FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Australian Communications Network Pty Ltd [2005] FCA 276

TRADE PRACTICES ACT – pyramid selling scheme – definition – extent to which commercial considerations are relevant – matters to which court may have regard – predominant purpose – objective test

Trade Practices Act 1974 (Cth)

ACCC v Worldplay (2004) 210 ALR 562

TPC v Mobil Oil Australia Ltd (1984) 3 FCR 168

Yorke v Lucas (1983) 49 ALR 672

ACCC v World Netsafe Pty Ltd [2000] FCA 1827

ACCC v Destiny Telecom International Inc (1997) ATPR 41-588

Campomar Sociedad Limitada v Nike International Limited (2000) 202 CLR 45

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v AUSTRALIAN COMMUNICATIONS NETWORK PTY LTD and MARTIN PAECH and ROBERT STEVANOVSKI and GIBBSCHADE PTY LTD and JONATHAN GIBBS and CHRISTINE SCHADE and KEITH JANKE

SAD 231 OF 2004

SELWAY J

23 MARCH 2005

ADELAIDE

THE COURT ORDERS THAT:

1.         Hearing be adjourned to a date to be advised for further submissions as to what orders should be made.

2.         Costs reserved.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     In these proceedings the applicant (ACCC) alleges that the first respondent (ACN) has participated in a marketing scheme which constituted a pyramid selling scheme contrary to s 65AAC of the Trade Practices Act 1974 (Cth) (the Act).  The ACCC also alleges that the fourth respondent (Gibbschade) was knowingly concerned in the scheme contrary to s 65AAC of the Act.  The ACCC alleges that the second respondent (Paech), who is a director of ACN, aided, abetted, counselled, procured or otherwise was knowingly concerned in ACN’s breach of s 65AAC of the Act contrary to s 75B of the Act.  The ACCC also alleges that the fifth respondent (Gibbs) and the seventh respondent (Janke) aided, abetted, counselled, procured or otherwise were knowingly concerned in ACN’s breach of s 65AAC of the Act contrary to s 75B of the Act.  It is alleged that Gibbschade, Gibbs and Janke were agents of ACN.  The ACCC has discontinued against the third and sixth respondents. 

2                     The ACCC seeks various orders against ACN, Paech, Gibbschade, Gibbs and Janke, including declarations and injunctions.  ACN and Paech have appeared and defended the proceedings.  Gibbschade, Gibbs and Janke have not.  However, the ACCC does not seek default orders against them until the liability (if any) of ACN is determined.  As only ACN and Paech have appeared and put submissions, references in these reasons to the arguments or submissions of the respondents are references to those put by ACN and Paech. 

3                     The primary issue in dispute in this case is whether the particular scheme established by ACN for marketing its telecommunication services involved a ‘pyramid selling scheme’.  These reasons deal with the question whether ACN participated in a marketing scheme which constituted a pyramid selling scheme contrary to s 65AAC of the Act and (if so) what orders should be made in relation to that conduct. 

4                     The ACCC has tendered into evidence various affidavits.  Those affidavits fall into two groups.  The first group are affidavits by persons who claim to have been involved in the scheme as participants.  The second comprised affidavits made by investigating officers of the ACCC which detail the information gathered by them during the investigation of ACN by the ACCC.  Annexed to those affidavits are a number of documents relating to those investigations. 

5                     The respondent has also tendered into evidence and relies upon various affidavits, most particularly a number of affidavits made by Paech and the documents annexed to those affidavits.  Paech was also called and cross-examined.  I did not understand that his credit was in dispute.  In any event, I accept Mr Paech as a witness of credit.

6                     There was little dispute as to the facts.  ACN asserts that its marketing arrangements are not in breach of the Act.  It has advertised those marketing arrangements extensively.  Both the ACCC and ACN have relied upon those advertisements in order to identify the basic features of the scheme.  The relevant facts can be summarised as follows:

(a)    ACN is a wholly owned subsidiary of American Communications Network Inc (ACN Inc), an American company. ACN Inc provides retail telecommunication services in the US.  It has established subsidiaries to provide such services in other countries, including in Canada and in Europe.  So far as the evidence reveals it has operated successfully in those markets, using a system of ‘multi-level’ marketing of the same broad description as that discussed below. 

(b)   On 29 March 2004 ACN Inc caused ACN to be incorporated in Australia for the purpose of providing retail telecommunications services in Australia.  In about April 2004 ACN commenced preparatory work including making arrangements for access to telecommunications networks, drafting contracts, drafting marketing documents etc.  In July 2004 arrangements were made for persons with experience in ‘multi-level’ marketing with ACN Inc, particularly Gibbs, to come to Australia for the purpose of promoting the ‘multi-level’ marketing arrangements in Australia.  Gibbs was an agent of ACN Inc.  ACN entered into a contract with Gibbschade (a company in which Gibbs had an interest) for Gibbschade to act as its agent.  Under the contract with Gibbschade (which is not in evidence) it was clearly envisaged that Gibbs would provide promotional services for ACN.

