On January 4, the Federal Trade Commission issued guidance clarifying the agency’s enforcement position regarding pyramid schemes. DSA President Joseph N. Mariano said, “This is a very positive statement by the FTC that reflects the principles of law after years of legislative efforts by the DSA on federal and state level to distinguish legitimate direct sellers from pyramid schemes. We look forward to our continued collaboration with the FTC and Congress to enshrine these principles into federal law.”  The guidance builds upon the remarks of Acting Chairman Ohlhausen delivered at DSA’s Fall Conference in November.

Specifically, the guidance focuses on the FTC’s perspectives for characteristics of a pyramid scheme. Importantly, it addresses how the FTC views personal (or internal) consumption by participants in determining when an MLM’s compensation structure is unfair or deceptive. The FTC states “product that is purchased and consumed by participants to satisfy their own genuine product demand – as distinct from all product purchased by participants that is not resold – is not in itself indicative of a problematic MLM compensation structure.” This reiterates the 2004 FTC staff advisory memorandum on the subject. 

The guidance also states “staff is likely to consider, among other factors, both (i) whether features of the MLM’s compensation structure incentivize or encourage participants to purchase product for reasons other than satisfying genuine demand; and (ii) information bearing on whether purchases were in fact made to satisfy personal demand to consume the product.” Compensation must be based on actual sales to real consumers.

Lastly, the FTC statement makes clear that it settlements, including the recent Herbalife and Vemma matters, are not binding on other direct selling companies but do provide insight into the FTC’s views on the matters investigated. The FTC guidance also makes clear that the agency’s reviews of alleged deceptive, unfair, or pyramidal activities are fact based and made on a case-by-case basis.