A Conversation with Jeff Babener Video Series: Learn about the difference between the various compensation plans and how distributors are compensated with each plan. It’s called multi-level marketing since distributors are compensated at each level as they recruit more consultants. How many levels are distributors compensated at? Learn about breakaway compensation plans. Learn the difference between sponsors and recruits. Get the definition of each unique compensation plan and which plans are most common and which are less successful. How many levels deep is it most common to go, and legal, to go?

When does a compensation plan become a lottery, which is considered legal by many states? Which programs have stood the test of time, and which have gone by the wayside? Which compensation plan should you choose so that your company is legal and stands the test of time? Learn how to ask the right questions to determine a legitimate operating MLM company vs. a pyramid scheme. Watch the video.

Keep yourself educated on the legal aspects of the MLM industry. Visit MLMLegal.com. Are you starting a MLM company? Make sure you have your legal aspects covered. Contact legal MLM expert Jeff Babener for your free legal consultation today.

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Multi-level marketing is a diverse and varied industry, employing many different structures and methods of selling.

Although there may be significant differences in how multi-level marketers sell their products or services, core consumer protection principles are applicable to every member of the industry. The Commission staff offers this non-binding guidance to assist multi-level marketers in applying those core principles to their business practices.

The FTC offers 18 common questions about MLM and running a direct selling business.

1. What is direct selling? What is multi-level marketing?

Direct selling is a blanket term that encompasses a variety of business forms premised on person-to-person selling in locations other than a retail establishment, such as social media platforms or the home of the salesperson or prospective customer.

Multi-level marketing is one form of direct selling. Generally, a multi-level marketer (MLM) distributes products or services through a network of salespeople who are not employees of the company and do not receive a salary or wage. Instead, members of the company’s salesforce usually are treated as independent contractors, who may earn income depending on their own revenues and expenses. Typically, the company does not directly recruit its salesforce, but relies upon its existing salespeople to recruit additional salespeople, which creates multiple levels of “distributors” or “participants” organized in “downlines.” A participant’s “downline” is the network of his or her recruits, and recruits of those recruits, and so on.

2. Under Section 5 of the FTC Act, what is an MLM with an unlawful compensation structure, which is sometimes called a pyramid scheme?

The most widely-cited description of an unlawful MLM structure appears in the FTC’s Koscot decision, which observed that such enterprises are “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 the sale of the product to ultimate users.” In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975).1

1 This document is focused specifically on MLM practices that may violate the FTC Act. It does not address other types of unlawful structures that do not involve the right to sell a product or service, such as chain referral schemes (sometimes called “chain letters”) and Ponzi schemes.

3. How do MLMs with unfair or deceptive compensation structures harm consumers?

READ MORE.

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Will the stock market rise tomorrow? Who will win the Kentucky Derby? If one knew the answers these questions, he or she would be rich beyond imagination. How much one might earn in a compensation plan is subject to too many moving parts to make any sort of accurate prediction: the compensation plan itself, percentages paid on product, profit margins of product, personal sales, down line sales, the factors are endless. Two important resources are available that will give you a good place to start on this arithmetic: (1) leading companies post average earnings disclosure charts which indicate the average earnings for consultants at various levels and stages of their direct selling program; (2) many companies provide online earnings calculators which allow consultants to plug in their own assumptions on their personal and group sales and activity, which are then used to calculate the payout based on their expected sales performance. These aren’t fool-proof tools but they will give you realistic expectations on potential earned income.

It’s important to be honest with yourself as well. Very few consultants make it ‘big time’ in direct selling, and that is because sales is hard work, difficult work and many give up shortly after running through their warm market (friends and family). But if you’re the type that loves to sell to every person that you come across in your daily life then you may be a great candidate for a consultant who earns really high auxiliary income.

If you are interested in attending the Starting and Running the Successful MLM Company conference visit our conference page, view our speaker list, or get more details. All executives/owners of direct selling companies are welcome to attend. Call 800-231-2162 to register.

