Casting a Wider â•œNet Impressionâ•š: How Emphasizing Deception in FTCA Litigation Complicates the Distinctions Between Pyramid Schemes and Multi-Level Marketing Companies

Ohio Northern University Law Review Ohio Northern University Law Review

Volume 49 Issue 2 Article 4

2023

Casting a Wider “Net Impression”: How Emphasizing Deception in Casting a Wider “Net Impression”: How Emphasizing Deception in

FTCA Litigation Complicates the Distinctions Between Pyramid FTCA Litigation Complicates the Distinctions Between Pyramid

Schemes and Multi-Level Marketing Companies Schemes and Multi-Level Marketing Companies

Adeline Clay

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429

Casting a Wider “Net Impression”: How Emphasizing Deception

in FTCA Litigation Complicates the Distinctions Between

Pyramid Schemes and Multi-Level Marketing Companies

DELINE CLAY

NTRODUCTION

In October 2021, the Federal Trade Commission (FTC) issued a

statement directed toward multi-level marketing companies, colloquially

known as MLMs, which promised to pursue legal action against these

companies for violating Section 5 of the Federal Trade Commission Act

(FTCA).

Section 5 proscribes “unfair or deceptive acts or practices in or

affecting commerce,”

and the FTC released this statement in conjunction

with an unaddressed letter which included “notices” of legal standards and

practice guidance for companies which courts analyze when determining

whether or not Section 5 is violated.

Of note, the FTC stated that misleading

or untrue earning projections exist when a court determines that the “net

impression” of a company’s statement indicates as much.

The FTC

addressed these letters “to more than 1,100 companies.”

The recent attention from various social media platforms and

documentaries highlighting the businesses practices of MLMs serves to

explain why the FTC has begun to target them for warnings.

Not to be

* Adeline Clay is an associate attorney at Frombaugh Law in New London, Ohio. In 2019, she received

her Bachelor of Arts in English from the Ohio State University at Mansfield. Afterward, she attended

Ohio Northern University College of Law and graduated in 2022. While in law school, she served as

Editor-in-Chief of the Ohio Northern University Law Review and was inducted into the prestigious Willis

Society.

1. FTC Puts Businesses on Notice that False Money-Making Claims Could Lead to Big Penalties,

ED. TRADE COMM’N (Oct. 26, 2021), https://www.ftc.gov/news-events/press-releases/2021/10/ftc-puts-

businesses-notice-false-money-making-claims-could-lead [hereinafter FTC Puts Businesses on Notice];

Letter from Federal Trade Commission (Oct. 26, 2021), https://www.ftc.gov/system/files/attachments/

penalty-offenses-concerning-money-making-opportunities/cover-letter-mmo.pdf [hereinafter Letter].

2. 15 U.S.C.A. § 45(a)(1) (West 2006).

3. Letter, supra note 1.

4. Id. (quoting F.T.C. v. Stefanchik, 559 F.3d 924, 928 (9th Cir. 2009)).

5. FTC Puts Businesses on Notice, supra note 1.

6. See Kelsey Weekman, As Multi-Level Marketing Companies Turn Their Attention to Social

Media, Young People Are Fighting Back, I

N THE KNOW (May 27, 2021), https://www.intheknow.com/post

/anti-mlm-creators-tiktok-youtube/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmN

vbS8&guce_referrer_sig=AQAAAIzPX5meAur-oWAbvN8-OFoeMl454IKcHJHOW5FDxX_T-Yko8b7

nY6MTocaMq6_uFZ8MzfRa7Cfexh8cP-AyXpLNrwq9EFMHRyaPniKKQQgy6n0jeQAVFSuiKg_l6X

1cnfkN0mUS3S3M0M0gfrVahl8O0X-dCHkMcQP7em34DgYj; Tom Kucher, 4 Documentaries Like

Clay: Casting a Wider “Net Impression”: How Emphasizing Deception in FT

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430 OHIO NORTHERN UNIVERSITY LAW REVIEW [Vol. 49

confused with pyramid schemes, which are illegal, MLMs may provide a

legal, dependable source of income for some entrepreneurs.

Most of these

direct sellers are women,

and MLMs often package their products and risky

money-making ventures as sure sources of income that allow women to feel

independent as business owners and available as mothers and wives.

Unfortunately, a 2011 report by the Consumer Awareness Institute asserted

that MLMs see nearly all their sellers lose money rather than earn it, and this

same report suggests that the illegal and patently fraudulent pyramid schemes

actually result in less economic damage to sellers.

Scholars suggest that the FTC could successfully slow or even stymie the

debilitating financial and social effects which misrepresentation and false

earning projections have on consumers and direct sellers by sending more

warning letters to potentially liable multi-level marketing companies and

issuing legal threats in connection with these letters.

Additional solutions

may include subjecting companies to civil liabilities for misrepresentations

or restructuring other areas of employment to accommodate working women

and their families.

While these methods may be effective in curtailing the

effects of direct sellers, they do not adequately address an underlying issue

with MLMs—that the net the FTC casts for its warnings is still too small,

even when 1,100 companies received warning letters.

That is, the number

of companies receiving FTC warning letters does not accurately reflect the

‘LulaRich’ to Stream That Investigate Multi-Level Marketing (MLM) Schemes, DIST. CHRON. (Sept. 28,

2021), https://districtchronicles.com/4-documentaries-like-lularich-to-stream-that-investigate-multi-

level-marketing-mlm-schemes/.

7. Multi-Level Marketing vs Pyramid Schemes, S.D.

CONSUMER PROT, https://consumer.sd.gov/

fastfacts/marketing.aspx (last visited Apr. 20, 2022); Gregory Karp & Chicago Tribune Reporter, The Fine

Line Between Legitimate Businesses and Pyramid Schemes, C

HI. TRIB. (Feb. 10, 2012, 12:00 AM), https://

www.chicagotribune.com/business/ct-xpm-2013-02-10-ct-biz-0210-herbalife-20130210-story.html.

8. Bridget Read, Hey Hun! In Women’s Joblessness, Multi-Level Marketers Saw Opportunity,

UT (Feb. 3, 2021), https://www.thecut.com/2021/02/pandemic-unemployment-multi-level-marketing.

html (“The Direct Selling Association, a trade organization of MLMs, estimates that 74% of the 16 million

Americans involved in direct selling are women . . . .”).

9. Id.

10. Jon Taylor, MLM’s Abysmal Numbers, in T

HE CASE (FOR AND) AGAINST MULTI-LEVEL

MARKETING 7-1 (2011), https://www.ftc.gov/sites/default/files/documents/public_comments/trade-regu

lation-rule-disclosure-requirements-and-prohibitions-concerning-business-opportunities-ftc.r511993-000

08%C2%A0/00008-57281.pdf (“MLM as a business model is the epitome of an ‘unfair or deceptive acts

or practice’ that the FTC is pledged to protect against. It is even worse than classic, no-product pyramid

schemes (for which the loss rate is only about 90%) and ‘pay to play’ chain letters.”) [hereinafter Taylor,

MLM’s Abysmal Numbers].

11. Christopher Bradley & Hannah Oates, The Multi-Level Marketing Pandemic, 89 T

N. L. REV.

321, 326 (2022).

12. Rohit Chopra & Samuel Levine, The Case for Resurrecting the FTC Act’s Penalty Offense

Authority, 170 U.

PA. L. REV. 71, 79 (2021).

13. Annie Blackman, Regulating the Reluctant: Policies That Benefit Vulnerable Participants in

Multi-Level Marketing, 25 U.

PA. J. L. & SOC. CHANGE 83, 83, 113 (2021).

14. FTC Puts Businesses on Notice, supra note 1.

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2023] CASTING A WIDER “NET IMPRESSION” 431

actual amount of multi-level marketing companies that should be receiving

warnings regarding their business practices.

If this initial number regarding

the unlawful activities of MLMs were more accurate, the FTC and other

policy- and lawmakers would have a greater ability to target the harms which

MLMs cause their direct sellers.

At the outset, this Comment does not propose additional penalties for

violations of the FTCA, nor does it suggest how to resolve the harm caused

by multi-level marketing companies and pyramid schemes. Instead, this

Comment focuses on the fact that the regulatory guidance the FTC provides

for “deceptive practices” in relation to multi-level marketing companies is

relatively unhelpful in determining the scope of which MLMs violate the

FTCA.

This assertion is supported by analyses of case law using and

extrapolating on the “net impression” standard courts created which the FTC

adopted and now proposes.

This Comment then suggests that the net

impression standard is insufficient to target the majority of harms associated

with multi-level marketing companies; while misleading earning projections

form the basis of liability under the FTCA for those deceptive practices, it is

the structure of MLMs which promote recruitment over sales, an “unfair”

practice under the FTCA, that truly mirror pyramid schemes.

If a net

impression of earning potential is the controlling standard, then MLMs that

publish timely income disclosure statements could escape liability although

they functionally pose the same threat to the public as pyramid schemes.

While the net impression standard is certainly useful in establishing one type

of liability under Section 5 of the FTCA, this standard should be accompanied

by a scrutinization of the unfair effects a multi-level marketing company’s

structure has on the public, which could be accomplished through another net

impression standard. Under this type of inquiry, more multi-level marketing

companies would likely be considered unlawful and likewise subject to civil

penalties because many MLM companies engage in the same unfair results,

which subject pyramid schemes to liability.

ISTORY AND BACKGROUND

The MLM Business Model—“These Things Sell Themselves”

As a business model, multi-level marketing companies typically provide

two sources of income for their distributors—commissions from selling the

15. Id.

16. Letter, supra note 1.

17. See infra text accompanying notes 161-62; Letter, supra note 1.

18. See infra text accompanying note 64.

19. See infra text accompanying notes 64, 66.

20. The Office: Michael’s Birthday (NBC television broadcast Mar. 30, 2006).

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company’s product, and commissions for recruiting new distributors.

This

model differs from “traditional marketing,” in which a company makes a

product and sends the product to a “wholesaler,” which distributes products

to retailers, who advertise and sell the product to the ultimate consumers.

Instead, MLMs employ network marketing strategies, in which a company

makes a product and recruits direct sellers who buy the product in order to

have it on-hand to advertise and sell to other consumers.

may occur through face-to-face parties, in which a seller can access a key

group of friends and colleagues to demonstrate a product, or through social

media, an avenue which allows the seller to reach an even wider scope of

potential customers and fellow direct sellers.

In some ways, MLMs may

seem more convenient than traditional marketing tactics by cutting out the

middleman and providing an accessible and often personal avenue by which

consumers can obtain products.

Studies on the network marketing model demonstrate that most direct

sellers are women.

The reason women dominate this business model stems

in part from societal conventions that some women have a greater desire to

stay at home to manage their families and simultaneously earn an income or

that they want to develop a “community” of business opportunities for other

women.

