The Italian Antitrust Authority has imposed a fine of 960,000 euros on US giant NewAge Inc. and subsidiary Ariix Italy S.r.l., jointly and severally, for unfair business practices, hidden marketing and pyramid selling. (1)
‘Slimming’ dietary supplements, cosmetics, personal care and home care. From the 500 euro ‘Body Purification Package‘ to the air purifier for 2,500, the big package is served. Complete with social marketing on Instagram.
1) NewAge, health and wellness in precarious health.
New Age Inc.
(Nasdaq: NBEV) is a U.S. health and welllness giant with omni-channel distribution based on e-commerce and direct sales through a network of more than 400 thousand ‘independent representatives‘ in over 75 countries. In 2020 it acquired five companies:
- ARIIX, founded in the U.S. in 2011, distributes dietary supplements and other products through multi-level marketing,
- Zennoa (Utah, USA, 2016) sells dietary supplements and various nutraceutical products including Noni juice, (2)
- LIMU Company, a producer of functional food made from brown algae rich in the polysaccharide fucoidan,
MaVie
, (Advanced Wellness Solutions Pte. Ltd., Singapore). DNA testing kits and customized services/products,- Shannen, industry founded in Indonesia in 2018, cosmetics sector. (3)
Moreover, the health of the U.S. giant is precarious in spite of the growth in sales (US$ 439.53 million, up 77 percent from the previous year). As shown by the collapse of the market cap (-100% in one year), the recent opening of bankruptcy proceedings, and the Security Exchange Commission ‘s indictment of a multimillion-dollar fraud against investors (4.5).
2) NewAge Inc. and Ariix Italy, Antitrust Investigation.
The Italian Competition and Market Authority (AGCM, or Antitrust Authority) has opened an investigation against NewAge Inc. as the registrant of the website that distributes the various products globally.
Ariix Italy S.r.l.
– an Italian company controlled by NewAge through Ariix LLC (USA) – has itself come under investigation for the unfair business practices mentioned below.
3) Unfair trade practices, AGCM’s objections
The charges brought by the Antitrust Authority (AGCM) against the U.S. giant and Ariix Italy S.r.l. concern:
- The establishment of a pyramid sales system, in violation of the Consumer Code (Legislative Decree 206/2005, Article 23.1.p),
- ‘ hiddenmarketing ‘ practices, which are themselves banned by the Consumer Code (Articles 20, 21, 22 paragraphs 1 and 2, and Article 23.1.a). (6)
A third charge – having marketed two dietary supplements (‘Slendeeriz Drops Day&Night‘ and ‘Tahitian Noni‘) without prior notification to the Ministry of Health was later dropped as they were allegedly notified under different names (‘Day pre-meal drops‘ and ‘Night soothing bedtime drops‘).
4) Pyramid sales system
Ariix and NewAge customers are invited by the companies to move from consumer to ‘commissioned‘ status to ‘transform their [vostra] lives physically or from an income perspective.’ The leitmotif of the NewAge group. With the promise of easy earnings through direct product sales and, most importantly, the recruitment of new ‘appointees‘. Those who will enter the system, at a lower level of the pyramid.
4.1) Affiliations and constraints
Membership in Ariix’s pyramid sales system requires the payment of a 30 euro obolus and the purchase of 200 euro worth of products (200 PV, Value Points). The new Distributor can then choose the level of business to which he or she aspires, to which a different commission corresponds.
Those who reach the highest level of the pyramid, ‘Ultimate,’ can get a share in all of their subordinate team’s commissions up to the lower seventh rung of the chain.
The ‘minimum turnover‘ to maintain the right to commissions is 100 euros (100 PV) every 4 weeks. And the platform therefore advises ‘appointees‘ to activate the ‘Autoship‘ function. Automatic orders, hoping to sell rather than fall through the cracks.
4.2) Who wins and who loses
The one who really gains, in the pyramid sales system, is the organizing company. This is followed by those at the top of the pyramid, whose job is not to sell products but to recruit as many ‘appointees‘ as possible.
In fact, each ‘appointee‘ guarantees a minimum turnover (230 €) for his affiliation alone, and 100 € every 28 days thereafter). Regardless of the value of individual sales, facing at their own expense the risk of unsold items and defaults.
4.3) Inevitable crisis
The economic unsustainability of the pyramid sales system is obvious, since the geometric growth of supply is bound to saturate the market all the more quickly when it comes to goods that are neither essential nor competitive per se. All the more so in times of black crisis such as the current one.
