FTC: MLM companies with little to no retail activity are illegal
Retail sales requirements within an MLM opportunity is perhaps the most decisive issue facing the industry today.
Proponents of pyramid schemes argue that affiliate purchases of product should count as retail sales. I myself argue that to permit as much would open door for product-based pyramid schemes to operate freely.
This stance is strongly rooted in the definition of an MLM pyramid scheme which, regardless of the company, has commonality with respect to a lack of retail sales.
If you start trying to change the definition of a retail sale instead of encouraging retail sales activity itself, you’re just trying to make excuses for pyramid schemes.
I’ve held this opinion for years here at BehindMLM and it forms the base of pretty much every MLM review I’ve written.
On December 15th the FTC published an article that all but confirms retail sales are indeed only sales to non-affiliates.
Penned by Lesley Fair, a senior FTC attorney, the article in question is titled “Dismantling a pyramid: Lessons from the Vemma settlement”.
Although not explicitly directed at anyone in particular, to me it reads like a directive aimed squarely at the MLM industry itself.
Fair begins by going over the FTC’s allegations against Vemma. Namely that it was a pyramid scheme with little retail activity taking place.
According to the FTC’s complaint, rather than marketing the company’s health drinks to the general public, the defendants encouraged participants to qualify for bonuses by buying products themselves and recruiting others to do the same.
The result, the FTC charged, was a classic pyramid scheme that compensated participants mainly for enrolling others in the network, rather than for retail sales based on legitimate consumer demand for Vemma’s beverages.
In stopping Vemma from paying affiliates to recruit new affiliates, Fair claims the settlement
shifts the focus away from signing up new recruits and puts it back where it belongs: on selling products to people who aren’t part of the network structure.
By doing this, the company incentivizes sales over recruitment.
Couldn’t be more clearer.
The second half of Fair’s article goes on to cite similar regulatory action by the FTC against Herbalife and Fortune Hi-Tech Marketing.
Are the Vemma settlements, the FTC’s $200 million Herbalife order, and the recent action against Fortune Hi-Tech Marketing (FHTM) striking a familiar chord?
They should because … the raison d’être for any legitimate business is to sell products to people who aren’t affiliated with the company.
This isn’t just a theoretical point. An MLM’s compensation plan should reward real sales to customers outside the network.
That’s not how Vemma and Herbalife operated, and the FTC alleged that both companies ran afoul of the law in different ways.
The FTC orders require Vemma and Herbalife to change their business models to comply with the law, and given their different business structures, use different remedies to reach that result.
What other MLMs do will depend on their structure and circumstance. But here are two key features that the Vemma and Herbalife orders have in common.
Both companies will have to distinguish between the people who join just to buy the product vs. participants who join to make money – and they must track those sales separately.
And both will have compensation schemes that incentivize sales to people outside the network instead of recruitment of new participants.
Again, couldn’t be clearer.
As per the FTC, retail sales in MLM are defined as sales to non-affiliates. And if your company has little to no significant retail activity taking place, it’s a pyramid scheme.
Oh and if you’re in an MLM company purposeful avoiding the US, the FTC’s clarification on this matter should make it abundantly clear why. Ditto anyone campaigning to have the definition of retail sales legally changed.
The exception would be a Ponzi scheme, save for the fact each and every MLM Ponzi scheme shut down in the US has had a pyramid scheme component.
Looking forward, this is the most recent statement by the FTC regarding pyramid schemes and retail sales in the MLM industry. Personally, I think it’s great to see common-sense has prevailed.
I’ll certainly be referencing this article any time someone tries to argue affiliate purchases are retail sales or that retail activity doesn’t matter. I suggest you do the same.
I don’t believe MLM “as we know it” can exist under these rules. A good thing!
The way MLM has been promoted was obviously for a reason. It’s how people were lured in which made the founders wealthy. Now, the language might need some changing. Here’s just a few:
Opportunity meeting = Learn how to sell shakes by pounding the pavement.
Business owner = Commissioned salesman
Residual income = Monthly sales quota required
Nothing wrong with being a salesman of products if you want to do that.
Being one without territories, where I have to pay for the privilege, customers having access to my pricing, and making $3 on $250 worth of product sold sounds like a pretty crappy deal.
Factor in the higher cost of products making them more difficult to sell, as well as not being on a store shelf and using only word of mouth advertising, and the whole thing crashes like Vemma.
