Many critics like to claim that Amway and other MLMs are a “product based illegal pyramid scheme”. The claim is that they are illegal pyramid schemes because the majority of products are consumed by “members of the scheme” and not retail customers. It’s quite common for them to also claim that in the FTC vs Amway, the FTC declared Amway not an illegal pyramid scheme because of these retail customers.
Even ignoring the fact there are many retail customers – I believe Amway North America alone has over 200,000 registered member/clients – these claims are not true. Amway was found not to be an illegal pyramid because payment is not made for recruiting – the sine qua non of an illegal pyramid scheme.
Self-described “MLM experts” (but in reality just anti-mlm zealots) such as Robert FitzPatrick of so-called “Pyramid Scheme Alert” repeat the “no retail sales” myth over and over. In recent times, FitzPatrick helped write a report on USANA by the so-called “Fraud Discovery Institute” which attacked USANA on the same basis. Len Clements of MarketWave Inc does a brilliant job of debunking that myth here and here. FitzPatrick even claims that in the definitive FTC vs Amway case in the 1970’s the court ruled that “At least 70% of product must be sold at retail to consumers who are not also Amway distributors.”(source). Eric Janssen of QuixtarBlog gives the same claim a “sticky” post on his site, and “lawdawg” of the now defunct “lawblawg” also repeated it – yet another Amway myth doing the rounds of the Internet Echo Chamber. The problem is, this is a complete fabrication on the part of critics – the court never said any such thing, something I addressed in MYTH: 70% Retail Sales Rule.
In early 2007, some supposedly high-powered lawyers in California fell for the same fabrication, filing a class action lawsuit against Quixtar and some associated IBO organizations which included the following “evidence” that Quixtar was a pyramid –
Few Quixtar products are sold to consumers; instead, most are purchased by Quixtar distributors for their own use.
Ummm … so Quixtar distributors using products are not consuming them? Did they even read what they wrote?
It’s become apparent to me that neither FitzPatrick, nor Janssen, nor “lawdawg”, nor the lawyers involved with this class action lawsuit actually even know what a “retail sale” is. Though I can’t blame them, since in my experience folk at Amway and Quixtar don’t always seem clear on it either.
So – what exactly is a “retail sale”? First stop, Dictionary.com
The sale of goods or commodities in small quantities directly to consumers.
Of, relating to, or engaged in the sale of goods or commodities at retail.
In retail quantities.
At a retail price.
v. re·tailed, re·tail·ing, re·tails
To sell in small quantities directly to consumers.
(also r-tl) To tell or repeat (gossip or stories, for example) to others.
To sell at retail.
That’s interesting. A retail sale is one made to a consumer. So if the IBO is the consumer, doesn’t that mean when he or she buys something for themselves it’s a retail sale?
This deserves further study …
the selling of goods to consumers; usually in small quantities and not for resale
Interesting indeed. A retail sale is a sale made to a consumer, where the person you are selling to is not planning to resell it. Wouldn’t that mean that an IBO buying things from his own Amway business or from his upline, if he’s not running a business, is participating in a retail sale?
So you say “Well, ok, maybe that’s in the dictionary, but that’s not a legal definition like the government would use is it?” Good question.
Here’s the definition from the California Retail Sales Act, the very state where the class action was lodged –
“retail sale” means
(a) a sale of tangible personal property to a purchaser for the purposes of consumption and not for resale as tangible personal property, and
(b) a sale of a taxable service to a purchaser for the purposes of consumption and not for resale as a taxable service or for sale as part of another taxable service or for improving or maintaining the state, quality, or condition of tangible personal property for sale;
And the Missouri Retail Sales Act –
(1) “Sale at retail” means any transfer made by any person engaged in business as defined herein of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption and not for resale in any form as tangible personal property, for a valuable consideration;
and when they were considering a Federal Sales Tax in the United States –
D. DEFINITION OF RETAIL SALE
1. This definition is of primary importance, since the nature of the definition determines whether or not sales of producers’ goods are taxable. In making the decision in regard to this problem, it is considered necessary to regard the Federal retail sales tax as a temporary war measure. Accordingly considerations of revenue and administration must take precedence over other economic considerations which should play a more significant part were the tax to be regarded as a permanent measure. On this basis it would be recommended that retail sales be defined to include all sales other than those made for resale, including sales of second hand goods.
Go check your own state or countries laws. It’s the same everywhere I’ve looked.
Purchases an IBO makes for their own consumption are by definition retail sales.
Still don’t believe me? Here’s a quote from Peter Vander Nat, an economist withe US Federal Trade Commission, the body that determines what to prosecute as an illegal pyramid, made in the March 15, 2007 edition of the Wall Street Journal
“Deciding what a retail sale is can be tricky,” Peter Vander Nat, the FTC economist who co-wrote a 2002 paper on the subject, says it depends on intent.
“If people are buying because they want to use a company’s products, those sales can count as “retail.”
Note, he does go on to say –
If they are buying to stay in the game for future commissions, those sales wouldn’t qualify, he said.
However, it is clear – Amway and Quixtar IBOs, and other network marketers, who are legitimately buying products for their own consumption are partaking in a retail sale. The dictionary says it. The law says it. The FTC says it. Still don’t believe me? Still think an MLM legally requires a certain percentage of “outside customers” to avoid being an illegal pyramid? Here’s what James A Kohm FTC letter to DSA in 2004 in response to an inquiry by the Direct Selling Association –
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.
So – who do you think is correct, Robert FitzPatrick, Eric Janssen and their colleagues, including former Quixtar IBO Eric Scheibeler, who now works with FitzPatrick’s Pyramid Scheme Alert, or the dictionary, the FTC, and the law? You can believe whoever you want. I know which sources have the most credibility with me.
One question that arises though is who is it a retail sale for? It’s my opinion that, ultimately, if an IBO is not actively operating as a business, then it should be counted as a retail sale for their sponsor. If they are actively operating as a business, then it is a retail sale for their IBOship. With direct fulfillment this becomes less clear, and another possible position, apparently taken officially by the Mary Kay company with their distributors, is that it is retail sale for the company itself.
Either way, all those products being consumed by IBOs and distributors – they’re retail sales.
NOTE: This post does not address Amway’s requirements regarding sales to customers. Different markets have different rules. Quixtar in North America for example has a “member/client volume rule” which requires retail sales to members or clients – ie non-IBOs.
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