HF 454 (LSB 1786HV (1) 89)

HOUSE FILE 454

BY  COMMITTEE ON COMMERCE

(SUCCESSOR TO HSB 33)

A BILL FOR

An Act prohibiting pyramid promotional schemes and making penalties applicable.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:

    Section 1.  Section 714.16, subsection 2, Code 2021, is amended by adding the following new paragraph:
   NEW PARAGRAPH.  q.  (1)  It is an unlawful practice for a person to establish, promote, or operate a pyramid promotional scheme.
   (2)  This paragraph shall not be construed to prohibit a plan or operation, or define a plan or operation as a pyramid promotional scheme, based on the fact that 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 if the following conditions are satisfied:
   (a)  The plan or operation does not result in inventory loading.
   (b)  The plan or operation implements a bona fide inventory repurchase program.
   (3)  For purposes of this paragraph:
   (a)  “Bona fide inventory repurchase program” means a program by which a person repurchases current and marketable inventory from an independent salesperson that was originally purchased from the person for resale by the independent salesperson, upon request and within twelve months after the date of original purchase at no less than ninety percent of the original net cost, less any appropriate incidental costs, when the independent salesperson’s business relationship with the person ends, and which program was communicated to the independent salesperson in writing.
   (b)  “Compensation” means payment of any money, thing of value, or financial benefit conferred in return for inducing another person to participate in a pyramid promotional scheme.
   (c)  “Consideration” means payment of any money or the purchase of goods, services, or intangible property. “Consideration” does not include the purchase of goods or services furnished at no cost to be used in making sales and not for resale, or time and effort spent in pursuit of sales or recruitment activities.
   (d)  “Current and marketable inventory” means any goods or services, including promotional materials, sales aids, and sales kits, that an independent salesperson is required to purchase pursuant to a bona fide inventory repurchase program. “Current and marketable inventory” does not include inventory that is no longer within its commercially reasonable use or shelf life period, communicated in writing to an independent salesperson prior to purchase as seasonal, discontinued, or a special promotion product not subject to the bona fide inventory repurchase program, or used or opened.
   (e)  “Inventory loading” means a plan or operation by which a person requires or encourages an independent salesperson to purchase inventory in an amount that exceeds the amount that the independent salesperson can expect to resell for ultimate consumption or to consume in a reasonable period, or both.
   (f)  “Pyramid promotional scheme” means a plan or operation by which a person provides consideration for the opportunity to receive compensation that is primarily derived from the introduction of other persons into the plan or operation and not from the sale or consumption of goods, services, or intangible property by persons introduced into the plan or operation. “Pyramid promotional scheme” includes a plan or operation by which the number of persons who may participate is limited either expressly or by the application of conditions affecting the eligibility of persons to receive compensation under the plan or operation, or a plan or operation by which a person, upon providing consideration, obtains goods, services, or intangible property in addition to the right to receive compensation.
    Sec. 2.  Section 714H.3, subsection 2, paragraph f, Code 2021, is amended to read as follows:
   f.  Section 714.16, subsection 2, paragraphs “b” through “n”, and paragraph “q”.
EXPLANATION
The inclusion of this explanation does not constitute agreement with
the explanation’s substance by the members of the general assembly.
   This bill prohibits a person from establishing, promoting, or operating a pyramid promotional scheme.
   The bill defines a “pyramid promotional scheme” as a plan or operation by which a person provides consideration for the opportunity to receive compensation primarily derived from introducing other persons into the plan or operation and not from the sale or consumption of goods, services, or property. The bill provides that a “pyramid promotional scheme” includes a plan or operation by which the number of participants is limited either expressly or by the application of conditions affecting eligibility, or a plan or operation by which a person, upon providing consideration, obtains goods, services, or property in addition to the right to receive compensation.
   The bill provides that it shall not be construed to prohibit a plan or operation, or define a plan or operation as a pyramid promotional scheme, based on the fact that participants give consideration in return for the right to receive compensation based upon purchases by participants for personal use, consumption, or resale, if the plan or operation does not result in inventory loading and implements a bona fide inventory repurchase program as defined in the bill.
   A violation of the bill constitutes an unlawful practice under both the “Iowa Consumer Frauds Act” (Code section 714.16) and the “Private Right of Action For the Iowa Consumer Frauds Act” (Code chapter 714H). Under the “Iowa Consumer Frauds Act”, the attorney general may investigate, issue subpoenas, and commence civil proceedings seeking restraining orders or injunctions prohibiting persons from engaging in unlawful practices or seeking termination of the business affairs of a person engaging in unlawful practices. In addition, a civil penalty of up to $40,000 per violation may be imposed by a court against a person found to have committed an unlawful practice. Under the “Private Right of Action For the Iowa Consumer Frauds Act”, a consumer may sue to recover actual damages and may seek punitive damages up to three times the actual damages in cases of willful and wanton conduct by a defendant. In addition, if the consumer prevails in a private right of action lawsuit, the court must award reasonable attorney fees.