(c)    The essential business of ACN is the provision of retail telecommunication services to businesses and other members of the public (‘customers’).  These services consist of fixed line local services, national (STD) services, international services and mobile services. 

(d)   ACN planned to use a ‘multi-level’ marketing arrangement in order to enter into customer contracts.  These arrangements involved the following:

a.       Under the ACN business model, an individual, partnership, trust or corporation would enter into an agreement with ACN (called an Independent Representative Agreement) to become an IR.  An IR is an independent contractor; not an employee of ACN.  Pursuant to the Agreement, the IR is authorised to act as agent for ACN for the purpose of entering into contracts with customers, and to introduce to ACN persons who are interested in becoming an IR. 

b.      IRs agree to pay a fee of $499 plus GST (totalling $548.90) (‘participation fee’) in consideration of being appointed an IR.  There is also an annual renewal fee of $163.90.

c.       The amount of the initial participation payment was discussed and decided by Paech in consultation with Mr David Merriman, Executive Vice President of ACN Inc, in February 2004.  The decision as to the size of the participation fee was based on Paech’s understanding of the participation fees set in other markets in Europe and North America where ACN Inc or its subsidiaries operate and his own understanding of the commercial acceptability of such a payment in the Australian market.

d.      It would seem to be clear from ACN’s budget and from the evidentiary material put before the Court that the participation fee is expected to meet most of the cost to ACN of marketing to its customers.  In particular, the participation fee is expected to meet most of the cost of preparing and producing marketing brochures, the cost of customer service and so on.

e.       The incentive to a prospective IR for the payment of the participation fee is the prospect of earning commissions and bonuses in relation to (1) making ‘customer contracts’ as agent for ACN and (2) introducing further IRs to ACN (see below). In addition, the IR receives various goods and services provided by ACN, including a StarterKit (sometimes called a Team Trainer Success Kit) and marketing and other materials. Some of these involve a cost to the IR, some are provided for free. It is clear, however, that none of these materials have sufficient value in themselves to be an incentive for the payment of the participation fee. 

f.        A person who becomes an IR through the sponsorship of another IR is referred to as a ‘downline (or down-stream) IR’.  All downline representatives of an IR belong to that IR’s ‘organisation’.  An IR’s organisation can consist of numerous levels.  Downline representatives who were directly sponsored by an IR are on the first level to the IR.  Downline representatives who were directly sponsored by a first level IR are on the second level to the IR and so on.

g.       The IR is expected and required to use what is called by ACN ‘warm’ marketing techniques.  This involves face to face marketing, usually to acquaintances.  It is to be contrasted with ‘cold’ marketing techniques such as media advertising, telephone marketing and so on.  IRs are not permitted to undertake ‘cold’ marketing techniques.

h.       At all relevant times there were four forms of compensation payable to an IR:

                                                                           i.      a commission based on revenue received by ACN from customers introduced by the IR (‘personal commissions’).  These are between 2-8% of the customer turnover (50% less for local fixed calls) (see below);

                                                              ii.                 a ‘bonus’ promotional payment, payable to IRs who have ‘signed up’ a minimum number of customers within a specified period.  If the IR can ‘sign up’ 10 customers within the first month the IR receives a bonus payment of $200.  If the IR can sign up 20 customers within the first month the IR receives a bonus payment of $500.  Although the ‘bonus’ promotional payments were intended to be limited to the period of the initial launch of the product, they have subsequently been extended.  Those bonus payments have remained in operation at all relevant times.  It is at least possible, indeed likely, that that bonus payments will be varied or discontinued at some future time;

                                                                        iii.      a bonus paid to reward the IR for assisting down-stream IRs to introduce customers who acquire ACN’s services (the ‘customer acquisition bonus’ or ‘CAB’).  The CAB is only paid if a down-stream IR introduces customers who acquire ACN’s telecommunications services; 

                                                                       iv.      a commission calculated as a percentage of amounts paid to ACN by all customers introduced by down-stream IRs, with the amount payable depending upon the level of the down-stream IR (‘residual override commissions’). Again, this form of compensation is only paid where ACN has received revenue from customers introduced by IRs.

i.         Personal commissions are paid as a percentage of the amount billed by ACN to IR’s ‘personal customers’ (the customers actually signed up by the IR) in usage of ACN telecommunications services.  They are calculated by reference to actual monthly billings of the customers. 

j.        It is possible that a downline IR will receive more in personal commissions and CABs than an IR.

