THE MULTI-LEVEL MARKETING PANDEMIC

THE

MULTI-LEVEL

MARKETING

PANDEMIC

CHRISTOPHER

BRADLEY*

&

HANNAH

E.

OATES**

INTRODUCTION.....................................................................................

322

I. MLMS

AND

THEIR

REGULATION

......................................................

327

A.

Direct

Sales

Companies,

Pyramid

Schemes,

and

the

Gray

Area

in

Between

........................................................

328

1.

Direct

Sales

Companies

................................................

328

2.

MLMs

and

the

Lure

of

the

Pyramid

............................

330

B.

Who

Profits

from

MLMs?

....................................................

334

C.

Regulatory

Responses-and

Limitations

...........................

340

II.

THE

MLM

PANDEMIC

.....................................................................

351

A

.

Unemploym

ent

....................................................................

352

B.

Flexible

Hours

and

Working

from

Home

.............

354

C.

Social

M

edia

........................................................................

355

D

.

H

ealth

Concerns

..................................................................

359

III.

STEMMING

THE

ADVANCE

OF

THE

MLM

PANDEMIC

....................

363

A.

Regulatory

Warnings,

Investigations,

and

Enforcement

Actions................................................................................

365

B.

Monitoring

by

Social

Media

Networks...............................370

C.

Self-R

egulation

....................................................................

372

D.

Toward

a

More

Comprehensive

Approach.........................374

CONCLUSION

........................................................................................

375

Among

the

societal

effects

of

the

COVID-19

pandemic

has

been

a

sharp

rise in

the

activities

of

multi-level

marketing

companies

(MLMs).

MLMs

are

business

enterprises in

which

participants

seek

not

only

to

sell

products

to

friends,

family,

and

social

media

contacts,

but

also

to

recruit

them

as

MLM

participants,

with

the

promise

of

"building

their

own

business

from

home."

False

promises

often

pervade

MLM

sales pitches.

Evidence

shows

that

few

participants

see

even

a

dollar

of

profit

from

their

MLM

work;

the

vast majority of

recruits

quickly

abandon

their

MLM

dreams

and

*

Wyatt,

Tarrant

&

Combs

Associate

Professor

of

Law

at

the

University

of

Kentucky

J. David Rosenberg

College

of

Law.

**

University

of

Kentucky

J.

David

Rosenberg

College

of

Law,

J.D.,

May

2021.

The

authors

contributed

equally

to

this

Article;

their

names

are

listed

alphabetically.

The

views

expressed

are

their

own

and

not

those

of

their

past,

present,

or

future

employees.

We

thank

the

editors

of

the

Tennessee

Law

Review

for

their

excellent

assistance

in bringing

this

Article

to

print

and

the

law

librarians

and

staff

at

the

University

of

Kentucky

law

library

for

their

efficient

and energetic

help.

TENNESSEE

LAW

REVIEW

lose

their

investments.

Yet

the

pitch

has

become

all

the

more

appealing

in

the

course

of

the

pandemic.

Many

people

are

desperate-unemployed

and

in

need

of

immediate

earnings

as

well

as

flexible,

at-home

work

due

to

health

concerns

and

family

responsibilities.

MLMs

have

been

particularly

appealing

to

the

working

mothers

who,

evidence

shows,

have

borne

the

brunt

of

COVID-19's

impact

on

employment,

childcare,

and

household

responsibilities.

Regulators

have

long

scrutinized

and

fought

the

worst

abuses

of

MLMs.

They

have

sought

to

shut

down

unscrupulous

MLMs

that

are

nothing

more

than

fraudulent

pyramid

schemes,

and

to

curtail

the

misrepresentations

and

exaggerations

that

are

all

too

often

the

stock-

in-trade

of

MLM

participants.

But

regulators,

including

the

Federal

Trade

Commission

(FTC),

face

significant

legal

and

practical

limitations

in

their

ability

to

promulgate

and

enforce

MLM

regulations.

This

Article

proposes

means

of

stemming

the

pandemic-driven

expansion

of

unlawful

MLM

activities.

It

assesses

efforts

by

regulators,

by

social

media

companies,

and

by

self-regulatory

organizations

set

up

by

MLMs

themselves.

Comprehensive,

long-term

success

at

curbing

the

abuses

of

MLMs

will

require

more

significant

regulatory

action

than

is

currently

permitted

by

law.

The

steps

outlined

here

can provide

some

much-needed

relief

for

consumers

harmed

by

the

unlawful

MLM

activities

that

have

been

fostered

by

the

pandemic.

They

may

also

provide

a

blueprint

for nimble

regulatory

responses

to

future

crises

when

unscrupulous

MLM

promoters

will,

no

doubt,

further

adapt

their

strategies

to

take

advantage

of

the

vulnerable.

INTRODUCTION

"This

past

year

has

been

an

active

one

for.

the

FTC

on

many

fronts,

but

in

particular

with

respect

to

activities

involving

illegal multi-level

marketing.

Sellers

beware:

we've

been

aggressive

in

the

cases

we've

been

pursuing,

the

remedies

we're

seeking,

and

our

willingness

to

go

to

court."

1

"Nearly

half

of

all

Americans

report

being

inundated

by

social

media

friends

selling

[multi-level

marketing]

products

on

their

1.

Noah

Joshua

Phillips,

Comm'r,

Fed.

Trade

Comm'n,

Keynote

Address

at

the

DSA

Legal

&

Regulatory

Summit

in

Washington,

D.C.

(virtual):

Seller

Beware

1

(Oct.

15,

2020),

https://www.ftc.gov/system/files/documents/publicstatements/1581726/

phillips_-dsaremarks_10-15-20.pdf.

322

[89:321

2022]

MULTI-LEVEL

MARKETING

PANDEMIC

323

news

feeds."

2

The

messages

are

all

over

social

media.

Someone

in

your

network

hawks

exotic

health

products

that

will

fight

the

disease

that

brought

a

worldwide

pandemic,

infected

504

million

people,

caused

more

than

6.1

million

deaths,

and

brought

vast

portions

of

the

world

economy

to

a

standstill.

3

And-more

good

news-you

could

join

that

acquaintance

and

make

hundreds

or

thousands

of

dollars

a week

while

working

from

home,

selling

these

products,

and

recruiting

others

to

join

your

"sales

team"

in

turn.

The

messages

conclude

in

a

string

of

hashtags,

with

everything

from

"#coronacure"

to

"#financialfreedom"

to

the

inevitable

"#blessed."

4

While

much

of

the

rest

of

the

economy

shrunk,

the

pandemic

of

2020-2021

has

brought

growth

to

businesses

relying

on

a

multi-level

marketing'structure-"MLMs,"

as

they

are

widely

known.

5

Generally

2.

Erika

Giovanetti,

MLM

Consultants

Pressure

Friends

and

Family

to

Overspend,

and

It's

Straining

Relationships,

LENDINGTREE

(Dec.

16,

2019),

https://www.lendingtree.com/debt-consolidation/survey-mlm-consultants-pressure-

spending/.

3.

Coronavirus

World

Map:

Tracking

the

Global

Outbreak,

N.Y.

TIMES,

https://www.nytimes.com/interactive/2021/world/covid-cases.html

(updated

Apr. 18,

2022).

4.

See,

e.g.,

Jessica

Bennett,

They

Feel 'Blessed',

N.Y.

TIMES

(May

2,

2014),

https://www.nytimes.com/2014/05/04/fashion/blessed-becomes-popular-word-hashtag-

social-media.html;

Letter

from

Fed.

Trade

Comm'n

to

Ron

Rose,

Dir.

of

Legal

&

Compliance,

Total

Life

Changes,

LLC

(Apr.

24,

2020),

https://www.ftc.gov/system/files/warning-letters/COVID-19-letterto_total_life_

changesllc.pdf

(providing

examples);

Letter

from

Fed..

Trade

Comm'n

to

Jennifer

Chaloemtiarana,

Chief

Legal

Officer,

Rodan

&

Fields,

LLC

(Apr.

24,

2020),

https://www.fte.gov/system/files/warning-letters/COVID-19-letter

to_rodanfields

llc.pdf.

5.

See, e.g.,

Giovanetti,

supra

note

2;

Abby

Vesoulis

&

Eliana

Dockterman,

Pandemic

Schemes:

How

Multilevel

Marketing

Distributors

Are

Using

the

Internet-

and

the

Coronavirus-to

Grow

Their

Businesses,

TIME

(July

9,

2020,

6:29

AM),

https://time.com/5864712/multilevel-marketing-schemes-coronavirus/

(reporting

rise

in

MLM

activity

during

Michael

Waters,

'They

Saw

an

Opportunity

with

the

Pandemic':

How

Social

Media

Platforms

Gave

Multi-Level

Marketing

a

Coronavirus

Surge,

MODERN

RETAIL

(Nov.

10,

2020),

https://www.modernretail.co/retailers/they-saw-an-opportunity-with-the-pandemic-

how-social-media-platforms-gave-multi-level-marketing-a-coronavirus-surge/.

This

Article

uses

the

general

term

"MLM'

to

refer

to

multi-level

compensation

structures.

It

adds

adjectives

as necessary

to

clarify

whether

a

given

observation

or

argument

applies

only

to

illegal

or legal

MLMs,

and

it

sometimes

simply

uses

the

term

"pyramid

scheme"

to

refer

to

unlawful

MLMs.

The goal

is

not

to

cast

aspersions

on

MLMs

as

a

whole-the

law

is

clear,

as

of

now,

that

some

multi-level

structures

are

legal-but

to

accentuate

that

fact

(acknowledged

by

all)

that it

is

often

very

difficult

to

distinguish

lawful

from

unlawful

MLMs.

TENNESSEE

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REVIEW

speaking,

an

MLM

is

a

business

in

which

the

participants

not

only

sell

goods

and

services

but

also

market

the

opportunity

to

become

a

participant

who

will,

in

turn,

sell

not

only

goods

and

services

but

the

opportunity

to

sell

goods

and

services,

and

so

on.

6

For

decades,

MLMs

have

drawn

scrutiny

from

regulators

and

consumer

advocates

because,

to

put

it

bluntly, almost

all

of

them

are

bad

for

almost

all

of

their

participants.

7

This

includes

MLMs

that

operate in

a way

that

arguably

does

not

run

afoul

of

existing

law.

Despite

these

concerns,

MLMs

have

continued

to

grow.

There

is

an

MLM

participant

in

at

least

one

in

six

American

households.

8

As

of

2019,

MLMs

brought

in

more

than

$35

billion

in

sales,

and

in

2020,

these

figures

grew

by

14%

to

more

than

$40

billion.

9

The

coronavirus-fueled

growth

of

MLMs

itself

forms

another

type

of

pandemic,

which

we

call

"the

MLM

pandemic."

The

MLM

pandemic

spreads

through

widespread

exaggerations

and misrepresentations

about

health

products

and

earnings

possibilities.

It

causes

recruits

to

pour

money

and

time into

schemes

that

are,

at

worst,

complete

scams

or,

at

best,

unlikely

to

yield

any

profit.

1 0

The

MLM

pandemic

is

one

that

the

relevant

state

and

federal

authorities

are scrambling

to

stop

with

limited

institutional

resources

and

legal

authority."

This

Article

explores

the

MLM

pandemic

and

how

to

deal

with

it.

The

Article advances

in

three parts.

Part

I

provides

an

overview

of

how

MLMs

work

and

how

they

have been

regulated.

These

issues

are intertwined,

because

the

structures

of

many

modern

MLMs

have

been

designed

to

avoid,

delay,

or

frustrate

regulatory

scrutiny.

While

some

MLMs

are

straightforwardly

illegal

and

can

be

classified

as

6.

See

Waters,

supra

note

5.

7.

See

infra

notes

62-105

and

accompanying

text.

8.

Direct

Selling

Fact

Sheet,

DIRECT

SELLING

ASS'N,

https://www.dsa.org/

docs/default-source/advocacy/direct-selling-fact-sheet.pdf

(last

visited

Jan.

28,

2022).

9.

Direct

Selling

in

the

United

States:

2020

Industry

Overview,

DIRECT

SELLING

AsS'N,

https://www.dsa.org/docs/default-source/research/dsa-industry-overview-fact-

sheet

(last

visited

Jan.

28,

2022)

[hereinafter

DSA

2020

Industry

Overview];

Direct

Selling

in

the

United

States:

2019

Industry

Overview,

DIRECT

SELLING

ASS'N

[hereinafter

DSA

2019

Industry

Overview],

https://www.dsa.org/docs/default-

source/research/growth-outlook/2019-research-overview-fact-sheet-fnal.pdf

(last

visited

Jan.

28,

2022);

see

infra

notes

199-201

and

accompanying

text

(explaining

the

increases

in

2020);

see

also

Heidi

Liu,

The

Behavioral

Economics

of

Multilevel

Marketing,

14

HASTINGS

BUS.

L.J.

109,

114

(2018)

("MLMs

sell

a

variety

of

goods

and

services,

from

health

and

beauty

products,

to

clothing,

and

financial

services,

with

'an

estimated

$34.47

billion

in

retail

sales,

and

...

18.2

million

direct

selling

distributors,

in the

U.S.

in

2014.'").

10.

See,

e.g.,

Liu,

supra

note

9,

at

112.

11.

See

id.

at

134.

324

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

simply

"pyramid

scheme"

scams,

other

MLMs

are

not

so

easy

to

classify

and

fall

into

a

gray

area

between

legitimate

sellers

of

viable

products

and

scams

designed

to

extract

maximum

money

from

participants.

Seemingly

legitimate

MLMs

often

artfully

craft

their

structures

to

rely

on

endless

"churn"

through

new

recruits-the

hallmark

of

an

illegitimate

pyramid

scheme-while

purporting

to

rely

on

legitimate

product

sales.

As

a

result,

distinguishing

whether

MLMs

are

lawful

or

unlawful

is

difficult

and

time-consuming.

Regulators

lack

the

sweeping

legal

rulemaking

and

enforcement

authority

they

would

need

to

properly

curtail

these

subtle

structural

abuses

of

the

MLM

form.

In

light

of

these

limits,

regulators

have

understandably

focused

on

addressing

misrepresentations

by

MLMs

and

their

participants,

which

are

easier

to

identify

and

to

police.

Part

II

of

the

Article

tells

the

story

of

the

MLM

pandemic-how

the

COVID-19

pandemic

has

provided

the

perfect

host,

as

it

were,

for

the

spread

of

MLMs.

MLMs

and

their

participants

commonly

advertise

MLMs,

via

social

media,

as

providing

the

opportunity

to

earn

immediate

income

on

a

flexible

work-from-home

schedule.

In

light

of

this,

there

are

at

least

five

distinct

but

interrelated

ways

in

which

the

COVID-19

pandemic

has

fostered

a

rich

environment

for

the

proliferation

and

replication

of

MLM

schemes:

1.

Unemployment.

Millions

of

jobs

have

been

lost,

and

people

are

desperate

for

immediate

ways

to

earn

money

to

niake

ends

meet.

2.

Working

from

home.

People

are

eager

to

work

from

home

because

'jobs

outside

of

the

home

are

risky

due

to

potential

disease

exposure,

and

often,

they

need

to

supervise

children.

3.

Flexibility.

Many

people

need

flexible

employment

because

they

need

to

supervise

children

or

take

care

of

other

members

of

the

household.

This

concern

has

arisen

because

traditional

caregiving

contexts

such

as

daycares,

schools,

and

assisted

living

centers

have

been

closed

or

had

their

operations

sharply

restricted.

Informal

employment

opportunities

also

seem

more

acceptable

and

desirable

because

of

the

increasingly

widespread

adoption

of

"gig

economy"

or

"side-hustle"

types

of

work.

4.

Social

media.

Many

people

are

attracted

to

businesses

using

online

platforms

because

they

are spending

more

time

online,

including

by

engaging

with

others

on

social

networks,

as

a

replacement

for

in-person

socializing

opportunities

that

have

been

restricted

during

the

pandemic.

5.

Health

concerns.

Many

people

are

attracted

to

health-related

products

and

businesses

because

of

heightened

concerns

about

325

2022]

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disease-including

concerns

stoked

or

shaped

by

misinformation

on

the

internet,

particularly through

the

same

social

media

channels

through

which

MLMs

are

often

promoted.

Data

gathered

during the

pandemic

suggests

the first

three

factors

tend

to

affect

women

much

more

than

men

because

they

have

borne

the

brunt

of

pandemic-related

job

loss

and

increased

childcare

responsibilities.

12

These factors

take

on

particular

importance

because

MLMs

traditionally

have

targeted

women

more

than

men.13

There

is

also

evidence

that

MLMs

may

appeal

more

to

those

with

fringe

or

non-mainstream

beliefs

of

various

sorts

and

thus,

the

fifth

factor

may

also

have

particular

force

in

aiding

the

proliferation

of

MLMs.14

The

MLM

pandemic

is

therefore

particularly

disturbing

because

the

impact

of

MLMs

is

focused

on

the

already

vulnerable

groups

that

have

been

most

significantly

impacted

by

the

COVID-19

pandemic.

And,

as

with other

inequalities

that

have

been

deepened

over

the

last

year,

the

MLM

pandemic

will

likely

continue

long

after

the

eventual

end

of

the

COVID-19

pandemic.

Part

III

discusses

approaches

to

dealing

with the

MLM

pandemic

and

looks

to

potential

responses

to

future

crises. Comprehensive

change

to

the

regulation

of

MLMs

will

likely

remain

elusive

until

the

FTC

is

provided

with

stronger

legal

authority.

But

some

powerful

means

are

already

available

to

curb

MLMs'

worst

abuses.

The

FTC

has

pursued

a

strategy

of

sending

numerous

informal

warning

letters

concerning

misrepresentations

on

social

media,

and

it

has

also

taken

formal enforcement

action

against

numerous

bad

actors,

including

some

MLMs,

who

have

taken

advantage

of

the

COVID-19

pandemic

to

scam

consumers.15

Some

evidence

suggests

that

these

efforts have

been

effective.

Other

federal

and

state

regulators

can

and

should

pursue

similar

steps.

The

Article

identifies

two

additional

means

of

stemming the

tide

of

MLM-related

consumer

abuses. Regulators

could

seek

the

cooperation

of

social

media

companies

that

play

a

crucial

role

in

modern

MLM

structures.

These

companies

could

prohibit health-

and

12.

See

infra

notes

209-211

and

accompanying

text.

13.

See Liu,

supra

note

9,

at

114

n.42

(discussing

and

collecting

citations);

DSA

2020

Industry

Overview,

supra

note

9

(reporting

that

75%

of

participants

were

women

in

2020).

14.

See

DSA

2020

Industry

Overview,

supra

note

9

(reporting

a

37.4%

rise

in

"wellness"

MLMs

in

2020);

see

also

Liu,

supra

note

9,

at

128

(linking

MLMs

to

religion).

15.

See,

e.g.,

Letter

from Fed.

Trade

Comm'n

to

Ron

Rose,

supra

note

4;

Letter

from

Fed.

Trade

Comm'n to

Jennifer

Chaloemtiarana,

supra

note

4.

326

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

earnings-related

misrepresentations

on

their

platforms

by

MLMs

and

their

participants.

If

they

are

not

willing

to

take

that

step,

they

could

work

to

provide

regulators

with

easy

access

to

MLM-related

postings

in

order

to

aid

law

enforcement

and

consumer

advocacy

groups.

Additionally,

there

may

be

a

role

for

self-regulatory

action

by

MLM

industry

associations.

Although

self-regulatory

organizations

often

lack

the

degree

of zeal

or

objectivity

necessary

to

police

abuses,

they

can

play

a

helpful

role

in

setting

and

enforcing

industry

standards

and

may

be

able

to induce

compliance

through

nimbler

and

less formal

means

than

government

regulators.

This

Part

discusses

the

likely

benefits

and

limitations

of

some

current

MLM-related

self-regulation

concerning

deceptive

representations.

A

brief

conclusion

follows.

I.

MLMS

AND

THEIR

REGULATION

This

Part

provides

an

overview

of

how

MLMs

work

and

how

they

have

been

regulated.

These

issues

are

intertwined

because

the

structures

of

many modern

MLMs

have

been designed

to

avoid,

delay,

or

frustrate

regulatory

scrutiny.

While

some

MLMs

are

straightforwardly

illegal

and

can

be

classified

as

simply

"pyramid

scheme"

scams,

other

MLMs

aren't

so

easy

to

classify.

1 6

They

fall

into

a

gray

area

between

legitimate

sellers

of

viable

products

and

scams

designed

to

extract

maximum

money

from

participants.

Often,

seemingly

legitimate

MLMs

artfully

craft

their

structures

to

rely

on

endless

"churn"

through

new

recruits-the

hallmark

of

an

illegitimate

pyramid

scheme-while

purporting

to rely

on

legitimate

product

sales.

17

Distinguishing

whether

an

MLM's

operations

are

lawful

or

unlawful

is

difficult

and

time-consuming.

Regulators

lack

the

sweeping

legal

rulemaking

and

enforcement

authority

they

would

need

to

properly

curtail

these

subtle

structural

abuses

of

the

MLM

form.'

8

Accordingly,

regulators

have

focused

on

addressing

misrepresentations

by

MLMs

and

their

participants,

which

are

easier

to

identify

and

to

police.'

9

As

regulators

have

recognized,

this

focus

on

deceptions

is not

enough

to

protect

the

public

from

abusive

MLM

16.

See

Liu,

supra

note

9,

at

113.

17.

See

MARGUERITE

DELIEMA

ET.

AL.,

AARP

FOUND.,

AARP

STUDY

OF

MULTILEVEL

MARKETING:

PROFILING

PARTICIPANTS

AND

THEIR

EXPERIENCES

IN

DIRECT

SALES

2

(2018),

https://www.aarp.org/content/damlaarp/aarpfoundation/2018/pdf/AARP%2OFoundat

ion%20MLM%20Research%20Study%20Report%2010.8.18.pdf.

18.

See

Liu,

supra

note

9,

at

134.

19.

See

Phillips,

supra

note

1,

at

2-3.

327

2022]

TENNESSEE

LAW

REVIEW

structures,

but

it curtails

at

least

some

harms

and

is

the

best

available

option

in

the

short

term.

A.

Direct

Sales

Companies,

Pyramid

Schemes,

and

the

Gray

Area

in

Between

"It

can

be

like

nailing

Jell-O

to

a

tree

proving

they're

pyramids."

