Industry Applauds New Montana Legislation

By Jeffrey A. Babener
  1999

FIVE DOWN AND FORTY-FIVE TO GO

Although the network marketing industry makes legislative progress inch by inch, it is good to note a periodic triumph. In October, 1999, Montana enacted model anti-pyramid legislation which will greatly enhance the opportunity for MLM companies and distributors in Montana in the future. Montana joined the ranks of other states such as Texas, Oklahoma, Kentucky and Louisiana 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.

BALANCE FOR CONSUMERS AND NETWORKERS ALIKE

The network marketing industry welcomes the new legislation. Montana 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, Oklahoma and Louisiana. In consideration for adopting a 12-month buy-back policy, the State of Montana recognized the importance of personal use by distributors in the direct selling industry.

"The State of Montana has recognized that usage by distributors is a valid end destination for product every bit as much as a sale to nonparticipant customers."

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 Montana statute, the statute exempts from the term "consideration," at-cost sales kits. The statute also specifically exempts from the definition of a pyramid promotion scheme plans that allow 15 days right of cancellation or where purchase of products are subject to a 12-month buy-back policy.

Most importantly, the statute defines pyramid compensation to exclude payments to participants for sales of products "used or consumed" by participants.

In layman's terms, the State of Montana has recognized that usage by distributors is a valid end destination for product every bit as much as a sale to nonparticipant 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 Montana.

PERSONAL USE RECOGNITION

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

Why is this important? Since the decision by the Ninth 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 nonparticipants. This position does not recognize how the industry works, and it was eloquently argued to the Ninth Circuit Court of Appeals in an amicus brief by the Direct Selling Association. Unfortunately, the industry opinion was ignored. 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.

THE FTC CHALLENGE - DROPPING THE BALL

Notwithstanding the new favorable legislation in Montana, the real challenge in the industry since 1994 has been the position of the Federal Trade Commission that more than 50 percent of sales must be to nonparticipants in order for a company to be a legitimate direct selling company. After 20 years of inactivity on the subject after its loss in FTC v. Amway, the FTC used the Omnitrition case to assert its position in a series of lawsuits against direct selling companies over the next several years. The most recent lawsuit filed by the FTC involved Equinox. The industry has been equally troubled by the "trial by ambush" tactics of the FTC in which restraining orders are achieved and assets seized without notice to the companies. Although it is true that many of the companies that were the subjects of suits deserve severe criticism, the FTC process has been an unfair threat to the industry. More importantly, in each of its cases, the FTC has grown more bold in its attack on the basic structure and functioning of network marketing companies to the point that many of the nation's leading network marketing companies could not pass the FTC test if the FTC's position was law. Although the Direct Selling Association has had some success at the state level, it has "dropped the ball" in terms of achieving a successful dialog and standard with the FTC. Many industry observers believe that this should have been, but has not been the DSA's number one priority for the last several years. Until this is resolved, leading companies continue to be in jeopardy.

A GOOD START

The new Montana 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.

Link here for the complete text of the new Montana statute, as well as statutes in all 50 states.

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.

www.mlmlegal.com

Main Library || MLM Legal || Babener & Associates || MLM Articles || Power Index