An Attorney's Perspective

In an industry where billions of dollars and millions of people are involved, much attention is being cast upon the opportunities and pitfalls in network marketing. Network marketing companies generated more than $28 billion in U.S. sales in 2002 through an estimated 13 million salespeople, according to the Direct Selling Association (DSA).
In September 2003 the World Federation of Direct Selling Associations released statistics on a global scale whereby network marketers accounted for more than $85.5 billion in sales with over 47 million salespeople. Despite these incredible numbers, questions regarding the legality of multilevel marketing companies persist. When considering whether to affiliate with a particular company, people simply want to know: "Is it legal?" Unfortunately, there is no simple or uniform answer… BUT the analysis can be relatively simple. A determination of legality is often times based simply on a subjective evaluation of the facts, good or bad, found in a particular plan or the manner in which the plan actually operates.

As a successful attorney with a thriving law practice and more than 10 years experience in the areas of business, corporate, and contract law, I certainly was not looking to become involved in or affiliated with an "illegal pyramid." Upon meeting Orrin Woodward, the founder of the Team, and after seeing the business opportunity and its potential for success, I began to investigate some of the complexities of the Team and the multilevel marketing (MLM) industry. What I found is that, in general, the key issue concerning legality is whether a company is in business to merchandise goods and services to consumers or whether it attempts to profit simply through fees for the mere recruitment or "headhunting" of additional participants.

The information in this article contains my personal perspective who, as an attorney and IBO affiliated with the Team, assisted in the design, analysis and evaluation of the Team compensation plan working with several of the foremost legal experts in the MLM industry together with Orrin Woodward and the Team Policy Council. This article is offered as a commentary on the Team compensation plan only, not as a commentary on other businesses in the MLM industry.

The Legislative and Judicial Guidelines

MLM legislation focuses on protecting the consumer. For that reason, it is broadly drafted and interpreted, which has a result of encompassing all possible variations of illegitimate schemes in order to provide a jurisdictional basis for regulation. The vague and ambiguous language of the statutory legislation often lends itself to arbitrary and disparate enforcement. The essential intent of the statutes is to prohibit marketing plans that require an investment or purchase by sales representatives simply for the right to recruit others for economic gain. The statutes require multilevel companies to be true retail organizations that market real products or services to an ultimate consumer.

Determining whether a particular program or business opportunity is a legitimate, multilevel marketing plan, versus an illegal pyramid, depends principally on two areas of focus:

The method by which the business’s products or services are sold; and,

The manner in which the participants in that business are compensated.

Essentially, if a program or business plan compensates participants for sales made by themselves, their enrollees/recruits, and/or down line enrollees/recruits, it is a legitimate, multilevel program. Conversely, an illegal pyramid is a scheme that compensates participants merely for the recruitment, introduction, or enrollment of others into the program, exclusive of any sales.

Design & Operation

In analyzing whether a program is legitimate or illegal, the focus is primarily upon the compensation plan. There is a two-fold analysis of the compensation plan. The first involves an investigation as to the design of the plan and whether it compensates participants (1) merely for the introduction of additional participants in the program, or (2) for the sale of goods or services.

If a compensation plan compensates participants merely for recruiting mew members, it would likely constitute a traditional example of an illegal pyramid. If, on the other hand, the plan compensates participants for the sale of goods or services it will pass the design requirement for legality. Second, a legal compensation plan requires an analysis of its operation. In particular, does the plan operate to reward members for the mere recruitment of additional distributors/participants or does it require actual sales.

In determining whether a particular program is a pyramid, the majority of individual states indirectly define what constitutes a "pyramid". Regardless of the legislative title or name, the intent of such legislation is to prohibit programs or plans that compensate participants, whether directly or indirectly, on the basis of recruitment/enrollment of other participants ("head hunting") rather than for the sale of products or services to consumers.

Team is a Michigan corporation. Michigan specifically defines and proscribes pyramid programs in its statutes regulating franchises, stating:

FRANCHISE INVESTMENT LAW (EXCERPT)

Act 269 of 1974



445.1528 Pyramid or chain promotion or distribution.

Sec. 28.

(1) A person may not offer or sell any form of participation in a pyramid or chain promotion. A pyramid or chain promotion is any plan or scheme or device by which (a) a participant gives a valuable consideration for the opportunity to receive compensation or things of value in return for inducing other persons to become participants in the program or (b) a participant is to receive compensation when a person introduced by the participant introduces one or more additional persons into participation in the plan, each of whom receives the same or similar right, privilege, license, chance, or opportunity.

(2) A pyramid or chain promotion is declared to be illegal and against the public policy of the state. Any contract made in violation of this section is voidable at the sole option of the purchaser.

(3) The department shall not accept for filing a franchise which involves a pyramid or chain distribution contrary to the laws of this state.