20

1.

Direct

Sales

Companies

Direct

sales

companies

are

companies

that

rely

on

a

network

of

sales

representatives,

usually

acting

as

independent

contractors

and

paid

on

commission,

to

sell

goods or

services.

2

1

As

with

any

other

type

of

business,

there

are

various

possibilities

for

abuse,

but

the

structure

is

generally

lawful.

Direct

selling-for

instance,

in the

form

of

door-

to-door

sales

by

"the

Fuller

Brush

Man"-has

long

formed

a

part

of

popular

lore.

22

And

today,

of course,

Girl

Scouts

directly

sell

about

200

million

boxes

of

cookies

each

year

in

order

to

raise

money

for

their

non-profit

activities.

23

Direct

sales

companies

rely

heavily

on

their

representatives-whether

Girl

Scouts

sitting

at

a

card

table

outside

the

grocery

store

or

"influencers"

posting

on

Instagram-for

sales,

marketing,

and

recruitment.

24

Most

representatives

are

treated

as

independent

contractors

and are

not

paid

on

a

salary

basis.

2

5

Instead,

they

work

on

commission

based

on

their

sales.

26

Direct

sellers

have

provoked

regulatory

scrutiny

in the

past

for

exaggerated

product

claims

and

abuses

of

financing

arrangements.

27

20.

Jean

Eaglesham,

SEC

on

Lookout

for

Web-Based

Pyramid

Schemes,

WALL

ST.

J.

(Dec.

3,

2014, 3:32

PM),

https://www.wsj.com/articles/sec-on-lookout-for-web-

based-pyramid-schemes-1417638739.

21.

See

Waters,

supra

note

5.

22.

See,

e.g.,

THE

FULLER

BRUSH

GIRL

(Columbia

Pictures

1950)

(starring

Lucille

Ball);

THE

FULLER BRUSH

MAN

(Columbia

Pictures

1948)

(starring

Red Skelton).

According

to

family

lore,

the

great-grandfather

of

one

of

the

authors

of

this

Article

(Bradley)

was

a

Fuller

brush

salesman

in

South

Texas

in

the

1910s

and

1920s.

23.

Girl

Scouts:

Fun

Facts

&

Figures,

GIRL

ScOUTS,

https://www.girlscouts.org/content/dam/girlscouts-gsusa/forms-and-documents/about-

girl-scouts/facts/GSUSA_facts_English_02-20.pdf

(last

visited

Jan.

28,

2022).

24.

See

DELIEMA

ET

AL.,

supra

note

17.

25.

Business

Guidance

Concerning

Multi-Level

Marketing,

FED.

TRADE

COMM'N,

https://www.ftc.gov/tips-advice/business-center/guidance/business-guidance-

concerning-multi-level-marketing

(last

visited

Mar.

25,

2021).

26.

Id.

27.

See,

e.g.,

ANNE

FLEMING,

CITY

OF

DEBTORS:

A

CENTURY

OF

FRINGE

FINANCE

182-84

(2018).

[89:321

328

MULTI-LEVEL

MARKETING

PANDEMIC

In

the

modern

world,

there

has

been

attention

paid

to

the

potentially

objectionable

practices

of

celebrities

or

other

social

media

influencers

promoting

products

without

disclosing

that

they

are

being

paid

to

do

s0.28

But

direct

selling

structures,

when

they

do

not

feature

a

multi-

level

element,

are

not

typically

problematic.

29

Indeed,

direct

sale

structures

can

bring

real

value

to

commerce

and are

particularly

appealing

in

the

internet

age.

Direct

selling

can,

for

instance,

lower

costs

for

an

upstart

producer

of

goods

which

may

not

be

able

to

afford

or

to

reach

an appropriate

audience

through

a

traditional

brick-and-mortar

storefront

or

through

traditional

advertising.

3

0

Direct

selling

"has

low

fixed

costs,

particularly

when

compared

to

the

price

of

operating

traditional

retail

outlets."

31

Using

a

direct

sales

business

model

can

greatly

increase

the

success

of

a

business.

The

cost

and

complexity

of

distribution

decline

when

you

have

sales

representatives

scattered

in

different

regions

with

preexisting

personal

networks

to

sell

to

at

little

upfront

cost.

3

2

Additionally,

depending

on

the

product,

more

sales

may

be

generated

through

testimonials

of

friends

and

family

than

through

traditional

marketing

tactics.

33

Lastly,

with

a

purely

commission-

based

structure,

there

is

little

risk

of

loss

for

the

company

if

a

particular

salesman's

distribution

party

is

a

flop

or

if

the

distributor

has

a below-average

month.

Instead,

the

individual

distributor

bears

the

costs,

which

serves

as

an

increased

incentive

for

distributors

to

perform

their

best

work.

3

4

As

consumers

develop

relationships

of

trust

on

social

media

platforms,

whether

with

friends

or

with

Internet

personalities

of

various

sorts,

it

makes

sense

that

they

would

want

to

purchase

goods

through

those

social

media

contacts.

Consumers

may

want

to

support

those

contacts

financially,

or

they

may

believe

that

the

endorsement

of

those

intermediaries

is

meaningful

and

more

28.

See

FED.

TRADE

COMM'N,

DISCLOSURES

101

FOR

SOCIAL

MEDIA

INFLUENCERS

2

(2019),

https://www.ftc.gov/system/files/documents/plain-language/100la-influencer

-guide-508_1.pdf.

29.

See,

e.g.,

Girl

Scouts:

Fun

Facts

&

Figures,

supra

note

23.

30.

See

Direct

Selling,

QUEENSLAND

GOVERNMENT:

BUSINESS

QUEENSLAND,

https://www.business.qld.gov.au/running-business/marketing-sales/marketing-

promotion/direct-marketing/direct-selling

(last

visited

Jan.

29,

2022).

31.

Corey

Matthews,

Using

a

Hybrid

Securities

Test

to

Tackle

the

Problem

of

Pyramid

Fraud,

88

FORDHAM

L.

REV.

2045,

2051-52

(2020).

32.

Andrew

Stivers,

Douglas

Smith

&

Ginger

Jin,

The

Alchemy

of

a

Pyramid:

Transmutating

Business

Opportunity

into

a Negative

Sum

Wealth

Transfer

3

(unpublished

manuscript)

(https://papers.ssrn.com/sol3/papers.cfm?abstract_

id=3497682).

33.

Id.

34.

See

Liu,

supra

note

9,

at

112

(describing

the

costs

and

expenses

of

being

a

consultant).

329

2022]

TENNESSEE

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REVIEW

likely

to

make

the

product

desirable-a

form

of

reputational

vetting

of

products.

35

Because

direct selling

is

generally

unobjectionable,

MLMs

like

to

associate

themselves

with

direct

selling.

The

main

industry

group

that

advocates

for

MLM

interests

is

called

the

"Direct

Selling

Association."

36

But

it

appears

that

most

of

the

members

of

the

Direct

Selling Association

are

not "pure" direct

sellers;

they

are

direct

sellers

who

rely

on

multi-level

marketing.

3

7

And

it

is

this

multi-level

aspect,

not

the

direct

selling

aspect,

that

regulators and

critics

find

objectionable.

38

What

distinguishes

a

"pure"

direct

sales

company

from

MLMs

is

that,

in

a

multi-level

structure,

commissions

are

earned

not

only

through

the

product

sales,

but

also

based

on

the

sales

of

those

recruited

to become

sellers.

39

The

multi-level

element

is

what

can

sometimes

transform

a

direct

seller into

a

pyramid

scheme.

This

is

the

concern

that

we

turn

to

now.

2.

MLMs

and

the

Lure

of

the

Pyramid

In

a

"pure"

pyramid

scheme,

if

there

is

a

product

being

sold,

it

is

an

after-thought

at

best.

40

Instead, the

real

goal

is

simply

to

lure

more

participants

into

the

pyramid,

profiting

those

higher

up on

the

pyramid.

41

Once

recruited,

of

course,

participants

have

to

bring

in

more

recruits

in

order

to

earn

any

rewards

themselves.

42

So

the

ever-

growing

structure

lurches

on

until

the numbers

of

new

recruits

being

drawn

in

no

longer

can

sustain

it,

and

it

collapses.

43

Because

the

wealth

of

those

higher

up

on

the

pyramid

can

only

be

extracted

from

those

below,

no economic

value

is

created

by

a

"pure"

pyramid

scheme.44

Inevitably (and

mathematically),

a small

group

of

early

35.

See

Steve

Olenski,

How

Brands

Should

Use

Celebrities

for

Endorsements,

FORBES

(July

20,

2016,

2:43

PM),

https://www.forbes.com/sites/steveolenski/

2016/07/20/how-brands-should-use-celebrities-for-endorsements/?sh=671041975593.

36.

See

Stivers,

Smith

&

Jin,

supra

note

32,

at

1.

37.

See

id.

38.

See

Waters,

supra

note

5

(discussing

the

FTC's

enforcement

measures

to

regulate

MLMs).

39.

Melanie

Hicken,

The

Money

Behind

Herbalife,

Mary

Kay

and

Others,

CNN

MONEY

(Jan.

10,

2013,

1:58

PM),

https://money.cnn.com/2013/01/09/pf/multilevel-

marketing-industry/index.html.

40.

See

id.

41.

See

id.

42.

See

id.

43.

See

Matthews,

supra

note

31,

at

2048.

44.

DELIEMA

ET

AL.,

supra

note

17,

at

9

(reporting

that

of

the three

individuals

who

made

six

figures

in

profit,

all

three

were

direct

sellers

for

the

MLM

company

and

one

of

them

founded

the

organization).

330

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

entrants

at

the

top

will

end

up

net

winners

in

the

scheme

while

the

larger

mass

of

late

comers

at

or

near

the

bottom

will

lose.

45

Most

MLMs

sit

uneasily

in

the

large

gray

area

between

"pure"

direct

sales

companies

and

"pure"

pyramid

schemes.

46

Neither

regulators

nor

consumer

advocates

have

objected

to

direct

selling

structures

as

a

general

matter.

It

is

the

multi-level

nature

of

MLMs

that

is

problematic.

47

The

difference

between

objectionable

multi-level

marketing

and

inoffensive

direct

selling

lies

in

the

temptation,

in

a

multi-level

structure,

for

recruitment

of

further

participants

rather

than

sales

to

actual

users

to

become

the

primary

focus.

48

This

is

when

multi-level

structures

become

unlawful-when

they

become

pyramid

schemes,

even

though

they

often

mask

it

well.

The

mathematics

of

recruitment-based

compensation

are

brutal

and

unforgiving.

In

order

to

earn

any

meaningful

compensation,

each

successful

recruiter

has

to

recruit

numerous

others,

who

in

turn,

must

themselves

recruit

numerous

others

to

be

successful.

49

For

a

recruiting-focus

enterprise

to

become

successful,

it

must

churn

through

many

new

recruits

each

year,

the

vast

majority

of

whom

will

invest

money

and

effort

in

hopes

of

themselves

becoming

successful

recruiters

but

will

fail.

50

This

might

sound

hard,

and

it

is.

Yet

for

pyramid

schemers,

it

is

irresistible

because

it

does

not

require

selling

a

superior

product

or

service,

which

is

hard

to

do

in

a

competitive

and

well-developed

market,

but

hope

itself.

If

you

are

good

at

selling

hope,

you

can

make

many

quick

and

easy

dollars

at

the

expense

of

those

you

draw

in.

Some

short-lived

MLMs

are

essentially

quick-hit

scams

that

function

like

simple

pyramid

schemes:

The

first

entrants

(called

"uplines")

are

paid

by

later

entrants

(called

"downlines"),

who

are

in

turn

paid

by

later

entrants

(who

will

have

their

own

"downlines"),

until

after

not

too

45.

See

id.

at

3

(stating

that

47%

of

MLM

participants

reported

losing

money

while

25%

reported

making

a

profit).

46.

See

Sergio

Pareja,

Sales

Gone

Wild:

Will

the

FTC's

Business

Opportunity

Rule

Put

an

End

to

Pyramid

Marketing

Schemes,

39

McGEORGE

L.

REv.

83,

87-88

(2008)

(noting

that

"many

direct

sellers

are

legitimate");

Liu,

supra

note

9,

at

113

("Specifically,

MLMs

are

compared

to

pyramid

schemes

given

similarities

in

organizational

structure

(i.e.,

the

incentive

to

recruit

new

people

means

that

only

a

few

people

will

make

large

profits)").

47.

See

Pareja,

supra

note

46,

at

87-88

(explaining

the

key

to

identifying

"schemes"

that

focus

on

recruitment

as

opposed

to

retail

sales).

48.

See

SEC

v.

Koscot

Interplanetary,

Inc.,

497

F.2d

473,

475-76

(5th

Cir.

1974);

Pareja,

supra

note

46,

at

87-88.

49.

See

Matthews,

supra

note

31,

at

2052.

50.

See

id.

("Only

the

very

few

at

the

top

earn

a

profit

because

the

base

necessarily

represents

the

vast

majority

of

participants.").

331

2022]

TENNESSEE

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REVIEW

long,

the

bubble

bursts

and

the

last

group

is left

with

nothing.

5 1

Simple

pyramid

schemes

inevitably

fail

(and

often

do

so

quickly)

because

if

each

distributor

is

required

to

recruit

five

new

members

and

those

five

new

members

then must

also

recruit

five

members

and

so

on,

then,

as

comedian

John

Oliver

aptly

put

it,

"within

fourteen

cycles,

you

run

out

of

people,

and

that

is

assuming

that

everyone

on

earth

wants

to

be

a

protein

shake

distributor."

52

The

market

for

participants

in

any

given

scheme

often

becomes

saturated

quickly,

and

the

scheme

runs

out

of

momentum

and

fails.

Of course,

MLMs

nearly

always

claim

that

they

are

not

inappropriately

focused on

recruitment

and

that

they

provide

a

real

product

or

service.

They

argue

that

the

multi-level

structure

encourages

close

relationships

between

"uplines"

and

"downlines"

who

share

a

fervent belief

in

the

product and

who

can

work

cooperatively,

helping

and

encouraging

each

other as

they

"grow[]

their

businesses"

together.

53

These

multi-level

structures,

they

argue,

are

simply

highly

effective

ways

of

spreading

enthusiasm

for,

and

increasing

the

sales

of,

the

MLM's

products.

54

How

well

this

story fits

the

operations

of

actual

MLMs

is

hard

to

assess.

Some MLMs

may

provide a

legitimately

competitive

good

or

service

that

would

be

desirable

on

the

open

market,

although

evidence

of

this

is

hard

to

come

by.5

5

But

for

others,

the

product

appears

to

be

little

more

than

afterthought.

The

product

often

serves

as

a

fig

leaf,

put

in

place to

satisfy regulators,

to

comfort

participants

who

may

worry

that

they

are

being

drawn

into

a

pyramid

scheme,

or

to

serve

as

a

sort

of

loss-leader

for

the

actually

profitable

"product"

of

attaining

51.

See

Phillips,

supra

note

1,

at

2.

52.

Last

Week

Tonight

with

John

Oliver:

Multilevel

Marketing

(HBO

television

broadcast

Nov.

7,

2016)

(available

at

https://www.youtube.com/watch?

v=s6MwGeOm8iI&list-PLN97WzUbS_N2zMVMoyZSdaiHHm4PXnNm3).

53.

See

,

Carol

Deeb,

How

to

Build

Your

Downline,

CHRON,

https://smallbusiness.chron.com/build-downline-39870.html#content

(last

visited

Jan.

29,

2022).

54.

See

Adam

Epstein, Multi-Level

Marketing

and

Its

Brethren,

The

Legal

and

Regulatory

Environment

in

the

Down

Economy,

12

ATL.

L.J.

91,

103

(2010);

Deeb,

supra

note

53.

55.

See

Camille

Sweeney,

Direct

Approach

Works

for

Avon,

N.Y.

TIMES

(Jan.

13,

2020)

(noting

more

than

$10

billion

in

sales),

https://www.nytimes.com/

2010/01/14/fashion/14skinside.html.

But

see

The

Associated

Press,

Company

News;

J.C.

Penney

and

Avon

End

Cosmetics

Partnership,

N.Y.

TIMES

(Feb.

1,

2003) ("J.

C.

Penney

and

Avon

Products

are

terminating

their

partnership

to

sell

a

cosmetics

line,

ending

Avon's

first

attempt

at

selling

at

retail."), https://www.nytimes.com/2003/

02/01/business/company-news-jc-penney-and-avon-end-cosmetics-partnership.html.

[89:321

332

2022]

MULTI-LEVEL

MARKETING

PANDEMIC

333

new

recruits.

56

This

is

the

challenge

for

regulators.

Nowadays,

due

to

a

long

record

of

regulatory

and

public

scrutiny,

most

MLMs

entwine

recruitment

rewards

with

sales

rewards

such

that

it

is

hard

for

regulators

and

even

participants

themselves

to

know

where

one

ends

and

the

other

begins.

57

For

instance,

rather

than

charging

a

buy-in

simply

to

become

a

participant,

MLMs

often

require

a

"startup

package"

of

actual

goods

or

services.

58

They

also

tacitly

encourage

participants

to

engage

in

what

is called

"inventory

loading,"

which

is

the

practice

of

purchasing

more

product

than

a

given

participant

actually

intends

to

consume

or

to

sell

to

actual,

current

customers.

59

MLMs

often

set

up

a

variety

of

formal

and

informal

incentives

seeking

to

induce

participants

to

inventory

load,

and

it

is

one

of

the

most

common

abuses

of

modern

MLM

structures.60

The

idea

is

that

the

participant

can

then

either

consume

or

sell

this

inventory.

Often,

however,

the

inventory

is

sold

at

a

loss

or

left

to

waste.

This

is

because

it

was

bought,

not

as

a

desirable

product

priced

competitively,

but

because

its

purchase

made

the

participant

eligible

to

partake

in

the

actual

focus

of

the

enterprise-recruitment--or

to

reap

greater

monetary

benefits

of

the

endless

churn

at

the

bottom

of

the

pyramid.

61

56.

See

Edith

Ramirez,

Chairwoman,

Fed.

Trade

Comm'n,

Keynote

Address

at

the

Direct

Selling

Association

Business

&

Policy

Conference

(Oct.

25,

2016),

https://www.ftc.gov/system/files/documents/publicstatements/993

4

73

/ramirez_-

_dsa_speech_10-25-16.pdf

(noting

that

"when

a

product

is

tied

to

a

business

opportunity

...

people

buying

it

may

well

be

motivated

by

reasons

other

than

actual

product

demand").

57.

See

Stacie

A.

Bosley,

Sarah

Greenman

&

Samantha

Snyder,

Voluntary

Disclosure

and

Earnings

Expectations

in

Multi-Level

Marketing,

58

ECON.

INQUIRY

1643,

1644

(2020)

(noting

"information

asymmetry"

about

financial

outcomes

of

MLM

participants);

Liu,

supra

note

9,

at

113

("While

not

all

MLM

schemes

are

illegal

pyramid

schemes

and

vice

versa,

both

MLMs

and

pyramid

schemes

may

draw

from

the

literature

on

influence

in

recruiting

consultants

that

may

override

a

rational

actor's

decision

to

participate.").

58.

See

Liu,

supra

note

9,

at

119.

59.

See

id.

at

118;

Business

Guidance

Concerning

Multi-Level

Marketing,

supra

note

25.

60.

See

Business

Guidance

Concerning

Multi-Level

Marketing,

supra

note

25.

The

FTC

describes

inventory

loading

as

when

"a

participant's

wholesale

product

purchases

...

are

made

in

an

attempt

to

advance

in

the

marketing

program,

rather

than

made

to

satisfy

actual

consumer

demand

in

the

marketplace

for

those

products."

Id.

Incentives

to

inventory

load

might

include,

for

instance,

meeting

a

required

threshold

for

a

given

status

within

the

organization,

which

entitles

the

participant

to

higher

compensation

or

to

other

perks.

See

id.

61.

See

Amway

Corp.,

93

F.T.C.

618,

667

(1979)

(describing

"inventory

loading").

TENNESSEE

LAW

REVIEW

B.

Who

Profits

from

MLMs?

Like

other

businesses,

MLMs

exist

primarily

to

profit

their

owners.

These may

be

shareholders

in

the

case of

a

large,

publicly

held

MLM

such

as

Tupperware

or

Nu

Skin,62

or

a

smaller

group

of

owners

in

the

case

of

most

MLMs.

Either

way,

the

founders

of

MLMs

benefit

because

they

are

usually

the

initial

owners of

the

company,

and

even

if

they

relinquish

ownership,

they

can

cash

out

handsomely

when

it

goes

public.

In

addition,

the

initial

owners,

like

other

early,

participants

in

the

enterprise,

are

often

the

highest

"upline"

figures

in

the

structure

and

therefore

reap

ongoing

benefits

from

the

sales

and

recruitment

efforts of

everyone

below

them.

63

But winners

are

few.

Losers

in

MLMs

far outnumber

winners.

The

clear

evidence is

that

MLMs

bring

financial

harm

to

most

participants,

yielding

little

benefit

for

considerable

investment

of

time

and

money.

64

While

each

company

has

different pay

out

and

earning

statistics,

data

on

the

industry

as

a

whole

shows

that

there

is

little

hope

of

success

for

most

participants.

65

In

2018,

AARP

conducted

a

study

profiling

participants

in

MLMs

to

identify

who

was

signing

up

as

distributors

and

to

understand

why

they

were

signing

up.

66

Out

of

1000

survey

participants,

601

were

or

had

been

involved

in

MLMs.

67

Of

the

MLM

participants,

47%

lost

money,

27%

broke

even,

and

"[o]nly

.a

quarter

of

MLM

participants

[who]

made

any

profit

during

62.

See

Nu

Skin

Enterprises

Inc.

(NUS),

N.Y.

STOCK

EXCH.,

https://www.nyse.com/quote/XNYS:NUS

(last

visited

Jan.

29,

2022);

Nu

Skin

Enterprises,

Inc.

(NUS),

YAHOO!

FIN.,

https://finance.yahoo.com/quote/NUS/

(last

visited

Jan.

29,

2022)

(reporting

that

Nu

Skin, as of

March

17,

2021,

had

a

share

price

of

$53.52

on

the

NYSE

and

a

market

capitalization

of

almost

$28.5

million);

Tupperware

Brands

Corporation

(TUP),

N.Y.