For some direct sellers, religious reasons motivate entrance into

MLMs;

Utah is “the number one state in the union for multi-level marketing

companies.”

In turn, “Mormons are seriously over-represented” in

MLMs.

The high proportion of religious people is not solely accounted for

by geographic convenience—MLMs suggest that community involvement

and hustling create the most successful salespeople, and churchgoers often

21. Fed. Trade Comm’n, Multi-Level Marketing Businesses and Pyramid Schemes (July 2022),

https://consumer.ftc.gov/articles/multi-level-marketing-businesses-pyramid-schemes [hereinafter F.T.C.

Multi-Level Marketing].

22. Supriya Bajaj, A Complete Guide of Multi-Level Marketing Business Model, S

OFTWARE

SUGGEST, https://www.softwaresuggest.com/blog/understand-multi-level-marketing-business-model/#

(last updated Dec. 21, 2021).

23. Id.

24. Id.; Caileen Kehayas Holden, What Is An MLM + Why Do They Target Women, C

AREER

CONTESSA, https://www.careercontessa.com/advice/multilevel-marketing/ (last visited Apr. 3, 2022).

25. Bajaj, supra note 22.

26. Blackman, supra note 13, at 94; Direct Selling Ass’n, Direct Selling in the United States,

ERMA (Oct. 25, 2021, 10:54 PM), https://perma.cc/F7XE-B4V9; Holden, supra note 24.

27. Blackman, supra note 13, at 96.

28. Holden, supra note 24.

29. Id. (quoting Mette Harrison, 10 Reasons Mormons Dominate Multi-Level Marketing

Companies, R

ELIGION NEWS (June 20, 2017), https://religionnews.com/2017/06/20/10-reasons-mormons-

dominate-multi-level-marketing-companies/).

30. Captain Cassidy, An Overlapping Venn Diagram: Christianity and Multi-Level Marketing

Schemes, P

ATHEOS (Feb. 28, 2018), https://www.patheos.com/blogs/rolltodisbelieve/2018/02/28/over

lapping-venn-diagram-christianity-mlm/.

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2023] CASTING A WIDER “NET IMPRESSION” 433

have large social networks to which they can outreach.

People tend to trust

those with shared characteristics, whether gender, ideology, or social class,

and the community aspect of MLMs relies on these relationships to recruit

sellers and consumers.

Unfortunately, many MLMs advertise financial independence,

entrepreneurial opportunities, community values, and women-centered

businesses to potential consumers over the quality of the products

themselves.

For example, the now-controversial clothing retailer LuLaRoe

states that it “was created to help others succeed” and was “built on the

principles of entrepreneurship, freedom, and service.”

Avon’s “values” do

not include mentions of makeup or fashion selections but instead describe the

efficacy of its business and the ultimate goal of bettering the world for

women.

doTERRA promises its sellers a business which “maintain[s] the

culture of a small company where everyone has a voice and a place,” and it

is only after this statement that the company describes the quality of its

essential oils products in any great detail.

These examples are neither

exclusive nor extraordinary when compared to other MLMs.

To recruit direct sellers, MLMs may offer joining options for their

website visitors.

However, new sellers often join based on testimonials

from acquaintances or friends claiming they now run their own businesses,

can pay off debts and bills, and have extra spending money for their

families.

By joining the original seller’s “downline,” a new direct seller

may be able to market to a similar social circle or reach out to their own

friends and family members to advertise their products.

Direct sellers might

pay an upfront cost for initial inventory, as well as continued expenses for

31. Holden, supra note 24; Harrison, supra note 29.

32. Holden, supra note 24; Harrison, supra note 29.

33. Blackman, supra note 13, at 94-96.

34. Our Story, L

ULAROE, https://www.lularoe.com/our-story (last visited Apr. 29, 2022).

35. Our Values, A

VON, https://www.avonworldwide.com/about-us/our-values (last visited Apr.

29, 2022).

36. The doTERRA Vision,

DOTERRA, https://www.doterra.com/US/en/brochures-magazines-

welcome-to-doterra-doterra-vision (last visited Apr. 29, 2022).

37. See also Blackman, supra note 13, at 96 (describing the sales tactics employed by retailers for

the company It Works!, in which distributors would “‘go into mom groups and look for anyone at [sic]

trying to look for friends or who had financial struggles and go after them . . .’”) (quoting Sara Silverstein

et al., People Who Sell for Multilevel Marketing Companies Look Wildly Successful on Facebook, But the

Reality Is Much More Complicated, B

US. INSIDER (Aug 6, 2019, 12:11 PM), https://www.businessinsider.

com/mlms-use-social-media-facebook-portray-financial-success-2019-7).

38. See also Join Us, L

ULAROE, https://www.lularoe.com/join-lularoe (last visited Apr. 29, 2022).

39. See Silverstein et al., supra note 37 (“Judging by what people post on social media, it seems

like there are a lot of multilevel marketers doing great and making money. But the data tells a different

story. . . . Some 94% of all [Young Living] members are at the very bottom rung where the average

monthly income is less than $1.”).

40. Charity, What’s a Downline? What Is an Upline?, MLML

EGAL (July 18, 2013),

http://mlmlegal.com/MLMBlog/whats-a-downline-what-is-an-upline/.

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434 OHIO NORTHERN UNIVERSITY LAW REVIEW [Vol. 49

products.

However, they can make sizable commissions by selling some

products, recruiting other sellers into their downline, and profiting “upward”

in the retail chain by earning a percentage of the income that their downline

receives.

For those direct sellers who join a multi-level marketing company

at its inception, the probability of large bonuses and reliable income is high.

Unfortunately, the more direct sellers are recruited, the fewer potential

customers remain because those customers already have representatives to

sell their product, or they themselves are direct sellers.

While those at the

top of these direct seller distribution chain benefit from the sales and

commissions their downlines receive, those at the bottom of this model

expend money to join the company and buy inventory yet are left with no

customers to which to advertise.

MLMs provide a product to the ultimate consumer, distinguishing them

from pyramid schemes which focus solely on recruitment.

While MLMs

emphasize business and money-making opportunities to their customers, the

products direct sellers sell make MLMs legal.If an MLM did not have a

product to market, it would be a pyramid scheme and would therefore be

illegal.

The FTC also noted that pyramid scheme recruiters often “make

extravagant promises about . . . earning potential,” and “emphasize recruiting

new distributors for your sales network as the real way to make money.”

In considering the structure of a multi-level marketing company, the first

distributors of a given corporation make the largest income, earned somewhat

from their personal sales but primarily from commissions derived from their

downline’s sales and their downline’s recruitment actions.

After the first

41. See Silverstein et al., supra note 37. One former seller for Young Living recounted that ‘“The

investment was $165, which [the company] totally downplayed and made it sound like you could become

the CEO of your own company for just 160 bucks.”‘ Id. “A study done in 2011 by John Taylor of the

Consumer Awareness Institute analyzed the compensation structure for 350 MLMs. See Taylor, MLM’s

Abysmal Numbers, supra note 10, at 7-1. Taylor accounted for expenses, including the products that

distributors had to buy themselves just to qualify for commissions or bonuses. Taylor also found that over

99% of participants lost money in each of the multilevel marketing companies analyzed.

42. F.T.C. Multi-Level Marketing, supra note 21; Bajaj, supra note 22.

43. See Taylor, MLM’s Abysmal Numbers, supra note 10, at 7-3. Taylor reported that “most of the

money goes to TOPPs [“top-of-the-pyramid promoters”] at the expense of a revolving door of unwitting

new downline recruits who try an MLM program and quit, only to enrich the TOPPs with commissions

from the purchases they made in a vain effort to ‘succeed.’”

44. See id.

45. Id. at 7-4 (“MLM compensation plans assume an infinite market and a virgin market, neither

of which exists in the real world.” (emphasis omitted)).

46. F.T.C. Multi-Level Marketing, supra note 21.

47. Id.

48. Id.

49. See Marguerite DeLiema et al., AARP Study of Multilevel Marketing: Profiling Participants

and their Experiences in Direct Sales, A

M. ASS’N OF RETIRED PERSONS, 1, 9 (2018). The AARP’s study

revealed a correlation between entering a multi-level marketing company early and earning a substantial

income.

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2023] CASTING A WIDER “NET IMPRESSION” 435

distributor recruits a distributor, who then branches out their own business

and recruits other distributors, the latter of these distributors are all

necessarily in the downline of the first distributor.

The shape this business

structure creates may be better thought of as a triangle or even a pyramid.

In considering this shape, however, it must be emphasized that based on

current regulations, a MLM would not be considered a pyramid scheme,

despite the two business plans having similar marketing structures.

What ultimately separates MLMs from pyramid schemes is “that there is

no real product that is sold in a pyramid scheme.”

Even when a company

does have a product to sell, the FTC writes that this product may be attributed

to a fraudulent marketing scheme, when the company engages in “inventory

loading and a lack of retail sales.”

Inventory loading reflects the amount of

product distributors purchase themselves to maintain a position in the

company or to have a high enough inventory to sell to consumers.

If the

companies’ distributors have few sales, but loaded inventories, the FTC

suggests the company is likely a pyramid scheme, not a legitimate MLM.

These factors differ from MLMs, which are required to have a “buyback

policy,” which “prohibit[s]” retailers from “buying new inventory until

retailers have sold 70% and have at least 10 new customers.”

Finally, the

FTC adds that the “hallmarks” of pyramid schemes are the guarantees of high

Only three individuals, half of one percent, reported profits of $100,000 or more. All of these

three individuals worked as direct sellers for the company for more than 5 years (and one person

for more than 20 years) and put in between 10 to 40 hours of work per week. One of the

individuals reported that he founded the organization.

Id.

50. Bajaj, supra note 22.

51. F.T.C. Multi-Level Marketing, supra note 21.

52. Id.

53. Multi-Level Marketing vs Pyramid Schemes, supra note 7.

54. Debra A. Valentine, General Counselor for the U.S. Federal Trade Commission, Statement at

the International Monetary Fund’s Seminar on Current Legal Issues Affecting Central Banks: Pyramid

Schemes (May 13, 1998), https://factsaboutherbalife.com/wp-content/uploads/2012/12/Valentine-FTC-5-

13-98.pdf.

55. Id.; See Fed. Trade Comm’n, Business Guidance Concerning Multi-Level Marketing,

https://www.ftc.gov/business-guidance/resources/business-guidance-concerning-multi-level-marketing

(last visited Apr. 29, 2022) (“An MLM compensation structure that incentivizes participants to buy

product, and to recruit additional participants to buy product, to advance in the marketing program rather

than in response to consumer demand in the marketplace, poses particular risks of injury.”) [hereinafter

F.T.C. Business Guidance].

