Dtpa V Pyramid Schemes

The Deceptive Trade Practices Act (DTPA) and Pyramid Schemes

Promoting a pyramid scheme is a deceptive act or practice under section 17.46(b)(21) of the DTPA and a criminal offense. See Tex. Bus. & Com. Code §17.461(c). A pyramid promotional scheme is a non-sustainable business model “by which a person gives consideration for the opportunity to receive compensation that is derived primarily from a person’s introduction of other persons to participate in the plan . . . .” Tex. Bus. & Com. Code §17.461(a)(6). Rather than supplying products or services to the public, pyramid schemes compensate participants for inducing other people to join the program. Pyramid schemes are generally considered inherently deceptive and contrary to public policy. The deception arises because the market eventually becomes saturated and the seemingly endless chain must end; consequently, many participants cannot even recoup their investments, let alone make a profit. See In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975), aff'd mem. sub nom., Turner v. F.T.C., 580 F.2d 701 (D.C.Cir.1978).

Courts and legislatures recognize a distinction between legitimate multi-level marketing programs and illegal pyramid schemes. See, e.g., United States v. Gold Unlimited, Inc., 177 F.3d 472, 480 (6th Cir.1999); In re Amway Corp., 93 F.T.C. 618, 716 (1979); State ex rel. Miller v. American Prof'l Mktg., Inc., 382 N.W.2d 117 (Iowa 1986); State ex rel. Ieyoub v. Phipps, 634 So.2d 51, 53 n. 3 (La.Ct.App.1994). Multi-level marketing programs (MLMs) utilize a business model that looks very similar to a pyramid scheme. Participants must entice new recruits to join the program, creating a down-line of distributors and a hierarchy of multiple levels of compensation. The distinction, however, is that ultimately MLMs are able to survive by making money off product sales, not new recruits. The DTPA makes the distinction between MLMs and pyramid schemes by only condemning programs that...