Multi-Level Marketing: A Modest Proposal

Douglas Brooks profile picture
Douglas Brooks


  • It is difficult to distinguish between legitimate multi-level marketing firms and pyramid schemes, which is a serious problem for MLM firms like Herbalife, Nu Skin and USANA.
  • The difficulty is primarily due to the Federal Trade Commission's Amway decision, which requires a detailed, cumbersome and time-consuming analysis of the retail sales records of MLM distributors.
  • MLM firms could avoid the uncertainty about whether they are pyramid schemes by eliminating inventory purchase qualifications from their compensation plans. There is no legitimate justification for inventory purchase qualifications.

Given the volume of comments on SA, the pyramid scheme question is a significant and contentious issue for investors in publicly traded multi-level marketing firms such as Herbalife (NYSE:NYSE:HLF), Nu Skin (NYSE:NUS) and USANA (NYSE:USNA). Several SA contributors have pointed out that the Federal Trade Commission's current enforcement posture concerning MLM makes it extremely difficult to distinguish between legitimate MLM firms and pyramid schemes. For instance, Bill Keep, Dean of the School of Business at the College of New Jersey, has stated that "there is a serious problem when experienced investors, journalists, lawyers, regulators, and consumers cannot tell the difference between a pyramid scheme and a legit MLM business." See here.

In a nutshell, the reason it has become so difficult to determine whether an MLM firm is a pyramid scheme is that under the FTC's decision in the famous Amway case, a firm which would have been considered a pyramid scheme under prior FTC decisions such as Koscot, is not considered a pyramid scheme if it has distributor rules which are enforced and effective in ensuring that most of the firms' sales are to retail customers. Accordingly, an MLM firm which desires to avoid being prosecuted as a pyramid scheme has two options: Either comply with the bright line rules set forth in Koscot (no payment of commissions except on consummated retail sales to non-participants, no required payment for the right to receive commissions other than the purchase of a reasonable quantity of sales materials sold at cost) or comply with the much fuzzier and ambiguous standards applied in Amway (have and enforce distributor rules which are actually effective in ensuring that most products are retailed). Predictably, all modern MLM firms have elected to follow the Amway model rather than the Koscot model. Those seeking a more detailed discussion of this issue can read Jon Taylor's

