Proposed Federal MLM
Look, If you had one shot, one opportunity
Eminem – “Lose Yourself”
Seeking Relief from Cloud of Uncertainty
The Direct Sales Industry has patiently survived almost a decade of regulatory tension on an issue critical to the MLM business model — the legitimacy of “personal use” by distributors. Uncertainty on this point has resulted in unwanted FTC and state consent decrees and attacks on MLM companies that place a cloud over the direct selling industry. New proposed federal legislation, H.R. 1220, would formally recognize legitimacy of “personal use” along side of retail sales outside the network, and bring relief to network marketing.
The issue has arisen in the context of examination as to whether a network marketing company is a legitimate business opportunity or an illegitimate pyramid headhunting recruiting scheme. Analysis in MLM law cases has often looked to evidence of sales to and use by the ultimate consumer. Should personal use of a company’s product by distributors be viewed with the same weight as sales to those outside the sales network? Many of the leading direct selling companies offer consumable products and a substantial portion of product sold is in fact used by distributors. Is this legitimate?
Industry advocates, led by the DSA, say “yes,” personal use should receive the same weight as nonparticipant sales. The FTC says “no,” taking the position that more than fifty percent of product must be sold outside the network for the program to stay clear of pyramid accusations. The industry has been unsuccessful in convincing the FTC to change its position, although it has achieved such recognition in multiple states and the DSA has amended its Code of Ethics to recognize personal use. Although the FTC has focused scrutiny on companies “on the edge,” the rest of the industry has been left quite uncomfortable.
The FTC History
The FTC made its first full-scale assault on the MLM model, accusing Amway of being an illegal pyramid scheme, and thus, a "deceptive trade practice" under FTC federal legislation. From 1975 to 1979, the FTC and Amway were engaged in litigation, climaxing with a historic loss of the FTC in 1979. In a landmark administrative law decision, an FTC administrative law judge ruled that Amway was a legitimate business opportunity as opposed to an illegal pyramid scheme based on three primary consumer safeguards: (1) a reasonable buyback policy for terminating distributors; (2) the 70% rule, which prohibited purchases of new inventory before old inventory had been sold or used; and (3) the ten retail customer rule, which required sales to ten customers. (Interestingly today, the Amway 70% Rule defines a retail customer to include purchases for personal or family use, or sales to nonparticipants).
The FTC v. Amway case became known for its "Amway safeguards," the general rules honored by courts, legislators and enforcement agencies to uphold legitimacy of MLM type organizations. The FTC was quiet on this subject for the next 20 years.
In the aftermath of odd language in a civil case against an MLM company, Omnitrition, in 1994, the FTC began a new assault. In the Omnitrition case, the U.S. Court of Appeals for the Ninth Circuit in language known in legal circles as "dicta," i.e., language unnecessary to the ruling in the case, challenged the concept of personal use by MLM distributors as not fulfilling the mandates for retail sales in evaluating pyramid schemes versus legitimate direct selling. A new generation of FTC officials were emboldened to revisit the legitimacy of the MLM model.
From 1996 through and into the new millennium, in a series of FTC filings involving such companies as Fortuna Alliance, World Class Network, JewelWay, Futurenet, Equinox and 2Xtreme, in a step-by-step and case-by-case assault, the FTC challenged the MLM model and the Amway safeguards.
The Purpose behind H.R. 1220
With help from the DSA sponsors of H.R. 1220, seek to bring relief to the direct selling industry. The proposed bill recognizes the importance of stamping out pyramid schemes while at the same time recognizing the problem created by the FTC’s interpretation of language in the federal case, Omnitrition, that started the debate:
H.R. 1220 Deserves Industry Support
The dialog between the MLM industry and the FTC continues. It is unlikely the FTC on its own will change its position. Industry supports are hopeful that relief from uncertainty will come as a result of passage of H.R. 1220 or that introduction of H.R. 1220 will accelerate positive dialog with FTC toward adoption of new rules similar to progressive legislation that has been adopted in many states that protects the consumer on one hand from pyramid schemes, while, at the same time, recognizing the position of the direct selling industry that personal use by distributors should be counted as legitimate end destinations of company product sold by network marketing companies.
To view the actual proposed legislation, H.R. 1220, and for other important industry articles and issues, please visit www.mlmlegal.com.
|Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
|Jeffrey A. Babener, the principal attorney in the
Portland, Oregon law firm of Babener & Associates, represents many of the leading
direct selling companies in the United States and abroad.
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