Nielsen v. Myers

Rule of Law:

A gifting club scheme constitutes an unlawful pyramid club under the Oregon Unlawful Trade Practices Act (UTPA) if it requires an investment as a condition to obtaining the right to solicit for economic gain, as such schemes are inherently deceptive due to their mathematical unsustainability.

Facts:

• Individuals, including plaintiffs Nielsen and Ray Sweat, participated in the "Northwest Family Reunion" (NWFR), a "gifting club" operating a pyramid-shaped board system.
• Participants paid either $2,000 or $6,000 to obtain a position on a board, with the lowest level positions termed "pit crew."
• The success of participants in moving to the top of the board and receiving a large return (e.g., more than $13,000 for a $2,000 investment) depended entirely on a sufficient number of additional individuals being recruited to also make a cash "gift" to the person at the top.
• The actual exchange of money occurred at "gifting meetings" held in Washington due to acknowledged uncertainty about the legality of the activities in Oregon.
• NWFR rules allowed an investor to pay for and name another person to a position on a board; for example, Pemberton paid for positions for his wife and aunt, who were unaware of it.
• Plaintiff Micka introduced NWFR to the Klamath Falls area in 1999, and he, along with other plaintiffs, paid to obtain board positions and induced at least one other person to participate.
• In late July 1999, the Oregon Attorney General issued a press release, published in the Klamath Falls newspaper, announcing NWFR was an illegal pyramid club under the UTPA and warning participants of potential fines.
• After the press release, all plaintiffs except Ray Sweat ceased their involvement; Sweat subsequently invited a previous NWFR participant, Ritchie, to attend two giftings, which Ritchie declined.

Procedural Posture:

• The Oregon Attorney General concluded that the Northwest Family Reunion (NWFR) gifting club was an illegal pyramid scheme and initiated steps to halt its operations.
• Plaintiffs filed a declaratory judgment action against the state in Klamath County, seeking a declaration that their activities were lawful and an injunction against the Attorney General's enforcement efforts.
• The state counterclaimed, seeking a declaration that plaintiffs had engaged in an unlawful trade practice under ORS 646.608(l)(r), an injunction, civil penalties, and attorney fees.
• Both parties moved for summary judgment before the trial court.
• The trial court granted the state's motion for summary judgment, denied that of the plaintiffs, and concluded that NWFR was an unlawful pyramid club under the UTPA.
• The trial court also issued a permanent injunction prohibiting plaintiffs from future involvement in pyramid clubs.
• Following a further evidentiary proceeding on penalties, the trial court assessed a $25,000 civil penalty against plaintiff Ray Sweat.
• Plaintiffs moved for a new trial, which the trial court denied.
• Plaintiffs (Nielsen and Ray and Shara Sweat) appealed the trial court's decision to the Oregon Court of Appeals.