This week, Scott Larsen posted an article "Alticor: The pot calling the kettle black" accusing Alticor of deliberately omitting information as to what an illegal pyramid is. Larsen goes and pulls out lots of quotes from FTC cases with a definition of what a pyramid is. But Larsen, doing exactly what he accuses Alticor of doing, omits important information – like for example the FTC explicitly stating that you can’t do what Larsen is doing! In this official staff advisory letter responding to an enquiry by the Direct Selling Assocation (DSA), the FTC Director of the Division of Marketing Practices, James A Kohm, says –
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With regard to your second question, the Federal Trade Commission often enters into consent orders with individuals and companies that the Commission has determined have violated the FTC Act. To protect the public from those who have demonstrated an unwillingness to follow the law, these orders often contain provisions that place extra constraints upon a wrongdoer that do not apply to the general public. These "fencing-in" provisions only apply to the defendant signing the order and anyone with whom the defendant is acting in concert. They do not represent the general state of the law. For example, when the Commission brings a pyramid scheme action, the case often concludes with a consent order. The scope and severity of the order will depend upon the facts of the case; however, most such orders contain definitions that exclude any sale to a participant in the business from the calculation of the venture’s legitimacy. These definitions draw very clear lines for those who have demonstrated a willingness to violate the law, but are not intended to represent the state of the law for the general public.
If you read Larsen’s article, he repeatedly cherrypicks quotes out of FTC cases as evidence as to what "constitutes a prohibited marketing scheme or "pyramid" – precisely what the FTC says you should not.
This isn’t something new by Amway/Quixtar critics. I fought the same battle with selfstyled MLM law expert "lawdawg", before finally writing a comprehensive post on the quixtarblog forums demolishing it. I’ve reproduced that post below the fold.
Larsen says in his post –
I get the impression they think pyramid schemes can only be when a scheme takes in money for the recruitment of others via headhunting fees.
Yes Scott, that probably is what they think – because that’s exactly what the courts have said! Payments for recruiting are the sine qua non of a pyramid scheme. What does "sine qua non" mean? "without which it is not". In other words, a pyramid scheme can only exist when the scheme takes in money for the recruitment of others via headhunting fees. Embarrassed Scott? You should be.
Read the lawdawg response post below for all the legalese and links. I had planned on posting a revised version of this post on this site in the future, but in the interest of rapid response to Larsen’s BS, here it is again, as is. Enjoy.
The dictionary gives the following definition of a lie –
dictionary.com says –
lie n. A false statement deliberately presented as being true; a falsehood. Something meant to deceive or give a wrong impression. v. lied, lyÂ·ing, (lng) lies v. intr.To present false information with the intention of deceiving. To convey a false image or impression: Appearances often lie.
Anti-quixtar zealots such as lawdawg are constantly spreading mistruths and disinformation about Amway/Quixtar and the law. I try to be polite. I try to be understanding. But I’ve had enough.Lawdawg is a liar.I do not make this claim lightly. In a thread a couple of months ago, lawdawg claimed that both myself and Crown Ambassador Jim Dornan were liars. This came about because of my disgreement with him in this post claiming that there were only 34, IBOs. That claim has now been thoroughly and inarguably demolished. In any case, when I pointed out to him that he had publicly and unequivocally libelled both myself and Jim Dornan, well, he disappeared for two months. Perhaps with his legal training realised he’d crossed the boundary and he wasn’t really willing to risk getting his butt sued. Now, he’s back. At the request of QBlog, in this frontpaged article, lawdawg continues with his ongoing obsession to redefine what is an illegal pyramid scheme. Lawdawg uses the following definition –
lawdawg says –
Thus, the real measure for determining if a scheme is an illegal pyramid scheme is not whether the compensation is paid for "products" or for "headhunting." The real measure is the cashflow. Does the scheme make money primarily by selling some product or service to outside customers or is most of the money made by sellingsomething to participants in the scheme?