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What are the key trends in the legal and business environment in today’s world?

A global $2 billion-dollar industry has great press, but it must be self-regulating, looking out for the consumers and distributors. Regulatory agencies today want MLM companies to have a great product and sell to real consumers. What does that mean? Personal use. Does the product stand on its own? Do real consumers buy it? Are you selling product or the opportunity?

Read the full description and watch the full video.

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Ring the bells that still can ring

Forget your perfect offering

There is a crack in everything

That’s how the light gets in

Leonard Cohen… Anthem

The new FTC Direct Selling Guidance arrived in January, 2018. It built on the goodwill dialogue between the FTC and the direct selling industry that was ushered in by a well-received DSA presentation of acting Chairperson Maureen Ohlhausen in November, 2017.

Was it helpful to the conversation on “personal use” and “pyramid?” Yes. Was it perfect? No. There are two major ambiguity flaws (likely inadvertent) in the Guidance that must be discussed. Are these “cracks” in this Faberge Egg? Yes, but, that’s how the light gets in.

Is more FTC/Industry dialogue and adoption of H.R. 3409 (anti-pyramid bill) a good next step? For sure.

How we arrived at this dialogue…

The direct selling industry search for certainty in proposed H.R. 3409 has some real basis in the vacillating positions of the FTC. After the initial success of a MLM structure, by Amway, Mary Kay and Shaklee, in the 1950’s and 1960’s, the appearance of a true pyramid in Koscot and Dare to be Great, prompted the FTC to challenge the entire MLM concept, and specifically Amway, as being a pyramid. In 1979, an FTC administrative law judge rebuked the FTC, holding that Amway was a legitimate business opportunity, principally because it adopted what has come to be known, in all subsequent cases, as the Amway Safeguards:

Read the full article at MLMLegal.com.

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Executive Summary: The legal environment and the accepted business model of leading direct selling companies has been relatively stable for 50 years. That equilibrium was upset by the regulatory proposals of a former FTC commissioner to upend that environment with new arbitrary rules that lack a basis in case authority or legislation…creating confusion in today’s direct selling market place. H.R. 3409, a mirror of many established state anti-pyramid statutes and the language of long adopted case authority, is intended to return predictability and stability and certainty to that market.

Like a poem poorly written

We are verses out of rhythm

Couplets out of rhyme

In syncopated time

Paul Simon, The Dangling Conversation

How We Got Here …Talking Past One Another

Creating Uncertainty and Confusion in an Established Market

He was born on third, but thought he hit a triple.

In July, 2016 the FTC concluded an investigation and settlement with Herbalife, without formal prosecution or litigation. No finding of wrong doing was made and no finding of “pyramid.” A substantial fine was paid. More significantly, Herbalife was obliged to radically change its MLM operating model to an extent that differentiated it from most other leading direct selling companies.

Industry observers postulated that the FTC had achieved by settlement a result that it could not have achieved through protracted litigation. And so why the result? Many experts, who follow the industry and FTC, understood the dynamics of why a publicly traded company, in the midst of a multi-year short seller attack (where its stock had spanned a volatile range of $27 to $80 over a four year period) might accede to onerous terms to bring an end to a cloud of uncertainty over its business. Many would argue that it was just a prudent move at a particularly vulnerable point of time in the financial markets.  Interestingly, the fine paid was eclipsed by the surge in market cap and stock valuation as a result of the settlement, a fact that did not elude Wall Street.

Herbalife may have prevailed financially, but the FTC was playing “long ball” in terms of its long term legal position. Would the bevy of operating restrictions carry over to a change in the legal environment for the entire direct selling industry? Was the FTC emboldened to approach the direct selling industry as if it had just changed the direction of direct selling law unilaterally by settlement as opposed to achieving a change in the law by persuading a court to change the rules?  Absolutely. Did it really change direct selling law? Well, sometimes history is written by the victor, whether correct or not. Or maybe that’s for the historians.

