"in relation to the introduction to the scheme of further new participants"
24 Selway J held at [17]-[19] that the CAB payments and the residual override commissions were "recruitment payments". That concept, in his Honour's view, includes benefits received in consequence of the introduction of new participants, whether or not the benefits are paid for the introduction as such or are paid as a result of the subsequent activities of the new participants introduced. So according to his Honour, in the present case, it did not matter that IRs only received benefits when their introduced IRs signed up customers who were billed by ACN for telephone services and that the bare introduction of a new IR generated no benefit.
25 In so holding his Honour followed the decision of Finn J in Australian Competition and Consumer Commission v Worldplay Services Pty Ltd (2004) 210 ALR 562 at 586 [111]-[116]. Finn J said:
"111 The prospect held out must be that new participants will be entitled 'to a payment (a "recruitment payment") in relation to the introduction to the scheme of further new participants': s 65AAD(1)(b).
112 The short point raised here is whether the envisaged payment to be received by a new participant must be that [which] relates solely to the introduction of new members as such, or whether it can encompass as well payments received subsequent to that introduction in consequence of the later (the down line) activities of the members introduced.
113 Before turning to this, I should note that s 65AAB defines a 'payment' to mean (inter alia):
(a) the provision of a financial or non-financial benefit to
or for the benefit of the person; or…
114 In O'Grady v Northern Queensland Company Ltd (1990) 169 CLR 356 at 376; 92 ALR 213 at 228 McHugh J made the observation (since repeated by the Full Court of this Court in Harris v Cmr of Taxation (2002) 125 FCR 46 at [68]):
'The prepositional phrase "in relation to" is indefinite. But, subject to any contrary indication derived from its context or drafting history, it requires no more than a relationship, whether direct or indirect, between two subject matters.'
115 The present context does not suggest any contrary indication. The Explanatory Memorandum to the 2002 amendment bill contains a schedule (Sch 1) which provides, inter alia, examples of possible pyramid schemes. Here I would merely note that example 4 characterises as a recruitment payment the payment to a member of a scheme of a commission on purchases made by members whom that person recruited.
116 I can see no reason for not applying the 'in relation to' formula to benefits received in consequence of the introduction of new members whether or not the benefits are paid for the introduction as such or are paid as a result of the subsequent activities of the members introduced."
26 In O'Grady v Northern Queensland Company Ltd (1990) 169 CLR 356,McHugh J was in the minority in the result. In the same case Dawson J said at 367:
"The crucial question is whether the proceedings constituted by the respondent's counterclaim were proceedings in relation to mining or to any mining tenement. The words 'in relation to', read out of context, are wide enough to cover every conceivable connexion. But those words should not be read out of context, which in this case is provided by the Mining Act 1968 (Q.). What is required is a relevant relationship, having regard to the scope of the Act. Where jurisdiction is dependent upon a relation with some matter or thing, something more than a coincidental or mere connexion - something in the nature of a relevant relationship - is necessary: see Reg. v Ross-Jones; Ex parte Green (1984) 156 CLR 185 at pp. 196-197, 210."
Dawson J's approach emphasises the need for attention to the legislative context and purpose; we would respectfully adopt it in the present case. This is an example of the primacy of context, stressed by Brennan CJ, Dawson. Toohey, and Gummow JJ in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408:
"…the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in the widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned [ie reports of law reform bodies]one may discern the statute was intended to remedy."
27 His Honour's approach is also consistent with that of Brennan CJ and Gaudron and McHugh JJ in PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Services (1995) 184 CLR 301 at 313 where their Honours said that the closeness of the relationship required by the expression "in relation to" in any instrument "must be ascertained by reference to the nature and purpose of the provision in question and the context in which it appears."
28 Harris v Commissioner of Taxation (2002) 125 FCR 46, the Full Court decision referred to by Finn J (and cited by Selway J), was concerned with the phrase "in relation to". Their Honours in that case applied the reasoning in an earlier Full Court decision, J & G Knowles and Associates Pty Ltd v Commissioner of Taxation (2000) 96 FCR 402 at 408 (a case concerning the phrase "in respect of", but the approach in principle is the same). In Knowles the Full Court said at 408 (citations omitted):
"The words 'in respect of' have no fixed meaning. They are capable of having a very wide meaning denoting a relationship or connection between two things or subject matters. However, the words must, as with any other statutory expression, be given a meaning that depends on the context in which the words are found…
The A[dministrative] A[ppeals] T[ribunal] was correct in stating that the phrase requires a 'nexus, some discernible and rational link, between the benefit and the employment'. That, however, does not take the matter far enough. For what is required is a sufficient link for the purposes of the particular legislation…It cannot be said that any causal relationship between the benefit and the employment is a sufficient link so as to result in a taxable transaction."