He then goes on to back up this definition. With lies. He intentionally deceives the reader by excluding relevant information contrary to his opinion, even when it is explicit and in the same cases he quotes and thus has certainly read. He presents so called "definitions" from the FTC even though he knows the FTC has explicitly stated they cannot be used in that way. He does this blatantly and knowingly. Lawdawg is a liar. He is deliberately and knowingly deceiving you.
So, lets get to the evidence.
Lawdawg quotes various FTC and court cases to back up the definition above. Now, the key issue here is that lawdawg claims that unless products or services are sold to "outside customers" then it is an illegal pyramid. In other words, unless IBOs are primarily earning income selling products to non-IBOs, then Quixtar is an illegal pyramid.Let’s have a look at the cases Lawdawg quotes. In each case I’ve emphasised the important sections. Here’s the first three cases, involving the Federal Trade Commission.
FTC v Five Star Auto –
There is a minimal $25. commission paid to the representative for each of the first three memberships sold. Additional memberships sold by the representative, or by members he has recruited, enable the representative to qualify for increased compensation in a progression through nine levels.
I think we’d all agree this make Five Star Auto an illegal pyramid scheme. You get paid to recruit. However lawdawg doesn’t mention that. He just gives this quote from the final order –
FTC v Five Star Auto –
‘Prohibited marketing scheme’ means a pyramid sales scheme, Ponzi scheme, chain marketing scheme, or other marketing plan or program in which a person participates under a condition that he or she make a payment, directly or indirectly, to receive the right, license or opportunity to derive income as a participant primarily from: the recruitment of additional recruits by the participant, program promoter or others; or non-retail sales made to or by such recruits. ‘Retail Sales’ means sales of products, services, or Business Ventures by Defendants, their successors, assigns, agents, servants, employees, and those persons in active concert or participation with them to third-party end users. Retail Sales do not include sales made by participants in a prohibited marketing scheme or multi-level marketing program to other participants or recruits in that scheme or program or to such a participants’ own accounts.
Now, on the face of it this would seem fairly damning. It unquivocally states that "sales to other participants" does not count. Case closed? Well, not exactly. You see, what lawdawg doesn’t tell you is that these definitions come from the "Definitions" section of the "Final Binding Order". Now this is important, because these definitions are proceeded by the following words –
FTC v Five Star Auto –
For the purposes of this final order, the following definitions apply
The FTC explictly state that these definitions are just for the purposes of this order. The Court could, if it chose, state in these definitions that – "For the purposes of this order … a Female shall be defined has having two testicles and a penis"This does not mean that all men are now legally Female. It just means for that specific document the FTC wants to use that definition. Furthermore, it’s enlightening to go and look at the original FTC complaint, and see what lawdawg doesn’t show you. Here’s the definition of a pyramid the FTC used in the actual court case –
FTC v Five Star Auto –
1. In pyramid schemes, each participant pays money to the scheme’s promoter in exchange for the right to recruit new participants. Participants then receive benefits for each individual they recruit or who appears below them in their pyramid (commonly referred to as a "downline"). Earnings in a pyramid are derived primarily from recruiting other participants into the program, not from the bona fide sale of products or services source
Note that in the actual court case, the FTC makes no mention of sales to non-participants as a requirement. It’s concern is that participants do not receive benefits for recruiting. It’s important to note that in Amway/Quixtar you receive no benefit at all from recruiting. Payments are made solely on the basis of product sales. Lawdawg goes on to quote from two more FTC cases –
FTC v. Trek Alliance –
"Pyramid scheme" means a sales scheme, Ponzi scheme, chain marketing scheme, or other marketing plan or program in which participants pay money or valuable consideration to the company in return for which they receive: the right to sell a product or service; and the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of products or services to ultimate users. For the purposes of this definition, "sale of products or services to ultimate users" does not include sales to other participants or recruits in the multi-level marketing program or to participants’ own accounts.
Again, this is from the Definitions section, which means that by .. well … by definition, that they don’t apply outside of that particular document. Let’s go look at the actual court case, rather than the FTC order. What do did the FTC say there?
