February 21, 1969 

Commissioner Francis A. Mlskell 

Consumer Credit Commissionek 

P. 0. Drawer “WW”~ Opinion No. H-343 

Capitol Station 

Austin. Texas 7871.1 

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Re: Whether ~“chain” or “wramid” 

selling plans, lnvol;ing the 

sale of distributorships primarlly and the 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: 

You have requested our opinion concerning certain chain or pyramid 

selling plans wherein the sale of distributorships is primary and the 

sale of’ merchandise is secondary, and have inquired as to whether 

such plans constitute lotteries, or are in violation of the Deceptive Trade Practice provision of the Texas Consumer Credit Code, 

or the Texas Anti-trust Act. 

The four selling plans in question, which are summarized from 

the various instruments, documents, charts and memoranda furnished 

by your office, all,operate in much the same way, three being almost 

identical, and the fourth different in operation. 

The three similar pyramid plans are utilized to distribute a 

product through four levels from the company to the public. One 

company sells an automobile accessory called a “vapor-inJector” 

which ostensibly increases gas6line mileage, reduces exhaust emissions, and results in the use of lower octane rated, less expensive 

gasoline. The second company sell8 an automobile accessory called 

a “gyromatic safety control” device which ostensibly prevent6 outof-control skidding. The th&M company sells a line of cosmetics. 

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Honorable Francis A. Miskell, Page 2 (M-343) 

The company utIlIz1ng 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. 

Member6 of each of these pyramid plan organizations are recruited by the company at periodic and regular company sales meetings held once a week or more. At these meetings little time Is 

spent by the company explaining the product, but a great deal of 

time is spent explaining the pyramid distribution concept and plan, 

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 number of units ot their product anal men reaiim 

a tremendous income after a short period of time by rlmp4 recruiting other distributors who will buy the product from the dlstributor who recruited them. The number of products required to b.e pu#- 

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 made between 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 new distributor he recruits. The “training fee” is ostensibly compensation, for the .,~. ,~,., ,, 

recruiter’s time in explaining the distribution plan of the company 

and teaching the new distributor to market the product. The company repreaents to prospective distributors that by simply recrulting several others Into the pyramid at each succeeding sales meeting a distributor can move steadily up the pyramid and expect to 

realize an income close to $100,000 within a year. One of these 

pyramid plans computes its figures by using an average of five 

people recruited~into the organization by each other person in the 

organization each month. The companies do not explain the market 

potential of their productn, and they do not screen the prospective distributors to dstermLne their relling ability or financial 

respohslbility . 

The company utilizing the fourth pyramid plan holds salea 

meetings on a weekly basis and recruits member8 In the name way 

as ~&MST other three plans. To join 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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Honorable Francis A. bflskell, Page 3 (M-343) 

Then he must pay a monthly service charge to remain a member. The 

members distribute company ca~rds with their distributor number 

thereon to several hundred people, and then receive a percentage 

of the p,rofit on the merchandise purchased,at a company store by 

one of their card-bearers. The distributors in the pyramid in 

line above the dilstributor whoae card is used also receive a percentage of the profit. Wo product is bought and sold by these pyramid plan members. They merely distribute cards and bring proepective members to the sales meetings. 

In Texas the term “lottery” is said to have no technical signification in the law; and since the prohibitory statute (Art. 

654, Vernon’s Penal Code) fails to provide any definition, its 

meaning must be determined from popular usuage in the common law; 

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 Wink v. Griffith Amusement Comr, , 100 S.W.Pd 695 (Tex. 

1936 * m V. State, 127 S W 2d 

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 money to be received by each dietributor as an 

“override” commleeion for the eale of the product and the money received as a “t.ralnlng fee” for helping to recruit people into the 

organizatioiwould conetltute the price which is the first element 

of a lottery. The third element, payment of coneideration by the 

participants for the right to participate, aleo clearly appears a8 

a part of theee pyramid celling plan arrangements. The conelUeration for the opportunity to receive the price 16 the purchase price 

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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 0r a lottery, 

the prize, is the percentage of the purchase price received by the 

card distributor whenever one of his card-bearers makes a purchase 

at a company store. The third element consideration, .is the aemher’s enrollment fee and the monthly iservice charge whfch must be 

paid to remain a member. 