56. Valentine, supra note 54 (“A lack of retail sales is also a red flag that a pyramid exists. Many

pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination,

the sales occur only between people inside the pyramid structure or to new recruits joining the structure,

not to consumers out in the general public.”).

57. Adrian Horton, ‘It’s Very Culty’: The Bizarre Billion-Dollar Downfall of Fashion Company

LuLaRoe, G

UARDIAN (Sept. 15, 2021, 3:37 PM), https://www.theguardian.com/tv-and-radio/2021/sep/15/

lularich-lularoe-amazon-docuseries.

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income in comparison to the amount of hours worked by distributors and that

when retailers do make money, they make a commission based on recruiting

more distributors to the network rather than for selling a product.

The differences between these two business models suggests that multi-

level marketing companies would be legitimate and free from fraud.

To the

network marketing system’s credit, the Direct Selling Association (DSA)

operates as the “national trade association” designed “to promote, protect and

police the direct selling industry while helping direct selling companies and

their independent salesforce become more successful;” and those MLMs that

are members of the DSA may be less harmful to distributors and consumers

because they are subject to regulation.

Whether the DSA is particularly

successful in its policing efforts is debatable, however, as some companies

which have won awards through the association, such as Herbalife,

Younique,

Amway,

Young Living,

and Beachbody

have either been

58. Valentine, supra note 54; Multi-Level Marketing vs Pyramid Schemes, supra note 7.

59. Bajaj, supra note 22.

60. Who We Are, D

IRECT SELLING ASS’N, https://www.dsa.org/about/association (last visited Apr.

29, 2022).

61. See Richard Craver, RICO Lawsuit vs. Herbalife May Have Reached Settlement, W

INSTON-

ALEM J. (Jan. 10, 2022), https://journalnow.com/business/local/rico-lawsuit-vs-herbalife-may-have-

reached-settlement/article_94070b56-7252-11ec-ae0a-1790ffd5a80e.html (describing a 2017 class action

lawsuit filed against the company after plaintiffs paid to attend “Circle of Success” presentations and

allegedly suffered damages as a result); see Curt Anderson, Distributors Who Didn’t Get Rich Sue

Herbalife Over ‘Circle of Success’ Events, I

NS. J. (Aug. 23, 2018), https://www.insurancejournal.com/

news/national/2018/08/23/498937.htm; see also Lisette Voytko, Herbalife’s $123 Million Chinese

Bribery Settlement Is Latest Legal Trouble for MLM Giant, F

ORBES (Aug. 28, 2020, 1:40 PM),

https://www.forbes.com/sites/lisettevoytko/2020/08/28/herbalifes-123-million-chinese-bribery-settlemen

t-is-latest-legal-trouble-for-mlm-giant/ (detailing Herbalife’s agreement to “pay $123 million in civil and

criminal penalties” after being accused of bribing the Chinese government to improve Herbalife business

in the country).

62. See Younique’s Original Moodstruck Lashes Settlement, F

IBERLASH SETTLEMENT,

http://www.fiberlashessettlement.com (last visited Apr. 29, 2022) (describing how the company entered a

settlement agreement after plaintiffs alleged it falsely labeled its false eyelash product).

63. See Josh Eidelson, Amway Sued by ‘Independent Business Owner’ Claiming Employee Status,

L.A. T

IMES (Jan. 10, 2020, 12:30 PM), https://www.latimes.com/business/story/2020-01-10/amway-

lawsuit-pay (detailing how a change in California law caused sellers for Amway, previously described as

“independent contractors,” to file suit to obtain “employee” status in order to receive “better pay and

benefits”).

64. See Erin Shaak, ‘No Medicinal Benefit’: Young Living Hit with Action Challenging Essential

Oil Health Claims [UPDATE], C

LASS ACTION, https://www.classaction.org/blog/no-medicinal-benefit-

young-living-hit-with-class-action-challenging-essential-oil-health-benefit-claims (last updated July 21,

2022); see also Nicole Einbinder, Some Members of Multilevel-Marketing Company Young Living Are

Making Questionable Claims About ‘Essential Oils’ Curing Cancer and Coronavirus, B

US. INSIDER (July

29, 2020, 6:02 AM), https://www.businessinsider.com/young-living-essential-oils-medical-claims-2020-

7 (explaining how the company has been subject to criticism and legal controversy due to potential claims

from retailers about the curative qualities of Young Living products).

65. See Ally Arcuri & Donna Sarkar, The Truth about Beachbody, H

EALTH DIG., https://www.

healthdigest.com/480585/the-truth-about-beachbody/ (last updated Dec. 13,2022, 9:22 AM). One line of

products sold by Beachbody, “Shakeology,” has been the subject of controversy due to the company’s

broad claim it contains various “superfoods” without describing the amount of each ingredient within the

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subject to a class action lawsuit or have been embroiled in some other high-

profile controversy regarding products or business practices.

At any rate,

the DSA’s existence suggests a strong stride toward keeping MLMs operating

as legitimate business model as opposed to pyramid schemes.

This Comment suggests that pyramid schemes and MLMs are

nonetheless too similar and that the FTC’s regulatory language in Section 5

of the FTCA should reflect that similarity in legal actions against the two

types of companies. Although many MLMs claim to pay their distributors

based on sales, the reality is that the overwhelming percentage of top-earners

in these companies instead earn their high incomes from recruitment.

Additionally, testimonials from former MLM representatives suggest that

these companies promise large incomes to their distributors encourage their

distributors to buy large amounts of products in order to maintain prestige in

the company.

These facts indicate that the key differences between pyramid

schemes and MLMs which the FTC highlights are thin at best and often

illusory. As noted earlier, the FTC’s current guidance on the potential

unlawfulness of MLMs and earning potential estimates is based on the “net

impression” created by a company’s business practices, but if these practices

more closely resemble pyramid schemes, than originally believed, then the

net impression standard becomes less helpful because this is not the legal

standard the FTC uses to regulate pyramid schemes.

In fact, pyramid

schemes are hardly afforded such a benefit of the doubt because they are

illegal by nature.

By briefly discussing the history of MLMs, the legal

situations in which courts have previously imposed liability on some

companies, and the current controversies surrounding some of the most

notable of these companies, the need for better clarification from the FTC

product. Additionally, Beachbody has made false claims about the disease-preventing and curing powers

of its products.

66. The Direct Selling Association (DSA) Announces 2019 Awards Winners and Highest

Performing Companies, B

US. WIRE (June 5, 2019, 3:35 PM), https://www.businesswire.com/news/

home/20190605005897/en/The-Direct-Selling-Association-DSA-Announces-2019-Awards-Winners-

and-Highest-Performing-Companies.

67. But see Taylor, MLM’s Abysmal Numbers, supra note 10, at Intro-5. While Taylor notes that

“recruiting is not a requirement for individual success in direct selling, and compensation must always

[be] based on the sale of products and services,” he continues that these sales can be made from one’s

“own sales or the sales made by [their] recruits.” If a retailer cannot form a downline upon entry into a

company, the only sales they will be able to make would be their own and a limited number of customers.

However, by forming a downline through recruitment, a retailer has a much broader reach of consumers

because they can make money off sales without having to advertise or network.

68. See Silverstein et al., supra note 37.

69. See F.T.C. Business Guidance, supra note 55. See also infra text accompanying note 125.

70. Valentine, supra note 54 (“Yet, both pyramid and Ponzi schemes are illegal because they

inevitably must fall apart.”).

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regarding MLM’s unlawful practices and the harms they inevitably

perpetuate becomes more evident.

History of MLMs

The year 1932 saw the birth of the first “network marketing” company,

Wachter.

The now-defunct company sported a reportedly “lucrative”

money-making opportunity for its sellers, while advertising “organic sea

products” as nutritional supplements.

More popularly, Nutrilite, is credited

as beginning the MLM movement following their incorporation in 1939.

Sporting itself as “a vitamin, mineral, and dietary supplement brand,” the

company began as an initiative by its founder, Carl Rehnborg, to incorporate

more healthy and organic substances into food and sported itself as “a

vitamin, mineral, and dietary supplement brand.”

While farming in

California, Rehnborg developed a multi-vitamin, later coined “DOUBLE X,”

and brought distributors into Nutrilite the following year.

The most

noteworthy distributors—Jay Van Andrel and Rich DeVos—left the

company after a decade to begin their own network marketing company,

Amway.

Amway first marketed an organic cleaning product and, by 1968,

had developed its own “clean” and “plant-based” makeup line, “Artistry.”

At Nutrilite, Rehnborg’s wife had ventured into the makeup industry a few

years prior to Artistry’s inception; by 1972, the interpersonal relationships in

Amway and Nutrilite and the similar products made Amway’s acquisition of

Nutrilite seem natural.

Through the 1972 acquisition, Amway acquired

Nutrilite’s products, reputation, and workforce and now makes an annual

revenue of over $8 billion.

71. See infra History of MLMs, Legal Background—The Court’s Search for Substantive Rule,

Controversies Surrounding MLMs.

72. Product Catalogue and Price List, W

ACHTERS’, https://www.wachters.com/catalog_print.php

(last visited Apr. 29, 2022).

73. Id.; Frank Ross, The Oldest Network Marketing Company, A

LL BUS., https://www.allbusiness.

com/the-oldest-network-marketing-company-52948-1.html (last visited Apr. 29, 2022).

74. Nutrilite History, N

UTRILITE, https://www.nutrilite.com.my/en/history (last visited Apr. 29,

2022).

75. The Brand Story, N

UTRILITE, https://www.nutrilite.com.my/en/article/the-brand-story (last

visited Apr. 29, 2022); Nutrilite History, supra note 74.

76. The Brand Story, supra note

75; Nutrilite History, supra note 74.

77. Nutrilite History, supra note 74.

78. Artistry About Us, A

MWAY, https://www.amway.com/artistry/about (last visited Apr. 29,

2022).

79. Nutrilite History, supra note 74; Artistry About Us, supra note 78.

80. Nutrilite History, supra note 74; Carly Hallman, The Top 25 MLMs By Revenue, T

ITLEMAX,

https://www.titlemax.com/discovery-center/lifestyle/the-top-25-mlms-by-revenue/ (last visited Apr. 29,

2022).

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2023] CASTING A WIDER “NET IMPRESSION” 439

The Management Study Guide describes the genesis of the downline

system in network selling as an “accident[].”

Because Nutrilite operated on

a network marketing model, salespeople with good social connections or

numerous family members interested in the products could naturally make

more sales than those without those connections.

Perhaps also naturally,

other consumers who saw a friend or relative earn an income through Nutrilite

wanted to have that same opportunity.

As a result, Nutrilite began offering

a bonus opportunity to its distributors.

This “2 percent bonus” system,

available to sellers who could convince others to join as Nutrilite salespeople,

proved lucrative for both the company and its salespeople.

