Louisiana

Louisiana has three sets of legal requirements affecting MLM.   These were adopted at different times, by different bodies and contain inconsistent and occasionally contradictory definitions and provisions.   It appears to be a case of the right hand not knowing what the left hand is doing, and neither knowing what the right or left foot had already done.

First, in 1956 the City of New Orleans adopted an ordinance regarding “endless chains.”   Operation of an endless chain is prohibited unless the operator obtains a permit.   The city council may deny the permit if it determines that the “plan or scheme is unstable and not based upon sound business principles and assets or if, in the opinion of the council such plan or scheme is calculated to or may mislead the public.”   The permit may be revoked if the “endless chain is not being fairly or honestly conducted or that methods are being used in connection therewith which are dishonest or unfair or which are calculated to or may mislead the public.”  I have not found any case in which this ordinance was enforced or even mentioned.

Second, in 1995 the Louisiana Department of Justice promulgated a regulation concerning chain distributor and multilevel distribution schemes, pursuant to its authority under the Louisiana consumer protection law.   The regulation defines “chain distributor scheme” as a “sales device whereby a person, upon a condition that he make an investment, is granted a license or right to recruit for profit one or more additional persons who also are granted such license or right upon condition of making an investment and may further perpetuate the chain of persons who are granted such license or right upon such condition.”  Notably the regulation prohibits plans where the financial gains are not based on sales to nonparticipants.

Most recently, in 1997 the Louisiana legislature enacted a version of the Direct Selling Association’s “model” statute, ostensibly making the promotion of a “pyramid promotional scheme” a crime, subject to a $10,000 fine and/or up to 10 years imprisonment, with or without hard labor.   As usual with the DSA’s model statute, the devil is in the definitions.  “Pyramid promotional scheme” is defined as a plan where participants pay “consideration” for the right to receive “compensation” primarily for recruitment rather than the sale of products.   “Compensation” does not include payments based on the sales of products “for actual use or consumption”, including by other participants.   This directly contradicts one of the key provisions of the Louisiana regulation referenced above, which prohibits the payment of compensation based on sales to participants.  To make things worse, “consideration” does not include payments for products subject to “reasonable commercial terms”, which is defined as a 90% repurchase agreement.   However, the statute permits a number of conditions and exclusions to the repurchase obligation so as to render it effectively useless.

The Louisiana Pyramid Promotional Scheme Act

LA. Rev. Stat. § 51:361 Definitions.

As used in this Subpart:

(1) “Compensation” means the payment of money, a thing of value, or any financial benefit. Compensation does not include:

(a) Payment to participants based upon sales of products purchased for actual use or consumption, including products used or consumed by participants in the plan.

(b) Payment to participants under reasonable commercial terms.

(2) “Consideration” means the payment of cash or purchase of goods, services, or intangible property. Consideration does not include:

(a) Purchase of products furnished at cost to be used in making sales and not for resale.

(b) Purchase of products where the seller offers to repurchase the participant’s products under reasonable commercial terms.

(c) Participant’s time and effort in pursuit of sales or recruiting activities.

(3) “Participant” means a person who contributes money into a pyramid promotional scheme.

(4) “Person” means an individual, a corporation, a partnership, or any association, or unincorporated organization.

(5) “Promote” means to contrive, direct, establish, or operate a pyramid promotional scheme.

(6) “Pyramid promotional scheme” means any plan or operation by which a participant gives consideration for the opportunity to receive compensation which is derived primarily from the person’s introduction of other persons into a plan or operation rather than from the sale of goods, services, or intangible property by the participant or other persons introduced into the plan or operation.

(7) “Reasonable commercial terms” includes repurchase by the seller, at the participant’s request, and upon termination of the business relationship or contract with the seller, of all unencumbered products purchased by the participant from the seller within the previous twelve months which are unused and in commercially resalable condition, provided that repurchase by the seller shall be for not less than ninety percent of the actual amount paid by the participant to the seller of the products, less any consideration received by the participant for purchase of the products which are being returned. A product shall not be deemed nonresalable solely because the product is no longer marketed by the seller, unless it is clearly disclosed to the participant at the time of the sale that the product is a seasonal, discontinued, or special promotional product, and not subject to the repurchase obligation.

§51:362 – Promoting pyramid promotional scheme unlawful

No person shall promote a pyramid promotional scheme in Louisiana or cause a pyramid promotional scheme to be promoted in Louisiana.

§51:363 – Violations; penalties

Whoever promotes a pyramid promotional scheme in Louisiana or causes a pyramid promotional scheme to be promoted in Louisiana shall be fined not more than ten thousand dollars or imprisoned, with or without hard labor, for not more than ten years, or both.

