What Is MLM? My Biased View

Many direct sales companies or their distributors choose to avoid the MLM (multilevel marketing) label, or deny they are MLM. One reason might be that most companies today no longer have a multi-level form of distribution, the kind where certain ranks of distributors buy direct from the company, and re-sell to lower ranks of distributors and to customers. The more efficient distribution model is for the company to directly fulfill orders to the end user consumer. This method is now the norm, not the exception. So it may be accurate to say that companies structured that way do not have a multilevel form of distribution. But most of these companies still have a multi-level form of compensation. My position has always been that if you have a multi-level form of compensation – the multi-level and anti-pyramid laws apply. Those laws apply even if the company literature never uses MLM language, and even if the company or its independent contractor distributors deny, verbally or in writing, that the company or its distributors engage in multilevel marketing. So where is the line? Here is my position, for what it is worth:
IF the independent contractor income opportunity is limited to the potential to RECEIVE income from the company, ONLY by your purchases (for your personal and family consumption and/or for resale) AND by the purchases of persons you DIRECTLY INTRODUCE to the company (no matter what these purchasers are called) – the company has offered a single-level income opportunity to independent contractors, and is NOT multi-level. The income opportunity offered by the company becomes multi-level when the potential to receive income GOES BEYOND what I have just written above. So, if the compensation plan rewards you when the people that you introduce, introduce more people who buy products – we have a multi-level form of compensation. At this point you are being rewarded for MORE THAN the business volume YOU personally generate – and are additionally being rewarded for business volume being generated by persons a level away from you – thus – multi-level.

The same line of demarcation, using different words, follows: “Income opportunity,” of course, means the opportunity to receive income. In the single level model, you (singly) control that flow of income to you. You do so by placing the orders for business volume yourself, and by being the “consumer finder” of consumers placing orders. The flow of money below you in the hierarchy (assuming the company places the consumers in a hierarchy, as some companies do) is only TOWARDS the company in the form of payment for products (or services.) If there is, or can be, a flow of money FROM the company to persons below you in the hierarchy, then those persons are independent contractors, instead of, or in addition to, being consumers. Since you were empowered to recruit, sponsor, or refer those people, and since the compensation plan, in addition to rewarding those people below you for their business volume, most likely also rewards you a percentage – we have a “multilevel” form of compensation.

A third take at it: When the only way you, as an independent contractor, can make money with the company is by generating business volume (yourself) you are participating in a single level income opportunity. If however, you are given two ways to make money – generate business volume – and optionally – find, (sponsor, recruit, refer) other independent contractors who generate business volume – you are participating in a multilevel income opportunity. The key is that the independent contractors are empowered to find, and rewarded for finding, additional independent contractors. That is the very definition (legal definition) of “multilevel.” A footnote type comment is necessary here. The “rewarded for” above, can only be an indirect reward based on the business volume of the second independent contractor. It can never be an immediate reward for just finding the person. Such an immediate reward is referred to as a “head hunting fee” and is pyramidal and illegal.

So where in the law is “multilevel” defined? Actually a definition appears in very few places, which will be discussed below. Before doing so, let me state that prohibitions against paying a participant to bring you another participant, and paying a company for the right to bring in more participants, exist in over 40 of the 50 states, without any mention of “multilevel.”

I am not aware of “multilevel” being mentioned or defined in any Federal statute. Five states and Puerto Rico do mention and attempt to define “multilevel.” Let’s take a look: Three situations are identical and easy to deal with. In the laws of Georgia, Massachusetts and Wyoming, the “multilevel” definitions include the operative words “participants may recruit other participants.” Clearly the flow of products directly to end users, or through “levels” does not matter. What matters is the right to sponsor. Puerto Rico gets to the same place with different language – “to dealers who serve as intermediaries to enlist other dealers.” With four of the six jurisdictions quite clear, we look at Montana. The statute is poorly drafted, but does contain language about both the levels of distribution of products, and about recruiting:

(3) (a) “Multilevel distribution company” means a person that:
(i) sells, distributes, or supplies goods or services through independent agents, contractors, or distributors at different levels of distribution;
(ii) may recruit other participants in the company; and
(iii) is eligible for commissions, cross-commissions, override commissions, bonuses, refunds, dividends, or other consideration that is or may be paid as a result of the sale of goods or services or the recruitment of or the performance or actions of other participants.

You may draw your own conclusion. I conclude that a right to recruit makes you multilevel by this Montana definition. And finally we get to Maryland. The Maryland statute makes no mention of the right to sponsor or recruit more participants. At last, a basis for saying “We are not MLM” even if it is only in one state. The definition is below:

In this subtitle, “multilevel distribution company” means a person who, for consideration, distributes goods or services through independent agents, contractors, or distributors at different levels of distribution with rates of pricing or discounting that differ from 1 level to another.

My conclusion – Most should take “We are not MLM” out of their vocabulary, if the company, or the program they are working – offers two ways to make money – bring in business volume – and find others who will do the same, and receive an additional reward on their efforts. Two exceptions – if you only operate in Maryland and do not distribute through levels – or – if you truly are “single-level,” meaning NO compensation based on the business volume of independent contractors you introduce.

Gerald P. Nehra is a private practice Attorney at Law. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multilevel marketing legal issues. He began his legal career in 1970, and from 1982 to 1991 he was the Director of the Amway Corporation Legal Division. He can be reached at Nehra & Waak, Attorneys at Law, 1710 Beach Street, Muskegon, Michigan 49441, 231-755-3800. His e-mail address isGNehra@mlmatty.com. You are invited to visit his web site at www.mlmatty.com. Permission to reproduce, with this attribution included, is granted.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.