FTC v. Trek Alliance –
17.The monetary benefits that Defendants’ program offers to participants include commissions, or "bonuses," that are based on or derived from the recruitment of other participants, as well as any profits that are realized on the sale of Trek’s products.
Again, obviously an illegal pyramid – you get paid for recruiting. Along with inventory loading requirements, you can see why the FTC went after them. And the definition the FTC used for an illegal pyramid scheme in the actual court case?
FTC v. Trek Alliance –
49.Defendants operate what is commonly known as a "pyramid scheme." In pyramid schemes, each participant pays money to the scheme’s promoter in exchange for the right to recruit new participants. Participants then receive benefits for each individual they recruit or who is added to their downline. Earnings in a pyramid scheme are derived primarily from recruiting other participants into the program, not from the retail sale of products or services.
Again, an illegal pyramid scheme is one where earnings are derived primarily from recruiting. In Amway/Quixtar there is no earnings from recruiting. Again, there is absolutely no mention of a requirement for sales to non-participants."But wait!" you say! "It then goes on to say retail sale! So retail sales are needed". No, it doesn’t say that at all. The key point of a pyramid is that the earnings are primarily from recruiting, not from selling. It does not state you have to make "retail sales". Furthermore, it’s my guess you don’t know what the definition of a "retail sale" is –
Self-consumption IS a retail sale.
The next FTC case lawdawg cites is FTC vs Equinox. In the Binding Order the same definition as for FTC v Trek Alliance is used. So again, lets have a look at the definition used in the actual court case, which lawdawg conveniently ignores –
FTC v Equinox –
COUNT 12(Operation of a Pyramid Scheme)79. Defendants have violated and continue to violate, NRS Â§ 598.11 by contriving,preparing, setting up, proposing, operating, advertising and promoting a pyramid promotional scheme or endless chain. Defendant Equinox is a pyramid promotional scheme pursuant to NRS Â§ 598.1(3) because it is a program or plan for the distribution of property and merchandise by which a participant gives or pays valuable consideration for the opportunity or chance to receive any compensation or thing of value in return for procuring or obtaining one or more additional persons to participate in the program or plan, or for the opportunity to receive compensation of any kind when a person introduced to the program or plan by the participant procures or obtains a new participant in the program or plan.
Again, quite clearly, the primary definition of an illegal pyramid scheme is related to whether you are paid for recruiting or not. It nowhere states that the products or services have to be marketed to non-participants, as lawdawg asserts. So, of the three FTC cases, the actual court cases do not support lawdawgs claims. The FTC’s definitions in the binding orders offer prima facie support for his assertion, but the documents themselves clearly limit those definitions. Furthermore, upon enquiry by the Direct Selling Association, James A. Kohm, attorney and Associate Director of Marketing Practises at the FTC (and one of the prosecuting attornies in the FTC vs Five Star Auto Club case quoted above) wrote the following about what lawdawg does –
Federal Trade Commission says –
For example, when the Commission brings a pyramid scheme action, the case often concludes with a consent order. The scope and severity of the order will depend upon the facts of the case; however,most such orders contain definitions that exclude any sale to a participant in the business from the calculation of the venture’s legitimacy. These definitions draw very clear lines for those who have demonstrated a willingness to violate the law, but are not intended to represent the state of the law for the general public.source
Quite clearly, lawdawg is cherrypicking the information he presents to us. He is obviously familiar with these cases, however he presents none of the definitions of a pyramid that the FTC presents in the actual court cases, and the definition he does present the FTC itself explictly states should not be used in the manner in which lawdawg uses them.
Lawdawg is aware of the FTC’s view on using the definitions in the manner he does, yet I doubt you’ll find a single time he addresses it unless challenged. When I did so on his blog he proceeded to ban me from further posting.
Shall we continue?
This was a case in appeals court by a scheme promoter who had been found guilty of operating an illegal pyramid scheme. Here is the excerpt lawdawg gives from it –
MLM [multilevel marketing] programs survive by making money off product sales, not new recruits. In contrast, "pyramid schemes" reward participants for inducing other people to join the program; over time, the hierarchy of participants resembles a pyramid as newer, larger layers of participants join the established structure.Ponzi schemes operate strictly by paying earlier investors with money tendered by later investors. No clear line separates illegal pyramid schemes from legitimate multilevel marketing programs; yo differentiate the two, regulators evaluate the marketing strategy (e.g., emphasis on recruitment versus sales) and the percent of product sold compared with the percent of commissions granted.
