ACCC loses its pyramid-selling case
Author: Matt Drummond
Date: 26/10/2005
Words: 433
Source: AFR
Publication: The Financial Review
Section: News
Page: 6

The Australian Competition and Consumer Commission yesterday lost in the Federal Court against a telecommunications company that the competition regulator had alleged was engaged in pyramid-selling.

Yesterday's decision in favour of Australian Communications Network is the third setback for the ACCC in as many months. In August the ACCC was forced to discontinue proceedings against a number of petrol retailers over price-fixing. Shortly after, another petrol retailer had fines of $3 million set aside on appeal.

The ACCC had claimed that ACN was operating a pyramid-selling scheme in breach of the Trade Practices Act 1974. Although the commission was initially successful, the full bench of the Federal Court found in favour of ACN on appeal.

ACN sells telecommunications services through a multi-level marketing scheme. To join its scheme, "independent representatives" pay a $548 participation fee. Representatives then introduce other downstream representatives to the scheme, who in turn introduce further downstream representatives.

The allegation of pyramid-selling revolved around the payment of the participation fee and ACN's system for dealing with commissions. ACN pays its representatives a commission on customer billings which the representative has signed up.

However, representatives were also paid commissions on the billings to customers signed up by downstream representatives. Further, bonuses were paid to representatives who assisted downstream representatives to introduce new customers.

The ACCC claimed that ACN's representatives were harmed by the system for collecting participation fees and paying commissions.

But Justices Peter Heerey, Ronald Merkel and Antony Siopis held that "the real vice inherent in pyramid-selling schemes appears to be that the rewards held out are substantially for recruiting others, who in turn get their rewards substantially for recruiting still more members, and so on".

The court found that ACN's multi-level marketing system did not contain this vice. "In the present case, there is not present the requisite relationship between the payments in question and the introduction of further new representatives."

The decision vindicates not only ACN, but other companies engaged in multi-level marketing systems.

"True it is, the marketing of goods and services may be involved in a pyramid-selling scheme. But the converse does not follow; the fact that there is a multi-level marketing of goods and services does not necessarily mean there is a 'pyramid-selling scheme'."

A spokeswoman for the ACCC, which has been ordered to pay ACN's costs, did not indicate whether it would seek to appeal.


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