§3.2 Pyramid schemes – No 14

Point No 14 of Annex I ‘Establishing, operating, or promoting a pyramid promotional scheme where a consumer gives consideration for the opportunity to receive compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the sale or consumption of products.’ This practice has been banned to prevent traders from luring consumers into a scheme promising them compensation when in fact the consumer will actually be compensated primarily for bringing new members into the scheme, rather than from the sale or consumption of products. The pyramid structure of the scheme is generally devised in such a way that it will deliver benefits only to the organisers at the top, whereas recruited consumers usually do not stand any reasonable chance to recover what they have invested. The Court has clarified the conditions under which a system of trade promotion can be considered a ‘pyramid promotional scheme’ within the meaning of Point No 14 of Annex I. The Court noted that: ‘the prohibition of pyramid promotional schemes is based (…) on three common conditions. First, such a promotion is based on the promise that the consumer will have the opportunity of making a commercial profit. Next, the realisation of that promise depends on the introduction of other consumers into the scheme. Finally, the greater part of the revenue to fund the compensation promised to consumers does not result from a real economic activity’ (237). In the same case, the Court clarified that: ‘a pyramid promotional scheme constitutes an unfair commercial practice only where such a scheme requires the consumer to give financial consideration, regardless of its amount, for the opportunity to receive compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the sale or consumption of products’ (238). In the case at hand, a company had advertised a bonus to new customers for every other customer they would recruit. Any newly recruited customer had to pay a registration fee. The Court expressed doubts as to whether the possibility for the consumer to receive compensation was derived primarily from the introduction of other consumers into the scheme, noting that the bonuses paid to existing members were funded only to a small extent by the financial consideration required from new members. The Court also recalled that, if a given practice is not prohibited by the provisions of Annex I, it may still be concluded that the practice is unfair within the meaning of the Directive’s general provisions (Article 5 to 9). Another case Loterie Nationale concerned a scheme where players were recruited to play Lotto together. New players were constantly recruited and de facto paid upwards in the scheme to players who had joined before and to the benefit of the organisers of the scheme. New members would pay EUR 10 as an introduction fee and some EUR 43 monthly to participate. Players who won would effectively receive 50 % of their win and there was also a cap on winnings over one million EUR, which were not paid to players. The Court clarified that it is sufficient that there is an indirect link between the contributions paid by new players and the compensation/profit paid to existing players for such a scheme to be classified as a pyramid scheme. A contrary interpretation would deprive the prohibition of its effectiveness (239). ‘It cannot, on the other hand, be deduced from the wording of that provision that the required financial link must necessarily be direct. What matters is the description ‘primarily’ or ‘mostly’ applicable to the contributions paid by new participants in the scheme.’ (240) For example: A consumer authority took action in three cases involving pyramid schemes. One case involved a sales scheme where the compensation system was based not on the sales volumes, but on the number of new sales agents that each of the resellers was able to attract to the system (241). Another case involved a sales scheme where the rewards structure was aimed mainly at attracting new consumers by recovering the registration fee from the entry of other agents (242). In a third case, consumers were proposed to purchase products through mechanisms aimed at recruiting other sellers who were asked for an initial contribution or subscription to a program of personal purchases (243). The authority also took into account how the schemes worked in practice. It focused on the number of agents who actually generated sales compared with the total number of recruited consumers and to the varying significance of the revenues/acquisitions from the agents or from sales to outsiders. Investigations showed that the mechanisms involved that the consumer could not make a contribution in exchange for the opportunity to receive compensation that was derived primarily from the introduction of other consumers into the scheme rather than from the sale/consumption of products. Hierarchical structures such as pyramid schemes are complex and it may be difficult to quantify the benefits of new members for the company. There may also be different methods for calculating the compensation received by existing members. For example: A consumer authority took action against a pyramid scheme in which the organiser offered participants opportunities to receive cash donations in return for introducing new members into the scheme (244). To obtain such financial gains, the participants had to: pay a registration fee, make a cash donation to another participant, make other donations to another participant and pay a commission to the organiser of the system. The opportunity to obtain cash donations from a new participant would appear only when a ‘Blue Circle’ was in place, consisting of participants introduced by people previously introduced by a new participant. It seems necessary to distinguish between banned commercial practice No 14, where participants make money mostly or solely by recruiting new participants into the programme, and multilevel marketing, where the sales force is compensated mostly for sales they personally generate and also for the sales of the other salespeople they recruit. It is also difficult to draw the line between consumers and traders: after a consumer has entered into a scheme, that person could, from the moment they starts promoting it, be considered as a trader and become subject to the prohibition of the UCPD themselves, as regards the professional conducts carried out in the framework of the scheme.

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Source: EUR-Lex (Cellar) · retrieved 2026-09-07