BurnLounge appeal denied, still a pyramid scheme.
Shut down in 2007, BurnLounge was just before my time covering the MLM industry.
For those unfamiliar with the company, launched in 2004, BurnLounge consisted of affiliates (Moguls) purchasing ‘music-related merchandise, and packages of music-related
merchandise‘, primarily to qualify for commissions.
BurnLounge affiliates recruited new affiliates who did the same, and long story short in 2007 the FTC shut them down for being a pyramid scheme.
Mogul package sales drove 92.6% of BurnLounge’s revenue in 2006, its one full year of operation, while music sales during the same year only amounted to 4.9% of revenue.
BurnLounge lost the case against them in court,
The defendants were also ordered to pay in aggregate about $17 million towards consumer redress – of this BurnLounge and Juan Alexander Arnold are to pay $16,245,799, John Taylor $620,138 and Rob DeBoer $150,000.
On February 29, 2012 an order was issued barring the defendants from operating a pyramid scheme and ordering them to pay some $17 million in damages. (Wikipedia)
The district court described BurnLounge’s bonus system as “a labyrinth of obfuscation.” It found there was a 93.84% failure rate for all Moguls, meaning 93.84% of Moguls never recouped their investment.
The district court also found that BurnLounge’s marketing focus was on recruiting new participants through the sale of packages.
BurnLounge appealed and yesterday saw the United States Court of Appeals for the Ninth Circuit hand down their decision.
The panel held that BurnLounge’s scheme satisfied both prongs of the Webster v. Omnitrition International, Inc., 79 F.3d 776 (9th Cir. 1996), pyramid scheme test because Moguls paid for the right to sell products, the rewards BurnLounge paid were primarily for recruitment, and Moguls were clearly motivated by the opportunity to earn cash.
Remembering that “Moguls” are what BurnLounge referred to as their affiliates, the appeal rejection should come as no surprise. Affiliates by definition are “motivated by the opportunity to earn cash”, otherwise they’d be retail customers.
Combine that with commissionable affiliate package deals, and regardless of what products and services are attached to the packages, what you have is still an opportunity primarily paying out on the recruitment of new affiliates (92.6% as was the case here).
This was spelled out in the District Court decision against the company:
The district court found that because purchasing a package was required for participation as a Retailer or Mogul, and because Moguls earned cash for selling packages, “[Moguls] by default received compensation for recruiting others into the program.”
In BehindMLM’s MLM reviews I tend to use the “defacto recruitment commissions” when I see a product or service is attached to recruitment, but recruitment commissions “by default”essentially means the same thing.
In upholding the District Court’s decision, the Court of Appeals agreed that the FTC’s two-prong test (established in Webster vs. Omnitron International Inc.) was sufficient for ‘determining whether a multi-level marketing (MLM) business is a pyramid scheme.
A pyramid scheme is “characterized by the payment by participants of money to the company in return for which they receive
(1) the right to sell a product and
(2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users.
On the first prong, the appeals court upheld that
(Moguls) were required to purchase a package (Basic, Exclusive, or VIP) in order to access a BurnPage. BurnPages provided Moguls with the ability to sell music, merchandise, and packages.
The sale of packages thus conveyed “the right to sell a product.
And on the second,
The FTC has explained that in a pyramid, “participants purchase the right to earn profits by recruiting other participants, who themselves are interested in recruitment fees rather than the sale of products.
Here, the FTC presented ample evidence to support the district court’s finding that BurnLounge was an illegal pyramid scheme. It did so by showing that:
(1) Moguls were required to recruit new members in order to become eligible for all three types of cash bonuses and
(2) Moguls were motivated by the opportunity to earn cash rewards, as shown by data illustrating the sharp difference in package purchasing patterns of Moguls and non-Moguls, and by the fact that BurnLounge’s sales plummeted after the Mogul program was enjoined.
After the parties entered into a stipulated preliminary injunction in July 2007 that stopped BurnLounge from offering the ability to earn cash rewards, BurnLounge’s revenues plummeted.
BurnLounge still offered packages, but its revenues decreased from $476,516 in June 2007 to $10,880 in August 2007.
Basically once the recruitment party was over, the sale of products and services within BurnLounge “plummeted”, revealing a complete lack of sales activity outside of the business opportunity.
Had BurnLounge affiliates of been selling products and services to a significant number of retail customers, they’d have been able to make the argument that retail activity was alive and well within the company.
On the topic of motivation, while BurnLounge’s music packages were available to non-participants (retail), it should be noted that
96.8% of the participants who bought packages became Moguls, which is strong evidence that package purchases were motivated by the opportunity to earn cash.
In the age of digital products and services, one of the recurring arguments I see raised against claims of recruitment-driven commissions being paid out, is that “we only pay commissions on the sale of products and services”.
Here, we can clearly see that that is not enough. Why people are buying these products and services matters.
There’s no clear-cut benchmark for this, but I like to use a 50% ratio. If around 50% of your product and/or service revenue is not coming from non-participants (retail), then you’re likely operating an effective pyramid scheme.
Here I’ll also emphasize the point that there’s nothing inherently wrong with affiliates purchasing products (which is one of the common misconceptions that take root when one raises objections to the “we only pay commissions on the sale of products” argument). The problem arises, as was the case in BurnLounge, when this makes up the majority of your sales revenue.
96% of the product and service packages BurnLounge sold was to affiliates, and this in turn made up 92.6% of the company’s total revenue. That is primarily what they were busted on and it should not be confused with questions of whether or not affiliates can purchase products and/or services (internal consumption).
Again, internal consumption is fine, but the majority of revenue coming from internal consumption by newly recruited affiliates is likely evidence of pyramid scheme.
Recurring internal consumption, based around the purchase of products and/or services for example, would be fine (provided of course an affiliate was not simply purchasing product each month to qualify for commissions).
You can’t make the argument that an ongoing purchase of product by affiliates has anything to do with recruitment commissions if they’re not recruiting. And of course the “value of the product” is also then a much easier reason to swallow as opposed to income motivation.
BurnLounge themselves tried to use the “but we have products!” argument, asserting that the FTC
to show that the scheme provides “the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users.”
That argument (which is still commonly deployed today by MLM affiliates), got shot down.
Reading “completely” into the test would be inconsistent with the outcome in Omnitrition. See id. at 782 (holding Omnitrition was likely a pyramid scheme because of its recruitment focus, notwithstanding the fact that Omnitrition made some retail sales).
Courts applying the Koscot/Omnitrition test have consistently found MLM businesses to be illegal pyramids where their focus was on recruitment and where rewards were paid in exchange for recruiting others, rather than simply selling products.
BurnLounge participants joined the scheme by buying packages, which included a BurnPage and merchandise. Participants earned rewards by recruiting others to join the scheme, i.e., by recruiting new participants to buy packages.
In each of these scenarios, the participants sold something (inventory or packages), but the rewards the participants received in return were largely for recruitment, not for product sales.
That products were purchased as a side-effect of the running of the BurnLounge pyramid scheme was ultimately neither here nor there.
The rewards BurnLounge paid to Moguls were primarily in return for selling the right to participate in the money-making venture—the Mogul program. The
merchandise in the packages was simply incidental.
Drawing a conclusion from the above points, the appeals court wrote:
The second prong of the Omnitrition test does not require that rewards for recruiting be “completely” unrelated to the sale of products.
If it did, any illegal MLM business could save itself from liability by engaging in some retail sales.
Such an outcome would be clearly contrary to our case law: a pyramid scheme “cannot save itself simply by pointing to the fact that it makes some retail sales.” Omnitrition, 79 F.3d at 782.
Basically the “but we have products!” argument is bust. And rightfully so.
How an MLM company sets up it’s compensation plan a role in things too. Time and time again I see MLM compensation plans that contain a paragraph detailing tiny percentages paid out on retail sales, and then encyclopedic volumes on the commissions tied into building an affiliate downline via recruitment.
Here’s what the appeals court had to say about BurnLounge and this practice:
Moguls received more lucrative bonuses if they sold premium packages. Moguls were also eligible to receive Mogul Team Points, with the goal of receiving Mogul Team Bonuses, by selling packages to new participants.
The district court found that Mogul Team Bonuses were “[t]he most lucrative.” This finding is supported by the record: in 2006, BurnLounge paid
a total of $2,726,965.50 in Concentric Retail Bonuses and four times that amount, nearly $8,480,975.00, in Mogul Team Bonuses.
The fact that BurnLounge paid approximately four times more in Mogul Team Bonuses than Concentric Retail Bonuses supports the district court’s finding that Moguls had a strong incentive to recruit new participants.
This incentive was the danger our court warned of in Omnitrition, where we stated, “The promise of lucrative rewards for recruiting others tends
to induce participants to focus on the recruitment side of the business at the expense of their retail marketing efforts, making it unlikely that meaningful opportunities for retail sales will occur.”
Too many times I get into discussions with affiliates who are quick to correct my analysis of a company they’re in, because of what can and can’t be done.
The fact of the matter is though, that if your MLM company uses a compensation plan that is heavily skewered towards affiliate recruitment, what can be done on the retail side of things becomes irrelevant.
If a compensation plan rewards affiliates to recruit and pays them peanuts to make retail sales, then it should come as no surprise that is what is going to be focused on by the affiliate-base. The mere fact that retail sales can be made in no way negates that.
All in all, while it’s certainly useful to have a recent court decision to cite for analysis of other companies going forward, ultimately the BurnLoung appeal rejection doesn’t really introduce any information we didn’t already know.
They key-points I took away from the 9th Circuit BurnLounge decision are as follows:
- the existence of internal consumption is not a sole factor in determining whether or not an MLM company is a pyramid scheme
- that products and/or services are bundled with affiliate recruitment does not negate a recruitment-driven business model
- how a compensation plan is set up and what it pays affiliates to do is a likely indicator of how an MLM company is effectively operating
- end-users and retail customers are not one and the same, a company can have plenty of end-users and still be a pyramid scheme due to a lack of retail customers purchasing whatever is being marketed
We affirm the district court’s holding that BurnLounge was an illegal pyramid scheme, in violation of § 5(a) of the FTCA.
BurnLounge’s scheme satisfied both prongs of the Omnitrition test because Moguls paid for the right to sell products, the rewards BurnLounge paid were primarily for recruitment, and Moguls were clearly motivated by the opportunity to earn cash rewards from recruitment.
Perhaps not as definitive as some would have liked, but there it is.
oz your contention appears to be that if burnlounge had 50 % outside retail , the court would have given a different decision .
my contention is that had burnlounge been able to convince the court of the value of its product , and had demonstrable retail [nowhere close to 50 %],it may have still evaded pyramid charges.
nowhere in the order is there any insistence on retail being the primary function of an MLM. other factors like product value , cash fees , inventory loading . compulsory product purchases on joining ,encouraging and having effective rules for retail , occupy the courts mind more than math equations of retail numbers vis a vis internal consumption.
also the overturning of the previous definition of ‘ultimate users’ as defined by onmitrition , is a body blow to the anti MLM brigade . herbalife has already released a press statement in this regard :
It would have never made it to court.
Regulators investigate before they file charges.
Right. They just included the 90%+ affiliate revenue statistic for giggles.
The issue in Herbalife isn’t ultimate users, it’s retail activity and the lack thereof.
Herbalife is quite obviously affiliate-heavy, which is why they never released those wholesale/retail customer figures they promised in April 2013.
