MLM companies operate under their own set of guidelines which come in every possible variety imaginable. The general looseness of the guidelines has resulted in a large number of lawsuits from distributors who have lost substantial sums of money in the programs. The landmark legal case for the industry is the 1979 Federal Trade Commission ruling on Amway which found that although Amway engaged in deceptive practices, as long as profits were made through the sale of product, the company could continue to operate within the law.
For MLM businesses to operate legally, they must meet the following criteria:
1. The company brings a product or service to the marketplace that is (a) retailable and (b) being retailed;
2. The product or service reaches the end user through direct sales representatives (independent contractors), rather than through traditional retail establishments;
3. The company's compensation plan (a) is designed to reward representatives for the sales of the product or service they make, and (b) includes a feature that additionally rewards a representative who introduces an additional representative to the company, based on the sales volume of the second representative.
A business that has all these components except for 3 (b) is a single-level direct selling company. 3 (b) is what makes it an MLM. All of the criteria above must be met for the MLM business to be legal. Any missing component turns it into an illegal business. For instance, if in 3. the second representative does not personally sell the product or service, the business is no longer legal. How much that percentage of sales needs to be has not been defined. If a program compensates representatives, directly or indirectly, simply for the introduction or enrollment of other participants in the program, it is considered to be a pyramid scheme which is illegal.
Additionally, recent court decisions have ruled that at least 70% of all goods sold by the MLM company must be purchased by non-distributors.
Beyond understanding what an MLM is, however, there is still an incredible controversy raging about whether these companies really do what they say they do.