k.      The level of CABs and residual over-ride commissions depends upon the ‘level’ of the IR within his or her ‘organisation’.  All IRs commence at one starting level: that of TT.  The next level is a ‘qualified TT’, who is an IR who has ‘signed up’ at least six active fixed-line personal customers, or at least eight personal customers, at least four of whom have agreed to acquire fixed-line telecommunications services.  The qualified TT receives a higher rate of commission and is entitled to receive CABs.  The next level is an Executive Team Trainer (‘ETT’) who is an IR who has ‘signed up’ at least twenty (at least ten for some IRs who entered the scheme before 1 November, 2004:) active personal customers and who has directly sponsored at least three qualified TTs in different organisations or legs.  The next level is a Team Co-ordinator (‘TC’) who is an IR who has ‘signed up’ at least six active personal customers and who has directly sponsored at least three qualified TTs in different organisations or legs and who has at least three separately sponsored organisations or legs, in each of which there are at least 200 customers. Next is the Regional Vice President (‘RVP’) being an IR who has signed up at least six active personal customers and whose organisation(s) have at least 3,000 customers whose monthly billings are at least $100,000, and who has at least one TC in each of five separate organisations or legs.  Finally, there is the Senior Vice President (‘SVP’) being an IR who has signed up at least six active personal customers, and who has an organisation(s) of at least 12,000 customers whose monthly billings are at least $500,000; and who has at least one TC or RVP in each of eight separate organisations or legs, with a minimum of three RVPs in three separate legs. These classifications are, to an extent, independent of the relevant level within an organisation.  It is possible, for example, for an IR and a downline IR both to be on the same level.

l.         Residual override commissions are calculated on the total monthly billings of customers of IRs in their organisation.  The amount of the commission is dependent upon the total billing and the number of ‘levels’ in the organisation.  In particular, the relevant percentage increases for levels 6 and 7.

m.     For most IRs the residual override commissions are capped at the 7^th level.  However, RVPs and SVPs are also entitled to the following residual override commissions:

n.       There are three different types of CAB.  Personal CABs are payable when newly sponsored IRs become qualified (see below).  Open line CABs are payable when downline IRs who are at a lower level sponsor new IRs who become qualified.  Generational IRs are payable when downline IRs at the same or a higher level sponsor new IRs who become qualified. 

o.      ‘Personal’ CABs are paid to IRs who are qualified TTs or higher (that is, IRs who have at least six personal customers) and who have directly sponsored an IR who, in turn, has become qualified (that is, acquired at least 6 active, fixed-line personal customers within 30 days or 8 customers with a minimum of 4 fixed-line customers).  The amount of the payment depends upon the IR’s level:

p.      Open line and generational CABs are payable in relation to newly qualified IRs introduced by downline IRs.  The amount of the CAB is:

q.      The maximum amount of the CAB is capped at a total value of $335.

r.        The forms of compensation paid by ACN require in every case the sale by an IR or a downline IR of telecommunications services to customers. The amount of compensation is calculated by reference to actual billed revenue, or the signing up of new customers obliged to make payments in respect of line rental and calls made.  No payment is made to IRs solely for the introduction of downline IRs.

s.       On the other hand, the amount of CABs and the amount of the residual override commission depends upon the number and level of downline IRs.

t.        There is no evidence in this case that ACN cannot operate viably in the telecommunications market.  There is no suggestion that its marketing strategies are a sham or that its financial projections cannot be realised.

u.       ACN expects that there will be a significant ‘turnover’ in customers.  Apparently this is inherent in the telecommunications industry, particularly for a new entrant. ACN also expects that a considerable number of IRs will ‘drop out’. When this occurs the customers allocated to the relevant IR are not ‘reallocated’. They are no longer counted for the purpose of CABs or of residual override commissions.

v.       ACN expects that, on average, there will be about one IR to each 13 customers.  However, given the complexities in the relevant calculations and the effect of IRs ‘dropping out’ this does not mean that calculations can be made on the assumption that each IR will only have 13 customers.

(e)    From about July 2004 various persons who had been appointed as IRs by ACN, including Gibbschade and Janke, commenced promoting ACN and recruiting IRs.  Various public meetings were held for this purpose. For present purposes it is sufficient to say that the description of the scheme in those promotions was consistent with the description set out above. However, it is probably fair to say that the emphasis in those promotions would seem to be the possibility of large returns from recruiting many levels of downline IRs.

(f)     In September ACN launched its ‘official’ soft launch to prospective IRs.  The description of the scheme in that soft launch was consistent with the description above. It would appear that there was less of an emphasis on the possibility of large returns from downline IRs and more of an emphasis on achieving the promotional bonus payments and the personal CAB by signing up immediate customers quickly. However, the difference (if any) between the Gibbschade promotion and the ‘soft launch’ was one of emphasis only.

(g)    On 1 November 2004 ACN launched its fixed line telephone service.

(h)    As at 31 December 2004 ACN had 7,647 IRs.  It had 28,734 customers as at that date. 

7                     The issue is whether this scheme is a ‘pyramid selling scheme’ as prohibited by s 65AAC of the Act which provides:

‘(1)      A corporation must not participate in a pyramid selling scheme.

(2)       A corporation must not induce, or attempt to induce, a person to participate in a pyramid selling scheme.’