Post FTC/Herbalife Settlement, former FTC Chairwoman, Edith Ramirez, in her October, 2016 presentation to the U.S. Direct Selling Association, announced a vision for a new FTC paradigm outlook on legitimate direct selling that was totally at odds with decades of case authority, state legislation and operating models of a 50 year old industry. To many observers, her position seemed to be drawn from “whole cloth” and fashioned as a “top down” bureaucrat “take it or leave it” style, i.e., “that’s the way it is, live with it!,” and “we know better than you…too bad.” Her position stunned CEOs of major direct selling companies. (The anxiety was heightened by another long time, and industry criticized, tactical practice of the FTC, referenced in the industry as “trial by ambush,” in which the FTC filed for a temporary restraining order and asset freeze at commencement of suit…leaving a company without any funds to defend itself….another issue for another day…)

My Way or the Highway…Bending the Arc of Direct Selling History

Her new theory of legitimate (vs. pyramid) direct selling was premised on a percentage analysis of non-participant consumption (perhaps mandating as high as two-thirds requirement to meet the FTC’s new standards), i.e., that the acid test for pyramid was demonstration of consumption by non-participants rather than the 40 year case standard established in the famous Koscot case, demonstration of consumption by the “ultimate user,” which could be either a non-participant or a participant….in one “fell swoop” distributors who used product became “second class” ultimate users and direct selling companies were on notice that their model, one that long recognized personal use and one that the FTC as late as its 2004 Advisory opinion recognizing personal use, was in jeopardy.

Almost by fiat, she announced proposed upcoming FTC guidance (as of 2017, not yet issued) that would require complete overhaul of the model of many leading direct selling companies:

(1)      She renounced use of the famous Amway Safeguard Standard, adopted in the landmark FTC case, In re Amway, 1979 as being irrelevant, overrated and not really relied on by courts in pyramid cases.

(2)      She redefined the famous Koscot standard to require compensation to upline to be based on sales to the nonparticipant retailer customer rather than the Koscot’s language, ultimate user, effectively making distributors “second class” “ultimate users.”

(3)      She pivoted away from a legal analysis in the most recent BurnLounge case, which demanded, in pyramid cases, a factual analysis of the “primary motivation” test in which a court asks “what is the primary motivation for distributors when they make purchases”…instead migrating to a punch list of operating restrictions imposed on Herbalife in its recent settlement.

(4)      She essentially described a new legal standard, the percentages test, an arbitrary new rule in which upline distributors were limited to receive commission credit for only one-third of sales volume attributed to personal use by downline distributors, whether or not such purchases were reasonable in quantity and for actual use by the distributor “ultimate user.”

(5)      She announced that a long time practice of almost all leading direct selling companies, autoship to distributors, should be prohibited.

(6)      She pivoted away from a well-established component of leading direct selling programs, stating that monthly activity volume requirements may not include any purchases by distributors.

(7)      She asserted that the long time practice of established direct selling companies, tracking of performance activity connected to wholesale purchasing should be banned.

In the absence of “inventory loading,” almost all of the new restrictions on long standing industry “practices” had never been of particular concern in 40 years of cases or robust legislation at the state level.

All in all, a Molotov cocktail was thrown into the garden of direct selling occupied by icons like Avon, Mary Kay, Amway, etc.

Confusion Gives Birth to H.R. 3409? … Time for Clarity

Nature abhors a vacuum…

Markets abhor uncertainty…

It was, as if the former Commissioner was talking right past those companies and models that had marshalled an important American economic channel for decades. Actually, right past case history and precedent.

A $36 billion dollar industry had lived with and understood court guidelines for many decades, but the Chairwoman proposed to upend 40 years of legal precedent to bend the arc of direct selling history.

