The Australian Competition and Consumer Commission (ACCC) has instituted proceedings against member-based online shopping portal, Lyoness, for operating a pyramid selling scheme and engaging in referral selling.

Lyoness has operated the scheme in Australia from mid-2011 and offers ‘cash back’ rebates to members who shop through a Lyoness portal, use Lyoness vouchers, or present their Lyoness card at certain retailers.

Although Lyoness has been investigated by regulators for conduct in other countries including the UK, this is the first court action taken against Lyoness alleging that the Lyoness Loyalty Program constitutes a pyramid scheme.

Listed retailers on the company’s Australian website include Target, Oakley, Deals Direct, Coles, and Ray’s Outdoor.

While cash back offers themselves are not prohibited by the Australian Consumer Law (ACL), the ACCC alleges that the Lyoness scheme also offers commissions to members who recruit new members who make a down payment on future shopping.

“Pyramid schemes are often sophisticated and may be operated under the guise of a legitimate business. Although these schemes can appear to be legitimate, the most significant inducement for new members to get involved is to earn ‘residual’ or ‘passive’ income from new members signing up,” ACCC chairman, Rod Sims, said.

“The concern with pyramid schemes is that the financial benefits held out to induce potential members to join up rely substantially on the recruitment of further new members into the scheme.  For these schemes to work so that everyone can make a profit, there would need to be an endless supply of new members.”

“Under the Australian Consumer Law, it is illegal not only to establish or promote a pyramid scheme, but also to participate in one in any capacity,” Sims said.

The ACCC also alleges that the conduct by Lyoness breached the ACL prohibition on ‘referral selling’, where a consumer is induced to buy goods or services by the promise of a commission or rebate contingent on a later event.

The ACCC is seeking declarations, pecuniary penalties, injunctions, an order requiring the Lyoness website to link to the case report and costs.

As Lyoness International AG, Lyoness Asia Limited and Lyoness UK Limited are located overseas, the ACCC will be making arrangements for service on those entities.

The first Directions Hearing in these proceedings will be at 9.30am on 16 September, 2014 before Justice Flick in Sydney.