STOCK

EXCH.,

https://www.nyse.com/quote/XNYS:TUP

(last

visited

Jan.

29,

2022);

Tupperware

Brands

Corporation

(TUP),

YAHOO!

FIN.,

https://finance.yahoo.com/quote/TUP/

(last

visited

Jan.

29,

2022)

(reporting

that

Tupperware, as

of March

17,

2021,

had

a

share

price

of

$28.43

on

the

NYSE

and

a

market

capitalization

of

almost

$30

million).

63.

See,

e.g.,

DELIEMA

ET

AL.,

supra

note

17,

at

9

(noting

that

of

the

more

than

six

hundred

surveyed

individuals

who

had

been

involved

in

MLMs,

only

three

claimed

to

have

made

more

than

$100,000

in

cumulative

compensation,

and

one

of

those

three

was

the

founder

of

the

MLM).

64.

See

id.

at

8-9.

65.

See

id.

at

3

(summarizing

survey

results).

66.

Id.

("This

report

addresses

two

research

questions.

1)

Identify

the

percentage

and

demographic

characteristics

of

American

adults

who

have

participated

in

MLMs

during

their

lifetimes;

and

2)

Understand

why

participants

join

MLMs

and

how

well

they

do

financially

as

a

result

of

that

participation.").

67.

Id.

at

3.

334

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

the

entire

time

...

worked

for

the

MLM."68

The

study

thus

confirmed

the

judgment

that

the

vast

majority

of

participants

in

MLMs

make

no

money.

A

deeper

look

at

the

quarter

of

MLM

participants

who

made

a

profit

showed

that

the

majority

claimed

to

have

made

less

than

$5,000.69

While

"half

of

one

percent"

(which

equated

to

three

participants)

did

report

profits

over

$100,000,

that

was

their

total

profit

for

more

than

five

years

of

hard

work

with

the

company-and

one

participant

was

the

founder

of

the

corporation.

70

The

same

study

found

the

average

time

spent

per

week

working

was

13.3

hours.

71

While

13.3

hours

is

not

full

time,

most

individuals

who

put

that

many

hours

into

a

job

during

a week

do

not

end

up

losing

money

at

the

end

of

the

year.

Even

the

individuals

who

identified

themselves

as

making

a

"profit"

were

not

asked

how

they

defined

that

term.

72

Another

study

has

shown

that

many

participants

do

not

ever

engage

in

level-headed

calculation

of

the

degree

to

which

they

have

profited

from

their

involvement

with

an

MLM.

7

3

Participants

in

the

AARP

survey

may

not,

for

instance,

have

ended

up

ahead

if

all

of

the

costs

of

travel

and

training

were

included,

if the

cost

of

purchasing

products

at

higher-

than-retail

prices

were

included,

or

if

they

included

the

value

of

the

time

they

spent

on

this

work.

74

There

is

considerable

reason

to

doubt

that

if

expenses

were

subtracted

from

revenue

and

the

hours

spent

working

were

tallied,

the

per-hour

compensation

of

even

the

MLM

participants

would

be

significant.

75

Instead,

the

best

evidence

suggests

that,

as

the

pyramid

structure

itself

implies,

there

are

a

few

big

winners

and

a

very

large

body

of

losers,

or

at

best,

"break

eveners."

7

6

Young

Living,

a

seller

of

essential

oils,

revealed

in

a

public

income

68.

Id.

at

3,

8.

69.

Id.

at

8.

70.

Id.

at

8-9

("Only

a

quarter

of

MLM

participants

(n=156)

made

any

profit

during

the

entire

time

they

worked

for

the

MLM.

Fourteen

percent

of

the

601

MLM

participants

made

less

than

$5,000,

6%

made

between

$5,000

and

$9,999,

3%

made

between

$10,000

and

$24,999,

and

3%

made

$25,000

or

more.").

71.

Id.

at

8.

72.

See

id.

73.

See

Michael

G.

Pratt,

The

Good,

the

Bad,

and

the

Ambivalent:

Managing

Identification

Among

Amway

Distributors,

45

ADMIN.

SCI.

Q.

456,

463

(2000)

("It

was

surprising

that

in

an

organization

that

valued

making

a

profit,

it

was

difficult

for

distributors

to

answer

the

question,

'How

much

money

are

you

making?"').

74.

See

id.

75.

See,

e.g.,

id.

(discussing

different

ad-hoc

calculation

methodologies

proposed

by

Amway

participants).

76.

See

DELIEMA

ET

AL.,

supra

note

17,

at

3.

2022]

335

TENNESSEE

LAW

REVIEW

statement

that

"more

than

ninety-four

per

cent

of

Young

Living's

two

million

active

members

made

less

than

a

dollar in

2016,

while

less

than

one-tenth

of

one

per

cent-that

is,

about

a

thousand

Royal

Crown

Diamonds--earned

more

than

a

million

dollars."

77

John

Oliver

put

the

matter

in

frank

terms,

referencing

similar

data

from

another

MLM,

a

skincare

and dietary

supplement

company

called

Nu

Skin:

"Ninety-three

percent

of

all

Nu

Skin

distributors

receive

zero

commissions

from

the

company

in

an

average month,

so

even

if

you

have

never

heard

of

Nu

Skin

before,

it

may

be

paying

you

just

as

much

as

it

does

93%

of

all

its

distributors."

78

This

hard

data

on

MLMs

contrasts

sharply with

the

rosy

views

that

are

promulgated

on

social

media

and

in

other

public

forums.

Even

the

MLMs

that

disclose

the

dim

financial prospects

for

the

vast

majority

of

participants

often

seek

to

minimize,

manipulate,

or

obscure

these

depressing

basic

facts. The

Direct

Selling

Association-

which

trumpets

its

mission

as,

in

part,

"[t]o

ensure

member

companies'

products

and

the

direct

selling

opportunity

is

conducted

with

the

highest

level

of

business

ethics"

7

9

-also

engages

in

this

sort

of

puffery.

In

its

2019

industry

fact

sheet,

Direct

Selling

Association

states,

"Direct

selling

in the

United

States

represents

$35.2

billion

in

retail

sales

in

2019

....

By

dividing

the

$35.2

billion

in

sales

by

the

6.8

million

direct

sellers,

direct

sellers

averaged

$5,176

in

retail

sales

per

year."

80

The

use of

the

"average"

here

81

seems

almost

certainly

misleading

given

the

evidence

concerning

the

unevenness

of

compensation-the

concentration

of

earnings

at

the

top

of

the

pyramid.

82

In

addition,

even

this

average

may

be

misleading

due

to

a

constricted

definition

of

"direct

sellers."

8

3

The

definition

is

left

unclear

on

the

fact

sheet

because

it

appears

to

exclude

an

additional

9.6

million

individuals

who

are

termed

"discount

buyers,"

who

appear

to

have

obtained

the

right

to

sell

product

and

to

recruit

new

participants

but

may not have

ever

done

so

or have

only

done

so

for

a

short

amount

77.

Rachel

Monroe,

How

Essential

Oils

Became

the

Cure

for

Our

Age

of

Anxiety,

NEW

YORKER

(Oct.

2,

2017),

https://www.newyorker.com/magazine/2017/10/09/how-

essential-oils-became-the-cure-for-our-age-of-anxiety.

78.

Last

Week

Tonight

with

John

Oliver,

supra

note

52.

79.

Who

We

Are,

DIRECT

SELLING

ASS'N,

https://www.dsa.org/about/association

(last

visited

Jan.

30,

2022).

80.

DSA 2019

Industry

Overview,

supra

note

9.

81.

Throughout,

this

Article

uses

terms

in

an

academic

and

descriptive

sense

and

not

to

indicate

an

opinion

on

the

legality

or

illegality

of

any

particular

statements,

practices,

or

MILMs.

82.

See

DELIEMA

ET

AL.,

supra

note

17,

at

8-9.

83.

See

DSA

2019

Industry

Overview,

supra

note

9.

[89:321

336

MULTI-LEVEL

MARKETING

PANDEMIC

of

time.

8

4

Individual

MLMs

have

been

criticized

for

similar

manipulations

when

calculating

similar

disclosures.

For

instance,

they

may

disclose

average

compensation

figures

based

only

on

"active"

sellers,

with

that

term

being

defined

to

exclude

many

participants

near

the

bottom

of

the

pyramid

who

have

not

profited

85

-thus

significantly

inflating

the

average

profit

numbers.

On

the

one

hand,

the

Direct

Selling

Association

fact

sheet,

even

if

misleading,

does

not

appear

to

be

completely

fraudulent,

and

we

might

expect

an

industry

group

to

rely

on

a

certain

amount

of

puffery.

On

the

other

hand,

it

undermines

the

Direct

Selling

Association's

positioning

of

itself

as

an

ethics

watchdog

and

instead

gives

support

to

critics

who

claim

the

MLM

industry

relies

on

false

hopes

concerning

the

compensation

that

a

participant

can

realistically

expect.

It

bears

noting

that

even

when

companies

do

provide

relatively

frank

disclosures,

some

crucial

figures

appear

missing.

For instance,

even

in

more

formally

drafted

disclosures,

"profits"

appear

often

to

be

used

to

mean

gross

revenue,

without

expenses

netted

out.

86

Actual,

net,

per-hour

compensation

is

never

or

almost

never

available.

87

Current

law

seeks

to

apply

a

sharp

distinction

between

MLMs

that

are

pyramid

schemes

(illegal)

and

non-pyramid

schemes

(legal).

88

The

Direct

Selling

Association,

many

of

its

members,

and

many

other

MLMs

like

to

emphasize

this

distinction

in

an

effort

to

convince

the

watching

public,

as

well

as

perhaps

regulators,

that

they

are

firmly

on

the

right

side

of

it.89

However,

as

indicated

above,

matters

are

simply

not

that

clear.

Even

the

Direct

Selling

Association,

while

characterizing

its

members

as

"perfectly

legitimate

companies"

in

contrast

to

"illegal

pyramid

schemes,"

offers

at

best

a

multi-factor

84.

Id.

85.

See

Bosley

et

al.,

supra

note

57,

at

1647.

86.

See

Peter

Vander

Nat

&

William

Keep,

MLM

Income

Disclosures:

When

Average

Does

Not

Equal

Typical,

TRUTH

IN

ADVERTISING:

GUEST

BLOC

(Sept.

9,

2020),

https://www.truthinadvertising.org/mlm-income-disclosures-when-average-does-not-

equal-typical/.

87.

See

id.

("The

data

the

company

choose[s]

to

disclose

obscures

the

distribution

of

earnings

for

a

signifcant

portion

of

participants

....

").

88.

See

Consumer

Alert,

Dana

Nessel,

Mich.

Att'y.

Gen.,

Multi-Level

Marketing

or Illegal

Pyramid

Scheme?,

https://www.michigan.gov/ag/0,4534,7-359-81903_209

4

2

-

208400--,00.html

(last

visited

Jan.

23,

2022).

89.

See

The

Difference

Between

Legitimate

Direct

Selling

Companies

and

Illegal

Pyramid

Schemes,

DIRECT

SELLING

ASS'N,

https://www.dsa.org/docs/default-

source/ethics/legitimatecompanies.pdf

(last

visited

Jan.

30,

2022)

("[The

Direct

Selling

Association]

wants

to

make

sure

that

the

stakeholders

who

are

important

to

us

-

analysts,

regulators,

direct

sellers

and

the

millions

of

people

who

purchase

our

products

and

services

-

understand

the

difference"

between

"pyramid

schemes"

and

"legitimate

direct

selling

companies").

2022]

337

TENNESSEE

LAW

REVIEW

test,

many

aspects

of

which

do

not

have

bright

lines.

90

Additionally,

some

prominent

members

have

later

been

revealed

as

running

illegal

schemes.

91

At

its

core,

in

the

eyes

of

both

regulators

and

industry

associations,

MLM

structures

become

unlawful when they reward

recruitment

without

sufficient

connection

to

the

sale of

actual

product

to

actual

consumers.

92

But

even

leaving

aside

the

question

of

how

to

measure

these

different

emphases,

any

attempt

to

disentangle

recruiting-related

compensation

and

sales-related

compensation

is

difficult-perhaps

by

design.

To

be

sure, many

MLMs-such

as

Amway

and

Mary

Kay,

to

take

two

prominent

examples-have

lasted

for

decades,

93

suggesting

that

their

economics

are

at

a

minimum

more

complicated

than

standard

pyramid

schemes, which

collapse

quickly.

94

But

even

unscrupulous

MLMs

may

survive

for

a

considerable

amount

of

time-mere

survival

doesn't necessarily

indicate

that

a

company

is

actually

profitably

selling

goods

and

services

rather

than

selling

recruitment-driven

dreams.

95

Even

in

very

well-established

MLMs,

there

is

a

remarkable

amount

of

churn

at

the

bottom:

MLM

structures

may

be

stable

enough

to

last

for

decades

if

organizers are

able

to

strike

a

careful balance

between

funneling

money

to

the

successful

participants

at

the

top

of

the

pyramid

and

stringing

along

a

sufficient

critical

mass

of

lower-

level

participants

to

keep

the

scheme

going.

To

support

the

structure

despite

high

levels

of

churn,

MLMs

often

focus

considerable

efforts

on

building

group

identity, suggesting

that

everything

might

turn

around

with

more

training

or

more

effort,

90.

See

id.

91.

See,

e.g.,

Scott

Cohn,

Nxivm's

Keith

Raniere

Used

a

Common

Marketing

Technique

to

Attract

Victims,

CNBC

(Jan.

22,

2021,

7:00

AM),

https://www.cnbc.com/2021/01/22/nxivm-keith-raniere-used-multilevel-marketing-to-

attract-victims.html (reporting

that

the founder

of

Nxivm,

a

group founded

to

promote

courses

teaching

the

philosophy

of

"rational

inquiry," was

sentenced

to

120

years

in

prison

for

using

a

multi-level

marketing

scheme

to

treat

women

as

sex

slaves

and

brand

them

with

his

initials).

92.

See

Business

Guidance Concerning

Multi-Level

Marketing,

FED.

TRADE

COMM'N,

https://www.ftc.gov/tips-advice/business-center/guidance/business-guidance-

concerning-multi-level-marketing

(last

visited

Mar.

9,

2022).

93.

See,

e.g.,

Our

Founder,

MARY

KAY,

https://www.marykay.com/en-us/about-

mary-kay/our-founder

(last

visited

Jan.

30,

2022)

(stating

that

Mary

Kay

was founded

over fifty

years

ago);

Our

History,

AMWAY,

https://www.amway.com/en_US/about-

amway/history

(last

visited

Jan.

30,

2022)

(stating

that

Amway

was

launched in

1959).

94.

See

William

W.

Keep

&

Peter

J.

Vander

Nat,

Multilevel

Marketing

and

Pyramid

Schemes

in

the

United

States:

An

Historical

Analysis,

6

J.

HiST.

RES.

MARKETING

188,

199

(2014)

199

(discussing

how MLMs

can

be

sustained

throughout

recruitment

even

while

the

vast

majority

of

participants

are

losing

money).

95.

See

id.

338

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

dangling

sufficient

short-term

rewards

to

whet

an

appetite

for

more.

9

6

In

other

words,

the

recruitment

process

doesn't

end

when

a

participant

signs

on

the

dotted

line.

Sales

efforts

continue,

and

the

salespeople

remain

customers

being

continually

enticed

by

the

MLM's

story.

9

7

Any

well-established

MLM

will

seek

at

least

to

tell

a

story

of

how

their

business

is

something

more

than

a

long-running

pyramid

scheme.

98

It

will

carefully

put

the

structure

together

and

craft

its

disclosures

to

be

at

least

superficially

consistent

with

that

story.

9

Unraveling

the

truth

or

falsity

of

this

story

is

often

difficult

for

participants

or

even

for

regulators

armed

with

data

to

determine.

100

Consistently

with

this,

evidence

shows

that

there

is

rarely

one

unmasking

moment

for

a

given

MLM

or

participant.

Participants

often

take

surprisingly

long

to

realize

that

their

hopes

of

economic

freedom

and

prosperity

are

not

going

to

be

attained.

1

0

1

Further,

there

tends

to

be

little

self-reporting

of

abuse

by

victims

of

pyramid

schemes

for

several

reasons.1

02

First,

even

though

there

are

more

victims,

the

monetary

loss

tends

to

be

smaller,

and

victims

may

not

consider

it

worth

reporting.1

03

Second,

because

of

the

nature

of

pyramid

schemes,

many

victims

play

an

unwitting

role

in

transforming

their

family

members

and friends

into

victims

as

well,

producing

intense

feelings

of

regret

and

embarrassment

that

deter

victims

from

reporting

to

agencies.1

04

Third,

victims

may

blame

themselves

for

failure

and

not

realize

that

they

were

the

victim

of

an

illegal

scheme

in

which

they

would

likely

have

failed

to

manage

the

effort

they

put

in

or

the

sales

talent

they

exhibited.1

0

5

Whatever

its

causes,

this

lack

of

reporting

can

further

frustrate

enforcement

agencies'

efforts.

96.

See

Matthews,

supra

note

31,

at

2061-62.

97.

See

id.

98.

See,

e.g.,

How

Herbalife

Nutrition

Works:

Entrepreneurial

Distributors,

HERBALIFE

NUTRITION,

https:/iamherbalifenutrition.com/business-opportunity/?

utm_source=direct&utm_medium=homepage&utm_campaign=Q4home

(last

visited

Jan.

30,

2022).

99.

See

id.

100.

See,

e.g.,

Bosley

et

al.,

supra

note

57,

at

1657

(noting

that

even

with

extensive

disclosures,

experimental

subjects

were

over-optimistic

about

their

chances

of

profiting

from

MLM).

101.

See

Liu,

supra

note

9,

at

112

(describing

the

costs

and

expenses

associated

with

being

a

distributor

long-term).

102.

Matthews,

supra

note

31,

at

2057.

103.

Id.

104.

See

id.

at

2056.

105.

DELIEMA

ET

AL.,

supra

note

17,

at

4,

9

(reporting

that

two-thirds

of

MLM

participants

"said

that

knowing

what

they

know

now,

they

would

not

join

the

same

MLM

company

again").

339

2022]

TENNESSEE

LAW

REVIEW

C.

Regulatory

Responses-and

Limitations

The

FTC

has

been

the

primary

watchdog

regulating

MLMs

and

protecting

victims

from

pyramid

schemes.

106

Section

5

of

the

FTC

Act

provides

that

the

"[FTC]

is hereby

empowered

...

to

prevent

persons

...

from

using

.. .

unfair

or deceptive

acts

or

practices

in

or

affecting

commerce."

107

This

may

sound

promising,

but

in

fact,

the

FTC's

authority

to

regulate

unfair

or

deceptive

acts

or

practices

is

much

more

limited

than

it

seems.

108

Both

its

enforcement

powers

and

its

rulemaking

powers

have been

sharply

limited

over

the

years,

leaving

it

with

a

limited

set

of

tools

with

which

to

address

the

many creative

and

well-funded

types

of

consumer

abuses

that

have

been

cooked

up

by

schemers

of

every sort,

including

some

using

MLMs for

their

questionable

practices.

109

After

a series

of perceived

regulatory

overreaches,

the

FTC's

rulemaking

authority

was

dramatically

stripped

back

from

the

mid-

1970s

through

the

1990s.

110

Both

Congress

and

the

FTC

commissioners

themselves

imposed

significant

limitations

on

the

FTC's

rulemaking

authority.

Among

other

things,

the

long

and

arduous

rulemaking

process

requires

the

FTC

to

engage

in

lengthy,

on-the-record

proceedings,

to

release

extensive,

particularized

findings,

and

to

face

more

intrusive

judicial

review.

111

The

result

of

the

limits

on

FTC

rulemaking

has

been

that

the

FTC

has

not

initiated

new

rulemaking

processes

without

specific

Congressional

authorization

for

streamlined

rulemaking

in

a

106.

See

James

Walsh,

Note,

"Tis

the

Time's

Plague

When

Madmen

Lead

the

Blind":

How

the

IRS

Can

Prevent

Pyramid-Scheme

Formation

(and

Why

It

Should),

67

CASE

W.

RES.

L.

REV.

577,

587

(2016)

("Combining

this

fact

with the

explosion

of

cheap

retail

merchandise

in

the

pyramid

model

has shifted

most

of

the

regulatory

burden

to

the

FTC.").

107.

Federal

Trade

Commission

Act

§

5,

15

U.S.C.

§

45(a)(2)

(2018).

108.

See

id.

§

45(n).

109.

See,

e.g.,

Federal

Trade

Commission

Act

Amendments

of

1994,

Pub.

L.

No.

103-312,

§

9,

108

Stat.

1691, 1695;

Federal

Trade

Commission

Improvements

Act

of

1980,

Pub.

L.

No.

96-252,

§§

7-9,

11,

15,

21,

94

Stat.

374,

376-77,

378-79,

388-90,

393-96;

Federal

Trade

Commission

Improvement

(Magnuson-Moss

Warranty)

Act,

Pub.

L.

No.

93-637,

§

202,

88

Stat.

2183,

2193-98

(1975).

110.

See,

e.g.,

Federal

Trade

Commission

Act

Amendments

of

1994

§

9;

Federal

Trade

Commission

Improvements

Act

of

1980

§§

7-9,

11,

15,

21;

Federal

Trade

Commission

Improvement

(Magnuson-Moss

Warranty)

Act

§

202.

111.

Jeffrey

S.

Lubbers,

It's

Time

to

Remove

the

"Mossified" Procedures

for

FTC

Rulemaking,

83

GEO.

WASH.

L.

REV.

1979,

1982-84

(2015) ("The

FTC's

rulemaking

procedures

go

far

beyond

the

relatively

streamlined

notice-and-comment

procedures

mandated in

Section

553

of

the

APA

to which

most

agencies

are

subject.").

340

[89:321

2022]

MULTI-LEVEL

MARKETING

PANDEMIC

341

particular

area

of

concern.

1

12

Congress

has

provided

such

authorization

with

respect

to

children's

online

privacy,

telemarketing,

and

some

other

areas.

11

3

Some

argue

that

Congress

should

authorize

such

rulemaking

with

respect

to

MLMs,

but

it

has

so

far

failed

to

do

so.

