Thursday, 19 December 2013

Pyramid schemes - AG Sharpston in 4finance (C-515/12)

19 December 2013: Opinion AG Sharpston in 4finance case (C-515/12)

AG Sharpston delivered a very interesting opinion today in a Lithuanian case concerning potential pyramid schemes. Have you ever been asked to recommend a certain product or a service to a friend by providing their email address or a phone number on a website, having been promised that if they register for the same service/ product you would get a certain benefit? The CJEU has to assess whether such practices could be considered to constitute a pyramid scheme that is prohibited as an unfair commercial practice in the EU.

UAB "4finance" concludes distance contracts with consumers the purpose of which is to grant consumers small loans. From October 2010 to February 2011 it advertised its services by stating that anyone who registers on its website would receive a credit to his bank account for each 'friend' introduced by them who then registered on this website. The initial registration fee was very low - LTL 0.01, while if a friend registered on the same website consumers could get a credit to their account ('a bonus') of either LTL 10 or LTL 20. While registering every consumer was asked to provide a phone number or an email address of his friends, who would then be invited to register by 4finance. After registration you could apply for a small loan with 4finance.

The Lithuanian State Consumer Rights Protection Authority considered this to be a pyramid selling scheme, where consumers received a right to payment primarily for the introduction of new entrants to the scheme rather than for the sale or consumption of products, and, therefore, it fined 4finance. Since 4finance questioned this decision the case arrived at the CJEU.

AG Sharpston decided in its opinion that a national court to establish that there was a pyramid promotional scheme needs to take into consideration: 1) whether a consumer gave consideration in order to join such a scheme; 2) whether the scheme had a pyramid structure - that is it consisted of different levels with the operator at the apex and there was a cumulative recruitment of new members increasing exponentially; 3) whether the compensation paid to existing scheme members was derived primarily from the consideration given by new recruits, and it should not matter how small the consideration was.

This opinion was based on the cumulative and exhaustive list of elements that must be established in order to recognize a pyramid scheme as mentioned in Point 14 of Annex I to the Directive. The pyramid scheme does not have to be fraudulent, since fraud is not one of the requirements. Nor is there a requirement there for the consideration to be of (at least) a certain value. (Par. 21) It also does not matter whether a high amount of the return in comparison to the entry fee is promised or a speedy gain, since these requirements are not listed either as defining pyramid schemes (Par. 22). 

There is an interesting issue of conflicting language versions of the Directive that the AG Sharpston interprets, so for anyone interested in language & law debate, you should read the text of the whole opinion.

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