8                     A ‘pyramid selling scheme’ is defined in s 65AAD of the Act which provides:

‘(1)      In this Act:

pyramid selling scheme means a scheme with both the following characteristics:

            (a)     to take part in the scheme, some or all new participants must make a payment (a participation payment) to another participant or participants in the scheme;

            (b)        the participation payments are entirely or substantially induced by the prospect held out to new participants that they will be entitled to a payment (a recruitment payment) in relation to the introduction to the scheme of further new participants.

(2)       A scheme may be a pyramid selling scheme:

            (a)     no matter who holds out to new participants the prospect of entitlement to recruitment payments; and

            (b)     no matter who is to make recruitment payments to new participants; and

            (c)     no matter who is to make introductions to the scheme of further new participants.

(3)       A scheme may be a pyramid selling scheme even if it has any or all of the following characteristics:

            (a)     the participation payments may (or must) be made after the new participants begin to take part in the scheme;

            (b)     making a participation payment is not the only requirement for taking part in the scheme;

            (c)     the holding out of the prospect of entitlement to recruitment payments does not give any new participant a legally enforceable right;

            (d)     arrangements for the scheme are not recorded in writing (whether entirely or partly);

            (e)     the scheme involves the marketing of goods or services (or both).’

9                     The general definitional provision in relation to the above provisions is s 65AAB.  It provides:

‘In this Division:

‘new participant’, in a pyramid selling scheme, includes a person who has applied, or been invited, to participate in the scheme; 

‘participant’, in a pyramid selling scheme, means a person who participates in the scheme; 

‘participate’, in a pyramid selling scheme, means:

(a)               establish or promote the scheme (whether alone or together with another person);  or

(b)               take part in the scheme in any capacity (whether or not as an employee or agent of a person who establishes or promotes the scheme, or otherwise takes part in the scheme); 

‘participation payment’ has the meaning given by paragraph (a) of the definition of ‘pyramid selling scheme’ in subsection 65AAD(1);

‘payment’, to a person or received by a person, means:

                        (a)        the provision of a financial or non-financial benefit to or for the benefit of the person;  or

                        (b)        the provision of a financial or non-financial benefit partly to or for the benefit of the person, and partly to or for the benefit of someone else; 

            ‘pyramid selling scheme’ has the meaning given by section 65AAD;

            ‘recruitment payment’ has the meaning given by paragraph (b) of the definition of ‘pyramid selling scheme’ in subsection 65AAD(1).’

10                  Section 65AAE provides:

‘(1)      To decide whether a scheme that involves the marketing of goods or services (or both) is a pyramid selling scheme, a court may have regard to the following matters in working out whether participation payments under the scheme are entirely or substantially induced by the prospect held out to new participants of entitlement to recruitment payments:

            (a)       the extent to which the participation payments bear a reasonable relationship to the value of the goods or services that participants are entitled to be supplied under the scheme (as assessed, if appropriate, by reference to the price of comparable goods or services available elsewhere);

            (b)       the emphasis given in the promotion of the scheme to the entitlement of participants to the supply of goods and services by comparison with the emphasis given to their entitlement to recruitment payments.

(2)       Subsection (1) does not limit the matters to which the court may have regard in working out whether participation payments are entirely or substantially induced by the prospect held out to new participants of entitlement to recruitment payments.’

11                  The word ‘services’ appearing in s 65AAE(1) of the Act is defined very broadly in s 4 of the Act to include:

‘any rights (including rights in relation to, and interests in, real or personal property), benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce, and without limiting the generality of the foregoing, includes the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under:

(a)       a contract for or in relation to:

            (i)      the performance of work (including work of a professional nature), whether with or without the supply of goods;

            (ii)     the provision of, or the use or enjoyment of facilities for, amusement, entertainment, recreation or instruction; or

            (iii)    the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b)       a contract of insurance;

(c)       a contract between a banker and a customer of the banker entered into in the course of the carrying on by the banker of the business of banking; or

(d)       any contract for or in relation to the lending of moneys;

but does not include rights or benefits being the supply of goods or the performance of work under a contract of service.’

12                  The word ‘scheme’ appearing in the relevant provisions is not defined. I am content to adopt the meaning identified by Finn J in ACCC v Worldplay (2004) 210 ALR 562 (Worldplay) at 581 [86]:

‘First, though the Act refers to a pyramid selling “scheme”, unsurprisingly, it does not define the term “scheme” (though it does require such a scheme to have the two characteristics prescribed in s 65AAD(1)).  For present purposes, I am content to give the word “scheme” a like meaning to that given it by Mason J (albeit in a different setting), in Australian Softwood Forests Pty Ltd v Attorney-General for New South Wales;  Ex rel Corporate Affairs Commission (1981) 148 CLR 121 at 129:  “all that the word ‘scheme’ requires is that there should be ‘some programme, or plan of action’”.  This meaning I would add does no more than reflect the appropriate dictionary meaning of the word in any event:  see Shorter Oxford English Dictionary, 5^th ed, Oxford University Press, “scheme:  4.”.’