Did industry leaders feel ambushed?  Well, that is a “charged” word…but, yes.  Direct Selling executives were rooted in the stability of historical case authority and state legislation respecting the role of personal use and rooting legitimacy in the Koscot standard, rewards must be related to sales to ultimate users (which includes personal use in reasonable amounts by distributors), the Amway standard, which asks companies to mandate that distributors achieve some level of retail sales, adhere to the 70% rule which prohibits reorders unless distributors have resold product or used it for personal use in an amount of at least 70% and offer a reasonable repurchase policy for repurchase of inventory of terminating distributors, and the BurnLounge standard that rejected the FTC argument against recognition of the validity of personal use and opted for a case by case factual analysis of “primary intent” of distributor purchasing rather than a lock step rigid rule.

Was it a wholesale rejection of legal precedent and legislative standards? Probably. Did it veer away from standards carefully formulated in famous case precedents of Koscot, Amway, BurnLounge? Yes. Did it part company with the FTC’s own 2004 Advisory Opinion accepting the validity of “personal use” recognition, all the way to the point of even suggesting that the concept of MLM buying clubs was commendable?  With all due respect, Yes. Did the position even conflict with the BurnLounge deposition testimony of the FTC’s own economist, who recognized the validity of personal use? Yes. Did the Commissioner’s position ignore the clear and growing trend in at least a dozen states where legislation called out the recognition of distributor personal use as a valid end destination to the ultimate user? Yes. Again, respectively, this state trend was missed altogether. (Actually, the Direct Selling Association points out that at least 21 states have adopted anti-pyramid legislation that also mirrors the anti-inventory loading/repurchase requirements seen in H.R. 3409.) Whether or not this omission was merely an oversight, who knows?

A close point by point FTC “fact check” is worthy of a read and a cup of coffee:

Fact Checking the FTC’s New Legal Guidance 

Jeffrey Babener, 2016

For those of a more studious nature, check out the detailed analysis on the evolving legal standards in case authority (including Koscot, Amway and BurnLounge) and at the legislative level:

BurnLounge Appeal Decision: Guidance on Pyramid v. Legitimate MLM and the Role of Personal Use in Pyramid Analysis

Jeffrey Babener, 2014

Also see legal analysis of the FTC punch list of operational restrictions arising from the Herbalife settlement:

FTC v. Herbalife: Post-Settlement Legal Guidance for the Direct Selling Industry

Jeffrey Babener, 2016

Anxious is the understatement for the business environment promoted by Chairwoman Ramirez. Her position on legitimacy challenged the models of virtually every direct selling company. And with the foregone expectation that an even greater regulatory regime would inherit the White House in November, 2016, there was an expectation of “but wait there’s more, not less, regulation coming…so live with it.”

And then “poof,” the totally unexpected happened in the November, 2016 election. An anti-regulation President was elected with the opportunity to nominate a new majority of the FTC; the designated head of a “deregulation” task force was named, the largest shareholder of one of America’s leading direct selling companies; and within months of the election, the term of FTC Commissioner Ramirez came to an end.

And thus uncertainty replaced anxiety in the direct selling industry…which brings us to the legal and business rationale for pending H.R. 3409, denominated the Anti-Pyramid Promotional Scheme Act of 2017…for the first time in history, proposed federal anti-pyramid legislation:

Two Different Views of H.R. 3409…the Next Challenge

Can you hear me now?…the Verizon guy…

Pending before Congress is H.R. 3409, a bi-partisan bill entitled the Anti-Pyramid Promotional Scheme Act of 2017.

It is the first of its kind at the federal level. Interestingly, anti-pyramid statutes have been enacted in almost all states for half a century, and specific anti-pyramid laws that are almost identical to proposed H.R. 3409 have provided guidance for more than 20 years in more than a dozen states.

However, no federal anti-pyramid statute has ever appeared on the books. The FTC Act Section 5 broadly prevents “unfair or deceptive practices,” and yet it has been the principal vehicle for anti-pyramid enforcement other than the SEC and U.S. Department of Justice, whose mandate is to prosecute fraud, securities fraud and securities violations.