Their Honours discussed Smith v Commissioner of Taxation (Cth) (1987) 164 CLR 513 and noted the different formulations that members of the High Court had adopted in ascertaining whether a benefit was "in respect of" or "in relation to" employment. The Full Court continued (at 410, emphasis in original):
"Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment. There is, in any event, a danger in placing too much emphasis on causation. As Lord Hoffman pointed out in Environment Agency v Empress Car Co Ltd [1999] 2 AC 22 at 29, an answer to the question of whether A has caused B will differ according to the purpose for which the question is asked."
29 It follows from the foregoing that, in determining the requisite connection or relationship between the payment or benefit described as the 'recruitment payment' and the introduction to the scheme of further new participants, the question is whether there is a relevant, sufficient or material connection or relationship, rather than merely a causal connection or relationship. Accordingly, we do not agree with the views expressed by Finn J in Worldplay at 586 [114]-[116], and applied in the present case by Selway J, that under s 65AAD(1)(b):
(a) "a relationship, whether direct or indirect, between the two subject matters" is sufficient; and
(b) accordingly, the question is whether the benefits in question "are received in consequence of the introduction of new members whether or not the benefits are paid for the introduction as such or are paid as a result of the subsequent activities of the members introduced".
30 The text of s 65AAD(1) indicates that a critical element in a "pyramid selling scheme" is the link between a "participation payment", the introduction of further new participants and the prospect of consideration or reward therefor. The very terms "recruitment" and "introduction" suggest an event or transaction discrete in point of time whereby a participant arranges for a new participant to join a scheme. The sufficient or material relationship (see Knowles, supra) the provision is directed to is that between the prospective entitlement and the introduction, in the sense discussed.
31 In the 'Readers Guide' to the amending legislation set out in the Explanatory Memorandum for that legislation a pyramid selling scheme is described as:
"a scheme by which, in return for a payment by new participants (a participation payment), the prospect is held out to them of obtaining a payment (a recruitment payment) for the recruitment of further participants in the scheme. But the participation payments must be 'entirely or substantially induced' by the prospect of recruitment payments."
32 The Explanatory Memorandum also provides four examples, the fourth of which was referred to by Finn J in Worldplay. In the first three examples the "recruitment payment" is a reward for introducing new participants. The fourth example is not as clear but does not take the matter much further than the first three examples because in that example, although the 'recruitment payment' was a commission on sales to recruited members it was a condition of the recruitment that a recruited member purchase a minimum value of products from the scheme promoter every three months. Thus, although the recruitment payment was a commission on sales it can also be characterised as a payment for recruitment, which necessarily involved a minimum purchase obligation on the part of the recruited member.
33 It is clear from the text of s 65AAD(1)(b) that a payment for the introduction to the scheme of further new participants will be a payment in relation to the introduction of the new participants. Also, it is clear from the Explanatory Memorandum that it was intended that a payment that is, in substance, a payment for the introduction of new participants is an aspect of the vice or mischief aimed at by the legislative scheme. But the question of whether payments made, for example, under a multi-level marketing scheme as a result of post-introduction activities of the members introduced by participants were also intended to be recruitment payments requires consideration of whether such payments were also considered to be part of that vice or mischief.
34 Since its inception in 1974, the Act has contained a prohibition on pyramid selling schemes. This was contained originally in s 61 which described a pyramid selling scheme as involving, inter alia, 'the prospect of receiving payments or other benefits in respect of the introduction … of other persons who became participants' in the scheme. Section 61 was replaced in 2002 by Div 1AAA. The latter provision was said in the Explanatory Memorandum to be a re-writing of s 61 'in plain English' in order to overcome the difficulty in understanding s 61. The aim of the rewrite was stated to be "to clarify the intent of the provision and make it easier to understand, while not making substantial changes to the coverage of the existing provision". However, neither the Explanatory Memoranda nor any Second Reading speeches, either in 1974 or 2002, contain any suggestion that the mischief or vice in pyramid selling schemes extends to rewards received from the subsequent activities of the introduced participants.
35 Reference to other material concerning pyramid selling schemes does not support the ACCC's contention that Div 1AAA necessarily applies to multi-level selling schemes of the kind promoted by ACN. For example, two articles appeared in volume 2 of the Australian Business Law Review in 1974 (around the time the Act was first enacted). In 'Non-Egyptian Pyramids - US Style'(1974) 2 Australian Business Law Review 84, American academics Robert D Myers, Donald K Wedding and Harvey A Maertin present an overall view of the reaction to pyramid investment at local, state and federal level in the United States. The authors say (at 84-85, emphasis in original):
"The key money-making ingredient in the pyramid organization is the selling of distributorships with the right to recruit other distributors. In other words, recruitment is the income generating event. We repeat, recruitment is the income generating event. The selling of product is secondary, and often non-existent.
