Some legal case authorities claim that if a consultant announces that they are going to join another MLM company on Facebook then it’s protected under freedom of expression by the First Amendment. Therefore, a company cannot accuse a consultant of raiding their downline for distributors. Other courts and cases have suggested that consultants separate out their Facebook downline from those of friends and family.

It is very common for consultants to have friends on their social media accounts who are friends and customers, or co-workers and friends, or family friends and work friends, as well as also being someone they know in their direct selling business as customers or sponsors. Since many consultants often sell to their warm market first, distributors often know their customers or sponsor as friends, relatives, or church members. This causes some issues to arise for the MLM company.

A common issue that the industry is grappling with right now occurs when a consultant leaves a network marketing company and joins another MLM company, then begins promoting the second company to their Facebook friends (or other social networks) and to the people who are in their downline organization from the first company. The question is often asked as to whether or not this is considered distributor raiding. The industry has not come to a consensus on this issue yet. Many MLM companies, however, do ask that consultants who leave their company and start selling for another company, not raid their sales organization because they’re damaging the livelihood of all of the other consultants left behind. The industry is working its way through this issue but has not come up with concrete solution to the problem yet.

There is conflicting legal case authority on the issue. Some legal case authorities claim that if a consultant announces that they are going to join another MLM company on Facebook then it’s protected under freedom of expression by the First Amendment. Therefore, a company cannot accuse a consultant of raiding their downline for distributors. Other courts and cases have suggested that consultants separate out their Facebook downline from those of friends and family. But, as we saw above, Facebook friends do not always fit into black and white categories. Often, your friend is also your co-worker. Your relative is also your customer. Your neighbor is also your friend. The courts have argued that Facebook is, in a way, simply a sophisticated means of sending emails because each post is like sending out a bulk email to several hundred people. From this prospective, deciding on whether or not there is a conflict is complex.

We will let you know if the courts come to a deciding factor anytime in the future. In the meantime, if you are in a similar position, we recommend that you read your company’s policies and procedures to see their specific policy on the topic of consultant raiding. You will also find hundreds of articles on our website(s) and blogs on the topic of distributor raiding.

Here are a few that may be of interest to you:

Why do MLM Companies Require Distributors to Use Replicated Websites Rather than Distributor-Created Websites?

Executive Interview by the DSWA – “Legal Hotspots for Direct Selling Companies” with Jeff Babener – Video

Can I and should I join multiple companies and establish multiple downlines?

MLM Company Policies on Social Networks and Distributor Raiding

How Have Raiding Rules Evolved in Direct Selling Contracts and Policies and Procedures? – Video

How Have Raiding Rules Evolved in Direct Selling Contracts and Policies and Procedures?

Has There Been Cases Won or Lost on the Topic of Social Media and Distributor Raiding?

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Has There Been Cases Won or Lost on the Topic of Social Media and Distributor Raiding?

There have been legal rulings both ways on this subject. Some companies have argued that when distributors communicate their intentions to leave a company and begin with a new one on Facebook then they are targeting. Others have argued the opposite point of view. At some point there will be a resolution to this debate at the appellate case level. At this point, most companies would ask that people not promote to people on their Facebook page who’ve been in their downline; however, many distributors would disagree arguing that their Facebook friends are not the friends of the company.

In other cases, consultants want to be “friends” with top leaders and company executives on Facebook in order to stay in the loop and then find themselves in a conflicting position when they want to leave to another company. A deciding factor is yet to be made on this point.

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By Jeffrey A. Babener
© 2016

On June 2, 2014, in the case of FTC v. BurnLounge, the U.S. Court of Appeals for the Ninth Circuit issued a seminal decision, affirming a lower court finding that the BurnLounge MLM (multilevel marketing) program was an illegal pyramid scheme, in violation of section 5(a) of the Federal Trade Commission Act, a decision that will dramatically impact the landscape of direct selling to provide guidance on two fundamental legal issues:

(1) What activity constitutes a “pyramid scheme?”

(2) What is the role of “personal use” (by distributors) in pyramid case analysis?

Stakeholders: “We Won!!” Proxy Wars…….

Victory has 100 fathers and defeat is an orphan. John Kennedy (1961)

As with any inconclusive war, the stakeholders offered immediate statements of victory or vindication.

That is, other than BurnLounge. BurnLounge lost, and a permanent injunction was affirmed.

