Defining a ‘pyramid scheme’

Lithuania: Rulings from Lithuanian and European Courts.

The Supreme Administrative Court in Lithuania has recently delivered a judgment crystalizing and elaborating the definition of a ‘pyramid scheme’, in line with recent judgment of the European Court of Justice.

These refer to an alleged pyramid scheme whereby clients contributed a payment of 0,01 LTL (as registration to a microcredit provider), and in return received 20 LTL (around 6 EUR) for each new customer they were able to attract. The scheme was used by the organizers to generate new business opportunities in 2010-2011. Because of this the Lithuanian Consumer Protection Authority subsequently imposed a fine of 8 000 LTL (approx. 2 320 EUR).

The fine was appealed against, and the courts annulled it. The basic reason for the annulment was that the payments awarded for inviting new participants were not paid from subsequent contributions received from the new participants. The scheme was therefore not identified as a financial pyramid.

This has to meet two conditions to be recognized as such:
1. The consumer is charged for participation (in any amount, no matter how small) in exchange for the possibility to receive remuneration for attracting new participants; and
2. The remuneration received by the consumer is derived mainly from subsequent contributions to the scheme from new joiners.

This ruling provides valuable clarity to the identification and treatment of so-called pyramid schemes. Companies will now be able to take more liberties in the way they market themselves to consumers, without fear of accidentally developing a scheme akin to a financial pyramid.

Source: Judgment of the European Court of Justice of 3 April 2014 in Case C-515/12; Judgment of the Supreme Administrative Court of Lithuania of 26 June 2014 in Case No A-442-23-14.

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