With a potential

bonus for sellers each time a new distributor is added to their downline, the

top seller in that downline could earn substantially more money as a recruiter

rather than as a door-to-door salesperson

The Management Study Guide

credits Nutrilite with the introduction of “network selling,” with other

companies like Amway and Shaklee following suit.

Now, the network

selling system predominates MLMs, and the Management Study Guide

suggests that “94%” of these companies use direct selling to make the

majority of their revenues.

Despite the wide usage of direct selling strategies and the amount of

income it generates for companies, current statistics regarding MLM bonus

payouts paint a tragic scene for most direct sellers, and companies such as

Wachter appear to be the exception rather than the “norm.”

For example,

the most successful network marketing company, Forever Living Products,

states on its LinkedIn page that the company sees “an annual turnover in

excess of $2.6 billion and assets of over $1.5 billion.”

It also boasts “a

network of some 9 million independent distributors.”

According to the

company’s Income Disclosure Statement, “89.8%” of direct sellers do “not

81. Brief History of Multi Level Marketing, MGMT. STUDY GUIDE, https://www.managementstudy

guide.com/multi-level-marketing-history.htm (last visited Apr. 29, 2022).

82. Id.

83. Id.

84. Id.

85. Id.

86. Brief History of Multi Level Marketing, supra note 81.

87. See id. See also Shaklee. Where Health Meets Science Meets Nature, S

HAKLEE, https://us.

shaklee.com/about-us (last visited Apr. 29, 2022); DSN Staff, Beyond Testimonials . . . to Science,

DIRECT

SELLING NEWS (Mar. 1, 2012), https://www.directsellingnews.com/beyond-testimonials-to-science/.

Shaklee is the invention of Dr. Forrest Shaklee. As Andrel and DeVos did with Amway, he worked for

Nutrilite before leaving in 1956 to start Shaklee, which first sold supplements before branching into

cleaning products and other meal supplements.

88. Brief History of Multi Level Marketing, supra note 81.

89. DeLiema et al., supra note 49, at 9.

90. Forever - The Aloe Vera Company, L

USHA, https://www.lusha.com/business/a21f9d7c74

f41468/ (last visited Apr. 6, 2023).

91. Id.

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receive any meaningful compensation or earnings” through this business

opportunity, meaning that nearly 8 million of these direct sellers either lose

money or make very little income.

Of the sellers who do make money

through Forever Living, the largest percentage of earners, promised to “be

[their] own boss[es],” would make sixty-nine cents an hour if their monthly

earnings were converted into a forty-hour week.

Legal Background—The Court’s Search for Substantive Rule

The FTCA, Briefly

As previously noted, Section 5 of the FTCA provides the legal backdrop

for FTC suits against multi-level marketing companies or pyramid schemes.

Under this Act, those companies which engage in “[u]nfair methods of

competition in or affecting commerce, and unfair or deceptive acts or

practices in or affecting commerce” are considered to be unlawful.

When

the FTC suspects a violation of this section and the FTC believes “a

proceeding by it in respect [to the violation] would be to the interest of the

public, it shall issue . . . a complaint stating its charges in that respect and

containing a notice of a hearing . . . .”

Along with subsection (b)’s

instructions for FTC action in suspected violations, which expressly mention

a public interest component, subsection (n) likewise notes that how a business

impacts the public is relevant when determining the lawfulness of a

company’s actions.

Regarding the factors of illegal practices, deception or unfair trade, courts

find an action deceptive “(1) if it is likely to mislead consumers acting

reasonably under the circumstances (2) in a way that is material.”

Addressing unfair practices, the Act states:

The Commission shall have no authority under [the FTCA] to declare

unlawful an act or practice on the grounds that such act or practice is

unfair unless the act or practice causes or is likely to cause substantial

injury to consumers which is not reasonably avoidable by consumers

92. Income Disclosure Statement, FOREVER LIVING, https://foreverliving.com/usa/en-us/income-

disclosure (last visited Apr. 29, 2022).

93. The Forever Opportunity, F

OREVER LIVING, https://joinnow.foreverliving.com/usa/en-

us/your-opportunity (last visited Apr. 29, 2022); see Income Disclosure Statement, supra note 92.

94. See supra Introduction.

95. 15 U.S.C.A. § 45(a)(1) (West 2022).

96. 15 U.S.C.A. § 45(b) (West 2022).

97. 15 U.S.C.A. §§ 45(b), (n) (West 2022).

98. F.T.C. v. Cyberspace.Com LLC, 453 F.3d 1196, 1199 (9th Cir. 2006).

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themselves and not outweighed by countervailing benefits to

consumers or to competition.

It concludes by noting that “public policies” are relevant but not dispositive

to the FTC’s declaration that a specific company has violated the FTC.

100

Under the FTCA, then, only those unfair acts accompanied by an unavoidable

potential or actual harm to the public, that was more harmful than helpful, are

actionable.

101

Koscot: The Endless Chain Fallacy and the 2-Part Test

The first definite rule addressing pyramid schemes arose from the FTC’s

complaint against Koscot Interplanetary and Glenn W. Turner Enterprises.

102

In In re Koscot Interplanetary, Inc., the court considered the business

dealings of the “cosmetics” and “toiletries” companies and how their actions

allegedly violated the FTCA.

103

While the company purported to operate as

a legal multi-level marketing company, its distributors could join Koscot and

immediately receive more commissions than an entry-level “retailer” by

“investing $2000” to qualify as a “supervisor.”

104

Moreover, a new

supervisor could become a “director” and receive a high discount on products

and a bonus on all their downline’s purchases and sales by investing an

“additional $3000” and recruiting someone else as a supervisor.

105

These two allegations made against Koscot—that the company rewarded

those sellers who invested a sizable amount of money into the company and

who recruited other sellers and paid an even higher amount—are still

symptomatic of many MLMs, and they likewise highlight the concerning

similarities between MLMs and pyramid schemes.

106

A small, initial

enrollment fee for distributors to break into the selling market is not

99. 15 U.S.C.A. § 45(n) (West 2022).

100. Id.

101. Id.

102. In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1106-07 (1975).

103. Id. at 1107.

104. Id. at 1108.

105. Id.

106. See Jon Taylor, MLM Definitions and Legitimacy: What MLM Is—And Is Not, in T

HE CASE

(FOR AND) AGAINST MULTI-LEVEL MARKETING 2-1, https://www.ftc.gov/sites/default/files/documents/

publiccomments/trade-regulation-rule-disclosure-requirements-and-prohibitions-concerning-business-

opportunities-ftc.r511993-00014%C2%A0/00014-57319.pdf [hereinafter Taylor, What MLM Is].

There are inherent flaws in any MLM, assuming an endless chain of recruitment and a pay plan

that is recruitment-driven, top-weighted, and financed primarily by incentivized purchases of

the participants themselves. I have looked for exceptions to this generalization in the 350

MLMs I have analyzed, but have found none.

Id. at 2-1. Dr. Taylor likens “recruitment-driven MLMs” to “product-based pyramid schemes” and

suggests that “retail-focused MLMs” are only “hypothetical” in nature. See id. at 2-9, 2-10.

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concerning—this startup cost could be attributed to training, product samples

and inventory, or rights to sell products.

107

However, when a participant

invests money into a network marketing company in order to achieve a

particular rank or title in the company, such an action is a high indicator of

participation in a pyramid scheme because “the percentage of purchases

accounted for by participants’ personal consumption . . . has become a litmus

test for determining if an MLM is an illegal pyramid scheme.”

108

In other

words, should this allegation be proven by a plaintiff, a court would likely

view the company as masquerading itself as a multi-level marketing company

when it was instead a pyramid scheme, especially when a distributor’s large

investments result in inventory loading.

109

The FTC’s second allegation, that one is recruiting another direct seller

and investing even more money into Koscot would result in another

promotion, is another problematic facet of multi-level marketing companies,

one which is perhaps more worrisome than the first because even now, courts

view this second charge as conditionally legal.

110

Courts may still find that a

pyramid scheme could be inferred from this business model when a company

primarily encourages recruitment rather than sales.

111

However, so long as a

company’s “sales volume” is relatively low and the company engages in

some preventative measures to avoid inventory loading, such as preventing

commissions based on personal purchases, courts will not view these

companies as operating as a pyramid scheme.

112

In Koscot, the FTC alleged that Koscot and Glenn W. Turner Enterprises

violated the FTCA because they made false earning projections for their

retailers and understated how much work was required in order for retailers

to make a sizable income,

113

fixed product prices, and placed limits on the

107. Doris Wood, Understanding MLM Compensation Plans, IMATRIX SOFTWARE (last visited Apr.

29, 2022), https://www.imatrixsoftware.com/understanding-mlm-compensation-plans/. See also Whole

Living, Inc. v. Tolman, 344 F.Supp.2d 739, 746 (2004) (“B]eyond the relatively small qualifying amount

of $100 to $200 a month, no larger amount of purchases will increase a distributor’s commission rate,

therefore there is no incentive for a distributor to purchase large amounts of non-refundable product to

obtain large commissions.”).

108. Taylor, What MLM Is, supra note 106, at 2-15.

109. See Valentine, supra note 54.

110. Koscot, 86 F.T.C. at 1108-09.

111. See Tolman, 344 F.Supp.2d at 746. See also Webster v. Omnitrition Int’l., 79 F.3d 776, 782-

83 (1996) (“Where, as here, a distribution program appears to meet the Koscot definition of a pyramid

scheme, there must be evidence that the program’s safeguards are enforced and actually serve to deter

inventory loading and encourage retail sales.”) (holding that a program with multiple distributor levels

based on the total amount of money invested into the company, primarily achieved through recruitment

and personal investments, creates the appearance of a pyramid scheme).

112. See Tolman, 344 F.Supp.2d at 742, 745-46. The court held that a company offering

commissions through a seller’s downline was not a pyramid scheme because distributors were not

encouraged to buy large amounts of product to receive a commission because an upline’s personal

purchases did not qualify for the commission, even when the downline personally purchased products.

113. Koscot, 86 F.T.C. at 1110, 1112-13.

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number of sellers and purchasers to whom distributors could approach

regarding products.

114

The FTC also alleged that the companies created a

sort-of “monopoly” by engaging in “discrimination in net price” against those

retailers who buy from other distributors as opposed to those able to buy

directly from Koscot.

115

Finally, an allegation was made that the companies

perpetuated “unfair” trade practices by failing to facilitate a company in

which distributors could earn back their initial investments through sales.

116

Here, the judge agreed with the FTC and found that Koscot and Glenn

W. Turner Enterprises were, in fact, operating as a pyramid scheme and

selling “an impossible dream and a virtual financial nightmare.”

