What is H.R. 1220?

H.R. 1220 is federal legislation introduced in the U.S. House of Representatives by Rep. Joe Barton (R-TX). H.R. 1220 will enact a clear federal law banning pyramid schemes and will give legitimate American direct sellers needed protection from maverick and rogue interpretations of the law impacting direct sellers.

What is the DSA?

DSA, established in 1910, is the national trade association representing more than 150 companies marketing their products and/or services to customers through independent salespeople, primarily through home parties or person-to-person sales. DSA members include some of the nation’s most well known commercial names, such as Avon, Alticor (formerly Amway), Creative Memories, Longaberger, Mary Kay, The Pampered Chef and Shaklee. This global industry generates more than $83 billion in worldwide sales each year, including about $27 billion in the U.S., and has a U.S. salesforce of more than 12.2 million people, of which about 81 percent are women. For some sense of presence, there are on average more than 30,000 direct salespeople per Congressional district.

Why does DSA Support this Federal Legislation?

There is no clear line in federal law separating illegal pyramid schemes from legitimate multilevel marketing businesses. However, there are huge differences. Primary among these differences is that the products and services sold by legitimate multilevel marketing companies are in fact used or consumed, and compensation is based upon those sales for consumption by the end-user. To the contrary, in a pyramid scheme, the product or service - if any actually exists - is not used or consumed by anyone, but money is made from the mere act of recruiting new participants into the scheme.

DSA has been working on this genre of legislation for more than 30 years to combat illegal pyramid promotional schemes. We have found that as the economy weakens, illegal pyramid promotional scheme activity increases. Based on historical trends and increased use of the Internet, DSA anticipates an increase in these types of unfair and deceptive practices that victimize consumers.

Our first effort in this area was in 1975 on the federal level when S. 1509 twice passed the U.S. Senate. In the 1980s we worked with the states to enact a number of anti-pyramid laws. DSA supports federal legislation that is based on our state work. The language introduced in the 108th Congress is based upon Kentucky’s law (enacted in 1986), with substantively identical language enacted earlier in Arizona, Illinois, Idaho and Utah in 1983, in Maryland in 1984, and in North Dakota and New Mexico in 1987. Most recently, the states of Texas and Oklahoma (1995) and Louisiana (1997) enacted pyramid legislation reflecting the Kentucky approach, but also containing separate exemption language for products purchased subject to a buy-back provision.

Kentucky has used its law to bring actions against alleged pyramid schemes – the definitions from the Kentucky law are also used in the Texas, Louisiana and Oklahoma anti-pyramid laws. The Texas law was used in 2000 to bring an action against Bigsmart.com (a lawsuit that the FTC joined) and the Louisiana law has been used frequently over the past five years to prosecute a number of illegal pyramid schemes. These laws, and the laws of approximately half of the states, clearly distinguish legitimate multilevel marketing companies from illegal pyramid schemes. These laws work to put bad actors out of business while allowing legitimate companies and their small direct sellers to successfully run their businesses and help their families.

Just this year South Dakota enacted a new anti-pyramid law. It represents the most current and comprehensive language to date and a version of which has also been introduced in the 108th Congress (H.R. 1220). This federal bill would provide an additional federal right of action and would not preempt any state anti-pyramid laws. It passed by votes of 64-3 in the House of Representatives and 34-0 in the Senate.

Absolutely not. DSA’s new approach represented in the South Dakota law was inspired by the rise of a new breed of pyramid promotional schemes disguised as charitable organizations, which are spreading throughout the country. These schemes, sometimes called “dinner clubs” or “gifting clubs,” such as “Women Helping Women,” have victimized citizens from all walks of life, including attorneys, legislators and others with professional credentials. This recent activity has clearly demonstrated that the general public, and in many instances, lawmakers, do not have a clear understanding of the complex, and often subtle, differences between illegal pyramid promotional schemes and legitimate business enterprises.

Before law enforcement can eliminate pyramid promotional schemes, it needs to be able to define such schemes and prove that such schemes are within the definitions of illegal activity. This requires distinct and well-written laws that delineate between illegal pyramid schemes and legitimate business practices. Such laws need to provide clear definitions to alert citizens to the fact that certain activities are unlawful. These laws must also contain enforcement and penalty provisions to deter unscrupulous individuals who would seek to establish and promote such illegal schemes, and penalize those who purposely violate the law and victimize others.

A number of states do not have specific, dedicated laws regarding pyramid schemes.   While these states try to prosecute offenders through other laws, such as general consumer protection laws, these laws are often inadequate for prosecutorial purposes. In these cases, justice is often not adequately served and the offenders may simply move on to another jurisdiction to victimize other innocents.

