Arkansas

 

Arkansas Code section 4-88-109 appears to prohibit “pyramid promotional schemes,” but was amended in 2019 so as to permit what would be considered pyramid schemes under the FTC’s Koscot decision.   The key is Section 4-88-109(c).   Subsection (c)(1)(A) expressly permits schemes where commissions are paid on a participant’s purchases for “personal use, consumption, or resale,” thus transforming distributors into consumers.   Under this provision an MLM would be allowed to function even if none of its products were sold to people who were not participating in the scheme.   Subsection (c)(1)(B) provides that the plan may not “require” inventory loading.   This is inconsistent with Subsection (b)(6) which defines “inventory loading” as “the requirement or encouragement by a plan or operation that its independent salesperson purchase inventory in an amount that exceeds the amount that the independent salesperson can expect to resell for ultimate consumption or to use or consume in a reasonable time period, or both.”    Sophisticated MLM plans never “require” the purchase of inventory; the only requirement is the purchase of a starter kit.   But where the commissions offered by the plan are only available if the distributor purchases the requisite amounts of inventory, such a plan arguably “encourages” inventory loading.  Finally, Subsection (c)(1)(C) requires that the plan have a “bona fide inventory repurchase program.”   As with other state statutes drafted by the Direct Selling Association, the MLM company is permitted to exclude “seasonal”, “discontinued”, or “special promotion products” from the inventory repurchase obligation, as well as products which are “no longer within the inventory’s commercially reasonable use or shelf life period or has been used or opened.”

Ark. Code § 4-88-109. Prohibition of pyramid promotional schemes – Definitions

(a) A person who promotes any pyramid promotional scheme engages in an unlawful practice.

(b) As used in this section:

(1) “Bona fide inventory repurchase program” means a program through which an entity repurchases from an independent salesperson current and marketable inventory in possession of the independent salesperson, upon request and upon commercially reasonable terms, when the independent salesperson’s business relationship with the entity is terminated;

(2) “Commercially reasonable terms” means the repurchase of current and marketable inventory within twelve (12) months after the date of purchase at not less than ninety percent (90%) of the original net cost, less appropriate set-offs and legal claims, if any;

(3) “Compensation” means a payment of any money, a thing of value, or financial benefit conferred in return for inducing another person to participate in a pyramid promotional scheme;

(4)

(A) “Consideration” means the payment of cash or the purchase of goods, services, or intangible property.

(B) “Consideration” does not include:

(i) The purchase of goods or services furnished at cost to be used in making sales and not for resale;

(ii) Time and effort spent in pursuit of sales or recruiting activities; or

(iii) Payment for sales demonstration equipment and materials furnished at cost for use in making sales and not for resale;

(5) “Inventory” means goods and services, including company-produced promotional materials, sales aids, and sales kits that an entity requires independent salespersons to purchase;

(6) “Inventory loading” means the requirement or encouragement by a plan or operation that its independent salesperson purchase inventory in an amount that exceeds the amount that the independent salesperson can expect to resell for ultimate consumption or to use or consume in a reasonable time period, or both;

(7) “Person” means an individual, corporation, trust, estate, partnership, unincorporated association, or any other legal or commercial entity;

(8) “Promote” means to contrive, prepare, establish, plan, operate, advertise, or otherwise induce or attempt to induce another person to participate in a pyramid promotional scheme; and

(9)

(A) “Pyramid promotional scheme” means any plan or operation through which a person gives consideration for the opportunity to receive compensation primarily from the introduction of other persons into the plan or operation rather than from the sale and consumption of goods, services, or intangible property by a participant or other persons introduced into the plan or operation.

(B) “Pyramid promotional scheme” includes any plan or operation that limits the number of participants either expressly or by the application of conditions affecting the eligibility of a person to receive compensation under the plan or operation, and includes any plan or operation under which a person, on giving any consideration, obtains any goods, services, or intangible property in addition to the right to receive compensation.

(c)

(1) This section does not prohibit a plan or operation, or define a plan or operation as a pyramid promotional scheme, if all of the following occur:

(A) The participants in the plan or operation give consideration in return for the right to receive compensation based upon purchases of goods, services, or intangible property by participants for personal use, consumption, or resale;

(B) The plan or operation does not require inventory loading; and

(C) The plan or operation implements a bona fide inventory repurchase program.

(2)

(A) An entity shall clearly describe a bona fide inventory repurchase program in an entity’s recruiting literature, sales manual, or contracts with independent salespersons.