Now, first of all, note that this section yet again defines a "pyramid scheme" as something where participants are rewarded for inducing other people to join. Clearly, this does not apply to Amway/Quixtar. Furthermore, and somewhat curiously, despite the fact he is attempting to legally define what is an illegal pyramid scheme, lawdawg completely ignores a section of the Opinion entitled "The Definition of ‘Pyramid Scheme’". You would think a section like that might be important if you were wanting to understand what the court considers to be a pyramid scheme wouldn’t you? But not a word of it from lawdawg. He doesn’t want you to read it. So what does the court say?
US v Gold Unlimited –
B. The Definition of "Pyramid Scheme"…The district court’s instructions do not appear misleading or incorrect, however. The district court’s definition of "pyramid scheme" (by which we and it mean "illegal pyramid scheme") mirrored that used in several other cases. The district court derived the instructions from the FTC’s opinion in In re Koscot Interplanetary, Inc., 86 F.T.C. 116 (1975), which enjoined the defendants from, inter alia:2. Offering, operating, or participating in, any marketing or sales plan or program wherein a participant is given or promised compensation (1) for inducing other persons to become participants in the plan or program, or (2) when a person induced by the participant induces another person to become a participant in the plan or program Provided, That the term "compensation," as used in this paragraph only, does not mean any payment based on actually consummated sales of goods or services to persons who are not participants in the plan or program and who do not purchase such goods or services in order to resell them.
So, in this definition a pyramid scheme is a scheme where you are either (1) paid for recruiting someone else or (2) paid when someone you recruited recruits someone. Clearly neither happens in Amway/Quixtar. However, the section after "provided" is very difficult to properly understand due to the double negative, but it seems to say that it is ok to pay compensation for (1) and (2) if it is based on sales to non-participants who do not plan to resell. So, you can pay for recruiting if you also have sales to non-participants. Now, another interpretation could be that this means you must have non-participant consumers, as lawdawg would have us believe, however, even if this was the case the court explicitly stated this section only referred to "compensation as used in this paragraph only", ie to compensation paid for recruiting. Thus, despite the awkward language, the court went out of it’s way to state this definition should not be used in the type of way lawdawg might. The opinion continues –
US v Gold Unlimited –
In a recent civil case, the Ninth Circuit adopted Koscot’s explication as its test for the existence of pyramid schemes:The Federal Trade Commission has established a test for determining what constitutes a pyramid scheme. Such contrivances "are characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users" [quoting Koscot]. The satisfaction of the second element of the Koscot test is the sine qua non of a pyramid scheme. . . . We adopt the Koscot standard here and hold that the operation of a pyramid scheme constitutes fraud for purposes of several federal antifraud statutes.
Sine qua non is a legal term meaning "without which it could not be". In other words, the court explictly states that receiving rewards for recruiting rather than sale to end-user is the absolute essence of a pyramid. Without this – it’s not a pyramid scheme. Clearly, this definition does not apply to Amway/Quixtar. Furthermore, there is no mention at all from the court that the FTC requires selling to non-participants, as lawdawg is asserting.The opinion continues –
US v Gold Unlimited –
A pyramid scheme is any plan, program, device, scheme, or other process characterized by the payment by participants of money to the company in return for which they receive the right to sell a product and the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the product to ultimate users.
