Do The Products Have “Intrinsic Value”?

Direct selling companies and their independent (non-employee) sales representatives operate in a minefield of laws, codes, and regulations, and interpretations of those laws, codes, and regulations. Companies whose products (unless clearly indicated otherwise, “products” includes services) are sold to its representatives exclusively, with no true customers, pose a pyramid law challenge most everywhere. For the purposes of this analysis, assume some sales are being made to customers who are not also sales representatives. I suggest you can test any company against the ideas presented here. Some ideas are brand new and untested in the legal arena.

Regulatory agencies in the United States and in other countries have interpreted laws and regulations to mean that some percentage of sales of a direct selling company (that also has a multilevel form of compensation) must be to persons outside of the program. The two most common actual numbers are “more than 50 percent” or “70 percent.” The 70 percent number coincides with the 70 percent rule from the Federal Trade Commission versus Amway case decided in 1979 in the United States, although the linkage and reference is incorrect. A careful reading of the Amway case will reveal that “70 percent,” wherever it appeared, appeared in the context of a prohibition against inventory loading, rather than as a retail sales requirement “outside the program.”

Why is this issue so important? Well, pyramids and endless chains are illegal in the United States and in most of the rest of the world. You cannot “pay to play.” Very simply, that is why no company (following the United States model) which offers an income opportunity with multilevel compensation can charge anything to join, or can require a product purchase to join. The only exception carved out of this very clear prohibition is that a requirement to purchase an at-cost, non-commissionable sales or starter kit is permitted. Some statutes contain a specific exclusion for sales kits. Where there is no specific exclusion, the same conclusion is reached by interpretation. Another way to say this is that one cannot be charged for the right to recruit others. Such a “charge” is prohibited as an illegal “headhunting fee.”

In my view, the only legal basis a legislator or regulator can have to prohibit or challenge commissions on independent representative consumption is to characterize product purchases as “headhunting” or “paying to play.” Another version of the same problem is the specific requirement in many laws that the company’s plan be “primarily” about moving products to consumers, rather than about recruiting more “participants.” But that issue brings us back to the same place – if the product purchases are linked to recruiting, rather than to traditional marketplace supply and demand, then the product purchases will be deemed disguised “headhunting” fees.

Nothing I have written above is new. The traditional methods of dealing with these concerns are various forms of company-imposed requirements for sales to consumers, and differing levels of record keeping and retention or submission of those records to the company. These protections and techniques all have their good points, yet some regulators view them as inadequate or subject to manipulation, going so far as requiring company verification of independent representative submissions. The following is a new (and, I believe, complementary) idea, and applicable to companies whose structures allow them to identify what product purchases are for “intrinsic value,” which means the purchaser wants the item and is willing to buy the item without the added incentive of an income opportunity. The idea is this: If the surrounding facts support the position that the product is being purchased for its intrinsic value, then the purchase is not being made “to play the game.” The facts must counter the regulatory accusation or the statutory prohibition that but for the income opportunity no one would buy the products. I also propose (remember, I said these are new ideas) that the status of the purchaser (specifically, an outside, non-participant consumer, rather than some form of independent representative) should make no difference. I will expand on this by looking at various types of purchasers:

1 . The traditional retail customer.
A person totally unconnected to the direct selling company and usually unknown to the company, because the purchase was from the independent representative. There should be no question that sales to such persons are for intrinsic value.

2. The customer “direct fulfilled” by the company.
The company knows this person because the company has a distribution system that provides direct shipping to end-users. The independent representative tells the company to ship, or the customer calls the company, identifies the independent representative who told them about the company for sales credit purposes, and places an order. The company deals with each order as it occurs and maintains no separate file of customers. It treats the order as if placed directly by the independent representative, but with a different “ship to” address. There should be no question that sales to such persons are for intrinsic value.

3. The preferred customer.
Many companies encourage their independent representatives to connect preferred customers directly to the company. Sometimes application forms are used and identification numbers are issued. Customers order directly. These persons, however, do not sign an independent representative application and do not have an income opportunity. There should be no question that sales to such persons are for intrinsic value.

4. The independent representative without a right to sponsor.
Some companies offer a separately delineated, single-level income opportunity. None of the purchases of these people can possibly be deemed “to play the game of an endless recruiting chain,” because these persons do not have the right to recruit other independent representatives. These sales are for their intrinsic value or for resale to customers, and no argument can be made that the sales are a disguised headhunting fee, since the person cannot recruit other income opportunity seekers.

5. The independent representative who “signs up” to buy wholesale.
This is very new thinking and not yet tested with regulators. I am willing to argue that the right to sponsor others in the independent representative agreement is an “offer” of a multilevel income opportunity, which is accepted when – and only when – the act of sponsoring occurs. A person signing up to purchase at the independent representative price, and choosing not to sponsor, cannot be purchasing “to play the game,” since, again, no recruiting of income opportunity seekers has occurred.

6. The non-sponsoring independent representative.
This is also very new thinking and not yet tested with regulators. I am willing to argue, and if unable to convince a regulator, to the appropriate judge (with good facts), that purchases by a non-sponsoring independent representative cannot possibly be a disguised headhunting fee or a “payment to play.” The reason is based on simple logic – the independent representative has (for the moment, at least) declined the company’s offer to “participate” (a word with legal significance) in the multilevel portion of the income opportunity. No argument can be made that the purchase is to qualify for downline bonuses or for the right to recruit, since no recruiting of additional participants has occurred.

7. The sponsoring independent representative.
In many companies that have low monthly business volume requirements to qualify for bonuses on the business volume of downlines, the following occurs: The independent representative consistently orders in excess of the minimum needed to qualify for all available downline bonuses. First, the amount above the minimum needed to qualify is not “to play the game,” since only the minimum is needed. A second, optional, argument can even be made that all of the order is for intrinsic value, since one ordering solely to “participate” would just order the minimum. This may be more aggressive than necessary, but is worth noting.

Many companies are structured to have available, at the corporation, records supporting the above types of purchases for intrinsic value. I believe sales defined in this manner (which is one approach, and not the only approach) directly address conduct that the anti-pyramid and endless chain laws everywhere seek to regulate. Note that I have avoided the use of the term “retail sale” or “retailing” throughout this article, and on purpose, because the concept I propose is more precise. The assumption (and legal argument in the proper forum, with good facts) is that the regulated and prohibited conduct is the sale of products that no one would buy for their intrinsic value, but instead would buy in order to participate in and further an illegal endless chain. Without “intrinsic value,” such sales become disguised headhunting fees, specifically prohibited by the laws of most countries.

Would you buy the company’s products absent the income opportunity? Would anyone? The answer needs to be “yes.” If a company’s sales are “primarily for intrinsic value,” the company can withstand legal scrutiny. In closing, please note that in this area what is good for the legal health of the company is also required for the economic health of the company. That is a whole new subject and article. I will just conclude by saying “sales for intrinsic value” are an absolute necessity for both legal and economic survival of direct selling companies around the world.

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