U.S. MLM LAW - NETWORK MARKETING STATE and FEDERAL LAWS

Rod Cook B.s., M.A., M.B.A.

SAMPLE RECENT CASE BELOW - BURN LOUNGE VS FTC

 A complete book to understanding the maze of 50 State MLM laws, Federal regulations, MLM Federal case law and how they got there. An absolute must for anyone that plans to be "MLM legal" and stay in the MLM industry. 

As only Rod Cook MLM consultant can do it! Hard hitting MLM law facts with the inside story of who, what, where, and when with humor thrown in! Also some blasts at the "odd creation" of some of the MLM laws you will see included in this book. If there were a bar exam on MLM Law or desk reference on MLM law, this is the one book you would want to have! 

These 140+ (8 1/2" x 11") big pages (this equals almost 300 pages at regular book size) can give you and your local lawyer some "MLM Law" knowledge of what you are up against across the United States with MLM law statutes from each state (plus some territories). It includes MLM rules and MLM actions from the Federal Trade Commission, Securities and Exchange Commission, plus postal and other federal authorities. This MLM Law book presents an organized evolvement of the MLM legal system that we have today. Listed are all the State Attorneys General, including their phone numbers and addresses. In some cases, the phone numbers of the members of MLM regulators (who apply MLM Law) and their staff that handle MLM Law enforcement. 

There is some shocking MLM history about how some of these MLM laws evolved. There are interviews with people (like Glenn Turner) who created some of the historical MLM pyramid Law cases. There are some interesting MLM law court cases included to give you a little depth in some areas so you don't get ambushed. We have written some full pages of information, not giving legal advice, but rather, historical MLM background information. There is a full reference list of good MLM Attorneys - Lawyers who are specialists in MLM law. 

This is not to be substituted for an MLM specialist lawyer. Although the laws in the book (over 140 pages) are as up-to-date as possible, the laws concerning MLM-NetWork Marketing change by court decisions (MLM case law) and other rulings. Retails at $79 by itself. If you buy it with The MLM Startup Book, your price is $210 for both.

  

SAMPLE FROM MLM LAW BOOK

MLM - TO PYRAMID FTC CUSTOMER REQUIREMENTS

 CASE HISTORY NEW (BURN LOUNGE) TO OLDER CASES

 The U.S. FTC has been moving steadily toward measuring the amount of Sales to Distributors compared to the dollar amount generated by sales to end consumers (Customers that do not belong to the pay plan). If there aren’t enough Customers, the MLM Company is considered a Pyramid Scheme. Regulators have found that pure pyramid schemes don’t have any end consumer customers.  The definition of a Customer is a person that only buys product or services and doesn’t belong to the compensation plan and has no expectation of making money.  The FTC Consumer Affairs people said in public speeches (not written rules) that MLM – Network Marketing Companies need to have a minimum of 50% Customers (that do not belong to the pay plan) to prove they are not a pyramid scheme.  They have also said (not in writing) that 3 years would be a fair time for a new company.

I now have over 5 patents pending "Hot" (desirable) MLM - Network Marketing pay plans that include "desirable" customer acquisition. The beauty of these plans are that Consumer Customers are shown on the face of the MLM Compensation Pay Plan.  Since one of the first things a regulator looks at is the MLM Compensation Pay Plan that alone can ward off the "evil eye" of regulators.  In fact using Consumer Customers in my Binary Compensation Plan design makes it the best on the market.

The older bigger MLM – Network Marketing companies such as Amway, Mary K, NuSkin and others of course support the end user customer acquisition requirement because they have tons of identified Customers – end users. In Amway’s case for instance they have approximately five times as many customers as distributors that the Company has rightfully accumulated over the years (I often say this is why Proctor and Gamble hates them so bad – soap).  

FEDERAL MLM - TO PYRAMID CASE HISTORY BURN LOUNGE

"CUSTOMERS" CASE #1

FTC BURNS BURN LOUNGE!

The Latest 9 June 2007. The FTC filed a TRO (Temporary Restraining Order)! The FTC said that Burn Lounge paid $50 for recruiting two new MLM Distributors, while paying only 50 cents per 2 albums sold, per the FTC complaint. Ouch! Can you spell Pyramid by FTC standards? The money in Burn Lounge was coming from recruiting.... Not the 50% of income from Customers/Product Sales the FTC wants. I bet Burn Lounge execs and the Investors that committed $40 million had studied the history of the FTC and Customer Requirements that you are reading now!  By the way,  Burn Lounge killed it's MLM Program by converting to a one level affiliate program quickly and the FTC settled the case.  Their stock is dead and the $40 million of investment money is down the drain. As an honest hard working top Compensation Plan Consultant I could have fixed this for a few thousand dollars!  Sad to waste $40 million!  Read On Below!

