European Union: ECJ Rules On Definition Of Pyramid Promotional Schemes

On 15 December 2016, the Court of Justice of the European Union (the "ECJ") held that a prohibited pyramid promotional scheme would exist within the meaning of point 14 of Annex I to Directive 2005/29/EC of 11 May 2005 concerning unfair business-to-consumer commercial practices (the "Unfair Commercial Practices Directive") even if there is only an indirect link between the contributions paid by new members of the scheme and the compensation paid to existing members (ECJ, 15 December 2016, Case C-667/15, Loterie Nationale — Nationale Loterij NV van publiek recht v. Paul Adriaensen, Werner De Kesel and The Right Frequency VZW).

Point 14 of Annex I to the Unfair Commercial Practices Directive ("Point 14") provides that the following commercial practice is in all circumstances considered to be unfair and thus prohibited: "Establishing, operating or promoting a pyramid promotional scheme where a consumer gives consideration for the opportunity to receive compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the sale or consumption of products".

The ECJ delivered its judgment in response to a request for a preliminary ruling from the Antwerp Court of Appeal (the "Court") in legal proceedings between the Belgian National Lottery (the "National Lottery") and the organisers of a scheme of collective participation in the Belgian national lotteries called "Lucky4All" (the "Lucky4All scheme"). The National Lottery argued that the Lucky4All scheme constitutes a prohibited pyramid promotional scheme within the meaning of Point 14.

Under the Lucky4All scheme, groups of lottery players play together in an eight-level pyramid scheme. The underlying idea is that players mutually increase their chances of success if they play together. Through the scheme, a complete group of players can play up to 9,841 combinations at the same time. Members pay an initial contribution of EUR 10 and a monthly contribution of EUR 43, allowing them to purchase 10 lottery combinations a week. The winner of a combination receives 50% of the winnings while 40% is allocated to members in higher levels of the scheme, including the Lucky4all scheme itself. The remaining 10% is reinvested in the purchase of new combinations. The possible winnings of Lucky4All players are capped at EUR 1 million.

According to Point 14, for a pyramid promotional scheme to exist, the following conditions should be fulfilled: (i) consumers must be attracted by the promise of improved chances of winning; (ii) the realisation of that promise depends on the introduction of ever more new players; and (iii) the contributions of new members essentially fund the compensation paid to existing members.

Examining the Lucky4All scheme, the Court found that both the first and the second conditions were satisfied, given that every player has an interest in recruiting new players to improve his or her position as the winnings are distributed to the players depending on their position.

However, being uncertain as to whether the third condition was satisfied as well, the Court decided to stay the proceedings and ask the ECJ for guidance on whether (i) the realisation of the financial promise to existing members should depend primarily or mostly on the direct transfer of the contributions of the new members ("direct link"); or (ii) it is sufficient that the realisation of this financial promise depends primarily or mostly on an indirect payment through the contributions of existing members, i.e. existing members depend for the realisation of the financial promise primarily or mostly on the introduction and contributions of new members ("indirect link").

Referring to its earlier case law, the ECJ reiterated that classification as a pyramid promotional scheme requires (i) that the members of the scheme pay a financial contribution; as well as (ii) a link between the contributions paid by new members and the compensation received by existing members. It continued that the wording of Point 14 does not imply that the financial link must be direct. It suffices that there is an indirect link between the contributions paid by new members and the compensation received by existing members. The ECJ noted that any different interpretation of Point 14 would deprive this provision of its effectiveness as it would become easy to circumvent the absolute prohibition of pyramid promotional schemes by making the link indirect.

Against this background, the ECJ held that the Lucky4All scheme seems to satisfy the third condition as well. This is because not only are the chances of winning linked to the introduction of new members but the winnings are also capped at EUR 1 million, a factor which contributes to the funding of the scheme. Accordingly, the ECJ concluded that the financial link between the contributions paid by the new members and the compensations received by existing members seems to be indirect but certain. However, it left it to the Court to make a final determination and also decide whether the Lucky4All scheme qualifies as a "commercial practice" (which, according, to the ECJ, appears to be the case).

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