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Proposed Federal MLM Statute
Personal Use: "OK"
By Jeffrey A. Babener
If you had one shot, one opportunity
To seize everything you ever wanted-One moment
Would you capture it or just let it slip?
- "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
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?
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
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.
- In the early cases, the FTC questioned
whether or not the Amway safeguards of promoting legitimate
sales were protected when a company demonstrated strong
personal use by participants.
- Next, the FTC argued that legality was
determined by compliance with the Amway safeguards, plus
sales greater than 50% of revenue to nonparticipant users.
- In a 1999 filing against 2Xtreme, the FTC
finally evolved to its position that the Amway safeguards
were really irrelevant altogether. The key issue for the
FTC was that sales to nonparticipants must exceed 50%,
and constitute the majority of revenue for the MLM.
- In addition, in the 2Xtreme case, the FTC
challenged autoship programs by consumable MLM companies
as evidence of a pyramid scheme. Many leading direct selling
companies have autoship programs for the convenience of
- The FTC also used the 2Xtreme case to challenge
the standard of business utilized by virtually all direct
selling companies, namely minimum monthly purchase or
activity requirements - as evidence of inventory loading
and pyramid schemes. Again, a devastating position for
the direct selling industry.
- Subsequent FTC actions have reaffirmed
the FTC's position on "personal use."
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:
SECTION 1. SHORT TITLE.
This Act may be cited as the `Anti-Pyramid
Promotional Scheme Act of 2003'.
SEC. 2. FINDINGS.
The Congress finds the following:
(1) Pyramid promotional schemes, chain
letters, and related schemes are enterprises--
(A) that finance returns to participants
through sums taken from newly attracted participants;
(B) in which new participants are promised
large returns for their investments; and
(C) involve unfair and deceptive sales
tactics, and lead to the victimization of unwitting
(2) Pyramid promotional schemes, chain
letters, and related schemes constitute a threat in
interstate commerce and to the financial well-being
of the citizens of the United States.
(3) The advent of the global Internet
makes pyramid promotional schemes international threats.
(4) The Ninth Circuit Court of Appeals
erred in defining a pyramid promotional scheme in Webster
v. Omnitrition Int'l, Inc. (79 F.3d 776; 9th Cir. 1996).
Congress to FTC: Recognize Personal Use
The proposed federal legislation directs
the FTC to adopt a new rule on pyramiding which both outlaws
pyramid schemes, but recognizes personal use. The bill
directs the FTC to adopt a model law similar to one adopted,
at the request of the industry, in numerous states in
recent years, including Texas, Louisiana, Oklahoma, Montana
and Kentucky. In such state models, assuming that a network
marketing company sells products to distributors in reasonable
quantities, i.e. no inventory loading, and assuming that
it adopts an industry standard 12-month, 90% inventory
refund policy for terminating distributors, then personal
use will be recognized as a legitimate destination for
product in the same fashion as sales to nonparticipants.
SEC. 4. RULES TO PROHIBIT OPERATING PYRAMID
(a) IN GENERAL- Not later than 1
year after the date of the enactment of this Act, the
Federal Trade Commission shall promulgate a rule under
section 18(a) of the Federal Trade Commission Act (15
U.S.C. 57a(a)) providing that it shall be an unfair or
deceptive act or practice under section 5 of such Act
(15 U.S.C. 45) for any person, by the use of any means
or instrumentality of transportation or communication
in interstate or foreign commerce, to promote, offer,
sell, or attempt to sell a participation or the right
to participate in a pyramid promotional scheme.
(b) LIMITATION- Nothing in this Act
or in the rule to be promulgated pursuant to this section
shall be construed to prohibit a plan or operation, or
to define such plan or operation as a `pyramid promotional
scheme', based upon the fact that participants in the
plan or operation give consideration in return for the
right to receive compensation based upon purchases of
goods, services, or intangible property by participants
for personal use, consumption, or resale, and the plan
or operation does not promote inventory loading and implements
an appropriate inventory repurchase program.
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.
For scores of other informative articles on MLM Software, MLM Consulting,
Direct Sales, Direct Selling, Network Marketing, Party Planing,
MLM Consulting and many more, visit MLMLegal.com's
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