Hardly Anyone Makes Money Selling Multi-Level Marketing Merchandise. So Why is it Still Legal?

·7 min read

At some point, you’ve probably been contacted by a family member, friend or Facebook acquaintance who fancies themselves a budding entrepreneur. They’re selling essential oils. Or nutritional supplements. Or cleaning products. Maybe they want to offer you the “amazing business opportunity” of joining their team and becoming a seller too.

This practice is known as multi-level marketing (MLM for short), also referred to as network marketing or direct sales. MLM companies like LuLaRoe (clothing), doTerra (essential oils) and Monat (haircare) recruit independent contractors — usually women — to sell products to the people they know. These distributors, who are provided lofty titles like “independent consultant” or “wellness advocate,” are often encouraged to recruit others to join their “downlines” in order to earn commissions on their sales — and the more new people they bring in, the more money they stand to earn themselves.

MLMs have long been accused of operating as thinly-veiled pyramid schemes that employ predatory business tactics. (Every company cited in this story either did not respond to a request for comment or declined to provide a response.) But in some circles, joining an MLM is more popular than ever, thanks to the coronavirus pandemic, and the resulting economic fallout that prompted people to look for new ways of earning an income.

So how, exactly, is this legal? A combination of murky laws, lack of resources and a whole lot of lobbying power.

MLM vs pyramid scheme

MLMs have existed for decades, but a wave of recent documentaries (Betting on Zero) and podcasts (The Dream) have brought the practice to the public eye. In 2020, TikTok became the first social media platform to ban MLM content and users who violate its anti “frauds and scams” guidelines. The subreddit r/antiMLM currently has more than 700,000 followers — and is laden with horror stories from former sellers who say they went into debt, and wasted years of their lives, chasing an impossible dream.

The Federal Trade Commission (FTC) has even said flat out that “some MLMs are illegal pyramid schemes.” Even so, the MLM industry is far from defeated. It accounted for $35.2 billion in retail sales in 2019, according to the most recent data available from the Direct Selling Association, an MLM lobbying group. There were approximately 6.8 million distributors during that period, and the DSA claims they earned an annual average of $5,176.

Yet according to independent analyses, the financial prospects for MLM participants are much grimmer. One study by AARP found that 73% of sellers either don’t earn a dime or actually lose money from the venture. One highly-circulated report from the Consumer Awareness Institute puts that number at closer to 99%.

The truth is, a business model that’s built on recruiting distributors makes it extremely difficult for most people to make much money at all. New recruits are sent to splashy websites that talk about “being your own boss” and living your best life, and top earners flaunt the proof across social media. But what these low-level distributors often don’t realize is how often MLM success stories come from people who joined on the ground floor and grew a massive downline underneath them — not from selling products.

MLMs continue to convince recruits otherwise, often using deceptive income claims, according to FTC complaints. And sometimes, they get caught.

One of the more high-profile examples is Herbalife, a Los Angeles-based company that has sold a rotating inventory of weight management and nutritional supplements since 1980. In 2016, the FTC forced determined Herbalife “deceived consumers into believing they could earn substantial money” by selling its products, which led to “substantial economic injury to many of its distributors.” Herbalife was ordered to restructure its business and pay a $200 million settlement.

MLMs aren’t just a danger to participants’ bank accounts. Those that operate in the health and wellness spaces are often accused of making unfounded health claims — and the coronavirus pandemic has only exacerbated the problem.

One social media post by a distributor for Plexus, an MLM that sells a powdered weight loss supplement nicknamed “the pink drink,” was recently flagged by the FTC for claiming the drink could prevent the transmission of COVID-19.

Youngevity, another MLM that sells health supplements, was also called out by the FTC for using its own website to make these sorts of bold claims. Naturally, Youngevity distributors followed suit: “With these, your body will be able to withstand and eliminate Covid-19 and the vaccines forthcoming for Covid-19,” one wrote on social media. “Stay Safe.”

Network marketing today

Despite this dubious track record, options are somewhat limited for holding MLMs accountable.

“There are really only two groups of people who are positioned to crack down on shady MLMs,” says Teel Lidow, an attorney and CEO of the consumer protection startup FairShake. That includes regulators, like the FTC or the Securities and Exchange Commission (SEC), or former MLM distributors themselves.

Sadly, distributors don’t have much leverage when it comes to legal action — MLM companies often include a “mandatory arbitration” provision in their distributor contracts, meaning disputes must be handled outside of the court system. Even if an MLM agrees to settle with a disgruntled distributor, and pay for damages incurred, their misconduct doesn’t become public record, Lidow says.

And regulators?

As the FTC sees it, MLMs are assumed legitimate until proven otherwise by the agency’s investigators, says Douglas M. Brooks, an attorney who specializes in representing victims of pyramid schemes, deceptive MLM programs and business opportunity scams.

“The FTC has to follow a case-by-case approach,” he says. “They just don’t have the resources to look at each one.”

Brooks pointed to one legal ruling, the FTC’s Koscot decision, as a widely-recognized precedent on determining what an illegal MLM looks like. In that 1975 case, a judge ruled that MLM companies must base distributor pay on actual retail sales to customers, and not on how many new recruits they bring in, or how much inventory they sell wholesale to those recruits.

Four years later, an FTC case against Amway muddied things a bit.

Amway, the largest MLM in the world, sells health, home and beauty products. Distributors earn commissions on both retail sales and sales to their downline recruits, who turn around and sell the products at a markup to people outside the Amway organization. This conflicts with the FTC’s earlier ruling, but thanks to a few legal loopholes— like the fact that distributors are required to buy back recruit’s unused products if they chose to quit —the agency gave Amway the go-ahead in 1979.

“That became the model for every MLM since then,” Brooks says. Most MLMs have adopted some version of those Amway rules, which still exist today, in order to fit the FTC’s definition of a legitimate MLM (i.e., not a pyramid scheme).

MLMs get a pass in other legal areas, too.

Take the FTC’s Business Opportunity Rule, which requires companies recruiting work-from-home and other independent sales reps to provide detailed information on the risks of buying in. When it was first proposed in 2006, that rule did apply to network marketing companies, but the industry dramatically increased its lobbying dollars to congressional representatives; many of whom wrote letters to the FTC urging it to exempt MLMs.

It worked: When the Business Opportunity Rule finally became law in 2012, the definition was revised to exclude most MLM companies.

For the last several years, MLMs have been well-positioned to continue to sway the courts in their favor. Former President Donald Trump heavily promoted the Concord, North Carolina-based company ACN between 2005 and 2015 (and was later sued by former sellers who claim they got burned but the company). Betsey DeVos, former Education Secretary under Trump, is related to several Amway higher-ups, including her husband (former Amway CEO Dick DeVos) and father-in-law (Amway co-founder Richard DeVos).

With a new administration in place, things may finally change. In a December 2020 speech to the DSA, FTC Commissioner Noah Joshua Phillips warned, “Sellers beware: we’ve been aggressive in the cases we’ve been pursuing, the remedies we’re seeking, and our willingness to go to court.”

“Now more than ever, ” he added, “this is a top enforcement priority for me.”

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