Again, no mention at all of a requirement to sell products to non-participants. One concern is that sales are to "ultimate users". Now I don’t know about you, but I think when I eat pasta I bought from A/Q, I’m pretty much the "ultimate user" of that pasta. Note that again the sine qua non of being paid to recruit is mentioned again. The court concludes –
US v Gold Unlimited –
It appears that the district court properly defined "pyramid scheme."(5)
So, in this appeal, the court concludes the original court properly defined a "pyramid scheme". At no point did the court say sales to non-participants was required to not be an illegal pyramid scheme. Remember, this is all in a case lawdawg actually quoted, yet, because it doesn’t support his case, he completely ignores a section headed "B. The Definition of ‘Pyramid Scheme’". Well, no sensible lawyer would provide evidence that doesn’t support his case would he? But then, a lawyer is paid not to find the truth, but to win the case. Lawdawg has been trained well. Lawdawg then quotes California Penal Code Â§ 327 to further try to back up his crumbling case –
California Penal Code Â§ 327 –
Every person who contrives, prepares, sets up, proposes, or operates any endless chain is guilty of a public offense, and is punishable by imprisonment in the county jail not exceeding one year or in state prison for 16 months, two, or three years. As used in this section, an "endless chain" means any scheme for the disposal or distribution of property whereby a participant pays a valuable consideration for the chance to receive compensation for introducing one or more additional persons into participation in the scheme or for the chance to receive compensation when a person introduced by the participant introduces a new participant. Compensation, as used in this section, does not mean or include payment based upon sales made to persons who are not participants in the scheme and who are not purchasing in order to participate in the scheme.
Except it doesn’t strengthen his case at all. Look at the last phrase, which I have emphasised. The Penal Code explicitly refers only to situations where the only sales are to participants and they are purchasing in order to participate. I purchase the aformentioned pasta because I like eating pasta, not to "participate in the scheme". I purchase Nutrilite because I believe in good nutrition. I purchase SA8 to wash my clothes. etc etc etc. This code is clearly written with reference to cases like the aformentioned "Five Star Auto Club", where you earned compensation based on recruiting other members, and those other members had to purchase a "club membership" in order to "participate". Even if every single participant in an MLM had no sales to non-participants, this code would not apply if the participants where buying products for their own legitimate consumption. Next lawdawg quotes People ex rel. Hartigan v. Dynasty System Corp
People ex rel. Hartigan v. Dynasty System Corp –
The defendants also argue that the evidence fails to show that the benefits received by TDSC distributors are primarily based upon the inducement of others to participate and are not primarily contingent on the volume of goods sold to persons for purposes of resale to consumers. We disagree. The evidence overwhelmingly demonstrates that the primary emphasis is on commissions earned by building a down-line organization. Testimony established that TDSC was represerted as a consuming organization and not as a selling organization. Commissions are not dependent upon retail sales to ultimate consumers, but are paid solely upon purchases made by distributors in the participant’s down-line organization.
Lawdawg claims this supports his assertion that Courts "have repeatedly emphasized that the distinguishing factor is whether the emphasis is primarily on recruiting new members to spend money within the system or whether the emphasis is on bringing money into the venture by selling products to outside customers who are not, themselves, participants" Except, yet again, the quote he gaves doesn’t say that at all. It states that the primary emphasis of a pyramid is on commissions earned by building a downline and that commisions are not dependent upon retail sales to ultimate consumers. Here lawdawg will have us fall for the fallacy that an IBO cannot be an "ultimate consumer", despite the fact nobody is going to eat the pasta I buy after I eat it, and that sales to IBOs are not retail sales, a topic I discuss here. In addition of course, in A/Q you receive no commission at all for building a downline. Commission is entirely based on product sales. Now, I’d love to find the original case to find out if lawdawg has continued with his habit of conveniently leaving out the parts of a case that are even more explicitly contrary to his assertions, but unfortunately he neglected to provide a link and I’ve so far been unable to find it. I’ll keep looking. Finally, lawdawg cites the famous FTC v Amway case.
FTC v Amway –
72. Amway, the Direct Distributor or the sponsoring distributor will buy back any unused marketable products from a distributor whose inventory is not moving or who wishes to leave the business. The buyback rule has been in existence since Amway started. Amway enforces the buyback rule.
73. To ensure that distributors do not attempt to secure the performance bonus solely on the basis of purchases, Amway requires that, to receive a performance bonus, distributors must resell at least 7% of the products they have purchased each month. The 7% rule has been in existence since the beginning of Amway. Amway enforces the 7% rule.
