February 21, 1969

Commissioner Francis A. Mlskell ConsumerCredit Commissionek P. 0. Drawer “WW ”~ Opinion No. H-343 Capitol Station Austin. Texas 7871.1 - - Re: Whether

~“chain” or “wramid” selling plans, lnvol;ing the sale of distributorships primarlly andthe sale o? merchandlee secondarily, constitute lotteries or violate the D,eceptive Trade Practice provision of the Texas Consumer Credit Code or the Texas Anti-trust Adt Dear Mr. Miskell: Youhave requested our opinion concerning certain chain or pyramid selling plans wherein the sale of distributorships is primary andthe sale of ’ merchandise is secondary, andhave inquired as to whether such plans constitute lotteries, or are in violation of the Deceptive Trade Practice provision of the Texas ConsumerCredit Code, or the Texas Anti-trust Act. The four selling plans in question, which are summarized from the various instruments, documents, charts andmemorandafurnished by your office, all,operate in muchthe sameway, three being almost identical, andthe fourth different in operation. Thethree similar pyramid plans are utilized to distribute a product through four levels from the companyto the public. One companysells an automobile accessory called a “vapor-inJector” which ostensibly increases gas6line mileage, reduces exhaust emissions, andresults in the use of lower octane rated, less expensive gasoline. The second companysell8 an automobile accessory called a “gyromatic safety control” device which ostensibly prevent6 outof-control skidding. The th&M companysells a line of cosmetics.

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ThecompanyutIlIz1ng the fourth pyramid plan, unlike the others, does not sell a product through its distributors but utilizes a three level pyramid organization to distribute cards which entitle the card-bearer to shop at the company‘8 discount stores. Member6of each of these pyramid plan organizations are recruited by the companyat periodic and regular companysales meetings held once aweek or more. At these meetings little time Is spent by the companyexplaining the product, but a great deal of time is spent explaining the pyramid distribution concept andplan, and its benefits to the members. In the three similar plans, the product distribution plans, the companies represent that a.person can .ioin the organization and become a distributor by purchasing the required numberof units ot their product analmen reaiim a tremendous income after a short period of time by rlmp4 recruiting other distributors whowill buy the product from the dlstributor whorecruited them. Thenumberof products required to b.epu#- chased to join the organization 1s determined according to which of the four levels is ChOBen;the higher the level, the greater the

‘number of units required to be purChaBed. Price differentials :

are madebetween the levels of the pyramid, with the higher levels enjoying a lower buying price. This differential is called an
“override”

. In addition to the “override” received on each unit of the product sold to a lower level distributor, each distributor receiv~es a “training fee” from each newdistributor he recruits. The “training fee” is ostensibly compensation, for the .,~. ,~,., ,, recruiter’s time in explaining the distribution plan of the company andteaching the newdistributor to market the product. Thecompany repreaents to prospective distributors that by simply recrulting several others Into the pyramid at each succeeding sales meeting a distributor can movesteadily upthe pyramid and expect to realize an income close to $100,000 within ayear. Oneof these pyramid plans computes its figures by using anaverage of five people recruited~into the organization by each other person in the organization each month. The companies donot explain the market potential of their productn, and they donot screen the prospective distributors to dstermLne their relling ability or financial respohslbility

. Thecompanyutilizing the fourth pyramid plan holds salea meetings on aweekly basis and recruits member8In the nameway as ~&MST

other three plans. Tojoin this card distribution pyramid organization a person must pay an enrollllent fee which Is priced according to the level chosen, a higher price for a higher level.

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Thenhe mustpay a monthly service charge to remain a member. The membersdistribute companyca~rdswith their distributor number thereon to several hundred people, andthen receive a percentage of the p,rofit onthe merchandise purchased,at a company store by one of their card-bearers. Thedistributors in the pyramid in line above the dilstributor whoae card is used also receive a percentage of the profit. Woproduct is bought and sold by these pyramidplan members. Theymerely distribute cards andbring proepective membersto the sales meetings.

In Texas the term “lottery” is said to have no technical signification in the law; andsince the prohibitory statute (Art. 654, Vernon’s Penal Code) fails to provide any definition, its meaning must be determined from popular usuage in the commonlaw; with due consideration to the public policy undsrlging tha authority. 37 Tex. Jur. 2nd 493, Lotteries, Sec. 1. It is well settled in Texas that a lottery ie composed of three elements : (1) a prize or prizes;

(2) the award or dietribution of the prize or prizes by chance; and (3) the payment either directly or indirectly by the particdpante of a consideration for the right or privilege of participating. City of Winkv. Griffith AmusementComr, , 100 S.W.Pd695 (Tex. 1936 * m 

### V. State, 127 

### SW2d vyP&ate ’is2 242 ’S:W.2 (Tex. Grim. 1939); Brice Socony tiibi.1 011 Company,386 S.W.26‘ 16 3 (1Bl)j State v. - ex. Civ