MLM will either fake their retail sales, or cease to exist. The whole system must change for it to work – but then it wouldn’t be “MLM”.
even though the MLM industry in the US is pretty old [100 years or so?], there is no law defining what MLM is and what the boundaries are.
courts have identified what a pyramid scheme is by using the koscot test, and this has been used to check the legitimacy of an MLM.
this would also be acceptable, except that koscot uses the term ‘ultimate users’ instead of simply using the term ‘retail’. so according to koscot, affiliates can only be paid compensation which is ‘related’ to the sale of products to ‘ultimate users’.
since then, we’ve seen an almost 40 year standoff between the MLM industry and the FTC, squabbling over the definition of ‘ultimate users’.
according to the FTC, ultimate users are retail customers and for the compensation to be ‘related’ to such sales, retail sales should be the majority sales.
according to the MLM industry, affiliates are themselves ultimate users, and sales to them for self consumption equate to retail sales, and hence [outside] retail need not be the majority sales. i suspect there is even a section of the industry that would be happy with no [outside] retail requirement at all.
even through decades of MLM related litigation, courts have not been able to define ‘ultimate users’ in full yet [though it ruled in burnlounge that ultimate users can be affiliates too]. most pyramid scheme cases have had very little to no retail, and the court did not need to address the question of how many ultimate users have to be outside the MLM, for it to be legit.
many times, cases like vemma or herbalife where there is a fair amount of retail going on, and the court could have had an opportunity to make a closer call on this issue, end up in settlements as neither the FTC or the MLM company wants to risk hearing what the court might rule.
so, both the FTC and the industry, stand at their pulpits sermonizing about what MLM should be, and while both have the freedom of speech, neither has the final word. all this finger wagging serves no purpose except to create discord and distrust.
what MLM should be, should either evolve through courts as ‘caselaw’ or by consensus via parliament in the shape of a law.
since nobody has shown preference for a court evolved law so far, let there be a law for MLM via consensus, through voting in the US house and senate.
HR 5230 introduced by republican representative marsha blackburn in may 2016, is good opportunity to achieve this consensus.
this bill has been proposed and sent to the committee for consideration. i’m sure it will be debated and revised and perfected, before being put on the floor for voting. let the industry and the FTC and experts put their views forward and a workable solution be reached.
when there are systems to solve problems and provide guidance why waste time arguing?
Oz, You have correctly identified the polar positions of the FTC and the direct selling industry on the meaning of “ultimate user” under Koscot. However, the FTC position is just that, “a position”.
The position is reflective of neither law, nor case law. That chapter is still to be written. Your commentator, Anjali, may be closer to the mark. See my article published December 12, at the WorldofDirectSelling.com for a detailed discussion and analysis:
Fact Checking the FTC’s New Legal Guidance
By Jeffrey A. Babener © 2016
(First Published in World of Direct Selling)
Sir, you are entitled to your own opinion. You are not entitled to your own facts.
Senator/Ambassador Daniel Moynihan
Shifting Sands
In her first post-FTC v. Herbalife settlement presentation, FTC Chairwoman Edith Ramirez argued that it was time to ratchet up regulation of the direct selling industry, and not a time to “put the brakes” on more regulation of the $36 billion industry and its 20 million strong sales force.
It was clear that the FTC and the Direct Selling industry are on the same wavelength as to a basic goal that the direct selling industry should prosper through effective and ethical practices. But, there remains a respectful divergence on methodology.
During her well-articulated speech to the October, 2016 DSA Policy Conference, she enunciated a wish list for new legal standards that would abandon a 40-year old gold standard, the Amway Safeguards Rule, and that would also upend and call into question decades of industry accepted business practices.
The Chairwoman argued for:
1. Abandonment of reliance on the Amway Safeguards Rule as a key test for legitimacy.
2. Effectively creating a new legal standard patterned after those requested by the FTC in the FTC/Herbalife settlement that, in reality, may upend decades of industry accepted practices and rewrite 40 years of court legal standards.
a. The existing Court standard derives from:
(1) Koscot … Compensation to upline should be based on sales to the ultimate user.
(2) Amway … A program that enforces the Amway Safeguards of a retailing mandate to qualify for MLM commissions, a 70% rule that prohibits ordering unless product is sold or used and a reasonable buyback policy for inventory for terminating distributors, if effectively enforced and in conjunction with avoidance of inventory loading, is indicative of legitimacy. (Also, Amway did not challenge recognition of distributor personal use purchases as legitimate sales to the “ultimate user”.)
(3) BurnLounge … The primary motivation for distributor purchases should be the purchase of product in reasonable amounts for resale or use as opposed to mere qualification in the program for rewards. A pyramid analysis will be “fact driven.”
b. On the FTC wish list for a new paradigm for legitimacy is:
(1) Abandonment of the reliance on the Amway standard.
(2) Redefining Koscot to require compensation to upline to be based on sales to the nonparticipant retail customer rather than the ultimate user.
(3) Adopting the FTC/Herbalife settlement “punch list” of mandates in lieu of the factual analysis of “primary motivation,” called for in BurnLounge, including:
(a) Only one-third of MLM compensation to upline should come from personal use by downline distributors, whether or not such purchases are reasonable in quantity for use by the distributor “ultimate user.”