 FEDERAL MLM - TO PYRAMID CASE HISTORY MALL VENTURES

"CUSTOMERS" CASE #2

CASE #2. In this case with Mall Ventures in 2004 the FTC took court action but did not shut the company down.

       a. Mall Ventures had 50,000 distributors and 98,000 pure Internet access and telephone customers who did not belong to the pay plan. The FTC fined them severely and put severe financial restraints on the owners. Why? The money coming from customers (not belonging to pay plan) to pay commissions was less than 50% the FTC wants.

       b. The FTC forced acceptance of the standard above in the settlement.

       c. This was the final evidence to us (legal observers of FTC direction) that when the FTC said 50% of the business must be from customers, they intended that to be money and not just the body count. The FTC does not put out directives or change their rules. You have to watch litigation and charges which creates “precedent law.” In this case the FTC quoted from precedent law: 

CASE #2 PARAGRAPH 8. “Prohibited marketing scheme,” means a pyramid sales scheme, Ponzi scheme, chain marketing scheme or other marketing plan or program in which a person participates under a condition that he or she make a payment, directly or indirectly, to receive the right, license or opportunity to derive income as a participant primarily from: (1) the recruitment of additional recruits by the participant, program promoter or others; or (2) non-retail sales made to or by such recruits or participants.

 CASE #2 PARAGRAPH 9. “Retail Sales” means sales of products, services, or business ventures by defendants, their successors, assigns, agents, servants, employees, and those persons in active concert or participation with them to third-party end users. Retail Sales does not include sales made by a participant in a multi-level marketing program to other participants, recruits, or the participant’s own account.  

FEDERAL MLM - TO PYRAMID CASE HISTORY SKYBIZ

"CUSTOMERS" CASE #3

The FTC and Federal Marshals walked into SkyBiz offices on 31 August 2001 and shut the company down. This is normal for the FTC since they don’t want to fight the legal power MLM and other types of companies have. They get a preliminary injunction in secret, walk in, and shut the company down.  

This is from 2 Jan 2002 FINDINGS OF FACT AND CONCLUSIONS OF LAW AND ORDER FOR PRELIMINARY INJUNCTION REGARDING SKYBIZ INTERNATIONAL LTD. .For complete case see CD-ROM #1 FTC that comes with the law book. Please note the critical elements (causes for action) presented on pages 14 and 15 of the lawsuit in this case. The third paragraph is the newest refined and the biggest change in the Customer direction for the FTC in determining MLM vs. Pyramid Scheme. The height of humor (or despair) was when SkyBiz sent out this email looking for Customers a couple of days before the trial started. Have a laugh, or frown, Skybiz did not even know if they had customers that were end users! Read This:

aaa@attglobal.net; Leslie Tumlin;    Sent: Tuesday, September 18, 2001 12:04 PM

Subject: Trial Preparation Friends of SkyBiz:

 

Urgent To All SkyBiz Members

We need the names and addresses of EVERY SATISFIED consumer that bought the SkyBiz products and have never sold the business opportunity. We also need the names and addresses of five VERY ZEALOUS Associates who are in the program, but haven't made a whole lot of money. Please keep in mind, we need consumers and associates who would not be reluctant about testifying in court and who presumably are in the United States (for travel purposes). If any of the potential witnesses you suggest are outside the U.S., please identify what country they're in. I need this information at your earliest convenience. Thank you. 

Martin Allen Brown, General Counsel

SkyBiz

World Service Corporation 

 (Author Note) In this following paragraph, the FTC shows it’s push for “retail sales to customers who don’t belong to the pay plan.”  