114

In

fact,

to

the

contrary,

several

amendments

have

been

introduced

in

recent

years

seeking

to

constrict

the

FTC's

enforcement

efforts

against

illegal

pyramid-schemes.

1

15

These

amendments

track

an

approach

that

MLMs

have

used

in

a

number

of

states

to

largely

protect

themselves

from

the

scrutiny

of

state

regulators.1

16

These

amendments

would

permit

the

FTC

to

take

actions

only

against

schemes

that

meet

a

narrow,

rigid

definition;

unsavory

MLMs

would

be

able

to

maintain

highly

questionable

business

practices

yet

avoid

falling

within

the

bounds

of

this

definition.

11

7

The

tide

may

eventually

turn

on

MLMs,

but

in

the

meantime,

FTC

rulemaking

may

not

be

likely.

The

range

of

the

legal

definitions

of

"unfair"

and

"deceptive"

hampers

the

FTC's

impact

on

both

enforcement

actions

and

any

potential

rulemaking.

1

18

The

FTC

cannot

simply

produce

a

rule

governing

MLMs

based

on

a

cost-benefit

analysis

showing

that

the

rule

would,

on

net,

benefit

consumers

or

the

economy

as

a

whole.

119

112.

See

id.

at

1985

(stating

that

"the

FTC

has

been

able

to

issue

only

a

small

number

of

'trade

regulation

rules"'

due

to

the

limitations

on

its

rulemaking

authority).

113.

Id.

at

1991-92.

114.

See

Rohit

Chopra,

Comm'r,

Fed.

Trade

Comm'n,

Statement

Regarding

the

Business

Opportunity

Rule

(June

14,

2021)

(on

file

with the

Fed.

Trade

Comm'n),

https://www.fte.gov/system/files/documents/public-statements/1591046/statementof

_commissioner-rohit-chopra-regarding

the_businessopportunityrule.pdf.

115.

See

Pareja,

supra

note

46,

at

104

(listing

the

states

that

have

enacted

the

"Amway

Safeguard

Rule"

which

is

favorable

to

"industry

promoting

product-based

pyramid

schemes").

116.

See

Clinton

D.

Howie,

Is

It

a

Pyramid

Scheme?:

Multilevel

Marketing

and

Louisiana's

"New"

Anti-Pyramid

Statute,

49

LA.

B.J.

288,

289

(2002)

(discussing

Louisiana's

anti-pyramid

statute);

Pareja,

supra

note

46

(listing

several

states

that

have

enacted

the

"Amway

Safeguard

Rule").

117.

See

Anti-Pyramid

Promotional

Scheme

Act

of

2017,

H.R.

3409,

115th

Cong.

§§

1-4

(2017);

H.R.

REP.

NO.

115-234,

at

122-23

(2017);

see

also

Press

Release,

Nat'l

Consumers

League,

Consumer

Groups

Call

on

House

to

Oppose

Pyramid

Scheme

Promotion

Amendment

(July

18,

2017),

https://nclnet.org/moolenaaramendment/

(demonstrating

that

the

proposed

amendments

were

fiercely

opposed

by

numerous

consumer

groups).

118.

See

FED.

RESERVE

BD.,

CONSUMER

COMPLIANCE

HANDBOOK,

FEDERAL

TRADE

CiOMMISSION

ACT SECTION

5:

UNFAIR

OR

DECEPTIVE ACTS

OR

PRACTICES

(2016),

https://www.federalreserve.gov/publications/supervision-cch.htm.

119.

See

15

U.S.C.

§

45(n)

(2018).

In

addition,

despite

having

staff

economists

with

experience

analyzing

MLMs,

the

FTC's

cost-benefit

analysis

would

of course

be

TENNESSEE

LAW

REVIEW

By

statute, the

FTC is

permitted

to

restrict

an

activity

as

"unfair"

against

consumers

only

in

narrow

circumstances,

including when

it

causes

"substantial

injury

to

consumers

which

is

not

reasonably

avoidable

by

consumers

themselves,"

regardless

of

whether

it

harms

them

in the

main

run

of

cases

when

they

in

fact fail

to

avoid

it.120

The

FTC's

position

on

what

"deception"

means

is

controlled

by

a

policy

statement

that

has

been

in

place

since

1983.121

Under

this

policy,

to

prohibit

a

representation

or

practice

as

"deceptive,"

the

agency

has

to

show

that

it

would

mislead

reasonable

consumers

in

a

material

way

to

their

detriment,

122

which

might

excuse

a

range

of

lesser

attempts

to

recruit

or

retain

participants.

Even

if

the

FTC

could

manage

to

successfully

establish

a

rule

despite

all

of

these

constraints,

it

would

likely

be

so

narrow

that

MLMs

could

craftily

avoid

it,

reinitiating

a

cat-and-mouse

game.

The

FTC's

enforcement

authority

also

faces

significant

limitations

in light

of

its

governing

statute

and

how

that

statute

has

been

interpreted

by

courts

in

recent

years. Courts

have chipped

away

at

the

FTC's

ability

to

obtain

injunctive

relief

by

requiring

greater

demonstrations

that

targets

of

FTC

actions

are

likely

to

re-offend.

To

obtain

injunctive

relief,

the

FTC

Act

provides

that

the

FTC

must

have

"reason

to believe"

a

defendant

"is

violating,

or

is

about

to

violate"

the

Act.

123

Recently,

a

federal

district

court

used

legislative

history

to

hold

that

the

FTC's

determination

of

this

"reason

to

believe"

was

not

sufficient

to

sustain

its

complaint.

124

The

defendants

were

allegedly

responsible

for

a

wide

range

of

unfair

and

deceptive

practices

committed

over

several

decades

through an

MLM

called

Advocare.

125

Nonetheless,

the

defendants

successfully

argued

that

the

FTC

could

not

obtain injunctive

relief

against

their

violations

of

the

FTC

Act

because

the defendants

had

stopped

the

allegedly

illegal

actions

answered

by

analyses

produced

by

the

industry,

which

might

well

perceive

rulemaking

as

an existential

threat

to

be

answered

with

considerable resources.

120.

Id.

(emphasis

added).

This

authority

specifically

applies

to

rulemaking

under

15

U.S.C.

§

57(a)

as

well.

Id.

121.

Letter

from

the

Fed.

Trade

Comm'n to

John

D.

Dingell,

Chairman,

Comm.

on

Energy

&

Commerce

(Oct.

14,

1983),

http://www.ftc.gov/public-statements/1983/10/ftc-

policy-statement-deception.

122.

Id.

The

statement

specifically

mentions

that

it

guides

enforcement,

but

several

footnotes

draw

on

FTC

rules,

and

it

seems

clear

that

the

FTC would

likely

take

a

consistent

stance

if

it

were

to

engage

in

rulemaking.

See

id.

123.

15

U.S.C.

§

53(b)

(2018).

124.

Fed.

Trade

Comm'n

v.

Shire

ViroPharma,

Inc.,

No.

17-131-RGA,

2018 WL

1401329,

at

*4-6

(D.

Del.

Mar.

20,

2018).

125.

See

Complaint

at

4,

Fed.

Trade

Comm'n

v.

Advocare

Int'l,

L.P.,

No.

4:19-CV-

715-SDJ,

2020 WL

6741968

(E.D.

Tex.

Nov.

16,

2020).

342

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

several

months

before

the

FTC

filed

its

complaint.

126

Advocare

had

agreed

to

stop

all

multi-level

marketing,

and

the

FTC

could

not

produce

evidence

that

the

defendants

were

pursuing

other

schemes.

12

7

The

court

observed

that

"the

FTC

not

only

fails

to

adequately

allege

ongoing

or

future

misconduct

by

the

McDaniels

but

appears

to

affirmatively

concede

that

the

channels

through

which

the

McDaniels

engaged

in

misconduct

are

permanently

closed."1

28

Some

courts

take

a

more

generous

view

of

the

FTC's

authority,

1

29

but

in

any

case,

even

if

these

particular

defendants

do

not

engage

in

any

unlawful

actions,

this

is

a

concerning

development

for

the

FTC.

Many

defendants

seem

easily

to

hop

from

one

scheme

to

another,

or

to

have

more

than

one

scheme

up

and

running

at

any

given

time.13

0

The

FTC

may

eventually

be

able

to

prove

that

such

egregious

violators

are

"about

to

violate"

again,

13

1

but

it

will

provide

defendants

another

avenue

for

seeking

to

evade

sanctions

and

resist

enforcement

actions.

In

addition

to

this

limit

on

prospective

relief,

the

FTC

was

recently

dealt

a

heavy

blow

to

its

retrospective

authority

to

seek

monetary

relief

for

harm

done

to

consumers

by

MLMs.

In

AMG

Capital

Management,

LLC

v.

Federal

Trade

Commission,

the

Supreme

Court

curtailed

the

FTC's

ability

to

'seek

financial

penalties

from

wrongdoers,

holding

that

it

lacks

authority

to

seek

monetary

relief

for

harm

done

to

consumers

in

many

cases.

13

2

The

case

emerges

from

the

same

section

of

the

FTC

Act

discussed

above,

which

on

its

face,

only

provides

for

injunctive

relief.

133

A

number

of

courts

had

interpreted

the

statute

to

implicitly

permit

the

FTC

to

pursue

other

forms

of

equitable

relief-including,

crucially,

"restorative

monetary

remedies"-as

well.134

This

matters

because

the

FTC's

ability

to

seek

damages

or

other

forms

of

monetary

relief

otherwise

is

limited.

126.

Fed.

Trade

Comm'n

v.

Advocare

Int'l,

L.P.,

No.

4:19-CV-715-SDJ,

2020

WL

6741968,

at

*6-7

(E.D.

Tex.

Nov.

16,

2020).

127.

Id.

128.

Id.

at

*6.

129.

See

United

States

v.

MyLife.com,

Inc.,

499

F.

Supp.

3d

757,

762-63

(C.D.

Cal.

2020)

(collecting

and

discussing

arguably

conflicting

case

law).

130.

See

Complaint

at

25-26,

Aduocare,

2020

WL

6741968

(No.

4:19-CV-715-SDJ)

(alleging

that

the

McDaniels

continued

their

deceptive

conduct

even

after

they

knew

about

an

ongoing

FTC

investigation

into

Advocare).

131.

See

15

U.S.C.

§

53(b)

(2018).

132.

AMG

Capital

Mgmt.,

LLC

v.

Fed.

Trade

Comm'n,

141

S.

Ct.

1341,

1352

(2021);

William

E.

Kovacic,

AMG Aftershocks,

REG.

REV.

(July

26,

2021),

https://www.theregreview.org/2021/07/26/kovacic-amg-aftershocks/

("AMG

shook

the

foundations

of

the

Federal

Trade

Commission's

(FTC)

law

enforcement

program...

").

133.

See

15

U.S.C.

§

53(b).

134.

See,

e.g.,

AMG

Capital

Mgmt.,

141

S.

Ct.

at

1349-50

(citing

Mitchell

v.

Robert

DeMario

Jewelry,

Inc.,

361

U.S.

288,

291-92

(1960)).

343

2022]

TENNESSEE

LAW

REVIEW

Section

19

of

the

FTC Act

permits

it

to

seek

monetary

relief

but

imposes

additional

preconditions

to

monetary

relief.

135

Relief

under

this

section

requires

the

violation

of

an

existing

rule

or

the

procurement

of

an

FTC

cease-and-desist

order

followed

by

a

subsequent

judicial

determination

that

a

reasonable

person

would

have

known

that

the

challenged

conduct

was

"dishonest

or

fraudulent."

136

The

standard

is

not

impossible

to

meet,

but

it

adds

to

the

obstacles

the

FTC

faces

before

it

can

effectively

claw

back

any ill-

gotten

gains.

As

previously

indicated,

the substantive

law

concerning

when

multi-level

marketing

practices

cross

the

line

into

unfair

or

deceptive

under

Section

5

of

the

FTC

Act

remains

extremely

clouded.

The

FTC

has

made

several

efforts

to

define

where

an

MLM

crosses

into

an

illegal

pyramid

scheme,

adding

numerous

refinements

over

the

years.

The

FTC's

"first

concerted

action

against

pyramid

schemes"

occurred

in

the

1970s

as

MLMs

were

rising.

1

37

"[C]osmetics[,]

...

kitchenware,

and

TupperwareTM

parties

became

an

icon

of

the

era."

138

Piggybacking

on

the

success

of

these

MLMs,

outright

pyramid

schemes

began

to

surge

as

well.

139

In

1975,

the

FTC

handed

down

its

Koscot

Interplanetary,

Inc.

decision,

which defined

a

pyramid

scheme

as:

.

. .

characterized

by

the

payment

by

participants

of

money

to

the

company

in

return

for

which

they

receive

(1)

the

right

to

sell

a

product

and

(2)

the

right

to

receive

in

return

for

recruiting

other

participants

into

the

program

rewards

which

are

unrelated

to sale

of

the

product

to

ultimate

users.14

The

second

element

is

"the

sine

qua

non

of

a

pyramid

scheme."

141

Koscot

supplies

the

basic

framework

that

the

FTC

still

utilizes

135.

See

15

U.S.C.

§

57b

(2018).

136.

Id.;

see,

e.g.,

Fed.

Trade

Comm'n

v.

Figgie

Int'l,

Inc.,

994

F.2d

595,

598

(9th

Cir.

1993)

(holding

that

Figgie's

violation

of

an

existing

rule/procurement

of

an

FTC

cease-and-desist

order

followed

by

the judicial

determination

that

Figgie's

conduct

was

dishonest and

fraudulent

allowed

the

FTC

to

seek

monetary

relief).

137.

Debra

A.

Valentine,

Former

Gen.

Counsel,

Fed.

Trade

Comm'n,

Speech

at

the

International

Monetary

Funds Seminar

on

Current

Legal

Issues

Affecting

Central

Banks:

Pyramid

Schemes

(May

13,

1998),

https://www.ftc.gov/public-statements/

1998/05/pyramid-schemes.

138.

Id.

139.

Id.

140.

Koscot

Interplanetary,

Inc.,

86

F.T.C.

1106,

1181 (1975).

141.

Webster

v.

Omnitrition

Int'l,

Inc.,

79

F.3d

776,

781

(9th

Cir.

1996).

344

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

today.

14

2

In

1979,

the

FTC

provided

more

guidance

on

how

MLMs

could

avoid

being

classified

as

illegal

pyramid

schemes

when

it

scrutinized,

and

ultimately

approved,

the

multi-level

compensation

scheme

of

Amway

Corporation.14

3

Amway

manufactured

and

distributed

its

own

products,

primarily

cleaning

and

personal

care

products.144

Sales

representatives

received

income

from

the

selling

of

products

as

well

as

the

recruitment

of

new

sales

representatives.14

The

commission

held

in

Amway's

favor,

deciding

it

was

not

an

illegal

pyramid

scheme,

focusing

on

three

distinctions

between

Amway

and

Koscot.1

4

6

These

distinctions

are

commonly

referred

to

as

"the

three

safeguards"

or

"the

Amway

safeguards"

and

include

"the

inventory

buy-back

policy,

the

70%

rule,

and

the

10

customer

rule."

14

7

The

commission's

opinion

described

the

safeguards

as

follows:

First,

Amway

required

distributors

to

buy

back

any

unused

and

marketable

products

from

their

recruits

upon

request.

Second,

Amway

required

each

distributor

to

sell

at

wholesale

or

retail

at

least

70%

of

its

purchased

inventory

each

month-a

policy

known

as

the

70%

rule.

Finally,

Amway

required

each

sponsoring

distributor

to

make

at

least

one

retail

sale

to

each

of

10

different

customers

each

month,

known

as

the

10

customer

rule.

1

48

The

Commission

found

Amway

not

to

be

a

pyramid

scheme

despite

concluding

that

the

company

"made

false

and

misleading

earnings

claims

in

attempting

to

recruit

persons

to

serve

as

distributors

of

Amway

products."

149

Thus,

while

the

FTC

was

not

condoning

Amway's

deceptive

behavior,

it

found

that

false

and

misleading

claims

alone

were

not

enough

to

transform

the

MLM

into

an

illegal

pyramid

scheme,

so

long

as

adequate

safeguards

were

in

place.

1

50

Following

the

Amway

decision,

many

MLMs

were

careful

to

follow

(or

appear

to

follow)

the

three

safeguards,

15

1

and

courts

were

142.

Matthews,

supra

note

31,

at

2061-62.

143.

See

Amway

Corp.,

93

F.T.C.

618,

706-07

(1979).

144.

Id.

at

710.

145.

Id.

at

712.

146.

Valentine,

supra

note

137.

147.

Id.;

see

also

Walsh,

supra

note

106,

at

597

("Collectively,

these

became

known

as

the

'Amway

Safeguards

Rule,'

which

serve

as

the

closest

resemblance

of

a

distinction

between

a

legal

MLM

and

an

illegal

pyramid

scheme.").

148.

Valentine,

supra

note

137;

see

Matthews,

supra

note

31,

at

2062.

149.

Amway

Corp.,

93

F.T.C.

at

710.

150.

Id.

151.

Valentine,

supra

note

137.

345

2022]

TENNESSEE

LAW

REVIEW

generally

"quite

deferential."

152

Unfortunately,

unscrupulous

MLMs

were

able

to

mask

their

true

identity

under

the

safeguards.

Thus,

courts

began

to

refine

their

approach

to

MLMs

further,

beginning

with

the

1994

Webster

v.

Omnitrition

decision.

153

Interestingly,

the

claim was

not brought

as

a

violation

of any

FTC

but

as

a

violation

of

federal

securities

laws.

154

But

the

FTC

and

SEC

have

relied

and

built

on

each

other's

precedent

for

defining

the

scope

of

legitimate

MLM

activities.

155

The

Omnitrition

case

represents

an

attempt

to

stop

illegitimate

companies

from

sheltering

behind

the

Amway

safeguards-abiding

by

them

in

theory

but

undermining

them

in

fact.

Omnitrition

used

the

MLM

model

to

sell

nutritional

supplements.

15

6

When

regulators

came

calling,

Omnitrition

claimed

that

it

was

legitimate

because

it

had

followed

the

Amway

model.

15

7

The

court

was

not

convinced:

"[T]he

existence

and

enforcement

of

rules

like

Amway's

is

only

the

first

step

in

the

pyramid

scheme

inquiry."

158

The

crucial

question,

the

court

held,

is

whether

these

rules

are

effective

in fact

to

orient

the

business

away

from

merely

promoting

endless

churning

of

recruits.

159

In

addition,

the

court

closely

analyzed

Omnitrition's

purported

compliance

with

the

Amway

safeguards

and

found

that

Omnitrition

was

not

substantively

meeting

them.

160

The

structure

in

practice

encouraged

and

permitted

"inventory

loading"

and

similar

practices

that

brought

compensation

largely

or

entirely

untethered

from

sales

to

actual

users

of

products.

161

Omnitrition

does

not

require

"a majority

of

an

MLM's

sales

[to]

come

from

non-participants"

nor

does

it

automatically

declare

a

business

a

pyramid

scheme

"where

distributor

self-consumption

constituted

a

large

portion

of

the

company's

sales."

162

The

percentage

152.

Liu,

supra

note

9,

at

117.

153.

Webster

v.

Omnitrition

Int'l,

Inc.,

79

F.3d

776

(9th

Cir.

1996).

154.

See

id.

at

781

(stating

that

"[o]peration

of

a

pyramid

scheme

constitutes

fraud

for

purposes

of

§

12(2)

of

the

Securities

Act

of

1933,

§

10

of

the Securities

Exchange

Act

of

1934

and

various

RICO

predicate

acts.").

155.

See,

e.g.,

id.

at

781-84

(analyzing

the

FTC's

work

in

the

Koscot

and

Amway

decisions);

Valentine,

supra

note

137

(referencing

the

Omnitrition

case

as

part

of

the

FTC's

regulatory

framework

for

MLMs).

156.

Omnitrition,

79

F.3d

at

780.

157.

See

id.

at

782-83.

158.

Id.

at

783.

159.

See

id.

160.

See

id.

at

783-84.

161.

See

id.

at

783.

162.

James

R.

Sobieraj,

Myths About

Self-Consumption

in

MLMs,

NAT'L

L.

REV.

(Feb.

22,

2018),

https://www.natlawreview.com/article/myths-about-self-consumption-

mlms.

346

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

of

self-consumption

is

not

determinative

of

whether

an

MLM

operates

legally.

163

Indeed,

the

FTC's

official

marketing

guidance

plan

for

MLMs

states

that

products

purchased

by

the

seller

"[are]

not

in

[themselves]

indicative

of

a

problematic

MLM

compensation

structure."

164

However,

"one

sign

of

a

pyramid

scheme

is

if

distributors

sell

more

product

to

other

distributors

than

to

the

public[.]"1

65

Participants

may

use

the

products

they

sell-it

might

be

odd

if

they

did

not-but

sales

in

excess

of

those

in

fact

"made

to

satisfy

personal

demand"

are

obviously

suspect.1

6

The

BurnLounge

case

provides

an

example

of

this

pernicious

phenomenon.

167

This

case

involved

a digital

music

MLM.168

When

the

FTC

obtained

an

injunction

removing

the

incentive

for

participants

to

purchase products

in

order

to receive

multi-level

compensation,

monthly

sales

of

the

products

dropped

from

$476,516

to

$10,880

in

a

span

of

three

months-a

drop

of

approximately

98%.169

Such

a

drop

indicates

plainly

that

the

reason

the

distributors

were

buying

product

for

themselves

was

not

actual

self-consumption

but

to

further

an

"opportunity

to

advance

in

the

marketing

program."

170

This

is

a

factor

that

weighs

against

a

business

in

the

pyramid

scheme

analysis.

171

In practice,

the

FTC's

guidelines

seem

likely

to

be

widely

abused,

and

abuses

seem

likely

to

be

rarely

detected.

The

FTC

proceeds

on

a

"case-by-case

adjudication

and

enforcement"

basis1

7

2

,

which

is

hardly

likely

to

be

sufficient

in

light

of

the

quantity,

variety,

and

sophistication

of

modern

MLMs.

With

most

MLMs,

there

may

not

be

any

easy

way

of

determining

how

many

purchases

by

participants

are

motivated

by

legitimate

desire

for

the

product

instead

of by

desire

for

multi-level

compensation.

Schemers

are

always

finding

"new

ways

to

circumvent

these

regulatory

measures"

that

delay

FTC

intervention

163.