13                  Both parties accepted that the ‘programme, or plan of action’ comprising the marketing scheme of ACCC as discussed above is relevantly a ‘scheme’ for the purposes of the relevant provisions of the Act. They were undoubtedly correct to do so. I would only add that the relevant scheme for this purpose includes the bonus promotional payment which was payable at all relevant times and remained payable as at the date of the hearing of these proceedings.

14                  It is clear that ACN promotes the scheme and that ACN is a participant in it. It is also clear that an IR is a ‘participant’ in the scheme and that the participation fee of $548.90 is paid by an IR to ACN as a condition of participating in the scheme. In my view that payment is a ‘participation payment’ for the purposes of the relevant provisions. This was accepted by the parties.

15                  On the other hand, as all parties accepted, customers are not ‘participants’ in the scheme. For the reasons given by Finn J in Worldplay at 583-584 [97]-[98] a person who is the ultimate consumer of goods and services that are the subject of an alleged pyramid selling scheme and who purchases them at their market value with no contractual rights other than as a purchaser, is not relevantly a ‘participant’ in the scheme. To adopt the words of Finn J, ‘something more is needed’.

16                  ACCC did not claim that the annual renewal fee payable by an IR was a ‘participation payment’.  I do not need to deal with that question.

17                  The ACCC claimed that the CAB payments and the residual override commissions were ‘recruitment payments’. For this purpose the ACCC relied upon Finn J in Worldplay at 586 [111]-[116] that ‘recruitment payments’ included benefits received ‘in consequence of the introduction of new members whether or not the benefits are paid for the introduction as such or are paid as a result of the subsequent activities of the members introduced.’ The respondents argued that I should not follow Finn J in this respect.  I would only depart from the approach of Finn J if I was satisfied that his Honour was plainly wrong.  I am not so satisfied.  I think that his analysis is correct.

18                  Applying that meaning then it would seem to be clear that CABs are ‘recruitment payments’. Whether it is a ‘personal’ CAB, an open line CAB or a generational CAB in each case the amount of the payment is conditional upon new IRs having been introduced into the scheme. In each case the payment and its amount is dependent upon the number and level of ‘new participants’ and consequently is ‘a payment in relation to the introduction to the scheme of new participants.’

19                  Similarly ‘residual override commissions’ are ‘recruitment payments’. The amount of those commissions is dependent upon the number and level of ‘new participants’ and consequently is ‘a payment in relation to the introduction to the scheme of new participants.’

20                  It should be noted, however, that the amount of the recruitment payment is not only conditional upon the recruitment of new participants.  The amount of the payment is also conditional upon the amount of business actually provided by customers.  If there is no such business then no payments will be made.

21                  It is clear that ACN ‘held out’ to new participants that there was ‘the prospect’ that they would receive ‘recruitment payments’ if they participated in the scheme.  As already mentioned, ACN did not make a secret of that prospect.  It was actively promoted. 

22                  As the ACCC accepted, personal commissions and bonus promotional payments under the scheme are not dependent upon the introduction into the scheme of new participants.  These payments are not ‘recruitment payments’. This gives rise to the interesting issue in this case which does not yet appear to have been judicially considered: how do the relevant provisions apply when the participants receive some payments that are ‘recruitment payments’ and other payments that are not? 

23                  This issue directs attention to the phrase ‘entirely or substantially induced’ in s 65AAD(1)(b) of the Act.  For the purpose of their submissions before me all parties accepted (although the ACCC sought to reserve its position if the matter should go further) that in order for a participation payment to be ‘substantially induced’ by the prospect of receiving recruitment payments the prospect that is held out must be the ‘predominant’ inducement: see Finn J in Worldplay at 586 [110]. Again I think that the analysis by Finn J is correct. If the word ‘substantially’ was given its ordinary and usual meaning of ‘actually’ or ‘really’ or ‘materially’ then the word ‘entirely’ would seem to be redundant.  This suggests that ‘substantially’ must be understood as meaning ‘in the main’, ‘essentially’ or ‘predominantly’: see Re Bonny [1986] 2 Qld R 80 at 82.

24                  The word ‘induced’ in this context refers to the actuating cause. In order to be relevantly ‘induced’ the payment of the participation payment must be relevantly caused by the prospect of receiving ‘recruitment payments.’ (The question as to who or what is relevantly ‘induced’ to make the participation payment is discussed below). The word ‘induced’ may suggest that the relevant causation involves proof of subjective intention. Both parties argued that the word should be understood as imposing an objective test of causation.  That view is strongly supported by the terms of s 65AAE (1)(a) of the Act.  That subsection provides that the Court ‘may have regard to’ ‘the extent to which the participation payments bear a reasonable relationship to the value of the goods or services that participants are entitled to be supplied under the scheme’. It would appear that the only relevant issue to which this relationship might be relevant is the question of whether the participation payments were ‘entirely or substantially induced’ by the prospect of receiving recruitment payments. As the test of ‘reasonable relationship’ is an objective one this suggests very strongly that the question of whether the relevant payment was ‘induced’ is an objective (and not a subjective) one. The word ‘induced’ appears to have been so understood elsewhere in the Act: see TPC v Mobil Oil Australia Ltd (1984) 3 FCR 168 at 183-184; Yorke v Lucas (1983) 49 ALR 672 at 681-682.