The stated purpose of H.R. 3409: To amend the Federal Trade Commission Act to prohibit pyramid promotional schemes and to ensure that compensation is not based upon recruitment of participants into a plan or operation, but on sales to individuals who use and consume the products or services sold, and for other purposes.

Now, does that sound any more controversial than the “mother and children protection act of _____.”  Well, guess again. Opponents of H.R. 3409 see a wolf in sheep’s clothing. They see it as a bill that seems innocuous on its face, but that is really intended to rob the FTC of its flexibility to chase after any pyramid scoundrel by actually defining the parameters of a pyramid rather than allowing the FTC to employ a vague statute, without specificity, to chase after direct selling businesses with assertions that their practices are “deceptive and unfair.”  In other less democratic countries, critics refer to such styles of governance as “a government of ‘men’ as opposed to a government of ‘laws.’”

The bipartisan sponsors of H.R. 3409 and the direct selling industry, led by the Direct Selling Association, assert that the legislation is anything but “flim flam.”  And quite honestly, a close look at H.R. 3409 does make it difficult to believe that it is anything other than robust consumer protection legislation…and that the “boogey man” is not hiding around the bend, ready to pounce on the innocent consumer. In fact, H.R. 3409 comes down like a sledge hammer on scams and schemes:

(1)      It condemns inventory loading;

(2)      It calls out as evil pyramid headhunting recruitment schemes;

(3)      It forbids payment of commissions or rewards that are unrelated or not based on sale of products and services to the “ultimate consumer;”

(4)      It absolutely rejects programs in which distributor product purchases are made in unreasonable amounts, either for resale or actual personal and family use;

(5)      And it demands, as a condition of legitimacy that companies adopt a repurchase policy in which terminating distributors will be refunded for returned product inventory, in resalable condition, that has been purchased within 12 months of termination.

If there is any new concession to the industry, it is that, in the course of protecting the consumer, H.R. 3409 also codifies case authority and state legislation in recognizing the legitimacy of reasonable personal use by distributors as being a sale to an “ultimate user.”

And there lies the rub…the parties are talking past each other…and in the words of Larry David’s grandmother…everyone is farmisht (confused as to what is the state of the law for legitimate direct selling).  It is difficult to imagine that anyone could cogently argue that “uncertainty” is a good thing for a 50 year old channel of distribution in the U.S. H.R. 3409, at the very least, provides a good starting template for input from all groups of good will, consumer groups, the FTC, Congress, the States and the direct selling industry. Perhaps, even the President, who has served as a spokesperson for at least two MLM companies, will place this issue on the Executive Branch anti-regulation task force agenda.

Why H.R. 3409? … Just One More Reason…Time for Clarity and Certainty in the Markets

It is hard to stand on shifting sands.

In the absence of some definitive resolution, the collision of the Ramirez FTC paradigm and the half century model of direct selling and 40 years of federal case authority and state legislative authority produces nothing but operational paralysis for a $36 billion industry and its 20 million participants.

Proponents and opponents of H.R. 3409 may debate ad infinitum on the goals of protecting the consumer or protecting the rights of direct selling distributors. But, a very clear unenunciated reason for passage of H.R. 3409 is that the overreaching positions of the FTC have created total uncertainty in the marketplace, and H.R. 3409 brings clarity and synchronicity to actual case authority and a clear federal standard that allows “business to be business” again. H.R. 3409 bursts the bubble of confusion.

Jeffrey A. Babener, of Portland, Oregon, is the principal attorney in the law firm of Babener & Associates. For more than 30 years, he has advised leading U.S. and foreign companies in the direct selling industry, including many members of the Direct Selling Association. He has served as legal advisor to various major direct selling companies, including Avon, Amway, Herbalife, USANA, and NuSkin. He has lectured and published extensively on direct selling. He is a graduate of the University of Southern California Law School, where he was an editor of the USC Law Review, followed by an appointment as a law clerk to the U.S. District Court for the Central District of California. He is an active member of the State Bars of California and Oregon.

