Multi-level marketing companies commonly hide behind a claim of “legality” to advance the scheme and recruit new members.
MLM expert Robert FitzPatrick explains in his paper The Myth of “Income Opportunity” in Multi-Level Marketing:
Another element of maintaining the MLM myth of legitimacy and a viable income opportunity is based on the claim that, regardless how it operates, MLM is still “legal.” As a legal enterprise, “success” in the business is then said to be the result of “hard work” and “following the system” recommended by the organizers – as would occur in legal businesses. Failure rates and financial losses among those recruited into MLM – regardless of their scale – are then treated as an outcome of normal business risks and markets forces or the fault of the individuals who lose.
The claim of technical legality is used to affirm financial legitimacy, to conceal a flawed structure that requires the vast majority to lose, and to justify systematic deception.
Until about 25 years ago in the United States, endless chain sales schemes were routinely viewed as illegal pyramid schemes or “unfair and deceptive trade practices.” Any sales company employing an endless chain to sell or market its products was seen as fraudulent due to the certainty of financial losses they perpetrate on the vast majority of participants and the necessary use of deception to lure participants. This report, however, does not directly address the question of whether the MLM endless chain system is legal or not.
Since 2000, the Federal Trade Commission has avoided prosecuting or overseeing the MLM industry to any significant extent, making the question of legality moot in terms of consumer protection. MLMs today operate largely without oversight. Consumers are on their own to know whether they are being defrauded or not.
Whether or not an endless recruitment chain is declared legal and whether or not the FTC ever prosecutes any particular MLM will not change the disastrous financial results such schemes inflict upon consumers. Endless chains – without the majority of people in the chain earning the majority of their income from retail selling – will always produce a massive loss rate for participants.
In the rare cases where the FTC has prosecuted MLM companies, it based its cases on the key factor of whether the majority of the sales of the MLM were made to consumers outside the chain, that is, sales made on a retail basis to people who are not also MLM sales representatives and occupy positions on the chain. This factor was used to determine whether the MLM is a “direct selling” company or a pyramid recruitment scheme. The reasoning for treating “nonretail” schemes as illegal pyramid recruitment schemes was based on federal court interpretations and rulings that cited the defining factor of retail revenue versus revenue gained primarily from the sales representatives themselves.
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