. An, err, ref., n.r.e.). In the facts presented in the product dietrdbution plans It appears that the moneyto be received by each dietributor as an
“override” commleeion for the eale of the product andthe moneyreceived as a “t.ralnlng fee” for helping to recruit people into the organizatioiwould conetltute the price which is the first element of a lottery. Thethird element, payment of coneideration by the participants for the right to participate, aleo clearly appears a8 a part of theee pyramid celling plan arrangements. TheconelUeration for the opportunity to receive the price 16the purchase price

-1693-Honorable Francis A. Mlskell, Page 4 (M-343) paid for the products purchased, either fr,om someone higher than the purchaser within the the “training fee” paid. In the card distribution plan the first element 

### 0ra lottery, price received by the the prize, is the percentage of the purchase card distributor whenever one of his card-bearers makes a purchase at a companystore. Thethird element consideration, .is the aemher’s enrollment fee andthe monthly iservice charge whfch must be paid to remain a member. the companyor from organization, add

Thesecond element of a lottery, the distributlm of the prize by chance, requires a cloeer annlynis in the Ii&it of the deci~lons as to whether or not the dominatW element of the entire scheme is that of chance or that of 8kl fjhC.J.S. 846 Lot- Set 2b(2)dk&%%%e”r,’ the plan or g;ms dependr’e&elg cm ’8kl.11, ikfs not a lotier,, although State, ts

rizea are offered ?or the bert rolutlon. 11 Tex. Grim. 381, 38 S.Y.2d sates over skill or lottery is estamed. 0. Leach, 67 W.D.28 618, (Wash. Sup. 1965)

. In the opinion to which you referred ln your first letter, Attorney General Oplnlaa lo. C-619 $966), it washeld that a chain referral selling plan contain 1ngthe elements of a prize constituted a lottery in Texas, where ,the,participants whopaid for the merchandise and turned in a list of namesto the company hadno control over whether the ..~.., contacted by the company, ti eople they namedonthat llst.were 80d P th8 merchandise which would resuit in a rebate to tharr. TRIrs muchof the LabC-arylawfrom other states as well a8Ten8 ~8 reviewed to determine whether chance predominated we? 11 and !e &t&ment in the plan, andwe mat it did becauro -8 inherent from the lack of control which the participants lnd war whether the persons they namedand referred were sold the merchandise. In the card distribution py,ramidplan in questian hors, chance appears to be the dominaat element over okill General Opinle. nt 6mnuity as it was in Attorney @a- participant in this plan receives noprize at all unlerr OMof hi8 card-bearers happens .to shop at one of the.cixnpaly rtorer, **and** make8 a purchase. Hehas no control over where hi8 card-bearer8 mi&t rhop. Granted he might screen carrfullg th8 if he gives them to ~tt~~f~~~~~~e~~~~~~‘~h~~~ will shop 

### at am oi 

### thase 8tore#, he 

### is not aaeured that they will #hopthere. Hedoea ccntrol tb psople he brings to the organizational

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sales meetings and encourages to join the pyramid plan, but he has no control over the shoppers to whomthey in turn give their cards andwhether those people shop at a companystore or not. Therefore, It appears to us that the element of chance predominates over any skill or udmentin the card distributionplan. inthe plan t rough the lack of control of the carwere. This

w Chance is inherent plan thus constitutes a lottery in Texas within the meaning of the commonlaw andArticle 654, Vernon’s Penal Code. Theproduct distribution pyramid plans present a closer question on the element of chance, which wethink would have to be submitted to the fact findxa court of law. Onthe face of all three plans there appears to be simply a business arrangement involving independent contractors contractually bound to other independent contractors. The distributors at the various levels purchase the oroducts for resale and resell themto whomthev nlease. Resale to the public, of course, ~;~~;;tto;*enuiEy. involves a certain amountof selling &ll, These three plans would certainly not be e sa e of merchandise were primary. However. the sale of merchandise appears to be only secondari to the sale,of &.stributorships, with the result that a distributor’s success hinges more onhis ability,to recruit lower level distrfbutors tnan onhis ability to sell the product. Weare unable to ascertain from the material which wehave received describing these three plans whether, in fact, any of the distributors at any level ever attempt to sell the product to the public. Someonemust SeUthe product if anyone in the organization is to realize a return onhis investment. We also cannot ascertain whether, in fact, any of the upper level distributors help train the lower level distributors or help themin their sales efforts if the lower level distributors doattempt to sell the product to the public. Someskill or judgment certainly is required to convince friends, relatives, andacquaintances to come to the sales meetings at which the organization leaders explain the pyramid plan andthe benefits of it. Further, wecannot ascertain from the material which is available describing these plans whether the membersof the pyramid organizations help at the sales meetings in selling the pyramid concept and in convincing prospective distributors to join the organization. If the membersdo sell the product, train newdistributors, and/or help sell the pyramid concept, then they are exerting suni degree of skill ingenulte in makingthe organisation workabl~e aeo chance would be a less dominant factor.
- These three plans differ from the plan, concluded as a matter of law to be a lottery, in Attorney General Opinion No. c-619 in that here the membersof the plans can sell the product and/or can help convince others to join the organization and/or can help train or supervise the recruited distributors, whereas in the referral selling plan considered in Attorney General Opinion No. c-619 the participants in the plan hadno control whatsoever once they turned in the list of namesto the, salesman. Weconclude, therefore, that there is a fact question In these three product distribution pyramid

-1695-Honorable Francis A. Miakell, Page 6 (M-343) plans as to whether there la enough skill, exerted by the distributors and membersof nate over the.chance element, which is certainly present to some extent. This s has no authority to determine fact questions, which is the province of the trier of facts in a court of law.

