Anti-MLM Zealots – Part IV

        Picking up where we left off, about half way through FitzPatrick’s latest work “Pyramid Nation,” he makes the outlandish claim that the “pyramid scheme industry,” (that’s us) led by the Direct Selling Association, has “turned it’s attention to ridding the country of effective state statutes against pyramid schemes.” Obviously, the DSA is not trying to get the Airplane Game legalized. What he is referring to is the lobbying effort to get states, and the FTC, to formally recognize personally consumed products by distributors as legally commissionable. The Anti-MLM Zealot’s best friend, the 9th Circuit Court of Appeals, declared that only retailed products to non-participants was legally commissionable in the 1994 Webster vs. Omnitrition case, and this is the backbone of Fitzpatrick’s case as well. Forget the fact that this was only dicta (an unsolicited opinion) offered by the most overturned appeals court in the country, that it created no law, that the case only involved dismissing a summary judgment by a lower court (in favor of Omnitrition), or that Omnitrition’s practices were never officially ruled illegal by a jury. Nonetheless, this concept of paying commissions on internal consumption is the basis for FitzPatrick’s claim that virtually all MLM companies are operating illegally in many states. Of course, he looks to other cases and statutes besides Omnitrition to make his case. For example, he also provides Wisconsin’s statute which “prohibits schemes, in which a person, upon a condition that he or she makes an investment, is granted a license to recruit, for profit, additional investors…”. But, this is why all MLMs are legal in Wisconsin! No MLM company offers the right to enroll others on the “condition” of an investment. Not one. Sure, some require an at-cost distributor kit for around 20 bucks. But a product purchase in never required as a condition to recruit others (to be a distributor). It’s never even a requirement to qualify for commission (personal sales volume is required, but there is never a requirement that you must purchase the required volume yourself). This is a subtle but critical distinction that apparently even a court certified “pyramid scheme expert” can miss.
        Keeping with the same theme, he next describes how the DSA is lobbying for a federal statute (HR 1220 – “Act to Prohibit Pyramid Schemes”) that would formally declare products purchased by distributors as legally commissionable. Therefore, he declares, this bill as pro-pyramid scheme. In fact, this bill “wipes out a defining characteristic used by prosecutors to identify product-based pyramid schemes.” He even goes so far as to state that this bill would have allowed Equinox and other such schemes to remain in business instead of being shut down. Here’s what he somehow missed (or has chosen to ignore): According to the DSA (see Press release 4/14/03 at www.dsa.org) this bill “would provide an additional federal right of action and would not preempt any state anti-pyramid laws.” Furthermore, the bill itself contains language that clearly defines illegal pyramids as those “that finance returns to participants through sums taken from newly attracted participants” (Sec. 2.1.a); and one “in which a participant gives consideration for the right to receive compensation that is derived primarily from the recruitment of other persons as participants in the plan or operation, rather than from the sales of goods, services, or intangible property to participants or by participants to others” (Sec. 3.11). It further defines the illegal act of “Inventory Loading” as encouraging “independent salespersons to purchase inventory in an amount that unreasonably exceeds that which the salesperson can expect to resell for ultimate consumption, or to use or consume, in a reasonable time period” (Sec. 3.7). Even with the provision to include sales to “participants,” this bill obviously would not have protected Equinox, or any successfully prosecuted pyramid. The front loading section alone would have nailed them. Plus, the Illegal Pyramid definition section still addresses what has actually been the “defining characteristic” of an illegal pyramid, which is the motive for distributor purchases, not the existence or amount of distributor purchases. If a significant amount of product is purchased only by new distributors as a token act to qualify in the pay plan (as opposed to their genuine desire for the product) Section 2.1.a above would absolutely still apply.
        The entire statute is only two pages long. FitzPatrick’s attack on it is longer than the bill itself – yet he seems to have somehow completely missed, or misinterpreted, all three of these pertinent sections. This bill is clearly not designed to protect illegal pyramids. It’s designed to protect MLM companies who have a lot of distributors who genuinely love their products and would be purchasing them regardless of the pay plan (thus have a lot of distributors purchasing the products for their own use), or those companies who have little or no barrier to entry (i.e. free enrollment) where retail customers freely enroll as reps simply to get the products cheaper.
        Several states have already adopted statutes based on this model, including Idaho, Texas, Louisiana, Kentucky, South Dakota and Oklahoma. The bill has already passed by a vote of 64-3 in the House and 34-0 in the Senate.
        FitzPatrick is further emboldened by language within the FTC’s suits against such companies as Equinox and Five Star Auto Club. In these, and other cases, the FTC does clearly state that commissions may only be paid on sales of products to those who are not “participants or recruits in the multilevel marketing program.” In other words, these federally prosecuted companies were, in fact, held to the standard of only paying commissions on sales made to retail customers. If the FTC were to hold every MLM company to the same standard, we’d be in trouble. The only chink in FitzPatrick’s seemingly iron-glad case is – the FTC doesn’t.
 vIn an effort to get a definitive and final answer to this murky and ominous question, the DSA did something rather ingenious – they asked the FTC. The FTC responded in a letter signed by the Acting Director of Marketing Practices (www.marketwaveinc.com/FTC_Letter.pdf) as follows:

        “The Federal Trade Commission often enters into consent orders with individuals and companies that the Commission has determined have violated the FTC Act. To protect the public from those who have demonstrated an unwillingness to follow the law, these orders often contain provisions that place EXTRA constraints upon wrongdoers that DO NOT APPLY TO THE GENERAL PUBLIC. These “fencing in” provisions only apply to the defendant signing the order and anyone with whom the defendant is acting in concert. THEY DO NOT REPRESENT THE GENERAL STATE OF THE LAW… For example, when the Commission brings a pyramid scheme action, the case often concludes with a consent order.  The scope and severity of the order will depend upon the facts of the case; however, most such orders contain definitions that exclude any sale to a participant in the business from the calculation of the venture’s legitimacy.  These definitions draw very clear lines for those who have demonstrated a willingness to violate the law, BUT ARE NOT INTENDED TO REPRESENT THE STATE OF THE LAW FOR THE GENERAL PUBLIC.” (Emphasis is mine).