Visit us at www.mlmlegal.com to learn more.

Whether your compensation plan is binary, matrix or an Australia 2-Up, and regardless whether your products are financial services, educational, health products, or vitamins, the answer is: The same legal principals apply no matter what your compensation plan is and no matter what your product is.

The questions you should be asking are “What is it that people are paying” and “Why are they paying it?” If you’re selling a quality product at a fair price to consumers then you are likely operating legitimately. If you’re running a program in which you are merely moving money or are selling overly-priced products to distributors who are buying into the compensation plan only to quality, then you probably have an illegitimate compensation plan structure.

State agencies and the FTC took a look at compensation plans and products in various spectrums. On a spectrum of compensation plans, a party plan that is retail-oriented is at the favorable end of the spectrum.  As we move across the spectrum, binary plans, particularly binary plans that have distributors buy multiple business centers moves to the far end of the spectrum, nearer to the territory of being a pyramid.

Companies that are marketing different types of products are looked at differently in terms of “Live and Let Live.”  At the conservative end of the spectrum, products that are used for daily household use, telecom, dietary supplements and vitamins – even if there is substantial personal use – state agencies understand that the product is being used and there is little to lose.  At the other end of the spectrum, and one that involves intense scrutiny, are products that are high-ticket items, like financial seminars, financial education programs, consumer benefit programs, and particularly, things that are intangible; states look at these and they ask the question “Who is buying it and why?”

If you think you can operate a legal business selling prayers or wishes you’re dead wrong.

States want to know that retail sales are making it to the end-consumer (not just the distributor).

For more information on compensation plans, check out the article “How to Analyze Compensation Plans.”

Expert MLM Attorney, Jeff Babener, has put together a lot helpful videos on compensation plans. Here are just a few. Visit our main website, mlmlegal.com, for more information on all aspects of running a legitimate direct selling business.

How Do I Create a Compensation Plan That Guarantees That I Am Legal?

What Compensation Plans Do Distributors Generally Prefer?

Role of Compensation Plan in a Successful Direct Selling Company

Is the Compensation Plan the Driving Force of Success?

Visit us at www.mlmlegal.com to learn more.

Almost all major direct selling companies have defined “retail sales” to include sales to non-distributors, as well as sales to distributors for actual use or consumption (distributors like to use the products they sell too). Many regulatory officials, however, have maintained that the “mark of legitimacy” is found in the programs where primary sales revenue comes from sales to non-distributors, i.e. consumers.

As a theoretical goal, the regulatory position is admirable. The fact is that personal use in the direct selling business creates high sales revenue for many companies from the moment of their inception.

For many years after the 1979 Amway decision, a “live and let live attitude” prevailed between the MLM industry and regulatory community. Although periodic legal skirmishes occurred, the industry and regulators appeared to be content to “agree to disagree.” Instead, the focus on legal investigation was upon inventory loading, cash pyramids, phony products, and earnings hype.

The comments of a federal appeals court in a 1996 class action case involving a company called Omnitrition invigorated the debate on personal use. In that decision, which involved an interim ruling in the case, the federal appeals court questioned whether or not a network marketing company could be viewed as legitimate if its sales were not derived from nonparticipant customers (i.e. distributors). The language in the decision was heavily criticized by the MLM industry, and the Direct Selling Association (DSA), in fact, filed an amicus brief citing the importance of personal use in direct selling marketing programs. However, the decision stood firm. In the trial court’s ruling, the court recognized that products purchased for personal use by distributors constituted a retail sale in the same fashion that sales to nonparticipants would constitute a retail sale.

In the aftermath of the decision, both state and federal regulatory agencies were emboldened to sue or obtain consent decrees against network marketing companies which contain very restrictive requirements regarding recognition of personal use by distributors. State agencies were all over the board on their position. Some demanded 50 percent sales to non-distributors. Some demanded 70 percent sales to non-distributors. Some demanded 80 percent to non-distributors. Even the FTC awakened after 20 years of dormancy and demanded that more than 50 percent of sales be to non-distributors in various consent decrees.