74. Amway’s ‘ten customer’ rule provides that distributors may not receive a performance bonus unless they prove a sale to each of ten different retail customers during each month. The Direct Distributors have the primary responsibility for enforcing the ten customer rule in their own group. The ten customer rule was started by Amway about 197. Prior to that, there was a 25 sales rule which required the distributor to make 25 retail sales a month without regard to the number of customers. The ten customer rule is enforced by Amway and the Direct Distributors.
75. The buyback rule, the 7% rule, and the ten customer rule encourage retail sales to consumers.
Lawdawg claims "the FTC decided that the Amway itself was not a pyramid scheme because it had and effectively enforced three rules that served to tie commissions paid to distributors". Now, the four items he quotes are part of the "Findings of Fact". There are 187 of these "Findings of Fact". They are not part of the actual discussion on whether Amway was a pyramid or not. You will not be surprised to find that lawdawg has, yet again, completely ignored the important section, as it is contrary to his claims.
FTC v Amway –
OPINION OF THE COMMISSIONBY PITOFSKY, Commissioner:…A. Allegations That the Amway Plan Is a Pyramid Scheme…The Commission had described the essential features of an illegal pyramid scheme: Such schemes are characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users. . . . As is apparent, the presence of this second element, recruitment with rewards unrelated to product sales, is nothing more than an elaborate chain letter device in which individuals who pay a valuable consideration with the expectation of recouping it to some degree via recruitment are bound to be disappointed. In re Koscot Interplanetary, Inc., 86 F.T.C. 116, 118 (1975) (emphasis added), aff’d mem., sub nom. Turner v. FTC 58 F.2d 71 (D.C. Cir. 1978).
Yet again, the very consistent position of the courts, as with the FTC, is that the sine qua non of a pyramid is payments in return for recruiting. In addition, the Commissioner specifically says "ultimate users". He does not say "participants outside the scheme". Thus, quite obviously, the Commissioner continues –
FTC v Amway –
See also In re GeroMar, 84 F.T.C. 95 (1974), aff’d in part, rev’d in part sub nom. Ger-Ro-Mar v. F.T.C., 518 F.2d 33 (2d Cir. 1975); In re Holiday Magic, Inc., 84 F.T.C. 748 (1974). The Amway Plan does not contain the essential features described above, and therefore it is not a scheme which is inherently false, misleading, or deceptive. The Koscot, Ger-Ro-Mar, and Holiday Magic cases all involved ‘marketing’ plans which required a person seeking to become a distributor to pay a large sum of money, either as an entry fee (usually called a ‘headhunting’ fee) or for the purchase of a large amount of nonreturnable inventory (a practice known as ‘inventory loading’). In exchange, the new distributor obtained the right to recruit others who would themselves have to pay a large sum of money some of which would go to the recruiting distributor to join the organization.  By contrast, a person is not required to pay a headhunting fee or buy a large amount of inventory to become an Amway distributor. The only purchase a new distributor is required to make is a $15.6 Sales Kit, which contains Amway literature and sales aids; no profit is made in the sale of this Kit, and the purchase price may be refunded if the distributor decides to leave the business. Initial Decision, p. 12, Findings 3437. Thus a sponsoring distributor receives nothing from the mere act of sponsoring. It is only when the newly recruited distributor begins to make wholesale purchases from his sponsor and sales to consumers, that the sponsor begins to earn money from his recruit’s efforts. And Amway has prevented inventory loading at this point with its ‘buyÂback rule,’ which states that a sponsoring distributor shall ‘[p]urchase back from any of his personally sponsored distributors leaving the business, upon his request, any unused, currently marketable products. . . .’ By this rule, a sponsoring distributor is inhibited from pushing unrealistically large amounts of inventory onto his sponsored distributors in order to increase his Point Value and Business Volume, and thereby increase his Bonus.
What’s of prime important to the FTC? Clearly it is again the sine qua non is being paid for recruiting and sales to consumers. No mention at all of lawdawg’s "non-participants".