(b) Autoship to distributors should be prohibited.
(c) Monthly activity volume requirements may not include any purchases by distributors.
(d) Tracking of performance activity connected to wholesale purchasing should be banned.
Query, are the premises for justifying the new FTC enforcement position well founded?
Although reasonable minds may differ, history does not necessarily support the Chairwoman’s position. Does it matter? Probably. Why?
When a new proposed enforcement policy may so profoundly impact the business and legal landscape, it is worth visiting the issue. Although the “black and white” terms may have been quite acceptable to Herbalife in its own factual circumstances, those stringent mandates are at odds with how the mainstream direct selling industry has operated for many decades and may prove quite disruptive.
At a minimum, the threat of FTC prosecution, pursuant to the new suggested paradigm, has caused major uncertainty in the direct selling community … with attendant options of “fight,” “capitulate” or “find common ground.”
Abandoning Amway
In abandoning support for the Amway Safeguards Standard, Chairwoman Ramirez stated as a premise:
I want to note that, although this is less common today, in the past some MLMs have sought to rely on policies similar to those referenced in the Commission’s 1979 Amway decision – specifically, the so-called “buy-back,” “70 percent,” and “10 customer” rules – as a sufficient basis for assuming that their product is purchased by real customers to satisfy genuine demand.
This reliance is misplaced. The Commission found those policies were effective given the specific facts in Amway,17 but neither the Commission nor the courts have ever endorsed those policies for the MLM industry at large.
FTC: Industry reliance on the Amway Safeguards standard is misplaced in that it is not such an important legal precedent to the courts.
Well, this is not quite accurate. Actually, Amway has been an integral part of a “gold standard legal analysis” for 40 years in most leading cases right up to, and including, the most recent case, U.S. Court of Appeals for the Ninth Circuit ruling, FTC v. BurnLounge, Inc., 753 F.3d 878 (9th Cir. 2014).
BurnLounge is typical of reliance on the Amway standard by courts in leading decisions. It is part of a fabric of decisions, such as Koscot, that contribute to the analysis, with the understanding that application of the Amway analysis was fact driven and, important, but not determinative, of the final conclusion.
For instance, the Omnitrition court noted that, in the presence of inventory loading, adherence to the Amway Safeguards did not guarantee “safety.” Similarly, where the evidence was that distributor purchases were primarily motivated by desire to qualify in the plan, no safety existed. (BurnLounge) Or where there was no encouragement to mandate retail sales or promote retail sales, safety disappeared. (Amway)
And, if a company failed to enforce the Amway Safeguards standard or fell short of its implementation, no safety existed. But, nevertheless, courts embraced the Amway Safeguards standard and relied on it, along with the original Koscot mandate that compensation must be tied to sales to the “ultimate consumer” as a base starting point in pyramid cases.
And, whether or not the FTC future prosecutions move away from pyramid bases to mere allegations of “unfair practices that are likely to cause injury to the public,” it is difficult to imagine courts not returning to 50 years of pyramid case analyses when faced with prosecution of a direct selling company.
In actuality, the BurnLounge court cites Amway multiple times. Here, in the BurnLounge decision, the Court indicates that the Amway precedent is alive and well in current court analysis:
In contrast, in Amway the FTC found that an MLM business was not an illegal pyramid scheme. In re Amway, 93 F.T.C. at 716-17.
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.” Id. at 716. BurnLounge argues that “[t]he only difference between Amway and BurnLounge is that BurnLounge did not require inventory purchases.”
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 Mogul’s recruits, and had no rules promoting retail sales over recruitment.
And similar analysis and respectful reference to the Amway safeguards is to be found, over four decades of legal rulings, cited sometimes in passing, and also frequently in-depth, in more than two dozen reported cases.
Creating a New Legitimacy Paradigm
FTC: The Settlement terms in FTC/Herbalife represent a more appropriate approach for the analysis of legitimacy:
Among those terms:
Only one-third of MLM compensation to upline should come from personal use by downline distributors, whether or not such purchases are reasonable in quantity for use by the distributor “ultimate user.”
In her presentation, notwithstanding almost 50 years of Koscot reference to “ultimate user,” the Chairwoman argues that “ultimate user” must be defined as a “real customer,” and that a “real customer” only “fits the bill” if that customer is a nonparticipant retail customer.
This description represents a “sea change” in what is an “ultimate user,” defies codified recognition of “personal use” in more than a dozen states and goes begging for support in a long lineage of case law.
And, the one case cited by the Chairwoman to demote legitimacy of personal use, Omnitrition, was actually a case that highlighted the major abuse of Omnitrition International, in failing the Amway standard, by requiring distributors to engage in “inventory loading,” buying “exorbitant amounts of products” and “thousands of dollars of products” in order to qualify for commissions in the program.