the company or from 

organization, add 

The second 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 

fjh C.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 was held that a 

chain referral selling plan contain 1 ng the elements of a prize 

constituted a lottery in Texas, where ,the,participants who paid 

for the merchandise and turned in a list of names to the company 

had no control over whether the ..~ .., 

contacted by the company, ti 

eople they named on that llst.were 

80 P d th8 merchandise which would resuit in a rebate to tharr. TRIrs much of the LabC-arylaw from 

other states as well a8 Ten8 ~8 reviewed to determine whether 

chance predominated we? 11 and 

!e 

&t&m ent in the plan, and we 

mat it did becauro -8 inherent from the lack of control 

which the participants lnd war whether the persons they named and 

referred were sold the merchandise. In the card distribution 

py,ramid plan 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 

no prize at all unlerr OM of hi8 card-bearers happens .to shop 

at one of the.cixnpaly rtorer, and make8 a purchase. He has 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 

#hop there. He doea ccntrol tb psople he brings to the organizational 

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Honorable Francis A. Mlskell, Page 5 (M- 343 

sales meetings and encourages to join the pyramid plan, but he has 

no control over the shoppers to whom they in turn give their cards 

and whether those people shop at a company store or not. Therefore, 

It appears to us that the element of chance predominates over any 

skill or ud ment in the card distributionplan. 

inthe plan w t rough the lack of control of the carwere. This 

Chance is inherent 

plan thus constitutes a lottery in Texas within the meaning of the 

common law and Article 654, Vernon’s Penal Code. 

The product distribution pyramid plans present a closer question on the element of chance, which we think would have to be submitted to the fact findxa court of law. On the 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 them to whom thev nlease. Resale 

to the public, of course, 

~;~~;;tto;*enuiEy. 

involves a certain amount of 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 

on his ability,to recruit lower level distrfbutors tnan on his ability to sell the product. We are unable to ascertain from the material which we have received describing these three plans whether, in 

fact, any of the distributors at any level ever attempt to sell the 

product to the public. Someone must SeUthe product if anyone in 

the organization is to realize a return on his investment. We also 

cannot ascertain whether, in fact, any of the upper level distributors help train the lower level distributors or help them in their 

sales efforts if the lower level distributors do attempt to sell 

the product to the public. Some skill or judgment certainly is 

required to convince friends, relatives, and acquaintances to come 

to the sales meetings at which the organization leaders explain 

the pyramid plan and the benefits of it. Further, we cannot ascertain from the material which is available describing these plans 

whether the members of the pyramid organizations help at the sales 

meetings in selling the pyramid concept and in convincing prospective distributors to join the organization. If the members do sell 

the product, train new distributors, and/or help sell the pyramid 

concept, then they are exerting suni degree of skill 

ingenulte in making the 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 members of 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 had no control whatsoever once they turned 

in the list of names to the, salesman. We conclude, therefore, that 

there is a fact question In these three product distribution pyramid 

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Honorable Francis A. Miakell, Page 6 (M-343) 

plans as to whether there la enough skill, 

exerted by the distributors and members of 

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. 

We have examined pyramid selling plane generally~and not 

specifically the four described above, in light of the Deceptive 

Trade Practices provision of the Texas Consumer Credit 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 members and prospective 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 and a ,“deceptive practice” under 

our construction of the Texas Consumer Credit 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;~ 

and an 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 members the numerical progression possible for ‘building an 

organizatl~on.’ Such a sales pitch might envision each member of a 

pyramid organization recruiting five others into the organization ” 

each month, and those five recruiting five others each, etc. from 

month-to-month. It is apparent on its iace that such ,a numerical 

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 way that it is represented, because some 

menibere will 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 

and progress as reprerented. To avoid a 

etrerring the numerical progression of a 

prerentation should not create the illusion 

will work for everyone or continue beyond 

TRMS ARTI-TRUST ACT 

You have elao requeated our opinion concerning pyramid selling 

plane as they might violate the Texas Anti-trust Act. Again we have 

considered pyramid plans generally in light of this ,lau. 

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Honorable Franics A. Miskell, Page 7 (M-343) 

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 whom they 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). - 

We are 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 65 i: , 

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 may not 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 and Commerce Code. 

s very truly, 

Prepared by Richard W. Chote u 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE 

Kerns Taylor, Chairman 

George Kelton, Vice-Chairman 

Tom Bullington 

A. J.’ Gallerano 

Robert Owen 

Malcolm Smith 

W. V. Geppert 

Staff Legal Assistant 

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