"... the better position would be to permanently remove the bottleneck, as well as address the current needs of MLM companies and distributors."

Louisiana - Industry Triumph

By Jeffrey A. Babener

July, 1997

 

A GOOD DAY FOR THE INDUSTRY

For the direct selling industry, it was refreshing. Very refreshing. On June 20, 1997, the Governor of Louisiana signed into law a model anti-pyramid legislation which will greatly enhance the opportunity for MLM companies and distributors in Louisiana in the future. Louisiana joined the ranks of other states such as Texas, Oklahoma and Kentucky in recognizing the validity of personal use by distributors, an issue that has been divisive between state and federal regulators and the direct selling industry in recent years.

THE LOUISIANA PROBLEM

The new legislation ends a period of difficulty that the direct selling industry has had during the last decade with Louisiana. Although, generally cordial to the direct selling industry, at least one Louisiana regulator, for a period of time, made life difficult for direct selling companies, justifying reliance on Arcane 1926 Louisiana statute on "endless chain" programs.

The problem arose in the registration process in Louisiana. Louisiana is one of several states that has adopted multi-level registration requirements. The registrations were routinely filed without comment until an interpretation was rendered by one Louisiana official that all multi-level marketing companies came within the purview of Louisiana revised statute 51:361, which requires "endless chain" programs to apply to the Louisiana Securities Commission and go through a lengthy process to obtain a permit to operate an "endless chain" scheme. Absent obtaining such a permit, the official would not accept the registration of MLM companies.

Ironically, the definition of an "endless chain scheme" which required a permit, was that of a pyramid. A company which filed for a permit to be an endless chain scheme would in effect be admitting that it was an illegal pyramid under other legislation in Louisiana. Obviously, no company could do this, and no person could be found that could recall any direct selling company ever having obtained such a permit in Louisiana. Unfiled registrations piled up in Louisiana for a two-year period and consumers were told that the unregistered companies were illegal.

REMOVING THE BOTTLENECK

The problem became so severe that industry leaders and officials began a dialogue with higher levels of Louisiana consumer protection division. Initially, some relief was given in that the interpretation of the statute was changed such that registrations were no longer blocked for failure to obtain a permit as an "endless chain."

Nevertheless, it was thought that the better position would be to permanently remove the bottleneck, as well as address the current needs of MLM companies and distributors. As a result, over time, new model legislation was crafted and signed into law in June 1997. Credit for the new legislation should go directly to the Direct Selling Association and representative of leading companies such as Amway, MaryKay and Shaklee, who assisted in its passage.

A NEW DAY IN LOUISIANA

The new Louisiana legislation is exemplary in several respects. First, the new legislation totally repealed the 1926 "endless chain" statute which requires pyramids to obtain permits from the Securities Commissioner, and which from time-to-time was applied to legitimate direct selling companies.

Secondly, and more importantly, legislators and the consumer protection division, took the opportunity to craft model anti-pyramid legislation that both protected the interest of consumers as well as the industry. The new legislation mandates a 12-month buy-back policy for product purchases by distributors, which is consistent with standards adopted by the Direct Selling Association, and most recently in Texas and Oklahoma. In consideration for adopting a 12-month buy-back policy, the State of Louisiana recognized the importance of personal use by distributors in the direct selling industry.

Under most pyramid statutes, the statutes define a pyramid as "a program by which a participant gives consideration for the opportunity to receive compensation which is derived primarily from a person's introduction of other persons into the plan rather than from the sale of goods or services." First, in the Louisiana statute, the statute exempts from the term "consideration," at-cost sales kits, and also exempts purchase of products where the products are subject to a 12-month buy-back policy. In addition, the statute defines "compensation" to exclude payments to participants based upon "sales of products purchased for actual use or consumption, including products used or consumed by participants in the plan."

In laymen's terms, the State of Louisiana has recognized that usage by distributors is a valid end destination for product every bit as much as a sale to non-participant customers. So long as direct selling companies follow the new model legislation, and they should not have problems doing so, both the companies and their distributors will feel much more secure in the future in Louisiana.

PERSONAL USE RECOGNITION

Louisiana legislation is very helpful to the industry. It continues a trend among states to recognize personal use. The states of Texas, Oklahoma and Kentucky have already adopted legislation to this effect. Recent Canadian legislation made such a recognition.

Why is this important? Since the decision by the 9th Circuit Court of Appeals in Omnitrition questioning personal use by distributors, regulators, courts and public officials have been arguing about what factors constitute legitimacy of direct selling companies. Some officials have argued that direct selling companies are not legitimate unless all sales are made to non-participants. This position does not recognize how the industry works, and it was eloquently argued that the 9th Circuit Court of Appeals in an amicus brief by the Direct Selling Association. The fact that several states have adopted legislation recognizing the validity of personal use by distributors will in and of itself provide evidence to future courts that must rule on the issue, as well as the future legislators that must address the issue. In the next year, the industry has targeted a Florida, North Carolina, Michigan and California for similar legislation.

A GOOD START

The new Louisiana legislation is good news for the industry as well as for consumers. It is definitely not the end game, however, in an industry that is increasingly under threat from narrow interpretations by state officials, and an increasingly active Federal Trade Commission, regarding the validity of personal use as the ultimate destination for products of direct selling companies. It is, however, a good start.


Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, a partner in the Portland, Oregon, law firm Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

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