Differentiating a legitimate network marketing opportunity from a pyramid scheme should not be a difficult task for the entrepreneur when some basic and objective indicators are observed.
Network Marketing Legal Issues
By Jeffrey A. Babener
Although not without its challenges today, as a general matter, legitimate network marketing companies are well received throughout the U.S. With increasing frequency, federal and state governments offer assistance and guidance to the network marketing industry. The IRS releases special publications, videos and has adopted specific regulations recognizing a very legitimate profession. As in the franchising industry, several states have also adopted specific legislation for multilevel distribution companies which set forth objective standards for those companies to follow. Differentiating a legitimate network marketing opportunity from a pyramid scheme should not be a difficult task for the entrepreneur when some basic and objective indicators are observed.
Any industry that offers such dramatic rewards and carries with it a lower dollar cost of entry obviously will tend to attract some of the best and some of the worst entrepreneurs. The industry has not always thrived. Over the years, it has come perilously close to extinction as a result of prosecution by regulators who claimed the industry promoted pyramid schemes under the guise of legitimate marketing. And, in many cases, the prosecutors were correctly chasing and eradicating such scam and scheme pyramids.
Other programs which were in fact legitimate have survived, however. In a classic legal decision in 1979, the Amway Corporation prevailed in such a prosecution and in fact, effectively, received a stamp of approval of its marketing program by the Federal Trade Commission. This particular decision opened the door to many other legitimate multilevel marketing companies.
Because of the abuses of the "rotten apples" of the industry, multilevel marketing has become a closely scrutinized and regulated industry. Regulations regarding multilevel marketing companies in the United States are a constantly changing patchwork of overlapping laws, which lack uniformity and vary from state to state.
The basic thrust of these statutes is that marketing plans are prohibited which require an investment or purchase by sales representatives for the right to recruit others for economic gain. Under these statutes, multilevel marketing companies must be bona fide retail organizations which market bona fide products to the ultimate consumer. Inventory loading and "headhunting," or remuneration for the mere act of recruiting others, are prohibited. Sales kits should be sold at actual company cost to sales representatives.
In the leading legal decisions, a variety of abuses have been targeted as potential elements of illegal marketing plans:
In determining whether or not a program is a legitimate multilevel marketing opportunity, the would-be participant or the entrepreneur, who is considering a multilevel marketing program, should consider several important points:
The future of the network marketing industry will require cooperation by companies, distributors and those governmental agencies charged with regulating the industry to assure that legitimate practices prevail and pyramiding schemes are stamped out. Every network marketer should apply the above principles in evaluating a new program or working within their existing program.
|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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