Is Network Marketing Legal? Yes, Network Marketing is legal.
Says who? Case law, which was established by a judge who made a particular ruling in one case during The Federal Trade Commission versus Amway lawsuit in 1975. When all the books were opened up and everything was investigated (over 4 years of litigation) the administrative law judge ruled that Amway's multilevel marketing program was a legitimate business opportunity as opposed to a pyramid scheme.
That is what makes it legal, it's established case law. That means the structure is legal. In other words, paying commissions on more than one level (multilevel marketing) is legal. The structure of it is legal. It doesn't matter how many people there are chanting, saying it's not legal. Those people are not willing to accept that it's law. Many industries and companies also pay on more than one level, but they're not called multilevel marketing companies. Many affiliate programs pay on more than one level, but they don't call themselves multilevel marketing or Network Marketing.
Hi, my name is Tim sales. I've been in the network marketing industry for 30 years. I've consulted for a couple of hundred Network Marketing companies. I was invited to the University of Illinois at Chicago to teach a certificate course on Network Marketing. I was also interviewed by the legendary Larry King on this topic, whether or not it's legal, and how Network Marketing is different from a Ponzi scheme or a pyramid scheme.
So How do you know if Network Marketing is legal? How do you know for sure, and which activities can you or your company do that would make it legal or illegal? The answers to these questions are based on a document published in 2018 by the FTC (Federal Trade Commission) and I'm going to go through this step by step.
Likely Legal vs. Likely Ilegal Activity In Network Marketing
If you're a part of a Network Marketing company or you're looking to join a network marketing company, you want to be aware of and understand the activities being promoted by the Corporate entity of that Network Marketing company. For example, Amway had a rule within their policies and procedures that you needed to have 10 retail customers in order to earn on downline commissions.
Personally, I feel this is an important point and I do it in my business. The reason is, if you can't get a retail customer you're going to have a hard time training your team to get retail customers and, over time, you'll be missing out on a lot of sales volume in your organization. So, even though this is under the Corporate Policy side of things, I believe it to be a good practice at the distributor level.
A Buyback Policy was another point that made Amway's MLM program legal - a buyback option on unsold, unopened inventory.
Another policy was called the 70% rule regarding unused or unsold inventory. If you have not sold or used 70% of your initial or existing inventory you were not allowed to purchase more inventory. As an example let's say in month one you sold $200 of your thousand dollars of the products you purchased, you cannot order more inventory. This is not a retailing rule, this is an inventory rule and it was to prevent people from warehousing products and holding too much inventory.
Having to acquire 10 retail customers is not a law, by any means, but the activity of doing so represents regular business practice - having to acquire customers.
Don't miss represent incomes; this is a BIG one in terms of what the Federal Trade Commission is looking for. So if you use hypothetical examples or if you use your own example as to how much income a person can earn, always show an average income statement to avoid any hyped-up or false income claims.
Don't make product claims; this is another BIG one in terms of what the FDA (Food and Drug Administration), not the Federal Trade Commission, will find fault with.
By the actions of making income claims and product-benefit claims, agencies can find fault(s) with Network Marketing companies because of the activities of the distributor doing these particular things, again, making claims regarding incomes, product benefit claims, cures, etc.
Here are activities that are likely to be pyramid-activity;
Large, large membership fees; Typically when you join a Network Marketing company, it's going to be somewhere between $25.00 and $50.00 to become a member. That's not a large membership fee, and it's not unlike becoming a member of Costco or a similar retailer in order to benefit from discounts or other member-only-benefits. In addition to membership fees, you have the products or services you may want to try before getting into any business. So what does that cost?
If it's $1,000.00 to $2,000.00 worth of product it's enough to consume yourself. If it's a lot more, that's a different story. Large membership fees allow front end loading. And if the company is allowing people to load up with $5,000.00 to $10,000.00 worth of products, then it's likely a pyramid.
Commissions on enrollment; There is a difference between a person joining a Network Marketing business and buying products and the upline getting paid a commission on sales volume because the person bought products to explore - the products that they're going to be out marketing and selling. That makes sense. But that's different than somebody joining and getting paid to join. So, legitimate Network Marketing companies can't pay commissions on enrollments, but they can pay commissions on products that a person buys - actual sales volume.
Product Purchase Intent; This is where the point of the spear is right now, as opposed to 10 years ago, 20 years ago, or 30 years ago. I would put this one at the very top. And it's what the Federal Trade Commission is looking at right now. What are the individual purposes of representatives, what's their intent in ordering products? If that intent is to consume the product, it's likely illegal. If it is to sell the product to a customer is likely legal. If the intent is to earn commissions from simply enrolling and buying products, then it's likely illegal....that's going to cross over a line of buying inventory. And what's the intent? Is it to consume the inventory? I don't think so. It's to earn more commissions, and that's where it gets shady. That's where the Federal Trade Commission doesn't like it.
I hope the video above and this post have been helpful to you.
I'm Tim Sales
PS. The FTC Document I refer to, you can see it here.