Herbalife to date has failed to demonstrate a demand for their products outside of the MLM business opportunity (they refuse to release retail/wholesale customer data/ratios).
You can get a third opinion from me, “just to add to the confusion”.
* SALE, REVENUE and similar factors are rather irrelevant.
That point can be logically explained by the fact that a company can have many different products, all with different profit margins, e.g. Mogul packages with high profit margin (because it has an opportunity attached) and music albums with low.
Profit margin is the difference between product cost and price (price OUT minus price IN). It can be used to reward sales efforts and recruitment, and to generate profit for the company.
The high profit margin in this example is related to the fact that most of the the people purchasing those product packages will primarily be interested in the opportunity itself. They will look at potential commission rather than price, and buy the most expensive package that offer the highest rewards.
The low profit margin in this example is related to that the music albums primarily have been added for “legitimacy purposes”, rather than for the profit they can generate for the company. They can easily be sold to external and internal consumers because of the relatively low price (compared to competitors).
REVENUE, REWARDS, PROFIT
The figures here are hypothethical.
Mogul packages can generate 40% of the sales revenue (payment for the opportunity, with some products attached for legitimacy purposes), but it can generate 90% of the rewards and 80% of the profit.
Music albums can generate 60% of the sales revenue (payment for products), but only generate 10% of the rewards and 20% of the profit. Most of the music sale can be to external consumers, but that isn’t really important.
It didn’t work exactly that way in BurnLounge, the sales revenue from music sale was probably around 5% or less. My intention was to show how it can be done.
anjali, you just made the point. If the products had value, they could have sold them to non-distributors. In fact, the ONLY way to prove the products have value IS to sell them to non-distributors.
Even the 1979 Amway decision relies on the fact that there is non-distributor demand for products, as the sales to non-distributors was one of the linchpins of that decision.
There is significant concern Amway didn’t actually HAVE the level of retail sales they claimed, which means they should be investigated again, as well as go after the ATS.
Consumers are not professionals. They don’t know much about the difference between PRICE and VALUE, so whether or not consumers can be willing to pay for something won’t prove anything of importance.
People can be willing to pay for almost anything they FEEL or BELIEVE have some value, e.g. discount cards or access to discounted travel offers. Some people will even be willing to pay for the opportunity to earn an income.
Some people will be willing to pay for their own ideas, a sales person can simply reflect ideas they already have and collect money for it.
Consumers can easily be misled. Sales to consumers may potentially prove that rather than prove the value of a product.
yes, which is why retail is necessary .but this order or the amway order do not indicate that third party retail has to be the primary function of the MLM .
the amway order is satisfied by the ten customer rule .which means a single product to ten outside consumers is allright, even if the distributor is earning 10 times more from a downline of say 100 people. the amway order quantifies the number of SALES not the SALES AMOUNT ,which are required , to satisfy the court , that amway is about ‘product’ sales and not ‘program’ sales.
the burnlounge order also takes the air out of the balloon of retail fans , when it says “a pyramid scheme cannot save itself simply by pointing to the fact that it makes some retail sales”. pyramid charges are not just about retail or the lack of it .
now that the burnlounge order says that personal consumption can be viewed as sale to the ‘ultimate user’, what does this mean ? can we count personal internal consumption as retail ? around 12 US states have statutes allowing this already .
The context of this statement refers to the 4 point something percent in BurnLounge that was retail. Ie. You can’t run a 99% affiliate-funded pyramid scheme and hope to get out of jail free because 1% of your revenue is retail.
It means that commissions on internal consumption alone does not conclusively determine whether or not an MLM company is a pyramid scheme. This was never an issue with anyone but the strictest of anti-MLM proponents though.
It’s certainly never been an issue on BehindMLM.
A high profit margin can also be described as “overpriced product”, but that isn’t always true. Some products will simply NEED a high price to be sold to the right type of consumers.
Pyramid schemes are about CHAIN RECRUITMENT SYSTEMS. They’re not about SALE, but they may be DISGUISED behind some sales activities. They’re about PAYMENT from participants for the opportunity to earn a profit on recruitment of other participants, disguised as “earning commissions on selling product packages or memberships”.
If people will need to buy a product themselves to achieve the right to earn commissions on selling it to others, there’s a red flag. Sales people won’t need to BUY, USE or OWN products themselves to be able to sell them. They will only need the RIGHT or PERMISSION to sell them.
If buying a product will “unlock an income stream” or “qualify for commissions”, then it’s not about sale of products or services. It’s about purchasing the right to earn something.
An overpriced product won’t sell.
Where’s the profit in that?
Oz, a key issue you’re missing in this discussion is defining what a “participant in the scheme” is. Just because you may be registered with some particular MLM does not mean you are “participating” in it’s compensation plan.
Canada has actually defined participation for this purpose –
“A participant in an MLM plan is an individual who actively engages in the activities necessary to realize the benefits of the MLM plan.”
Also, EU law and US state laws (where they’ve specific MLM laws) all explicitly consider legitimate internal consumption, so your chosen 50% barrier simply doesn’t exist in law.
Indeed, there’s no legal or ethical reason why you couldn’t, in theory, have a legitimate MLM with 100% internal consumption – as long as the purchasing decision was one of legitimate demand.
Of course, no retail sales at all makes it hard to judge whether there is any legitimate demand for the products at the price offered, or if people are purchasing them because of the attached opportunity.
it’ll sell if you scam people (promote it fraudulently).
It’s also worth noting that Omnitrition was also 9th Circuit Court. 🙂
I wasn’t talking about gasoline there. Car owners can drive miles to find the lowest price and save a few cents per gallon or litre. That’s because that type product is extremely sensitive even to small changes in price.
Look at some brands and products where people in general have some “perceived ideas” about differences in quality or taste? The well known brand product will most likely be sold at a higher price than the other brand product.
The lesser known MLM brands are priced much HIGHER than well known brands, and that’s why they can’t sell them.
Pyramid schemes are about 3 components:
1. A chain recruitment system
2. Payments from people
3. Rewards paid out to people
Pyramid scheme = You pay for the opportunity to earn rewards from other people doing the same (pay for the opportunity to earn rewards from other people doing the same (pay for the opportunity to earn rewards from other people doing the same)).
The payment can be disguised as product sales = product plus opportunity bundled in a “package”, or products as “qualifying purchases” for the right to earn commissions.
It says “personal consumption”, it doesn’t say “qualifying purchases” or anything like that.
“Personal consumption” = what you and your family reasonably can be expected to consume (as consumers) within reasonable time. In Amway 1979, $20 per month average consumption among low level distributors was accepted as “reasonable enough” (“reasonably” isn’t an exact measurement, and it will differ from product to product).
Herbalife released that press release before they even had analysed the decision, approximately at the same time when Kevin Thompson published his video. BOTH those search hits had the same timestamp, “published 3 hours ago”, when I first found KT’s video.
I think in that case you would be selling an illusion not an “overpriced product” and even illusions can be overpriced.
Not sure what you are referring to but precedent is not statute.
People often pay more for branded products. That reflects a willingness to pay more for a favored item not a willingness to buy a product that is overpriced.
If you’re signed up as an affiliate and/or paying/paid an affiliate fee, you’re an affiliate (participant), end of story.
The only non-participants are retail customers (including preferred).
I’m not having any of this “affiliates who can’t recruit a downline aren’t affiliates” garbage. Leave that for the MLM companies to abuse when they put together their income disclosure statements.
Every Ponzi/pyramid scheme ever shut down by the regulators has had this scenario.
Motivation is key, and it’s hard to argue value in the product when you have affiliates earning commissions and no retail activity. Quite obviously then the primary motivation is money (you can’t argue value in the product when nobody outside of the business opportunity is purchasing the product).
Some sources on the internet have already pointed out that the BurnLounge decision is in Herbalife’s disfavor.
The decision separated Retailers from Moguls when it analysed BurnLounge for potential pyramid scheme issues. “Retailers don’t have the right to earn cash rewards, so they’re clearly not part of a pyramid scheme”.
If a similar logic can be applied to Herbalife, a court or a regulator can separate the low level distributors from Supervisors when analysing Herbalife.
HERBALIFE RED FLAGS [1..7]
 In Herbalife, distributors must purchase 4,000 VP or 5,000 VP of products in order to become Supervisors, a payment for products in the range $2,000 or more.
 In exchange for the payment, they will get the highest discount level (50%), plus the right to earn commissions from recruitment of a downline.
 In addition, Supervisors will need to make monthly “qualifying purchases” each month to qualify for the recruitment commission. The discount will not be affected if they don’t qualify, it will only affect the recruitment commission.
 The recruitment commission is calculated from SRP (Suggested Retail Price) rather than from the actual purchase price of the products.
 People will need to pay EXTRA for some different non-refundable expenses when they order products. Money collected that way will be distributed upwards in the system.
* 7% “surcharge”
* Local VAT based on SRP
* Overpriced Shipping & Handling
 It’s impossible to advance in ranks higher than a certain level if people don’t recruit.
 Omnitrition’s compensation plan and business model was basically a COPY of Herbalife’s model (Omnitrition was started by former Herbalife leaders).
in this context , under the head discussing ‘saturation’ in the amway order 1979,it is noted :
the court is aware that all distributors do not recruit ,in fact MOST distributors do not recruit, that they are just enjoying discounted products .the court does not find any problem with this . the court does not say that the 3 out of four distributors of amway , who do not recruit are ‘failed distributors’ .the court does not suggest that such distributors be classified separately as a preferred class or something .
also, with the latest burnlounge order interpreting personal internal consumption as sale to the ‘ultimate user’ there is no longer any need to divide distributors into preferred customers and recruiting distributors.
MLM is about ‘product sale to ultimate users’ and the burnlounge order has clarified that these ultimate users are both within the the plan [participants] and outside [non participants].
Then by all means launch an MLM that focuses only on the sale of products to affiliates and see what happens. You can call it BurnLounge2 and adopt the same business model and product range as BurnLounge1.
When you get shutdown again, you can simply tell the courts you were selling products to end-users and so you’re not a pyramid scheme.
Reality check: Regulators and courts will not care if you call them “ultimate users” or any other name. You still need retail in MLM or you’re going down for being a pyramid scheme.
blazing humor in the morning ? 🙂 . no one will follow this suggestion , oz, as the court found burnlounge products to be valueless [or overpriced] .
understand this , my grouse is not with pure retail , i am simply trying to see if any case law supports the view of the FTC ,which has been pushing its ‘revenue primarily from retail’ program on the unsuspecting public .
the FTC was wrongly foisting the idea that ‘ultimate users cannot be in the pay plan ‘, and the ninth circuit court concluded that this idea was unsupported by case law . now we have to find out if this ‘primarily outside retail’ condition the FTC is pushing ,is law or monkey business .
Every MLM pyramid scheme that has been busted and taken to court has had insignificant retail revenue.
Let’s move on.
Every MLM pyramid scheme that has been busted and taken to court has had insignificant retail revenue. – oz
true and correct statement .beyond reproach .’insignificant’ is the operative word here.
however it is very different from saying that any MLM has ever been busted for having less than 50 % outside retail.
also , herbalife with around 70 % non recruiting distributors , who purchase for personal use, and hence can now be categorized as ultimate users , just slid off the frying pan .