History: 1974, Act 269, Eff. Oct. 15, 1974 .

© 2004 Legislative Council, State of Michigan

Similar statutes in other states generally provide that pyramids or endless chain schemes are illegal. As long as a multilevel compensation plan does not fit within the parameters of the prohibited activities, under the pyramid legislation, it is permissible.

In specifically reviewing the Michigan statute, the elements of a pyramid are:

a plan or scheme or device,

by which

a participant gives valuable consideration for the opportunity to receive compensation for inducing other persons to become participants in the program, or

a participant is to receive compensation when the person introduced by the participant introduces one or more additional persons into participation into the plan.

each of whom receives the same or similar right, privilege, license, chance or opportunity.

IF ANY OF THE ELEMENTS LISTED ABOVE ARE ABSENT, THE PROGRAM DOES NOT VIOLATE MICHIGAN ANTI-PYRAMID LEGISLATION.

There is no federal anti-pyramid statute in the United States. The legal guidance offered on the federal level is derived from the administrative and judicial decisions of the Federal Trade Commission and the federal courts. The FTC decision in The Matter of Koscot Interplanetary, Inc. 86 FTC 1106, 1180 (1975) is the most widely used basis for defining a pyramid on the federal level. Today, the safeguards set forth in the FTC administrative law judge decision in the landmark case In The Matter Of Amway Corporation, Inc. et al 93 FTC 618 (1979), continue to be the standard in evaluating the difference between legitimate multi-level companies and illegal pyramids. The elements of a pyramid, based upon the FTC and federal decisions, are characterized by "the payment by participants of money to the company in return for which they [the participants] 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." 1

Team Background

The Team produces training and support materials and provides training and support seminars that may be purchased and utilized by any Team affiliated independent business owner ("IBO"). Team affiliated IBOs can also participate in the sales-based Team compensation plan and purchase these materials directly from the company.2

The Team is a training and development organization dedicated to supporting IBOs. The Team plan is based upon the seminars, training, and support materials that share the knowledge and experience of successful IBOs in building a successful business. These training and support materials, which may include books, CDs, tapes, brochures, business meetings, seminars and other related items, are commonly referred to as Business Support Materials (BSM). Utilization of the training and support materials is common in every area of business whereby employees, business owners, independent contractors, consultants, and other professionals, participate in training, seminars, professional development programs, and continuing education for the training, motivation and education in each specific industry. These tools are made available to acquire knowledge and to achieve personal advancement in any chosen field. Such training and support plays an important role in the advancement of any business success. The specific BSMs created by IBO leaders affiliated with the Team provide business building techniques, improved interpersonal communication skills, principles and practices for success, valuable time and money management skills, as well as leadership concepts from the perspective of those who have achieved success in a business. The use of these BSMs is at the option of an IBO and is always accompanied with a refund policy and, in compliance with federal and state requirements.3

Team — Multilevel or Not?

Since the Team compensation plan is independent and separate from the compensation plan, any analysis of its legality would be independent and the plan would have to stand on its own.

In reviewing the Team business model, there is a question as to whether the compensation plan can even be considered ‘multilevel’. In analyzing specific multilevel legislation, companies, and plans, the Team compensation plan does not appear to fit within the traditional definition of a multilevel business.

First, a determination must be made as to whether a business or marketing plan is even subject to state or federal regulation of multilevel marketing companies. MLM legislation does not apply unless it is, in fact, a legally defined multilevel business. Very few states specifically define and regulate multilevel marketing plans. Michigan is not one of them. However, a minority of other states have adopted statutory regulations that may provide guidance. The few states that have defined a multilevel company or marketing plan are nearly identical in nature and include the following elements:

A person, firm, corporation or business entity

Which a) sells, b) distributes, or c) supplies (note: they do not define ‘distribute’ or ‘supply’)

For consideration

Goods or services

Through independent agents, contractors, or distributors

At different levels

Participants may recruit other participants

Compensation to participants is paid as a result of

sale of goods or services or

the recruitment, actions or performance of other participants (i.e. purchase and sales of goods and services)

Taken from Georgia Code 10-1-410.

(6) .Multilevel distribution company. means any person, firm, corporation, or other business entity which sells, distributes, or supplies for a valuable consideration goods or services through independent agents, contractors, or distributors at different levels wherein such participants may recruit other participants and wherein commissions, cross-commissions, bonuses, refunds, discounts, dividends, or other considerations in the program are or may be paid as a result of the sale of such goods or services or the recruitment, actions, or performances of additional participants. The term shall not include licensed insurance agents, insurance agencies, licensed real estate brokers, licensed real estate agents, licensed real estate agencies, licensed securities dealers, licensed limited securities dealers, licensed securities salesmen, or licensed limited securities salesmen.

Wyoming’s statute is similar to Georgia’s and states:

Wyoming Multilevel and Pyramid Distributorship Act

40‑3‑102. Definitions.

