Consumer Safety & Awareness Part 16

Multi-Level Marketing and the Law -- Part 2

In 2007 a class action lawsuit was brought against both Amway and Quiztar. Amway refused to cooperate because all their distributors have to sign an agreement not to sue them, but rather to submit to binding arbitration. They get to pick the moderator and set the rules. The judgment went against them.

The suit is based on the same charges that the FTC brought against Equinox, SkyBiz and other MLMs that regulators shut down. It states that the Quixtar program – based upon selling products to recruits "for personal use", then authorizing them to recruit others to do the same while requiring them to maintain quota levels of monthly purchases, and then rewarding them in a multi-level compensation system – is a fraud. The suit also attacks Quixtar's infamous "tools" business as a second pyramid scheme perpetrated on new recruits.

Equinox International Corporation, and its founder, William Gouldd, operated a multi-level marketing company that encouraged consumers to become distributors for products including water filters, vitamins, nutritional supplements and skin care items. Equinox distributors ran classified ads in the "help wanted" sections of newspapers, which implied that a salaried position was being offered. Those who responded to the ads were instead given a sales presentation designed to recruit new distributors.

The suit claims that Equinox told potential distributors that they could earn money by selling products or recruiting additional participants but emphasized that the real way to make money is through recruiting, not through sales. New recruits were encouraged to purchase $5,000 worth of products to become a manager, rent desk space for $300 to $500 a month, obtain their own telephone line and attend training seminars that cost between $300 and $1,000. Participants were told that "financial gains were dependent upon the continued successive recruitment of other participants" and that retail sales are not required to make money.

Investigations determined that a very small percentage of distributors actually recoup their expenses. In reality, the majority of participants drop out of the program with little or no earnings despite the defendants' claims that everyone who participates in the program will receive substantial income. The courts closed down the business and ordered over $40 million in restitution.

The United States Postal Inspector made this statement:
Multi-level marketing is a system of selling in which you sign up other people to assist you, and they, in turn, recruit others to help them. Some entrepreneurs have built successful companies on this concept because the main focus of their activities is their product and product sales. However, there are many multi-level distributorship schemes that are nothing more than sophisticated chain letters. They operate as a "pyramid," claiming participants can earn lots of money by concentrating most, if not all, of their efforts on recruiting distributors rather than selling a product.

The success of a pyramid distributorship for each and every distributor depends on continuously getting additional people to join the pyramid. However, there is a practical limit to how many distributors can be found and to how many product units they can sell or use. To protect yourself against falling victim to a multi-level marketing scheme, note whether the basis of the promotion is the sale of a product at the retail level, as opposed to an emphasis on recruiting more and more distributors to help you increase your income.
There is no easy way to wealth. A multi-level marketing scheme is no exception, other than perhaps for the promoter who originates it and receives the large fees from unsuspecting victims.

Before you get involved in any business where you have to sell products to your friends, take the time to read the information at mlmwatch.org. They list governmental legal action against several dozen multi-level marketing companies including Amway, Herbalife, Nu Skin, Nature’s Sunshine, and Oxyfresh. Even Scientology has been classified as an MLM as members get paid for every new recruit they bring in.

The truth is that there are many legal companies that fall into this type of business, and it is possible, with a few of them, to become financially successful, but not without work. More important, from a consumer’s point of view, is that the value of the products they sell tend to be exaggerated or misrepresented.

As we have recommended before, when offered a product from anyone or any company, you should initially turn it down so that you can research it. If the product claims to be a cure, whether called natural, herbal, or scientifically proven, at very least have your doctor check for compatibility with any medication you are already taking. Copy the ingredients from the bottle or jar. If you feel you have a medical need for such a product, have your physician do a blood test to discover if there is a systemic cause for the problem. Often doctors can find inexpensive remedies as opposed to the month-after-month of using an unproven and possibly expensive product.

Before you purchase a perfume, skin cream, nail softener, or other cosmetic product, compare its price to both name brands and store brand products that have similar claims. MLM state their products are less expensive because of no middleman, but they do indeed have a multiple of middlemen, all of whom grab a profit. A truly honest salesperson will let you take the product in to your pharmacist so that you can seek advice.