“Insignificant” in a discussion about the relevance of retail sales within MLM companies and pyramid schemes? Please…
Right. Regulators just explicitly specify the amount of retail revenue and affiliate revenue in their court filings for shits and giggles.
Affiliates are affiliates.
Until Herbalife release their true retail customer figures vs. affiliates, any discussion on Herbalife pertaining to their affiliate-base is pointless.
An MLM company with close to 100% revenue generated by affiliate ultimate users will still be shut down for being a pyramid scheme, case in point BurnLounge.
I couldn’t give a toss about “ultimate users”. The focus has and always will be on retail.
One suspects if the FTC did specify an exact “acceptable” retail / affiliate ratio, Anjali would be the first on here protesting about the agency interfering in commerce or some such pseudo constitutional / libertarian nonsense.
Likewise, I’m in no doubt if the FTC ever DID specify such a ratio, Anjali and her like would be here making such claims as: “if 70% is an acceptable retail / affiliate ratio, then if the products retail price is within xxx% of comparable non MLM products, then an affiliate / retail ratio of xxx% should be permissible” etc, etc ad infinitum, ad nauseum
They don’t have the right to participate in the compensation plan. Supervisors and higher levels have that right.
Herbalife’s low level distributors will be similar to Retailers in BurnLounge. They can be separated from a potential pyramid scheme. Supervisors and higher levels will be similar to Moguls.
Pyramid scheme isn’t about the income opportunity itself. It’s about the chain recruitment part of it. Any single level distributor can legally buy, sell or consume products or services.
Affiliates in the general sense of the word (anyone who can earn).
I don’t typically subscribe to MLM companies changing terms.
its not upto the FTC to decide this ratio. some case law precedent is required .can you guide me to some MLM case order which makes any specific reference to retail/affiliate ratios ?
but unlike the moguls of burnlounge, a court may not find anything wrong with the incentives herbalife pays for recruitment :
the ninth circuit court did not find this portion of burnlounges plan to be a pyramid. the higher level plan or mogul plan was found to be a pyramid . did the lower level ‘music purchase plan’ have over 50 % retail ?
that’s entirely your choice but the FTC thought it was bloody important, and tried hard to ensure that ‘ultimate users’ remained ‘outside’ the pay plan .
the ninth circuit court also thought it was important enough , so as to address it separately since it was brought to their notice that :
I think you mean “earn commission from sales from downline”, which is part of the comp plan but usually is not the WHOLE comp plan.
Generally affiliates sign up for the right to distribute the product.
So you’re trying to bargain how much is considered pyramid scheme?
No, they didn’t. They only reiterated the definition of end-users.
Ultimately affiliate revenue was cited as the primary reason for a lack of perceived value in the products, ie. only affiliates were buying the bigger packages and thus contributing upwards of 90% of BurnLounge’s revenue.
It’s brutally simple, unless you’re trying to find excuses to justify 100% or close to affiliate-funded pyramid schemes.
They found the business to be a pyramid scheme. They never compartmentalized anything. Upwards of 90% of the company’s revenue was from affiliates.
BurnLounge is a pyramid scheme. And if Herbalife has anything short of around 50% retail, they are too. End of story.
anjali didn’t mention that most Amway distributors who don’t sponsor don’t buy products, either. They see the product prices and quit.
Also, Amway’s volume continues to rise ONLY because they move into new countries. Amway’s U.S. volume has gyrated up and down since the early 80s.
Ultimate users are internal and external buyers, but only external buyers are customers. The court stated having <5% customers is an illegal pyramid.
The non-sponsoring HLF distributors “slid off the frying pan” only because HLF redefined them last year.
M_Norway, the chain recruitment idea was an idea tried by the FTC that was shot down in 1975 – see this decision, particularly section IV: http://www.mlmlegal.com/legal-cases/GerRoMar_v_FTC.php
The real issue is lack of retail sales. Always has been, always will be.
The other part is a “wholesale discount sliding scale”, where you can qualify for 12 months discounts by making 1 or 2 purchases. Discount levels = 25%, 35%, 42% and 50% on SRP Suggested Retail Price.
Herbalife is first of all “deceptive by design”. The wholesale discounts have been included in the compensation plan as “stair steps”.
* Distributor 25%
* Senior Consultant 35%
* Success Builder 42%
* Supervisor (or higher) 50% (first level with recruitment rewards)
Pyramid schemes are about earning REWARDS from a downline of other participants, from people you have introduced directly or indirectly into the plan, people who have bought the same rights as you have to earn rewards from recruitment.
Low level distributors don’t have the same rights to earn recruitment rewards. They’re simply not participants.
“But they CAN earn money on sale of products!”
Yes, but a pyramid scheme isn’t about that. It isn’t about ANY type of money making.
The Ninth Circuit Court mostly ignored the Retailers. They were simply not part of the pyramid scheme.
In BurnLounge, Retailers couldn’t even earn CASH, only BurnPoints redeemable in products or services. That’s not important in itself, but it separated them even more from the Moguls
If majority of their income are actually commissions based on their downlines’ purchases (and not their own purchase, either for self-consumption or resale), then the wholesale discount sliding scale is IRRELEVANT, right?
“Chain recruitment system” is simply another common name for pyramid scheme. You may see them listed as synonyms within the same paragraph in the same law in some jurisdictions.
If you want to separate between something, you should separate between traditional pyramid schemes (based solely on money or other values) and product based ones, “promotional pyramids” (called “pyramid promotional” in most states in the U.S.).
I make the distinction for clarity. The idea behind the chain idea usually is it never ends, and within a very short period of time everybody on the planet will be sponsored.
The court rejected that concept, it has little to do with reality, and courts like reality, as opposed to theory. If we don’t define our terms, confusion will result and then we don’t make progress.
I prefer “pyramid selling”, which is the term often used outside of the US, such as Asia.
I like the term “illegal pyramid,” as there is nothing wrong with the structures in Egypt, whether they are for sale or not. Plus, selling implies they are actually selling products to external customers, which is the farthest thing from the truth.
The word “illegal” also separates a scammy MLM from the normal corporate/military organization, which is also pyramidal in shape, and often used by MLM scammers to look legitimate.
I wasn’t able to interpret that statement completely, you will need to accept an alternative answer.
I will sometimes analyse “legal differences”, e.g. “are these 2 groups legally different or are they legally similar?”. I will analyse the details for that, HOW they’re different and HOW they’re similar.
1. Low level distributors can buy amounts of products in one or two orders, and receive the right to higher discount for 12 months. They do not receive the right to earn recruitment based commission. They don’t need to qualify each month.
2. Supervisors and higher levels receive exactly the same, max discount for amounts of products in one or two orders, for 12 months without qualifying criteria each month.
3. Supervisors will also receive the right to earn recruitment based commission. They must make qualifying purchases each month to qualify for that commission. There’s a legal difference here.
— preliminary result —
There’s no legal difference between low level distributors and supervisors in the wholesale discount sliding scale. They will follow exactly the same RULES, only the amounts and discount percentages will be different.
If those 2 groups had followed exactly the same rules in both parts, discount AND recruitment, then it wouldn’t be necessary to separate between them. I could have used the logic “affiliates are affiliates”.
“Affiliates are affiliates” can still be valid logic, e.g. if the legal difference is unimportant. So I will need to check how important the difference is and why it is important.
That should be enough for now. I can probably complete the analysis in another post.
who am i to bargain? i am merely a truth seeker. lots of people would like to know , how much retail are the courts looking for , in order to clear an MLM of pyramid accusations.
from amway 1979 , and later orders including burnlounge. all that courts clearly say is that – MLM should sell products rather than recruitment programs , MLM should encourage retail by installing some rules, MLM should ensure the compensation plan is not skewed in favor of recruitment.
now you can translate this courtspeak , into any language of your choice , but it will still never mean ‘MLM should have MORE revenue from retail than internal consumption ‘
if amway distributors who don’t sponsor , don’t buy products it’s because they don’t HAVE TO .this just goes to show amway is not running a pyramid scheme.
the amway order 1979 , has no issue with the price of amway products .if you cant afford them – don’t buy them . simple !
as for quitting , theres no law against it . as long as quitting an MLM does not lead to substantial financial losses , a court will not care about it . if the entry threshold of the MLM is low [<200 $], and the purchases are refundable , courts will not complain . from the amway 1979 :
while finding amway to be a legal MLM enterprise , the court was thus fully aware of the churn rate . herbalife has comparable churn rates , if i'm not wrong ? in sharp contrast , in koscot , you had to pay 4000 nonrefundable dollars to participate .
Anjali can pose legal hypotheticals all she likes, whatever the court may be looking for, it sure as hell isn’t the 92.6% of payouts being based on recruitment BurnLounge was doing.
Why does the law need to be changed or further refined ??
When was the last successful pyramid scheme prosecution where the “retail” sales were anywhere near 70% or 50% or even 40% ??
Come to think of it, in recent times, how many MLM companies charged with being pyramid schemes weren’t ??
For goodness’ sakes, Anjali, 92.6% of payouts recruitment based and you’re splitting hairs AGAIN claiming the ruling has further confused things ??? ??
Actually, it means Amway runs a s****y business, because it’s loaded with people who don’t sell stuff (they don’t buy to resell) and they don’t find people who do.
Assuming this type is the MAJORITY of the distributors, of course. If it’s a minority, then it’s insignificant.
Bloody oath.They found the business to be a pyramid scheme. They never compartmentalized anything. Upwards of 90% of the company’s revenue was from affiliates.- oz
from the burnlounge order :
all i asked was ,how much retail was going on in the lower rung retailer program of burnlounge , which the court did not find to be a pyramid ? the retailer program did not pay cash rewards . is this why it is not a pyramid ?
by all means , don’t change or refine the law , if you don’t want to . at the same time stop spouting nonsense that is unsupported by the law as it stands. if you want to insist that MLM is legal ONLY if outside retail is >50 % , get a court to say it first . don’t cite omnitrition ,it just got chopped
Here’s a part of it:
The “Mogul Program” is the MLM business opportunity. It’s not some component of the business model as you’re trying to make it out to be.
I’ll make this easy for you:
Unless you can cite one MLM company charged as a pyramid scheme that had less than 50% retail, it’s the spambin.
and the retailer program was not ? couldn’t retailers too buy a package to become participants, and then resell packages for non cash rewards ? that aint MLM?
i know companies which are charged as pyramid schemes, which have insignificant retail . however i do not know of any company with say 30% or 40 % retail which has been taken to court by the FTC.only the ‘insignificant retail’ MLM’s land up in court .
if it’s the spambin ,let me get my blanket first .
Retailers couldn’t earn anything, you had to be a Mogul IIRC. Retailers got points or something which could be used to access music services or some such. They were external from the business opportunity.
Neither do I, so we’re done here. Insignificant retail revenue (be it less than 50% or thereabouts) and you’re a pyramid scheme.
Because they are not being paid $$$, only in points (which can be traded for songs).
In any case, the “retailer” is a very minority of the entire membership, and thus is mostly irrelevant. I don’t remember the exact number, but IIRC it’s less than 10%.
anjali: if amway distributors who don’t sponsor , don’t buy products it’s because they don’t HAVE TO .this just goes to show amway is not running a pyramid scheme.
