Federal Trade Commission Guidance to Multi-Level Marketing Companies

Federal Trade Commission (FTC) enforcement investigations will often target an industry that recently has been the subject of staff guidance. Earlier this year, FTC staff issued Business Guidance Concerning Multi-Level Marketing. Offered as a list of frequently asked questions, it describes the characteristics of lawful and unlawful multi-level marketing companies (MLMs), a type of direct selling company.

MLMs rely on a network of participants (or distributors) to sell their products or services. Participants can earn compensation based on their own sales as well as the sales of the other participants they recruit, called their “downline” distributors. Historically, the underlying supposition of enforcement was that an MLM that did not pay compensation based on actual retail sales to actual consumers did not sell products that were in consumer demand. These MLMs, colloquially known as pyramid schemes, would not survive because eventually downline distributors run out of new individuals to recruit and cannot earn money or recover their costs through the sale of product or services alone.

With the Business Guidance, the FTC staff expresses its intention to evaluate MLMs based on a case-by-case approach that considers the factors in totality to distinguish between lawful MLMs and MLMs that violate Section 5 of the FTC Act. The Business Guidance advises that the FTC will consider several factors in determining whether to initiate an enforcement action. These include whether compensation structures over-reward recruitment, proof of claimed sales, and whether claims and representations are truthful.