CASE #3 PARAGRAPH 15. A lawful multi-level marketing program is distinguishable from an illegal pyramid scheme in the sense that the "primary purpose" of the enterprise and its associated individuals is to sell or market an end-product with end-consumers and not to reward associated individuals for the recruitment of more marketers or “associates” See Gold Unlimited, 171 F.3d at 483-84 (suggesting that based on a statutory survey of state criminal laws against pyramid schemes, this is a difference). See also Ger-Ro-Mar, Inc. v. FTC, 518 F.2d 33. 36 (2d Cir. 1975) (explaining that the distributors profited by earning commissions from their own sales and those of their recruits); In re Amway Corp., 93 F.T.C. 618, 716 (1979) (sponsors do not make money from their recruits' efforts until a newly recruited distributor begins to make wholesale purchases from his sponsor and sales to consumers) .  

FEDERAL MLM - TO PYRAMID CASE HISTORY NEXGEN 3000

"CUSTOMERS" CASE #4

CASE #4. In the next case, NexGen3000, you can see how the FTC goes venue shopping for a Federal Judge that will allow them an injunction to shut an MLM Company down. You will notice the FTC Prosecutor is from the FTC office in Georgia and the case is filed in Federal court in Arizona. This is called venue shopping. This was a walk in and shut down case with Federal Marshals. 

FTC Press Release: Consumers paid a registration fee to join the NexGen program, and most also purchased a “WebSuite” including the Internet Mall and related goods and services. A “Basic WebSuite”cost $185, including the registration fee, and a “Power Pack WebSuite” cost $555. NexGen allegedly claimed that “each activated business center has the potential to earn up to $60,000 per week.”

 FEDERAL TRADE COMMISSION

Chris M. Couillou, Georgia Bar No. 190062

Robin L. Rock, Georgia Bar No. 629532 225 Peachtree Street, Suite 1500 Atlanta, Georgia 30303

(404) 656-1353, (404) 656-1368

Attorneys for Plaintiff Federal Trade Commission

 IN THE UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF ARIZONA

 

COMPLAINT FOR PERMANENT INJUNCTION AND OTHER EQUITABLE RELIEF

FEDERAL TRADE COMMISSION, Plaintiff,

v.

NEXGEN3000.COM, INC. GLOBION, INC., INFINITY2, INC.,

DAVID A. CHARETTE, JENNIFER K. CHARETTE, ROBERT J. CHARETTE, JR., MARTA N. CHARETTE, STEPHEN M. DIAMOND, CHRISTINE A. WASSER, and EDWARD G. HOYT, Defendants.

 

CASE #4 PARAGRAPH 24. NexGen also paid commissions to affiliates on purchases from Internet merchants that resulted from visits to the affiliates' malls. Similarly, affiliates earned commissions from purchases directed to third-party Internet merchants as a result of visits through the malls of their downline. The commissions NexGen paid on these purchases were relatively small compared to the commissions it paid on sales of websuites to new recruits.

  FEDERAL MLM - TO PYRAMID CASE HISTORY BIGSMART

"CUSTOMERS" CASE #5

CASE #5. In the “BigSmart” case, you can see that the FTC is refining its wording of end user and customer. This was a walk in and shut down operation by the FTC and Federal Marshals. You can see some outline of changing requirements: 

CASE #5  Subparagraph C. “Prohibited marketing scheme,” means a pyramid sales scheme, Ponzi scheme, chain marketing scheme or other marketing plan or program characterized by the payment participants of money to the program in return for which they receive (1) the right to sell a product or service and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of products or services to ultimate users. Rewards are “unrelated” to the sale of products or services to ultimate users if rewards are not based primarily on revenue from retail sales. 

CASE #5 Subparagraph D. “Retail Sales” means sales of products, services, or business ventures by Defendant, his successors, assigns, agents, servants, employees, and those persons in active concert or participation with them to third-party end users. “Retail Sales” does not include sales made by participants in a multi-level marketing program to other participants, recruits, or to such a participant’s own account.

CASE #5 Subparagraph E. “Ultimate users” are purchasers of retail sales.

       FEDERAL MLM - TO PYRAMID CASE HISTORY 2XTREME PERFORMANCE

"CUSTOMERS" CASE #6

On December 9, 1999, the FTC filed suit in U. S. District Court for the District of Maryland seeking a preliminary and permanent injunction and a legal asset freeze against Dallas-based 2Xtreme Performance International that was a Pyramid Scheme (bad one) disguised as an MLM – Network Marketing Company. The FTC legal complaint alleged that the defendants used Web sites, direct mail, infomercials, telemarketing and seminars to convince consumers they could make substantial income by investing in their multi-level marketing scheme, which marketed nutritional supplements, beauty, weight-loss and other products. Marketing materials represented that consumers could expect to earn enough MLM – Network Marketing income to retire in two years, while the pseudo MLM Company ripped them off for $10,000 - $30,000. We can see the shaping of precedent law in the following paragraph.  The Final Settlement said: 