Tex: Do you realize how stupid this sounds? Why would somebody pay money to become an Amway distributor if they didn’t sponsor anybody and didn’t buy any products? This would make Amway a pure pyramid scheme, except these participants would leave it to others to make it bigger.
anjali: the amway order 1979 , has no issue with the price of amway products .if you cant afford them – don’t buy them . simple !
Tex: The court didn’t have an issue with products because they were told the products were being sold to external customers, and there is solid indication this was a lie. Also, the court didn’t even touch the most significant overpriced items, the Amway Tool Scam.
anjali: as for quitting , theres no law against it . as long as quitting an MLM does not lead to substantial financial losses , a court will not care about it . if the entry threshold of the MLM is low [<200 $], and the purchases are refundable , courts will not complain .
Tex: You're right about no law being against quitting, but DEAD WRONG about substantial financial losses.
Also, courts DO care about taking small amounts of money from many people under fraudulent conditions, here's a recent example: http://www.bloomberg.com/news/2014-03-31/fbi-said-to-probe-high-speed-traders-over-abuse-of-information.html Also, the purchases are refundable for only a short period of time and, much more significantly, the refunds don't include the tool scam costs, let alone the wasted time.
Regarding the threshold for retail level, I believe well over 90% of MLMs would be out of business if the threshold level was 10%, so the actual threshold value is mostly a moot point.
the court noted that amway followed the 10 customer rule .the court was satisfied with this 10 customer rule. by no stretch of imagination can a layperson ,let alone a court , be fooled into thinking that the ten customer rule, means all products are being sold to external customers.
over that ,you allege the amway court was lied to, and in spite of MLM cases relying heavily on the amway order since 1979 , this lie has lain hidden in your heart ,and not a single court espied it . this argument clearly lies in la la land territory , so i’ll stop right here .
Might be the end of your story, and you’re entitled to your opinion, but the Canadian Government, for one, disagrees. So do I – if you’re not doing anything, you’re not participating in anything.
If I put an entry in to the Boston Marathon but don’t turn up to run, was I a participant? In MLM, if you are not selling and/or recruiting you are unable to earn any benefits from the compensation plan. You are not participating in it.
That’s incorrect. Think about things like the Airplane game – no product involved at all.
You are correct that motivation is the key, but answer this – if someone registered as an affiliate is purchasing products voluntarily, and continues to purchase them voluntarily for years, but doesn’t try to sell to anybody, doesn’t try to sponsor anybody, and doesn’t earn any commissions – what do you think is their motivation for purchase?
I’m not saying retail customer sales are unimportant, in my opinion they are. One of the reasons is that they offer easily understood evidence that the products in question have legitimate market demand at that price point. That would clearly imply there is also legitimate market demand at the lower, distributor, price point.
If there’s a clear market for the product, then clearly there’s the possibility of a legitimate business opportunity.
Opinion or not, it’s fact. What the Canadian government does is neither here nor there (but I will keep it in mind when reviewing Canadian MLM companies… all none (?) of them).
Regardless, if said Canadian company is going to operate in the US, they need to follow established law there. By all means, start up a 100% or close to internal consumption MLM and see what happens.
You paid a fee to participate.
Participation in MLM isn’t the same as running a marathon. Participation in MLM is having access to the comp plan. If you have access (paid for or otherwise), you’re a participant.
Unable != no access. If you don’t want to be a participant sign up as a preferred/retail customer.
Right. Old school pyramid schemes. Fair enough.
These days however the point stands. Peg it at a decade or two, and you’ll find 100% internal consumption behind close to 100% of the regulatory pyramid scheme shutdowns (Canada schmanada).
The more appropriate question is why are they an affiliate? Preferred/retail customer classes exist in MLM for this very reason.
Paying an affiliate fee and not wanting to be an affiliate makes no sense to me, so my answer to your question is “because they are idiots”.
anjali: the court noted that amway followed the 10 customer rule .the court was satisfied with this 10 customer rule. by no stretch of imagination can a layperson ,let alone a court , be fooled into thinking that the ten customer rule, means all products are being sold to external customers.
Tex: People lie in court all the time. The basis of my concern is from a former Assistant AG from Wisconsin. He stated there is nothing in the court record that the FTC challenged Amway’s statements.
Amway’s own internal, confidential report stated a measly 3.4% of products are sold to non-distributors, and I know that number is inflated for several reasons. A rule not enforced in practical terms doesn’t exist. The upline doesn’t WANT to enforce the rule, they want any bonus a distributor wants to be funneled up to them in the form of tool profits.
anjali: over that ,you allege the amway court was lied to, and in spite of MLM cases relying heavily on the amway order since 1979 , this lie has lain hidden in your heart ,and not a single court espied it . this argument clearly lies in la la land territory , so i’ll stop right here .
Tex: No, other courts cases have CONFIRMED whether the statements claiming retail sales are true, so the problem is largely confined to Amway. You better stop right there, the hole you’re digging is deep enough already.
IBOFB like to twist ideas and words around, until they bear little resemblance to the original idea:
If someone doesn’t participate, they should be automatically downgraded to a customer. This also begs the question what to do with those attempting to sponsor/sell but are not successful, are they “participating?” If you run in the Boston Marathon and can’t finish, did you participate? In both cases, of course they did, they’re called losers.
The original quote didn’t reference whether products were involved or not. The airplane game sells seats, and all of the consumption is internal, that’s the point of the original post – but you try to twist it into some other idea, as usual.
If someone isn’t doing anything except self consuming, they should automatically be defined as a customer, only then will there be a clear indication what the source of their buying motivation is.
I agree customer demand equals a legitimate price point, but the level has to be much greater <5%, according to the BurnLounge decision.
As far as Canada goes, I wouldn’t accept IBOFB’s statement unless he can back it up with a reliable reference, as he’s a known liar.
The real answer to the question why these people aren’t customers is so companies like Amway can muddy the waters, so much so that it is more difficult to prove who is doing what and for what reason.
This is why people who only buy for self consumption shouldn’t be allowed to be distributors, because the hope of eventually sponsoring somebody or selling something is always in the back of their mind and motivation for buying the products, and therefore this is not external volume.
did you read the latest burnlounge order of only a few days ago ? the ninth circuit court has confirmed , that distributors , buying for self consumption , is a totally acceptable notion , as long as the products are valuable and have legitimate demand.
did the court say that such distributors should be classified separately ? NO . in fact the court went a step ahead and said that such sales ,arising from self consumption are legally commissionable . now where does that leave your argument tex ?
…except that the small amounts of money people pay for the business pack on joining amway , is fully refundable .
The court noted that Amway had a system in place that actually worked and was enforced to protect against inventory loading. Having rules like that doesn’t make any sense if they don’t work.
Amway settled charges about organized price fixing, IIRC. Price fixing is about when independent distributors are forced to sell at a fixed price (including internal sales at wholesale prices).
“Forced” is about agreements or contracts, control systems, manuals, forms, policies and other methods to maintain a price fixing system.
anjali, yes, I read the decision. The point is internal consumption is okay IF, and ONLY IF, there is adequate external sales. There wasn’t, and therefore BL was an illegal pyramid.
The court didn’t comment on the classification, they shut down the entire business, so reclassifying them was a moot point, and courts hate commenting on moot points. Reclassifying them as customer would actually INCREASE external sales, and you just don’t get that, do you?
People don’t lose money only the business pack, they also lose money to the Amway Tool Scam and all other overhead related costs, which are mostly NOT refundable.
The truth is Amway does NOT enforce the retail rules. I and many others were specifically taught how to manipulate the computer to make a self consumption purchase look like a retail sale, distributors are taught how to “sell” products to a nearby friend or relative, use that person’s credit card, have the products delivered to their residence, then go over there to pick up the products with a check in hand to reimburse them for the products, among other techniques.
As I said above, “The upline doesn’t WANT to enforce the rule, they want any bonus a distributor [is paid] to be funneled up to them in the form of tool profits.” It gives the ILLUSION of profit, when it’s actually a loss.
This practice keeps people in longer, so they can scam them for more money and waste more of their time, which can NEVER be repaid.
Well said, and it only took a few words.
Thanks, I’ve been saying it for a very long time. However, adequate external sales by themselves only fixes the second largest problem, and the lack of retail sales is a distant second largest problem.
Here’s how a court must analyse whether a MLM company is legit or operates a pyramid scheme:
Plain and simple. It can’t use single “rules of thumb” or “written test procedures” (e.g. Koscot) as the only method, it will need to identify relevant facts about how the business operates in practice.
When you’re asking about single details, e.g. internal vs external sales, you’re asking the wrong types of questions and will only get the wrong types of answers.
The BurnLounge case used “purchase patterns” as a key indicator among other indicators. Other cases may completely ignore that method.
Pyramid scheme is about PAYMENT for the opportunity itself, so it will also be about REWARDS for internal sales among participants. It isn’t about the act of recruitment, but about the payments and rewards.
External sales can be used as exculpatory evidence (prove legitimacy), e.g. proof for that “people could easily make a profit on retail alone”, or facts about how compensation from retail sale was distributed.
Here’s some additional logic.
The court analysed payouts through different parts of the compensation plan:
* $2,726,965.50 in Concentric Retail Bonuses (sales based)
* $8,480,975.00 in Mogul Team Bonuses (recruitment based)
Retail sale isn’t enough. Bonuses that ONLY can be earned through recruitment can be a strong indicator for a pyramid scheme, e.g. if those bonuses clearly are unrelated to “value generating activities” (sale, training, etc.), if those bonuses are more lucrative than sales bonuses, if people PRIMARILY get rewarded that way.
I used the data from the court document, and how it had been analysed, to extract that logic.
Legality in business revolves around the concept of “exchange of values”.
* TRADE is about exchange of values
* WORK is about exchange of values (recruitment rewards may be acceptable to some degree)
Legality in business is also about the concept of “fair exchange of values” (what that might be).
Legality in business isn’t about “constructed law theories” but about realities, how the business operates in practice (how a court might see it).
Illegality typically revolves around concepts like “harmfulness”, “unfairness” and similar ethical ideas.
This section wasn’t about laws. It was about the TYPE of ideas people most likely will accept.
GOOD DEFENSE ARGUMENTS
Good defense arguments should revolve around what’s commonly accepted / “acceptable”. “Acceptable” is about something that CAN be accepted if presented correctly.
“Constructed law theories” will normally only be accepted by small groups of people. Most of those theories can easily be attacked if they don’t reflect realities. BurnLounge had many ideas like that, and nearly all of them failed.
One defense argument I liked was “people do actually get an education” (in selling travels). That’s clearly something a court can see some value in. People with higher education (like judges) will most likely see a value in factors like that.
What is the definition of “constructed law theories”
I Googled it and there’s nothing, except this ” Constructal law is a theory that the generation of design (configuration, pattern, geometry) in nature is a physics phenomenon that unites all animate and inanimate systems.
I believe I got that expression from the Supreme Court of India, along with some other descriptions of the functionality of that court.
You can get an example of a constructed law theory in Gerald Nehra’s modification of TelexFree’s contracts. He modifed some details in the agreements.
* AdCentral –> AdCentral + 10 “99Telexfree” software
* $20 per week –> 1 “99Telexfree” software, which the company would buy back for $20.
Those modifications were probably based on some theories about “flow of products”, e.g. that commission will be perfectly legal if it’s related to sale of products or services.
The same idea is reflected in FTC’s definitions, but Gerald Nehra has constructed new uses for that idea. The new uses will poorly reflect realities.