117

considering the business model, in which distributors were incentivized more

to recruit other distributors into a downline than to make sales on products,

the judge noted that Koscot relied on an “endless chain” idea, or a “fallacy”

in which distributors would eventually run out of potential recruitment

candidates because, if Koscot’s money-earning system was so lucrative,

everyone would want to join as a distributor.

118

If everyone joined as a

distributor, someone inevitably must serve as the bottom of the downline who

would necessarily receive no commission based on anyone else’s sales and

would not even have a consumer-base with which to sell products.

119

Additionally, Koscot’s earning projections for distributors were quite

different than what actually occurred,

120

and the turnover rate for distributors

was high.

121

Ultimately, the judge noted,

The Koscot program was organized and operated in such a manner

that the realization of profit by any participant was predicated upon

the exploitation of others, most of whom had virtually no chance of

receiving a return on their investment and all of whom had been

114. Id. at 1114-15.

115. Id. at 1115.

116. Id. at 1116.

117. Id. at 1129.

118. Koscot, 86 F.T.C. at 1132.

119. Id.

The fallacy in the ‘endless chain’ aspect of the Koscot marketing program . . . is that it involves

a geometric progression which, carried through to its ultimate result, would mean that in 18

months the entire United States population (203 million in 1970) would be involved in the plan.

Aside from the mathematical fallacy inherent in the Koscot plan, an endless chain scheme must,

in any event, ultimately fail to provide returns to all participants. Such a scheme must cease

when it exhausts the number of people willing to invest in it (citation omitted).

Id.

120. See id. at 1135 (“Whereas Koscot depicted a distributor’s annual product sales as ranging from

$50,000 to more than $200,000, the actual annual average or mean sales of distributors in those States in

1971 were reported in hundreds of dollars, not thousands.”) (citation omitted).

121. Id.

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induced to participate by inherent misrepresentations as to potential

earnings.

122

As a result, Koscot’s business model was deemed illegal.

123

Of note, the judge expressed distaste for most multi-level marketing

companies and pyramid schemes due to the “inevitably deceptive

representation” present when a company implements a buyback policy or a

no-risk investment policy but does not adequately honor it.

124

In fact, the

judge writes, “[t]hat these schemes so often do not allow recovery of

investments by means of retail sales either merely points up that there is very

little positive value to be lost by not allowing such schemes to get started in

the first place.”

125

What emerged from Koscot was the widely accepted rule regarding

pyramid schemes and when they were illegal.

126

While the judge in Koscot

might have suggested that all companies operating under this scheme could

be per se unlawful because deceptive practices were inherently embedded in

their policies, the FTC adopted the Koscot test to suggest that pyramid

schemes and multi-level marketing companies are unlawful when a company

requires a retailer to invest in: “(1) the right to sell a product and (2) the right

to receive in return for recruiting other participants into the program rewards

which are unrelated to sale of the product to ultimate users.”

127

As of 2018,

this test is still the one used by the FTC in regulating direct selling

companies.

128

Leading the Amway: MLMs and the Legitimate Business Model

If a company qualifies as a pyramid scheme, courts hold that it is “per se”

illegal because it violates the FTCA.

129

However, multi-level marketing

companies are not illegal unless a claimant can show that the company

misrepresented how much money a direct seller would make.

130

Nonetheless,

legal issues surrounding even the most popular and successful MLMs are not

uncommon, as shown by the previous discussions.

131

In fact, the seminal case

regarding the legality of MLMs centered on Amway’s business practices.

132

122. Id. at 1157.

123. Koscot, 86 F.T.C. at 1157.

124. Id. at 1181.

125. Id.

126. Id. at 1180.

127. Id.; see Valentine, supra note 54.

128. See supra note 55 and accompanying text.

129. Webster v. Omnitrition Int’l., 79 F.3d 776, 788 (1996); F.T.C. v. Cyberspace.Com LLC, 453

F.3d 1196, 1200 (9th Cir. 2006).

130. See generally supra text accompanying note 1.

131. See discussion supra History of MLMs.

132. In re Amway Corp., Inc., 93 F.T.C. 618, 622 (1979).

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As in Koscot, in In re Amway, the FTC brought a complaint against Amway

for various alleged violations of Section 5 of the Federal Trade Commission

Act, specifically that, (1) Amway limited its distributors through “resale price

maintenance,” or an agreement in which “resellers” “will sell product or

products at certain prices at or above price floor (minimum RPM) or at or

below price ceiling (maximum RPM)”;

133

(2) Amway hurt its distributors by

limiting how many products they could purchase to sell and to whom they

could sell their products;

134

(3) Amway “restrict[ed] the distributors’

advertising”;

135

(4) Amway did not disclose how much money a distributor

could earn by forming a greater downline;

136

and (5) Amway overstated how

profitable selling through Amway could be, especially because distributors

could struggle to find other potential distributors to work under them and

would have to pay a sizable amount of money to join Amway as a

distributor.

137

When considering the legality of Amway’s actions, the judge noted that

the “sales literature” the company provided seemingly promised potential

distributors the ability to purchase “a new car, a new house, college education

for [their] children . . . [, and a] retirement income,” by stating that a

distributor could “realize the achievement of [their] dreams through the

Amway Sales and Marketing Plan.”

138

This promise was offset by the

somewhat confusing structure of Amway’s compensation plan; the company

offered its retailers income based on “performance” rather than purely on

sales—that is, Amway distributors received a “discount” on their purchases

from Amway, and they received additional bonuses based on the total amount

of sales, including purchases made from other distributors in one’s

downline.

139

In an attempt to safeguard against distributors’ buying products

in bulk and then returning the product through Amway’s buyback policy,

Amway required distributors to “resell at least 70% of the products they have

purchased each month” before Amway would repurchase unsold products.

140

Additionally, to prevent retailers’ using the volume of purchases to earn a

performance bonus, the company required its distributors to sell products to

“prove a sale to each of ten different retail customers.”

141

Distributors could

133. Id.; Krystyna Blokhina Gilkis, Resale Price Maintenance Agreements, CORNELL L. SCH.

EGAL INFO. INST., https://www.law.cornell.edu/wex/resale_price_maintenance_agreements (last updated

March 2020).

134. Amway, 93 F.T.C. at 630.

135. Id.

136. Id.

137. Id.

138. Id. at 640-41.

139. Amway, 93 F.T.C. at 637-38.

140. Id. at 646.

141. Id.

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not sell products in retail stores or at public events,

142

they could not advertise

products in any manner not sanctioned by Amway,

143

and they could not

change the price of products in any way.

144

The FTC alleged, therefore, that

these “vertical restrictions” in Amway supported a finding that Amway acted

unlawfully when it would fix its prices and “pyramid distributors.”

145

In considering these restraints on Amway distributors, the judge found

that Amway’s self-regulatory actions were lawful and reasonable.

146

Despite

the somewhat strict restrictions Amway placed on its distributors considering

price-fixing and purchasing agreements, the court held that Amway

reasonably needed these restrictions because of the inaccessibility of the

cleaning supplies market.

147

Specifically, the judge wrote, Amway’s “control

of the distributors’ marketing practices is no broader than necessary to

achieve the main purpose of direct selling in an oligopolistic market.”

148

Additionally, the direct selling structure of the company increased and

maintained consumer demand, whereas Amway risked losing customers if

they sold their products in retail stores alongside other popular cleaning

products.

149

Regarding the payment plan Amway implemented, the court again found

that Amway acted lawfully.

150

While the FTC conceded that Amway’s bonus

system would not always result in financial losses to distributors, the

company nonetheless misrepresented to potential distributors how much

money they would earn by joining.

151

Instead, the judge noted, “This rule of

per se illegality for pyramid plans has not yet been accepted by the courts”

and that the Koscot ruling on pyramid schemes only applied when both

elements were met.

152

Here, unlike in Koscot, Amway distributors only had

to purchase a relatively cheap informational package to begin selling through

the company, and sales were required in order for distributors to receive

bonuses.

153

While the court agreed that pyramid schemes were in and of

themselves harmful, even without economic loss to distributors, Amway had

142. Id. at 648.

143. Id. at 650.

144. Amway, 93 F.T.C. at 652.

145. Id. at 691, 692, 698. Regarding vertical restrictions, the judge wrote that these restraints on

distributors “must be analyzed under the rule of reason,” or that the FTC would have to prove that these

restrictions have a “demonstrative economic effect,” using a “preponderance” evidentiary standard, on

distributors before a court would find any unlawful activity.

146. Id. at 691, 693.

147. Id. at 692-93.

148. Id. at 693.

149. Amway, 93 F.T.C. at 693.

150. Id. at 695-96.

151. Id. at 698.

152. Id. at 699.

153. Id. at 699-700.

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not been operating one because it “avoided the abuses of pyramid

schemes.”

154

Finally, the court concluded that Amway did not engage in the

misrepresentations and failures to disclose typically found in pyramid

schemes because the company emphasized that payments and bonuses for

distributors could only be achieved through sales and not just through

recruitment and that the turnover rate for distributors was not unusually

high.

155

Therefore, despite the difficulty involved in making a sizable income

through the company, Amway was not operating as a pyramid scheme and

was instead a “substantial manufacturing company” with “an efficient

distribution system.”

156

A Bad First “Net Impression”

While In re Amway held that Amway was a legally operating MLM rather

than a pyramid scheme, recognizing the point when a MLM becomes legally

actionable as an undercover pyramid scheme can be difficult. When is

Section 5 of the FTCA violated in such a manner that a direct selling company

is deemed not only illegal but per se illegal? That is, when is a business

model so potentially harmful to its participants that its very existence is

prohibited? Under current case law, the extent to which multi-level

companies are subjected to liability under the FTCA results when these

companies create a “net impression” that earnings projections are

“mislead[ing].”

157

The phrase “net impression,” used as an inquiry for courts in determining

whether a company engaged in deceptive business practices, originated from

F.T.C. v. Cyberspace.Com, LLC.

158

In that case, the FTC brought suit against

Internet providers who solicited business by mailing potential customers

checks with a small amount of money payable to the recipient.

159

The “back

of the check . . . contained small-print disclosures” to inform recipients that

once cashed, the check would form a contract between the customer and the

Internet providers.

160

The providers sent an invoice and “advertising insert”

along with the checks, but none of the materials contained obvious or highly

visible language to indicate the formation of a contract between the parties.

161

After more than “225,000 small businesses and individuals” formed contracts

154. Amway, 93 F.T.C. at 700. The court notes that these abuses are “(1) not having a ‘headhunting’

fee; (2) making product sales a precondition to receiving the performance bonus; (3) buying back excessive

inventory; and (4) requiring that products be sold to consumers.”

