Pennsylvania v. First Financial Security

Does the separation of the right to sell to end users and the right to sell distributorships remove a company from the statutory definition of a pyramid scheme?


The Court held that separating the plans for selling distributorships from those that sold memberships, and not charging to for the right to sell distributorships, did not allow First Financial to escape the operation of the Consumer Protection statutes. First Financial distributed financial products through an MLM network. Membership in the program costs $100, but a member must apply to become a distributor if they wish to solicit new members. Members can become distributors at no cost, and a distributor need not also be a member. The trial court ruled that this structure did not fall under the definition of a pyramid scheme because the right to solicit others was not conditioned on the payment of money. The Commonwealth Court held that the trial court was incorrect. The motivation for becoming a distributor was to solicit other paying members; a distributor did not earn any commission for recruiting a non-paying distributor. Though the right to distribute did not cost anything initially, there were facts in the record that in practice, most, if not all distributors also joined as members and paid a fee. The Court found that in practice the program behaved as a statutorily defined pyramid scheme, and it should not be exempt from the law.

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Reference Info:State, 3rd Circuit, Pennsylvania | United States

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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