His ideas can easily be attacked, e.g. by pointing out that those modifications didn’t have any real function for the business.
Maybe you didn’t look in the right places?
You googled for something that wasn’t about laws, but about the TYPE of ideas people most likely will accept. That’s not a very rational idea?
I just want to know what the definition is. Can you cut out the waffle?
“TYPE of idea people most likely will accept”.
More information for the “truth seeker”. 🙂
Page 12 in the BurnLounge decision is about Prong 2 in the Koscot / Omnitrition test. The Latin phrase sine qua non means “without which [there is] nothing” (no pyramid scheme if that condition isn’t met).
It’s not about internal consumption. It’s not about retail customers or sale. It’s about “recruitment with rewards unrelated to product sales.”
“Recruitment with rewards unrelated to product sales” doesn’t mean “completely unrelated to product sales” (page 15 in the decision).
so where does this leave us ? as we stand today in june,2014 , there is no legal binding on any MLM company to classify its non recruiting distributors into a preferred customer class.
the courts, since amway 1979, have been aware of the presence of large numbers of such distributors in the pay plan of amway , but from then till now , no court found it necessary to relocate these distributors into a preferred class.having a preferred class is a ‘choice’ some MLM companies make , however ‘encouraging retail’ and having ‘rules for retail’ are ‘legally reqd’ from companies, resultant of the amway case .
overhead spends by distributors are not paid to the MLM company ,and the company cannot be held responsible for them . the MLM company does not insist on specific overhead costs so they are safe from blame .
some distributors spend pennies , some spend pounds , and that is specific to their personal spending habits. the court can only ensure that the MLM company does not separate people from their money .
i dont know enough about what you call the toolscam .but i suspect it is about business tools being sold by top distributors , and it may be difficult to hang the company for this too .
norway , thanx for your posts . you hit the nail on the head .i appreciate your holistic approach toward understanding MLM , and not many get it . it cannot be about strict requirements of retail /consumption , but as babener said in an article ‘you know it when you see it ‘.
IOW, “if you want to continue to pull the (FTC) tigers’ tail, be prepared to suffer the consequences”
yeah , a ‘sequestered’ tiger which goes after only blatant pyramid schemes . your tiger lost the saturation argument [amway] , lost the endless chain argument [ger-go-mar] and now the internal consumption debate[ burnlouge] .your tiger may need a dentist visit to check if those teeth still bite 🙂
By all means, set up a near 100% internal consumption MLM company that takes off and see what happens.
Are you suggesting there’s a need for MORE government interference ??
So, do you want free enterprise or not, or are you one of those faux-libertarians who on one hand criticize regulation while spending countless hours here demanding clarity from the judiciary and the FTC.
Forget about Koscot and Omnitron, how about applying the common sense “any reasonable person” test ??
Better still, the “Oz” test
Works every time.
i believe the ‘buddha’ middle path works in every facet of life . regulation ,govt interference should be ‘just right’ like goldilock’s porridge.
the boundaries for MLM ,are being slowly developed through case law, and that’s fine too. i am mainly against ‘experts in blunderland ‘like ackman , the anti MLM faction , non libertarians like oz, who try to force their ‘opinion’ about legal MLM ,which is unsupported by precedent law.
oz has great expertise in recognizing blatant pyramid schemes. he rarely opines strongly on grey area companies like amway or herbalife .oz, do you think herbalife is a pyramid which will be shut down ? or are you hedging your bets ?
herbalife has conducted market surveys [neilsen] to show demand for their products .
in the amway order 1979 , the court has considered the demand for amway products ,by relying on a market study .the court did not ask for retail receipts . the order does not mention any retail sale percentage of amway products at all !
so , if if the amway court could accept the high demand of products based on a market study . wont the same hold true for herbalife too ?i mean , if there is a strong precedent of a court accepting a market study , wont the same facility be available to herbalife too ?
Established US law, as confirmed by the Burnlounge appeal decision, is that motivation matters, not who purchases it. Furthermore, various US state laws explicitly exclude internal consumption as an issue when determining if something is a pyramid. The *only* peg the anti-internal consumption brigade had to hang their hat on was the omnitrition dicta, and now that’s gone.
Everyone has access to the comp plain, including you. Taking a signature on a contract as the line is as arbitrary as any other – especially given it’s step actively promoted as part of due diligence in establishing whether you want to actively participate.
So you’re suggesting people should actively choose to pay more for products than they need to, for no other reason than that some people won’t believe you’re buying the products because you want them?
In the “preferred customer” setup, how do you cope with someone like myself? I joined Amway primarily to get the products cheaper, then decided to build a business, then decided to stop again – but kept buying the products – then later started, then later stopped – several times.
Does Amway have to recategorize me every week depending upon my mood?
The only reason is because some people believe I’m not buying the products because I want them, which is patently false.
In Amway, even if you just wanted to buy one high-ticket item, you save money by registering as an affiliate to get the cheaper price. If you regularly by products to a certain value, you save money by registering. That’s smart, not idiotic.
“Motivation matters” = “do people buy the products to qualify for commissions, or do they buy them for the value of the products?”.
If they buy products for the value of the products, then monthly “qualifying purchases” will be unnecessary (it won’t have any real function if people will buy the products anyway). Monthly autoship will still have a function.
And how did they determine “motivation”?
When is “something a pyramid”?
When there’s no retail…
And I give a shit why?
Only affiliates have access.
What defines an affiliate, whether you think it’s arbitrary or not is neither here nor there.
Preferred customers attract a discount.
If customers think retail prices are to high, they shop elsewhere. That’s how marketing works.
The onus is on the MLM company to provide retail value.
Sign up as a preferred customer.
Change to an affiliate, then go back to being a preferred customer.
Honestly, what is your point?
When you’re not an affiliate, be a preferred customer if you want the discount. If you want to be an affiliate, sign up as one.
Couldn’t care less about the individual. MLM companies are analysed as a whole. If there’s no retail activity occuring, there’s clearly a problem.
If Amway aren’t delivering value on the retail front, that’s entirely on them.
Not providing value to your customers is perhaps the most idiotic business strategy of them all.
Herbalife do not make their retail figures public (for reasons known only to them).
They said they would last year but then renegged on the promise.
I can’t make the call either way without knowing what that retail figure is. The good news is they can’t hide that figure from regulators, the bad news is regulatory investigations can take some time.
That survey was BS, and I debunked it in a separate article.
“Demand for products” != retail activity. The Neilsen survey was smoke and mirrors bullshit, nothing more.
It’s quite simple for Herbalife to put out a report stating “Last year we took in $x from affiliates and $x from retail customers”. Yet they don’t.
They claimed last April they were going to create a proper preferred customer class to address the “failed affiliates are retail” excuses, but then reneged for reasons they never made public.
I can only surmise something is up.
OZ (and/or anyone else) – would you agree or care to comment on the statement issued by CEO Michael Johnson on the FTC ruling on “product consumption by participants”?
“your tiger lost the saturation argument [amway]”. The court will not analyse hypothetical ideas like “not an unlimited supply of people in the world”. It will simply not recognize arguments like that as valid legal arguments.
Prosecutors will need to point out a REAL existing problem that can be recognized by the court.
We can recognize arguments like that as valid, but a court can’t. We can do it “for the purpose of communication”, “to make things easier to understand”. But a court will need to look at the realities. The Amway case had unsupported claims not recognized by the court.
“lost the endless chain argument [ger-go-mar]”. I haven’t analysed that, but it’s probably about unsupported claims not recognized by the court.
“and now the internal consumption debate[ burnlouge]”. Again, we can recognize arguments like that as valid, because that’s where the problem is most visible and easiest to recognize. We’re not a court or a regulator, and most people will be able to recognize the difference between an MLM review site and a court. 🙂
“FOR THE PURPOSE OF COMMUNICATION”
If I interpret it as the court sees it, e.g. pointing out that “the second Prong of the Koscot / Omnitrition test is the sine qua non (without which [there is] nothing) of the pyramid scheme test”, people will mostly ignore my comment. It reflects how the judges have analysed it, but it doesn’t reflect how people in general THINK.
It’s simply EASIER to point out simple factors and identify them as the main problem. People WANT simple ideas they can recognize, they simply don’t want constructed legal logic. It doesn’t matter if the legal logic is more correct, people will still not WANT IT.
“People want simple ideas, not complicated legal arguments”. Until people in general change how they THINK, I will prefer to simplify logic and make it more understandable. “Commonly accepted” should be the main rule in communication.
Sure. Here’s my reponse:
“How much retail revenue versus affiliate revenue did Herbalife bring in last year?”
1]retail revenue : 30 % sales drop shipped directly to customers
2]affiliate revenue : 70% affiliates self consume the valuable herbalife product [‘valuable’ as evidenced by customer demand in the neilson survey}. burnlounge says self consumption of demand driven valuable products is legally commission able
so , revenue from 1 and 2 should suffice to keep herbalife going .hence proved :herbalife is not a pyramid . howzzat ?
He has not analysed the whole decision himself. He’s repeating how it was interpreted by DSA lawyers immediately after the decision was published, and THEY focused solely on ideas in support of their own viewpoints.
You can look at the Kevin Thompson video, published immediately after the decision was made public (video was shot on a DSA event). He can obviously not have had the time to interpret the whole document.
“People will primarily look for reflections of their own ideas”. That’s how the decision was interpreted immediately after it was published. He was looking for reflections of his own ideas, what he WANTED to find, and he found it. But he ignored important legal arguments which didn’t support his belief system.
THE BURNLOUNGE DECISION
The decision is NOT in favor of Herbalife. The fact that Michael Johnson WANT TO BELIEVE it’s in favor of Herbalife doesn’t make it true.
* It’s in favor of genuine retail purchases (among the distributors themselves), purchases not related to the opportunity to earn rewards from recruitment.
* it’s not in favor of “qualifying purchases” (which Herbalife has).
I’m taking it you didn’t take into consideration Herbalife’s definition of “customers”. They included affiliates who had not recruited anyone (not retail).
Also “sales” (orders) != revenue.
The entire survey was pointless smoke and mirrors, commissioned solely to detract from the fact that Herbalife reneged on its earlier promise to create a preferred customer class.
Herbalife are slippery snakes when it comes to retail disclosure.
It leaves us where we often are in our legal system, the scenario is partly defined, and partly undefined. We know the customer sales level must be above about 5% and less than 100%, the court ruled on these endpoints.
What the middle go/no go point is, or perhaps a middle range to account for other factors, is undefined. The court didn’t have this issue in front of them, because BL was so extremely low with customer sales, it was a “no-brainer” to shut them down.
The UK held Amway responsible, India does as well. the Pokorny lawsuit held Amway accountable. Herbalife recently outlawed ANY tool profit, but only because they are getting hammered in the public and stock market. It’s about time the U.S. government held them responsible as well.
Babener like the “you know it when you see it” undefined approach because this equals billable dollars for him.
my interpretation was that the burnlounge court , does not mind the incentivization of ‘qualifying purchases’ IF [like amway ]there are rules to discourage distributors from inventory loading , and there are rules for retail .
read this portion of the order :
In contrast, in Amway the FTC found that a MLM business was not an illegal pyramid scheme. Though Amway created incentives for recruitment by requiring participants to purchase inventory from their recruiters ,”it had rules it effectively enforced that discouraged recruiters from “pushing unrealistically large amounts of inventory onto” recruits.” .