Id.

164.

Business

Guidance

Concerning

Multi-Level

Marketing,

supra

note

25.

165.

As

Job

Security

Fizzles,

Multilevel

Marketing

Awareness

Explodes!,

NETWORK

MARKETING

CENT.,

http://networkmarketingcentral.com/as-job-security-

fizzles-multilevel-marketing-awareness-explodes/

(last

visited

Feb.

4,

2022).

166.

See

Business

Guidance

Concerning

Multi-Level

Marketing,

supra

note

25.

167.

Fed.

Trade

Comm'n

v.

BurnLounge,

Inc.,

753

F.3d

878

(9th

Cir.

2014).

168.

See

id.

at

880-81.

169.

See

id.

at

885;

Business

Guidance

Concerning

Multi-Level

Marketing,

supra

note

25.

170.

Business

Guidance

Concerning

Multi-Level

Marketing,

supra

note

25.

171.

See

id.

172.

Matthews,

supra

note

31,

at

2062;

see

Business

Guidance

Concerning

Multi-

Level

Marketing,

supra

note

25.

347

2022]

TENNESSEE

LAW

REVIEW

until

"it

is

too

late

to

help

injured

stakeholders."

173

For

all

of

these

reasons,

proceeding

under

Section

5

of

the

FTC Act

is

certainly

not

foolproof.

As

inadequate

as

the

FTC's

Section

5

authority

is,

its

franchise

and "business

opportunity"

rules

are

even

less suitable.

The

franchise

rule

requires

those

falling

subject

to

it

to

make

certain

disclosure

of

material

information

in

an

effort

to

help

potential

franchisees

make

an

informed

decision.

174

However,

there

are

several

exceptions

that

make

the

franchise

rule

inapplicable

to

most

MLMs.

175

The

FTC's

business

opportunities

regulation

is

a

similar regulatory

tool.

176

As

compared

with

franchises,

which

tend

to

be

larger

and

better

known

name

brands,

business

opportunities,

commonly

referred

to

as

"biz

opps,"

tend

to

be

less

well-

known,

require

less

of

a

long-term

time commitment,

provide

less

marketing

support,

allow more freedom,

and

demand

a

smaller

initial

investment.

177

They

are

also

more

likely

to

be

scams.

178

Offering

a

business

opportunity

is not

itself

illegal; "however,

[it]

mandate[s]

compliance

with

a

host

of

onerous

regulatory requirements."

17 9

The

rule

requires

those

to

whom

it

applies

to

make

certain

disclosures,

173.

Walsh,

supra

note

106,

at

588-89.

Even when

the

FTC

is

successful

in

intervening,

actually

shutting

the

business

down

is

another

story,

as

the

BurnLounge

case

illustrates.

See id.

at

589

(quoting

Matt

Stroud,

An

Insider

Explains

Why

the

FTC

Can't

Put

an

End

to

Pyramid

Schemes,

BLOOMBERG

(Feb.

27,

2015,

1:39

PM),

http://www.bloomberg.com/news/articles/2015-02-27/an-insider-explains-why-the-ftc-

can-t-put-an-end-to-pyramid-schemes).

Because

it

took

the

FTC

seven

years

to

ultimately

shut

the

MLM

down,

thirty

thousand

additional

people

were

bamboozled.

See

id.

174.

Phil

Nicolosi,

Does

the

FTC

Franchise

Rule

Apply

to

MLM

Offers?,

PHIL

NICOLOSI

LAW,

P.C.,

https://www.internetlegalattorney.com/ftc-franchise-rule-

liability/

(last

visited

Feb.

4,

2022).

175.

See

Matthews,

supra

note

31,

at

2058;

Walsh,

supra

note

106,

at

592

("The

FTC

promulgated

[the

business

opportunity]

rule

because

pyramid

schemes

usually

fit the

exceptions

to

the

FTC's

'franchise

rule."').

176.

See

Paul

Chaney,

Franchise

vs

Business

Opportunity:

What's

the

Difference,

SMALL

BUs.

TRENDS

(Sept.

4,

2020),

https://smallbiztrends.com/2020/09/franchise-vs-

business-opportunity.html

("People

often

use

the

term

business opportunity

interchangeably

to

include

a

franchise

opportunity.

But there

are

actually

distinct

legal

definitions

for

each

term.").

177.

See

id.

178.

Id.

179.

Multilevel

Marketing

Primer-The

MLM

Startup,

REESE

RICHARDS

PLLC

(Sept.

30,

2019),

https://www.mbulaw.com/law-library/multilevel-marketing-primer-

the-mlm-startup;

see

also

Phil

Nicolosi,

Understanding

the

FTC

Business Opportunity

Rule,

PHIL

NICOLOSI

LAW,

P.C.,

https://www.internetlegalattorney.com/

understanding-ftc-business-opportunity-rule/

(last

visited

Feb.

4,

2022)

("If

you

offer

any

business

opportunities[,]

...

you

will

have

to

make

the

required

disclosures

under

the

[Business

Opportunity]

Rule

to

each

prospective

purchaser

within

the required

time-frame.").

348

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

particularly

concerning

earnings

claims,

and

to

generally

comply

with

truth-in-advertisement

principles.1

8

0

But

the

FTC

decided

to

exclude

most

MLMs

from

the

scope

of

its

business

opportunity

rule.1

8

1

Although

the

FTC

is

by

far

the

most

important

regulator

of

MLMs,

other

agencies

also

have

roles

in

enforcement.

The

Department

of

Justice

has brought

criminal

actions

for

wire

fraud

and

other

committed

by

illegal

MLMs

and

their

principals.

182

The

Securities

and

Exchange

Commission

(SEC)

also

wields

considerable

civil

and

criminal

power

for

those

violating

securities

laws.

The

SEC

joined

the

fight

against

pyramid

schemes

in

the

1970s

and

continues

to

exert

energy

on

enforcement.18

3

If

a

corporation

is

established

to

be

involved

in

the

selling

of

securities,

there

are

numerous

requirements

the

business

is

required

to

follow.

184

Failure

to

do

so

can

result

in

extensive

civil

and

criminal

liability

against

the

corporation

and

its

top-level

promoters.1

85

The

SEC

is

capable

of

bringing

down

pyramid

schemes

and

has

done

so

in

the

past,

even

as

recently

as

2014

with

the

Telexfree

case.18

6

While

this

company

was

promising

returns

of

200%,

the

actual

returns

were

minimal

and

paid

to

upline

participants

from

new

downline

participants,

with

little

revenue

generated

from

actual

product

sales.1

87

However,

most

MLMs

do

not

fall

within

the

SEC's

ambit

because

they

do

not

offer

"securities"

as

180.

See

Selling

a

Work-at-Home

or

Other

Business

Opportunity?

Revised

Rule

May

Apply

to

You,

FED.

TRADE

COMM'N,

https://www.ftc.gov/tips-advice/business-

center/guidance/selling-work-home-or-other-business-opportunity-revised-rule

(last

visited

Feb.

4,

2022).

181.

Beata

Krakus,

Recent

Changes

to

the

FTC

Business

Opportunity

Rule:

A

Trap

for

the

Unwary,

10

INTL

J.

FRANCHISING

L.

37,

40

(2012)

("The

FTC

...

concluded

that

requiring

disclosures

would

not

help

consumers

distinguish

between

the

many

legitimate

MLM

operators

and

those

whose

systems

involve

fraudulent

pyramid

schemes

and

that

it

would

instead

continue

its

enforcement

against

abuse

in

fhe

MLM

industry

under

Section

5

of

the

FTC

Act.");

Liu,

supra

note

9,

at

121

("In

2008,

the

FTC

chose

to

exclude

MLMs

from

regulation

by

the

Rule

and

to

eliminate

questions

regarding

legal

actions

against

a

company's

employees.");

Business

Guidance

Concerning

Multi-Level

Marketing,

supra

note

25.

182.

See

infra

notes

308-310

and

accompanying

text.

183.

See

Multi-Level

Distributorships

and

Pyramid

Sales

Plans,

36

Fed.

Reg.

23,289,

23,289

(Sec.

&

Exch.

Comm'n

Nov.

30,

1971);

Eaglesham,

supra

note

20.

184.

See

Multi-Level

Distributorships

and

Pyramid

Sales

Plans,

36

Fed.

Reg.

at

23,289.

185.

See

Matthews,

supra

note

31,

at

2065.

186.

See

Complaint

at

2,

Sec.

&

Exch.

Comm'n

v.

Telexfree,

Inc.,

164

F.

Supp.

3d

187 (D.

Mass.

2015)

(No.

14-11858-NMG);

Rory

Zamansky,

Multi-Level

Marketing

Companies

Can

Be

Pyramid

Schemes,

AM.

BAR

ASS'N

(Nov.

14,

2016),

https://www.americanbar.org/groups/litigation/committees/securities/practice/

2

016/m

ultilevel-marketing-companies-can-be-pyramid-schemes/.

187.

See

Zamansky,

supra

note

186.

349

2022]

TENNESSEE

LAW

REVIEW

defined

by

federal

law.1

88

This

result

occurs

because

the

promised

profits

to

be

made

by

participants

depend

on

participants'

own

efforts

and

are not

simply

the

result

of

a

passive

"investment."1

89

The

line

is

blurred,

and

there

is

certainly

a

role

for

the

SEC

in

this

area.1

90

However,

it

is

unlikely

to

supplant

the

FTC

as

the

primary

regulator

of

MLMs.

State

regulators

also

have

a

role.

Many

states

have

passed

dedicated

anti-pyramid

statutes.1

91

However,

many

are

the product

of

MLM

industry

lobbying

and are

easily

evaded

by

all

but

the

most

egregious

pyramid

schemes.192

Regulators

are

often

pressed

for

time

and

resources

and

may

not

be

able

to

pursue

claims

against

sophisticated

adversaries

that

are

at

least

superficially

operating

within

the

bounds

of

the

law.

1

93

Enforcement

is

also

difficult

because

companies

can

forum

shop,

especially

in

the

age

of

online

commerce.1

94

State

securities

laws,

varying

in

uniformity

to

the

same

extent,

similarly

provide

little

help

to

impaired

victims.

195

There

are

twenty-five

states

that

also

have

laws

regulating

business

opportunities

that

offer

either

equal

or

greater

protection

to

consumers

than

federal

law.1

96

However,

there

is

still

a

minimum

threshold

amount

for

most

state

business

opportunity

laws

to

apply,

ranging

from

$200

to

$500.197

Therefore,

clever

MLMs

may

be

able

to

avoid even

these

state

disclosure

rules

by

manipulating

the initial

investment

amount

necessary

for

distributors

to

begin

188.

See

Multi-Level

Distributorships

and

Pyramid

Sales

Plans,

36

Fed.

Reg.

at

23,289

(stating

that

muli-level

marketing

plans

often

involve

"the

offering

of

an

'investment

contract'

or

a

'participation

in

a

profit-sharing

agreement,'

which

are

securities

within

the

meaning

of

section

2(1)

of

the

Securities

Act

of

1933").

189.

See

Matthews,

supra

note

31,

at

2065.

190.

See

id.

at

2068

("[F]ederal

courts

have

come

to

varying

conclusions

about

whether

pyramids constitute

securities.").

191.

Id.

at

2059.

192.

See

Howie,

supra

note

116;

Matthews,

supra

note

31,

at

2059.

193.

See Howie,

supra

note

116

(discussing

how

MLMs

can

narrowly

avoid

the

purview

of

the

anti-pyramid

statutes

based

on

the definitions

found

within

the

statutes).

194.

See

Matthews,

supra

note

31,

at

2059

(stating

"predatory

pyramid

schemes

are

able

to

move

easily

across

state

lines

to

avoid

disclosure

requirements

or

limit

liability

in

future

enforcement

actions").

195.

Id.

at

2060.

196.

Keith

J.

Kanouse,

FTC's

New

Business

Opportunity

Rule:

Reduced

Disclosure

but

Increased

Coverage,

FLA. BAR

J.,

Apr.

2012,

at

36,

https://www.floridabar.org/the-

florida-bar-journal/ftcs-new-business-opportunity-rule-reduced-disclosure-but-

increased-coverage/.

197.

Id.

350

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

participation.

198

II.

THE

MLM

PANDEMIC

The

COVID-19

pandemic

provided

the

perfect

environment

for

the

proliferation

of

MLMs.

The

leading

MLM

industry

association

reports.

that

the

pandemic

increased

the

revenue

of

at

least

64%

of

its

member

organizations.

199

And

the

FTC

reports

a

dramatic

rise

in

consumer

complaints

about

MLMs

and

pyramid

schemes-a

generic

term

for

various

illegal

multi-level

structures

that

do

not

include

any

meaningful

sale

of

products.

200

The

FTC

puts

pyramid

schemes

in

the

"income

scam"

category,

which

also

includes

fake

check

schemes

and

fake

entrepreneurial

training

programs.

It

reports

that

"the

volume

of

reports

to

the

FTC

about

income

scams

reached

the

highest

levels

on

record

in

the

second

quarter

of

2020"

and

that

"[p]eople

have

reported

losing

about

$610

million

from

income

scams

since

2016,

with

nearly

$150

million

reported

lost

in the

first

nine

months

of

2020

alone."201

It

is not

our

argument

that

all

MLM

structures

are

abusive.

By

comparing

the

proliferation

of

MLMs

to

a

pandemic,

we

don't

intend

to

argue

that

they

are

a

"disease"

to

be

eradicated

altogether.

But

the

best

evidence

suggests

that

many

MLMs

are

indeed

abusive,

either

because

their

structure

promotes

recruitment

over

meaningful

sales

and

thus

guarantees

that

most

participants

will

be

losers,

or

because

they

build

their

businesses

through

misrepresentations.

And

in

light

of

the

very

low

earnings

reported

by

even

those

few

who

earn

any

profits

from

MLMs,

there

is

little

reason

to

believe

that

their

rise

during

the

COVID-19

pandemic

will,

in

fact,

address

the

societal

problems

that

have

been

exposed

by

the

pandemic

and

that

have

driven

the

increase

in

MLM

activities-whether

those

relating.

to

unemployment,

increased

childcare

difficulties,

or

health.

Because

of

198.

See

id.

199.

Coronavirus

QuickPulse

Dashboard,

DIRECT

SELLING

ASS'N,

https://www.dsa.org/statistics-insights/coronavirus-impact---quickpulse

(last

visited

Feb.

6,

2022).

200.

Emma

Fletcher,

Income

Scams:

Big

Promises,

Big

Losses,

FTC

CONSUMER

PROT.,

DATA

SPOTLIGHT

3

n.6

(Dec.

2020)

("Reports

about

multi-level

marketing

companies

(MLMs)

and

pyramid

schemes

of

all

types

doubled

in

the

second

quarter

[of

2020].")

https://www.ftc.gov/system/files/attachments/blogposts/Income%20scams%3A%

2

0bi

g%20promises%2C%20big%201osses%20/incomescams.final_.correctlink.pdf.

201.

Id.

at

1;

see

also

id.

at

3

n.1

("In

Q2

2020, 11,879

income

scams

were

reported,

a

70%

increase

from

reports

captured

in

Q2

2019.

In

total,

29,419

income

scams

were

reported

directly

to

the

FTC

in

2020

through

Q3,

compared

to

26,719

in

all

of

2019.").

351

2022]

TENNESSEE

LAW

REVIEW

the

seriousness

of

these

concerns,

the

growth of

MLMs

during

the

pandemic

deserves

careful

scrutiny.

These

factors

should,

in

turn,

guide

the

regulatory

response,

which

we

will

discuss

in

the

following

Part

of

the

Article.

This

Part

of

the

Article

identifies

five

distinct

(but interrelated)

ways

in

which

the

pandemic

has

fostered

a

rich

environment

for

the

proliferation

and

replication

of

MLM

schemes. Many of

these

factors

are

likely

to

persist

long

after

the

pandemic

has

receded

from

the

memory.

Part

IIA

demonstrates

the

effect

of

widespread

unemployment,

which

leads

to

the

desperate

need

for

replacement

income, on

MLMs.

Part

II.B

shows

how

the

need or

desire

to

work

from

home, due

to

health

risks

and

the

need

to

provide

childcare,

have

benefitted

MLMs,

and

how

MLMs

have promised

to

meet

a

need

for

flexible

work,

particularly

by

working

parents

with

significant

childcare

responsibilities.

Part

II.C

discusses

how

increased

internet

use and,

in

particular,

the increased

reliance

on

communities

developed

on

social

media

have

aided

MLM

recruitment.

Finally,

Part

II.D

focuses

on

the

health

concerns

that

many

MLMs

have positioned

themselves

to

address,

including

by

exploiting

the

doubts

about

mainstream

science

and

medicine

among

particular

communities

on

social

media.

Altogether,

these

factors

have

brought

on

a

crisis

in

parallel

with

the

COVID-19

crisis.

People

are

turning

to

MLMs

to

fill

gaps

that

the

COVID-19

crisis

has

opened

in

employment,

social

life,

and

healthcare.

But

involvement

with

MLMs

are

unlikely

to

help

bridge

any

of

these

gaps

for

most

people.

In

addition,

the

impact

of

the

pandemic,

and

of

the

turn

to

MLMs,

is

focused

on

the

already

vulnerable

groups

that

have

been most significantly impacted

by

the

COVID-19

pandemic-particularly

working

mothers.

202

Like

the

other

inequalities

that

have

been

deepened

over

the

last

year,

the

MLM

pandemic

will

likely

continue

long

after

the

eventual

end

of

the

COVID-19

pandemic.

A.

Unemployment

rates

shot

up

as

the

COVID-19

pandemic

took

202.

Bonne

Patten,

a

consumer

advocate,

warned

"[t]ens

of

millions

of

Americans

are

out

of

work

and

trying

to make

ends

meet.

It's

a

very susceptible

population

...

certain

MLM

companies

and distributors

are

preying

on

those

vulnerabilities

and

...

saying

that

you

can

make

money

if

you

become

a

distributor

-

which

...

is

just

not

true."

Jesselyn

Cook,

MLMs

Are Using

Coronavirus

Anxiety

to

Exploit

the

Quarantined

and

Unemployed,

HUFFPOST

(May

29,

2020),

https://www.huffpost.com/entry/mlms-

capitalzing-on-coronavirus-anxiety_n_5ecad83ac5b63a8c2095c800.

352

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

hold

in

March

2020.203

Many

people

lost

their

jobs

and

needed

immediate

ways

to

earn

money

and

make

ends

meet.

This

created

an

opportunity

for

MLMs.

Prior

recessions

have

made

clear

that

MLMs

do

well

during

recessions,

as

people

are

desperate

to

replace

their

lost

jobs.

204

The

"Chief

Marketing

Officer"

of

the

leading

industry

group

has

acknowledged

that

their

members

do

well

during

recessions:

"Traditionally,

direct

selling

has

done

well

during

a recession,

particularly

during

the

last

two

recessions.

We

saw

direct

selling

increase

during

the

recession."205

She

noted

that

"in

economic

times

where

people

are

concerned

about

losing

a

job

or

making

ends

meet

with

their

current

income,

they're

looking

for

other

options,

and

they

look

to

direct

selling

for

those

options."

206

Those

with

"fewer

opportunities

in

the

mainstream

job

market"

are

also

more

susceptible

to

the

recruitment

sales

pitch

of

MLMs.

2

0

7

This

is

one

reason

that

a

high

percentage

of

MLM

participants

are

women-about

three-quarters,

according

to

data

before

the

pandemic.

2

08

Largely

due

to

male

dominated

social

structures

and

hierarchies,

women

were

restricted

from

regular

formal

employment.

Unsurprisingly,

they

sought

opportunities

to

work

from

home

in

ways

that

were

deemed

acceptable,

motivated

by

a

range

of

factors

from

the

desire

to

supplement

or

sustain

household

income

or

to

gain

autonomy

and

develop

underutilized

skill

sets.

The

COVID-19

pandemic

will

likely

draw

even

more

women

to

MLMs,

and

any

resultant

harm

will

disproportionately

affect

women.

The

pandemic

has

been

described

as

having

caused

a

"she-cession"

because

of

its

greatly

and

tragically

disproportionate

impact

on

women.

2

09

Women

have

borne

the

brunt

of

pandemic-related

job

loss-

as

well

as

taking

on

increased

childcare

responsibilities

as

a

result

of

203.

Press

Release,

U.S.

Dep't

of

Labor,

The

Employment

Situation

-

March

2020

(Apr.

3,

2020)

(https://www.bls.gov/news.release/archives/empsit_04032020.pdf).

204.

Vesoulis

&

Dockterman,

supra

note

5

(reporting

rise

in

MLM

activity

during

Eilene

Zimmerman,

Direct

Sales

as

a

Recession

Fallback,

N.Y.

TIMES

(Mar.

14,

2009),

https://www.nytimes.com/2009/03/15/jobs/15sales.html.

205.

Emilie

Ritter

Saunders,

Direct

Sales

Companies

Saw

Spike

in

Sellers

During

Recession,

NPR:

STATE

IMPACT

(Mar.

20,

2012),

https://stateimpact.npr.org/idaho/

2012/03/20/direct-sales-companies-saw-spike-in-sellers-during-recession/.

206.

Id.

207.

Matthews,

supra

note

31,

at

2056.

208.

Direct

Selling

Fact

Sheet,

supra

note

8;

Liu,

supra

note

9,

at

114.

209.

Alisha

Haridasani

Gupta,

Why

Some

Women

Call

This

Recession

a

'Shecession',

N.Y.

TIMES

(May

9,

2020)

("A

majority

of

the

jobs

lost

in

April

were

held

by

women,

a

sharp

reversal

of

gains

in

the

labor

market."),

https://www.nytimes.com/

2020/05/09/us/unemployment-coronavirus-women.html.

2022]

353

TENNESSEE

LAW

REVIEW

the

closure

of

schools

and

many

other

childcare

providers.

210

Recovery

of

jobs

for

women

has

lagged

far

behind

those

for

men,

and

the

disproportionate

effects

are

likely

to

take years

of

recovery

just

to

reach the

pre-pandemic

level

of

employment.

Two

and

a

half

million

women

are

not

just

unemployed

but

have

in

fact

left

the

labor

force,

which

Vice

President

Harris

has

called a

"national

emergency."