25                  Having referred to s 65AAE (1)(a) of the Act it is sensible here to turn to another issue, which is what is included within the word ‘services’ in that paragraph of the Act. The importance of the issue can be seen in the following considerations:

(a)                ACN plainly provides some goods to the IRs – namely the marketing materials already referred to. There was no evidence that these materials have a market value bearing any relationship to the participation payments. In any event, I do not accept that these provision of these materials was the predominant inducement for participants to enter the scheme;

(b)               In its Policies and Procedures (which were incorporated into the standard form IR contract) ACN represented that it would offer ‘quality products and services [to customers] at competitive prices’, that it will provide ‘prompt, courteous service from a dynamic support scheme’ and that it would process ‘all orders in a prompt and efficient manner’. It might be said that these undertakings and commitments are what might be expected of a company in ACN’s position.  Nevertheless, given that the payments received by an IR are ultimately dependent upon the number of customers and the extent to which they use the services, the commitments are clearly critical to the IR. They are ‘real’ commitments – there is a real market in which ACN provides real services to real customers.  The ACCC did not dispute that the business operated by ACN was viable and competitive. If ACN did not give these commitments to its IRs then an IR would have no means of obtaining any return under the arrangements, whether that return constituted a ‘remuneration payment’ or otherwise. Otherwise an IR would pay the ‘participation fee’ for nothing more than a fond hope. In my view the contractual representations by ACN to IRs as to ACN’s future conduct in relation to the services it provides to customers constitute ‘services’ (as defined in s 4 of the Act) to an IR.  The question of the ‘value’ of those services is discussed below. 

(c)                The undertakings by ACN to pay CABs, residual override commissions, personal commissions and bonus promotional payments also were contractual commitments in relation to future conduct.  On the face of it such undertakings also constituted ‘services’ within the wide definition in the Act.  Both the ACCC and the respondents argued that ‘services’ in s 65AAE(1)(a) of the Act should be understood as meaning ‘services exclusive of recruitment payments’.  If so then CABs and residual override commissions should not be considered for the purposes of s 65AAE(1)(a) of the Act, notwithstanding that they would seem otherwise to fall within the broad definition of ‘services’.  I think that the parties are correct in their understanding of the relevant provisions.  It might be different if s 65AAE(1)(a) of the Act was, or purported to be, a definitional provision. But it is not. It only purports to point to matters to which the Court ‘may have regard’ in its consideration of s 65AAD(1)(b) of the Act. That paragraph draws a clear distinction between ‘recruitment payments’ and other benefits to the participant under the scheme and requires the Court to assess the relative importance of those benefits. I note that a similar distinction is made in s 65AAE(1)(b) of the Act. Against that background the evident purpose of s 65AAE(1)(a) would be rendered nugatory if undertakings to make ‘recruitment payments’ were included as ‘services’ under s 65AAE(1)(a).

26                  In the result, I think that under s 65AAE(1)(a) of the Act I can take into account ‘the extent to which the participation payments bear a reasonable relationship’ to the value of the contractual obligations owed to IRs by ACN to provide appropriate services to customers and to pay personal commissions and bonus promotional payments.

27                  In my view a ‘reasonable relationship’ for this purpose is a relationship that would be considered reasonable in commercial terms, having regard to relevant risks and uncertainties. 

28                  It is not surprising that s 65AAE(1)(a) of the Act directs attention to these commercial considerations.  Some schemes which are at least similar to pyramid selling schemes involve the purchase and sale of goods and services between various marketing levels within the scheme: see Heydon, Trade Practices Law (looseleaf) at 14-52-14-53. Plainly enough the purchase price of the goods is likely to increase the closer the marketing level is to the ultimate consumer of the goods and services.  The question of whether such schemes are, in reality, pyramid selling schemes or merely multi-level trading arrangements will ultimately depend upon the extent to which the relevant price of those goods and services bears a ‘reasonable relationship’ to their value.

29                  The effect of s 65AAE(1)(a) in this case is that, recruitment payments aside, the ‘commercial’ viability of the scheme is a relevant consideration at least in limited contexts (see below) in determining whether the scheme is a ‘pyramid selling scheme’. This may not have been the case in relation to the Act, as it applied to ‘pyramid selling schemes’ prior to the amendments effected by Act No 128 of 2002: see ACCC v World Netsafe Pty Ltd [2000] FCA 1827; ACCC v Destiny Telecom International Inc (1997) ATPR 41-588.  In the Explanatory Memorandum, circulated when the relevant Bill for Act No 128 of 2002 was introduced, it was stated that the amendments were not intended to change the basic meaning of the provisions, but to clarify their meaning. Finn J in Worldplay at 581 [83] was referred to that aspect of the Explanatory Memorandum, although his Honour went on to point out that the new provisions would catch schemes that were not caught by the previous provisions: see at 581-582 [87].  Notwithstanding the Explanatory Memorandum, in my view the current provisions are quite differently worded from the provisions they replaced.  On the face of it, they are not the same. In particular, the current provisions seem to place a considerably greater emphasis upon the commercial viability of the arrangements (excluding the recruitment payments) than did the previous provisions.