Wehave examined pyramid selling plane generally~and not specifically the four described above, in light of the Deceptive Trade Practices provision of the Texas ConsumerCredit Code, Article 5069 - 10.01, et seq., Vernon‘8 Civil Statutes. If a pyramid selling plan has as its primary purpose the eelling of a product only to membersandprospective members 3f the organization rather than to the public at large, then a Fepreeentation, or the creation of an illueion, that the primary purpose is to sell the product to the public will constitute a false repreeentatlon of the,purpose of the plan anda,“deceptive practice” under our construction of the Texas ConsumerCredit Code. If the primary purpose is to sell the product to the public, then public sales figures or potential ealee figures must not be falsely repreeented;~ andan inaccurate or exaqerated claim of ea)ee, expressed or I”- plied, will constitute a deceptive practice under the Texas Consumer Credit Code. Typically a pyramid plan sales pitch stresses to the promtlve membersthe numerical progression possible for ‘building an organizatl~on.’ Sucha sales pitch might envision each memberof a pyramid organization recruiting five others into the organization ” each month, andthose five recruiting five others each, etc. from month-to-month. It is apparent on its iace that such ,anumerical progression cannot continue long without saturating the market. Thus, one of two occurrences is certain. Either the,market will soon be saturated, or more likely, the progression will not continue to operate in the waythat it is represented, because some meniberewill not recruit other members.

“deceptive practice” is In either instance, a Eannot continue to #row deceptive practice in pyramid plan, the sales that such a progression a short time. committed because the pyramid does not and andprogress as reprerented. Toavoid a etrerring the numerical progression of a prerentation should not create the illusion will work for everyone or continue beyond

TRMSARTI-TRUSTACT Youhave elao requeated our opinion concerning pyramid selling plane as they might violate the Texas Anti-trust Act. Again wehave considered pyramid plans generally in light of this ,lau.

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Pyramid organizations generally regard each member not as an agent but as an independent contractor, bound by the terms of a written contract. The typical pyramid organization’s contract terns require that these independent contractors, their members, buy products exclusively from the immediate superior who recruited them and sell exclusively to the immediate subordinates whomthey recruited into the pyramid.. Additionally, the contract terms typically fix the price of the product according to levels in the pyramid. Such contract ~terms violate the Texas Anti-trust Act. There is no doubt now that the Texas Anti-trust Act forbids such

“exclusive dealing” and “price fixing” agreements ,in Texas. Title 2, Texas Business and Commerce Code, S,ec. 15.01, et seq.; Ford Motor Co. v. State, 142 Tex. 5, 175 S.W.2d 230 (1943). - Weare unable to say unequivocally whether the four pyramid plans described earlier in this opinion violate the Texas Consumer Credit Code or the Texas Anti-trust Act. The memoranda detailing their operations is not complete enough to so determine. Thus, a fact question is raised which would have to be decided by a court of law. It is our opinion, however, that If the pyramid plane in question opexate by use of the false representatins discussed in the past few paragraphs, or their promoters engage in conduct which~ creates confusion or misunderstand:ing about their selling plans, they violate the Texas Consumer Credit Code.’ Additionally, if they rely upon “price fixing” or “exclusive dealing” contract arrangements written or oral, they violate the Texas Anti-trust Act. SUMMARY The card distribution pyramid plan constitutes a latter in Texas within the meaning of the common law and Article 65i:, Vernon’s Penal Code, because it contains the elements of a prize and consideration r’or the opportunity to win a prize, and the award thereof is determined by chance which is inherent from the participants’ lack of control over the pyramid plan’s success, and chance predominates over skill, judgment or ingenuity. In the three product distribution pyramid plans considered, a fact question is raised as to whether chance dominates over skill, judgment or ingenuity. This ,ie a question for the t,rier of facts in a court of law and on.e which this office maynot decide. If the pyramids plan promoters make false representations or engage in conduct which creates confusion ‘or mieunderstanding about their selling ‘plans, they commit a “deceptive practice” in violation of the Texas Consumer Credit’ Code, Article

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t**. .** 

Honorable Francis A. Miskell, Page 8 (M-343).

569 - 10.01, et seq. Pyramid plans which rely upon “price fixing” or ‘kxclusive dealing” agreements are in violation of the Texas Anti-trust Act, Section 15.01, et seq., Texas Bueiness andCommerceCode.

s very truly,

Prepared by Richard W.Chote u Assistant Attorney General APPROVED: OPINIONCOMMITTEE Kerns Taylor, Chairman George Kelton, Vice-Chairman TomBullington A. J.’ Gallerano Robert Owen Malcolm Smith W.V. Geppert Staff Legal Assistant

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