Although a reference, in passing, is made to the effect that personal use alone may not satisfy sales to the “ultimate user,” no language in Omnitrition suggests or justifies devaluing “personal use” by two-thirds. Again, the gravamen of abuse in the case was promotion of inventory loading to qualify for commissions, and not “personal use.”
Other than the passing reference in Omnitrition, no court case has ever challenged the “giving of credit” for “personal use in reasonable amounts” as voiding the transaction as a sale to an ultimate user, let alone, limited such credit as drastically as the FTC suggests should be considered as the legal standard.
It is true that courts have condemned inventory loading and have examined for factual evidence that purchases were for “qualification” rather than reasonable use. But, they have not rendered personal use purchases “second class citizens” in the world of direct selling.
In fact, as noted, more than a dozen states have codified the recognition of personal use purchases as legitimate end destination ultimate user purchases, which are due full credit.
The FTC is effectively proposing to reverse the presumption that one buys product to be used, until shown otherwise, into a presumption that, if a distributor buys a product, the presumption is that the purchase is for nefarious qualification purposes of recruitment such that the purchase does not deserve full credit in the sales process.
The FTC is seeking to achieve by “guidance” what it could not get a court to accept in BurnLounge. In the BurnLounge appeal the FTC argued against validation of personal use purchases. However, the FTC position was rejected by the U.S. Court of Appeals for the Ninth Circuit in BurnLounge:
The FTC counters that ”internal sales to other Moguls cannot be sales to ultimate users consistent with Koscot.” Neither of these arguments are supported by the case law.
(Page 18 of opinion)
And this “scarlet letter” on personal use, is contrary to the FTC’s own position in its 2004 Advisory Opinion:
Internal Consumption
Much has been made of the personal, or internal, consumption issue in recent years.
In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme, The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.
It is important to distinguish an illegal pyramid scheme from a legitimate buyers club. A buyers club confers the right to purchase goods and services at a discount.
If a buyers club is organized as a multi-level reward system, the purchase of goods and services by one’s downline could defray the cost of one’s own purchases (i.e., the greater the downline purchases, the greater the volume discounts that the club receives from its suppliers, the greater the discount that can be apportioned to participants through the multi-level system).
The purchase of goods and services within such a system can, therefore, be distinguished from a pyramid scheme on two grounds. First, purchases by the club’s members can actually reduce costs for everyone (the goal of the club in the first place).
Second, the purchase of goods and services is not merely incidental to the right to participate in a money-making venture, but rather the very reason participants join the program. Therefore, the plan does not simply transfer money from winners to losers, leaving the majority of participants with financial losses.
And, even the FTC’s primary expert economist in many of its pyramid prosecutions, including BurnLounge, Dr. Peter Vander Nat, has shrugged off the need to “penalize” or automatically stigmatize a personal purchase sale:
Below is an excerpt from Dr. Vander Nat’s deposition in the BurnLounge case:
Vander Nat BurnLounge deposition on issue of internal consumption … November 12, 2008:
218-219
Q. Under the heading internal consumption, the second sentence. “In fact the amount of internal consumption in any multilevel compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme.” Do you agree with that sentence?
A. I think so. Yes. I think that that is consistent with what I said this morning on this point.
Q. What if the sentence read a little differently? What if the sentence read the amount of internal consumption in any multilevel compensation business is not a factor in the analysis of the FTC’s determination of whether or not a plan is a pyramid? Would you still agree with the sentence?
A. I think I would. I said this morning, when I think back on this testimony, that I expect there to be internal consumption in the organization and the fact that it’s there is itself not determinative one way or another. I think I said that.
220
Q. And that is the sales that you consider in your analysis. And you exclude from that sales within the distribution network.
A. I said I exclude from it those purchases that people are required to make in order to enter the business opportunity. That’s exactly what I said about it.
Q. And isn’t that at least some of what internal consumption is?
A. No. I don’t think that that’s what’s being referred to here. I mean, normally when you’re talking about internal consumption, if you just use the word generally, it means people wanting to use the product for their own use just because they like the product.
I mean, that’s normally what the phrase refers to. And I simply made this other qualifier about it. Whatever you are required to purchase of consumable goods in order to enter the business opportunity, I count that as part of your business investment because you’re required to buy it as part of the investment.
228
Q. Do you have any opinion as to a percentage of sales within a distribution network of a company that would not make it more likely that there be a finding of pyramid?
A. No. As I’ve said, internal consumption doesn’t count one way or another with me. I’ve given all the factors that I use. Internal consumption is itself not one of the factors.
And notwithstanding his declarations in many FTC pyramid prosecutions that “retail sales” are the dividing line, Dr. Vander Nat cuts to the chase in his BurnLounge deposition that, in fact, the acid test is whether or not distributors are making payments as a gateway to the business opportunity, i.e. purchases incidental to the business opportunity. In this regard, he is on the same wavelength as both the case law, 2004 FTC Advisory opinion and the position of the direct selling industry.