30                  In this case what needs to be determined for the purpose of s 65AAD(1)(a) of the Act is the relative value of these contractual commitments as against the amount of the participation payment (being $499 plus GST totalling $548.90). 

31                  If the IR can sign up 20 customers in the first month the IR receives a bonus payment of $500 ($200 if the IR can sign up 10 customers during that period). Plainly some IRs will be able to convince 20 friends and relations (and themselves) to become customers within the first month and consequently get most of their participation payment back straight away. Others will have considerably greater difficulty. It is likely that there will be many IRs who will never ‘sign up’ 20 or even 10 customers, much less be able to do so in the first month.

32                  The ACCC suggested that the average personal commission for an IR is likely to be less than $20 per month. The respondents said that these figures were unduly conservative.  Given the commercial sensitivities of the relevant numbers and budget forecasts, it is probably inappropriate to go into too much detail as to the figures and calculations in these reasons.  However, even if the amount of commission is increased by more than 50% (which would be generous to the respondent’s case) to (say) $30 per month the average annual amount of personal commissions would still only be $360 per year.  Of course they may be significantly higher or significantly less in a particular case depending upon the personal circumstances of the individual IR, the amount of effort expended and so on.

33                  In determining the relevant value of the contractual undertakings by ACN the further undertakings made by ACN in relation to its services to customers must be borne in mind.  In the absence of those undertakings the value of the promises to make financial payments would effectively be nil. In this case the relevant evidence suggests that ACN’s offering to customers is competitive and may even be attractive.  The evidence does not go so far as to suggest that an IR can earn commissions and bonuses without making a significant effort, or that success is certain.

34                  The question then is the extent to which the relative value of these contractual commitments by ACN as against the participation payment of $499 plus GST would be considered reasonable in commercial terms, having regard to relevant risks and uncertainties. In my view they would not be considered reasonable. In my view a reasonable person acting commercially and having regard to relevant risks and uncertainties would not pay $499 (or even $499 plus GST) for these various ‘services’. Plainly some ‘up front’ payment by participants might be considered reasonable. The amount of any payment which might be considered to be reasonable would be affected by evidence of the actual operation of the scheme, in particular evidence of the likely returns to IRs.  It would also be affected if ACN varied its commitments. So, for example, if the bonus payments were not part of the scheme then the participation payment would need to be considerably less than it might otherwise be.

35                  Section 65AAE(1)(a) directs attention to ‘the extent’ to which the comparators bear a ‘reasonable relationship’ to each other. In my view the participation payment is too high in terms of the services to which participants are entitled to be supplied for them to be said to have a ‘reasonable relationship’. The extent to which it is too high involves a matter of judgment and degree. On the evidence before me I think that a participation payment of any more than $200 plus GCT would not bear a reasonable relationship to the value of the ‘services’. Certainly I do not think that a payment of $499 plus GST bears such a relationship.

36                  Section 65AAE(1)(b) enables a court to take into account ‘the emphasis given in the promotion of the scheme’ to the supply of goods and services in relation to the emphasis given to the entitlement to recruitment payments. In this case, both were emphasised. As already noted, the promotion of the recruitment payments was given relatively greater emphasis in the early promotions by Gibbs and Janke than in the later promotions organised by ACN itself. However, even in relation to the earlier promotions it could not be said that the supply of ‘services’ (as discussed above) was hidden or ignored.  Even in the latter promotions by ACN I think that the promotion of ‘recruitment payments’ was relatively more emphasised than the promotion of ‘services’, although I do think that the difference was not very significant. 

37                  The matters referred to in s 65AAE(1) of the Act are matters that the court can ‘have regard to’ for the purpose of determining whether the participation payments were predominantly induced by the prospect held out to new participants that they will be entitled to a recruitment payment.  As already mentioned, in my view the word ‘induced’ involves an objective test of causation. 

38                  It is necessary then to return to consider the meaning of s 65AAD(1)(b) of the Act and the question of who must be relevantly ‘induced’ (even accepting that that word involves an objective test.) The respondents draw attention to the use of the plural sense of the words ‘payments’ and participants’ and say that if any reasonable person, having regard to their individual circumstances, would have made the participation payment predominantly so as to be entitled to ‘services’ (as described above) rather than the recruitment payment then the scheme is not a pyramid selling scheme. Plainly, if this were the test the ACCC has not met it in this case. It is easy to envisage a hypothetical reasonable person who, by reasons of his or her personal circumstances (for example, a person with large numbers of family members, many of whom operate small businesses, all wishing to assist the person and all prepared to change their telecommunication provider) where the ‘services’ might be the predominant actuating cause of that person making the participation payment. 