CASE #6 Subparagraph F. “Prohibited marketing program” means any marketing program, Ponzi scheme, chain marketing scheme, or other marketing plan or program in which a person who participates makes a payment and receives the right, license or opportunity to derive income as a participant primarily from: (i) the recruitment of additional recruits by the participant, program promoter or others; (ii) non-retail sales made to or by such recruits or their recruits; or (iii) any other payments made by recruits. For purposes of this Final Order, a "prohibited marketing program" does not include a marketing plan or program in which the program promoter demonstrates to the defendant that it has instituted and enforced rules that have the actual effect of ensuring that the participants in the program derive income  from the retail sale of goods or services to persons who are end-users of the goods or services and who are not participants in the program.

 

FEDERAL MLM - TO PYRAMID CASE HISTORY FUTURENET

"CUSTOMERS" CASE #7

FTC Press Release (summary): April 8, 1998

FutureNet Defendants Settle FTC Charges; $ 1 Million in Consumer Redress for "Distributors"

CASE #7 According to the FTC's complaint, FutureNet, Inc. claimed that its recruits could earn substantial income for the rest of their lives by joining a multi-level marketing program selling Internet access devices. Consumers paid fees ranging from $195 to $794 to become Future-Net distributors in the scheme, which was promoted on the Internet. But, according to the FTC, a major portion of the income the defendants promised was not based on sales of the devices, which are easily available at other retail distributors, including Sears and Circuit City, at comparable or lower prices. Instead, the promised income came from fees paid by newly recruited distributors who would then bring on more recruits to provide a nonstop "down stream" of paying members. FutureNet claimed that their recruits -- so called "Internet Consultants" -- would receive $200 - $400 when they personally recruited another consultant, and $25 - $50 when a person in their downline recruited a new member.           The agency charged that income from the FutureNet multilevel marketing plan did not depend on sales of the Internet devices they were purportedly selling, but rather on the recruitment of new distributors -- the typical profile of an illegal pyramid.  The stipulated final judgment announced today would settle charges with FutureNet, Inc., FutureNet Online, Inc., and two corporate officers: Alan J. Setlin and Chris Lobato. Three other defendants, Larry Huff, Robert Depew and David Soto, did not settle the FTC charges and the FTC's case against them will proceed to trial.

  

FEDERAL MLM - TO PYRAMID CASE HISTORY JEWELWAY INTERNATIONAL

"CUSTOMERS" CASE #8

FTC Press Release: November 17, 1997

FTC SETTLEMENT WITH JEWELWAY INTERNATIONAL DEFENDANTS NETS $5 MILLION IN CONSUMER REDRESS

The Federal Trade Commission has settled charges against JewelWay International, Inc., and its corporate officers in an agreement requiring a $5 million payment, which will be distributed to harmed consumers, and provisions halting the challenged conduct. In June of this year, the FTC charged JewelWay and six individual defendants with making deceptive earnings claims, and promising lucrative earnings and other benefits to induce almost 200,000 consumers to invest more than $1000 per person in an illegal multi-level marketing plan, or pyramid scheme. The suit was filed as part of the FTC’s "Project Field of Schemes" - a sweep targeted at investment-related fraud. Legitimate multi-level marketing plans are a way of making retail sales of products or services to consumers through a network of representatives. However, in an illegal pyramid scheme the main focus is not on sales, but on recruiting new representatives into the program. Typically, each new representative must buy a certain amount of products and must recruit a specified number of new participants in order to earn money in the program. In a pyramid scheme there is almost no emphasis on making retail sales of products to persons who are not participants in the program. According to an FTC expert, earnings claims made in conjunction with promoting a pyramid scheme are false because pyramids inevitably collapse when no new participants can be recruited and approximately 90% (or possibly more) of the participants consequently lose their money.

