
Should you have any questions, please contact any member of the Siskinds’ MLM team.
This article was written in collaboration with co-author Savvas Daginis, student-at-law.
1 R.S.C. 1985, c. C-34.
2 86 F.T.C. 1106 (1975).
3 93 F.T.C. 618 (1979).
4 79 F.3d 776, 781 (9th Cir. 1996).
5 753 F.3d 878, 883 (9th Cir. 2014).
6 In re Koscot Interplanetary, Inc., 86 F.T.C. at 1181.