South Dakota’s law clearly delineates illegal pyramid schemes from lawful business operations - including direct selling - and establishes strong enforcement guidelines and penalties. We believe this new law, drafted with the cooperation of the Direct Selling Association, the South Dakota’s Attorney General’s Office, South Dakota legislators, and a number of direct selling companies - including Avon Products and Alticor - can effectively serve as a guidepost for anti-pyramid laws around the world.

In a nutshell, the legislation supported by DSA:

What is the “Real” Problem?

The “real” problem is that current law is confusing. The Federal Trade Commission (FTC) uses Section 5 of the Federal Trade Commission Act to investigate and prosecute alleged pyramid schemes. However, the FTC Act does not itself define pyramid schemes - this is done only through its published decisions, using the standard that “such schemes possess an intolerable capacity to deceive in violation of Section 5.” schemes.

Our efforts since 1996 have been a response to the case Webster v. Omnitrition Int'l, Inc., 79 F.3d 776. (9th Cir. 1996) and an effort to clarify the law and prevent an erroneous legal theory from proliferating. In Omnitrition, on an appeal of a grant of a motion for summary judgment in a private class action case, the United States Court of Appeals for the 9th Circuit, in dicta, decided that sales to members of a company’s sales force are not legitimate retail sales for purposes of determining whether or not the marketing plan is legal or illegal. Webster v. Omnitrition Int'l, Inc., 79 F.3d 776. (9th Cir. 1996). This case was returned for a trial on the merits, but the case was settled and no trial was ever held. This dicta language had no basis in law or fact.

There is no general American legal standard, either federally or in the states, suggesting that compensation based on personal use or consumption by sellers is illegal or should be limited. Bona fide marketing plans almost invariably award compensation on the products or services consumed by their distributors, their families, and other purchases made by end-users. While these incentives initially may be based upon the purchases made by recruits of the participant, they are made effectively contingent upon sales occurring to ultimate consumers. DSA recognizes that such consumption must be in a timely manner and at a fair cost.

DSA concluded that the 9th Circuit misapplied the law and witnessed several state attorneys general and federal authorities represent this language as the law of the land in enforcement actions and in response to inquiries from foreign governments.

Our major concern is that the Webster dicta casts aspersion upon compensation received by salespeople for products they themselves buy and use, and those bought and used by other salespeople within their organization. We believe the law to be quite clear on this issue. In re Amway, 93 FTC 618 (1979), is the seminal, persuasive, controlling, authority in the United States. A number of rules were identified by the Amway case that provided evidence that that plan was not a pyramid scheme. Many companies have adopted similar rules in an effort to protect participants and distinguish themselves from pyramid schemes. Such rules are helpful and can be indicia of a plan’s legitimacy, but are generally neither legally mandated nor a guarantee, standing alone, that a company is not a pyramid scheme.

The rules are simple.

The rules protect salespeople who consume the product or those who receive compensation on the basis of sales to other salespeople who say they have consumed the product. “ . . . every distributor must sell at wholesale and/or retail at least 70% of the total amount of products he bought during a given month in order to receive the Performance Bonus due on all products bought . . .” (emphasis added). 93 F.T.C. at 714-733.

A marketing plan that calculates and pays compensation initially on the volume of inventory purchase by participants for resale or for personal use and which includes features designed to effectively avoid the ills associated with pyramid schemes is, on its face, valid. Personal use is a natural and appropriate element of direct sales.

Since 1996 we have met continuously with representatives from the FTC and state regulators attempting to address this issue through dialog and, when that failed, through our legislative proposals.

Our problem is a simple one: the law is being misapplied and, in our view, needs to be amended to prevent this phenomenon from continuing. We do not seek to protect any specific company or marketing plan. We are open to discussing another manner in which this misapplication can be addressed. However, currently, the legislative remedy appears to be our only option.

Have any DSA members been prosecuted as Illegal Pyramid Schemes?

Yes. Two (2) former DSA members, Equinox International and Trek Alliance, have been alleged to have been illegal pyramid schemes. At present, neither entity was or has been determined to be an illegal pyramid scheme by a court of law. Equinox International was investigated by the several states in the early 1990s and allowed to remain in business. Because these states allowed Equinox to remain in business DSA was unable to take action against the operation. The Federal Trade Commission (FTC) brought suit in 1999 and their operation ended as a result of a settlement with the FTC in 2000. Equinox did not renew its membership in the DSA in 1999 and was consequently dropped.

Trek Alliance was sued by the FTC in December of 2002 and we are just becoming aware of the facts of the case. Trek Alliance is no longer a DSA member. It is clear that these two companies did not disclose complete information to the DSA on their applications for membership.
Omnitrition was not a DSA member at the time of the class action lawsuit against them and the FTC did not bring suit against them.

International Heritage was never a DSA member.In response to these issues, the DSA Board of Directors is expected to support extending the company review period from one year to two years and designing a membership suspension disciplinary action.