Page 130 of the Vander Nat BurnLounge deposition:
I believe in the Mogul program people are buying the product for the sake of a business opportunity. That’s why they’re buying it. So the VIP package has a certain business value which is distinct from the exclusive package as a business value which is again distinguished from the basic package as a business value.
I am basing the analysis on this basic premise in the Mogul program people are buying into a business opportunity. They’re paying what in essence is a business investment for them. The fact that it has some consumable items in it, that may be beneficial to them, but they’re buying it for the sake of the business opportunity.
Therefore the issue of whether they’re harmed is for me they went into a business in the hopes of making money but in fact they have a business loss. So for me the business loss is the harm.
The Other New Legitimacy Rules on the FTC Horizon
How do those other new mandates that upend decades of industry practice fit into the legal landscape?:
1. Autoship to distributors should be prohibited.
2. Monthly activity volume requirements may not include any purchases by distributors.
3. Tracking of performance activity connected to wholesale purchasing should be banned.
Actually, in 50 years of case authority on pyramid schemes, the courts have condemned inventory loading, earnings misrepresentations, lack of incentives on retailing, absence of return policies, programs that inadequately enforce the Amway Rules or pay out rewards on sales to those who are not what Koscot referenced as “ultimate users.”
But, in the presence of adequate safeguards under Koscot, Amway or BurnLounge, no court has insisted on the type of restrictions called for by the FTC. If the FTC has the muscle to impose such marketing prohibitions, it will likely be due to “extra judicial” factors rather than reliance on the existing legal standards of 50 years of case authority.
The FTC will also need to buck an opposite trend in more than a dozen states and a proposed congressional action, H.R.5230, a bi-partisan anti-pyramid bill to codify recognition of personal use purchases and establish legitimacy standards acceptable to the direct selling industry.
The bill is sponsored by Marcia Blackburn, member of the Presidential-Elect Transition Team and other bi-partisan sponsors in a post-2016 election environment that is decidedly “anti-regulatory,” where one incoming cabinet member is a family owner of Amway, where a President-Elect was formerly the branded spokesperson for multiple direct selling companies and where one prominent congressional committee chair was previously a ten-year employee of a leading direct selling company.
And so, the question: Ratchet up the regulation or ratchet down the regulation? Only time will tell. Better yet … this is a good time for the FTC and direct selling industry to find common ground and workable rules that will allow the industry to prosper in an effective and ethical manner.
(Ozedit: attempt to take discussion offsite removed)
@anjali
How many MLM companies with little to no retail have to settle before you accept it’s not the FTC who isn’t willing to go to court?
@Jbabs
I think it’s time the MLM industry stopped using the past to attempt to justify little to no retail business models.
The past should be redefined to the past few years of regulatory actions. Instead of wasting all this time clinging to decades of friendly pyramid scheme grey area regulation, the MLM industry should be looking to the future.
If Herbalife, one of the biggest MLM companies in the world, didn’t want to go to court and prove having little to no retail activity doesn’t make you a pyramid scheme – what does that tell you?
I say this with all due respect, given the reluctance of both Herbalife and Vemma to go to court and argue for pyramid schemes, advising clients with little to no retail to maintain the *winkwink nudgenudge* status quo would be terrible legal advice.
The FTC aren’t the ones who have buckled and settled, it’s the MLM companies with little to no retail doing so. They’re not confident in their position and neither should proponents of pyramid schemes within the MLM industry be.
As for H.R.5230, it might great for business (both MLM companies and their representing lawyers), however it’s a terrible law for consumers.
Counting affiliate purchases as retail sales only safeguards product-based pyramid schemes. It otherwise hurts legitimately operating MLM companies with healthy retail margins, as they’ll have to compete with “legalized” scams.
Anyone who supports such a bill and claims it’s for the good of the industry should be ashamed of themselves.
Affiliate purchase should never be counted toward commission or qualification toward sales target.
The court was right in Omnitrition: “‘If Koscot is to have any teeth, such a (non-retail) sale cannot satisfy the requirement that sales be to ‘ultimate users’ of a product.’ Omnitrition, 79 F.3d at 783”
DSA has been trying to end-run Omnitrition for DECADES by trying to legitimize self-consumption (i.e. non-retail sale as “sale to ultimate user”) because it’s much easier to make your own sales force to be consumers than to actually find the consumers.