The Louisiana Pyramid Sales Regulation

La. Admin. Code tit. 16, Pt. III, §503

§503. Multi-Level Distribution and Chain Distributor Marketing Schemes

1. Definitions. For the purpose of this Section, the following definitions shall apply.

Chain Distributor Scheme―a sales device whereby a person, upon a condition that he make an investment, is granted a license or right to recruit for profit one or more additional persons who also are granted such license or right upon condition of making an investment and may further perpetuate the chain of persons who are granted such license or right upon such condition. A limitation as to the number of persons who may participate, or the presence of additional conditions affecting eligibility for the above license or right to recruit or the receipt of profits therefrom, does not change the identity of the scheme as a chain distributor scheme.

Investment―any acquisition, for a cause or consideration other than personal services, of movable or personal property, tangible or intangible, for profit or business purposes, and includes, without limitation, franchises, business opportunities and services. It does not include real estate, securities registered in accordance with Louisiana law, or sales demonstration equipment and materials furnished at cost for use in making sales and not for resale.

Multi-Level Distribution Scheme―a scheme whereby goods or services are distributed through independent agents, contractors or distributors at different levels, wherein any one level enjoys a different rate of pricing or discounting from that of any other level, and wherein participants in the marketing program may recruit other participants and wherein commissions, cross-commissions, bonuses, refunds, discounts, dividends or other consideration in the marketing program may be paid as a result of the sale of such goods and services or the recruitment, actions or performances of additional participants.

Pyramid Sales Marketing Scheme―the conduct of any business in trade and commerce wherein a multi-level distribution scheme or a chain distributor scheme, or a combination of these schemes, is used.

• Prohibitions

1. Any marketing scheme utilizing a chain distributor scheme, as defined in this rule, is per se an unfair and deceptive trade practice, in violation of R.S. 51:1405(A).

• It shall also be an unfair and deceptive trade practice, in violation of R.S. 51:1405(A), for any person using any pyramid sales marketing scheme to do any of the following:

1. to fail to provide in the contract of participation in bold face type of a minimum size of 10 points a statement substantially indicating that such contract may be canceled for any reason at any time by a participant upon notification in writing to the company of his election to cancel. If the participant has purchased products while the contract of participation was in effect, all products in a resalable condition then in the possession of the participant shall be repurchased. The repurchase shall be at a price of not less than 90 percent of the original net cost to the participant returning such goods, taking into account any sales made by or through such participant prior to notification to the company of the election to cancel; or

• to require participants in its marketing program to purchase products or services or pay any other cause or consideration in order to participate in the marketing program unless such products or services are in reasonable quantities in relation to the rate at which they actually sell and unless it agrees:

1. to repurchase all or part of any products which are in a resalable condition  at a price of not less than 90 percent of the original net cost to the participant; and

1. to repay not less than 90 percent of the original net cost of any services purchased by the participant; and

1. to refund not less than 90 percent of any other consideration paid by the participant in order to participate in the marketing program; or

• • to operate or, directly or indirectly, participate in the operation of any multi-level marketing program wherein the financial gains to the participants are primarily dependent upon the continued, successive recruitment of other participants and where sales to nonparticipant are not required as a condition precedent to realization of such financial gains; or

1. to offer to pay, pay, or authorize the payment of any finder’s fee, bonus, refund, override, commission, cross- commission, dividend or other cause or consideration to any participants in a multi-level marketing program solely for the solicitation or recruitment of other participants therein; or

1. to offer to pay, pay, or authorize the payment of any finder’s fee, bonus, refund, override, commission, cross- commission, dividend or other cause or consideration to any participants in a multi-level marketing program in connection with the sale of any product or service unless such participant performs a bona fide and essential supervisory, distributive, selling or soliciting function in the sale or delivery of such product or services to the ultimate consumer; or

1. to offer to pay, pay, or authorize the payment of any finder’s fee, bonus, refund, override, commission, cross- commission, dividend or other cause or consideration to any participant where payment thereof is or would be dependent on the element of chance dominating over the skill or judgment of such participant, or where no amount of judgment or skill exercised by the participant has any appreciable effect upon any finder’s fee, bonus, refund, override, commission, cross-commission, dividend or other cause or consideration which the participant may receive, or where the participant is without that degree of control over the operation of such plan as to enable him substantially to affect the amount of finder’s fee, bonus, refund, override, commission, cross-commission, dividend or other cause or consideration which he may receive or be entitled to receive; or

• to represent, directly or indirectly, that participants in a multi-level marketing program will earn or receive any stated gross or net amount, or represent in any manner, the past earnings of participants; provided, however, that a written or verbal description of the manner in which the marketing plan operates shall not, standing alone, constitute a representation of earnings, past or future; or

• to represent, either directly or indirectly, that additional distributors or sales personnel are easy to secure or retain, or that all or substantially all participants will succeed; or

• to fail to comply with all Louisiana corporation registration laws, if applicable, or, in any case, to fail to notify the Consumer Protection Section of the Louisiana Department of Justice of any of the following, prior to its doing business in this state:

1. that it will be doing business in Louisiana;
   1. each place within Louisiana where it will actually be doing business;
   1. the full name and mailing and permanent address of its authorized agent for service of process within Louisiana, which it is also required to have at all times herein; 
   1. that the Consumer Protection Section of the Louisiana Department of Justice and its representatives are authorized and invited to attend any and all of its opportunity meetings, recruitment meetings, training sessions, or any other meeting wherein a prospective participant or any participant is explained the marketing system, and are authorized and invited to visit, at any reasonable time, any and all places wherein it keeps files, records, data, communications, or information and to inspect same.