BurnLounge argues that “[t]he only difference between Amway and BurnLounge is that BurnLounge did not require inventorypurchases.” This argument is unpersuasive because“”BurnLounge required Moguls to purchase a product package to get the chance to earn cash rewards, provided cash rewards for the sale of packages by a Mogul’s recruits, and had no rules promoting retail sales over recruitment.”””
Here’s our problem…
30% of shipments is not 30% of total sales. Also, it is easy to cheat, by shipping products to a nearby friend or relative, putting the products on their credit card, then driving over with a check in hand to pay for them.
Happens all the time with Amway, it probably happens with HLF as well.
Amway doesn’t require inventory purchases either. So BL was either lying or stupid. Take your pick.
Here’s an analogy that should help: Suppose I decided to start a $10,000 pencil MLM. How many REAL customers would buy one?
If you said close to zero (I would have said zero, but there’s a LOT of idiots out there, and you may find one – LOL)…ding! ding! You are correct.
How many people who see a way to play a product supported airplane game would buy one? If you said enough to make back my money and then some….ding! ding! You are correct again.
Now, start reducing the pencil price to $5,000, $1,000, etc., until you can sell more than a few percent of the pencils to REAL customers, and you have a legitimate MLM. Comprendie?
Selling to REAL customers is the ONLY way to measure buying motivation and that’s why it is REQUIRED, or the operation is an illegal pyramid.
The 2 MLMs that I believe (and I don’t use the word as confirmation, it’s more of they appear to be legitimate, but I haven’t fully researched them) are Tupperware and Pampered Chef. To the best of my understanding, they have a lot of retail sales and no tool scams, so they pass my 2-point scam test.
Now, I think both companies’ products are overpriced and I wouldn’t buy them, but that isn’t the point. I allow the free market to decide that answer, not me.
It is interesting that both companies sell products that generally will last a lifetime, and both have plenty of “extras” beyond the basic core products, as opposed to most of the vitamin/lotion/potion MLMs that make up the vast majority of the MLM scam business industry.
OZ – Is it possible the FTC has determined that SOME (not all) “internal consumption models” could BE considered the same as Retail to non-participants?
It appears the CEO of Herbalife sees the ruling in that light.
Not as far as MLM goes, or else BurnLounge wouldn’t be a pyramid scheme.
PS. “Internal consumption model”? Either you have significant retail or you don’t.
I don’t like using the term “significant” any more than the next guy, but until this is clarified at some point that’s all we have to go on.
Herbalife immediately reorganized a part of its business the same day the BurnLounge decision was published, banning certain internal sales in jurisdictions affected by the decision.
Sales Leaders high up in the organization can no longer sell “business tools” (e.g. training and education) for profit to other participants.
“Business Tools” are about more than training and education, meetings and events. But I’m not able to identify all of them.
I covered page 1 of 2 in these quotes. I haven’t really looked into it in details.
^^Offtopic note to Tex: Typically when something is linked to here an excerpt is put up. I’ll usually mark “SEE THIS WEBSITE!” links with a vague description as spam.
I was about to tell him something like that in the “About” section, but I decided to let you handle it.
It would probably have been picked up if it had been posted in the newest Herbalife thread (or even here), if he had described what the information was about rather than promoting his own blog.
I entirely agree – however I also note that very few of the top MLMs have monthly personal “qualifying purchases”. Amway doesn’t. Some have volume requirements in order to earn bonuses, but these can be fulfilled through customer orders. Others have specific customer volume requirements.
You look at the program as a whole. Have you actually read the Burn Lounge decision?
No, the sine qua non of a pyramid scheme (as per Koscot) is when there is payment for recruiting. This is basic knowledge Oz, I’m surprised you’re not aware of it.
The issue of product purchase motivation is when some kind of product is being used as a cover for payment for recruiting. Australian Consumer Law regarding Pyramids, for example, is concerned primarily with whether people are getting products of appropriate value in return for the money they pay. BurnLounge would clearly have failed that test.
No, not everyone who registered has access to compensation – they have to fulfill certain qualifying requirements. Registration is necessary but not sufficient.
This isn’t actually available in my market, but beside the point.
I’ve just been buying some software. I was happy to pay full retail for it, but I searched around for discounts first, found them, and took advantage of them.
A couple of years ago I signed up one of my companies as a Microsoft reseller primarily to get access to software packages through reseller deals.
Yup, that’s how marketing works.
OK. So (assuming it’s possible) I sign up as a preferred customer. My brother says he likes XS and wants some. I transfer to being an affiliate so I get his points. I then transfer again to being a preferred customer, because you don’t like me being an affiliate. Then a year later my sister says she likes the XS and wants some. I change to becoming an affiliate again. I sign her up. Then I change to becoming a preferred customer again.
Why? Because you don’t think I should be registered as an affiliate if I’m not actively building the business.
There’s no other reason but your opinion!
Can you give another reason?
Not according to the FTC, Competition Canada, EU, Australian Consumer Law etc.
Well – that’s not quite true. In business and in law a retail sale is a sale to an end user
If sales to end users aren’t happening, yeah, you have a problem
Do you not understand that something can be good value at one price, and actually better value at a cheaper price?
Isn’t that about the same thing?
* Volume requirements = buy a certain amount of products each month to earn the right to receive commissions from sale to people in your own downline, and from their sales to external consumers.
* Qualifying purchases = buy a certain amount of products each month to earn the right to receive commissions from sale to people in your own downline, and from their sales to external consumers.
“They don’t have qualifying purchases, the only have Volume Requirements” will be a rather moot point if they’re both about the same thing.
No, it’s not the same thing. If the customers are buying, it’s customer money, if the distributor is buying, it’s the distributor’s money.
However, if you look at the REAL world, the prices are too high for customers to buy, so it ends up being the distributor’s money.
Go on… how did they determine “motivation”?
A has nothing to with B. I don’t disagree with your statement. What it has to do with participants though escapes me.
In other news, I like the color blue.
exactly what it was in the BurnLounge decision, and every other pyramid scheme decision before it. That being entirely attributable to a lack of retail.
Failing to qualify for commissions does not negate access to a compensation plan as an affiliate.
I think it’s a pretty big point if your market fails to have a preferred customer class.
The shortcomings of “your market” are no excuse for a lack of provided retail value.
Please don’t waste my time with idiotic hypotheticals. You know as well as I do the likely affiliate fees involved would outweigh the commissions of single-orders.
Right. Because the percentages cited in the BurnLounge decision were totally not referring to the business as a whole.
In MLM, a retail customer is not an affiliate. I couldn’t give two shits about end-users. In the hundreds of MLM reviews I’ve conducted, I’ve never once used “end-user” as a yardstick for anything.
Horseshit again. It was “retail customers”.
This is not how typical business works. This sounds like something a pyramid scheme participant would trot out.
Your customers aren’t idiots. You’re either providing retail value or you’re not. End of story.
Thanks for the tip regarding promoting my blog, I prefer to refer to it as promoting the information that is on my blog, and referring to it saves a LOT of typing on this blog.
You people are talking in circles, which will happen FOREVER as long as IBOFB is involved.
Please comment/discuss/ask questions about my pencil example above, the answers to ALL of this discussion is found in that story, and it is consistent with every U.S. court case, law, FTC/SEC position (that hasn’t been thrown out by the court system), etc., not to mention common sense and ease of audit/verification from a company/regulatory point of view.
Well a vague “NEW NEWS!” copy with a link didn’t convey much information wise.
In fairness I actually clicked through on the original link and after noting a lack of a source and unquoteable all-caps text, went ahead and nuked the comment.
I know there’s perhaps a history between you two. But as long as I think the discussion is constructive I’ll continue to engage.
What I am getting sick of though is all these interpretations of the BurnLounge decision. Anyone would think it wasn’t written in plain English.
You’ve got anjali trying to tell us that because the opinion didn’t explicitly state that the sky is blue, that the sky indeed is pink. And IBO going on about end-users, like that has anything to do with retail customers and trying to redefine how “motivation” was decided upon.
WE don’t talk about the same thing, but that doesn’t mean IT isn’t about the same thing.
It’s about PURCHASING a certain amount of products each month to qualify for certain commissions. It can be purchased for reselling purposes or for personal consumption (a certain amount of personal consumption can be completely reasonable).
If everyone repeats the same pattern, “purchase goods to unlock the income stream”, then people near the top of the organization will make a lot of money. People near the bottom will get a lot of products. Everyone will have some personal consumption. But we’re not talking about “normal consumer purchases” here.
The BurnLounge decision didn’t support that type of sale. It’s motivated by the opportunity to earn rewards rather than a desire for the products.
I assumed (wrongly) that a single click would be easy enough to see there was significant information on my blog, including a detailed explanation and a link to the actual document. My bad.
“A history” is the understatement of the year. I’ll try to be patient, and noticed you slapped him down very ably above, as I did recently here: mlive.com/business/west-michigan/index.ssf/2014/05/india_pressured_to_change_laws.html#comments
He simply twists words and meaning, then wanders off in another direction/topic, and comes back around and brings up the original settled points, over and over and over again. That’s his MO.
M_Norway, one of us is horribly confused. It simply isn’t the same thing. If all of the products were purchased by the distributors, it’s an illegal pyramid. If all the products are purchased by customers, it’s not (unless other factors make it one, such as a high buy-in rate).
Then you will need to organize the blog differently, e.g. make it easier for people to find the information they’re looking for without first having to look through different “issues” (you could have linked directly to the document itself, you could have placed in a more relevant thread, you could have included some descriptions, etc.).
The information was first accepted when I posted it here, in one of many “potential relevant threads”. Relevance = someone had brought up a related question about Herbalife, so I was able to implement your information as a part of my answer.
I didn’t NEED to quote the whole first page. That’s usually too much, there’s no need to drown people in information.
Normally I would have identified the most relevant part, and only quoted an example from that part (and provided a link to the original source).
That method will offer people a chance to decide whether or not they’re interested (before they have spent too much time and reading efforts). The interested ones will check the link themselves or ask for more information.
You look at the program as a whole. Have you actually read the Burn Lounge decision?
Go on… how did they determine “motivation”?
The looked at the products and determined the primary products were intimately linked to the business opportunity, ie the motivation for purchase was to participate in the business opportunity, making commissions prime facie payments for recruiting, satisfying the Koscot test.
First of all, you’ve already acknolwedged other pyramid scheme’s such as Airplane game, so your claim about “every other” decision is simply not true.
Secondly, the District Court in Burn Lounge (confirmed by 9th Circuit)actually acknowledged the sale of the website packages to BurnLounge reps was a sale to an end user, ie a retail sale. They also acknowledged BurnLounge had retail customer sales.
You’re arbitrarily drawing lines where it suits your conclusion.
Never said it was
It’s not hypothetical at all. Amway has several “big ticket” items where the savings as an agent significantly outweigh the registration costs. Furthermore, even if you’re just a regular purchaser, monthly savings can easily exceed the cost of registration.
You seem to be admitting here you actually don’t care what the law and other experts say about the industry?
You need to get out more. There are numerous “wholesalers” who will sell to end-users (ie retail customers) at wholesale price in exchange for yearly membership fees or some other criteria. It’s not atypical at all.
No argument there. So why are you so focused on whether someone is an affiliate or not, rather than on whether the products are of value?