211

For

these

reasons,

the

pandemic

is

likely

to

represent

a

gain

for

MLMs,

particularly

in

their

recruitment

of

women,

long

after

the

direct

effects

of

the

pandemic

have

faded.

B.

Flexible

Hours

and

Working

from

Home

MLMs

advertise

themselves

as

providing

immediate

earnings

for

flexible

work engaged

in

from

the

home.

In

addition

to

unemployment

making

MLM

participation

more

attractive,

the

flexibility

of

MLM

participation

and

its

promise

that

work

can

be

accomplished

from

home

have

contributed

to

the

rise

in

the

attractiveness

of

MLMs.

2 12

These

factors

have

become

particularly

important

for

two

primary

reasons:

many

people

want

to

work

from

home

because

jobs

outside

of

the

home

are

risky

due

to

potential

disease

exposure;

and

increased

childcare

responsibilities in light

of

widespread

daycare

and

school

closures

means

that

parents

can't

reliably

work

outside

of

the

home

with

normal,

9-to-5

hours.

Accordingly,

the

hope

of

income

that

can

be

earned

outside

of

the

home

and with

flexibly

timed

work

is

irresistible

to

many

working

parents.

Again,

because

the

evidence

shows

that

women

shoulder the

bulk

of

responsibility

for

children,

these

factors

will

have

a

disproportionate impact

on

children.

Mothers are

significantly

more

likely

than

fathers

to

have lost

their

job

during

the

COVID-19

210.

See

Ella

Koeze,

A

Year

Later,

Who

Is

Back

to

Work

and

Who

Is

Not?,

N.Y.

TIMES

(Mar.

9,

2021)

(providing

data

showing

sizable

ongoing

differences

between

unemployment

for

men

and

women),

https://www.nytimes.com/interactive/

2021/03/09/business/economy/covid-employment-demographics.html.

211.

Katie

Rogers,

2.5

Million

Women

Left

the

Work

Force

During

the

Pandemic.

Harris

Sees

a

'National

Emergency',

N.Y.

TIMES

(Feb.

18,

2021),

https://www.nytimes.com/2021/02/18/us/politics/women-pandemic-harris.html;

Julie

Kashen,

Sarah Jane

Glynn,

&

Amanda

Novello,

How

COVID-19

Sent

Women's

Workforce

Progress

Backward:

Congress'

$64.5

Billion

Mistake,

CTR.

FOR

AM.

PROGRESS

(Oct.

30,

2020)

("Four

times

as many

women as

men

dropped

out

of

the

labor

force

in

September,

roughly

865,000 women

compared

with

216,000

men.

This

validates

predictions

that

the

impact

of

the

COVID-19

pandemic

on

women-and

the

accompanying

child

care

and

school

crises-would

be

severe."),

www.americanprogress.org/issues/women/reports/2020/10/30/492582/COVID-19-

sent-womens-workforce-progress-backward/.

212.

Vesoulis

&

Dockterman,

supra

note

5.

354

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

pandemic,

and

on

average,

they

perform

several

hours

more

childcare

per

day

than

fathers-in

addition

to

other

household

labor.

213

Health

care concerns

will also

affect

larger,

multi-generational

households,

and

therefore

also

have

greater

impact

on

parents-especially

mothers,

who

more

often

live

with

children

as

well

as

other

family

members.

These

aspects

of

MLMs'

popularity

are

linked

to

a

broader

shift

in

employment

relationships,

to

less

formal,

"gig

economy"

or "side-

hustle"

types

of

employment

structures.

The

MLM

industry

association

has

reported

that

more

than

three-quarters

of

American

are

"interested

in

flexible,

entrepreneurial/income

earning

opportunities."

214

These

arrangements

remain

controversial;

they

often

come

with

more

constraints

and

yield

less

income

than

participants

anticipate.

But

their

low

barriers

to

entry

and

perceived

flexibility

have

led

to

them

being

considered

more

acceptable

and

desirable

options

than

in

the

past.

This

is

particularly

true

for

younger

generations

who

may

have

encountered

difficulty

entering

the

traditional

job

market.

215

MLMs

often

position

themselves

as

offering

the

good

aspects

of

"gig

economy"

jobs

without

the

drawbacks:

"The

MLM

world

implies

a

glamorous

and

safer

alternative

[to

other

flexible

working

arrangements,

such

as

driving

for

Uber],

and

its

prime

target

is

women,

who

have

been

hit

especially

hard

in

this

recession."

2

16

C.

Social

Media

Social

media

has

played

perhaps

the

most

significant

role

in

the

pandemic-related

rise

of

MLMs.

During

a

pandemic

that

sharply

restricted

in-person

interactions,

everyone

is

much

more

online

than

usual,

especially

on

media

platforms

where

people

can

continue

to

have

a

social

life

that

became

impossible

to

have

in

person.

21

7

213.

See,

e.g.,

Alison

Andrew

et

al.,

Parents,

Especially

Mothers,

Paying

Heavy

Price

for

Lockdown,

INST.

FOR

FISCAL

STUD.

(May

27,

2020),

https://www.ifs.org.uk/

publications/14861.

214.

2020

Consumer

Attitudes

&

Entrepreneurship

Study,

DIRECT

SELLING

ASS'N

(2020),

https://www.dsa.org/docs/default-source/research/dsa-ipsos-2020-

consumerattitudesinfographi2-27.pdf?sfvrsn=68ddfa5_2%27.

215.

Hicken,

supra

note

39.

216.

Vesoulis

&

Dockterman,

supra

note

5.

217.

Alex

Schultz

&

Jay

Parikh,

Keeping

Our

Services

Stable

and

Reliable

During

the

COVID-19

Outbreak,

FACEBOOK

(Mar.

24,

2020),

https://about.fb.com/news/

2020/03/keeping-our-apps-stable-during-COVID-19/.

As

early

as March

24,

2020,

Facebook

reported

a

sharp

increase

in

usage.

Id.

"In

many

of

the

countries

hit

hardest

by

the

virus,

total

messaging

has

increased

more

than

50%

over

the

last

month."

Id.

355

2022]

TENNESSEE

LAW

REVIEW

Unsurprisingly,.

people

are

attracted

to

businesses

using

online

platforms.

Trust

in

online

sellers,

online

marketplaces,

and

online

employment

are all

on

the

rise.

218

The

FTC

has

relayed

that

of

the

complaints

it

has

fielded

regarding

pyramid

schemes

since

the

beginning

of

the

pandemic,

40%

of

the

schemes

were

promoted

through

social

media.

2

19

Long

before

the

onset

of

the

pandemic,

MLMs

had

recognized

that

online

tools

were

crucial

to

growth.

22 0

As

early

as

the

1990s,

FTC

officials

had

recognized

the

internet's

role

in

promoting

schemes.

22

1

The

rise of

social

network,

of

course,

transformed the

way

most

people

interacted with

the

internet,

in ways

that

proved

easily

exploitable

by

MLMs.

By

2016,

the

AARP

identified

social

media

networks

as

one

of

the

factors

leading

to

an

MLM

"renaissance."

22

2

MLMs

employ psychologically

driven

recruitment

tactics

to

target

particular

groups,

such

as

women

with

childcare

responsibilities.

223

Even

before

the

recession,

MLMs

positioned

themselves

as

not

just

money-makers

but

as

social

outlets-a

way

to

obtain

relief

from

feelings of

isolation

or

loneliness.

224

An

expert

on

MLMs,

Rochelle

Burnside,

has

explained

that

even

before

the pandemic,

many

"mother

groups"

and similar

networks

had

formed

on

social

media.

225

218.

See

generally

Tamara

Charm,

Becca

Coggins,

Kelsey Robinson,

&

Jamie

Wilkie,

The

Great

Consumer

Shift:

Ten

Charts

That

Show

How

US

Shopping

Behavior

is

Changing,

MCKINSEY

&

CO.

(Aug.

4,

2020)

(discussing

pandemic-driven

shifts

in

consumer

behavior),

https://www.mckinsey.com/business-functions/marketing-and-

sales/our-insights/the-great-consumer-shift-ten-charts-that-show-how-us-shopping-

behavior-is-changing.

219.

Fletcher,

supra

note

200.

220.

Trends

Impacting

the

Direct

Selling

Industry,

DIRECT

SELLING

AsS'N

("2

in

5

Americans

learn

about

new

brands

and

products

from

social

networking

sites."),

https://www.dsa.org/docs/default-source/researchldsa-trends-infographicf

3d7a29c41746fcd88eaff

00002c0f4.pdf?sfvrsn=2

(last

visited

Feb.

2,

2022);

Matthews,

supra

note

31,.

at

2047

("Pyramids

have

proliferated in

the

digital

age,

thanks

in

great

part

to

the

internet

and

the ubiquity

of social networking.").

221.

Valentine,

supra

note

137

("In

the

U.S.,

probably

nothing

has

contributed

to

the

growth

of

pyramid

schemes

as

much

as

Internet

marketing.").

222.

DELIEMA

ET

AL.,

supra

note

17,

at

2.

223.

Hicken,

supra

note

39;

Taylor

Lorenz,

How

Women

Are

Fighting

the

Marketers

That

Nearly

Ruined

Them,

DAILY

BEAST

(Mar.

14,

2018),

https://www.thedailybeast.com/how-women-are-fighting-the-marketers-that-nearly-

ruined-them.

224.

Casey

Bond,

MLMs

Are

a

Nightmare

for

Women

and

Everyone

They

Know,

HUFFPOST

(July

5,

2019),

https://www.huffpost.com/entry/mlm-pyramid-scheme-

target-women-financial-freedom_1_5dObfd60e4b07ae90d9a6a9e.

225.

Id.

("Several

corners

of

the

internet

have

become

devoted

to

connecting

mothers

with

each

other,

and

MLMs

are

tapping

into

these

networks

to

make

their

356

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

When

the

pandemic

swept

in,

it

was

easy

for

MLMs

to

penetrate

existing

social

media

groups

or

pages.

The

successful

move

of

MLMs

from

in-person

to

online

recruitment

is

perhaps

somewhat

surprising,

in

a

historical

context.

Traditionally,

MLMs

relied

heavily

on

in-person

interactions,

from

the

small

and

personal

to

the

massive

and

spectacular.

2

26

Many

MLMs

relied

on

extravagant

in-person

conferences

that

were

described

as

like

a

concert

or

a

religious

revival,

where

executives

and

top

promoters

were

treated

like

celebrities

or

evangelists

(or

even,

perhaps,

deities

of

a

sort).

22 7

While

the

stated

purposes

of

these

events

was

to

educate

participants

concerning

companies'

practices,

to

increase

brand

loyalty,

to

build

comradery,

and

to

facilitate

excitement

around

the

business

and

its

products,

studies

had

found

that

a

primary

benefit

from

the

conferences

was

that

"the

emotional

intensity

of

the

event

may

heighten

prospective

consultants'

propensity

to

invest

in

a

MLM."

22

8

On

a much

smaller

scale,

MLM

participants

often

focused

their

marketing

efforts

on

isolating

individual

potential

recruits

in

one-on-

one

"business

meetings,"

or

on

hosting

events

for

friends

and

family

members,

where

guests

could

try

on

or

try

out

a

product

229

while

enjoying

a

meat

and

cheese

board

and

cup

of

tea

or

glass

of

wine.

Promising

attendees

could

then

be

targeted

for

recruitment

as

participants

in

the

multi-level

structure. Interpersonal

dynamics,

both

at

the

individual

and

the

group

scale,

were

thought

to

be

crucial

to

the

success

of

MLMs-the

in-person

sales

pitch,

the

"ask,"

with

its

various

forms

of

explicit

and

implicit

social

pressure,

were

considered

central.

2

3

o

Without

such

in-person

opportunities,

certain

forms

of

trust

and

optimism

upon

which

MLMs

rely

have

to

be

built

by

alternative

means.

The

fact

that

there

appears

to

be

a

significant

rise

in

activity

suggests

that

somehow

MLMs

are

overcoming

these

potential

obstacles.

Social

media

has

filled

that

gap.

Today,

targeting

efforts

largely

occur

on

social

media,

231

with

"private

social

media

groups,

sales

and

recruitment.").

Burnside

is

"a

content

management

specialist

who

manages

the

MLM

section

for

business

review

site

BestCompany."

Id.

226.

Liu,

supra

note

9,

at

123.

227.

Id.

228.

Id.

229.

Bond,

supra

note

224.

230.

See

id.

231.

Monroe,

supra

note

77

("A

decade

ago,

that

happened

through

hosting

parties

or

classes;

these

days,

the

chatty,

relationship-based

sales

pressure

favored

by

the

companies

takes

place

largely

on

social

media,

and

the

industry

is

attracting

a

greater

share

of

young

people.").

357

2022]

TENNESSEE

LAW

REVIEW

Facebook

live

presentations

and

Instagram

posts."

23

2

In

other

words,

Instagram

Live

has

taken

the

place

of

Tupperware

parties.

Of

course,

the

message

remains

the

same:

Make

money,

be

your

own

boss,

and

attain

your

dream

lifestyle

through

MLMs.

While

the

message

of

MLMs

remains

the

same,

the

tactics

used

to

make

the

crucial

personal

connection

needed

to

bring

an

actual

participant

into

the

structure

have

been

reimagined.

Social

media

driven

MLM

strategy

tends

to

focus

on

subsets

of

the

population

to

utilize

preexisting

networks,

exploit

specific

belief

systems,

and

"increase

pressure

to

participate."

233

Promoters

focus

on

religious

groups

"or

social

organizations,

sports

teams,

and

college

students."

234

Additional

epicenters

for

MLM

recruitment

are

among

military

spouses.

23

A

survey

of

one

thousand

Americans,

conducted

by

the

consumer

lending

platform

Lending

Tree

in

December

2019,

found

that

"2

in

5

Americans

felt

pressured

to

buy

products

from

MLM

consultants

within

the

last

12

months,"

with

family,

friends,

and

social

media

connections

identified

as

the

most

common

sources

of

the

pressure.

236

It

also

found

that

"[n]early

half

of

all

Americans

report

being

inundated

by social

media friends

selling

MLM

products

on

their

news

feeds."

2 37

To

take

one

example,

doTERRA,

an

MLM

that

promotes

"essential

oils,"

is

largely

concentrated

in

Utah.

238

The

large

and

tight-knit

Mormon

communities

in

Utah

create

a

perfect

environment

for

MLMs

to

flourish

due to

the

"large

number

of

stay-at-home

mothers

and

its

naturally

networked

communities."

239

Because of

this

especially

favorable

social

backdrop,

"Utah

has

more

multilevel-marketing

companies

per

capita

than

any

other

state"

and

"direct

sales

are

Utah's

second-biggest

source

of

revenue,

after

tourism."

240

Now

that

online

MLM

sales

techniques

have

been

even

more

well-

honed

and

online

networking

has

become

even

more

engrained,

these

effects

are

likely

to

continue

long

after

the

pandemic.

Survey

data

232.

Bond,

supra

note

224.

233.

Don't

Get

Caught

in

a

Pyramid

Scheme,

N.Y.

ST.

ATT'Y

GEN.,

https://ag.ny.gov/consumer-frauds/pyramid-schemes

(last

visited

Feb.

2,

2022).

234.

Id.

235.

Andrew

Quillen,

Multilevel

Marketing

Schemes:

A

Threat

to

Veterans

and

Dependents;

MASON

VETERANS

&

SERVICEMEMBERS

LEGAL

CLINIC

(Jan.

26,

2021),

https://mvets.law.gmu.edu/2021/01/26/multilevel-marketing-schemes-a-threat-to-

veterans-and-dependents/.

236.

Giovanetti,

supra

note

2.

237.

Id.

238.

Monroe,

supra

note

77.

239.

Id.

240.

Id.

358

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

suggests

that

the

pandemic-driven

move

to online

shopping

will

persist

into

the

future,

and

this

and

suggest

that

social

media

will

continue

to

be

a

primary

factor

in

MLMs'

success.

24

1

As

the

explores,

not

only

the

rise

in

usage

of

social

media

platforms

but

also

the

rise

of

health-related

fears

and

even

conspiracy

theories

may

have

further

contributed

to

the

rise

of

MLMs

during

the

pandemic.

D.

Health

Concerns

A

final

factor

leading

to

a

rise

in

MLM

activity

is

the

prevalence

of

health

concerns

in

society

at

large.

Many

MLMs

make

claims

to

provide

health

and

wellness

products

and

many

also

speak

to

the

anxieties

and

concerns

of

those

who

hold

fringe

beliefs

or

generally

feel

alienated

from

mainstream

thinking

about

healthcare

and

the

pandemic.

24

2

It

is

important

to

recognize

that

the

factors

we

have

discussed

in

this

Part

of

the

paper

are

deeply

interrelated.

Unemployment,

the

need

to

work

from

home

under

flexible

conditions,

increased

reliance

on

social

media

networks,

and

health

concerns

frequently

work

in

concert

to

amplify

the

message

of

prominent

MLMs.

24

3

In

addition,

there

is

evidence

that

MLMs

may

appeal

more

to

those

with

fringe

or

non-mainstream

beliefs

of

various

sorts

and

thus

social

media

may

have

particular

force

in

aiding

the

proliferation

of

MLMs

making

health

2

44

Many

MLMs

promise

quick

and

easy

income

to

the

jobless-as

well

as,

in

many

cases,

various

forms

of

near-miraculous

resistance

to

the

virus

that

was

the

source

of

the

unemployed

status.245

It

seems

likely

that

nationwide,

the

desperation

of

unemployment,

the

heavy

burdens

of

childcare,

the

prevalence

of

near-constant

social

media

usage,

together

with

the

fear

and

distrust

that

has

swirled

around

the

coronavirus

pandemic

since

early

2020,

have

together

fostered

an

environment

friendly

to

MLMs.

Significant

subcultures

have

developed,

particularly

among

those

who

feel

alienated

from

mainstream

health

scientists.

2

46

Such

feelings

of

alienation

and

241.

Libby

Rodney

&

Abbey

Lunney,

The

Pulse

of

COVID-19,

HARRIS

POLL

(stating

"49%

of

Americans

say

they

will

shop

online

more

than

before

the

pandemic

as

their

area

reopens,"

compared

to

15%

who

say

they

will

shop

more

in-store),

https://theharrispoll.com/wp-content/uploads/2020/05/The-Pulse-of-COVIDw10.pdf

(last

visited

Feb.

2,

2022).

242.

Cook,

supra

note

202.

243.

Id.

244.

See, e.g.,

Liu,

supra

note

9,

at

128.

245.

Cook,

supra

note

202.

246.

See

generally

id.

359

2022]

TENNESSEE

LAW

REVIEW

disaffection

with

mainstream

life

can

help

build

the

type

of deep

bonding

characteristic

of

successful

MLM

ventures.

Many

people

are

attracted

to

health-related

products

and

business

because

of

heightened

concerns

about

disease-including

concerns

stoked

or

shaped

by

misinformation

on

the

internet,

particularly

through

the

same

social

media

channels

through

which

MLMs

are

promoted.

2

47

As

we

have

mentioned,

MLMs

promote

themselves

as

permitting

work

outside

of

a

traditional

organizational

context

and

often

MLMs

use

the

allure

of

an

idealistic,

non-mainstream

lifestyle

to

bond

distributors

to

the

brand.

24

S

For

example,

Young

Living

is

a

prominent

MLM

that

peddles

"essential

oils."249

As

The

New

Yorker's

investigation

observed,

Young

Living's

marketing

materials

constantly

repeat

words

like

"purity,

abundance,

wellness,

vitality"

that

allow

the

creation

of

"a

shared

culture

that

prizes

freedom,

family,

and

self-sufficiency,

and

is

suspicious

of

regulation

and

Big

Pharma."

25 0

The

pandemic

has

given

this

message

powerful

new

resonance.

As

another

reporter

put

it:

"Now,

amid

an

economic

crisis,

[MLMs]

are

pushing

their

business

opportunities

as

fast-track

tickets

to

financial

freedom....

The

pandemic is

also

creating

a

whole

new

potential

customer

base of

people

who

are terrified

of

contracting

the

potentially

deadly

virus."

251

With

a

past

of

seeking

out

the

economically

distressed

and

the

victims

of

health-related

disabilities

as

potential

targets

of

recruitment,

the

pandemic

produced

the

perfect breeding

ground

for

MLMs.

252

In

March,

CNBC

reported

that

distributors

in

several multi-level

marketing

companies,

including

doTERRA

and

Young

Living,

were

making

unsubstantiated

claims

that

their

products

could

help

prevent

and

combat

COVID-19.253

CNBC

gave

the

following

examples

of

actual

posts

from

distributors

of

both

companies:

If

there

is

one

good

thing

about the

Novel

Corona

Virus

[sic]....it's

finally

making cleanliness

and

personal

hygiene

a

number

one

priority....meaning

wash

your

247.

Id.

at

2047-48.

248.

See

Matthews,

supra

note

31,

at

2052;

Stivers,

supra

note

32,

at

3;

see

also

Megan

Graham,

MLM

Sellers

Are

Asking

for

Cash

to

Donate

Products

to

Health

Workers,

but Experts

Say

It's

a

Marketing

Ploy,

CNBC

(Apr.

4,

2020,

11:01

AM)

https://www.cnbc.com/2020/04/04/mlm-sellers-asking-for-donations-for-health-

workers-marketing-ploy.html.

249.

Monroe,

supra

note

77.

250.

Id.

251.

Cook,

supra

note

202.

252.

Id.

253.

Graham,

supra

note

248.

360

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

hands!

*Self

promo

time*

[Hyperlink

to

"Doterra

On

Guard

Products"

page]

Doterra

Essential

Oil

Blend

OnGuard

is

amazing

to

help keep

you

virus

free

during

the

corona

virus

[sic]

scare

of

2020.

Shop

the

link

below

and order

yours

(like

I

just

did)

before

it

sells

out!

25

4

Additional

claims

discovered

by

the

news

network

included

statements

like

"the

most

powerful

anti-virus

essential

oils

to provide

defense

against

coronavirus"

and

"[l]ooking

to

stay

healthy

in

this

Corona

Virus

[sic]

scare

time?

Well,

one

of

my

absolutely

favorite

ways

to

stay

healthy

is

doTERRA's

Life

Long

Vitality

Vitamins."

255

While

other

posts

differ

in

exact

language,

the

basic

message

remains

the

same:

COVID-19

can

be

overcome

with

our products.