…
In any case, regardless of product quality or availability, the pyramid emphasis has been on the recruitment of distributors who are promised riches through the recruiting of other distributors. This endless recruiting is in reality an endless chain which becomes doomed by mathematical impossibility."
36 A variety of legislative provisions have been used in relation to pyramid schemes in the United States. One example that applied when the Act was first enacted in 1974 was a successful prosecution of promoters of a pyramid promotion enterprise for marketing of a "security" without registration under the Securities Act 1933 (US): Securities and Exchange Commission v Koskot Interplanetary Inc 497 F 2d 473 (1974). The Court of Appeals for the Fifth Circuit noted the successful argument of the Commission (at 475-476):
"The SEC does not contend that the distribution of cosmetics is amenable to regulation under the federal securities laws. Rather, it maintains that the marketing of cosmetics and the recruitment aspects of Koscot's enterprise are separable and that only the latter are within the definition of a security. That the district court acknowledged the fragmentation discerned by the SEC is witnessed by the following observation:
"Many if not all of the persons, seeking to become Koscot distributors are attracted by the lure of money to be earned by high-pressure recruiting of other persons into the Koscot program, rather than the sale of the cosmetics themselves."'
37 The second article, 'Pyramid selling legislation - effective?' (1974) 2 Australian Business Law Review 167 by Michael Head, discusses the inadequacy of existing Australian State legislation. The author cites as a "concise judicial summary of the pyramid selling concept" the statement in Kugler v Koskot Interplanetary Inc 293 A 2d 682 (1972) (Superior Court of New Jersey) at 690:
"It is an arrangement whereby one is induced to buy upon the representation that he can not only regain his purchase price, but also earn profit by selling the same program to the public. It thus involves the purchase of the right to sell the same right to sell.
A pyramid type practice is similar to a chain letter operation. Such a program is inherently deceptive for the seemingly endless chain must come to a halt inasmuch as growth cannot be perpetual and the market becomes saturated by the number of participants....Thus many participants are mathematically barred from ever recouping their original investments, let alone making profits.
Broadly speaking pyramid schemes include an arrangement or scheme relating to the sale of goods or provision of services under which the participants pay for their rights under the scheme and receive a reward for recruiting new participants"
38 An Australian text published soon after the enactment of the Act (Bruce G Donald and JD Heydon, Trade Practices Law: Restrictive Trade Practices, Deceptive Conduct and Consumer Protection (1978)) also supports the view that multi-level marketing schemes are not necessarily prohibited by the Act. In commenting on s 61 of the Act (as then in force), the authors stated (vol 2, at 653-654):
"The law does not object to multi-level selling where the main purpose is the sale of products to consumers, and where there is no deception of those recruited into the various levels of the scheme.
…
The real vice of pyramid schemes is not in injury to the ultimate consumer resulting from irritation at being importuned at the front door or from dissatisfaction with the quality of what is bought…The vice in pyramid selling schemes comes from the deception of those sellers in the scheme and the tendency of the scheme not have as its main purpose the sale of goods or services."
For a more recent iteration of those same views see: JD Heydon, Trade Practices Law: Restrictive Trade Practices, Deceptive Conduct and Consumer Protection at [14.40] and [14.50].
39 When Div 1AAA of Pt V was introduced in 2002, contemporary understandings of the vice of pyramid selling were substantially the same. Professor Allan Fels, then Chairman of the ACCC, said in its publication ACCC Update, issue 11, June 2002:
"There can be confusion between an acceptable multilevel distribution marketing scheme and a pyramid scheme. Both will exhibit a pyramid structure, but a multilevel marketing scheme will reward participants for the sale of genuine products by them or the people they have brought into the scheme. Rewards are based on product sales not for enlisting others. Goods sold must be genuine products; the type consumers buy from time to time.
Pyramid selling may involve the pretence of selling goods but often they are over-priced, of poor quality, difficult to sell and of little value. But promotion and sales are of little importance; the target is recruiting people and collecting their fees."
40 A similar view was later expressed on the ACCC website, under the heading "Differences between pyramid selling and multi-level marketing":
"Pyramid selling schemes rarely include the legitimate and regular retailing of products. Instead, they provide rewards for introducing new participants. Saturation point is very quickly reached and later recruits have little chance of recovering their money. Legitimate marketing schemes only provide rewards based on genuine product sales.
Pyramid sales promoters may attempt to disguise their schemes by selling goods and services that are overpriced, of poor quality, difficult to sell or of little value.
…
There are two questions that may help consumers identify legitimate multi-level marketing schemes:
· Are the rewards for participants in the scheme purely based on product sales (by either themselves or others they introduce to the scheme)?