DSA should be called “Direct BUYING Association” because it lost emphasis on selling a long time ago.
if the FTC is willing to go to court, who is holding a gun to their head forcing them to settle?
in the absence of an MLM specific law, it is the duty of the FTC to litigate and prod the courts on to reach a conclusion that under 50% retail sales will render an MLM a pyramid scheme.
after all, the FTC has to protect all MLM participants and not just herbalife distributors from loss.
if the FTC was confident about the outcome in court, they should have stopped negotiating with herbalife and said – see you in court!
having a court say that retail should be over 50%, is vastly different from an FTC lawyer writing an article saying – hey guys we just wrote some new law for you!
the FTC may be right, but they are not the lawmakers in a democracy. they are regulators who enforce law. they should get the court to ratify their view and then whip the whole MLM industry with it.
this bill should just be looked at as a conversation starter. it will go through purgatory before anyone votes it into law. the FTC has yet to say it’s piece, and nobody ignores a regulators viewpoint.
the fact that an MLM sympathetic administration will soon be in place, will ensure that this bill gets the attention needed. trump may get his ass impeached or not return in 4 years, but at least the bill would have gotten the momentum it needs.
i think a specific law for MLM is an idea already running late, because of lack of political will. india is in the process of finalizing a law for MLM, why should the US [where MLM began] fall behind?
there is no need to fear a proposed bill because the end result will be acceptable to the majority. if you look at the laws we live by, they are pretty rational.
No it’s not.
It’s the responsibility of the FTC to ensure the regulations are “sufficiently broad” so as not to stifle legitimate commerce.
Otherwise, we’d end up with an European Community like situation where bureaucrats control every aspect of trade, while hiding behind the “law” to justify and rationalize their intrusions.
Only in the theoretical world is there an argument about whether or not 50% or 51% is a sufficient number of “retail” customers.
The lesson is simple – if you don’t want to tempt fate and face prosecution, structure your MLM business accordingly.
If you want trouble, quibble about the 50% or 51%
Nobody, but why waste time in court when they can get a judgement in the amount of harm they can prove to consumers?
In the case of Vemma it wasn’t paid, but that would have been the same in a trial scenario (BK obviously doesn’t have $200 million).
The FTC settlements also saw companies forced to change their pyramid scheme business models.
The FTC aren’t anti-business, they’re anti-scam. It’s not always about shutting down a company for good.
If the MLM industry wants to make a case for product-based pyramid schemes, they need to go to court instead of settling.
If the companies they litigate against fold and offer up a settlement equal to what the FTC believe they’d be awarded at trial, they’d be unwise to oppose settlement.
Yep. When the company has a consumer affiliate willing to find another consumer affiliate who is willing to find another, why would the company want a consumer who stops the chain? (i.e. the affiliate’s retail customer)
To the MLM, the retail customer of an affiliate is an obvious disadvantage.
“Direct BUYING Association” – lol, that’s funny.
And why are affilates even buying?
Vemma’s decline can answer that.
Read, INHERENTLY FLAWED. One cannot be both predator and prey or you’ll end up eating yourself.
I agree with a previous comment that almost all of the current MLM companies, and there are a bunch, can not exist under the FTC retail rules.
Listening to John Fichthorn on CNBC he believes the way MLM companies currently operate they are all Ponzi schemes and he named names. He called out big boys like Usana and Nuskin.
When looking at an MLM company first you should look at the product and see if it is something you would buy and use. Then check if its something that others would buy and use without the benefit of getting paid.
– the ‘observation’ of the ninth circuit in omnitrition about ‘ultimate users being only non participants’, was not a final ruling.
– the same ninth circuit court rejected this previous ‘observation’ in burnlounge by noting that it was not based in ‘caselaw’.
– it’s true that the DSA has been trying to end run the omnitrition ‘observation’ and the fact is that the ninth circuit [in burnlounge] supported their stand.
– the stand of the nnth circuit in finding that ‘ultimate users can be participants too’ is now the latest ‘caselaw’.
– the question that now remains to be answered is how many ultimate users need to be outside the scheme for it to be a legitimate MLM.
– the FTC is unilaterally trying to enforce the idea that over 50% [66% for herbalife] ultimate users need to be outside the scheme.
[personally, i think an MLM product needs to show that it has ‘value’ as a standalone product without the business opportunity. i think, say 25%-30% ultimate users outside the scheme is enough to establish WHY participants are buying the product.
participants are definitely ultimate users too. however, i draw the line at any suggestion that an MLM need not have any retail at all, as long as participants are buying small amounts of product for personal use]
as far as i can see, the indian guidelines for the MLM industry is going to treat self consumption by participants/distributors in reasonable quantities as retail.
the guidelines do not use the terms ‘retail’ or ‘ultimate users’ but simply ‘consumers’.
this is the relevant part of the guidelines, 2016:
where this^^ gets interesting is the definition of ‘consumer’ per the consumer protection act, 1986, india [edited for brevity]:
the ‘explanation’ in the definition of consumer above, seems to suggest that the personal consumption of a distributor is a sale to a ‘consumer’.