However, BurnLounge was a proxy war on the tests for “pyramid” and the role of “personal use” in pyramid analysis, among the interested parties, short sellers of publicly traded direct selling companies, publicly traded direct selling companies, industry spokespersons such as the DSA, the FTC, MLM critics, etc.

Each, in turn, issued press releases or statements claiming victory and validation of their respective positions.

The BurnLounge decision offered guidance for all stakeholders and a clear message for “going forward.”

To Short Sellers:

Rethink your criticism of direct selling companies. Distributors’ personal use is a legitimate end destination for product sales. Criticism of personal use is not a valid criticism. So long as distributor purchases are not merely incidental to the business opportunity, such purchases in reasonable amounts for personal use, coupled with rewards for one’s own purchases, as well as use by non-distributors and other distributors is as legitimate as a sale to a non-distributor customer, and is not a basis for a pyramid.

To the FTC:

Congratulations, you won this case on the facts presented. However, since the Omnitrition case (1996), you have been arguing the wrong legal standard on personal use for more than 15 years, albeit a slight diversion in a 2004 FTC Advisory Opinion that recognized legitimacy of personal use. The court pointed out: “The FTC counters that ‘internal sales to other Moguls cannot be sales to ultimate users consistent with Koscot.'” The court proceeded to roundly reject this contention noting that this argument is not “supported by the case law.” And so the message to the FTC is that personal use criticism will not be accepted in the future and the FTC should look back to its 2004 Advisory Opinion position.

To the Industry:

Accept your victory on recognition of personal use as a legitimate destination for product and representative of “sales to ultimate users.” However, “get your act together,” and adopt “best practices” methods and rules that promote product use over mere recruiting. The presence of personal use is not “a free ticket out of trouble.” It will be viewed as part of a legitimate MLM, but it is only one factor for the case by case fact based analysis of the “economic reality” of an entire program in which the acid test will be that the predominant and primary motivation of distributor purchases is for personal use or resale and not merely to qualify for rewards in the program by personal purchases and recruitment of others to do the same.

Major Impact of the BurnLounge Case…

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MLMLegal.com is one of the most informative and reliable websites about network marketing on the web. MLM Legal provides educational articles answering common industry questions, such as:

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MLM Legal offers over 70 videos where MLM expert Jeff Babener discusses network marketing for both consultants and company owners. The website offers research assistance by providing over 700 MLM company profiles, a vendor and supplier directory, and the latest industry news. MLM Legal also offers free materials to those who qualify, including a free MLM Startup Manual, an insightful DVD, and newsletters.

MLM Legal is free and open to anyone, anytime. However, what do you do when you need answers on the go? MLM Legal now offers a free iTunes application. This application offers up-to-date information on the direct selling industry, news and headlines, frequently asked questions, MLM law in 50 states, hundreds of articles, notorious MLM cases, as well as legal news and articles written by Jeff Babener.

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Interviewer: Jeff, let me ask you this question. The industry has come a long way in the last several decades. Can you share with me your experience on how the industry is viewed today versus how it was viewed decades ago?

Babener: Yes, if you’ll indulge me a little bit. I’m going to give you a mini history of what happened in the direct selling industry and where the industry is going. From both a legal and industry standpoint, the origins of the MLM industry go all the way back to the 1800s to the days of the Yankee Peddler. Yankee Peddlers were direct sellers because they sold directly to the public.

From a legal standpoint, there have been three points in time in our industry where issues have become complicated and differentiated. In the days of the Yankee Peddler there was an issue with the product; there was the perception that salesmen were selling snake oil off the back of a wagon and then skipping town.

During the first half of the 20^th century, salespeople were going door-to-door selling vacuum sweepers or encyclopedias, like the famous Fuller Brush man. Whether they were selling high-ticket items, like vacuums, or encyclopedias, they would go in, make high pressure sales, and then disappear. So, during the first half of the twentieth century the direct selling industry had problems that related to the presentation to the consumer. The net result was that somewhere after the 1950s-1960s, the states adopted what was called the “Cooling-Off Rule.” This was intended to resolve the problem of high pressure consumer sales tactics in the home.

Interviewer: Buyer’s remorse, right?

Babener:  Yes. The Federal Trade Commission (FTC)’s “Cooling-Off Rule” basically stated that if a salesperson comes to your home and sells you something, and you pay a significant amount of money in the excitement of the moment, then you have three days to change your mind. It’s called the Three Day Right of Rescission. You have three days to cancel the transaction.

The methodology of direct selling changed in the 1950s, allowing distributors/marketers to not just sell person-to-person, but also they became allowed to recruit other people into their sales team. This was a novel approach. And, it all started with Mary Kay, Shaklee, and others.

