## Facts

- Omnitrition sold nutritional supplements, vitamins, and skin-care products through a multi-level marketing program using “Independent Marketing Associates” (IMAs).
- Entry-level IMAs (“distributors”) could purchase products at a discount and recruit additional participants.
- To reach “Bronze Supervisor” status, an IMA had to order several thousand dollars in product (at suggested retail price) within one or two consecutive months and then meet monthly minimum order requirements to maintain supervisor status.
- Bronze Supervisors could receive “Royalty Override Bonuses” (about 1–4%) based on orders placed by up to three generations of “downline” supervisors, who also had to satisfy monthly minimum purchase requirements to generate commissions.
- Participants alleged the compensation plan rewarded recruiting and internal purchasing rather than sales to ultimate users, constituting an inherently fraudulent pyramid scheme under federal and California law.
- Omnitrition pointed to a “70 percent rule” that purported to require significant retail selling, arguing it prevented the plan from being a pyramid scheme.
- Plaintiffs later added Omnitrition’s outside counsel and law firm as defendants and asserted federal securities claims against them.

## Issues

1. Whether summary judgment was proper on the ground that Omnitrition’s multi-level marketing plan was not a pyramid scheme as a matter of law, or whether material fact disputes existed under the FTC-based pyramid-scheme test.
2. Whether federal securities claims against Omnitrition’s outside counsel and law firm were barred by the applicable statute of limitations.

## Decision

- The Ninth Circuit affirmed in part and reversed in part.
- The court reversed summary judgment for Omnitrition and its insiders on pyramid-scheme-based claims, holding there were triable issues of material fact as to whether the plan rewarded recruiting and participant purchasing rather than sales to ultimate users.
- The court affirmed summary judgment for the outside counsel and law firm, holding the federal securities claims against them were time-barred.
- The case was remanded for further proceedings on the revived claims against Omnitrition and its insiders.

## Legal Principles

- A pyramid scheme exists where participants pay money for (1) the right to sell a product and (2) the right to receive rewards for recruiting others that are unrelated to sales of products to ultimate users.
- Written safeguards (such as a retail-sales or “70 percent” policy) do not defeat a pyramid-scheme claim as a matter of law when evidence suggests the plan’s actual incentives and operation tie compensation to recruitment and internal purchases.
- Where evidence would allow a reasonable factfinder to conclude rewards are unrelated to sales to ultimate users, pyramid-scheme characterization is typically a fact question unsuitable for summary judgment.
- Federal securities claims may be dismissed on limitations grounds when plaintiffs knew, or with reasonable diligence should have known, of the alleged violation outside the limitations period.

## Conclusion

The Ninth Circuit held that evidence of compensation tied to recruitment and ongoing product-purchase requirements created a jury question on whether the MLM functioned as a pyramid scheme, notwithstanding a stated retail-sales rule, but it left dismissed as untimely the federal securities claims against the company’s outside counsel.


Webster v. Omnitrition Int’l, Inc., 79 F.3d 776 (9th Cir. 1996)