 CASE #8 PARAGRAPH 15. A lawful multi-level marketing program is distinguishable from an illegal pyramid scheme in the sense that the "primary purpose" of the enterprise and its associated individuals is to sell or market an end-product with end-consumers and not to reward associated individuals for the recruitment of more marketers or “associates” See Gold Unlimited, 171 F.3d at 483-84 (suggesting that based on a statutory survey of state criminal laws against pyramid schemes, this is a difference). See also Ger-Ro-Mar, Inc. v. FTC, 518 F.2d 33. 36 (2d Cir. 1975) (explaining that the distributors profited by earning commissions from their own sales and those of their recruits); In re Amway Corp., 93 F.T.C. 618, 716 (1979) (sponsors do not make money from their recruits' efforts until a newly recruited distributor begins to make wholesale purchases from his sponsor and sales to consumers) . 

OTHER OLDER CASES

The wording in court cases for consumer requirements goes all the way back to 1984 in a State of Illinois trial and appeal of a Texas Pyramid Company named Dynasty where the appeals court judge used the words, "no end consumers."  After several years the FTC picked it up and started a disorganized application of it in FTC cases.  The planned steady implementation of precedent law in understandable and quoted cases has been presented in this article.

 ARTICLE SUMMARY

Rod Cook B.s, M.A., M.B.A.

 You can see how the FTC has marched forward with the MLM – Network Marketing “customer proof of innocence” for an MLM Company. Why is this a clear-cut mechanism for them? Because they have found that in most cases of a pyramid scheme, customers measuring the end value of the product or service will not buy! While some of us do not totally agree with customer acquisition and its application, it is better than the Omnitrition case by the ninth Federal Court of Appeals. The court said no pay except for retail sales.    Distributor purchases would not count! That was insane Dicta (meaning to be used for legal arguments) because an MLM – Network Marketing sales person needs to use their own products to logically sell them. The 9th Federal Court of Appeals has had their decisions overturned 10x more times than any other Federal District Court of Appeals by the Supreme Court. They are considered the left wing liberals of the legal system in the U.S. But still the legal regulators can use what they said in Court as a legal arguing point (Dicta) against MLM – Network Marketing Companies. 

Now, several of the 50 states are getting on board with the FTC legal trend in determining if an MLM Company is legal by using “end consumers – customers – retail sales to non participants”. In fact two states are so bad I tell my clients not even to do business in them! In 2005 there were over 30 actions brought by the individual states against MLM companies that included some sort of legal customer measurement. The FTC promoted the customer measurement legal measurement at last year’s National Association (of) Attorney Generals (We are an Associate Member). The FTC gave a session about it to AG’s, Deputies and Investigators. At the current rate of complaints I am getting at the MLM Watchdog – I always look at MLM - Network Marketing Companies with the idea in mind would I buy this MLM product or service if there were no money making prospect attached. If the answer is NO – The MLM WatchDog is known to go into “Expose  Mode.” 

When the FTC calculations on Mall Ventures started (I knew the very excellent MLM lawyer on the case) I started designing my patent pending pay plans, to include customer acquisition. I knew in the future that this would be a key to success and survival of MLM - Network Marketing Companies. The trick is not to just require customers, but to give them a benefit or more money or rank for getting customers. If you make getting customers exciting it becomes natural for marketers to grab them. One fact many MLM Company owners do not grasp is that distributors come and go... but Customers stay!        As companies mature they accumulate more customers. Amway has five times as many customers as it has distributors in the U.S. Melaluca, with sales of 750 million a year, derives an estimated 50% of its sales from Customers. You want Customers!

 The MLM – Network Marketing Customer measurement is moving world wide. Canada and the U.K. have shown interest in finally having a “hard core” measurement to decide what constitutes a pyramid scheme. The older companies are pushing this MLM – Network Marketing standard in China right now while China tries to determine what it’s final MLM – Network Marketing Laws are going to be in their legal structure. India (the University of Prune) contacted me on Customer guidelines in their preparation of a review of MLM – Network Marketing Legal book for their Parliament to use to pass MLM laws to determine their legality.  In addition to the FTC pioneering this, the States in the U.S. have picked up the Customer requirement. North Dakota has speared several MLM companies on the “no customer” issue legally. It has been an interesting legal topic of discussion at National Association of Attorney Generals (NAAG) meetings.

 Disclaimer: This article and the MLM Law book were written with review by MLM Network Marketing and Party Plan Specialty lawyers. Rod Cook doesn't pretend to be an MLM lawyer nor does he practice MLM Law. He acts only as an MLM Consultant who designs legal MLM companies with the review of MLM Lawyers. The complete purpose of the MLM Law Book when it started was to record MLM history. Since MLM law is so critical to history both MLM law and history were combined! However the majority of the book is MLM Law.