155. Id. at 706.

156. Id.

157. See generally Letter, supra note 1.

158. F.T.C. v. Cyberspace.Com LLC, 453 F.3d 1196, 1200 (9th Cir. 2006).

159. Id. at 1198.

160. Id.

161. Id. at 1198-99.

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with the providers as a result of cashing the checks, complaints arose in which

some customers claimed they did not realize receiving the money would

result in a contractual relationship.

162

As a result of these complaints, the FTC brought suit against the providers

under Section 5 of the FTCA.

163

The Ninth Circuit Court of Appeals

ultimately held that the Internet providers had violated the FTCA by

affirming the lower court’s summary judgment ruling in favor of the FTC.

164

Conversely, the Internet providers argued that their solicitations were not

misleading because of the information contained on the backs of the products

which would have informed recipients that cashing the check would form a

contractual relationship.

165

The court instead held, “A solicitation may be

likely to mislead by virtue of the net impression it creates even though the

solicitation also contains truthful disclosures.”

166

Here, the appearance of the

checks and the lack of clear contractual language on the fronts of them created

the net impression that these items were indeed checks and not contracts.

167

In making its determination, the court considered the large number of

individuals who fell prey to this solicitation device—225,000 customers—

against the number of individuals who “attempted to use” the providers’

Internet—”less than one percent.”

168

Finally, the court found that the checks

represented a “material” misrepresentation because most people who receive

an apparent check would subsequently cash it and unknowingly contract

themselves to a service agreement.

169

An example of the net impression standard being used in a multi-level

marketing context can be found in Federal Trade Commission v. Vemma

Nutrition Company.

170

The FTC brought suit against a multi-level marketing

company, Vemma, which specialized in “nutrition and energy drink” sales,

under the FTCA.

171

Specifically, the Commission argued that the deceptive

practices at issue arose from Vemma’s solicitation of direct sellers, or

“[a]ffiliates.”

172

Notably, the company did not require its sellers to purchase

products to join the company, but they were “strongly encourage[d]” to invest

$600 in merchandise in order to receive sales bonuses, as well as to enroll in

a “monthly auto-delivery of two cases of product to maintain eligibility for

162. Id. at 1199.

163. Cyberspace.Com, LLC, 453 F.3d at 1199.

164. Id. at 1201.

165. Id. at 1200.

166. Id.

167. Id. at 1200-01.

168. Cyberspace.Com, LLC, 453 F.3d at 1201.

169. Id.

170. F.T.C. v. Vemma Nutrition Co. No. CV-15-01578-PHX-JJT, 2015-WL-11118111 (D.Ariz.,

Sept. 18, 2015).

171. Id. at *1-2.

172. Id.

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bonuses.”

173

The FTC accused Vemma of operating as a pyramid scheme

because the company sold significantly more product to its own retailers than

to outside consumers.

174

In Vemma Nutrition Company, the court examined Vemma’s practices

and found that it both operated as a pyramid scheme and violated the FTCA

because the company published “print, web, audio, video, and live

presentation of exorbitant Affiliate earnings,” even though “93% of Affiliates

earned less than $6,200.”

175

Additionally, encouraging salespeople to buy

into the company before joining as a direct seller satisfied the first part of the

Koscot test.

176

The court likewise found the second element satisfied because

“the bonuses Affiliates earn are primarily for recruitment of other Affiliates,

not the sale of products.”

177

For the Section Five claim, the court used the net

impression test to find that large earning projections with weak disclaimers

were still misleading because consumers would likely assume that the stated

estimates were more usual than the outliers.

178

As a result, Vemma had

violated the FTCA, and because it was a pyramid scheme, its operations were

inherently illegal.

179

What the net impression test demonstrates is that when a company

produces materials or makes claims with results different than a reasonable

consumer or seller would infer from the representations, the company has

violated Section 5 of the FTCA.

180

Such a fact is true even when the company

produces disclaimers if such disclaimers do not effectively dispel the

misrepresentations.

181

The Vemma Nutrition Company court even described

this test as one of “common-sense,” yet MLMs continue to face controversies

resulting from deceptive and unfair business practices.

182

While one might

think that a settled test such as this might alleviate the harms caused by

MLMs, the net impression test only addresses the deceptive practices in

173. Id.

174. Id.

175. Vemma, 2015-WL-11118111 at *5.

176. Id. at *4.

177. Id.

178. Id. at *6.

179. Id. at *12.

180. Vemma, 2015-WL-11118111 at *7.

181. Id. at *6 (“Thus, representations may be misleading despite the use of a disclaimer such as

‘results may vary’ if the consumer may reasonably believe that a statement of unusual earning potential

represents typical earnings.”).

182. Id. (quoting FTC v. Minuteman Press, 53 F. Supp. 2d 248, 262 (E.D.N.Y. 1998). See also

O’Shaughnessy v. Young Living Essential Oils, L.C., 810 Fed.Apx. 308, 312 (2020). While this case only

details Young Living’s motion to compel arbitration, the plaintiff’s claim alleged that Young Living was

acting as a pyramid scheme. O’Shaughnessy, 810 Fed.Apx. at 310. Additionally, the court declined to

compel arbitration, even though courts generally view arbitration agreements favorably, because the

agreement between the parties did not represent a “meeting of the minds.” Id. at 312.

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which multi-level marketing companies engage.

183

As a discussion on

personal accounts relating to controversial companies will illuminate, the

unfair practices supposedly proscribed by Section 5 of the FTCA need greater

attention.

184

Controversies Surrounding MLMs

LuLaRich—A Lesson on Leggings

In recent years, documentarians have spotlighted the controversial

business practices which MLMs conduct. Most recently, the company

LuLaRoe received almost instantaneous and unanimous Internet backlash

with the release of LuLaRich, a four-part breakdown of the founding, rise,

and legal ramifications of this fashion retailer.

185

The documentary provided

interviews from former and current salespeople, as well as former corporate

employees and even the founders themselves, Mark and Deanne Stidham.

186

Throughout the series, viewers learned that LuLaRoe, like any typical

network marketing company, started as a one-woman enterprise, with one

product sold—skirts.

187

According to Deanna Stidham, she began in the retail

business by selling dresses for another dressmaker and was able to make a

commission based off her sales of his products.

188

When her daughter needed

a skirt, she sewed one together, and others in her community soon wanted

similar products.

189

With her own product to sell, Stidham was able to focus

on her business and hosted parties in which she would sell merchandise to

attendees.

190

As Stidham’s consumer base increased, so too did her product line, the

most popular of which were her leggings, as well as her need for more

distributors.

191

The company grew quickly and dramatically, but its downfall

from public favor was nearly as breakneck.

192

Greater increase and high

demand of popular products saw a decrease in quality, originality, and

availability.

193

Those looking to join the company as salespeople were put

183. See Letter, supra note 1.

184. See discussion infra Controversies Surrounding MLMs.

185. LuLaRich (Amazon Prime Video Sept. 10, 2021).

186. Id.

187. Id.

188. Stephanie McNeal, Millennial Women Made LuLaRoe Billions. Then They Paid the Price,

UZZFEED NEWS (Feb. 22, 2020, 10:32 PM), https://www.buzzfeednews.com/article/stephaniemcneal/

lularoe-millennial-women-entrepreneurship-lawsuits.

189. LuLaRich (Amazon Prime Video Sept. 10, 2021).

190. Id.

191. Id.

192. Id.

193. See id. This assertion is somewhat of an understatement. Testimonials from former

salespeople describe receiving wet and moldy clothing, clothing that tore easily, or unflattering and even

inappropriate patterns on clothing.

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on a waitlist for “onboarding” with the company and could have been asked

to pay over $5,000 to receive inventory to begin selling.

194

Because many

wanted to join LuLaRoe as distributors after seeing friends and family

members receive commissions based off sales and recruitments, the

company’s decisions to make membership exclusive, to raise the price of

joining the company, and to limit the availability of products and styles due

to the large demand are somewhat understandable.

195

However, LuLaRoe

had also changed its commission policy in 2017, from rewarding distributors

based on how many products their downline bought to how many products

their downline sold.

196

Additionally, the company replaced its 100-percent

buyback policy with a stricter 90-percent return policy.

197

As a result of these

changes and other issues with LuLaRoe’s products themselves, the company

faced a number of class-action lawsuits, the most notable of which alleged

that the company was really a pyramid scheme disguised as a multi-level

marketing company.

198

After settling lawsuits and dodging heavy criticism,

LuLaRoe has a much lower number of distributors, though it still operates as

a resilient company.

199

LuLaRich employs a sympathetic tone for those former distributors who

lost relationships because of heavy advertisement of LuLaRoe products,

those who bought too much product to continue receiving commissions and

other company benefits, even if they lost money in the process, and those who

initially received sizable commissions for impressively large downlines but

who later lost that income due to commission cutbacks and the volatility of

the network marketing system.

200

In short, the documentary portrays those

194. See Rachel Hunt, ‘LulaRich’: We Researched the LulaRoe Onboarding Package 2021 So You

Don’t Have To, C

HEATSHEET (Sept. 14, 2021), https://www.cheatsheet.com/entertainment/lularich-

research-lularoe-onboarding-package-2021.html/. This number is a rough estimate of a startup cost. Some

interviewees in LuLaRich claimed that distributors were asked to pay as much as $10,000 to start up their

business with the company, though onboarding with LuLaRoe now costs distributors $499 (this cost also

represents a much smaller amount of inventory a distributor will receive in their startup package).

195. LuLaRich (Amazon Prime Video Sept. 10, 2021).

196. McNeal, supra note 188. While this commission change may have been an effort by the

Stidhams to meet FTC guidelines, the sharp drop in earning potential was certainly detrimental to retailers

who had become accustomed to the former commission structure.

197. Ginger Rough, LuLaRoe Abruptly Changes Return Policy; Consultants Say They Are Owed

Thousands, USA

TODAY (Sept. 14, 2017, 11:33 AM), https://www.usatoday.com/story/life/allthemoms/

news/2017/09/14/lularoe-return-policy-changes-outrage/34915297/. This return policy now only allowed

returns on unopened clothing purchased directly from LuLaRoe within the previous year. As with the

commission changes, this change of policy is not inherently harmful; in fact, it was “the original policy”

implemented by LuLaRoe. However, encouraging distributors to buy copious amounts of product in order

to sell more product to a waning consumer base without warning these distributors that they can no longer

return all unwanted merchandise would understandably result in criticism and skepticism of the company’s

business practices.

198. McNeal, supra note 188.

199. See Joey Keogh, Is LulaRoe Still in Business?, T

HE LIST (Jan. 12, 2022, 11:57 AM),

https://www.thelist.com/731732/is-lularoe-still-in-business/.

200. LuLaRich (Amazon Prime Video Sept. 10, 2021).

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direct sellers, even the ones still supportive of LuLaRoe, as victims (if not

unaware victims), and the founders as predators.

