Op-Ed in The Hill by Orville Thompson: Protecting consumers and legitimate businesses from pyramid fraud

September 22, 2017

As past chairman of the Direct Selling Association’s (DSA) board of directors, and CEO of Scentsy, an Idaho based direct selling company, I disagree with Frank VanderSloot’s assertion that H.R. 3409, the Anti-Pyramid Promotional Scheme Act, legitimizes harmful business tactics.

I believe his criticism of the bill’s purpose and effect is misguided. I take strong exception to his characterization of DSA, its members, and the bill’s sponsors, Reps. Marsha Blackburn (R-Tenn.) and Marc Veasey (D-Texas), who are experienced and conscientious legislators.

I have deep respect for Frank and his company, Melaleuca. The success of companies like his inspired my wife, Heidi, and me to launch Scentsy as a direct selling business in 2004. For years, Frank and I have advocated for the highest ethical conduct in our industry predicated on the principle, “first cause no harm.”

Direct selling attracts those the mainstream economy can’t reach—military spouses who must move on a moment’s notice, ambitious young people who missed the opportunity for higher education, moms who want to work, but choose to stay home with their young children, parents who need to make extra income to cover the cost of medical bills or children’s activities.

As with all industries, ours can attract unscrupulous actors. By providing clear direction through its Code of Ethics, enforced by an independent administrator, and educating companies on best practices, DSA has been a leader in protecting our customers and salespeople from predatory practices. Improving these efforts has been a top priority for the board’s executive committee.

The FTC, direct selling companies, the courts and state legislatures have worked for decades to define the differences between pyramid schemes and legitimate direct selling. All fifty states have enacted anti-pyramid laws. One key player has been absent -- Congress.

Reps. Blackburn and Veasey introduced H.R. 3409 to create a federal standard that incorporates lessons learned by regulators, the courts and state attorneys general. Their legislation has equal numbers of Republican and Democrat co-sponsors, reflecting the strong bipartisan support the bill and direct selling enjoy in Congress. 

H.R. 3409 defines and prohibits pyramid schemes consistent with thirty years of court decisions. It gives clearly defined terms and guidance to regulators, prosecutors and the public that differentiate schemes that cause harm from legitimate direct selling companies that provide beneficial opportunities. It codifies recent case law that distributors may purchase products for personal use if they desire. And it requires for the first time that direct selling companies repurchase unsold inventory from their distributors.

The careful and wise assimilation of legal and regulatory precedent serves the dual purpose of guiding direct selling companies in best practices and making it a federal offense to inventory load or provide compensation for the recruitment of another into a plan.

Requiring companies to offer a bona fide “buyback” program removes the incentive for promoting inventory loading, while protecting the legitimacy of internal consumption. 

Pyramid schemes profit by compensating for recruiting others to the scheme, and creating incentives or requirements for purchasing inventory that is unlikely to be consumed by an end user. This is ultimately unsustainable, but as long as the allure of quick profits exists, so will incentives to run such schemes.

If a company must repurchase product that is unsellable by the company's distributors because of the company's own practices, there will no longer be profit in such tactics. Where no profit exists in loading inventories, companies are more likely to ensure their distributors are purchasing products that can legitimately be consumed.  

Maintaining, as Melaleuca does, that the legislation allows bad actors to avoid prosecution by simply claiming to have a bona fide buy back policy is like contending one can avoid punishment for tax evasion by producing a tax return. If a buy back policy fails to remedy inventory loading in practice, it will be no more effective than an incorrect tax return in providing relief to bad actors. Indeed, states with model anti-pyramid laws have found the same buy back provision has not impeded but aided successful prosecutions of pyramid schemes.

Melaleuca's argument rests on the assertion that bad actors, not regulators or prosecutors, will be able to define the term bona fide, and that the DSA, its board and member companies are complicit in empowering them. This is just plain wrong, and damaging to the millions of Americans involved in direct selling. 

Every DSA board member believes pyramid schemes are immoral and illegal and should be prosecuted to the full extent of the law. That is the basis for our support for this important legislation.

Orville Thompson is the Chief Executive Officer of Scentsy, a direct selling company, past Chairman of DSA’s Board of Directors, and current member of its Executive Committee

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