Monday, July 31, 2017

DSA's latest attempt to destroy direct selling: Moolenaar Amendment

Direct Selling Association is supposed to be promoting direct selling. Instead, for the past several decades, DSA has been trying to destroy direct selling by killing legislation that would have promoted retail, and promoting legislation that discouraged retail. This is actually not a surprise as DSA is really a lobbying group by the largest MLM companies like Amway, Avon, Herbalife, and so on.

In July 2017, DSA launched its latest attempt to destroy direct selling by trying to attach a rider to the current budget appropriations bill for FY18, known as the Moolenaar Amendment. It claimed that there is no Federal law that defined a pyramid scheme, and this bill would define one. The problem is, this is at best, a half-truth.

The US courts and FTC already have an existing definition of a pyramid scheme: The Koscot Test.  MLM attorney Jeff Babener called it "a twenty-year standard", back in 2001. So by now, it's a 36-year-old standard.  DSA, in its "selective blindness", pretended this standard does not exist so it can substitute a LOOSER definition instead.

DSA's previous attempt to pass a bill, deceptively titled "Anti-Pyramid Promotional Scheme Act of 2016", never made it out of committee. This time, by attaching the failed legislation to the appropriations bill, DSA hope it will sail through until various consumer organizations called them out.

But what is wrong with this piece of legislation, vs. the existing standard?

While on the surface the bill sounds rather clear, it contains several interesting bits of language designed to erode the definition over all.

But first, let us go back to the Koscot Test, and how it stood for 36 years (and counting).

The Koscot test is very simple. You can read a more detailed explanation here, but to make it very short, a pyramid scheme is defined by four parts:

(1) Payment of money by the participant to the company, in return;
(2) The participant receives the right to sell a product (or service);
(3) The participant also receives compensation for recruiting others into the program;
(4) The compensation is unrelated to the sale of products (or services) to the ultimate user.

This definition has been in use for 36 years, and it was successfully used to prosecute pyramid schemes for that long, And in the past year, two major DSA members, Vemma, and Herbalife, lost their pyramid scheme cases to FTC and was forced to undergo major changes under various settlements.

While this "anti-pyramid 2016" bill mentioned earlier sounds like a reiteration of the Koscot definition, it introduced several alternative definitions to limit the legislation's effectiveness.

a) it introduced a "buyback guarantee" (called "appropriate inventory repurchase agreement" in the bill) that companies can incorporate to avoid the pyramid promotional scheme label, when this in no way exonerates the scheme. It is worth pointing out that both Herbalife and Vemma had such policies in place when they were sued by FTC into instituting reforms.

b) it attempted to redefine "ultimate user", which was already defined by Omnitrition case, by adding "a participant who purchases reasonable amounts ... for personal use... not made solely for purposes of qualifying for increased compensation", trying to go around a precedent set.  Omnitrition case already defined in dicta that "If Koscot (test) is to have any teeth, such a sale (to participants) cannot satisfy the requirement that sales be to 'ultimate users' of a product."

The net effect of these modifications is letting the direct selling industry sail on without instituting any more meaningful changes, despite seeing two of its members prosecuted as pyramid promotional schemes, because the bill basically made self-consumption legal (which negated any need to retail), and thus rendered Koscot useless, throwing away the precedent that had worked for 36 years.

But just consider this from the most basic view.

DSA = Direct Selling Association.  Selling is in the title.

Yet the bill introduced basically guarantee the legality of an MLM to not sell anything, that its members can just buy stuff, and make money by recruiting people who ALSO buy stuff.

That makes no sense at all.

And I've been saying that since 2013.

Letting this amendment remain will lead to erosion of FTC's ability to prosecute pyramid schemes, esp. similar behavior by large MLMs that are already entrenched.


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