(a) As used in this act [§§ 40‑3‑101 through 40‑3‑125]:

(i) "Multilevel distribution companies" means any person, firm, corporation or other business entity which sells, distributes or supplies for a valuable consideration, goods or services through independent agents, contractors or distributors, at different levels wherein such participants may recruit other participants, and wherein commissions, cross‑commissions, bonuses, refunds, discounts, dividends or other considerations in the program are, or may be, paid as a result of the sale of such goods or services or the recruitment, actions or performances of additional participants

Maryland is another jurisdiction that specifically defines a multilevel company:

§ 14-301. "Multilevel distribution company" defined.

In this subtitle, "multilevel distribution company" means a person who, for consideration, distributes goods or services through independent agents, contractors, or distributors at different levels of distribution with rates of pricing or discounting that differ from 1 level to another.

[An. Code 1957, art. 23, § 180A; 1992, ch. 4, § 2.]

Source: Maryland Code/BUSINESS REGULATION/TITLE 14. BUSINESS OPPORTUNITIES, FRANCHISES, AND MULTILEVEL DISTRIBUTION COMPANIES/SUBTITLE 3. MULTILEVEL DISTRIBUTION COMPANIES/§ 14-301. "Multilevel distribution company" defined.

In light of these guidelines, the Team business/compensation plan is not a multilevel company nor a multilevel marketing plan and, therefore, not subject to the regulation and scrutiny of such legislation. In analyzing each element under Georgia’s statute, the Team is 1) a person, firm, corporation or other business entity 2) which sells, distributes, or supplies 3) for a consideration 4) goods or services 5) through independent agents, contractors, or distributors.

The remaining elements, however, become somewhat problematic for many typical multilevel compensation plans that compensate people or have special pricing or discounts for people at different levels. Qualification to participate in the Team compensation plan, however, is achieved after qualification of only one level. Upon qualification, a participant’s income or price is irrelevant to that person’s particular level. Qualification and compensation are based upon sales volume allocated in a certain number of sponsorship lines without regard to level. Further, there is no differential pricing for individuals at different levels. All pricing is the same at every level. Compensation is not determined based upon level of sponsorship but upon the sales of the Team goods and services to: (1) individuals who are not participants, meaning they are not compensated in the Team plan, or (2) to other participants who may be compensated in the Team plan. It is important to discern the difference between a participant in the compensation plan and someone who would be a non-participant customer. Individuals who are in a particular participant’s line of sponsorship are not necessarily participants in the compensation plan unless they qualify based upon performance, i.e., sales volume.

Element 7 is also not applicable to the Team because participants may not recruit other participants. That is not to say that an IBO in a particular participant’s line of sponsorship could not become eligible to participate in the compensation plan, but it is not possible to simply recruit someone who is automatically eligible to participate in the compensation plan.

The eighth element is partially met in that compensation that is paid to participants is paid as a result of a) the sale of such goods or services, but subsection b) is only partially applicable in that compensation may be paid for the actions or performance of other participants who buy and sell Team goods and services. Although someone may be eligible to participate in the compensation plan, that does not automatically make that person immediately eligible to participate in the Team compensation plan. Again, the eighth element provides for compensation paid as a result of the recruitment, actions, or performance of participants. Under the Team compensation plan, that is never the case.

Team Analysis Under State and Federal Regulation

In analyzing the Team business/compensation plan, it is important to understand that it cannot definitively be determined or classified as a "multilevel company" or "multilevel marketing plan", and therefore, it would not be subject to state or federal regulation as a multilevel entity. This conclusion would render any analysis of anti-pyramid legislation irrelevant and inapplicable since the components of a multilevel company/compensation plan would not be present.

Even if the Team plan were a multi-level plan, it does not violate any state or federal anti-pyramid legislation. The Team plan is not violative of state or federal law because there is never money paid to simply join or to receive the right or opportunity to receive compensation for the introduction of additional participants "into the compensation program/plan." In other words, there is no payment for the mere introduction or qualification of someone into the Team compensation program. Any compensation is paid solely as a result of actual sales. Since the compensation is based on a percent commission of the net profits, the very nature of the program requires sales for a commission to even be calculated.

The Team offers a compensation plan to qualifying participants whereby a participant’s commission is based upon a percentage of the net profits generated from the sale of the BSMs and services. The Team compensation plan is based completely upon the sales and volume of the materials and services sold. Eligibility to participate in the Team compensation plan is met when an IBO achieves an early qualification level and generates regular monthly sales of Team goods and services consistent with the parameters of the Team compensation plan. Once an IBO has achieved those sales numbers, he or she becomes eligible to participate in the Team compensation plan as a distributor. Any other level of achievement is irrelevant to income under the Team compensation plan. The specific compensation a distributor receives is based completely upon the income generated by that participant’s sales of BSM. Irrespective of any level in the business, the participant IBO is compensated based on the net profits generated from the sale of the BSM under a formula of calculation that is entirely performance based.