No, not the same thing. If I’m in an MLM with volume requirements and I have customers generating the qualifying volume, there’s no requirement for me to purchase anything.
Now, having said that, I’m not a fan of volume requirements because I think they do clearly have the potential to corrupt the purchasing decision and – as I think you already noted – if people are buying them out of legitimate demand, then the rule is unnecessary anyway.
If you want to have a rule requiring qualifying volume, make it customer volume.
Then check post #107 and post #109?
From my point of view, IBOFB only posted a vague and general post about the same thing as “qualifying purchases”.
You have some OTHER “Volume requirements”, e.g. “10 customers”, “70% rule”. That’s about something different.
Note that the discussion was about whether the BurnLounge decision supported internal purchases or ruled against some of them.
* it supported genuine retail consumption (by distributors)
* it didn’t support reward oriented purchases (by distributors)
Herbalife clearly has reward oriented purchases. It doesn’t really matter what we call them, “qualifying purchases” or “Volume requirements”. BurnLounge clearly had the same. Not exactly the same, but it did have reward oriented purchases.
ibofb is ALWAYS vague and general, that’s part of his MO.
The court has no problem with self consumption by distributors, including being paid for that volume, as long as there is adequate consumption by non-distributor customers. This really isn’t that complicated.
Please separate between internal customers and external customers to make it clearer?
Do most of them receive some types of rewards if they buy products? The discussion was about genuine retail purchases vs reward motivated purchases. It doesn’t need to be mandatory purchases or anything like that.
Rewards doesn’t include discount on their own purchases. It’s primarily about rewards from people’s own downline, “advance in rank” rewards, “earn rights” rewards.
In Herbalife, low level distributors can qualify for Supervisor positions by making 4,000 PV purchase in one order, or by making 2 orders 2,500 PV in two consecutive months.
That’s an “advancement in rank” reward, it will maximize wholesale discount to 50% for 12 months (no problem), and Supervisors are also qualified for Royalty Override Bonus (they can earn commissions from selling products to people they have recruited directly or indirectly).
Advancement to Supervisor is a “advancement in rank” reward. The purchaser receives the RIGHT to earn recruitment based bonus(es). Pyramid schemes can clearly be about purchasing the right to earn something.
Why wouldn’t rewards include discount on their own purchases? It sounds like a reward to me, as large or small as it may be.
Why did you follow it up with, “It’s primarily about….” It’s about EVERYTHING, no need to include/exclude certain rewards.
That type of reward isn’t recruitment based. It isn’t really a “reward” either, it’s a “mechanism in trade” (similar to what a price is). It’s a reduction in price rather than a payout.
As a customer, you can buy discounted products without having to pay any taxes on the discount. It’s about money you SAVE (potentially), not about money you RECEIVE. It doesn’t generate any taxable event (for you) if you buy a product at a discounted rate.
You can even buy products at wholesale and sell them in retail (in small scale), without having to pay any taxes. In small scale.
I separated between discount and real rewards to avoid confusion, to clarify which types of reward I was talking about.
Because I focused on my own arguments, my own questions. The discussion was about genuine consumer purchases vs recruitment reward motivated purchases (both RIGHTS and PAYOUTS).
Upgrading to Supervisor (HLF) can be motivated by 2 factors:
1. The right to buy products at a discounted rate for 12 months
2. The right to earn recruitment based rewards
My focus was solely on the second point.
Sure, and the data from the major MLM’s I’ve studied indicates that the majority of people purchasing as distributors are NOT receiving some type of reward.
For example, in Amway, data revealed some years back showed that more than half do multiple purchases, whereas less than 15% earn bonuses on downline volume – in other words, they are purchasing and continuing to purchase without any financial incentive to do so.
This is an issue specific to Herbalife and I would not be surprised to see it disappear following the FTC investigation, even if there is no formal case.
IMO I agree it’s a clear case of providing a direct (and immediate) financial incentive to inventory load. Now, IMO their data doesn’t indicate it’s enough of an issue to make them illegal, but for me it’s certainly an “incentive” they should remove.
Are you aware the FTC and SEC also include ongoing internal sales with little to no external sales as signs of illegal pyramids? And why WOULDN’T ongoing sales be considered ongoing rewards for the initial recruitment?
I see any coupon as a reward. It is also a lowering of price. Why shouldn’t I view this as a reward?
I think you’re slicing and dicing this up into such small pieces that nobody can understand the end result. There is no need to be so granular.
Please define small scale, I don’t think this is true. Even eBay charges taxes for small sales.
Feel free to over-analyze to your heart’s content, but I don’t see the value of it. It also gives people like ibofb (not to mention the lawyers) fuel to confuse matters even more than he has so far.
Just because most Amway IBOs don’t get paid for downline volume doesn’t mean they aren’t trying to sponsor others, AND getting ripped off by the Amway Tool Scam while they do so.
I wouldn’t be surprised to see the HLF front loading go away, either, based on the pressure from Ackman, let alone the FTC, SEC, DOJ, FBI, and at least 2 AGs that have announced investigations, Illinois and New York and who knows how may other AGs that haven’t announced investigations. And it’s FAR from unique to HLF.
“Sure” means they DO receive some types of rewards, if you answered what I asked about. The rest of that part of your answer was about something else?
I didn’t ask you about reports you had studied. You shouldn’t try tricks like that here, we don’t offer that type of “communication training”.
Of course it was specific to Herbalife. I only used Herbalife as an example, to help you identify what I was asking about.
It was clearly marked as EXAMPLE:
You’re avoiding direct questions as best as you can, by answering something else. We will only waste time with that strategy. Try to find another audience?
Your strategy has failed here. It will only bring you deeper into trouble if you continue with the same strategy. I won’t recommend you to try other tricks either.
I tried to focus on my OWN discussion, the questions I had asked myself rather than the questions you wanted me to ask.
I have separated between wholesale discount and recruitment based rewards because they’re different. I don’t have any “issues” with rewards in general or with MLM in general.
Or in other words, there was no retail.
Thankyou for your time.
Airplane games don’t have retail.
Horseshit. At no point anywhere in the opinion was an “end-user” reclassified as a “retail customer”.
If that were the case, there’d be no issue with the 92.6% of BurnLounge’s revenue being sourced from affiliates.
Sorry, was there a point hidden in your waffle?
If Amway are selling overpriced products that offer no retail value, that’s on them.
Try a little less “seem to be” assumption and instead focus on what was actually said.
While we’re at it, a little less “seem to be” when reading the BurnLounge opinion wouldn’t hurt either.
Not in MLM. Preferred customers uniformly do not come with a membership fee.
As was the case in the BurnLounge appeal denial, no retail is evidence of a lack of product value. It’s the standard benchmark for pyramid scheme analysis.
Always is, always will be.
No, I must have misunderstood you. The “sure” is to the second part of your question. The response was to the first. I thought it was a clear answer to your question, apparently not. So here it is – no, most of them do not receive some kind of rewards it they buy products
Sorry? So how do you expect me to respond? Without any research or data to back my answer?
This article is about BurnLounge, not Herbalife, and the discussion is about motivation for purchase in MLM in general. You gave a Herbalife example of a potential problem, and I agreed with you that problem potentially exists in Herbalife, while also pointing out it doesn’t exist in another MLM, Amway – so clearly it’s not the MLM model per se that’s the issue.
To be honest I’m not at all sure why you’re taking offence at my responses. They are good faith comments discussing the points you raise. Even re-reading them I still don’t see where you’re seeing an issue.
(Ozedit: End-users have nothing to do with retail customers. Spam removed.)
Forget “most of them”, because that can be rather vague. It doesn’t really tell me anything if less than 50% upgrades to Sales Leaders or similar positions.
Do ANY of them make recruitment reward motivated purchases, e.g. similar to the Herbalife example (it doesn’t need to be very similar either)? “Recruitment reward” in that example was the upgrading to the right to receive Royalty Override Bonus after a 4,000 PV purchase, it was not about discount on personal purchases.
If you’re in a business, you normally should have first hand information about the system. “Research reports” have been used rather often to disguise the realities, e.g. the research report Herbalife produced when it was asked about retail customers.
You could have tried it on another type of audience, but don’t try it here.
It was in the use of “Research reports”. The question was about your personal downline, the area where you potentially could have first hand information.
If people make claims about something, e.g. retail customers, I will usually ask them direct questions about their own situation. I will ask them all types of unoffensive questions they normally should be able to answer first hand.
A TelexFree promoter made a claim that his sponsor had 1,500 retail customers, “Chew on that, boy”.
I asked him “How many retail customers do YOU have? Only include those who actually have paid MONEY (not internal payments from your own back office)”.
He disappeared immediately, and has never returned making similar claims. The question was only offensive if he had made a false claim.
End users have something to do with customers. End users could be distributors (internal end users) or they could be customers (external end users). The fact is there are very few end user customers in most MLMs, making most MLMs illegal pyramids.
IF the court had found the product to have inherent value , the court may NOT have had a problem by the high internal consumption .
in the burnlounge order the court has reflected on several issues and not JUST retail retail retail . the court recognized that internal consumption was valid and commission able BUT had a problem with the internal consumption in Burnlounge for SEVERAL reasons , lack of retail being ONE of them
1] “The district court also found that BurnLounge’s marketing focus was on recruiting new participants through the sale of packages”- this means a] the focus was recruitment and not on retail [ ie no ‘rules’ for retail ] , and b]participants HAD TO buy a package to earn recruitment commissions without any ‘rules’ for inventory loading.
2] ” David Nolte,provided estimated values of the merchandise in theBurnLounge packages that were not credible or supported by the evidence” – this means the products were viewed as more or less widgets by the court ,a cover for a pyramid scheme. an important point to note here is that in deciding the ‘value’ of the burnlounge product , the court did not rely on how much the product was retailing, but established the cost of the package independently ,probably by some comparison to other music products .
even in amway 1979 , the value of the products , was measured by the court on the basis of comparison with other products , and not on the basis of its retail sales . what you seem to say , oz , is that everything should be measured using retail as the scale . everything is not about retail , there is a whole nuanced world out there .
Why did the court determine the product didn’t have inherent value? Because of the high internal consumption (ergo lack of retail).
YOU SPIN ME RIGHT ROUND BABY RIGHT ROUND, LIKE A RECORD BABY RIGHT ROUND ROUND ROUND!
Of course. But on the issue of whether or not BurnLounge was a pyramid scheme or not, that was because they had insignificant retail.
There’s that phrase again…
What’s with including “IF” and “MAY” in a discussion about what a court “DID” decide ??
Thank goodness we have judges and courts and not “Anjalis” deciding cases on individual merits, otherwise court cases would last decades by the time each “IF” and “MAY” had been dealt with.
Legislators make the rules, courts enforce them.
What’s with including “IF” and “MAY” in a discussion about what a court “DID” decide ??
Thank goodness we have judges and courts and not “Anjalis” deciding cases on individual merits, otherwise court cases would last decades by the time each “IF” and “MAY” had been dealt with.
Legislators make the rules, not courts.
IF the court had found the product to have inherent value, they would have had real customers.
Correct. It analysed how the business had operated in practice, not just retail retail retail.
Lack of retail is one of the main reasons for WHY people at the bottom will lose money. If people realisticly could have made money on sale to external consumers, many more would have been able to make money, not just those few near the top.
