### THE J$.TB?CBRNEY GENERAL OPI‘EXAS

February 1,1971

Honorable Enrique H. Pena County Attorney Room 201 Opinion No. M- 781 City-County Building El Paso, Texas 79901 Re: Whether corporation licensed to transact business inTexas and whose marketing system has several levels of distributorships violate theAntitrust, Deceptive Trade Practice, or Lottery Dear Mr. Pena: Laws of Texas.

You have requested our opinion concerning the legality of a sales plan currently being utilized by a Texas corporation. Specifically, you requested thatwe review the sales plan in light of theAntitrust, Deceptive Trade Practice and Lottery Laws of the State of Texas.

Along with your opinion request, you submitted the following information describing the company's sales plan. The company offers for sale, atvarying prices, several positions. The positions are generally referred to as distributorships. The structure of the company is in the general classification of apyramid ormulti-level type.

As you know, not infrequently businesses organized along this structural line do engage in violations of the Antitrust and Deceptive Trade Practices acts of this State and **on** occasion may violate the Lottery statutes. When this is so,however, it isbecause the actions andmisrepresentations engaged inby the company's representatives when presenting the program and the opportunities formaking money, for apyramid business structure isnot presently, inand of itself, aviolation of any of the three laws above named.

Pyramid companies typically provide that goods must be purchased only from those people who introduce the purchaser to theplan and these new distributors then become apart of that introducing distributor's sales organization. The introducing distributor then is rewarded for all sales madewithin his organization, even thosemade by recruits of his distributors. Thiswould constitute a conspiracy between two or **more**

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persons not tobuy from or sell to another individual which would be in direct violation ofArticle 15.03(a)(11,Vernon's Civil Statutes which provides as follows:

"(a) It is a conspiracy in restraint of trade for

(1) two ormore persons engaged in buying or selling tangible personal property to agree not tobuy from or sell to another person tangible personal property;" Thus it is clear that if the person who is introduced into theplan by a certain distributor isprohibited by the plan from purchasing from anyone other than his introducing distributor, there is aviolation of our law.

Additionally, in aplan such as this there isnormally a fixed price listwhich controls the resale price of goods sold by thedistributors at the various levels.

An agreement among the distributors and the company fixing andmaintaining the resale price of themerchandise so that all distributors at the same level sell an item for the same price is also aviolation of the Texas Antitrust laws. SeeArticle 15.02(b)(5)(A),Vernon's Civil Statutes, which provides: "(b) h 'trust' is a combination

of capital, skill, **or** actsby two ormore persons to

(5) agree (A) not to sell, dispose of, transport, **or** prepare tangible personal property formarket or transportation, or not tomake an insurance contract, at aprice below a common standard or figure;"
It is clear that ifprices for the product are set andmaintained by theparent organization and the individual distributors are not free to choose their own resale price, as isnormally the case in apyramid organization if it is towork as outlined by the sales representatives, then there is another violation of our Texas Antitrust law.

The Distributor's Manual which you supplied alongwith your request affirmatively points out that members of theprogram are free topurchase fromwhomsoever they desire at the best price possible and that theymay resell their goods to anyone at any price they so choose. Whether or not such conditions are in fact true in this particular sales plan is -3803-Honorable Enrique H. Pena, Page 3 (M-781)

aquestion of fact and one uponwhich this office will not pass. We pause topoint out that themere recitation in the salesmanual of these facts does not control, and it is the actual actions of the company and its "distributors" when making the sales presentation and in dealing with its distributors which determines whether or not there has been aviolation of our law.