201

For those unaccustomed to the MLM structure and its sales tactics,

LuLaRich presents a shocking introduction to this system. If all the

testimonials regarding the impropriety, poor product quality, and nepotism

shown in the corporate makeup are unnerving, then the stories of distributors

forced into bankruptcy and the later lawsuits lobbed at LuLaRoe, which detail

sellers’ financial and emotional losses as a result of selling for this company

are devastating.

202

Two key takeaways from LuLaRich, however, demonstrate the timeliness

and relevance of this Comment—first, that LuLaRoe is neither unique nor

incredibly egregious in comparison to other top MLM companies

203

; second,

that while LuLaRoe faced a lawsuit alleging that the company was a pyramid

scheme veiling itself as an MLM, finally settling the lawsuit for $5 million,

neither of the founders or other top officials has been convicted of fraud or

any other crime which would suggest that the company is legally a pyramid

scheme.

204

Based on current legal standards, LuLaRoe is, for all intents and

purposes, a typical MLM which lawfully recruits direct sellers with

overstated promises of financial freedom and empowering

entrepreneurialism.

205

But a company which is technically legal yet

overwhelmingly harmful in terms of its effect on the public deserves a higher

degree of scrutiny than the FTC currently grants it.

Essential (Snake) Oils, Financial Foibles, and Online Discourse

As noted, LuLaRich is not the only documentary developed to expose the

harmfulness of the MLM industry.

206

Both the first episode of (Un)well

207

and the documentary Betting on Zero

208

tackle the health and wellness side of

MLMs and the false claims, victimization of women, and large financial

investments, often with zero returns, perpetuated by these companies.

209

201. Id.

202. Id.

203. See Alden Wicker, Multilevel-Marketing Companies Like LuLaRoe Are Forcing People into

Debt and Psychological Crisis, Q

UARTZ (Aug. 10, 2017), https://qz.com/1039331/mlms-like-avon-and-

lularoe-are-sending-people-into-debt-and-psychological-crisis/ (noting that although “LuLaRoe is queen”

among the “MLMs masquerading as women’s empowerment,” its notoriety derives from the popularity of

the brand rather than any unique business practices).

204. Stephanie McNeal, LuLaRoe Is Paying More than $4 Million to Settle a Lawsuit That Claimed

It Was Running a Pyramid Scheme, B

UZZFEED NEWS (Feb. 2, 2021, 1:32 PM), https://www.buzzfeednews

.com/article/stephaniemcneal/lularoe-settles-washington-state-pyramid-scheme-lawsuit.

205. F.T.C. Multi-Level Marketing, supra note 21.

206. LuLaRich (Amazon Prime Video Sept. 10, 2021).

207. (Un)well: Essential Oils (Netflix Original Programming Aug. 12, 2020).

208. B

ETTING ON ZERO (Zipper Brothers Films 2016).

209. See Kucher, supra note 6.

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Perhaps most unsettling, research on these wellness-focused MLMs show

that these companies or their distributors have made misleading and even

harmful claims relating to the curative attributes of their products, which

could lead users of these products to delay seeking medical attention and

treatment.

210

With the devastating medical and financial effects of COVID-

19, some MLMs have used this emergency to market their products as agents

“to treat or prevent coronavirus, or about the money people can earn if they’ve

recently lost income.”

211

The FTC, aware of the network marketing

opportunity available with the pandemic, warned MLMs in 2020 against

touting their products as coronavirus preventatives or against making false

earning projections for joining MLMs.

212

Despite the fact that multiple resources exist detailing the harmful effects

of MLMs,

213

financial

214

or otherwise,

215

participation in these companies is

still high, and MLMs remain a formidable market.

216

A report from the

210. Einbinder, supra note 64. According to this article, companies selling essential oils have been

reprimanded by the USFDA for “selling products that claim to cure of prevent coronavirus.” Additionally,

the company Young Living has been criticized for promoting a culture that resulted in “loved ones [of

essential oils users] delaying medical care because of their belief in the healing benefits of the oils.”

211. Megan Graham, FTC Warns Multilevel Marketing Company Sellers, CNBC (Apr. 27, 2020,

3:18 PM), https://www.cnbc.com/2020/04/27/ftc-warns-doterra-rodan-fields-other-mlm-sellers-on-covid-

claims.html.

212. Id.; Fed. Trade Comm’n, FTC Sends Warning Letters (Apr. 24, 2020), https://www.ftc.gov/

news-events/press-releases/2020/04/ftc-sends-warning-letters-multi-level-marketers-regarding-health.

213. In addition to documentaries, popular Internet figures, such as former LuLaRoe salesperson

Roberta Blevins, have taken to social media and podcasts to highlight the dangers of joining MLMs.

Roberta Belvin, Life After MLM, A

PPLE PODCASTS (Feb. 14, 2021), https://podcasts.apple.com/us/

podcast/life-after-mlm/id1553784236. YouTube and TikTok users have dedicated channels or video

series to speak against companies that use direct sellers and network marketing tactics. See also münecat,

OUTUBE, https://www.youtube.com/c/münecat/playlists.

214. An interview from an anonymous former Young Living retailer details her negative experience

selling the essential oils, that she spent more money on buying inventory and trying to recruit friends and

family and did not make enough income to generate a living. See (Un)well: Essential Oils (Netflix

Original Programming Aug. 12, 2020). Further input revealed that Young Living retailers had to spend

$100 a month to qualify for a commission, even if they were not able to sell the product, and that “94%”

of the Young Living distributors made “less than $1 a month.”

215. See id. MLMs occupying the essential oils industry, specifically doTERRA and Young Living,

suggest that aromatherapy may prove more effective in treating serious health issues, such as chronic

illnesses or cancers, than modern Western medicine can. However, Dr. E. Joy Bowles suggested that

while essential oils may legitimately treat users with anxiety and other mental problems and could be

effective as a placebo, the science behind the helpfulness of essential oils is simply incomplete, and there

is no clinical evidence to show that essential oils can cure the diseases their proponents suggest they can.

Additionally, a biographical snippet about the founder of Young Living, Gary Young, deftly demonstrated

the conflicting evidence of aromatherapy—lemongrass may have cured Young’s paralysis, but vitamin C

may have nearly killed one of his patients.

216. The reasons for increased participation in MLMs can be attributed to financial problems

increasing during the pandemic, businesses moving remote or shutting down, and even products being

promoted as “cure-alls” of the coronavirus. See also Abby Vesoulis & Eliana Dockterman, Pandemic

Schemes: How Multilevel Marketing Distributors Are Using the Internet, T

IME (July 9, 2020, 6:29 AM).

See also Graham, supra note 211; Áine Cain, Utah’s Governor Highlighted a Controversial Essential-Oil

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AARP noted that in 2018, “about one in thirteen (7.7%) adults 18 years of

age or older in the United States have participated in at least one MLM

organization during their lifetime.”

217

Accordingly, the “2020 Industry

Overview” published by the DSA records the number of direct sellers as “7.3

million,” including “0.5 million” sellers who would describe their work as

“full-time.”

218

Testimonies from LuLaRich and (Un)Well demonstrate the

pitfalls of MLMs which this Comment has previously addressed—that while

the founders and top retailers in a network marketing company make a sizable

income, those retailers on the bottom of a downline invest thousands of

dollars into a dream of self-made success yet ultimately lose money in the

process.

219

ROPOSAL—SATISFYING SECTION 45(N) WITH A REPURPOSED NET

IMPRESSION TEST

Personal testimonies from former direct sellers, expert opinions from

those informed on multi-level marketing companies, and even caselaw point

to a sobering conclusion—that the inherently harmful effects of MLMs do

not stem from unrealistic earning projections.

220

Instead, it is the structure of

the MLM, unfair in its nature and designed in such a way that direct sellers

will eventually run out of potential downline candidates, that both creates the

disparity in pay between the top sellers and the entry-level downline and

reflects the similarities between these companies and pyramid schemes.

221

The FTC suggests that pyramid schemes are per se “illegal because they

inevitably must fall apart” due to the recruitment system.

222

If multi-level

companies, like pyramid schemes, offer commissions for recruitment, and if

a retailer’s sales goals can be achieved by purchases her downline makes,

then all consumers would reasonably be incentivized to join multi-level

MLM, BUS. INSIDER (Sept. 28, 2021, 12:28 PM), https://www.businessinsider.com/doterra-utah-

governor-cox-mlm-essential-oils-school-covid-19-2021-9.

217. DeLiema et al., supra note 49, at 3.

218. Industry Fact Sheets, D

IRECT SELLING ASS’N, https://www.dsa.org/statistics-insights/

factsheets (last visited Apr. 29, 2022).

219. See LuLaRich (Amazon Prime Video Sept. 10, 2021); see (Un)well: Essential Oils (Netflix

Original Programming Aug. 12, 2020).

220. See supra The MLM Business Model, Legal Background, Controversies Surrounding MLMs.

221. See Taylor, MLM’s Abysmal Numbers, supra note 10, at 7-4, 7-5.

From analyses of the compensation plans of hundreds of MLMs, I have found a consistent

pattern of pay plans that are recruitment-driven and top-weighted, meaning they are driven by

incentives to recruit, with company payout of commissions going primarily to founders and a

select few . . . who are usually those who were positioned at the beginning of the recruitment

chain.

Id.

222. Valentine, supra note 54.

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marketing companies. Whether a product is available in an MLM as opposed

to a pyramid scheme is irrelevant when the ultimate result and the

characteristic which legitimizes pyramid schemes—that uplines will

eventually extinguish potential downline recruits—are virtually the same.

223

Despite these considerations, discussions on the legalities of MLMs or

lack thereof center on the deceptive practices of these companies.

224

However, the FTCA specifically provides a subsection on unfair practices.

225

To oversimplify the subsection, an unfair practice is only actionable under

the FTCA when it creates harm to the public which consumers themselves

cannot avoid.

226

The harms caused by unfair practices also do not possess

any mitigating factors which would make the injurious effects less serious.

227

Additionally, the statute specifically carves out public policy considerations

for the FTC.

228

As previously noted, the FTC has brought suit under the FTCA against

various multi-level marketing companies for allegedly deceptive practices.

229

But how can the FTCA be more effective in curtailing the unfair practices

perpetuated by these companies? The method this Comment proposes is by

bringing suit for allegedly unfair practices. As case law regarding this prong

of the FTCA suggests, “unfairness” is a “flexible concept with evolving

content.”

230

Indeed, finding a definite standard by which to judge unfairness

is difficult, though courts have noted that the “plain meaning” of the word is

helpful in such an inquiry.

231

Additionally, previous findings of unfairness

by courts and the FTC are not only non-exhaustive, but the same practices

which are actionable for deceptiveness could also be actionable for

unfairness.