This did really well in the 1950s. They stumbled upon a great method of marketing. This is partially what makes up our 30 billion dollar U.S. industry today with 16 million direct sellers, and perhaps, more than 100 billion in sales and 60 million salespeople around the world today. It was very successful.

Now, with successful models often come the charlatans. In the 1960s, along came a program called Dare to be Great, by Glenn Turner. Companies like this one were parading around as if they were direct selling companies but really all they were doing is moving money.

In the Dare to be Great program, individuals were invited to a seminar where they paid $5,000 where they were taught to recruit others to come to the seminar and pay another $5,000. Lo and behold, this marketing system really tainted the direct sales model.

They tainted the MLM business model so much that pyramid laws were adopted all over the country. The business model was tainted so badly that in 1975, the FTC looked at Amway and questioned its validity, accusing it of being a pyramid scheme. Although the company was not a pyramid scheme it still spent four years in litigation with the FTC.

In 1979, a FTC administrative law judge looked carefully at Amway, and for various reasons, proclaimed it not to be a pyramid scheme. Some of the reasons included the reasonable buyback policy for those leaving the business, the adoption of the 70 Percent Rule and the company’s fair customer rules.

The 70 Percent Rule basically stated that distributors shouldn’t buy more products for resale unless they’ve sold or used at least 70% of what was previously purchased. After reviewing Amway, the FTC judge decided it was a legitimate company. Had Amway not won that case in 1979, there would be no direct selling industry today.

Ever since, there has been a constant ebb and flow – a tug and pull – between our FTC and attorney generals and the MLM industry.

I’d say that until the 1990s, the MLM industry still had a negative image. People would read nothing but bad press about the direct selling, network marketing, party plan industry. There remained bad images because there were some abuses in the system. Yet, all of sudden in the 1990s, people started to pay attention to the direct selling model. Then, MLM companies started to explode around the world.

Companies like Avon today are doing 12, 13, 14,000,000,000 around the world in sales with 1,000,000’s of distributors. Amway doing better than 10,000,000,000 around the world. All of a sudden we have companies like Herbalife being traded on the New York Stock Exchange.

Shaklee was bought by Wall Street investment houses. Warren Buffet stepped into the picture, spending hundreds of millions to buy Pampered Chef.

All of a sudden the press began to turn positive, and we were known in the industry as entrepreneurs.

We were known as the industry that capitalized on the things that had become important. Everybody realized that all new jobs in America came from small businesses. Direct sales is a great micro business.

Just when our industry began to come into its own we went into a major recession when our stock market collapsed in 2008. Many companies might have thrown in the towel but some of the largest direct sellers, like Avon and Amway, saw it as an opportunity for their time to shine.

If you saw the 2009 Super Bowl you would have noticed something interesting. The first commercial of the Super Bowl was an Avon commercial. And, it wasn’t a commercial for the company’s products, but for its opportunity. Avon was making a statement that they were credible and they were serious. They were telling viewers that they had an opportunity for you. They were the new Plan B.

This resonated with folks who lost their 401(k)’s, saw their retirements disappear, their bubbles burst, or had reach glass ceilings. The company was telling viewers that they had something real to offer; a good part time business with good products.

Avon, of course, stuck around. The national anthem was then sung by Jennifer Hudson, the spokesperson for Avon. This was not a mistake. Avon had realized that Amway had spent a fortune on promoting its brand. Whereas, Avon had been absent on its branding for some period of time. The company began taking great pride in its products and its successes.

While America was having problems around the world with all of our money going floating away, guess what has been one of America’s most successful exports? We have taught the world direct selling. We have taken it everywhere. Direct selling is almost like basketball. It is indigenous to America, but it does well in Japan and China. Even in China, MLM isn’t allowed, and the industry still does well.

Today, Amway does billions in sales. All of a sudden there was a message being heard on Wall Street. MLM companies were being traded on the NYSE. The industry came into its own.

When you have companies like Excel sign on four million customers, or Network 2000 that sign on two million customers for Sprint, or you see major companies, from Texas and other states selling deregulated energy, and having tremendous success then there is some pride to be taken there.

Everybody is discovering that the principles behind direct selling, network marketing, MLM, and party plan. This method of marketing can be quite successful if done with integrity and done with ethics. And today, the industry is now very well accepted. And it’s also well accepted around the world.

Interviewer: Awesome. Thank you for sharing that.

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