Why multi-level marketing companies fear an honest conversation

There’s no fool like an old fool, or a young fool, or a rich fool, or a poor fool.

Unfortunately, the multi-level marketing industry and its trade association the Direct Selling Association hopes to limit regulators’ power to stop the kind of business foolishness that makes victims of adult consumers of any age.

By garnering member support for the amendment passed Thursday night by a voice vote to the House Financial Services and General Government Appropriations bill for FY18, the industry attempts to avoid what it dreads most, an honest public hearing on the risk of MLM companies operating as illegal pyramid schemes.

{mosads}The amendment, sponsored by Rep. John Moolenaar (R-Mich.), my home state and the home of Amway, among other MLM companies, legitimizes endless chain selling to the detriment of consumers. The language mirrors that of last year’s H.R. 5230, a bill roundly criticized by consumer protection groups.

Since 1996 the Federal Trade Commission filed 26 pyramid scheme cases against MLM companies, each time emphasizing false earnings representations and other deceptive marketing.

How did the FTC do?

Of the few MLM companies willing to face FTC prosecutors in court, all lost. Of the remaining cases, each MLM settled, agreeing to FTC terms. The vast majority closed their doors.

As anyone with a Facebook account knows, MLM activity can have a virus-like movement through social media. Here is an industry that, according to industry data, engages with approximately eight percent of the U.S. adult population each year, yet generates less than one percent of total U.S. retail sales.

Subtract the products that MLM distributors buy for their own use and keep buying to remain “eligible” to earn income and you get the idea of just how small MLM sales are to consumers who are not also MLM distributors. Factor in the churn of the distributor base and ongoing recruitment becomes a major source of income for distributors and to sustain the overall business model.

The FTC’s successful track record illustrates not only the quality and consistency of its legal arguments but also the continuing egregious behavior of members of the industry, and the role of the trade group as dutiful apologist.

One need only look at the DSA members subject to prosecutions and class actions to wonder about the conversations that take place at trade association meetings.

Are they the kind that I or any other business dean would send our students to watch?

The type of fraud known as an “endless chain” dates back to at least 1900 in the United States. In the 1920s and 1930s two cases attracted national attention because the defendants sold a commonly used consumer product — women’s silk stockings.

In the former case, the Nation’s Business reported that the Supreme Court “dealt a blow” to endless chains by letting stand the lower court decision of a “fraud order.” Less than five years later a similar scheme grew quickly until it too was closed by prosecutors.

The schemes did not purport to sell products to consumers other than to those who became part of the endless chain and help grow the scheme.

If made into law, the amendment passed on Thursday ties the hands of federal regulators and further facilitates an already troubled industry that lacks transparency.

If the MLM industry and DSA truly believe in the various manifestations of the MLM business model then let them welcome a full congressional hearing on the matter.

After all, it was DSA President Joe Mariano who said, “There are a lot of pyramid schemes that like to disguise themselves as legitimate direct-selling companies. That creates an environment where there can be confusion” and “Pyramids are bad guys…Their mere existence confuses the marketplace and makes it more difficult for legitimate direct-selling companies to do business and to be understood.”

By the way, the FTC agreed with Mariano when it wrote in 2011: “Drawing on its law enforcement experience, the Commission acknowledged that some MLMs do engage in unfair or deceptive acts or practices, including operating pyramid schemes or making unsubstantiated earnings claims that cause consumer harm.”

As documented by the non-profit TruthInAdvertising.org, evidence that mirrors FTC concerns six years ago continues to build, which may be what motivates the troubled industry to push an amendment that will tie the hands of regulators.

William W. Keep is the dean of the School of Business at The College of New Jersey.

The views expressed by contributors are their own and are not the views of The Hill.