Data provided to the Antitrust Authority by Ariix Italy show that 50-55% of the sales made by the company in 2021 were absorbed by the ‘appointees‘ themselves. Who have saturated their homes with useless goods and emptied their wallets under the illusion of becoming ‘entrepreneurs of themselves‘. And since ‘monthly sales to third parties per Distributor turn out to be less than 50 PV, [ciò] means that the Distributor himself would have to make more self-consumption than sales to third parties to meet the qualifying requirement.’ (1)
4.4) Pyramid sales, the ban in EU
The pyramid sales system built by NewAge Inc. with Ariix Italy-according to Antitrust’s findings-corresponds exactly to the pyramid promotional scheme banned in the EU. Indeed, the Court of Justice in Luxembourg clarified how the unfair trade practices in question are distinguished by three characteristics:
- ‘the promotion is based on the promise that the consumer will have the opportunity to realize an economic benefit,
- the fulfillment of that promise depends on the entry of other consumers into such a system,
- most of the revenue to finance the consideration promised to consumers does not result from real economic activity‘ (6)
5) Covert marketing
Covert marketing challenged by antitrust to NewAge Inc. and Ariix Italia S.r.l. concerns the way products are promoted by ‘appointees‘ through social media. Female ‘appointees‘ were in fact given a document of instructions to follow for social marketing. ‘LADY NETWORK – Daily actions on Instagram, a vademecum‘. 2 or 3 posts a day, all the better in the form of stories.
Women included in the pyramid sales system are required to show themselves in their daily lives. Show how they themselves are the first to use the products, how and with what formidable results. The neo-realism of the pyramid slaves must then carry the master’shashtag (#ariix) without specifying-as required, but not always demanded, by the Antitrust Authority (7,8)-that it is advertising. So too ‘circumvent the defense and reaction mechanisms of consumers’. (1)
6) Penalties
The penalties imposed by the Antitrust Authority on NewAge Inc. and Ariix Italia S.r.l. , as a result of ascertaining the system of pyramid sales and covert social marketing, amounted to 1 million and 200 thousand euros, respectively.
A discount was then applied, with penalties restated to 800,000 and 160,000 euros for the two violations, taking into account the unfavorable economic conditions of the responsible companies.
Curiosity remains as to what portion of these sums will actually be collected.
Dario Dongo and Alessandra Mei
Notes
(1) AGCM Weekly Bulletin, Year XXXIII – no. January 1, 2, 2023 https://www.agcm.it/dotcmsdoc/bollettini/2023/1-23.pdf
(2) Commission Decision 2003/426/EC authorizing the placing on the market of “noni juice” (juice of the fruit of Morinda citrifolia L.) as a novel food ingredient under Regulation (EC) No 258/97 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32003D0426
(3) NewAge Agrees to Combine with ARIIX and Four Additional E-Commerce/Direct Selling Companies to Create a >$500 Million Global Enterprise. https://www.globenewswire.com/en/news-release/2020/07/20/2064579/0/en/NewAge-Agrees-to-Combine-with-ARIIX-and-Four-Additional-E-Commerce-Direct-Selling-Companies-to-Create-a-500-Million-Global-Enterprise.html Global Newswire. 20.1.20
(3) NewAge. Stock report. https://simplywall.st/stocks/us/household/otc-nbev.q/newage. Simply Wall St. 19.3.22
(4) Bill Peters. Former CEO of NewAge, a drink company that shot to pot-stock fame, accused by SEC of ‘multi-year fraud’. https://www.marketwatch.com/story/former-ceo-of-newage-a-drink-company-that-shot-to-pot-stock-fame-accused-by-sec-of-multi-year-fraud-11666139099 Market watch. 19.1.23
(5) Legislative Decree. 6.9.05, n. 206. Consumer Code. Text updated as of 17.1.22 on Normattiva https://www.normattiva.it/uri-res/N2Ls?urn:nir:stato:decreto.legislativo:2005-09-06;206
(6) European Union Court of Justice (EUCJ). Case C-515/12, judgment 3.4.14. See item 20 https://eur-lex.europa.eu/legal-content/IT/ALL/?uri=CELEX%3A62012CJ0515
(7) Dario Dongo, Selena Travaglio. Influencer marketing, what rules? GIFT (Great Italian Food Trade). 23.7.20
(8) Dario Dongo. Influencer marketing, our report to the Antitrust. GIFT (Great Italian Food Trade). 25.7.20
Dario Dongo, lawyer and journalist, PhD in international food law, founder of WIISE (FARE - GIFT - Food Times) and Égalité.
Graduated in Law from the University of Bologna, she attended the Master in Food Law at the same University. You participate in the WIISE srl benefit team by dedicating yourself to European and international research and innovation projects.
