Op-Ed in Law360 by DSA President Joseph N. Mariano: Keeping Ethics Paramount in the Direct Selling Industry

March 13, 2017

As President of the Direct Selling Association (DSA), the national trade association for companies that sell goods and services through independent salesforces, I can attest to the popularity and success of the direct sales retail channel. 

Our member companies include some of the best-known brands in America. Some of our members have been in business for a hundred years, selling some of the most well-known and best-loved products in the country, and providing full and part-time business opportunities to millions of Americans.

I can also attest to the Association’s commitment to the highest of ethical standards in our industry and to protecting our industry and consumers from fraud. The DSA’s member companies commit to abide by our stringent Code of Ethics as a condition of membership. The Code of Ethics protects our members’ customers and independent contractor salesforces from abuses typical of pyramid schemes, and protects the direct selling business model from reputational damage by association with such fraud.

The Code’s strictures represent the gold standard in the industry and far exceed the minimum standards imposed by applicable laws and regulations. It is enforced by an independent administrator, who is responsible for resolving complaints made against member companies.

Our members accept that our Code of Ethics is an evolving mandate meant to maintain the highest ethical standards while accounting for changes in the marketplace and technology. The most recent revisions to the Code as amended last year greatly strengthened our effectiveness in policing our membership and demonstrate our energetic commitment to setting the industry standard for honesty and transparency.

Included in those enhanced provisions are more stringent prohibitions against unlawful or unethical recruiting practices and encouraging salespeople to purchase unreasonable amounts of inventory. DSA member companies must provide salespeople with accurate sales and earning claims and guarantee a 90 percent or more refund on unsold inventory returned within twelve months.

Prospective DSA members are examined to ascertain whether their practices conform to the Code’s requirements, which prove too demanding for some companies. In my opinion, direct selling companies that are not members of our Association — and therefore have not pledged to abide by our strict Code of Ethics — deserve closer scrutiny for the propriety of their practices

DSA will continue to strengthen our Code of Ethics to further improve the transparency of complaints and enforcement actions, and to require ever more detailed substantiation of product claims and stricter guidance on earnings claims.

Some critics of our industry assert incorrectly that the “internal consumption” of products by salespeople represents prima facie evidence of a pyramid scheme. If that were true, there would be many department stores committing pyramid fraud by allowing salesclerks to purchase the products they sell at a discount.

Some independent salespeople work full time at direct selling with the intention of earning substantial income from the sales of goods and service by a large network of sellers they recruit. But many others who contract to sell our members’ products do not intend to work full time building bigger businesses and recruiting an extensive salesforce. Most do it for the flexibility their independence allows or for social reasons, or, in many instances, to purchase products they like at a discount for themselves and their family and friends.

Salespeople might be stay-at-home spouses, who want to earn a little extra income for their families. Others are early retirees supplementing their pension. Many young people choose direct selling as a part time occupation and their first experience as entrepreneurs. And some, as noted, become involved in direct selling simply because they enjoy certain products and want an opportunity to buy them at a reduced price.

Pyramid schemes typically offer scarce or no means to return unused inventory. They often burden their victims with high startup costs. They usually compensate recruitment, not sales. Legitimate direct sellers compensate their distributors on the sale and consumption of their products by end users. Salespeople may also be end users.

There is nothing wrong with counting such transactions as legitimate sales as long as they are not the result of inventory loading or other unethical practices proscribed by the DSA Code of Ethics. It is not who is buying a product that determines the legitimacy of a transaction, but whether it is consumed. Again, DSA members provide nearly full refunds for unused inventory, and their compensation models are based on real sales to end users of the products sold.

Extensive federal and state case law affirm that sales for internal consumption are legitimate sales and not evidence of pyramid fraud as long as those and other legitimate sales are the basis for salesforce compensation. Likewise, model law in many states outlawing pyramid schemes, based on recommendations from the Council of State Governments, specifically recognizes the legitimacy of internal consumption.

We believe pyramid schemes should be prosecuted to the fullest extent of the law. Our member companies and supporters in Congress are advocating for a federal statute to provide a sanctioned definition of a pyramid scheme as most states have done. The legislation will distinguish honest sales and compensation models from unfair association with bad actors in the marketplace and the reputational harm they inflict on legitimate direct sellers and their customers.

We are proud of our continuing commitment to protect our customers, salespeople and our companies from fraud. As I noted, we are always working to strengthen our Code of Ethics and the transparency of actions taken to enforce it. We are at all times endeavoring to remain ahead of the curve in adapting ethically to new challenges and opportunities.

Toward that end, we continue to work closely with the Federal Trade Commission to ensure our industry operates with the highest integrity, and reflects the sterling reputations of the brands we represent. We understand that the enduring appeal of the direct selling business model rests almost entirely on the trust of our independent sellers and their customers in the ethical conduct of our members and the quality of their products. We will leave nothing to chance in our efforts to protect that trust.

—By Joe Mariano, Direct Selling Association

Joseph Mariano is the president of the Direct Selling Association, a national trade association for companies that offer entrepreneurial opportunities to independent sellers to market and sell products and services, typically outside of a fixed retail establishment. 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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