232

To inform an administrative or judicial body as to what practices are

unfair, the Supreme Court apparently implicitly adopted three bases for

unfairness the FTC proposed, otherwise known as the “S & H criteria”:

233

(1) whether the practice, without necessarily having been previously

considered unlawful, offends public policy as it has been established

223. McNeal supra note 188; F.T.C. Multi-Level Marketing, supra note 21.

224. F.T.C. v. Cyberspace.Com LLC, 453 F.3d 1196, 1200 (9th Cir. 2006).

225. 15 U.S.C.A § 45(n) (West 2022).

226. Id.

227. Id.

228. Id.

229. See, e.g., In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1132 (1975).

230. See FTC v. Wyndham Worldwide Corp., 799 F.3d 236, 243 (2015) (quoting Federal Trade

Commission v. Bunte Bros., 312 U.S. 349, 353 (1941).

231. Wyndham, 799 F.3d at 244-45 (finding that unfair acts need not rise to “unscrupulous or

unethical behavior,” and consumers need not actually suffer severe injury before such acts are violative of

the FTCA).

232. Id. at 245.

233. In re International Harvester Co., 104 F.T.C. 949, 1073-74, 1076 (1984).

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by statutes, the common law, or otherwise—whether, in other words,

it is within at least the penumbra of some common-law, statutory, or

other established concept of unfairness; (2) whether it is immoral,

unethical, oppressive, or unscrupulous; (3) whether it causes

substantial injury to consumers (or competitors or other

businessmen).

234

While the second criterion cannot be the determinative factor in finding

unfairness of a particular practice, courts have noted that the last criterion “is

the primary focus of the FTC Act, and . . . . [b]y itself . . . can be sufficient to

warrant a finding of unfairness.”

235

Accordingly, injury to consumers and unfair acts motivated the FTC to

add (n) to the FTCA.

236

And it is this very text of the FTCA which provides

what this Comment suggests is a workable rubric for analyses of unfair

practices within the multi-level marketing community.

237

Because the net

impression standard in deceptive practices analyses appeared to be a

judicially created standard, courts too could promote utility and uniformity

(while still following Congressionally codified rules) between analyses of

unfair and deceptive practices by adopting a version of the net impression

standard for unfair practices analyses. That is, a multi-level marketing

company engages in unfair practices in violation of Section 5 of the FTCA

when, based on a net impression of the company’s actions, it promotes

recruitment over sales in distributing commissions and bonuses.

238

As with

the net impression test and disclaimers, a company could still be found in

violation of the Act even when it does not wholly reward bonuses based on

recruitment if a seller would reasonably infer that the company significantly

promoted recruitment over sales.

239

With this test, the net impression of unfair practice would be based on the

three considerations presented in (n) of Section 5 of the FTCA.

240

A court

would first determine whether a specific company’s recruitment-based

incentives resulted in, or would result in, a serious injury to direct sellers and

consumers. If such a finding is not present, the inquiry will end. If, however,

a “substantial injury” occurred, then the question of whether the injury was

234. F.T.C. v. Sperry & Hutchinson Co., 405 U.S. 233, 244 n.5 (quoting 29 Fed. Reg. 8355 (July 2,

1964)).

235. See Wyndham, 799 F.3d at 244; International Harvester Co., 104 F.T.C. at *248.

236. Wyndham, 799 F.3d at 244; Federal Trade Commission Act Amendments of 1994, Pub. L. No.

103-312 § 9, 108 Stat. 1691, 1695 (1994).

237. 15 U.S.C.A § 45(n) (West 2022).

238. See id.

239. See id.

240. Id.

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“reasonably avoidable by consumers themselves.”

241

Again, a negative

answer to this question would result in a finding of no violation of the Act.

Conversely, the last question of the analysis would be whether the injury is

“outweighed by countervailing benefits to consumers or to competition.”

242

If a court found that all three elements were met, at least to some degree, it

could then balance the findings to determine whether a net impression of

unfair practices is created and whether Section 5 of the FTCA is therefore

violated.

243

In practice, an analysis under this proposed net impression test would

include empirical information detailing losses, economic and otherwise,

resulting from the recruitment-based structure of multi-level marketing

companies.

244

Existing information suggests the unfair practice requirements

could be easily satisfied by many MLMs.

245

In the case of MLMs, the

injurious effects of the companies are prevalent. Generally, “99%” of direct

sellers lose money after joining an MLM.

246

While other losses associated

with MLMs, such as social and emotional losses, may be present, economic

losses would likely be the most helpful loss to prove unfair practices.

247

Statistics regarding losses attributable to a specific MLM would vary, but the

overwhelming truth is that a “substantial injury” is likely to occur from an

MLM promoting recruitments over sales.

248

The question of whether a consumer may be able to avoid the harms

caused by these companies on their own is somewhat more challenging—

certainly, consumers could choose not to engage with MLMs, but not every

MLM identifies itself as such. A consumer might also begin purchasing

products from a friend without realizing that they will soon be asked to join

a company in order to receive more benefits and products at higher

discounts.

249

Additionally, companies oversaturate social media with

advertisements from the company itself and through direct sellers about

earning opportunities and life-changing products, and a consumer might

241. Id.

242. 15 U.S.C.A § 45(n) (West 2022).

243. Id.

244. See F.T.C. Business Guidance, supra note 55. This proposal would be consistent with current

practices, as the FTC uses a case-by-case analysis in making determinations such as whether the “Business

Opportunity Rule” applies to MLMs.

245. Taylor, MLM’s Abysmal Numbers, supra note 10, at 7-1. “Our studies, along with those done

by other independent analysts . . . clearly prove that MLM as a business model — with its endless chain

of recruitment of participants as primary customers —is flawed, unfair, and deceptive” (emphasis added).

246. Id.

247. This assumption is derived from the fact that this would be an evaluation under the FTCA, an

act designed to regulate trade practices.

248. 15 U.S.C.A § 45(n) (West 2022).

249. See Silverstein et al., supra note 37. A former retailer for a multi-level marketing company

described the process as targeting “a friend offering them this thing that they needed.”

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reasonably believe that there is little risk to joining a company and purchasing

products if their return will be high.

250

Lastly, courts would have to examine a company for its specific

contribution to consumers or to the market in which it operates to determine

whether the injury caused by the company is mitigated. A particular MLM

might be a relatively low-risk investment, it might have a successful buy-

back policy, or it might have a product to distribute in a market inaccessible

to traditional sales models. This new net impression standard would not

impose liability on every multi-level marketing company simply for

promoting recruitment over sales; it would, however, impose liability when

this tactic results in unavoidable harm to a consumer when the company fails

to alleviate the injury or contributes to the market in a beneficial manner.

The benefit of this test is that it would not upset the existing precedent

regarding the legality of multi-level marketing companies. For example, if

one were to consider In re Amway under this new net impression standard,

Amway would still be considered a legally operating MLM.

251

In that case,

the court pointed toward multiple factors which indicated that Amway was

not a pyramid scheme and had not violated the FTCA.

252

First, any injury

caused by the recruitment system in Amway was not significant due to the

low cost of entry into the company.

253

While this fact could end a net

impression inquiry, any injuries attributed to Amway’s sales plan were

reasonably avoidable by consumers and sellers because Amway had

implemented a policy in which direct sellers had to affirmatively inform the

company of their intent to remain as sellers in the company every year or they

would be released from the company.

254

Therefore, Amway had not

employed more direct sellers than available consumers.

255

Finally, the benefit

Amway provided to the market outweighed any harm caused by its

practices.

256

For example, its buyback policy “deter[red] inventory

loading,”

257

and it had a smaller turnover than most other multi-level

marketing companies.

258

Perhaps most importantly for this part of the

analysis, Amway had entered a market in which “chain food store[]”

competition was fierce, and the market was nearly inaccessible.

259

250. See id. (stating that according to retailers, “[a] curated and positive social media feed is a

must”).

251. In re Amway Corp., Inc., 93 F.T.C. 618, 706 (1979).

252. Id.

253. Id. at 715-16.

254. Id. at 668.

255. Id. at 700.

256. Amway, 93 F.T.C. at 706.

257. Id. at 668.

258. Id. at 672.

259. Id. at 675-76.

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employing a direct-selling model, Amway could enter the market in an

unconventional manner and sell products with positive customer response

that it otherwise would not have been able to do.

260

Based on these observations, Amway would not have been found to be in

violation of the FTCA, even under a new net impressions test. It is possible

that this test would not achieve any more effective results than the current net

impressions test for deceptive practices. However, providing courts and the

FTC another avenue by which to conduct analyses could serve as a deterrent

for unfair business practices if multi-level marketing companies knew that

they could be found to be liable for unfair recruitment systems that do not

provide safeguards to protect their sellers and consumers.

ONCLUSION

Section 5 of the FTCA provides workable guidelines by which the FTC

and courts can review the business and trade practices of a given company to

determine if the Act has been violated.

261

This section is particularly helpful

in investigations of multi-level marketing companies because the difference

between a legal MLM and an illegal pyramid scheme is often difficult to

ascertain.

262

Unfortunately, current analyses and scholarship on Section 5

claims highlight the possible deceptive practices of MLMs without

recognizing the inherently unfair practices these companies employ when

they reward bonuses based on recruitment over sales.

263

This Comment first

addressed this issue by discussing the history of multi-level marketing

companies and the accompanying legal framework.

264

While the Koscot test

provided a two-part test to determine when a company is a pyramid scheme,

In re Amway complicated analyses by suggesting that safeguards, put in place

to prevent the effects of pyramid schemes, could allow a company to operate

legally as an MLM.

265

However, as the current issues surrounding many MLMs and the net

impressions test for deceptive practices demonstrate, ineffective safeguards

and disclaimers will not curtail the harmful effects multi-level marketing

companies have on their distributors. The net impressions test, though

helpful, did not effectively spotlight the larger issue revolving around

MLMs—if courts and the FTC only focus on the effects of misleading earning

projections in Section 5 claims, then they will ignore the fact that these

projections can only exist because these companies consist of uplines and

260. Id. at 677-78.

261. 15 U.S.C.A § 45(n) (West 2022).

262. See Multi-Level Marketing vs Pyramid Schemes, supra note 7.

263. Letter, supra note 1.

264. See supra notes 67-89 and accompanying text.

265. In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1180 (1975); Amway, 93 F.T.C. at 680, 706.

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downlines which create the pay disparities. In response to this gap in Section

5 analyses, this Comment suggested a new standard to accompany the

existing one, a net impression standard based on the unfair practices present

in many MLMs.

266

Under the considerations presented by this new standard,

the FTC could flag more multi-level marketing companies as violative of

Section 5 of the FTCA, and greater regulation of these companies could result

in more effective network marketing companies by minimizing recruitment

and promoting more equitable distributions of income to retailers.

266. See supra notes 212-16 and accompanying text.

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