THE "INTRINSIC VALUE"
POSITION PAPER

by Gerald P. Nehra
Attorney-at-Law

Companies and their independent representatives operate in a seeming minefield of laws, regulations, and interpretations of those laws and regulations. A hot topic of discussion and attention is the question of "retailing." I suggest you test the company you are considering, or the company whose program you are working, against these ideas, some of which are brand new.

Begin by examining two severe interpretations of "retailing." First, the North Carolina Office of Attorney General has negotiated settlements with MLM companies attacked as pyramids in their state. North Carolina, in these settlements, has required 70 percent of the sales of the MLM company to be to persons outside of the program. Second, the Omnitrition case, of which much has been written, says, in its strictest interpretation, that sales to your own independent representatives are not "retail" sales, and therefore, commissions cannot be paid on them. Fortunately, not even the California Attorney General Office (the Omnitrition decision is from a Federal Appeals Court sitting in California) has interpreted that language so strictly. The California Attorney General Office has acknowledged that reasonable amounts of purchases by independent representatives are commissionable in their settlement negotiations with AuQuest, settled after the Omnitrition decision.

What is going on here? What is all the fuss? Well, pyramids and endless chains are illegal in the U.S. You cannot "pay to play." Very simply, that is why no company offering you an income opportunity with multi-level compensation can charge you anything to join, or can require you to purchase products or services 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. Another way to say this is that you 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 regulator can have to 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 and services to consumers, rather than about recruiting more "participants." But that issue brings us back to the same place - if the purchases are linked to recruiting, rather than to traditional marketplace supply and demand, then the purchases will be deemed disguised "headhunting" fees.

Nothing I have written above is new. The traditional methods of dealing with these concerns are the "ten customer rule," "90 percent buy back protection," and the "70 percent rule," derived from the 1979 Amway decision. 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 sales/purchases are for intrinsic value. "Intrinsic value" means the purchaser wants/needs the items and is willing to buy them without the added incentive of an income opportunity. The idea is this: If the surrounding facts support the position that the goods are being purchased for their intrinsic value, then the purchases are not being made "to play the game." The facts must counter the regulatory accusation 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, a total outside consumer or 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 company offering the income opportunity, and usually unknown to the company, because he/she purchased 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 or pin 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 there can be no argument 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 multi-level 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 multi-level 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.

Conclusion: Many companies are structured to have available, at the corporation, statistics supporting the above purchases for intrinsic value. It's of public record that I represented one of the companies settling with North Carolina. Their facts did not warrant a fight in court. The company has since closed. If a company has "good facts," which I define as over half of their sales "for intrinsic value," I will fight for them in any state, including North Carolina. I believe retail 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 seek to regulate. That regulated and prohibited conduct is the sale of products and services that no one will buy for their intrinsic value, but will only buy to participate in and further an illegal endless chain. When such circumstances surround such sales, the sales become disguised headhunting fees, specifically prohibited by the laws of most states. Would you buy your 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," I believe the company can withstand legal scrutiny.

Gerald P. Nehra is an MLM Specialist Private Practice Attorney. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multi-level marketing issues. His 25 years of legal experience includes 9 years at Amway Corporation where he was Director of the Legal Division. He can be reached at 1710 Beach Street, Muskegon, MI 49441, 616-755-3800, 616-755-4700 FAX. Credentials and Billing Information are available through Fax-on-Demand at 803-548-3299, ext. 3088, and E-Mail Auto Responder at MLMAtty@memo.net. His E-Mail Address is MLMAtty@aol.com

Permission is hereby granted to duplicate this article, AS LONG AS the biographical information above is included.