The other main reason is that people paid for the opportunity itself, paid for the right to earn recruitment based rewards. That’s necessary in a pyramid scheme, it will need high payouts to attract income opportunity seekers. People will need to “see” themselves making money to part with their own money.
Don’t say I didn’t warn you about ibofb. LOL
If you could be so kind as to list the rules legislators have made for MLM ? They are such open ended rules, with so many ‘if’s and ‘but’s’ it’ll spin you RIGHT ROUND AND ROUND .
products CAN have inherent value and YET, little or no retail , if there are 1] no rules to enforce retail , 2] the retail margin is low , or 3] just because people can earn more long time money from building a downline, and wont waste too much time on retail unless they are not ‘encouraged ‘ to do so by way of ‘retail rules’ .
if people at the bottom DO NOT have to make any qualifying purchases , why will they lose money ?
What makes MLM so special it needs its’ own set of rules ??
There’s plenty of “rules” in existence already.
MLM and its’ supporters are making MLM a special case, no one else.
So, who has been unfairly prosecuted ??
Which MLMs have been targeted which DIDN’T have to make substantial changes to they way they operate / ed ??
What makes MLM so special it needs its’ own set of rules ?? – littleroundman
the ‘method of selling’ in MLM is contrary to narrow channel retail selling used by traditional trade . do you find external sales/internal sales to be the issue in any other industry ?will not specific industries have a specific set of rules , say for instance the pharma industry ? the basic trade rules will apply to all , but there will be some industry specific rules too .
1]retail revenue : 30 % sales drop shipped directly to customers
distributors of herbalife are saying this :
so , we can consider the 30 % sales to be retail sales.
Because it primarily revolves around distribution of money among participants? Then it has got its own laws already.
Internal sales isn’t an issue in itself. “If people are making purchases as consumers, it isn’t important whether they’re employees buying from an employer’s retail store or external customers buying from the same retail store.”
The problem is that people can’t clearly identify when they’re consumers and when they’re participants in an income opportunity. They’re NOT buying as consumers in many cases, i.e. they don’t have a consumer type of purchase pattern. They’re not buying as resellers either, most of them are buying as irrational income opportunity seekers.
Why would a company that chooses the MLM business model, which relies ONLY on word of mouth promotion, want END users?
Fact is they don’t. Duh, right? This should be OBVIOUS due to the system itself. Amway sums it up nicely with their motto, “Buy from yourself and teach others to do the same”, translated to self consumption and recruiting.
Char, that may have been the motto of some Amway groups, but it’äs never been Amway’s motto. In fact Amway has required customer volume in order to earn bonuses on downline volume. In the last 5 years they’ve implemented quite strict reporting and monitoring of this.
Amway also doesn’t rely only on word of mouth, it spends millions on advertising.
(Ozedit: end-users have nothing to do with retail customers. Spam removed.)
Retail is a part of the whole decision, e.g. in purchase patterns and the facts of the case. Retailers also counted as retail users of the service (as opposite to the Moguls). It was also about music sales, but that part wasn’t halted / wasn’t analysed in details (it was indirectly analysed in some parts).
The problem when analysing court orders is that people will focus on different parts of the orders, and interpret things differently. “People will primarily look for reflections of ideas they already have”.
You can point out that others have ignored some parts, while others can point out that you have ignored parts. Studying a court order as a Bible doesn’t make much sense either.
The answer to your questions are in the pencil analogy, grasshopper:
Above message is for anjali, but it also applies to a LOT of people on this site.
Nope. It’s wordsmithing BS.
Who the products are sent to is irrelevant. Where the revenue comes from is what matters.
Herbalife quite obviously has less than 31% retail revenue, or they’d just spit it out. They are deliberately operating in the grey and trying to cover it with smoke and mirrors statistics that are neither here nor there.
What, you don’t think if the company had significant retail revenue they’d be shouting it from the rooftops?
okay , fine , have it your way . let end users be separate from retail customers
according to vandernat [the pill], to be legal an MLM should have >50% revenue from legal commissions. after omnitrition and before burnlounge , this legal commission was achievable ONLY from retail . NOW ,sales to end users is also commissionable and is an additional income to the revenue of the MLM which will help carry it over the 50% mark.
so, even if you insist retail customers are separate from the end users in the pay plan , no worries , their financial impact on the MLM is the same now.
uh what ? the products are shipped to non members and so the revenue will come from the non members = retail ?
If end-users mattered, BurnLounge would not be a pyramid scheme.
There was only 8% or thereabouts retail. That’s why BurnLounge was a pyramid scheme.
End-users including affiliate purchases makes the class entirely irrelevant for pyramid-scheme analysis. It’s easier to just use the retail/affiliate figures, as the 9th Circuit and the court before it did.
People are getting real hung up on this end-users crap. Why I have no idea, it was never put forth that internal consumption was illegal. Yes some hardliners might adopt that notion but it was never the case here.
I’m getting pretty close to just nuking any comment that goes on about end-users. Talk about non-issues.
Ah, you have pay close attention when dealing with Herbalife statistics. They are masters of being sneaky.
Note they don’t mention retail revenue, they instead talk about where orders are shipped. They don’t at any time mention who’s paying for the orders or why… as that’s evidently against Herbalife corporate policy:
“Hear no retail, see no retail, speak no retail.”
the ninth circuit court said : end users matter , but , in the SPECIFIC instance of burnlounge they dont matter .hence , end usage of burnlounge was ignored by the court, and BL was declared a pyramid.
the ninth circuit court said : retail is low and this is ONE of the reasons BL is a pyramid.
the ninth circuit court said: omnitrition has put undue pressure on MLM , from now on, some internal consumption is legally commissionable , so relax people!
All they did was clarify the definition of “end-users” (which as far as I’m concerned was never under dispute).
BurnLounge still needed retail to not be a pyramid scheme. If they had retail, they wouldn’t have been a pyramid scheme.
Given the above is absolutely conditional, it’s all that’s relevant (anything else doesn’t matter).
This is the crap I’m talking about. Internal consumption was always commissionable. This was never questioned.
…and one day, oz morphed into a conspiracy theorist 🙂
To clarify something about court order or decisions …
Normal components are
* Formalities: The court / regulator itself, parties
* The case itself, facts
* Law rule (relevant legal sources)
* Law applied to facts
Discussions around court orders have a tendency to be detail focused rather than focused on the whole. That doesn’t make much sense.
Here’s some other details about Legal Method, translated from a Norwegian source. Legal Method = how a regulator or a court will analyse and handle a case, “the basic method”.
You probably got it deleted because you REPEATED something that already had been discussed or posted earlier in this thread, “nitpicking on details”. You will probably find exactly the samme part quoted earlier in this thread.
You will also find some CONCLUSIONS in post #91, but not the type of conclusions you expect.
When we already have analysed it and we already have pointed out that the focus on details doesn’t make much sense, most people will accept being deleted without putting up a Drama Queen attitude.
It doesn’t make much sense looking at the details in that decision separated from a whole.
“Consumer purchases” are perfectly legal. It doesn’t really matter WHO you buy it from. If you’re able to make the income opportunity part of a MLM program become rather unattractive, and make the product purchase bacome attractive, then the problem will probably solve itself.
Oz “it was never put forth that internal consumption was illegal.” If you include the aspect of earning bonus for internal consumption, yes it was put forth, by the FTC. And the court disagreed, so the FTC lost that argument.
if the product is attractive , its purchase, both internally and externally , will become attractive , and this will make the income opportunity MORE attractive .
Here’s some additional factors to take into consideration when reading a court decision.
* what is the decision about? The whole case or a part of it?
The Ninth Circuit decision is about the cross appeal = defendants arguing about how the law have been interpreted and applied to the facts, and about amounts for disgorgement (from FTC and one of the defendants, cross appeal).
One of the final orders (the orders were amended) had 2 layers of “for the purpose of this order” and “for the purpose of this definition”, which it used to exclude retail sale from the definitions.
It caused great frustration among MLM attorneys and other MLM professionals that retail sale was excluded that way. The cross appeal was partly about that, i.e. it was reflected in several of the arguments.
Kevin Thompson recommended MLM companies to increase their retail sales after reading the 2011 order, “make sure to outrun the slowest person in your group if you’re being chased by a grizzly bear”, the idea that FTC will hunt down the worst ones first.
(Final order 2011, Kevin Thompson)
The order was amended after 2011, I only picked up the first “BurnLounge Final Order” videos I found.
“Motive and marketability” was the core, in Kevin Thompson’s view. Low margins for music contributed. “The best way to prove marketability is to show some real customer sale”.
Why would somebody want to be involved in an unattractive MLM program? Again, you’re making this FAR too complicated.
As long as there are adequate sales to outside customers and this is where the bulk of the profit comes from, there’s not a problem. This is a VERY attractive income opportunity MLM program, the problem is most people don’t like to sell, so they come up with all kinds of elaborate tricks.
I should have specified “the recruitment based parts of the compensation plan” (make those less attractive). The sales based parts of a compensation plan isn’t really any problem.
The problem is that people are joining recruitment based income opportunities for the chance to earn rewards that derives primarily from recruitment.
To fix that problem, you will need to change something in the payment system or change something in the reward system. The system will need to be less focused on recruitment and more focused on sales.
CHANGE THE LAWS, OR CHANGE THE BUSINESSES?
Anjali want to make changes in laws, e.g. make recruitment based commissions be accepted as legal. I believe it’s better to focus on the business functions rather than laws (it’s more easy to change something directly under your own control as a business owner than it is to change something “out there”).
MLM companies want the laws to be adjusted to meet their own needs. They want laws to be designed especially for that purpose, to protect their own needs and wants. They want laws to protect their own profit making ability rather than the interests of the society as a whole. That’s not a good idea.
ALL business types have the same problem = the laws have several restrictions in direct conflict with their own wants and needs as businesses. You even have laws against dumping toxic waste, laws against hiring a low cost work force, and laws about taxes.
Business people should clearly be able to solve business problems unless they interpret them as something different. Interpreting a business problem to primarily be about “some legal issues” will make the problem become rather unsolvable.
Why would qualified business leaders focus on something outside their own control? The answer is probably “because it will be more profitable if the LAWS can be changed, rather than if WE would need to change something”.
I want some laws adjusted too, to make something become more profitable for myself. So I’m clearly interested in law changes of that type. 🙂
Then I would agree with you.
Anjali won’t be able to change the laws, this would legalize Ponzi and Illegal pyramid schemes, which is NOT going to happen.
However, keep in mind the FTC and SEC, on their websites, consider ONGOING, not just the initial sponsoring rewards, to be “recruitment based income” as well, making external customer sales still important.
In other words, if there was ZERO profit from sponsoring somebody and little to no retail sales, the MLM is still an illegal pyramid. I don’t think the FTC/SEC has brought one of these cases to court yet, because there are so many blatant examples of the initial sponsoring rewards issue, but I believe this time is coming (Amway) and it will be viewed favorably by the courts.
While I am not against changing the laws, this will take years with no guarantee the outcome will be adequate. Also, I think the current laws are sufficient, as FTC Section 5 prohibits “unfair and deceptive” practices, and there is adequate case law that defines what is considered unfair and deceptive.
There’s of course “a few” problems with my “Change the Business rather than the Law” idea = MLM will need new types of products, and probably new types of consumers. 🙂