Direct sales programs that call themselves “multilevel marketing” (MLM) companies run the gamut from being merely annoying to full-blown pyramid schemes, and the folks at the Federal Trade Commission are responsible for holding MLMs accountable when they cross that line from irksome to illegal. But two pieces of legislation, both backed by a trade group with direct ties to Education Secretary Betsy DeVos, are attempting to limit the FTC’s ability to investigate and prosecute rogue MLMs.
One piece of legislation, the Anti-Pyramid Promotional Scheme Act, has one of those titles that sounds good until you actually see what it does.
The bill, introduced by Rep. Marsha Blackburn (TN), claims to restrict certain MLM practices that may cross the line into pyramid scheme territory. However, critics say the text of the bill — purportedly written by an MLM industry trade group with direct connections to the DeVos family — actually makes it easier for bad MLMs to operate with impunity.
One of the most common criticisms of MLMs involves the practice of inventory loading — that’s when the company requires that a sales rep purchase a large amount of product, regardless of their ability to actually sell it to customers. For example, a number of LuLaRoe sellers have complained about having to go deep into debt just in order to make these mandated purchases, only to be left with merchandise they can’t sell and can’t return.
Under the Blackburn bill, an MLM is not a pyramid scheme if it has a “bona fide inventory repurchase agreement,” meaning a program for buying back these unsold items. But critics of the legislation point out that Herbalife — which recently reached a $200 million settlement with the FTC for its bad behavior — had an inventory repurchase agreement that would have complied with the definition that Blackburn is trying to establish.
Additionally, while this bill would not specifically stop the FTC from investigating MLMs, opponents of the measure say that the legislation would certainly impede the agency’s ability to take actions against companies that cross the line.
The Blackburn bill is currently still sitting in committee and, despite an in-person lobbying push in D.C. by the MLM industry last week, will likely not make it to the full House for a vote.
A more insidious piece of legislation — and one that seeks to explicitly limit the FTC’s reach — is not a bill, but an amendment to a house spending bill.
That amendment, introduced by Rep. Joe Moolenaar (MI) and adopted by the House Appropriations Committee without any hearings, is now part of HR 3280, the Financial Services and General Government Appropriations Act.
It’s an example of pure pork-barrel politics, tacking a controversial piece of legislation onto a completely unrelated spending bill in order to get it to pass.
What Moolenaar’s amendment does is take the idea established in Blackburn’s bill — that merely having a “bona fide inventory repurchase” program automatically exempts an MLM from being considered a pyramid scheme — and literally blocks the FTC from using any of its federal funding to investigate a company that meets this new definition.
Consumer advocates, including our colleagues at Consumers Union, say that this attempt to redefine a pyramid scheme breaks from all legal understanding of the term.
“The courts have consistently stated that the critical difference between a legitimate MLM business and a pyramid scheme is that a MLM’s revenues must come primarily from the sale of products and services to retail customers unaffiliated with the business opportunity,” explained a coalition of consumer advocacy groups in a July 2017 letter [PDF] to Congressional leadership.
In other words, it’s long been understood that a pyramid scheme occurs when the company at the top is making most of its revenue from making sales to its own sales force, rather than from sales to actual customers. The Blackburn and Moolenaar laws attempt to gloss over this long-held legal standard and swap it with the tangential issue of inventory loading and buy-back programs.
A group of six former high-ranking FTC officials recently expressed their concerns in a letter [PDF] to House leaders Paul Ryan and Nancy Pelosi that passing the spending bill with the Moolenaar amendment intact could “put practices now recognized as harmful and deceptive beyond the reach of the law.”
The DeVos Connection
Both the Blackburn bill and the Moolenaar amendment have the firm support of the Direct Selling Association, a trade group representing MLM companies. According to Frank VanderSloot, CEO of MLM company Melaleuca — itself a member of the DSA — lawyers for the association are the actual authors of the bill that Blackburn introduced. It’s unclear if the DSA also authored the Moolenaar amendment, but the organization has publicly lobbied in its favor.
What’s the connection to DeVos? DSA’s most prominent member is Amway. Multiple Amway executives hold spots on the DSA’s board of directors, including the board’s chair, who is head of sales for the company.
Secretary Devos’ father-in-law is Amway co-founder Richard DeVos. Her brother-in-law is Amway president Doug DeVos. Her husband is former Amway CEO Dick DeVos. The DeVos family is an owner of Alticor, Amway’s parent company, which reportedly brings in about $9 billion per year.
Even though Dick stepped down as Amway CEO more than a decade ago, the couple still earns millions of dollars a year from, and holds significant assets in, parent company Alticor. According to DeVos’ financial disclosures filing [PDF], the couple holds at least $106 million worth of shares in Alticor, receiving more than $16 million a year in dividend payments from the company.
[h/t NY Post]