LOYALTY card shopping scheme Lyoness has won a court case against the consumer watchdog, which accused the company of operating a pyramid scheme and engaging in referral selling.
The Australian Competition and Consumer Commission initiated the proceedings against the Austrian company in August last year.
A pyramid scheme involves participants gaining a financial or other benefits from recruiting new members into the scheme. Referral selling is when a consumer is induced to buy goods or services by the possibility of a later commission or rebate.
While cashback offers themselves are not prohibited under Australian consumer law, the ACCC alleged that the Lyoness scheme offered commissions to members who recruit new members who make a down payment on future shopping.
In his judgment in the Federal Court today, Justice Flick said there could be “no doubting the fact that inducements were held out to prospective members that they would ultimately receive financial benefits other than the discounts they received on purchases made from loyalty merchants”.
However, the court found that any entitlement was dependent not on the introduction of new members, but from those new members engaging in shopping activity. The ACCC also failed to establish that people could become members only by making down payments.
The court made similar findings about referral selling conduct.
“The manner in which pyramid selling schemes operate … is complex and elusive. The present Lyoness Loyalty Program is no exception,” Justice Flick said.
ACCC chairman Rod Sims said the judgment “echoed some of the concerns the ACCC had with the scheme, in particular its complexity and the inducements that were held to prospective members”.
“The ACCC will continue to investigate schemes that encourage consumers to recruit new members,” he said in a statement.
“We will take action where appropriate to ensure consumers are not drawn into schemes where the financial benefits held out to induce potential members to join up rely substantially on the recruitment of further new members into the scheme.”
After the court action last year a number of Australian members came forward to voice their concerns, with some claiming to have lost thousands of dollars in the scheme.
“They haven’t been able to deliver on the promises that they made to people like us in order for us to work hard and put the effort in and get some return on the money that we put in,” Paul Maait told the ABC.
“And I don’t know of anyone else who at the time who was involved who has actually made any gain of any kind out of it.”
Mr Sims told news.com.au he wouldn’t be surprised if some of those people were disappointed in the outcome. “We would not have taken it on if we didn’t there was a potential for harm,” he said.
“It’s a very complex scheme, and you’ve got to meet particular criteria about whether payments must be made to become a member, whereas it was possible to join in other ways. It became a question of how likely that was.”
In a statement, Lyoness said it welcomed the decision. “At every stage we have wholly rejected the allegations raised by the ACCC,” Lyoness Australia managing director James O’Sullivan said.
“As a company Lyoness is committed to compliance with consumer laws in every country we operate in. We look forward to continuing to provide a great shopping and loyalty experience for our members and merchants.”
The ACCC says it is “carefully considering the judgment”. “These are very serious matters and we’ll take all the time we need to consider it properly,” Mr Sims said.