Varying discount price schedule-distributor recruitment through grant of override The Federal Trade…

No. 155. Varying discount price schedule-distributor recruitment through grant of override The Federal Trade Commission advised a manufacturer of household products that his proposed varying discount price schedule and his proposed granting of bonus payments to recruiting distributors on the business of distributors whom they recruit would, under the facts presented, in all probability result in violation of both Section 2 (a) of the amended Clayton Act and Section 5 of the Federal Trade Commission Act.

The manufacturer proposed to appoint as independent distributors such persons as would buy the requisite amount of inventory. Initial sales to such distributors would be at 33% percent of the manufacturer s suggested prices for his products. Incentive bonuses, computed at from 5 percent to 60 percent of the value their purchases , increasing as the value of purchases increased would be paid from time to time to the distributors. Distributors would be encouraged to recruit additional distributors who would also make a capital investment in inventory. A recruiting distributor would be given at 10 percent to 12 percent override on the dollar volume of purchases of any distributor whom he had recruHed.

The Commission noted that because of the nature of the plan it was almost inevitable that very \vide differences in prices \vould be charged customers, some of whom would, by reasonable assumption, be competitive with others. These differences would be so great that the anti-competitive effects made unlawful by the amended Clayton Act would almost certainly follow. In addition, it is clear from the facts presented that the requesting party contemplates that the so-called independent distributors would be for the most part selling at retail. The marketing plan is not primarily designed as an offer to knowledgeable businessmen, competent to weight and evaluate commercial risks. It is designed, rather, to appeal to uninformed members of the general public, unaware of and unadvised of, the true nature of the risks run-persons with limited capital who are led to part with that capital by promise and hopes which are seldom , if ever, fulfilleo. A particular vice of the plan is that part which provides override bonuses for recruited distributors. Implicit in such an arrangement is the promise, rarely if ever kept, that the recruiting distributor can, without himself working, profit greatly from the work of others. (File No. 683 7043, released Dec. 29 , 1967. ,