Prohibited Activities and Recruiting

 by Gerald P. Nehra

Have you ever spoken words to the effect (or heard others say) that direct selling (in many instances called network marketing or multi-level marketing) is primarily about recruiting? Speaking or even thinking that way sends shudders through the very being of lawyers who provide legal services to direct selling companies. Let me explain why. The word "primarily" is not very precise. My definition, for the purposes of this article, is "more than half."

"Primarily" is not a word one would expect to find in legislation, for the very reason that it lacks precision. Laws in this country are, for the most part, very precise, for the benefit of the persons and corporations affected by them, and for the benefit of judges who enforce the laws. This is not the case with a group of laws affecting direct sellers. Sixteen states use the word "primarily" in laws prohibiting certain conduct of direct sellers who have a multi-level form of compensation. Here is the (abstracted) language from those statutes:

PROHIBITED ACTIVITY

Alabama
Prohibited Activity: …any plan…wherein a person for consideration…acquires the opportunity to receive a pecuniary benefit, which is based primarily upon the inducement of additional persons…to participate in the same plan…and is not primarily contingent on the volume … of goods, services or other property sold or distributed. "Consideration" Exclusion: …sales demonstration equipment and materials furnished on a nonprofit basis…less than $100

Arkansas
Prohibited Activity: …any scheme whereby a participant pays valuable consideration for the chance to receive compensation primarily from introducing one or more additional persons into participation in the scheme… "Compensation,"…does not mean or include payments based upon sales made to persons who are not participants in the scheme and who are not purchasing in order to participate in the scheme. "Consideration" Exclusion: …payments based upon sales made to persons who are not participants in the scheme and who are not purchasing in order to participate in the scheme.

Florida
Prohibited Activity: …any sales or marketing plan…whereby a person pays…in excess of $100 and acquires the opportunity to receive a benefit…not primarily contingent on…goods (or) services sold in bona fide sales to consumers, and which is related to the inducement of additional persons…to participate in the same sales or marketing plan… "Consideration" Exclusion: …goods or services furnished at cost for use in making sales…

Idaho
Prohibited Activity: …any plan…whereby a person gives consideration for the opportunity to receive consideration to be derived primarily from any person's introduction of other persons into…the plan…rather than from the sale of goods, services, or other intangible property by the person or other ersons introduced into the plan… "Consideration" Exclusion: …not for profit sale of sales demonstration equipment and materials

Illinois
Prohibited Activity: …any plan…whereby a person, in exchange for money…acquires the opportunity to receive a benefit…which is primarily based upon the inducement of additional persons…to participate in the same plan…and is not primarily contingent on the volume or quantity of goods, services or other property sold or distributed. "Consideration" Exclusion: …sales demonstration equipment and materials furnished on a nonprofit basis…

Louisiana
Prohibited Activity: …any plan…by which a participant gives consideration for the opportunity to receive compensation which is derived primarily from the person's introduction of other persons into a plan…rather than from the sale of goods, services, or intangible property by the participant or other persons introduced into the plan… "Compensation" Exclusion: Payment to participants based upon sales of products purchased for actual use or consumption, including products used or consumed by participants in the plan. "Consideration" Exclusions: …products furnished at cost to be used in making sales…Purchase of products where the seller offers to repurchase the participant's products under reasonable commercial terms.

Maryland
Prohibited Activity: …any plan…by which a participant gives consideration for the opportunity to receive compensation to be derived primarily from any person's introduction of other persons into participation in the plan or operation rather than from the sale of goods, services, or other intangible property by the participant or other persons introduced into the plan or operation. "Consideration" Exclusion: …goods or services furnished at cost for use in making sales to persons who are not participants in the scheme…

Massachusetts
Prohibited Activity: …any multi-level marketing program wherein the financial gains to the participants are primarily dependent upon continued, successive recruitment of other participants and where retail sales are not required as a condition precedent to realization of such gains…

Missouri
Prohibited Activity: …any plan…whereby a person for a consideration acquires the opportunity to receive a pecuniary benefit, which is not primarily contingent on the volume or quantity of goods, services or other property sold…for purposes of resale to consumers, and is based upon the inducement of additional persons…to participate in the same plan…

New Mexico
Prohibited Activity: …any…plan…by which a participant gives consideration for the opportunity to receive compensation which is
derived primarily from any person's introduction of other persons into participation in the plan or operation rather than from the sale of goods, services or intangible property by the participant or other persons introduced into the plan or operation. "Consideration" Exclusion: …goods or services furnished at cost to be used in making sales…

North Dakota
Prohibited Activity: …any plan…by which a participant gives consideration for the opportunity to receive compensation which is derived primarily from any person's introduction of other persons into participation in the plan …rather than from the sale of goods, services or intangible property by the participant introduced into the plan… "Consideration" Exclusion: …goods or services furnished at cost for use in making sales…

Oklahoma
Prohibited Activity: …any plan…by which a participant gives consideration for the opportunity to receive compensation which is derived primarily from the person's introduction of other persons into the plan…rather than from the sale of goods, services or intangible property by the participant…introduced into the plan… "Consideration" Exclusion: …products furnished at cost to be used in making sales…

Puerto Rico
Prohibited Activity: …any marketing program in which the benefits of the participants depend primarily on the continuous and successive enlistment of other participants and where the distribution and/or sale of properties or services is not required as a prerequisite to obtain said services.

Tennessee
Prohibited Activity: …any…plan…wherein a person for a consideration acquires the opportunity to receive a pecuniary benefit, which is not primarily contingent on…goods, services or other property  sold…to consumers, and is based on the inducement of additional persons…to participate in the same plan…

Texas
Prohibited Activity: …a plan…by which a person gives consideration for the opportunity to receive compensation that is derived primarily from a person's introduction of other persons to participate in the plan…rather than from the sale of a product by a person introduced into the plan… "Compensation" Exclusion: …sale of a product to a person…for actual use… "Consideration" Exclusion: …product furnished at cost to be used in making a sale…

Utah
Prohibited Activity: … any … plan … under which a person gives consideration in exchange for compensation … which is derived primarily from the introduction of other persons into … the plan rather than from the sale of goods, services or other property "Consideration" Exclusion: …sales demonstration equipment and materials furnished at cost…

I ask the question again, "What is Direct Selling PRIMARILY about?"  It must be PRIMARILY about products and services moving to consumers. The starting point, or root cause, of the majority of Attorney General actions with which I have been involved has been a thought process put into action in some form by the company or by distributors that the venture is about recruiting. Bottom line - change the thinking, change the actions, be about getting products/services to consumers, and significantly reduce legal risk.

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

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