Untitled Texas Attorney General Opinion ( 1969 )

February 21, 1969
Commissioner Francis A. Mlskell
Consumer Credit Commissionek
P. 0. Drawer “WW”~ Opinion No. H-343
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Capitol Station
Austin. Texas 7871.1 Re: Whether ~“chain” or “wramid”
selling plans, lnvol;ing the
sale of distributorships pri-
marlly and the sale o? merchan-
dlee secondarily, constitute
lotteries or violate the
D,eceptive Trade Practice pro-
vision 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 Decep-
tive 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 emis-
sions, 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 out-
of-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 re-
cruited by the company at periodic and regular company sales meet-
ings 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 recruit-
ing other distributors who will buy the product from the dlstribu-
tor 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 distribu-
tor receiv~es a “training fee” from each new distributor he re-
cruits. 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 com-
pany repreaents to prospective distributors that by simply recrult-
ing several others Into the pyramid at each succeeding sales meet-
ing 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 prospec-
tive 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 ~&MSTother 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 per-
centage of the profit. Wo product is bought and sold by these pyra-
mid plan members. They merely distribute cards and bring proepec-
tive members to the sales meetings.
In Texas the term “lottery” is said to have no technical sig-
nification 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 (Tex. Grim. 1939); Brice
vyP&ate ’is2 242’S:W .2 3 (1Bl)j State v. -
Socony tiibi.1 011 Company, 386 S.W.26‘ 16 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 re-
ceived 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 conelUera-
tion 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 the company or from
someone higher than the purchaser within the organization, add
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 aem-
her’s enrollment fee and the monthly iservice charge whfch must be
paid to remain a member.
The second element of a lottery, the distributlm of the
prize by chance, requires a cloeer annlynis in the Ii&it of the de-
ci~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 rizea are offered ?or the bert rolutlon.
State, 11 ts 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 1ng 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 eople they named on that llst.were ..~ ..,
contacted by the company, ti 80Pd th8 merchandise which would re-
suit 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 &t&m ent in the plan, and we
mat it did becauro !e -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 nt 6mnuity as it was in Attorney
General Opinle. @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. Chance is inherent
inthe plan
w t rough the lack of control of the carwere. This
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 ques-
tion on the element of chance, which we think would have to be sub-
mitted to the fact findxa court of law. On the face of all
three plans there appears to be simply a business arrangement involv-
ing independent contractors contractually bound to other indepen-
dent 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, involves a certain amount of selling &ll,
~;``;;tto;*enuiEy. 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 &.stribu-
torships, with the result that a distributor’s success hinges more
on his ability,to recruit lower level distrfbutors tnan on his abi-
lity to sell the product. We are unable to ascertain from the mater-
ial 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 distribu-
tors 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 as-
certain 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 prospec-
tive 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 eell-
ing of a product only to members and prospective members 3f the
organization rather than to the public at large, then a Fepreeenta-
tion, or the creation of an illueion, that the primary purpose is
to sell the product to the public will constitute a false repreeen-
tatlon 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 prom-
tlve 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 con-
tinue to operate in the way that it is represented, because some
menibere will not recruit other members. In either instance, a
“deceptive practice” is committed because the pyramid does not and
Eannot continue to #row and progress as reprerented. To avoid a
deceptive practice in etrerring the numerical progression of a
pyramid plan, the sales prerentation should not create the illusion
that such a progression will work for everyone or continue beyond
a short time.
TRMS ARTI-TRUSTACT
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 pro-
ducts exclusively from the immediate superior who recruited them
and sell exclusively to the immediate subordinates whom they re-
cruited into the pyramid.. Additionally, the contract terms typi-
cally 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 Con-
sumer Credit Code or the Texas Anti-trust Act. The memoranda de-
tailing 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 in-
herent from the participants’ lack of control over the pyra-
mid plan’s success, and chance predominates over skill, judg-
ment or ingenuity. In the three product distribution pyra-
mid 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 mieunderstand-
ing about their selling ‘plans, they commit a “deceptive prac-
tice” in violation of the Texas Consumer Credit’ Code, Article
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t
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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 Buei-
ness and Commerce Code.
s very truly,
u
Prepared by Richard W. Chote
Assistant Attorney General
APPROVED:
OPINIONCOMMITTEE
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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