Regarding theDeceptive Trade Practices Act, it is not unusual forpyramid sales companies, and indeed other companies, tomake gross misrepresentations in the sales presentation as toprospective earnings,and the easewith which these earnings may be accomplished. These claims are often made in a revival like,mass meeting referred to by some glowing namewhere the plans are outlined with rehearsed and theatrical precision. Unfortunately, it isnot unheard of for the representation tobemade at such ameeting that this office, or some other governmental agency, has approved theplan. Suffice it to say thatwhere misrepresentations aremade **con** cerning thebenefits of the sales plan or its approval of sponsorship, it is aviolation ofArticle 5069-10.01(b) (5) which provides:

”(b) 'Deceptivepractices' means any one ormore of the following:

(5) representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities that they do not have or that a person has a sponsorship, approval, status, affiliation, or connection thathe does not have;"
The material you submitted indicates that this company does not utilize themass sales meeting technique. Rather, it seems, a company representative approaches every person individually and describes the sales plan on its ownmerit. Additionally, you state that each person is toldhow many distributors there presently are in the area and the total number **of** distributorships available for the area. Thus aprospective purchaser is aware at the time of his purchase of themarket saturation, **or** lack thereof, inhis area. Further, it appears from the submitted materials that realistic claims of earnings are presented by the company to prospective distributors rather than the exhorbitant and fantastic claims which all too often are companions to sales presentations of this type. We caution again that actual fraud or misrepresentation is aquestion of fact, ana we do not attempt topass upon the question ofwhether the company actually follows the sales manual you supplied. It
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Honorable Enrique ii.Pena, Page 4 (M-781)

does appear from the information that you furnished us that this company does not engage in such misrepresentation. It is elementary that if there is nomisrepresentation of theproduct, the sales program involved or potential earnings, then there is no violation of our Deceptive Trade Practices Act.

Finally we come to thequestion ofwhether this sales plan violates the Lottery Laws of the State of Texas. A lottery in Texas consists of three essential elements, which are consideration, prize and chance. See Griffith Amusement Company v. Morgan, 98 SW2d 844 (Tex.Civ.App. 1936, nowrit); City ofWink v. Griffith Amusement Comnanv 129 Tex. 40, 100 SW2d 695 (1936); State v. Socony Mobil Oil ComLany, 386 SW2d 169; andAtt. Gen. Opinion Nos. C-619 (1966)and M-343 (1969). In aplan such as this the problem always is one ofwhether or not there is chance. There is obvious consideration, the cozt of distributorship, and prize, the chance tomake large earnings. The only question remaining iswhether skill or chance is the dominant factor. From the facts given, it appears that in thisplan skill and effort on thepart of the distributor areparamount and that chance, if any, isminimized to thatpoint towhich any ordinary businessman would be subjected. SeeAtty. Gen. Opinion No.M-343 (1969). For this reason it is the opinion of this office that the sales plan aspresented does not constitute aviolation of theLottery laws of this State.

We stress that this opinion isbased upon the assumption of the truth and accuracy of the facts submitted along with your opinion request aspointed out above. If the company is saying one thing in their sales manual but actually doing another, then theremight well be aviolation of any or all of the above noted laws. In addition, since this office iswithout authority to determine factual questions,we point out that if it is caused to appear that a factual controversy ispresented, the court of jurywould make theultimate factual determination.
SUMMARY ------- A sales plan which does not contain a conspiracy not tobuy from or sell to another individual andwhich does not fix resale prices does not violate Article 15.03(a)(l), Vernon's Civil Statutes. A sales plan which does not fix ormaintain resale prices does not violate Article 15.02(b)(5)(a). A sales plan inwhich there isno deceptive sales representation does not violate Article 5069-10.01 et seq. A sales plan which does
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not contain the essential eration, chance and prize a lottery inviolation of **COd8.** If it appears that

._ - .. elements; considdoes not constitute Article 654, Penal the facts are controvertea as to any or tne elements constituting a lottery, the determination of such a factquestion cannot be made by this office but is aquestion for a cqrt or jury.

., ",.' Vea$Xuly Yours, ./

AGorney/06neral of Texas Prepared by Robert E. Owen Assistant Attorney General
APFROVED: OPINION COMMITTEE
Xerns Taylor, Chairman W. E.Allen, Co-Chairman Gordon Case Larry Craddock Jim Swearingen Wardltm Lane
MEADE F. GRIFFIN Staff Leqal Assistant
ALFRED WALKER **EX8CUtiV8** Assistant
NOLA WHITE First Assistant

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