FTC v Amway –
The ALJ found that the buyback rule, the 7 percent rule, and the ten customer rule are enforced, and that they serve to prevent inventory loading and encourage retailing. Initial Decision, p. 26, Findings 72-75, and p. 58, Findings 145-47. Given these facts, the Amway plan is significantly different from the pyramid plans condemned in Koscot, Ger-Ro-Mar, and Holiday Magic. Specifically, the Amway Plan is not a plan where participants purchase the right to earn profits by recruiting other participants, who themselves are interested in recruitment fees rather than the sale of products.
The rules lawdawg cites are mentioned here, as encouraging retailing. No disagreement there. However, directly after this, which lawdawg conveniently ignores, the Commission continues Specifically, the Amway Plan is not a plan where participants purchase the right to earn profits by recruiting other participants. There it is again – the sine qua non. Specifically what made the Amway Plan not a pyramid was not the rules lawdawg quotes – it was not earning profits by recruiting. Furthermore, throughout the case you find statements like this –
FTC v Amway –
It is only when the newly recruited distributor begins to make wholesale purchases from his sponsor and sales to consumers
Again, the FTC directly talks not about "non-participants" but about "consumers". Note also they confirm my position that an IBO purchasing from their sponsor is participating in a wholesale transaction. Furthermore in Footnotes the Commission says –
FTC v Amway –
FN24 The ALJ found that home consumption of Amway products by distributors accounts for a significant amount of Amway’s sales. See Initial Decision, pp. 55Â56, Finding 137.
FTC v Amway –
FN27 We note that this figure is not ‘retail sales’, but Business Volume – that is, the retail value of the products purchased for resale to consumers and sponsored distributors, and for distributor home consumption, which was stated before, constitutes a large portion of all sales of Amway products.
The commission was clearly aware that even then a large portion of the volume was within the network. And yet, despite this, at no point did the Commission address the issue of sales to non-participants, the issue which lawdawg would have us believe is what matters. The FTC knew the network was largely self-consumption. The FTC was attempting to prosecute Amway as an illegal pyramid. And yet, despite this knowledge, they don’t even challenge Amway on the area that lawdawg claims is "the key distinguishing factor" of an illegal pyramid! Lawdawg quotes definitions from FTC Orders, which have little legal weight, and uses them in a manner directly contrary to the FTC’s own statements. He does not refer once to the actual court cases, which have greater legal weight, neglecting to even mention sections with titles such as "Operation of a Pyramid Scheme" which go on to explicitly define a pyramid scheme. He then continues with a variety of court cases in exactly the same vein. In "US v Gold Unlimited" he quotes a section which only vaguely backs his case, while completely ignoring a section in the same case headed "The Definition of Pyramid Scheme". Virtually every case he ever quotes involves companies paying compensation for recruiting, which A/Q does not do, yet he apparently doesn’t consider this of relevance and again and again he utterly ignores any statements contrary to his case. This self-proclaimed expert on MLM law is knowingly and blatantly deceiving the readers of this and other websites. He has no interest in facts that contradict him, deliberately ignoring them even when they are in the same cases he quotes. Indeed, in knowingly ignoring the facts outlined above and failing to give them to his "client" in the advice he gives QBlog, he is almost certainly in violation of the ethics of his profession. I am not a lawyer, so I will leave the final word on "sales to non-participants" to James A. Kohm, the Associate Director of Marketing Practices for the Federal Trade Commission. He is the attorney responsible for prosecuting illegal pyramids. If you’re operating an illegal pyramid, he’s the one that will come after you. In January 24 the Direct Selling Association asked the FTC to clarify their position on self consumption, and the meaning of the definitions that lawdawg so gleefully and dishonestly uses. This is an official statement of the FTC, not just "an opinion of one employee" as lawdawg claimed on his blog when I first raised the topic. Lawdawg has been aware of this official opinion for at least a year, well before I was, but you won’t find him mentioning it while he tries to convince you what a "pyramid scheme" is. I wonder why that is?
Federal Trade Commission –
Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.
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