T-4855-80
The Queen on the Information of the Deputy
Attorney General of Canada (Plaintiff)
v.
Shaklee Canada Inc. (Defendant)
Trial Division, Mahoney J.—Edmonton, January
27 and 28; Ottawa, February 11, 1981.
Pyramid selling — Combines Investigation Act — Informa
tion charging defendant with inducing and inviting persons to
participate in such scheme contrary to s. 36.3(2) of the Act —
Crown seeking an order prohibiting continuation of alleged
offence — Whether defendant's program a "scheme of pyra
mid selling" within definition of s. 36.3(1) of the Act —
Combines Investigation Act, R.S.C. 1970, c. C-23, as amended
by S.C. 1974-75-76, c. 76, ss. 30(2), 36.3, 46(4).
The defendant is deemed to have induced or invited persons
to participate in a scheme of pyramid selling contrary to section
36.3(2) of the Combines Investigation Act. The Crown seeks an
order prohibiting continuation of the alleged offence pursuant
to section 30(2) of the Act. The issue is whether defendant's
program was a "scheme of pyramid selling" within the defini
tion of section 36.3(1) of the Act. The defendant's business is
the marketing by direct sales of its products which it sells only
to supervisors. These in turn sell the products to distributors or
to the ultimate consumer. Distributors may sell to other dis
tributors, down a sponsorship line, or to the ultimate consumer.
All the products purchased by a distributor are returnable in
the event of termination. A supervisor receives a bonus corre
sponding to a percentage of his group's monthly purchase
volume (PV). The issue of an alleged offence arises when a
special bonus is paid to a supervisor as compensation when a
distributor within his sponsorship group becomes a supervisor.
This special bonus is a percentage of the monthly group PV
(i.e. the personal PV of a distributor plus that of those below
him in a sponsorship line) of the supervisor.
Held, the application is dismissed. The defendant's program
does not fall within the definition of section 36.3(1 )(a) of the
Act: no fee is paid by anyone to participate in it and it involves
only sales, not leases. However, the sale of the product that
gives rise to the group PV upon which the special bonus is
based is a sale to an "ultimate user or consumer". Thus the
bonus, paid in respect of such a sale, falls within the exclusion
of section 36.3(I)(b)(iii). That finding is based on the agree
ment which provides for the liquidation of a distributor's
inventory on a reasonable basis. Thus, in the final analysis, a
distributor's personal PV over the term of his participation in
the program is an amount that relates only to product sold to
someone outside the program or retained for his personal use.
APPLICATION.
COUNSEL:
Ingrid Hutton, Q.C. for plaintiff.
R. M. Sedgewick, Q.C., J. D. Whiteside and
J. R. Sproat for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Miller, Thomson, Sedgewick, Lewis & Healy,
Toronto, for defendant.
The following are the reasons for judgment
rendered in English by
MAHONEY J.: The information charges that the
defendant did, between August 20, 1977, and Sep-
tember 25, 1980, in Edmonton, Alberta, and else
where in Canada, induce or invite persons to par
ticipate in a scheme of pyramid selling contrary to
subsection 36.3(2) of the Combines Investigation
Act.' The Crown seeks, under the procedure pro
vided by subsection 30(2) of the Act, an order
prohibiting continuation of the alleged offence.
This Court's jurisdiction is vested by subsection
46(4).
The evidence consists entirely of admitted facts.
As to the elements of the alleged offence, the only
issue is whether the defendant's program was a
"scheme of pyramid selling" within the definition
of the Act. The defendant says that even if it is
within that definition, it is also within the excep
tion of subsection 36.3(4). The defendant also says
that section 36.3 is beyond the legislative compe
tence of Parliament as it deals with property and
civil rights and matters of a merely local or private
nature in a province. The defendant says further
that if the section is within the legislative compe
tence of Parliament as criminal law, it is never
theless beyond the competence of the Deputy
Attorney General of Canada to institute the pro
ceedings. The Crown takes a contrary position to
all of the foregoing and says that the section is
within the legislative competence of Parliament as
' R.S.C. 1970, c. C-23, as amended.
it deals with the regulation of trade and commerce
and the peace, order and good government of
Canada as well as criminal law.