if i have understood the guidelines properly, india seems to have legitimized distributor purchases in reasonable quantities for self consumption as a sale to a ‘consumer’ and hence a ‘retail sale’? am i reading this right?
if i have understood it properly, this^^ is in line with what HR 5230 is trying to achieve in the US.
i’m not surprised at the similarity between the [proposed] US and [finalized] indian MLM law at all, considering that companies like amway etc have been actively lobbying in india for this new MLM law.
it would be great if oz, jeffrey babener, kevin thompson or anyone else could take a look at the MLM guidelines which have been finalized in india:
mondaq.com/india/x/544314/Consumer+Trading+Unfair+Trading/The+Direct+Selling+Guidelines+2016
No claim is made that a personal use sale in reasonable quantity to distributor is a retail sale. Rather.. it is a sale to an “ultimate user” for pyramid analysis. The thinking of Anjali and HR 5230 follows the statutes adopted in 10 states.
(Idaho,Kentucky,Louisiana,Montana, Oklahoma,South Dakota,Tennessee,Texas,Utah and Washington).
In addition, it follows the thinking in the EU and Europe under the Belgian decision on Herbalife.
See the analysis and actual court decision at mlmlegal.com/herbalife%20is%20no%20pyramid.html
Similar approaches have been taken in Canada under the Competition Act. And it follows the thinking in court decisions of Koscot, Amway, BurnLounge.
I am not yet familiar enough with the Indian approach to comment.
You’re calling “affiliates sales should count as retail” something else (“ultimate users”) but it’s the same concept.
If you start counting affiliates purchases as retail sales and get rid of the distinction, you open the food gates for product-based pyramid schemes.
In case law and legislation, product based pyramid schemes are characterized by:
1. Inventory loading purchases (unreasonable commercial quantities) for resale, particularly with no repurchase policy.
2. Forced distributor purchases to qualify for commissions or rank.
3. Distributor purchases in unreasonable amounts for personal use.
4. Where a factual analysis indicates that the primary motivation for distributor purchases is to qualify in the opportunity as opposed to reasonable purchases for personal use or quantities needed for resale.
So why try to count affiliate purchases as retail sales then?
As it stands it’s not illegal for affiliates to purchase. It only becomes a question of pyramid recruiting if there’s no retail.
Having little to no retail activity is the hallmark of an MLM pyramid scheme.
Trying to worm around that by counting affiliate purchases as retail sales is trying to legitimize pyramid schemes.
Following the 1979 Amway decision, almost all leading direct selling companies adopted some type of retailing mandate to qualify for commissions or ranks advancement. The industry has followed this approach for 40 years.
However, the concept of stripping personal use purchases of sales volume credit (by 50% (Vemma) or 67% (Herbalife) ) as “ultimate user” purchases is a new concept never adopted in case law or legislation.
Neither company felt confident taking the matter to court.
What does that tell you they were running behind closed doors?
It is now! (mic drop)
Time to move into the information age then, eh? MLM claimed to be next step beyond retail for 40 years. It’s still a tiny fraction of retail, and can’t even match franchising which start at the same time.
Face the facts: the idea of individual members “stocking” products in their garage and act as actual ‘distributors’ is LONG GONE.
Nowadays members take orders to be dropshipped from company warehouses by holding home parties and such. Which means there is practically ZERO reason for a member to maintain stock for BUSINESS reasons.
The only real reason for company to accept individual members doing “personal consumption” to make them consumers first, distributors second. And that is just a conflict of interest, much like the old industrial barons creating “company towns” with jacked up prices so most of the money paid out in salary goes back into company coffers any way.
And allowing any sort of self-qualifying is doing exactly just that. Can you imagine McDonalds requiring its employees to eat at least two meals from the company daily to get paid? Phooey.
BULLSHIT!!! Or is it ignorance?
Here is a snippet of a newly written article by a 10 year senior director in Mary Kay. I suggest reading the entire article as well as the many other articles on the site pinktruth.com TO LEARN THE TRUTH.
pinktruth.com/2016/12/19/trapped-by-the-o-word-in-mary-kay/
True for most in this day and age, but unfortunately it still happens.
Let’s look at this “leading direct sales company” Mary Kay, and their inventory loading practices. I will quote from the same article I posted above.