(B) The recruiting literature, sales manual, or contracts shall disclose any inventory that is not eligible for repurchase under the bona fide inventory repurchase program.

(3) A bona fide inventory repurchase program is not required to apply to inventory that is no longer within the inventory’s commercially reasonable use or shelf life period or has been used or opened.

(d) Before an independent salesperson of an entity purchases inventory, the entity shall clearly document the inventory that is excluded from the bona fide inventory repurchase program as “seasonal”, “discontinued”, or “special promotion products” and indicate that the inventory is not subject to the bona fide inventory repurchase program.

History: Amended by Act 2019, No. 340, §1, eff. 7/24/2019. Acts 1971, No. 92, § 5; A.S.A. 1947, § 70-905; Acts 1991, No. 1177, § 3

Ark. Code § 4-88-113. Civil enforcement and remedies – Suspension or forfeiture of charter, franchise, etc

(a) In any proceeding brought by the Attorney General for civil enforcement of the provisions of this chapter, prohibiting unlawful practices as defined in this chapter, the circuit court may make such orders or judgments as may be necessary to:

(1) Prevent the use or employment by such person of any prohibited practices;

(2)

(A) Restore to any purchaser who has suffered any ascertainable loss by reason of the use or employment of the prohibited practices any moneys or real or personal property which may have been acquired by means of any practice declared to be unlawful by this chapter, together with other damages sustained.

(B) In determining the amount of restitution to be awarded under this section, the court shall consider affidavits from nontestifying purchasers, provided that:

(i) The affidavits are offered as evidence of a material fact;

(ii) The affidavits are more probative on the point for which they are offered than any other evidence which the Attorney General can procure through reasonable efforts;

(iii) The interests of justice will be best served by admission of the affidavits;

and

(iv) The Attorney General makes the names and addresses of the affiants available to the adverse party sufficiently in advance to provide the adverse party with a fair opportunity to communicate with them; and

(3) Assess penalties to be paid to the state, not to exceed ten thousand dollars ($10,000) per violation, against persons found to have violated this chapter.

(b) Upon petition of the Attorney General, the court may order the suspension or forfeiture of franchises, corporate charters, or other licenses or permits or authorization to do business in this state.

(c) Any person who violates the terms of an injunction issued under this chapter shall forfeit and pay to the state a civil penalty of not more than ten thousand dollars ($10,000) for any single action brought by the Attorney General.

(d)

(1) Every person, or every partner, officer, or director of another person who directly or indirectly controls another person or who is in violation of or liable under this chapter or every person who directly or indirectly facilitates, assists, acts as intermediary for, or in any way aids another person who is in violation of or liable under this chapter in the operation or continuance of the act or practice for which the violations or liability exists shall be jointly and severally liable for any penalties assessed and any monetary judgments awarded in any proceeding for civil enforcement of this chapter, if the persons to be held jointly and severally liable knew or reasonably should have known of the existence of the facts by reason of which the violation or liability exists.

(2) There is contribution as in cases of contract among the several persons so liable.

(3) Every person subject to liability under subdivision (d)(1) of this section shall be deemed, as a matter of law, to have purposefully availed himself or herself of the privileges of conducting activities within Arkansas sufficient to subject the person to the personal jurisdiction of the circuit court hearing an action brought pursuant to this chapter.

(e) As compensation for his or her services under this chapter, the Attorney General shall be entitled to all expenses reasonably incurred in the investigation and prosecution of suits, including, but not limited to, expenses for expert witnesses, to be paid by the defendant when judgment is rendered for the state, and, in addition, shall recover attorney’s fees and costs.

(f)

(1)

(A) A person who suffers an actual financial loss as a result of his or her reliance on the use of a practice declared unlawful by this chapter may bring an action to recover his or her actual financial loss proximately caused by the offense or violation, as defined in this chapter.

(B) A private class action under this subsection is prohibited unless the claim is being asserted for a violation of Arkansas Constitution, Amendment 89.

(2) To prevail on a claim brought under this subsection, a claimant must prove individually that he or she suffered an actual financial loss proximately caused by his or her reliance on the use of a practice declared unlawful under this chapter.

(3) A court may award reasonable attorney’s fees.

History: Amended by Act 2021, No. 1015, §3, eff. 7/28/2021. Amended by Act 2017, No. 986, §3, eff. 8/1/2017. Acts 1971, No. 92, § 11; 1977, No. 835, § 1; A.S.A. 1947, § 70-911; Acts 1991, No. 1177, § 3; 1993, No. 587, § 4; 1995, No. 836, §4; 1999, No. 990, § 1.