Section 36.3 provides: 2
36.3 (1) For the purposes of this section, "scheme of pyra
mid selling" means
(a) a scheme for the sale or lease of a product whereby one
person (the "first" person) pays a fee to participate in the
scheme and receives the right to receive a fee, commission or
other benefit
(i) in respect of the recruitment into the scheme of other
persons either by the first person or any other person, or
(ii) in respect of sales or leases made, other than by the
first person, to other persons recruited into the scheme by
the first person or any other person; and
(b) a scheme for the sale or lease of a product whereby one
person sells or leases a product to another person (the
"second" person) who receives the right to receive a rebate,
commission or other benefit in respect of sales or leases of
the same or another product that are not
(i) sales or leases made to the second person,
(ii) sales or leases made by the second person, or
(iii) sales or leases, made to ultimate consumers or users of
the same or other product, to which no right of further
participation in the scheme, immediate or contingent, is
attached.
(2) No person shall induce or invite another person to
participate in a scheme of pyramid selling.
(3) Any person who violates subsection (2) is guilty of an
offence and is liable
(a) on conviction on indictment, to a fine in the discretion of
the court or to imprisonment for five years or to both; or
(b) on summary conviction, to a fine of twenty-five thousand
dollars or to imprisonment for one year or to both.
(4) This section does not apply in respect of a scheme of
pyramid selling that is licensed or otherwise permitted by or
pursuant to an Act of the legislature of a province.
The defendant urges that for its sales program to
fall within the definition of a "scheme of pyramid
selling" it must meet the criteria of both para
graphs (a) and (b) of subsection 36.3(1). I dis
2 S.C. 1974-75-76, c. 76, s. 18.
agree. The subsection describes two distinct
schemes. The defendant's program is not a scheme
of pyramid selling as described in paragraph
36.3(1)(a) since no fee is paid by anyone to par
ticipate in it. It involves only sales, not leases.
The defendant is incorporated in Ontario and
carries on business in all ten provinces and the
Northwest Territories of Canada. Its business is
the marketing, by direct sales, of its products: food
supplements, household cleaners and cosmetics.
The products are sold exclusively by independent
self-employed persons who approach potential cus
tomers directly, usually in their homes. Canadian
gross sales in 1979, by over 44,000 distributors,
exceeded $10,000,000. The defendant is a wholly
owned subsidiary of a California corporation
which itself and through subsidiaries operates the
same business in North America, Europe and the
Far East. World gross sales, by some 400,000
distributors, exceeded $240,000,000 in 1977. Per
sons involved in the program are often husband
and wife teams.
The defendant sells its products only to "super-
visors". Supervisors, in turn, sell the products to
"distributors" or to the ultimate consumer. Dis
tributors may sell to other distributors, directly or
indirectly sponsored by them, or to the ultimate
consumer. The products are sold with a "complete
satisfaction or money refunded" guarantee. A
person or couple, interested in becoming a dis
tributor, must be sponsored by someone already in
the program: a supervisor or distributor. In his
application, he agrees to buy an "Earnings Oppor
tunity Kit" for $12.50. If the application is accept
ed by the defendant, it may be terminated by
either party by written notice, effective at the end
of a month. If terminated in the first two months
the Earnings Opportunity Kit may be returned for
a full refund. All products purchased by a distribu
tor are returnable in the event of termination for a
refund of not less than 90% if the distributor
terminated and 100% if the defendant terminated.
A distributor remains in the sponsorship line of
his sponsor leading back to a supervisor. For
example, as illustrated in the following chart, dis
tributor 'N' is in a sponsorship line that leads back
through distributors `L', 'H', 'D' and 'B' to the
supervisor 'X'.
Supervisor 'X'
Superviseur X'
Distributor 'A' Distributor 'B' Distributor 'C'
Distributeur 'A' Distributeur 'B' Distributeur 'C'
•
Distributor 'D' Distributor `E' Distributor 'F'
Distributeur 'D' Distributeur E' Distributeur 'F'
Distributor `G' Distributor 'H' Distributor
Distributeur `G' Distributeur 'H' Distributeur J'
Distributor 'K' Distributor `L' Distributor 'M'
Distributeur 'K' Distributeur `L' Distributeur 'M'
Distributor 'N' Distributor `O' Distributor `P'
Distributeur 'N' Distributeur `O' Distributeur P'
This chart represents supervisor X's group. He
directly sponsored distributors A, B and C and
indirectly all the other distributors. A sponsored no
one; B directly sponsored both D and E; C directly
sponsored only F, and so on down each sponsorship
line.
