Congress not taking it easy on MLM companies these days

“Work from home! Earn thousands of dollars per week!” Have you ever heard an advertisement that promises this kind of scheme? Chances are it’s a company using a multi-level marketing model, or MLM, to pitch their product.  It sounds like complicated business lingo, but the multi-level marketing approach is pretty straightforward.  The company relies on “distributors” (e.g. you) to not only sell their product, but also to recruit other people to become distributors as well.  The more people you’ve recruited “below” you, the more money you make—assuming those recruits buy the company’s products.

Though multi-level marketing can theoretically be used to sell any type of product, most companies that use an MLM model today sell consumable health and personal care items like makeup and nutrition supplements.  This approach provides a more sustainable business than sales of durable goods, because once a consumer starts using a type of makeup or a nutritional supplement, chances are they’ll continue to buy it if they feel that it’s helpful.

What’s not so easy to understand is whether the average person can actually make any money working as an MLM distributor.  Usually, there are minimum monthly purchases you need to make to retain your status as an active member in the MLM’s network.  This puts a steady drain on any potential earnings, and as a result, it can be hard to claw your way to a profit every month.  Multi-level marketing companies often sell services to their distributors too, with the stated goal of helping them improve their sales abilities and extend their network of contacts.  If you choose to buy these services as well, this cuts further into your profits.

This, combined with the vaguely pyramid-scheme-like design, has caught the attention of the government on numerous occasions.  Congress and regulatory organizations like the FTC have sought to reign in the MLM industry.  Here are a few multi-level marketing companies that found themselves the object of the government’s ire.

Nu Skin

Nu Skin is a Utah-based multi-level marketing company that focuses on makeup, beauty products, and supplements.  Its flashy advertising and marketing materials make big promises about both the quality of its products and the potential earnings of distributors, but these promises landed the company in hot water with the government on several occasions.

As reported by the New York Times, Nu Skin ran afoul of Federal Trade Commission regulations multiple times during the ’90s (1).  In 1994, it was the subjects of an investigation into false advertising claims about the products they offered and false representation of the profitability of becoming a Nu Skin distributor.  Nu Skin had touted the benefits of hair loss and anti-aging treatments without providing solid scientific evidence to back them up.  Additionally, the company had misrepresented the average earnings that a distributor could expect to make selling their products. 

The investigation led to a fine of over a million dollars, and a stern warning not to delve into false advertising again in the future.

However, it wasn’t long before the Federal Trade Commission had its sights trained on Nu Skin again.  This time, according to the Wall Street Journal, Nu Skin was found guilty of promoting supplements that were supposed to burn fat and build muscle (2).  When the Federal Trade Commission challenged Nu Skin to back up these claims, Nu Skin was unable to provide solid scientific studies or evidence for their efficacy.  In 1997, Nu Skin was handed down another million-dollar-plus fine for false advertising and unsupported claims.  Nevertheless, Nu Skin admitted no fault in the settlement, and continues to operate today, though surely with a closer eye on its advertising practices.

Amway

Perhaps one of the best-known multi-level marketing companies in the world, Amway sells the usual smattering of supplements, cosmetics, and household consumables like lotions, cleaners, and air filters.  Amway was the focus of a landmark Federal Trade Commission ruling in 1979 (3).  Amway was accused of being a pyramid scheme—an illegal chain-recruitment operation in which people at the top of the pyramid (the company’s owners and early distributors) make heaps of money from people at the bottom.  A pyramid scheme is not only prohibited by law, but is also mathematically unsustainable: soon enough, there aren’t enough new recruits to keep the money flowing, and the enterprise collapses.  Those at the top laugh all the way to the bank, while those at the bottom when the pyramid collapses end up losing money.

The Federal Trade Commission ruled that, strictly speaking, Amway Corporation was not a pyramid scheme because it did indeed sell real products, and could sustain its business model indefinitely, unlike a true pyramid scheme.  The ruling did, however, castigate Amway for allocating specific customers to individual distributors, manipulating the prices of their products, and retaliating against distributors that didn’t follow Amway’s pricing guidelines. 

Amway was provided with a list of ten specific behaviors it had to cease immediately, including price-fixing, prohibiting sales to other distributor’s customers, and forcing distributors to sell back their products when they quit selling Amway products.  Like Nu Skin, Amway was also grilled for misrepresenting the potential earnings of distributors in their network. 

In the aftermath of the ruling, Amway changed its business practices, and has largely avoided trouble, save for a class action lawsuit settled in 2011 (4).  The lawsuit alleged that Amway mostly sold products to its own distributors, not actual customers.  Amway chose to settle the suit instead of go through a lengthy litigation process.

Herbalife

The multi-level marketing company that’s been making the most headlines recently is a nutrition and supplement provider called Herbalife.  The supplement and meal replacement manufacturer was founded in 1980 and came under fire almost immediately.  By 1985, the Los Angeles Times was reporting on “stormy” hearings before a United States Senate committee, during which representatives questioned Herbalife CEO Mark Reynolds Hughes on the safety and medical efficacy of the company’s products (5).  The aftermath of the hearings led to a settlement with the Attorney General of California, in which Herbalife was fined and prohibited from making unsubstantiated product claims (6).

Herbalife largely laid low for the next 30 years, growing into a well-established and profitable MLM company.  Then, in 2011, a strange turn of events unfolded.  First, billionaire hedge fund manager David Einhorn asked Herbalife executives pressing questions about the company’s finances.  The company’s stocks plunged.  A few months later, another investor publicly made a bet against the company’s stock, then proceeded to give a three-hour presentation explaining his reasoning.  This investor, Bill Ackman, alleged that Herbalife was running a fraudulent, unsustainable business model—essentially the same charges leveled against Amway back in 1979 (7).

Ackman’s accusations, along with calls from congressional representatives like Senator Edward Markey of Massachusetts, led to a 2014 Federal Trade Commission probe (8).  According to Fortune Magazine, the FTC is currently in talks to resolve the probe, but there’s no word on what the outcome will be (9).

What’s the future of MLMs?

With their long history of drawing the ire of Congress and the FTC, the endgame is likely to be a more tightly regulated industry, but it’s anyone’s guess as to when that may come about.  It’s been almost 40 years since the initial wave of investigations and hearings on Amway, and MLM model companies continue to steam along—and also stir up controversy.

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