• All rules and regulations or parts thereof in conflict herewith are hereby repealed.

• If any part of this rule is ever legally declared to be invalid for any reason, the remainder of the rule shall continue in full force and effect, and to this end, this rule is declared to be severable.

AUTHORITY NOTE: Promulgated in accordance with R.S. 51:1401 et seq.

HISTORICAL NOTE: Promulgated by the Department of Justice, Consumer Protection Section, LR 21:950 (September 1995).

New Orleans, Louisiana Code of Ordinances Sec. 30-401 et seq.

§ Sec. 30-401 Definitions.

The following words, terms and phrases, when used in this article, shall have the meanings ascribed to them in this section, except where the context clearly indicates a different meaning:

Endless chain means and includes any plan or scheme wherein any person sells, transfers, assigns or issues to any person any right, property, ticket, coupon, certificate, contract or other token and wherein:

(1) The purchaser, transferee or assignee thereof or the person to whom such token is issued undertakes or is permitted to undertake for himself or as the agent, representative or attorney of such person to sell, transfer, assign or issue to another any right, property, ticket, coupon, certificate, contract or other token which may under certain conditions entitle the purchaser or recipient thereof to any right, property, ticket, coupon, certificate, contract or other token; and,

(2) The purchaser, transferee or assignee thereof from the original purchaser, assignee or transferee, or from a subsequent purchaser, assignee or transferee, is also given as a consideration for their entry into or participation in such plan or scheme and their purchase or receipt of such right, property, ticket, coupon, certificate, contract or other token the right, privilege or obligation of making further sales, assignments or transfers of any right, property, ticket, coupon, certificate, contract or other token.

§ Sec. 30-402 Permit required.

It shall be unlawful for any person to operate, conduct or carry on, to cause to be operated, conducted or carried on or to assist or participate in the operation, conducting or carrying on in the city of any system of merchandising by means of an endless chain or to solicit or canvass in connection therewith unless such person shall have in his possession at all times while engaged therein a valid, unsuspended and unrevoked permit so to do from the council.

§ Sec. 30-403 Application for operation permit.

Before any permit provided for in section 30-402 may be issued, such person shall file with the council a statement in writing, duly verified or sworn to by such person, setting forth the name and address of such person, or the names and addresses of all of the members of such firm or of all of the officers of such corporation, if such person be a firm or corporation, together with a statement of the financial condition of such person, setting forth his assets and liabilities, and also a full and complete statement of the plan of operation of such endless chain and with such statement a copy of each written, typewritten, printed or other matter proposed by the applicant for such permit to be used in connection with such endless chain.

§ Sec. 30-404 Agent’s permit.

It shall be unlawful for any person to sell or offer for sale or to solicit or canvass in connection with any endless chain, either for himself or as agent, representative or attorney of any other person operating, conducting or carrying on any endless chain without having applied to and obtained from the council a permit in writing to do so and without having furnished to the council an application in writing, duly verified or sworn to, stating such person’s name and address and such further information as the council may require.

§ Sec. 30-405 Investigation; refusal.

No permit shall be issued under this article until the council shall have investigated fully the plan of operation of any such endless chain, the financial condition and the reputation of the operators thereof, the reputation for integrity of each applicant for a permit to sell, solicit or canvass in connection therewith and such other matters as may be deemed advisable. If, in the opinion of the council the plan or scheme is unstable and not based upon sound business principles and assets or if, in the opinion of the council such plan or scheme is calculated to or may mislead the public, the council shall refuse to issue such permit.

§ Sec. 30-406 Approval of written matter used in plan.

It shall be unlawful for any person to use in any manner in connection with any endless chain any written, typewritten, printed or other matter, a copy of which has not been submitted to and approved by the council.

§ Sec. 30-407 Revocation or suspension of permit.

The council shall suspend or revoke any permit granted under the provisions of this article upon its own motion or upon complaint being made to the council that any endless chain is not being fairly or honestly conducted or that methods are being used in connection therewith which are dishonest or unfair or which are calculated to or may mislead the public.

§ Sec. 30-408 Hearing prior to revocation of permit.

No permit required by this article shall be revoked without a hearing thereon by the council after at least five days’ notice in writing served either personally upon the holder of such permit, by posting it in his place of business or by sending it by registered mail, postage paid, to the last-known address of the holder of such permit. Such notice shall specify the charges against such holder and the grounds for revocation of such permit pending before the council. At the hearing of such charges before the council, the holder of such permit may be present and be heard in person and by counsel.