The

majority

of

the

posts

have

come

directly

from

the

distributors

and

not

from

the

company

themselves,

which

is

one

way

that

companies

seek

to

avoid

liability

for

misleading

claims.

In

March

of

2020,

in

response

to

these

distributor

claims,

both

doTERRA

and

Young

Living

stated

they

did

not

condone

nor

support

distributors

making

these

types

of claims

and

said

that

they

were.

taking

active

steps

to

monitor

and

prevent

distributors

from

continuing

to

do

so.

2 56

The

director

of

public

relations

at

doTERRA,

Kevin

Wilson,

said

that

the

company

believes

essential

oils

have

"health

and

wellness

benefits,

but

we

do

not

claim

that

our

products

prevent,

treat

or cure

illnesses

or

diseases,

including

COVID-19."

2

57

Matt

French,

Young

Living's

chief

legal

counsel

ensured

that

the

company

"would

never

encourage

members

to

claim

any

product

'kills'

coronavirus

or

can

prevent

COVID-19."258

Wilson

went

on

to

clarify:

"Compliance

is

an

ongoing

process,

and

we

take

seriously

our

responsibility

to

continue

to

educate

our

Wellness

Advocates

on

the

appropriate

ways

to

talk

about

doTERRA

products.

During

this

time,

we

are

particularly

sensitive

to

any

coronavirus

claims

and

have

asked

our

Wellness

Advocates

to

be

as

well."

2

59

French

made

similar

254.

Megan

Graham,

Multilevel

Marketing

Sellers

Are

Using

Coronavirus

to

Push

Oil

and

Vitamin

Sales

on

Facebook,

CNBC

(March

13,

2020)

https://www.cnbc.com/

2020/03/13/facebook-multilevel-marketing-sellers-use-coronavirus-to-sell-oils.html.

255.

Graham,

supra

note 254.

256.

Id.

257.

Id.

258.

Id.

259.

Id.

361

2022]

TENNESSEE

LAW

REVIEW

assurances

regarding

distributors

for

Young

Living:

"We

are

taking

this

situation

very

seriously

and

working

closely

with

our members

regarding

proper

communications

. . . .

We

specifically

prohibit

members

from

making

these

types

of

claims.

Our

compliance

team

is

continuing

to

actively work

to

remove

any

posts

or

other

materials

contrary

to

this

on

a

global

scale."

26 0

Despite

these

claims,

it

is

difficult

to

ascertain

the

success

of

such

monitoring

efforts.

As

we

discuss

in

Part

III,

later

in

2020,

the

FTC

sent

out

dozens

of

letters

to

MLMs

seeking

to

force

them

to

tamp

down

on

the

extravagant

claims

of

their

participants.

261

There

seem

to

be

no

shortage

of

misrepresentations.

Some

participants

in

MLM

schemes

also

found

more

direct

ways

to exploit

the

pandemic

for

profit.

In

April

of

2020, CNBC

found

that

sales

representatives

from

several

MLMs

were

using

donated

money

to

bolster

their

sales

numbers.

26 2

For

instance,

several

individuals

from

Arbonne, a

company

selling

nutritional

health

products

with

a

"holistic

approach

to

beauty,

health

and

wellbeing,

focusing

on

the

whole

person

to

help

them

flourish

inside

and

out,"

263

were

soliciting

donations

from

their

social

media friends

to

fund

care

packages

of

Arbonne

products

to

COVID-19

front

line

workers.

Facebook

donations

alone

amounted

to

nearly

to

$13,000

to

supply

Arbonne

snacks

and

health

products

to

hospitals

and

other

groups

of

essential

workers.

26 4

However,

hospitals

stated

that

they preferred

direct cash

or

medical

equipment

donations,

and

some

weren't

accepting

other

forms

of

donation.

265

It

seems

the

majority

of

the

benefit was

being

felt

by

the

distributors

and

the

MLMs

themselves.

When

distributors

purchase

products

from

the

MLM

company-even

if

they

purport

to

donate

the

products

"without

commission"-the

purchases still

help

participants

to

meet

quotas

or

move

up

in

the

company's

hierarchies

or

rankings

(and

of

course

provide

benefits

to

the

MLM

as

well,

as

for-profit

seller

of

the

products).

26 6

In

response

to

the

individual

behavior, Arbonne

260.

Id.

261.

See

infra

Part

III.

262.

Graham,

supra

note

248.

263.

DISCOVER

ARBONNE,

https://www.arbonne.com/discover/index.shtml

(last

visited

Dec.

30,

2020).

264.

Graham,

supra

note

248

("On

Facebook

alone,

dozens

of

fundraisers

had

gathered

more

than

$13,000 for

"care

packages"

or

"break

room

bundles"

containing

items

like

"fizz

sticks"

or

protein

bars

from

Arbonne.").

265.

Id.

("But

when

CNBC

contacted

those

hospitals

and

organizations or

reviewed

their

donation

policies,

they

typically

said

they

preferred

direct financial

donations

or

were

primarily

seeking

personal

protective equipment.").

266.

Id.

362

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

made

a

public

announcement

that

according

to

their

charity

policies,

by

distributors

are

not

"sanctioned,

endorsed

or

promoted"

by

the

company

nor

should

any

distributor

be

"taking

advantage

of

the

current

situation."

267

The

practices

revealed

by

CNBC's

investigation

show

yet

another

way

in

which

the

health

anxieties

of

the

COVID-19

pandemic

have

combined

with

a

rising

form

of

online

social

interaction-the

fundraising

made

popular

by

sites

like

GoFundMe

and

Kickstarter-to

benefit

MLMs

and

their

participants.

The

situation

demonstrates

at

a

minimum

the

creative

forms

of

opportunism

that

we

can

expect

to

emerge

from

any societal

crisis

such

as

the

COVID-19

pandemic.

The

factors

surveyed

in

this

Part

of

the

paper

aren't

new,

nor

has

their

tactical

significance

for

MLMs

gone

unrecognized.

Scholars,

reporters,

regulators,

and

advocates

have

recognized

them

as

crucial

contributors

to

the

success

of

modern

MLMs.

But

these

factors

have

all

been

made

much

more

salient

in

the

last

year.

Even

when

the

COVID-19

pandemic

itself

recedes,

they

will

continue

to

leave

their

mark.

New

forms

of social

interaction

and

new

ways

of conceiving

of

work,

of

health,

and

of

society,

have

emerged

and

have

benefited

MLMs.

These

factors,

and

the

MLM

tactics

they

have

spurred,

are

likely

to

persist.

The

of

this

Article

turns

to

means

of

seeking

to

control

abuses

by

MLMs

and

their

participants.

It

surveys

some

recent

promising

steps

by

the

FTC

as

well

as

the legal

limitations

preventing

the

FTC

from

taking

a

more

active

role

in

the

regulation

of

MLMs.

It

also

discusses

the

role

that

social

media

companies

and

consumer

advocacy

groups

could

take

in

preventing

or

heading

off

some

of

the

worst

abuses

of

MLMs.

III.

STEMMING

THE

ADVANCE

OF

THE

MLM

PANDEMIC

[T]he

FTC

is fully

engaged

in

this

area

and

is

determined

to

protect

hard-working

consumers

from

losing

money

to illegal

pyramid

schemes

or

other

business

opportunities

that

make

deceptive

earnings

claims.

I

caution

you

to

stay

on

the

straight

and

narrow

because

now,

more

than

ever,

this

is

a

top

enforcement

priority

for

me,

and

I

hope

the

agency.

26 8

This

Part

presents

some

ways

to

stem

the tide

of

the

MLM

pandemic.

Part

IIIA

discusses

actions

that

could

be

taken

267.

Id.

268.

Phillips,

supra

note

Error!

Bookmark

not

defined..

363

2022]

TENNESSEE

LAW

REVIEW

immediately

by

regulators

at

the

state

and

federal

level.

We

endorse

the

FTC's

recent

use

of

informal

warning

letters

to

MLMs.

At

a

minimum,

these

warnings

may

provoke

MLMs

to

do

a

better

job

of

monitoring

the

extravagant

earnings

and

health-related

claims

made

by

their

participants.

The

FTC

and

state

regulators

should

pursue

investigatory

and

enforcement

actions

as

well.

Because

of

the

need

for

immediate

help,

they

would

probably

be

best

advised

to

focus

on

preventing

egregious

consume

misrepresentations

rather

than

building

up

more

substantial

cases

against

MLMs'

business

models,

although

that

work

will

of

course

remain

important

in

the

longer

term.

Part

III.B

proposes

that

regulators

and

consumer

advocates

should

involve

social

media companies

in

monitoring

participants'

deceptive

claims.

Even

if

not

legally

required

to

do

so,

social

media

companies

have

shown

some

willingness

to

take

steps

to

prevent

their

networks

being

used

for

demonstrably

unlawful

or

socially

harmful

activities.

There

are

a

range

of

potential

actions

that

they

could

take

to

prevent

MLM

participants

from

using

their

networks

to

make

false

claims.

Even

if

social

media companies

are

reluctant

to

investigate

and

intervene

themselves,

they

could

at

a

minimum

provide

regulators

and

MLMs

with

access

and

transparency

to

posts

that

may

involve

unlawful

misrepresentations,

so

that

they

could

take

appropriate

steps.

Part

III.C

discusses

the

potential

for

self-regulation

by

MLMs.

Self-regulation

can

be

effective

at

times,

particularly

when

lawful

industry

actors

are

motivated

to

prevent

less

scrupulous

actors

from

encroaching

on

their

business.

In

the

case

of

MLMs,

there

is

a

powerful

membership-based

industry

organization,

the

Direct

Selling

Association,

and

a

more

recently

formed

industry-wide

self-regulatory

body,

the

Direct

Selling

Self-Regulatory

Council,

that

could

in theory

serve

as

a

node

for

self-regulation.

Indeed,

the

members

of

this

association

have

taken

some

steps

to

self-regulate.

But

while

it

may

have

some

marginal

benefits,

there

are

reasons

to

be

skeptical

that

MLMs'

self-regulation

has

sharp

enough

teeth

to

be

effective

at

preventing

consumer abuses. This

Part

proposes

a-few

steps

that

could

be

taken

to

make

self-regulation

more

effective-if

indeed

the

MLM

industry

is

committed

to

change.

Part

III.D

acknowledges

the short-term

and

provisional

nature

of

these

steps,

and

the

need

for

more

substantial

and

thoroughgoing

regulation

in

the

longer

term.

It

also

emphasizes

that

these

steps

are

crucial

not

just

to

deal

with

the

COVID-19

pandemic

but

for

future

crises

of

every

sort.

364

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

A.

Regulatory

Warnings,

Investigations,

and

Enforcement

Actions

While

the

FTC Act

broadly

empowers

the

FTC

to

take

aim

at

"unfair

or deceptive

acts

or

practices

in

or

affecting

commerce,"

it

places

significant

constraints

on

the

FTC's

rulemaking

authority

and

enforcement

authority

alike,

as

was

discussed

in

Part

II

of

this

Article.

269

For

decades,

FTC

rulemaking

has

been

limited

to

amending

current

rules

and making

new

rules

in

targeted

areas

as

specified

by

Congress.

270

The

MLM

lobby

has

exerted

enough

pressure

in

the

past

to

prevent

any

legislative

change,

and

to

win

exemptions

from

rules

such

as

those

governing

"business

opportunities."

271

In

addition,

the

combination

of

statutory

limitations

and adverse

case

law

have

limited

the

FTC's

enforcement

authority

in significant

ways.

272

It

is

conceivable

that

the

COVID-19

pandemic

has

brought

a

shift

in

power

sufficient

to

bring

new

legislation

to empower

the

FTC,

but

even

if

Congress

grants

the

FTC

rulemaking

authority,

it

would

initiate

a

lengthy

process.

Changes

to

the

FTC's

enforcement

authority

might

have

more

immediate

effect,

but

the

prospects

of

this

remain

unclear.

Still,

the

FTC

has

considerable

powers

under

current

law.

It

can

initiate

an investigation

where

it

has

grounds

to

do

so,

and

it

is

certainly

possible

that

an

FTC

inquiry

would

quick

curb

at

least

some

of

the

more

egregious

practices

of

some

unscrupulous

actors.

273

Even

simpler,

but

more

public,

is

to

send

a

warning

letter.

274

269.

15

U.S.C.

§

45(a)(1)

(2018).

270.

See Liu,

supra

note

9,

at

120-21.

271.

Id.

272.

See

15

U.S.C.

§

45(a)(2) (2018)

(Section

5

of

the

FTC

Act

provides

that

the

"[FTC]

is

hereby

empowered

...

to

prevent

persons

...

from

using

...

unfair

or

deceptive

acts

or

practices

in

or

affecting

commerce");

id.

§

45(n)

(applying

specifically

to

rulemaking

under

15

U.S.C.

§

57(a)

as

well,

the

FTC

is

permitted

to

restrict

an

activity

as

"unfair"

against

consumers

only

in

narrow

circumstances,

including

when

it

causes

"substantial

injury

to

consumers

which

is

not

reasonably avoidable

by

consumers

themselves"-regardless

of

whether

it

harms

them

in

the

main

run

of

cases

when

they

in

fact fail

to avoid

it);

Magnuson-Moss

Warranty-Federal

Trade

Commission

Improvement

Act,

Pub.

L. No.

93-637,

§

202, 88

Stat.

2183,

2193-95

(1975);

Federal

Trade Commission

Improvements

Act

of

1980,

Pub.

L.

No.

96-252,

§§

7-12,

15,

21,

94

Stat.

374,

376-80,

388-90, 393-96

(1980);

Federal

Trade

Commission

Act

Amendments

of

1994,

Pub.

L.

103-312,

sec.

9,

§

45(n),

108

Stat.

1691,

1695

(1994)

(After a

series

of

perceived

regulatory

overreaches,

the

FTC's

rulemaking

authority

was

dramatically

stripped

back

from

the

mid-1970s

through

the

1990s).

273.

See

generally

A

Brief

Overview

of

the

Federal

Trade

Commission's

Investigative,

Law

Enforcement,

and

Rulemaking

Authority,

FED.

TRADE

COMM'N

(May

2021),

https://www.ftc.gov/about-ftc/what-we-do/enforcement-authority.

274.

Press

Release,

Fed.

Trade

Comm'n,

FTC

Sends Warning

Letters

to

Multi-

2022]

-.

365

TENNESSEE

LAW

REVIEW

Warning

letters

may

be

particularly

effective

if

the

FTC

is

less

interested

in addressing

wrongdoing

on

the

part

of

the

MLM

itself

and

more

interested

in

sparking

particular

affirmative

actions-such

as

increased

monitoring

of

participants.

Misrepresentations

by

participants

on

social

media

platforms

during

the

pandemic

have,

as

Part

II of

this

Article

explained,

run

rampant,

and are

likely

causing

harm

particularly

to

groups

such

as

working

mothers

who

are

already

disproportionately

impacted

by

the

pandemic.

2

7 5

So

it

is

not

surprising

that

this

has

been

a

focus

for

regulators.

Since

the

beginning

of

the

pandemic,

the

FTC

has

made

prolific

use

of

the

tactic

of

sending

warning

letters

to

MLMs

concerning

disclosures.

On

April

24,

2020,

the

FTC

sent

warning

letters

to

ten

MLMs.

2

76

The

warning

advised

an

immediate

halt

in

claims

the

use

of

their

products

to

prevent

or

treat

COVID-19

as

well

as

earning

claims.

277

Most

of

the

letters

referred

to

claims

made

by

individual

participants

and

not

the

companies

themselves.

278

However,

MLMs

are

responsible

for

the

claims

made

by

their

participants,

according

to

the

FTC's

marketing

guidelines.

279

Some

MLM

participants

were

identified

as

making

both

health

and

earning

claims

280

while

others

were

just

accused

of

one

or

the

other.

28 1

Only

one

of

the

MLMs-It

Works

Marketing,

Inc.-was

accused

of

making

misrepresentations

itself,

in

the

form

of

videos

on

its

Facebook

site.

28 2

No

doubt

to

send

a warning

that

would

speak

not

just

to

these

MLMs

but

to

others,

the

FTC

sent

all

ten

letters

the

same

day,

issued

a

press

release

and

posted

all

of

the

letters.

283

The

Director

of

the

FTC's

Bureau

of

Consumer

Protection,

Andrew

Smith,

declared

in

the

Level

Marketers

Regarding

Health

and

Earnings

Claims

They or

Their

Participants

are

Making

Coronavirus

(Apr.

24,

2020),

https://www.ftc.gov/news-

events/press-releases/2020/04/ftc-sends-warning-letters-multi-level-marketers-

regarding-health.

275.

See

infra

Part

II.

276.

Id.

277.

Id.

'278.

Id.

279.

Business

Guidance

Concerning

Multi-Level

Marketing,

supra

note

25.

280.

Press

Release,

Fed.

Trade

Comm'n,

FTC

Sends

Warning

Letters

to

Multi-

Level

Marketers

Regarding

Health

and Earnings

Claims

They

or

Their

Participants

are

Making

Coronavirus

(Apr.

24,

2020)

[hereinafter

FTC

April

2020

Press

Release],

https://www.ftc.gov/news-events/press-releases/2020/04/ftc-sends-warning-

letters-multi-level-marketers-regarding-health.

281.

Id.

(stating

corporations

that

received

warnings

for

earning

claims

included

IDLife,

LLC,

It

Works

Marketing,

Inc.,

Rodan

&

Fields,

LLC,

while

the

only

corporation

to receive

solely

health

claims

was

Zurvita,

Inc.).

282.

Id.

283.

Id.

366

[89:321

MULTI-LEVEL

MARKETING

PANDEMIC

press

release

that

"[d]uring

this

health

and

economic

crisis,

we

are

on

the

lookout

for

false

income

claims

for

work-at-home

opportunities,

in

addition

to

spurious

health

claims

that

products

can

treat

or

prevent

COVID-19."284

The

letters

explain

how

misrepresentations

concerning

health

effects

and

earning

possibilities

violate

Section

5

of

the

FTCA.

2

8

5

They

explain

that

claims

must

be

"truthful

and

non-

misleading,"

so

if

there

is

a claim

about

"the

potential

to achieve

a

wealthy

lifestyle,

career-level

income,

or

significant

income,"

the

participants

in

the

MLM

must

actually

"generally

.

. .

achieve

such

results,"

rather

than

success

being

only

a

theoretical

possibility

attained

by

at

most

a

fraction

of

a

percent

of

participants.

286

The

FTC

letters

warn

that

even

if

a

particular

distributor

making

the

claims

has

achieved

substantial

success,

it

still

"will

likely

be

misleading

unless

the advertising

also

makes

clear

the

amount

earned

or

lost

by

most

participants."

2

87

The

letters

contained

specific

examples

of

suspect

claims.

288

The

examples

are

generally

shocking

and

egregious.

Some

representative

samples

follow.

From

a

participant

in

doTERRA,

an

MLM

specializing

in

essential

oils:

"For

those

of you

working

from

home

now,

who

says

you

ever

have

to

go

back?

With

a

little

education

and

a

lot

of

uplifting

support...

you

can

take

your

health

and

your

career

future

into

your

own

hands."

28

9

From

a

participant

in

Arbonne,

an

MLM

selling

"cruelty-free

beauty

products"

2

90:

"Living

in

quarantine

and

where

14

million

people

applied

for

unemployment

just

last

week

...

I'll

stick

with

the

opportunity

to

change

people's

lives

...

turn

a

small

investment

into

six

figures

....

#arbonne

...

#quarantine

#2020".291

From

a

participant

in

Rodan

&

Fields,

an

MLM

focused

on

284.

FTC

April

2020

Press

Release,

supra

note

280.

285.

Letter

from

Fed.

Trade

Comm'n

Staff

to

Mark

A.

Wolfert,

Gen.

Counsel,

DoTERRA

Int'l,

LLC,

(Apr.

24,

2020),

https://www.fte.gov/system/files/warning-

letters/COVID-19-letter_to_doterra_international_ll.pdf.

286.

Id.

287.

Id.

288.

Id.

289.

See

DOTERRA,

https://www.doterra.com/US/en

(last

visited

Jan.

28,

2022);

Letter

from

Fed.

Trade

Comm'n

Staff

to

Mark

A.

Wolfert,

General

Counsel,

doTERRA,

supra

note

285

(punctuation

in

original).

290.

DISCOVER

ARBONNE,

https://www.arbonne.com/discover/

(last

visited

Jan.

28,

2022).

291.

Letter

from

Fed.

Trade

Comm'n

Staff

to

Bernadette

Chala,

Gen.

Counsel,

Arbonne

Int'l,

LLC

(April

24,

2020),

https://www.ftc.gov/system/files/warning-

letters/COVID-19-letter_to_doterra_international_llc.pdf

(punctuation

in

original).

2022]

367

TENNESSEE

LAW

REVIEW

skincare

products

292

:

During

an

uncertain

time

like

this,

one

thing

I

am

grateful

for

is

residual

income

from

my home

based

business.

If

you're

struggling,

and

could

use

an extra

few

hundred

dollars

a

month,

why

not

give

this

a

try....

#residualincome."

The

image

accompanying

this

post

states,

"I

have

spots

available

on

my

team!!!

If

you

want

to

make

an

extra

$200,

$500,

or

$1,000

a

month,

message

me!

293

On

June

5,

2020,

the

FTC

sent

a

second

round

of

warning

letter

to

six

additional

MLMs.

2 9 4

These

letters,

similar

to

the

first

round,

cited

a

range

of

false

health

claims

and

false

earning

claims.

2

95

Any

responses

that

MLMs

provided

to

the

FTC

have

not

been

made

public.

296

But

informal

reports

suggest

that

the

warning

letters

appeared

to

have

some

real

effects.

Certainly,

after

receiving

such

a

letter,

MLMs

will

have

a

hard

time

arguing

that

they

were

not

on

notice

of

the

claims

being

made.

And

the

FTC's approach

implicitly

makes

the

argument

that

if

regulators

have

been

able to

locate

these

claims,

MLMs

should

be

able

to

do

so

as

well.

Several

MLMs

responded

by

counseling

distributors

to

be

cautious

about

how

they

were

promoting

products

to

clients,

especially

on

social

media.

297

Kevin

Thompson,

an

MLM

attorney,

asserted

that

the

warning

letters

"led

to

a

lot

of

activity

in

the

industry

and

a

really

good

discussion."