        In their response letter, they also go on to explain that, indeed, they pay more attention to the motive for distributors buying the product, not the number or percentage of distributors buying the product. Case closed.
        Other benighted comments by FitzPatrick in his book include “The FTC has been shown to have inadequate resources to prosecute the MLM pyramid cases. It is financially forced to settle out of court.” The federal government can’t afford to prosecute MLM companies? The same federal government that spends $500 for hammers and $300,000 to study the mating habits of Amazonian tree frogs? Now I’m even more insulted that he thinks we’re all that ignorant.
        One of my favorite FitzPatrick leaps-of-logic is his statement “NuSkin only counted the ‘active’ group when reporting average incomes… leaving out the larger group who never earns anything.” Perhaps they never earned anything because they were… inactive? It follows the same illogic as “The vast majority of the losers in MLM drop out within a year.” But then, this is very likely the reason they lost money – they quit within a year. In fact, most voluntarily quit within weeks. That’s a problem with the commitment level of most distributors, not the MLM model.
        He also states that “In 1998 NuSkin paid out 2/3rds of its entire commission to just 200 upliners out of more than 63,000 currently active distributors. The money that this .3% received came directly from the unprofitable investments of the 99.7% of the others.” Nu Skin paid out over $330 million in commissions in 1998. This produced at least 200 millionaires, according to Fitzpatrick (that’s a bad thing?). And the remaining $110 million went to the other 62,800 reps, who would have then averaged over $1,750 in earnings that year. Yet, he matter-of-factly claims every one of these 62,800 were “unprofitable.”
        FitzPatrick has written another popular internet hit piece titled “The 10 Big Lies of Multi-Level Marketing.” He kicks this diatribe off by calling MLM a “free market hoax… analogous to calling the purchase of a lottery ticket a ‘business venture.'” Of all the specific accusations made by anti-MLM zealots none offends or insults me more than this one. I’ve put in years of hard work, at great expense and sacrifice, to get to the level of success that I’ve reached in MLM. Now I’m being told by Robert FitzPatrick that I was just lucky.
        FitzPatrick again reveals his lack of understanding of even the most basic MLM concepts with observations like, “If a 1,000-person downline is needed to earn a substantial income… those 1,000 will need one million more to duplicate the success.” True, if you assume all 1,000 of those under you are on your first level – a wholly absurd assumption. However, if you had 1,000 people under you, wouldn’t the nine people directly upline from you also have at least 1,000 under them? So, right there we have ten people with 1,000 people under them and it only required 10% of the people FitzPatrick is claiming it would. To be fair, I understand and appreciate the point he’s trying to make – yes, the progression obviously can’t go on forever – but let’s not mislead the reader with garbage math. His statement is simply, logically, mathematically untrue.
        I won’t attempt to defend against each and every one of FitzPatrick’s alleged “big lies” since they all fall into one of three categories. Either they are simply not a lie, such as #7, “You can do MLM in your spare time.” In fact, most successful MLMers worked part time in the beginning. Your time investment does take on a bell shaped curve, requiring more than spare time effort eventually, but only as your downline, and income, grows accordingly. Or, the “lie” is overstated, such as #6, “Success in MLM is easy.” Sure, many over-zealous, naive or dishonest MLM participants make such claims. But most don’t. The majority understand the obvious folly in using such an approach – if you deceive your prospect into joining this way, they are quickly and inevitably going to discover the truth on their own and quit, making the whole process pointless. Or, the “lie” is entirely fictitious, such as #3, “Eventually ALL products will be sold by MLM” (emphasis mine). Even the mythical “50-60% of all goods will be moved by MLM… according to the Wall Street Journal” claim is accepted as ridiculous today by most MLMers with even a modicum of experience. I have heard some of the most outrageously over hyped MLM presentations of all time, and never, not one single time, have I heard anyone even insinuate that, someday, “all” products will be sold via MLM.
        So, to wrap up, Robert FitzPatrick acknowledges in his works that MLM is “backed by an ex-president” and “defended by top law firms.” He claims MLM even has its own caucus in Congress. Inc. Magazine, Forbes, Entrepreneur, and Success Magazine have all published positive articles about this industry. MLM is recognized as a legal business model by all fifty state’s Attorneys General, the FTC, the vast majority of the House and Senate, and many state and federal courts, and has been for decades – not to mention the SEC and the several hundred thousand investors in MLM company stock. Yet, FitzPatrick believes he’s right, and all of them are wrong. He also claims the “great majority” of the three largest U.S. based MLM company’s sales are outside the U.S. – so we’re fooling the citizens, courts, and regulators in over 60 other country too!
        Or, maybe the ex-president, top law firms, business media, our state and federal government – and the several million of you who participate in this industry – are the one’s who get it, and Robert FitzPatrick is wrong.

        Next issue we begin a series on Ruth Carter, author of “Behind The Smoke & Mirrors” and co-founder of MLMSurvivors.com.