          THE     J$.TB?CBRNEY         GENERAL
                       OPI‘EXAS


                        February 1, 1971


Honorable Enrique H. Pena
County Attorney
Room 201                    Opinion No. M- 781
City-County Building
El Paso, Texas 79901        Re:   Whether corporation licensed to
                                  transact business in Texas and
                                  whose marketing system has sev-
                                  eral levels of distributorships
                                  violate the Antitrust, Decep-
                                  tive Trade Practice, or Lottery
Dear Mr. Pena:                    Laws of Texas.

        You have requested our opinion concerning the legal-
ity of a sales plan currently being utilized by a Texas cor-
poration.  Specifically, you requested that we review the
sales plan in light of the Antitrust, Deceptive Trade Prac-
tice and Lottery Laws of the State of Texas.

        Along with your opinion request, you submitted the
following information describing the company's sales plan.
The company offers for sale, at varying prices, several posi-
tions. The positions are generally referred to as distribu-
torships. The structure of the company is in the general
classification of a pyramid or multi-level type.

        As you know, not infrequently businesses organized
along this structural line do engage in violations of the
Antitrust and Deceptive Trade Practices acts of this State
and on occasion may violate the Lottery statutes. When this
is so, however, it is because the actions and misrepresen-
tations engaged in by the company's representatives when
presenting the program and the opportunities for making money,
for a pyramid business structure is not presently, in and of
itself, a violation of any of the three laws above named.

        Pyramid companies typically provide that goods must
be purchased only from those people who introduce the purchaser
to the plan and these new distributors then become a part of
that introducing distributor's sales organization.  The intro-
ducing distributor then is rewarded for all sales made within
his organization, even those made by recruits of his distribu-
tors. This would constitute a conspiracy between two or more

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Honorable Enrique H. Pena, Page 2 (M-781)



persons not to buy from or sell to another individual which
would be in direct violation of Article 15.03(a) (11, Vernon's
Civil Statutes which provides as follows:

             " (a) It is a conspiracy in restraint
        of trade for
               (1) two or more persons engaged in
        buying or selling tangible personal prop-
        erty to agree not to buy from or sell to
        another person tangible personal property;"

        Thus it is clear that if the person who is introduced
into the plan by a certain distributor is prohibited by
the plan from purchasing from anyone other than his introducing
distributor,  there is a violation of our law.

        Additionally, in a plan such as this there is nor-
mally a fixed price list which controls the resale price of
goods sold by the distributors at the various levels.

        An agreement among the distributors and the company
fixing and maintaining the resale price of the merchandise so
that all distributors at the same level sell an item for the
same price is also a violation of the Texas Antitrust laws.
See Article 15.02 (b) (5) (A), Vernon's Civil Statutes, which
provides:

             "(b) h 'trust' is a combination
        of capital, skill, or acts by two or more
        persons to
               (5) agree
               (A) not to sell, dispose of, trans-
        port, or prepare tangible personal property
        for market or transportation, or not to make
        an insurance contract, at a price below a
        common standard or figure;"

        It is clear that if prices for the product are set
and maintained by the parent organization and the individual
distributors are not free to choose their own resale price,
as is normally the case in a pyramid organization if it is
to work as outlined by the sales representatives, then there
is another violation of our Texas Antitrust law.

        The Distributor's Manual which you supplied along with
your request affirmatively points out that members of the pro-
gram are free to purchase from whomsoever they desire at the
best price possible and that they may resell their goods to
anyone at any price they so choose. Whether or not such
conditions are in fact true in this particular sales plan is
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Honorable Enrique H. Pena, Page 3 (M-781)



a question of fact and one upon which this office will not
pass. We pause to point out that the mere recitation in the
sales manual of these facts does not control, and it is the
actual actions of the company and its "distributors" when
making the sales presentation and in dealing with its distrib-
utors which determines whether or not there has been a viola-
tion of our law.

