Business

Consumer Groups Oppose H.R, 5230, Demand Real Protection From Pyramid Scheme

If you have been following the Herbalife (non ending) saga then you are familiar with this piece of legislation – if not here is some background from a shrewd anti Herbalife short. Anyway, a consumer group is fighting the measure see their letter toregulators on pyramid schemes and the bill below.
Consumer Groups Oppose H.R, 5230, Demand Real Protection From Pyramid Scheme

Washington, DC—The National Consumers Group, and four national consumer groups, today called on members of the U.S. House of Representatives to oppose H.R. 5230, the Anti-Pyramid Promotional Scheme Act of 2016. The bill, which is currently pending before the House Energy and Commerce Committee, purports to strengthen consumer protections from fraudulent pyramid schemes. In reality, it would rob the Federal Trade Commission (FTC) of its ability to protect Americans from all but the most egregious forms of pyramid schemes.

The FTC has consistently stated that a critical difference between a legitimate multi-level marketing (MLM) business and a pyramid scheme is that an MLM succeeds primarily by retailing products and services. In contrast, an illegal pyramid scheme incentivizes recruitment over retail sales and induces participants to focus on recruiting distributors who typically must pay to join the business opportunity. This characterization has been developed and embraced by over 40 years of case law. Unfortunately, H.R. 5230 would remove this core tenet and instead provide numerous carve outs and exemptions for pyramid schemes masquerading as MLMs.

“Despite its positive name, H.R. 5230 undercuts the FTC’s ability to protect consumers from pyramid schemes disguised as legitimate direct sellers,” said John Breyault, NCL Vice President of Public Policy, Telecommunications and Fraud. “Consumers should not be put at risk by legislation designed to give a pass to all but the most blatant pyramid schemes.”

The groups cited numerous ways that the bill would weaken current prohibitions on pyramid scheme activity, including:

Relieving MLMs of the need to have actual customers outside the distributor network. This would allow MLM operators to simply sell distributors on the idea of joining an endless chain, instead of operating their own retail business.

Allowing an MLM parent company to profit off a churning base of recruits who, in an effort to qualify for rewards, are urged repeatedly to purchase directly from the parent company.

Eliminating anti-pyramiding safeguards that were put in place after the FTC’s landmark 1979 Amway decision. Those important consumer protections require companies that want to be regarded as legitimate MLMs ensure that sales by distributors are made primarily to customers outside of the distribution network.

Giving MLMs permission to engage in purchase and recruiting behaviors the courts have already identified as endemic to illegal pyramid schemes.

Signatories of the letter included Consumer Action, Consumer Federation of America, Consumer Watchdog, the National Consumers League and U.S. PIRG.

Consumer Groups Oppose H.R, 5230, Demand Real Protection From Pyramid Scheme

June 2, 2016

The Honorable Fred Upton, Chairman

The Honorable Frank Pallone, Ranking Member Committee on Energy and Commerce

United States House of Representatives 2125 Rayburn House Office Building Washington, D.C. 20515

RE: H.R. 5230, the “Anti-Pyramid Promotional Scheme Act of 2016”

Dear Chairman Upton and Ranking Member Pallone,

The undersigned consumer organizations wish to express our opposition to H.R. 5230, the “Anti-Pyramid Promotional Scheme Act of 2016,” which is currently pending before the House Energy and Commerce Committee. Although multi-level marketing (MLM) organizations may provide a legitimate business opportunity to some consumers, many MLMs are in reality illegal pyramid schemes.

The FTC has consistently stated that a critical difference between a legitimate MLM business and a pyramid scheme is that an MLM succeeds primarily by retailing products and services. Yet, H.R. 5230 makes numerous changes designed to make it harder for the FTC to challenge illegal pyramid schemes, placing consumers seeking small business opportunities at grave risk of being taken for a ride.