39                  In contrast, the ACCC argues that a similar test should be applied as under s 52 of the Act in identifying whether conduct is ‘misleading or deceptive’. That test directs attention to the class of consumers likely to be affected by the conduct and, in that context, refers to the ‘reasonable’ or ordinary members of that class: see Campomar Sociedad Limitada v Nike International Limited (2000) 202 CLR 45 at 85-87. In my view the same reasons why that test was adopted in relation to s 52 suggest that a similar test should be applied under s 65AAD(1)(b) of the Act. Such a test is consistent with the evident purpose of ss 65AAE(1) and 65AAD(1) of the Act – a purpose that would largely be frustrated by the adoption of the test suggested by the respondents. It is also consistent with the ‘objective’ test suggested by the reference in s 65AAE(1)(a) of the TPA to a ‘reasonable relationship’. In my view the characteristic of a pyramid selling scheme referred to in s 65AAD(1)(a) of the Act is that, looking at the scheme as a whole including the manner in which it was promoted, the sole or predominant reason why a hypothetical reasonable person to whom the scheme was directed paid the participation payment was the prospect held out to that person that he or she would be entitled to a recruitment payment.

40                  But for the express direction in s 65AAE(1)(a) to ‘have regard’ to the commercial effects of some aspects of the scheme, the requirements of s 65AAD(1)(b) are largely formal in nature. So, for example, if there is no participation payment payable then it is not a pyramid selling scheme, no matter what other payments or other consideration may be payable by the participants and no matter that the scheme involves obvious recruitment payments. On the other hand, so long as the participation payment is predominantly induced by the recruitment payment (after having regard to the matters within s 65AAE), it makes no difference if the participation payment is merely nominal or very large. In either case the scheme is still a pyramid selling scheme. 

41                  To this extent the questions of whether the scheme, including the recruitment payments, is sustainable long term or whether it is ‘fair’ are not to the point. There is certainly no evidence that the scheme operated by ACN is not sustainable. Given that the scheme is similar to that operating by ACN Inc or its subsidiaries elsewhere in the world and that returns from recruitment payments are ultimately based upon actual business in real products and services provided to actual customers, as well as the fact that the amount of those payments are capped, then it may be possible to conclude that the scheme is sustainable long term.  Certainly there was no evidence in this case that it was not.  However, these are not relevant considerations for the purpose of s 65AAD(1)(b) of the Act.

42                  The matters to which I may have regard under s 65AAE of the Act have already been discussed. The question still remains whether the ‘predominant’ actuating cause for the payment of the participation payment was the recruitment payment. As already discussed, the participation payments do not bear a reasonable relationship to the services provided by ACN. If they did it might be concluded that the predominant actuating cause was the supply of those services, or at least, that the recruitment payments were not the predominant actuating cause. However, the conclusion that they did not bear such a reasonable relationship does not necessarily mean that the ‘predominant’ cause was the recruitment payment.  There may have been other causes which need to be considered. It may be that no cause was ‘predominant’. 

43                  Ultimately the matter becomes one of judgment. In my view the predominant actuating cause for a reasonable person paying the participation payment of $499 plus GST would be the prospect of obtaining recruitment payments.  This is reflected in the promotion of the scheme by Gibbs and Janke – in my view the concentration in those promotions on the potential for significant financial returns from recruitment payments merely reflected the commercial reality that the predominant inducement for a reasonable person becoming an IR and making a participation payment was the entitlement to receive recruitment payments.  It is reflected in the promotional material used by ACN.  The most common example within that material is calculations of prospective financial returns to potential IRs involved calculations of residual override commissions at the 7^th level. This is not surprising.  It is at that level that commission payments become very significant. That promotional material reflected the reality that it was the prospect of those payments (which are ‘recruitment payments’) that provided the predominant inducement for making the participation payment.  The affidavits of the other witnesses who attended the various promotions are to the same general effect. What they perceived as the actuating cause for making any participation payment (whether they did so or not) was the prospect of receipt of recruitment payments.

44                  Given the matters to which regard may be had under s 65AAE of the Act the situation might be different if the participation payment was $200, but it is not. In my view the participation payment of $499 plus GST was ‘substantially induced by the prospect held out to new participants that they will be entitled to recruitment payments’. Consequently it is my view that the scheme is a ‘pyramid selling scheme’. In my view ACN has breached s 65AAC of the Act in participating in that scheme and in inducing and attempting to induce persons to take part in the scheme. From his affidavit and from his evidence, it is clear that Paech made the relevant decisions in relation to the scheme, including fixing the amount of the participation payment. He was knowingly concerned in the breach of the Act by ACN and ‘aided, abetted’ that breach. In my view he was a person ‘involved in the contravention of the Act’ by ACN: see s 75B of the Act.

45                  I will hear the parties as to what orders should be made against ACN and Paech in relation to these findings and what orders, if any, should be made against the respondents who have not appeared or defended these proceedings.

Associate:

Dated:              23 March 2005