So, applying the Team compensation plan to the elements of anti-pyramid legislation shows that the elements of a pyramid are not satisfied. The Team is a (1) scheme, plan or program, but is NOT one (2) for which a participant renders consideration to join (3) for the right or chance to receive compensation or other things of value, and (4) which is contingent upon the introduction of additional participants into the scheme, plan or program. Under the Team compensation plan, there is absolutely no consideration paid to participate other than performance, and the only way to become eligible to participate in the compensation plan in the first place, is based upon performance-- the sale of materials, the sale of goods, and the sale of services. There is no "pay to play" as it may sometimes be called. As a participant in the compensation plan, there are no subscription fees, enrollment fees, or minimum personal purchases required for eligibility. There is no compensation for joining and there is simply no compensation for the mere introduction or recruitment of additional participants into the compensation plan which an individual cannot do anyway. Eligibility is not based upon recruitment/enrollment, but exclusively upon sales volume. Pursuant to State and Federal regulations, if any of the elements listed above are absent, the program does not violate either state or federal anti-pyramid legislation. Because the Team compensation plan does not contain three of four prohibited elements, it does not violate applicable state or federal anti-pyramid laws.

Conclusion

The Team cannot definitively be considered a business that is governed and regulated by MLM or anti-pyramid legislation. Even if it were, the Team compensation plan does not compensate for the "recruiting" of participants in its design. The Team plan operation, "what actually happens", compensates participants with a percentage of net profits from actual sales of goods and services (BSMs). There is no compensation for the mere recruitment of people into the program, both in its design and operation. All compensation is directly related to the actual legitimate sale of products and services, and, thus, Team operates more like a traditional profit-sharing plan than a traditional MLM business.

Once someone is possessed of correct and accurate information, the analysis and conclusion becomes clear. It is assumption that is the origin of misunderstanding. Be cautious of self-proclaimed "experts" who lack any professional qualifications yet boldly present legal and factual conclusions allegedly based on a supposed analysis or understanding of a particular business or compensation plan. When the self-proclaimed experts do not have possession of or even access to the relevant documentation describing a plan or complete knowledge of the facts of a particular business, their statements, conclusions and even opinions are inaccurate, false and misleading. Many critics in any area, inside or outside of business, lack the information or knowledge in their self-proclaimed field of amateur expertise. As in any area of life, beware the motives and agendas of those laypersons endorsing themselves as ‘experts’ in any area of law or business where the formal education, training and experience of investigating, drafting, analyzing, prosecuting and defending legal issues are nonexistent. The most reliable guidance will come from those with the actual experience and training in the legal analysis and interpretation of statutory legislation and judicial precedent.

I simply share the information and personal insight of the issues discussed in this article from the perspective of someone who considered similar concerns in making a personal and professional assessment of a particular business opportunity. I encourage everyone to engage in the consideration of legitimate sources in evaluating the potential of any business opportunity in your life.



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1. As recently as 1998, the FTC has issued a statement relying on and restating these decisions and standards. (Return)

2. The analysis discussed in this article is not of the business or its compensation plan but of the Team compensation plan. (Return)

3. The refund policy is a topic requiring its own attention in perhaps another review. (Return)



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Matthew J. Abraham heads the Law Office of Matthew J. Abraham, PC and is a business and contract specialist private practice attorney. He is a member of the ABA and Michigan Bar Associations as well as the United States Chamber of Commerce. Mr. Abraham is also an IBO and is a member of the Team. He and his wife Cheryl have achieved the level of Emerald. Mr. Abraham actively participated with Orrin Woodward and the Team Policy Council in the design, review and analysis of the Team compensation plan in cooperation with the foremost legal experts in the industry of multi-level marketing. Multiple professional law firms and attorneys specializing in the area of MLM law, independent of the Team, were utilized and consulted in the drafting and analyzing of the Team compensation plan. (Return)

IMPORTANT NOTICE AND DISCLAIMER: The articles, analysis, cases, legislative material and other content of this review are intended solely for general information, discussion and education. The contents should not be regarded as legal advice. For advice on specific legal and tax matters, always be sure to contact competent direct selling or multilevel marketing legal or tax counsel.

This article is written from a legal perspective of an attorney who has had the opportunity to analyze and participate in the drafting of the Team compensation plan and in doing so has had the opportunity to review other compensation plans in the MLM industry. The information, comments and opinions herein are for information purposes only and are not legal advice. The transmission of any information is not intended to create, and receipt does not constitute, an attorney/client relationship. Internet subscribers and on-line readers should not act upon this information without seeking professional counsel.

© 2004 Matthew J. Abraham, PC