Selling Non-Compliant Products and the Pyramid Scheme Risk

Valentus is a direct selling company which markets its ‘Prevail’ range of health products including ‘SlimRoast’ coffee. The company is US-based but appears to have started trading in the UK some time during 2015.

Whilst foods and food supplements do not need to be ‘registered’ before being marketed and sold in the UK they do need to comply with the UK’s laws in terms of their ingredients, formulations, labelling and packaging, and any claims made in relation to those products.

Some direct selling companies expanding into the UK will initially market and sell their products on what they euphemistically term a ‘Not For Resale’ or ‘NFR’ model – which basically means that the company will be recruiting representatives in the UK but the products that it ships to the UK will not comply with the UK’s laws and are intended to be purchased only by the company’s representatives for their own use and not for resale to retail customers.

First, it should be noted that the UK has not granted any formal exemption from its product regulations for products which are sold into the UK on this ‘NFR’ basis. Secondly, if a company is seeking to operate on an NFR basis then in practice that model will be incompatible with the activities of a growing number of ‘boots on the ground’ representatives marketing the products and recruiting others in the UK.

By August 2017 Valentus found itself in a position where it had been operating in the UK for the best part of 2 years, had a number of UK representatives who were now both marketing and selling its products, and still had a non-compliant product range. At which point Trading Standards stepped in …

… And knocked on the door of a Valentus representative in Portreath, Cornwall, named Charlotte Thomson. What brought this particular representative, a former Miss England and FHM magazine glamour model, to the attention of Trading Standards is unclear; nor why she was disturbed in the shower and obliged to open the front door clutching her dressing gown and a puppy. But certainly this colourful scene ensured that Trading Standards’ action attracted media attention ranging from The Daily Mail to the Coventry Evening Telegraph.

Following that ‘dawn raid’ Trading Standards wrote to Ms. Thomson on 1^st August 2017 and drew her attention to the relevant UK product regulations. However, in their letter Trading Standards also noted that “In relation to the marketing side of the operation, the Consumer Protection from Unfair Trading Regulations make it an offence to promote a pyramid scheme (whether it is called a pyramid scheme or not)”.

This is a reference to Paragraph 14 of Schedule 1 to those Regulations which provides that “Establishing, operating or promoting a pyramid promotional scheme where a consumer gives consideration for the opportunity to receive compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the sale or consumption of products” is a commercial practice which is considered unfair, and so prohibited, in all circumstances.

Why had Trading Standards apparently concluded that Valentus was a pyramid scheme? After all, it did have a range of products and, on the face of it, Trading Standards presented no evidence that representatives were paying to join on the basis that they would earn from getting others to join rather than from product sales.

The argument runs like this. If a company has no products and people pay to join then this is a straightforward pyramid scheme: the money paid by the new joiners is being paid out to those higher up the chain and this is the only thing that keeps the scheme going; when people stop joining, the scheme will collapse. If a company has products but those products do not comply with the UK’s product regulations and so cannot lawfully be sold in the UK, why should that company be in a better legal position than a company with no products? If the products cannot be sold then this scheme must also be paying out based on the monies paid by new joiners and not based on monies generated by product sales.

Trading Standards’ approach has some merit. It does not mean that a company which has a range of products, one of which is non-compliant for some reason, will be branded a pyramid scheme, because its revenues should still be generated primarily from the sales of it compliant products; but it does mean that a company marketing and selling non-compliant products, whether or not on the NFR model discussed above, is at risk of being closed down as a pyramid scheme.

The Valentus experience provides direct selling companies with a salutary lesson as to the risks of marketing non-compliant products in the UK and the related risks of seeking to justify doing so by the operation of an NFR model.