298

Many

MLMs-not

limited

to

those

who

received

letters-appear

to

have

added

virtual

trainings

for

distributors

and

292..

RODAN

&

FIELDS,

https://www.rodanandfields.com/

(last

visited

Jan.

28,

2022).

293.

Letter

from

Fed.

Trade

Comm'n

to

Rodan

&

Fields,

supra

note

4

(punctuation

in

original).

294.

Seena Gressin,

FTC

Letters

Target

More

Unproven

MLM

Health

and

Earnings

Claims,

FED

TRADE

COMM'N:

CONSUMER

INFO.

BLOG

(June

5,

2020),

https://www.consumer.ftc.gov/blog/2020/06/fte-letters-target-

more-unproven-mlm-health-and-earnings-claims.

295.

Press

Release,

Fed.

Trade

Comm'n,

FTC

Sends

Second

Round

of

Warning

Letters

to

Multi-Level

Marketers

Regarding

Coronavirus

and

Earnings

Claims,

(June

5,

2020),

https://www.ftc.gov/news-events/press-

releases/2020/06/second-round-warning-letters-to-mlms-regarding-coronavirus.

296.

About

FTC

Warning

Letters,

FED.

TRADE

COMM'N,

https://www.ftc.gov/news-

events/media-resources/truth-advertising/about-ftc-warning-letters.

297

Jesselyn

Cook,

MLMs

Are

Using

Coronavirus

Anxiety

to

Exploit

the

Quarantined

and

Unemployed,

HUFFPOST

(May

29,

2020),

https://www.huffpost.com/entry/mlms-

capitalizing-on-coronavirus-anxiety_n_5ecad83ac5b63a8c2095c800.

298.

Id.

[89:321

368

2022]

MULTI-LEVEL MARKETING

PANDEMIC

369

enacted

software to

better

monitor

posts.

299

Thompson

stated

that

this

could

be

a

turning

point

for how

MLMs

will

approach

distributor

statements

in

the

future.

300

Where

previously,

the

corporations

had

a

more

lax

approach,

what

Thompson

called

"a

loose

connection

with

the

field,"

they

are

now

taking

"it

more

seriously"

as

COVID-19

appeared

to

shock

"the

companies

and

the

industry

to

take

the

statements

made

by

their

distributors

more

seriously."

301

Others

are

not

so

certain

that

the

change

will

be

lasting.

30 2

Certainly,

the

FTC

will

have

to

continue

to

monitor

both

the

recipients

of

letters

and

other

MLMs.

But

it

seems

likely

that

the.

benefits

of

this

speedy

regulatory

intervention

exceed

its

costs.

Misrepresentations

are

easier

to

detect

and

police

than

a pyramid

structure,

which

requires

detailed

economic

analysis.

303

Policing

misrepresentations

will

never

be

perfect,

both because

some

misrepresentations

will

sneak

through

and

because

even

if

representations

are

accurate

there

will

be

victims

drawn into

unlawful

MLM

pyramid

schemes.

But

the

use

of

warning

letters

is

a

powerful,

relatively

low-cost

way

of

keeping

pressures

on

MLMs

and

their

participants

to

avoid

some

egregious

forms of deceptive

recruitment.

3 0 4

MLMs

aren't

the

only

ventures

that

have caused

concern

during

the

COVID-19

pandemic.

The

FTC

reports

that

during

the

pandemic,

it

has

issued

more

than

three

hundred

warning

letters

for

false

health

claims

by

a

range

of

actors,

most

of

which

were

not

MLMs.305

These

efforts

show

that

the

FTC

is

capable

of

swift

intervention.

The

will

be

to

track

whether

these

efforts

are

successful

at

stemming

the

pandemic-driven

tide

of false

claims.

299.

Id.

300.

Id.

301.

Id.

302.

Id.

("We've

found

that

it's

a

game

of whack-a-mole

...

historically,

when

MLM

companies

are

presented with

a

sampling

of

inappropriate

income

claims

[from

their

distributors], they'll

work

to

take

those

down,

but

then

others

will

just

pop

up."

(quoting

Bonnie

Patten,

director

of

Truth

in

Advertising)).

303.

Waters,

supra

note

5

("20

years

ago,

the

overwhelming

emphasis

was,

'Is

this

a

pyramid

scheme?'

Now

regulators

are

saying,

'Whether

this

is

a

pyramid

scheme

or

not,

you

can't

go

out

and

say misleading

things,'

said

[an

expert].").

304.

About

FTC

Warning

Letters,

supra

note

296.

305.

Lesley

Fair,

Fed.

Trade

Comm'n,

20

More

Warning

Letters

Tell

Companies

to

Cut

Out

Unproven

COVID-19

Claims,

BUS.

BLOG

(Aug.

14,

2020),

https://www.ftc.gov/news-events/blogs/business-blog/2020/08/20-more-warning-

letters-tell-companies-cut-out-unproven;

Lesley

Fair,

Fed.

Trade

Comm'n,

20

More

Marketers

Making

Covid

Claims

Receive

FTC

Warning

Letters,

BUs.

BLOG

(Nov.

12,

2020),

https://www.ftc.gov/news-eventsiblogs/business-blog/2020/11/20-more-

marketers-making-Covid-claims-receive-ftc-warning.

TENNESSEE

LAW

REVIEW

The

formal

letters

aren't

enough

on

their

own-the

threat

of

action

has

to

be

real.

Accordingly,

the

FTC

hasn't

relied

on

letters

alone.

306

The

FTC

has

also

pursued

a

series

of

formal legal

actions,

under

the

umbrella

of

"Operation

Income

Illusion,"

in

coordination

with

numerous

other

federal

and

state

regulators,

including

arms

of

the

Department

of

Justice,

the

Securities

&

Exchange

Commission,

the

Commodity

Futures

Trading

Commission,

state

attorneys

general,

and

many

others.

30 7

These

actions

are

against

false

earning

claims

made

by

various

illegal

scams,

several

of

which

have

a pyramid

structure.

308

The

FTC

and

its

partners

have

filed

complaints,

sought

temporary

restraining

orders,

procured

criminal

convictions,

and

reached

various

settlements.

30 9

In

all,

there

are

more

than

fifty

actions

in

this

"Operation,"

and

in

many

of

them,

formal

action

was

initiated

after

the

onset

of

the

COVID-19

pandemic.

310

Several

of

the

schemes

specifically

premised

false

earnings

claims

on

aspects

of

the

COVID-19

pandemic.

31 1

No

doubt

many

other

investigations

remain

pending

and

formal

action

will

follow

in

due

course.

These

investigations

and

formal

actions

are

crucial

because

they

demonstrate

that

the warning

letters

are not

paper

tigers,

they

have

teeth.

Despite

the

limitations

on

their

authority

that

Part

II

of

this

Article

discusses,

Operation

Income

Illusion,

among

the

FTC's

other

actions,

demonstrates

that

the

FTC

and

its

partner

enforcement

agencies

are

capable

of

turning

informal

threats

into

formal

actions-

which

in

turn

endows

the

informal

warnings

with

greater

power.

B.

Monitoring

by

Social

Media

Networks

Increased

reliance

on

social

media

as

the

channel

for

recruitment

might

have

a silver

lining

from

a

consumer

protection

standpoint.

One

effect

is

that

this

may

make

monitoring

and

enforcement

of

disclosure

rules

easier.

Because

of

the

permanent,

concrete

nature

of

posts

on

306.

Press

Release,

Fed.

Trade

Comm'n,

As

Scammers

Leverage

Pandemic

Fears,

FTC

and

Law

Enforcement

Partners

Crack

Down

on

Deceptive

Income

Schemes

Nationwide,

(Dec.

14,

2020),

https://www.ftc.gov/news-events/press-releases/2020/12/

scammers-leverage-pandemic-fears-ftc-law-enforcement-partners.

307.

Id.

308.

Id.

309.

See

generally

Operation

Income

Illusion:

Federal,

State,

and

Local

Actions,

FED.

TRADE

COMM'N

(2020),

https://www.ftc.gov/system/files/attachments/press-

releases/scammers-leverage-pandemic-fears-ftc-law-enforcement-partners-crack-

down-deceptive-income-schemes/operation-income_illusion_-_federal_state_and_

localactions_2020.pdf.

310.

Id.

311.

Id.

[89:321

370

MULTI-LEVEL

MARKETING

PANDEMIC

social

media,

as

compared

to

fleeting

words

at

a

small,

hosted

event,

the

FTC

now

has

a

more

substantial

evidential

tool

to

bring

about

their

enforcement

mechanisms.

Regulators

and

consumer

advocates

should

seek

the

help

of

social

media

companies,

whose

products

have

played

a

crucial

role

in

the

rapid

spread

of

MLMs

and

particularly

of

misinformation

about

them.

To

protect-their

product

and

serve

the

broader

public

interest,

some

companies

may

be

willing

to

monitor

and

prohibit

misrepresentations

about

MLMs

as

they

have

about

both

political

and

health

matters

in

the

course

of

2020-2021.312

The

social

media

network

TikTok

has

prohibited

such

claims

in

its

guidelines,

although

it

is

unclear

whether

TikTok

will

monitor

posts

or

rely

on

user-based

reporting

of

violative

posts.

3

13

But

even

if

they

cannot

be

persuaded

or

required

to

remove

or

restrict

false

statements

about

MLMs,

social

media

companies

could

devise

and

provide

interfaces

for

regulators

or

for

law-abiding

MLMs

to

monitor

and

sanction

participants

making

false

claims.

Such

a

"dashboard"

could

lower

investigation

costs

and

make

enforcement

more

certain,

deterring

the

relevant

behavior.

Interestingly,

as

social

media

has

been

used

as

a

mechanism

to

lure

individuals

into

becoming

distributors,

social

media

has

also

become

a

mecca

for

the

sullen

and

disappointed.

A

Facebook

group

with

over

40,000

people

called

"Sounds

like

an

MLM

but

ok"

is

a

refuge

where

former

distributors

of

a

variety

of

MLMs

or

family

members

of

current

distributors

share

their

stories

of

hardship

finances

and

personal

relationships,

"flag

new

MLMs

to

watch

out

for,"

and

"speak

freely

about

the

ways

that

they

were

duped

by

their

MLM

companies

in

the

past."

31

4

Consumer

advocacy

groups

such

as

this

one

might

be

enlisted

to

support

the

effort

to

prevent

misrepresentations.

All

of

that

said,

the

limitations

of

this

approach

should

be

acknowledged.

Participants

in

MLMs

have

noted

that

one

commonly

adopted

strategy

is

to

avoid

making

concrete

misrepresentations

but

312.

See,

e.g.,

Chris

Mills

Rodrigo,

Google

Blocked

Nearly

100

Million

Misleading

Coronavirus

Ads

in

2020,

TfiE

HILL

(Mar.

17,

2021),

https://thehill.com/policy/

technology/543529-google-blocked-nearly-100-million-misleading-coronavirus-ads-in-

2020.

313.

Allana

Akhtar,

TikTok

Is

Banning

Content

That

Promotes

Pyramid

Schemes

and

Multi-Level

Marketing

Companies,

BUS.

INSIDER

(Dec.

16,

2020),

https://www.businessinsider.com/tiktok-bans-mlm-pyramid-ponzi-scheme-content-

promotions-2020-12.

314.

Taylor

Lorenz,

How

Women

Are

Fighting

the

Marketers

That

Nearly

Ruined

Them,

DAILY

BEAST

(Mar.

14,

2018),

https://www.thedailybeast.com/how-women-are-

fighting-the-marketers-that-nearly-ruined-them.

371

2022]

TENNESSEE

LAW

REVIEW

to

construct

a

persona

or

narrative

around

the

beneficial

effects

that

have

flowed

from

involvement

in

the

MLM.

As

one

put

it,

"We

were

told

very

specifically,

never post

anything

negative

on

your

Facebook

...

[Y]ou

were

supposed

to

filter

your

Facebook

as

though

once

you

joined

[the

MLM]

all

your

problems

went

away."

315

This

sort

of

more

subtle

advocacy

would

be

nearly

impossible

to

police,

and

wouldn't

be

the

worth

the

effort of

trying.

This

is

a

good

example

of

the

limits

of

disclosure

regulation,

even when

technology-aided.

C.

Self-Regulation

MLMs

have

made

some

effort

at

self-regulation,

largely

through

the

Direct

Selling

Association

(DSA)

and

the

more

recently

formed

Direct

Selling

Self-Regulatory

Council

(DSSRC),

which

is affiliated

with the

Better

Business Bureau

and

is largely funded

by

the

DSA.316

Both

of

these

organizations

have

promulgated

various

guidelines

for

MLM

practices,

and

they

can

take

action

against

MLMs

that

violate

these

guidelines.

317

The

DSA

is

a

membership-based

organization;

the

DSSRC's

guidelines

apply

across

the

industry,

and

it

considers

"cases"

in

which

MLMs

have

violated

the

guidelines.

318

As

with

other

industries,

these

efforts

appear

to

be

intended

to

assure

regulators

and other critics

that

the organizations

that

have subjected

itself

to

the

guidelines

will

police

themselves

and

thus

do

not

merit

further

regulatory

scrutiny.

Similar

to

other

industries,

there

are

reasons

to

question

the

overall

efficacy

of

these

efforts

if

the penalties

for

violation

are

insufficient

to

deter

the

relevant

conduct.

The

DSA's

primary

power

appears

to

be

the

ability

to

kick

its

members

out,

a

primarily

reputational

form

of

penalty,

or to

call

for

315.

Akhtar,

supra

note

313.

316.

Policies

and

Procedures

for

BBB

Nat'l

Programs,

Inc.'s Direct Selling

Self-

Regulatory

Council,

BETTER

BUS.

BUREAU

NAT'L

PROGRAMS,

Part

V.E.2,

https://bbbnp-bbbp-stf-use

1-O.s3.amazonaws.com/docs/default-source/bbb-national-

programs/procedures/dssrc-procedures.pdf

[hereinafter

Policies

and

Procedures

for

BBB

Nat'l].

One

of

the

three

members

of

the

"Appeals

Board"

is

also

a

DSA officer.

DIRECT

SELLING

SELF-REGULATORY

COUNCIL,

DSSRC Appellate

Board,

BETTER

BUS.

BUREAU

NAT'L

PROGRAMS

(2020),

https://bbbprograms.org/programs/all-programs/

dssrc/dssrc-appellate-board

[hereinafter

DSSRC

Appellate

Board].

317.

See

Policies

and

Procedures

for

BBB

Nat'l,

supra

note

316;

DSSRC

Appellate

Board,

supra

note

316.

318.

DIRECT

SELLING

SELF-REGULATORY

COUNCIL,

CASE

NUMBER

33-2021:

GOVT

REFERRAL-RBC

LIFE

SCIENCES,

INC.,

BETTER

BUS.

BUREAU

NAT'L

PROGRAMS

(2020),

https://bbbprograms.org/programs/all-programs/dssrc/cases-and-closures-details/

case-33-2021-monitoring-inquiry-rbc-life-sciences-inc.

Because

the

MLM

didn't

respond,

the self-regulatory

process was

deemed

to

have

failed,

and

the

matter

was

referred

to

the

FTC.

Id.

[89:321

372

MULTI-LEVEL

MARKETING

PANDEMIC

voluntary

remedial

steps.

3 19

In the

case

of

the

DSSRC,

it

appears

that

the

penalties

for

violation

of

the

guidelines

are

similarly

weak.

320

The

DSSRC

can

request

corrective

measures

be

taken

and

can

refer

the

matter

to

the

DSA's

ethics

board

or,

under

some

conditions,

to

regulators.

321

There

is

perhaps

some

reputational

harm

from

an

adverse

decision

being

posted

on

the

DSSRC's

website.

3

22

But

these

steps

are

hardly

severe,

and

one

might

suspect

that

those

chosen

by

industry

actors

to

manage

their

self-regulate

are

less

lions

than

lambs

when

it

comes

to

enforcement

efforts,

at

least

against

the

DSA

members

who

ultimately

pay

their

bills.

The

DSSRC

guide

provides

explanations

accompanied

by

more

than

a

dozen

examples

of

compliant

and

non-compliant

social

media

posts.

323

It

offers

numerous

examples

of

what

to

do

and

what

not

to

do,

addressing

everything

from

the

prominence

of

disclaimers

(Is

the

font

big enough?

Does

the

color

blend

into

the

background?),

proximity

(Are

disclaimers

too

far

from

the

claim

they

qualify?),

and

overall

placement

and

structure

of

posts.

3 24

The

guidelines

themselves

include

many

helpful

and

substantive

points.

From

a

regulatory

perspective,

they

could

be

helpful

at

showing

basic

industry

norms.

For

its

part,

the

DSA's

focus

appears

to

be

its

Code

of

Ethics.

325

Self-regulatory

organizations

and

practices

may

have

a

role

to

play

in

restricting

some

of

the

worst

offenders

and

identifying

practices

that

are

far

beyond

the

pale.

Many

of

the

pandemic-induced

abuses

may

well

fall

into

this

category,

and

self-regulatory

efforts

may

be

another

helpful

tool

for

stemming

some

of

the

worst

abuses

that

have

arisen

in

the

MLM

pandemic.

At

the

same

time,

there

is

reason

to

believe

that

the

MLM

industry

as

a

whole

is

more

interested

in

freedom

from

meaningful

regulation

than

in

thoroughgoing

reform.

As

noted

above,

various

states

have

limited

the

ability

of

regulators

to

pursue

MLMs

that

have

over-emphasized

recruitment

over

sales

and

thus

seem

to

be

exhibiting

the

hallmarks

of

a

pyramid

scheme.

States

have

done

this

319.

See

DIRECT

SELLING

ASS'N,

https://www.dsa.org/about/faq

(last

visited

Jan.

28,

2022).

320.

Policies

and

Procedures

for

BBB

Nat'l

Programs,

supra

note

316

at

Part

II.

321.

Id.

322.

Id.

323.

DIRECT

SELLING

SELF-REGULATORY

COUNCIL,

Guidance

on

Earnings

Claims

for

the

Direct

Selling Industry,

BETTER

BUs.

BUREAU

NAT'L

PROGRAMS

(2020),

https://bbbnp-bbbp-stf-use

1-01.s3.amazonaws.comn/docs/default-source/dssrc/dssrc

guidanceonearningsclaimsforthedirectsellingindustry_2020.pdf?sfvrsn=4ecfcd368

324.

Id.

325.

Code

of Ethics,

DIRECT

SELLING

ASS'N

(2022),

https://www.dsa.org/

consumerprotection/code

-of-ethics.

373

2022]

TENNESSEE

LAW

REVIEW

by

constraining

regulators

from

taking

action

against

MLMs

unless

they

fit

a

relatively

rigid

and narrow

definition

of

pyramid

scheme.

32

6

Similar

amendments

have

been

proposed

in

recent

years

at

the

federal

level

as

well.

32 7

The

strong

industry

support

for

these

amendments

suggests

that

even

the

most

respectable

industry

actors

do

not

consider

it

to

their

benefit

to

restrict

the

activities

of

unscrupulous

MLMs.

32

8

D.

Toward

a

More

Comprehensive

Approach

This

Part's

proposals

have

been

limited

to

fast-acting,

emergency-

type

measures

that

could

be

implemented

quickly

and

could

bring

significant

benefits

are

relatively

low

costs.

These

first

steps

could

be

implemented

quickly

and

under

existing

legal

and

regulatory

regimes

and

bring

significant

benefits

even

in

the

absence

of

a

more

comprehensive

approach.

Longer

term,

comprehensive

solutions

to

MLM-related

consumer

abuses

would

probably

require

legislation

enhancing

the

FTC's

enforcement

authority

and

significant

new

regulation,

along

with

additional

authorizing

legislation.

In

addition

to

identifying

some

effective

short-term

steps,

this

Article

is

intended

to

provide

groundwork

for

future

research

on

the

ideal shape

of

that

much-

needed

legislation

and

regulation,

and

to

encourage

greater

attention

to MLMs

from

lawyers,

economists,

and

consumer

advocates.

At

the

time

of

this

writing,

the

COVID-19

pandemic

appears

to

be

receding.

But

attention

to

consumer

abuse

by

MLMs

will

remain

imperative

for

future

crisis,

whether

they

relate

to

disease,

terrorism,

or

weather

and

climate.

Like

other

exploiters

of

consumers,

unscrupulous

MLMs

have

shown

themselves

able to

adapt

their

strategies

quickly

to exploit

some

of

the

most

vulnerable

and

desperate

members

of

society.

329

The

development

of

highly

responsive

regulatory

tools

is

therefore

crucial.

326.

See

discussion

supra

Part

I

B;

see

also

Matthews,

supra

note

31,

at

2060.

327.

See

Howie,

supra

note

116

and

accompanying

text.

328.

The

president

of

the

Direct

Selling

Association,

the

primary

industry

group,

wrote

an

op-ed

enthusiastically

supporting

the

Moolenaar

amendment.

Joseph

N.

Mariano,

Direct

Selling

is

No

Pyramid

Scheme,

THE

HILL

(July

25,

2017),

https://thehill.comlblogs/pundits-blog/economy-budget/343508-protecting-legitimate-

businesses-in-todays-economy.

329.

See

Cook,

supra

note

171.

[89:321

374

2022]

MULTI-LEVEL

MARKETING

PANDEMIC

375

CONCLUSION

Given

how

pervasive

they

are

in

our

everyday

lives

and

how

much

money

they

bring

in

for

their

owners

and

others

at

the

top

of

their

compensation

structures,

the

law

governing

MLMs

remains

remarkably

under-developed-which

seems

to

have

provided

opportunities

for

unscrupulous

actors

to

join

the

industry.

And

that

was

true

even

before

the

pandemic

that

arrived

in

early

2020.

Unfortunately,

among

the

many

tragedies

of

the

COVID-19

pandemic

is

an

increased

vulnerability

of

many

to

the

siren

call

of

misrepresentations

by

MLMs

and

their

participants.

While

the

broader

problem

of

who

MLMs

should

be

regulated

may

remain

unresolved,

some

urgent

steps

can

be

taken

to curb

the

worst

abuses

of

unscrupulous

MLMs

and

their

participants.

Developing

a

quick-

response

regulatory

toolkit

against

MLMs'

exploitation

of

consumers

is

crucial

not

just

for

the

COVID-19

pandemic

but

for

future

crises.