The supervisor orders product from the defend
ant to fill the orders of his distributors and, if he
sells to the public, to fill his own retail needs. He
pays the defendant the same price as he charges
his distributors. The goods are sold down the
sponsorship line on the same basis; there is no
profit taken by a distributor selling to the distribu
tor below him in the sponsorship line. The price to
the public is determined by the seller although the
defendant does recommend a suggested retail price
list be followed. The seller to the public pockets
the mark-up.
A supervisor is entitled to be paid, by the
defendant, a bonus of 22% of his group's monthly
purchase volume. There is a suggested scale for the
devolution of part of that bonus down the sponsor
ship lines but actual devolution is discretionary.
The suggested bonus plan is based on purchase
volume, or "PV", a dollar amount assigned to each
product by the defendant. That amount appears to
be the suggested retail price less allowances for
such costs as shipping, handling, taxes and special
packaging. "Personal PV" is the PV that relates to
the product that the distributor personally uses or
sells to other consumers, but not to distributors
below him in a sponsorship line. His personal PV
plus that of those below him in a sponsorship line
is his "group PV". It is suggested that a distributor
with at least $150 personal PV in a month be paid
a bonus in respect of his group PV for the month.
Thus, referring to the chart, if C's personal PV is
at least $150, his bonus is calculated on that plus
the personal PV's of F and J and, if F's personal
PV is at least $150, his bonus is calculated on J's
personal PV as well.
When a distributor's group PV reaches $1,000
per month, he is eligible to be appointed an assist
ant supervisor. As illustrated by the chart, B's
group PV is the aggregate of his own personal PV
plus the personal PV's of D, E, G, H, K, L, M, N,
O and P. The defendant suggests that an assistant
supervisor be paid a higher rate of monthly bonus,
i.e., 11% to 18%, than a distributor, i.e., 6% to 8%,
of his group PV. An assistant supervisor still pur
chases product from his supervisor, not directly
from the defendant. B would become eligible to be
appointed an assistant supervisor when his month
ly group PV reached $1,000. If, after at least three
months as an assistant supervisor, B's group PV
reached $3,000 per month, he would be eligible to
be appointed a supervisor and to order direct from
the defendant.
This is the threshold of where the defendant's
program is alleged to become a scheme of pyramid
selling as defined by paragraph 36.3(1)(b). Up to
this point, no one is entitled to be paid a bonus in
respect of the sale of any product that he has not
himself bought and resold or used. Again referring
to the chart, if B were to become a supervisor, X
would lose B's group PV from his bonus base. His
group PV would consist only of his personal PV
and those of A, C, F and J. To compensate, special
bonuses are provided. They are not discretionary;
they are an obligation of the defendant to a super
visor when another supervisor is appointed out of
his group.
In the example of B's appointment, X would
become entitled to an ongoing bonus of 5% of B's
group PV. If, later, D were to be appointed a
supervisor, B would become entitled to 5% of D's
group PV and X would become entitled to 2% of
D's group PV as well as to continue to be entitled
to 5% of B's, presumably shrunken, group PV.
Then, if H were to be appointed a supervisor, D
would become entitled to 5%, B to 2% and X to 1%
of H's group PV. That is X's final level of special
bonus entitlement under the program as a supervi
sor. In the terminology of the program, related to
this example, B is a first level supervisor within
X's sponsorship group. It is likewise for D vis-à-
vis B's group and H vis-a-vis D's. Similarly,
within X's sponsorship group, D is called a second
level supervisor and H a third level supervisor. As
stated, a supervisor is entitled to be paid special
bonuses of 5%, 2% and 1%, respectively, of the
monthly group PV of the first, second and third
level supervisors in his sponsorship group.