The aggressiveness of government activity was alarming to the industry. The industry quickly marshaled forces, and in short order, at least four states adopted legislation specifically recognizing personal use as a legitimate end destination for products. Other states were likewise targeted for such legislation and the industry was of the belief that a trend would be started that ultimately would be recognized by all state and federal agencies. So strongly did the industry feel about it, that its leading trade association, the DSA, undertook consideration of a formal amendment to its ethics code which would recognize that, for purposes of a pyramid analysis, a retail sale would include sales to nonparticipants, as well as sales to participants for actual use or consumption.

Notwithstanding the ongoing debate on personal use, the industry seems to thrive in almost all states. These is no question; however, that the “personal use” issue is a thorny issue and one issue upon which the industry and regulators must carry on an earnest ongoing dialog to reach a consensus that protects consumers, distributors and network marketers.

Learn more about the multilevel marketing industry and personal use. Watch expert Attorney Jeff Babener’s videos:

What Is the U.S. and International Trend in Recognizing the Validity of Personal Use by Distributors in Pyramid Cases?

Is There a Message to the Direct Selling Industry on Next Steps after the Burnlounge Case on Personal Use?

Visit us at www.mlmlegal.com to learn more.

The FTC and the Direct Selling industry are clearly of the same opinion of the basic goal that the direct selling industry should prosper through effective and ethical practices. However, FTC Chairwoman Edith Ramirez emphasized 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.

Briefly, 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.
3. 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.”

1. 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.

Leading MLM industry expert Jeff Babener takes a closer look at what this means for the direct selling and multilevel marketing industry. Read the full article: Fact Checking the FTC’s New Legal Guidance

Visit us at www.mlmlegal.com to learn more.

– Promotions where the business opportunity is the product. If no legitimate product or service is being sold, but only the opportunity itself, chances are that the company is operating a pyramid scheme.

– Products are sold at inflated prices. Pyramid promoters try to mask their true intentions by selling a product. Often, the product will be vastly over-priced, and unlikely to generate much retail activity. This is a sure tip-off that the real “product” being sold is the compensation opportunity.

– Programs that require inventory “loading.” A legitimate network marketing opportunity doesn’t require you to buy unreasonable amounts of inventory to launch your business.

– Programs that require substantial initial cash investments. Many states consider $500 or more to be a “substantial” up-front investment. A multilevel (MLM) company requiring such a high investment is likely to attract the attention of law enforcement agencies.

– Programs that require the mandatory purchase of peripheral or accessory products or services. Some pyramids seek to hide their true face by charging a minimum price for a “startup” kit, but then compel the participant to buy more expensive items, such as training or demonstration materials. Legitimate network marketing companies sell their business startup kits and selling aids at their cost, or just slightly over their cost.

– Companies that don’t  offer a”buy-back” policy. Any company that does not agree in writing to repurchase a reasonable percentage of unsold inventory or unused sales materials from its distributors for a stated time after purchase should be avoided. This is often a sign of a pyramid scheme.

– Programs that pay fees for recruiting. A legitimate network marketing company bases compensation on product sales, not recruiting. If money is paid for signing up new distributors rather than for product sales, the business is likely to be a pyramid.

– Recruiters who misrepresent earnings. If the opportunity is sold as a “get-rich-quick” scheme, beware! The only people who do well in such companies are those who can sucker others into buying into a criminal confidence game.

– You give money, then have your friends give money, and so on. This is a sign of a ponzi scheme. When you give money to a company, it should be for a tangible product or service.

If you want to learn more about the warning signs of pyramid schemes in the direct selling industry, browse the vast collection of articles and videos at mlmlegal.com, such as this video: Jeff Babener explains the difference between a legal MLM company and a pyramid scheme:

Visit us at www.mlmlegal.com to learn more.