From: noring@netcom.com (Jon Noring)
Subject: Re: ILLEGAL TO OPERATE MULTI-LEVEL WITH PURE MONEY TRANSACTIONS??
Date: Thu, 30 Jul 92 03:13:47 GMT
Organization: Netcom - Online Communication Services  (408 241-9760 guest) 
Followup-To: alt.business.multi-level

(Note the followup-to line.  Let's keep discussion off of misc.entrepreneurs.)


>Well, there are certainly some significant similarities between pyramid schemes
>and Amway *as marketed by many distributors*.  IMHO, "pure money games", while
>clearly illegal, are much more straightforward... that is to say, there is
>less likely to be dishonesty recruiting people into a pure money game, than
>there is recruiting people into Amway.  Amway benefits from being in a gray
>area of the law... while Amway is often marketed in an unethical manner,
>determining it to be illegal would require the FTC to find that the Amway
>products were a sham, insofar as the marketing plan goes.

To better discuss the issue of legality/illegality/"grey legality", let
me provide the following facts about the legal issues.  This is not necessarily
an answer to Eli's objections, rather it will add some information that may
not have been previously known by those discussing the issue.

I made the following post several months ago.  Some of the information might
not be pertinent to this discussion:

*****************************************************************************

>Many of us consider [Amway] to be a pyramid,...
>
>Your declaration that it is not a pyramid does not establish that assertion
>as fact.

It depends on what you define to be a pyramid.  The phrase 'pyramid scheme'
is used loosely to describe network marketing businesses in general.  It
does have a strict legal definition, which I describe below (an extract from
a posting of several months ago).  I'm assuming that the use of the word
'pyramid' in the posting above is not the strict legal definition.


************
...........................  First of all, it is understood among law
enforcement agencies and in the legal profession that pyramid schemes are
illegal (the definition of a pyramid scheme will be described below)
Let me take Amway as an example (since that is the one I know best).  Amway
operates in all fifty states in the U.S. (as well as over 48 countries).
It has passed all legal scrutiny (which I will add to below).  It is a legal
business.  Therefore, simple logic says that Amway, which is an example of
a network marketing business, is not a pyramid scheme....

Of course, people do use the phrase 'pyramid schemes' loosely and that is
their right [to do so].....
  
Now let me quote a couple of paragraphs from the book "Promises to Keep",
by Charles Paul Conn, where he describes the Amway business, and by
extension, to network marketing.  (Note:  Mr. Conn is not an Amway
distributor, although he has written several books about the subject...

Quote #1.  The following quote describes the 60 Minutes program about
Amway aired in early 1983, the investigator being none other than Mike
Wallace:

"Speaking of the Amway story several months later, Wallace acknowledged
that he had begun his investigation with several "preconceived
misconceptions" which he had discovered were not true.  He told a reporter,
'We found their products are good, and that THEY'RE NOT A PYRAMID
OPERATION' (caps are mine).  Interviewed by late-night radio host Larry
King, on a national Mutual Broadcasting show, Wallace was questioned again
on the subject, and joked that his attitude was so positive toward the
company that 'this is going to sound like a commercial for Amway'.  He
described his own expectations of the show: 'We thought we would have to
do a story without cooperation, but these are classy people.  They opened
up to us...these people are first rate'.

"Several months later, Wallace was still citing Amway as an example of an
open company with nothing to hide.  Questioned by Ted Koppel on an ABC
television news show, he discussed the tendency some companies have of
trying to stonewall the '60 Minutes' crew:  '...Let me give you examples.
The Amway Corporation...felt they had something to gain by making the best
case they could.  They didn't ask for questions ahead of time, they didn't
ask for any special editing privileges.  They were forthcoming, they opened
their books, they opened their plants to us.  And as a result, you can
talk to these people, and they'll say, perhaps it wasn't the broadcast that
we would have liked to see, but it was fair, it was balanced, it was
accurate, and we probably did ourselves good in the long run."

(End of first quote out of Paul Conn's book....)

Quote #2 (pp. 72-74):  "...Yes, pyramids are illegal.  No, Amway is not
a pyramid.  That is not just the personal opinion of Amway people, it is
a matter of legal record...Edward Bladen is assistant attorney general in
charge of the Economic Crime Division in Amway's home state of Michigan. 
Asked by a Washington Times reporter about the Amway operation, he
responded: 'We have not had any information on record to lead us to
believe that they are a pyramid scheme.  In fact, they are one of our
staunchest supporters of anti-pyramiding schemes.  They've basically
advised legislators these kinds of things shouldn't be done.'...

"Steve Sachs, attorney general in Maryland, offered the following comment
on a Baltimore television station about pyramid operations in his state.
He said, 'These are different from some of the fairly heavy commissioned
sales arrangements.  Amway is one that comes to mind.  Now THEY'VE BEEN
OKAYED BY THE COURTS because...it's not the same lottery aspect that
the pyramid thing does...I'm not here to give testimonials for any
particular company, but Amway is one that's been okayed by the courts.
IT'S NOT A PYRAMID SCHEME (caps are mine).  People are buying products,
getting value for what they're buying.  It has a heavy commission
arrangement but that's okay.'

"Rodney K. Smith, an attorney and professor of contract law at the Univ.
of North Dakota School of Law, explains what is a pyramid scheme in his
book MULTILEVEL MARKETING: 'The two primary characteristics of an
illegal pyramid are clear.  They are: (1) "inventory loading" - the notion
that new recruits must purchase a substantial, nonreturnable inventory to
get involved in the business, with their sponsor rewarded for the new
distributor's purchase of the inventory;  and (2) a "headhunting fee" -
the notion that the new recruit or distributor is to pay a large sum of
money as an entry fee, the sponsor to receive a portion of that fee.
The presence of either or both of these factors will generally suffice
to label an enterprise as an illegal pyramid.'

"The most direct clarification of Amway non-pyramid status has come from
the courts themselves.  When a California court found a company called
Figurettes guilty of pyramiding in the late 1970's, the defendents
claimed legitimacy by comparing their marketing plan to Amway's.  The
court flatly refused to accept such a comparison, and in so ruling
offered an appraisal of the Amway difference: 'Amway had avoided the
abuses of a pyramid scheme by (1) not having a headhunting fee...(2)
making product sales a precondition for receiving the performance bonus...
(3) buying back unsold inventory...and (4) requiring a substantial
percentage of products be sold to customers at retail...'

"The Federal Trade Commission ruled directly that Amway is not a pyramid
in its findings in 1978.  After months of hearings and legal inquiry,
Judge Timony ruled in favor of Amway in a clear and unambiguous way:
'The Amway sales and marketing plan is not a pyramid plan.  In less than
twenty years, it has built a substantial manufacturing company and an
efficient distribution system, which has brought new products into the
market...Consumers are benefited by this new source of supply, and have
responded by remarkable brand loyalty to Amway products.'

"Professor Rodney Smith reviews all these cases in his book and reaches
this emphatic conclusion: 'It is clear that Amway is not and never has
been an illegal pyramid scheme.'"

(end of Quote #2)
***********************************************************************


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