So even the old problems are still present. I suggest all the issues exist because this “is” MLM – a product based pyramid scheme.
according to which caselaw or legislation?
are the FTC’s attitude or ideas written in stone? it seems the FTC’s ideas shift according to the govt in power. the FTC which wrote the 2004 DSA advisory under george bush, is the same FTC which has done a ‘omnitrition’ waving volte-face under obama.
the 2004 advisory was in tune with established caselaw ike amway, the >50% retail demand per omnitrition is not based in caselaw.
what happens to this same FTC under trump? here’s what MLM attorney kevin thompson says on the subject:
retail sales are no doubt non negotiable. the problem is with a strict ‘quantification’ of retail requirements, as opposed to having retail rules and encouraging retail with a good fair priced product and curbing inventory loading.
instead of the MLM industry living under the rule of one FTC commission to another, dependent on elections, it may be wise to crystallize and regulate MLM with a law based on majority agreement.
thompsonburton.com/mlmattorney/2016/12/19/network-marketing-progress-at-tip-of-spear/
omg. whoa.
trump has appointed carl icahn as his ‘special adviser to the president on overhauling federal regulations’.
icahn is the biggest shareholder of herbalife, one of the largest listed MLM’s, which has had a run in with the FTC recently. i suspect icahn is bristling at the treatment meted out to herbalife recently, and will be lobbying for drastic changes in the FTC leadership.
this is going to be a very interesting phase for american MLM, and the FTC’s ‘take’ on MLM may swing by a 180 degrees.
meanwhile, nobody would wish to be in ackman’s shoes right about now!!
wsj.com/articles/trump-to-name-icahn-as-adviser-on-regulatory-overhaul-1482354552
Oh dear god. What a terrible four years this is going to be for legitimate MLM.
Looks like I’m really going to have my work cut out for me.
not having followed american politics much, i’m a bit surprised to learn that it has a two party system, with both parties often polarly opposite on issues ranging from foreign policy to healthcare to regulation.
one FTC commission says the amount of self consumption does not matter, and the next says self consumption is capped at 33% [herbalife]. what next now?!
it must be difficult to get things done, or know what’s right, if the govt’s viewpoint can shift drastically from one administration to the next.
is there no ‘sensible’ middleground? things are usually not black or white and the truth often lies somewhere in the middle.
Ah well, whoever’s in charge I’ll still be here.
Someone has to keep flying the flag of nonpartisan common-sense.
I remember a quote from MLM crook Tom McMurrain (Onecoin, ad naus) from before the election when a Trump victory was v unlikely. He said something along the lines of:
My personal point of view (fwiw, not much) is that the next four years are going to be “noses in the trough” big style. Trump’s stance on MLM and money at all costs seems fairly clear.
Facilitate, promote, collect, deny.
foxla.com/news/139720670-story
on the subject of regulation, i heard a rather ‘enterprising’ idea yesterday.
the new MLM regulation being set up in india is insisting on ‘retailable’ [competitively priced] products and minimal inventory loading, rather than insisting on any particular amount of retail. as far as i can see, personal consumption of affiliates will be treated as a ‘consumer’ [retail] sale.
so, how do you demonstrate that your product is ‘retailable’?
well, MLM companies in india [amway, unicity etc] have thunk up a neat little ‘trick’ to establish the ‘retailability’ of their products!
they will set up retail franchises in a few cities across the country. this will show that their products are regularly sold at retail in the open market. meanwhile their MLM arm will proceed with personal autoships of affiliates with no real requirement for retail.
this^^ is what i’ve heard from a *reliable* MLM participant, but i can’t confirm it. one MLM has already started hiring staff to market it’s franchising business, so this is worth noting.
neat idea, or what?? but, how can an MLM have a franchise arm in competition to it’s MLM arm? i don’t know if indian regulators will allow them to implement this newly thunk up ‘trick’!
It’s pseudo-compliance.
The franchises will be company-run and likely operate at a loss (little to no product will be sold).
These comparatively minor losses will be recouped by the business via the booming pyramid recruitment taking place.
Basically it’d be yet another attempt to legalize pyramid recruiting from the MLM industry.
I think eCOSWAY tried that by paying for top affiliate’s retail location. Those never seem to last too long. Wonder if the company use that as “loss leaders”.
HR 5230 is now dead and gone.
HR 5230 was introduced in may 2016, in the 114th congress of the US govt. the 114th congress lasted from jan 2015 to jan 2017 – ie a two year cycle.
since HR 5230 did not pass both houses of parliament before jan 2017, it is now in the dustbin.
this is the current status of HR 5230:
a congress representative will have to re-introduce HR 5230 or sponsor some new version of it. from may 2016 to jan 2017, this bill attracted the support of only 30 representatives, which is a far cry from over 269 [house 218 + senate 51] votes required for a bill to be passed in both houses of parliament.
i think the DSA is going to take full advantage of trump’s [assumed] pro MLM administration, and try to introduce an MLM bill again.
i’m not sure that marsha blackburn, the republican representative from tennessee, will re-sponsor the bill again in this cycle of congress. in an interview with the DSA published on april 13th, 2017, she didn’t specifically say anything about HR 5230 or its re-introduction.
dsa.org/news/individual-press-release/looking-for-high-touch-in-a-high-tech-world-dsa-s-conversation-with-rep.-marsha-blackburn
S’long pyramid supporters. Till next time…