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Douglas Brooks profile picture
Summary: Mr. Brooks is a lawyer in Brookline, Massachusetts. Over the past 35 years Mr. Brooks has litigated a wide variety of civil cases nationwide, including matters involving franchising, dealerships and product distribution, as well as securities, antitrust and consumer protection class actions. Mr. Brooks has substantial experience representing the victims of fraudulent and deceptive multi-level marketing (“MLM”) schemes. He has represented MLM distributors in putative and certified class actions in state and federal courts, and is frequently consulted by consumer advocates, the media and other attorneys concerning MLM issues. Mr. Brooks was class counsel in one of the most significant MLM cases, in which the United States Court of Appeals for the Ninth Circuit held that a MLM firm could not avoid being characterized as a pyramid scheme simply by having rules against inventory loading and requiring retail sales; it has to actually enforce rules which ensure that distributors retail products to persons who are not themselves part of the sales force. See Webster v. Omnitrition International, Inc., 79 F.3d 776, 782 (9th Cir. 1996), cert. den. 519 U.S. 865 (1996). Mr. Brooks represented a class of Nu Skin Canada distributors and won rulings that MLM distributors in Canada could sue under the federal securities laws, and that such claims should be certified for class action treatment. See Capone v. Nu Skin Canada, Inc. Case No. 93-C-2855 (D. Utah). In a case involving victims of a “buying club” which sold memberships through a MLM system, Mr. Brooks successfully argued that securities claims should be upheld and that an arbitration clause in the MLM distributor contract should not be enforced because it violated the public policy of the State of New York. See Rhodes v. Consumers' Buyline, Inc., 668 F.Supp. 368 (D. Mass. 1993). Mr. Brooks obtained substantial class settlements for distributors in two cases involving Herbalife “lead generation systems.” See Jacobs v. Herbalife International, Inc., Case No. CV 02-01431 (C.D. Cal.) and Minton v. Herbalife International, Inc., Case No. BC 338305 (Cal. Super. Ct., Los Angeles Cty). Mr. Brooks successfully defended the operator of the web site against claims of defamation by a high level Amway distributor. See Deimler v. Scheibeler, et al, No. 2003 CV 1405 CV (Dauphin County Court of Common Pleas, Pennsylvania). Most recently Mr. Brooks represented 18 former Herbalife distributors who objected to the class action settlement in Bostick v. Herbalife (C.D.Cal.). Mr. Brooks has worked pro bono for a number of non-profit organizations involved in the effort to educate and protect consumers from deceptive and fraudulent MLM schemes, including Pyramid Scheme Alert (, the Consumer Awareness Institute (, Quackwatch ( and, MLM Survivor (, and the Rick A. Ross Institute ( Since 1995 Mr. Brooks has participated in rule-making proceedings by the Federal Trade Commission concerning its proposed business opportunity rule in which he has argued for disclosure and conduct regulation of the MLM industry. Representative Decisions: NXIVM Corp. v. Ross Institute, 364 F.3d 471 (2nd Cir. 2004) (Mr. Brooks successfully opposed efforts to obtain a preliminary injunction against his client, a non-profit anti-cult organization, in lawsuit alleging Copyright and Lanham Act violations, including plaintiff’s appeal to the Second Circuit and petition for certiorari to the Supreme Court; Mr. Brooks is representing the defendant pro bono); Wolinetz v. Berkshire Life Insurance Co., 361 F.3d 44 (1st Cir. 2004) (Mr. Brooks obtained a ruling reversing summary judgment in a “vanishing premium” case); In re: AOL Version 5.0 Software Litigation, 168 F.Supp.2d 1359 (S.D.Fla. 2001) (Mr. Brooks represented internet service providers suing America Online for distributing software that interfered with customers seeking to use their services); Scheck v. Burger King Corp., 756 F.Supp. 543 (S.D.Fla. 1991) (widely cited case in which Mr. Brooks successfully opposed summary judgment in encroachment claim by franchisee), further opinion, 798 F.Supp. 692 (S.D.Fla. 1992) (denying motion for reconsideration); Szymanski v. Boston Mutual Life Ins. Co., 56 Mass.App. 367 (2002), rev. den., 438 Mass. 1106 (2003) (reversing summary judgment in vanishing premium litigation); Oganesov v. GNC Franchising Inc., Bus. Franchise Guide (CCH) ¶11,808 (Pa. Ct. Cmn. Pl., March 3, 2000) (awarding $700,000 judgment for franchisee in encroachment litigation; Mr. Brooks represented the franchisee at trial and in the franchisor’s appeals), aff’d, Bus. Franchise Guide (CCH) ¶12,163 (Pa.Super. 2001); Gentle Wind Project v. Garvey, 2005 WL 40064 (D.Me. January 10, 2005) (Mr. Brooks successfully obtained dismissal of claims by alleged cult against operator of cult information web site); Richards v. Arteva Specialties SARL, 66 Mass. App. 726 (2006) (Mr. Brooks successfully obtained reversal of trial court ruling dismissing indirect purchaser antitrust action under Massachusetts consumer protection law). Admissions: Mr. Brooks is a member of the bar of the Commonwealth of Massachusetts, the U.S. District Court for the District of Massachusetts, and the U.S. Courts of Appeals for the First and Third Circuits. He has been admitted pro hac vice in many state and federal courts across the country. Bar Associations: Mr. Brooks is a member of the American and Massachusetts Bar Associations and a member of the Forum on Franchising of the American Bar Association. Mr. Brooks was a speaker at the 1995 Annual Forum on Franchising of the American Bar Association, where he delivered a paper entitled "Survey Evidence - Use of Collected Data in Encroachment Cases" and has been a speaker at conventions of the American Association of Franchisees and Dealers and the American Franchisee Association. Education: Suffolk University Law School (J.D. 1982) (Note Editor, Suffolk Transnational Law Journal, 1981-82); Northwestern University (B.A. 1979).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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