Court ruling clarifies protections regarding pyramid schemes

A ruling early last week by the U.S. Circuit Court of Appeals for the Ninth Circuit in San Francisco has created key case law that will help clarify several important consumer protection questions related to identifying and prosecuting pyramid schemes, while at the same time allowing legitimate direct selling companies to continue to offer quality products and services through a salesforce of independent contractors.

As part of a decision upholding the Federal Trade Commission’s identification of digital music seller BurnLounge as a pyramid scheme, the Court affirmed that compensation in a multilevel marketing business must be primarily based on the sale of products and services to the ultimate consumer, whether or not that consumer is also a seller of the products. The decision also bases a portion of its ruling on the long-held principle of law wherein compensation systems funded primarily or exclusively by recruitment rather than the sale of merchandise are illegal.

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This ruling has far deeper implications than may be apparent from the relatively little amount of media coverage it received, as it clearly and directly addresses several questions that have been raised about the direct selling business model in recent months. Were the decision to have been different, we certainly would have heard from Wall Street billionaires and direct selling critics who disguise their financial motivations as selfless acts in the name of consumer protection, but instead that normally vocal minority has quietly dismissed the decision as irrelevant.

But in fact, this critical ruling could not be more relevant. The Direct Selling Association (DSA) has worked collaboratively and productively with regulators and legislators over many decades to not only perfect the definition of a pyramid scheme, but also to give law enforcement the tools they need to prosecute the offenders. Concurrently, DSA enforces one of the most rigorous self-regulatory codes of ethics in business today, ensuring that direct selling companies not only follow the law, but in many cases exceed its requirements. Some may say it is difficult to identify a pyramid scheme, but in fact in only requires looking at the source of income, which must be based primarily on sales of products or services to the ultimate consumer.

Critics of direct selling have demonstrated not only a lack of understanding of the business model but a level of elitism that flies in the face of the consumer protection banner they wave, and in fact will harm the exact people they claim to protect. Luckily, the wisdom of the court will protect people like the suburban stay-at-home mom who earns $200 in supplemental income each month. That $200 a month is portrayed as a pittance by the uninformed, but means being able to pay the electric bill for many Americans.

Legitimate direct sellers take pride in their commitment to ethical business practices and consumer service, with DSA’s Code of Ethics serving as cornerstone. Every member company pledges to abide by the standards and procedures outlined in the code as a condition of admission and continuing membership with DSA. DSA has worked with numerous state legislatures to strengthen anti-pyramid statutes, most recently working with the Tennessee legislature to help pass House Bill 2356, signed into law by Gov. Bill Haslam (R) this past spring.

Direct selling offers excellent entrepreneurial opportunities to individuals as independent contractors to purchase and/or sell products and services through one-on-one selling, in-home product demonstrations or online. Nearly 17 million Americans participated in direct selling in 2013. On behalf of each of those individuals and the companies they represent, DSA salutes both the FTC and the 9th Circuit for clarifying the law surrounding legitimate direct sales and protecting those who adhere to state and federal law.

Mariano is president of the Direct Selling Association.