  • Specifically, H.R. 5230 eliminates the purpose of direct selling as a form of retailing by relieving MLMs of the need to have actual customers — external of the recruitment process. This would allow MLM operators to simply sell the idea of joining a business opportunity, instead of operating their own retail business.
  • Second, the bill allows the MLM parent company to profit off a churning base of recruits who, in an effort to qualify for rewards, are incentivized to purchase product directly from the parent company.
  • Third, the bill eliminates anti-pyramiding safeguards that were put in place after the FTC’s landmark 1979 Amway Those important consumer protections require companies to ensure that sales by distributors are made primarily to customers outside of the distribution network.
  • Finally, the bill also gives MLMs permission to engage in purchase and recruiting behaviors the courts have already identified as endemic to illegal pyramid schemes.

According to research conducted by the National Consumers League, one third of consumers have difficulty spotting the difference between a legitimate MLM opportunity and a pyramid scheme.1 Given this fact, the ability of the Federal Trade Commission (FTC) to identify and prosecute pyramid scheme operators is essential to maintaining consumer trust in the marketplace. H.R. 5230 purports to strengthen consumer protections from fraudulent pyramid schemes. In reality, however, it would undo decades of legal precedent and rob the FTC of its ability to protect Americans from all but the most egregious forms of pyramid schemes.

Again, the FTC has consistently stated that a critical difference between a legitimate MLM business and a pyramid scheme is that an MLM succeeds primarily by retailing products and services. By comparison, a pyramid scheme incentivizes recruitment over retail sales and induces participants to focus on the recruitment side of the business at the expense of their retail marketing efforts. This characterization has been developed and embraced by over 40 years of case law.2 Unfortunately, H.R. 5230 would remove this core tenet and instead provide numerous carve outs and exemptions for all but the most blatant pyramid schemes.

In just the past two years, the FTC has used its enforcement authority to successfully prosecute pyramid schemes like BurnLounge,3 Fortune Hi-Tech Marketing4 and Vemma5 that purported to be legitimate MLMs. In fact, those companies defrauded thousands of consumers with promises of easy riches. Were H.R 5230 law today, it would likely have prevented the FTC from bringing such actions. The undersigned groups strongly urge you to oppose H.R. 5230 and instead support legislation that would clearly define what a pyramid scheme is and in the process protect consumers’ confidence in the marketplace.

  1. National Consumers League. “Economic misery increases vulnerability to pyramid schemes,” February 2009. Online: http://www.nclnet.org/economic_misery_increases_vulnerability_to_pyramid_schemes
  2. Vander Nat, Peter. “Why this anti -pyramid scheme bill is outrageously wrong for consumers,” TruthinAdvertising.com. May 23, 2016. Online: https://www.truthinadvertising.org/why-hr-5230-is -wrong/
  3. Federal Trade Commission. “FTC returns almost $1.9 million to consumers in BurnLounge pyramid scheme,” Press release. June 15, 2015. Online: https://www.ftc.gov/news- events/press- releases/2015/06/ftc -returns-almost-19-million- consumers-burnlounge -pyramid-scheme
  4. Federal Trade Commission. “FTC Settlement Bans Pyramid Scheme Operators From Multi-Level Marketing,” Press release. May 13, 2014. Online: https://www.ftc.gov/news-events/press-releases/2014/05/ftc-settlement-bans-pyramid-scheme-operators-multi-level
  5. Federal Trade Commission. “FTC acts to halt Vemma as alleged pyramid scheme,” Press Release. August 26, 2015. Online: https://www.ftc.gov/news-events/press-releases/2015/08/ftc-acts-halt-vemma-alleged-pyramid- scheme

Sincerely,

Linda Sherry
Director, National Priorities
Consumer Action

Susan Grant
Director of Consumer Protection and Privacy
Consumer Federation of America

John M. Simpson
Privacy Project Director
Consumer Watchdog

Sally Greenberg
Executive Director
National Consumers League

Ed Mierzwinski
Consumer Program Director
U.S. PIRG

cc: Members of the Committee on Energy and Commerce

About the National Consumers League

The National Consumers League, founded in 1899, is America’s pioneer consumer organization. Our mission is to protect and promote social and economic justice for consumers and workers in the United States and abroad. For more information, visit www.nclnet.org.

Consumer Groups Oppose H.R, 5230, Demand Real Protection From Pyramid Scheme