· Are the products genuine products of real value, and of a type that normally will be used and purchased time and time again by a consumer, and not at a grossly inflated price?
If you answer yes to both questions, it is likely that the scheme is a legitimate multi-level marketing scheme."
41 Similarly, the authors of a 1999 article on the New Zealand experience (Wayne Hudson and Katherine Hubert, "An Incredible Business Opportunity" (August 1999) New Zealand Law Journal 270), distinguished between multi-level marketing and pyramid selling schemes at 270:
"While many multi-level marketing schemes have a pyramid structure, a participant only earns money by selling the scheme's goods or services. These earnings are derived from:
· goods or services that the participant sells; and
· goods or services sold by each new participant recruited into the scheme by a participant.
A participant in a multi-level marketing scheme does not receive any income for recruiting other people into the scheme.
…
While participants in a pyramid selling scheme also usually sell goods or services for reward, they earn most or all of their money by recruiting new participants. Because product sales are not central to the generation of income, pyramid selling schemes tend to be based around a single product or a limited range of "gimmicky" products."
42 Finally, Bills Digest No. 66 2002-03 was, published by the Department of the Parliamentary Library for distribution to Senators and Members of the Australian Parliament in order to assist them in the 'debate' about Div 1AAA. The Digest, which cited cases and contemporary writings about pyramid selling schemes, viewed the schemes as essentially involving "payments when new participants are recruited into the scheme".
43 The above references are consistent with the view that is apparent in s 61AAD(1)(b) and in the Explanatory Memorandum and the examples given in it, that the vice inherent in pyramid selling schemes is the reward that, as a matter substance, is given directly or indirectly, for the introduction of new participants, rather than a reward based on sales or other such activities by a participant or others introduced by participants. In the present case, the ACCC was not able to refer the Court to any material or cases that suggest that the latter activities, which the ACCC itself described as a legitimate multi-level marketing scheme, were an aspect of the vice or mischief aimed at by the legislative prohibition of pyramid selling schemes. Indeed, the ACCC was not able to point to any economic or social vice or mischief involved in a multi-level marketing scheme that would warrant such a scheme falling within the prohibition of pyramid selling schemes proscribed by Div 1AAA.
44 True it is, the marketing of goods and services may be involved in a pyramid selling scheme, as subs (3)(e) makes clear. But the converse does not follow; the fact that there is multi-level marketing of goods and services does not necessarily mean there isa "pyramid selling scheme".
45 The relevant provisions have to be applied case by case to infinitely variable fact situations. The statutory purpose would not be served either by a construction in which:
(a) it is sufficient that there is an element of introduction, even though that is not enough in itself to earn any reward, and no matter what else has to be done subsequently to earn a reward, and no matter how genuine or competitive the goods or services being sold; or, on the other hand;
(b) the recruitment payment must be solely for introduction, no matter how worthless the prospect of selling goods or services under the scheme.
The first construction would criminalise commercial activity which the material to which we have referred, including the ACCC's own public statements, does not recognise to be illegitimate. The second would open the door to artificial evasion, and could not be reconciled with s 65AAD(3)(e).
46 The real vice inherent in pyramid selling schemes appears to be that the rewards held out are substantially for recruiting others, who in turn get their rewards substantially for recruiting still more members, and so on. If there is no underlying genuine economic activity the scheme must ultimately collapse and many people will have been induced to pay money for nothing. We see the purpose of the legislation as directed at proscribing schemes where the real or substantial rewards held out are to be derived substantially from the recruitment of new participants, as distinct from rewards for genuine sales of goods or services.
47 In the present case, there is not present the requisite relationship between the payments in question (CABs and residual override commissions) and the introduction of further new IRs. The receipt of any payments by IRs is dependent on the activities of IRs themselves, and/or of the IRs downstream of them signing up customers for ACN and those customers acquiring ACN's telephone services. If an IR does no more than recruit other IRs there is no entitlement to any payment. The quantum of remuneration essentially turns on the volume of customers' business with ACN regardless of whether those customers have been signed up by an IR or a downstream IR. There is no suggestion that the services provided by ACN to its customers are of poor quality or are not commercially competitive. Further, what is payable by the new IR on recruitment is the participation fee, which is not large. The recruiter does not get any benefit from the recruit's participation fees; they go to ACN. The benefits an IR recruiter gets come not from new recruits but from customers and ACN.
48 We accept that there is a causal connection between the rewards held out to participants and their introduction of IRs in that the reward is based on sales of ACN's services to the customers of the downstream IRs who form part of the upstream IR's organisation. However, for the reasons set out above, we do not regard that connection as a relevant, material or sufficient connection for the purposes of s 65AAD(1)(b). It follows that the appeal must succeed.