        Regarding the Deceptive Trade Practices Act, it is
not unusual for pyramid sales companies, and indeed other
companies, to make gross misrepresentations in the sales pre-
sentation as to prospective earnings , and the ease with which
these earnings may be accomplished.   These claims are often
made in a revival like, mass meeting referred to by some glow-
ing name where the plans are outlined with rehearsed and theat-
rical precision.  Unfortunately, it is not unheard of for the
representation to be made at such a meeting that this office,
or some other governmental agency, has approved the plan.
Suffice it to say that where misrepresentations are made con-
cerning the benefits of the sales plan or its approval of
sponsorship, it is a violation of Article 5069-10.01(b) (5)
which provides:

             ” (b)  'Deceptive practices' means any
        one or more of the following:
               (5) representing that goods or ser-
        vices have sponsorship, approval, character-
        istics, ingredients, uses, benefits, or
        quantities that they do not have or that a
        person has a sponsorship, approval, status,
        affiliation, or connection that he does not
        have;"

         The material you submitted indicates that this company
does not utilize the mass sales meeting technique.   Rather,
it seems, a company representative approaches every person
individually and describes the sales plan on its own merit.
Additionally, you state that each person is told how many dis-
tributors there presently are in the area and the total number
of distributorships available for the area.   Thus a prospective
purchaser is aware at the time of his purchase of the market
saturation, or lack thereof, in his area. Further, it appears
from the submitted materials that realistic claims  of earnings
are presented by the company to prospective distributors rather
than the exhorbitant and fantastic claims which all too often
are companions to sales presentations of this type. We caution
again that actual fraud or misrepresentation is a question of
fact, ana we do not attempt to pass upon the question of whether
the company actually follows the sales manual you supplied.   It
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.     -




    Honorable Enrique ii. Pena, Page 4 (M-781)



    does appear from the information that you furnished us that
    this company does not engage in such misrepresentation.  It is
    elementary that if there is no misrepresentation of the product,
    the sales program involved or potential earnings, then there is
    no violation of our Deceptive Trade Practices Act.

           Finally we come to the question of whether this sales
    plan violates the Lottery Laws of the State of Texas. A lottery
    in Texas consists of three essential elements, which are consid-
    eration, prize and chance. See Griffith Amusement Company v.
    Morgan, 98 SW2d 844 (Tex.Civ.App. 1936, no writ); City of Wink
    v. Griffith Amusement Comnanv 129 Tex. 40, 100 SW2d 695 (1936);
    State v. Socony Mobil Oil ComLany, 386 SW2d 169; and Att. Gen.
    Opinion Nos. C-619 (1966) and M-343 (1969). In a plan such as
    this the problem always is one of whether or not there is chance.
    There is obvious consideration, the cozt of distributorship, and
    prize, the chance to make large earnings.  The only question re-
    maining is whether skill or chance is the dominant factor. From
    the facts given, it appears that in this plan skill and effort
    on the part of the distributor are paramount and that chance,
    if any, is minimized to that point to which any ordinary busi-
    nessman would be subjected. See Atty. Gen. Opinion No. M-343
    (1969). For this reason it is the opinion of this office that
    the sales plan as presented does not constitute a violation of
    the Lottery laws of this State.

           We stress that this opinion is based upon the assump-
    tion of the truth and accuracy of the facts submitted along
    with your opinion request as pointed out above. If the com-
    pany is saying one thing in their sales manual but actually
    doing another, then there might well be a violation of any
    or all of the above noted laws. In addition, since this of-
    fice is without authority to determine factual questions, we
    point out that if it is caused to appear that a factual con-
    troversy is presented, the court of jury would make the ul-
    timate factual determination.

                         SUMMARY
                         -------
                A sales plan which does not contain a
           conspiracy not to buy from or sell to another
           individual and which does not fix resale prices
           does not violate Article 15.03(a)(l), Vernon's
           Civil Statutes. A sales plan which does not fix
           or maintain resale prices does not violate Arti-
           cle 15.02(b) (5) (a). A sales plan in which there
           is no deceptive sales representation does not violate
           Article 5069-10.01 et seq. A sales plan which does

                               -3805.
Honorable Enrique H. Pena, Page 5 (M-781)



        not contain the essential elements; consid-
        eration, chance and prize does not constitute
        a lottery in violation of Article 654, Penal
        COd8.
                              - .. the facts are con-
               If it appears that
              ._
        trovertea as to any or tne elements consti-
        tuting a lottery, the determination of such
        a fact question cannot be made by this office
        but is a question for a cqrt or jury.
                                .,
                                 " ,.'
                           Vea$Xuly    Yours, ./




                             AGorney/06neral   of Texas

Prepared by Robert E. Owen
Assistant Attorney General

APFROVED:
OPINION COMMITTEE

Xerns Taylor, Chairman
W. E. Allen, Co-Chairman
Gordon Case
Larry Craddock
Jim Swearingen
Wardltm Lane

MEADE F. GRIFFIN
Staff Leqal Assistant

ALFRED WALKER
EX8CUtiV8 Assistant

NOLA WHITE
First Assistant




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