A supervisor with four first level supervisors
within his sponsorship group is entitled to apply to
be appointed a coordinator by the defendant. A
coordinator with nine first level supervisors is eli
gible to become a key coordinator and a key
coordinator with fifteen first level supervisors will
be considered for appointment to the rank of
master coordinator. These titles are honorary.
What their award appears to promise is the right
to retire and to continue to be paid one half of the
5%, 2% and 1% bonuses for life.
There are approximately 23 coordinators, two or
three key coordinators and no master coordinators
across Canada. No key or master coordinator has
yet retired. There are approximately 366 supervi
sors and 1,871 assistant supervisors. Of the 44,000
odd distributors, about 6,000 are active (full time,
I take it), 12,000 are part-time, 11,000 buy
primarily for their own use and 15,000 are inactive
and do not presently sell the defendant's product.
It is useful to repeat the definition of paragraph
36.3(1)(b):
36.3 (1) ... "scheme of pyramid selling" means
(b) a scheme for the sale or lease of a product whereby one
person sells or leases a product to another person (the
"second" person) who receives the right to receive a rebate,
commission or other benefit in respect of sales or leases of
the same or another product that are not
(i) sales or leases made to the second person,
(ii) sales or leases made by the second person, or
(iii) sales or leases, made to ultimate consumers or users of
the same or other product, to which no right of further
participation in the scheme, immediate or contingent, is
attached.
The simplest scenario, the special bonus pro
gram applied to a supervisor with one first level
supervisor in his sponsorship group, involves the
sale of a product by one person, the defendant, to
another person (the "second" person), the supervi
sor. It also involves that second person, the super
visor, having "the right to receive a ... benefit in
respect of sales ... of ... another product that are
not (i) sales ... made to" nor "(ii) sales ... made
by" the supervisor. It does, however, appear that,
regardless of intervening sales by the first level
supervisor to distributors and by one distributor to
another, the bonus is, .in, the final analysis, paid in
respect of "sales ... to ultimate consumers or
users" of that other product and, as such, the
bonus is within the exclusion of subparagraph (iii).
I reach that conclusion because of the provision
of the agreement each distributor has with the
defendant that permits him to terminate the rela
tionship at the end of any month and to require the
defendant to repurchase product on hand for not
less than 90% of what he paid for it. As long as a
distributor participates in the program there may
and likely will, from time to time, be an element of
his personal PV that relates to inventory in his
hands and that would, at the same time, be reflect
ed in the group PV. Strictly speaking, a supervisor
with a right to receive a special bonus on his first
level supervisor's group PV containing such ele
ments of personal PV would have a "right to
receive a ... benefit in respect of sales ... of ...
another product that are not ... sales ... made to
ultimate consumers" as that term is used in sub-
paragraph 36.3(1)(b)(iii). That, however, is noth
ing but an inevitable consequence of the necessity
of fixing a particular time period for the calcula
tion of the bonus. It remains that the program does
provide for the liquidation of the distributor's
inventory on a reasonable basis. Thus, in the final
analysis, a distributor's personal PV over the term
of his participation in the program is an amount
that relates only to product sold to someone out
side the program or retained for his personal use.
In either event, the sale of the product that gives
rise to the group PV upon which the special bonus
is based is a sale to an "ultimate user or con
sumer" as contemplated by subparagraph
36.3(1)(b)(iii).
Referring only to the scheme of pyramid selling
defined by paragraph 36.3(1)(b), it would appear
that an essential element of the evil which Parlia
ment envisaged is that some participants in such a
scheme might find themselves, having paid for
product, without a reasonable opportunity of dis
posing of it. That element is contemplated by
subparagraph 36.3(1)(b)(iii). It is an element that
is not present in the defendant's program because
of its commitment to repurchase product on
reasonable terms. Having reached that conclusion,
1 do not find it necessary to comment on other
positions taken by the parties.
The reasoning, mutatis mutandis, and the result
is the same vis-à-vis the other special bonuses
provided in the program. The defendant may move
for judgment on the basis of these reasons. If the
Crown's approval as to the form of judgment is
forthcoming, the motion may be brought under
Rule 324. Judgment shall not issue until settled by
the Court.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.