Utah Legislature Defeats Product Pyramid Bill

The DSA (Direct Selling Association), which has been promoting HR 1220, a federal bill that would essentially legalize all product-based pyramid schemes, assisted Rep. M. Noel to present HB 269 to the Utah's House Business and Labor Standing Committee. Utah has the dubious honor of being home to more MLM companies than any other state.

HB 269 focused primarily on the issue of inventory loading, where MLM participants lose money by purchasing excess product and cannot get it refunded. The bill would force companies to buy back excess inventory. 

Specifically HB 269 was deceptive in that it claims to strengthen the current Pyramid Scheme Act (76-6a-2) by amending it, when in fact, the language (lines 9, 24, 99, and 112-118) nullifies and takes the teeth out of the current statute. Lines 9 and 24 suggest that an "operation" is not a pyramid scheme so long as it has an inventory repurchase plan. This is like saying that if a bank robber gets caught and refunds the money left over, it's not a bank robbery.  See also "answers to 10 important questions about HB 269"

Hidden in the bill were a few key changes of definitions that have long helped to define an "illegal pyramid scheme" as one where the majority of products are sold to distributors themselves instead of the public at large.  Without the "market test" of having to have the majority of sales to people outside of the compensation scheme, promoters would be able to disguise an illegal pyramid in an MLM scheme selling excessively expensive products.  See this page on Product Pyramid schemes.

The Utah web site has the bill and its proposed changes on line.

Very noticeable was the change in the definition of "Compensation", which eliminated the terms "bonuses, commissions, overrides", which are all forms of compensation in MLM plans. 

 [(2)] (4) "Compensation" means [money bonuses, commissions, overrides, prizes, or
             72      other real or personal property, tangible or intangible.] a payment of any money, thing of value,
             73      or financial benefit.

Also noticeably changed was the definition of "Pyramid promotional scheme" which eliminated the terms "sales device" from its definition.

              95        [(4)] (11) "Pyramid promotional scheme" means any [sales device or plan under]
             96      operation in which a [person] participant gives consideration [to another person in exchange
             97      for compensation or] for the right to receive compensation [which] that is derived primarily
             98      from the [introduction] recruitment of other persons as participants into the [sales device or
             99      plan] operation rather than from the sale of goods, services, or other intangible property.

According to Dr. Jon M. Taylor the heavy emphasis placed upon having a "buy back plan" in this legislation would have made the definition of an illegal pyramid in Utah primarily based only upon the absence of a buy back program.   This bill would have placed sales to participants for personal consumption on the same footing as sales to end users, allowing an "endless chain" recruitment scheme to become legal.

The current FTC  precedents require these four major tests to be met.

1. No required fixed fee to join

2. No minimum required purchases to made

3. A refund provision ensuring at least a 90% refund on returned goods

4. At least 50% of the benefits are derived from those not participating in the plan

The 50% benchmark of the FTC is not a "market test" in the sense of determining whether the company satisfies a market demand. The figure is the barest minimum which would satisfy three federal court rulings that held that sales to the distributors do not constitute retail sales. This retail requirement is not arbitrary or hair splitting. It is fundamental and it defines the nature of the scheme. If the majority of income is derived only from the distributors who are recruited, then, by definition, the majority of the rebates are directly tied to the recruiting that produced the purchases by the distributors. Hence, they are recruitment payments.

If the great majority of goods are only purchased by the "participants, then the purchases serve to launder or disguise what are really just "investments." When you tie rebates based on "purchases" by distributors to the policy of authorizing every distributors to recruit others and paying them rebates on multiple levels, you have the main
ingredients of the classic pyramid.

We should also remember that this is not a law, just a policy of the FTC. The FTC has never issued a "rule" that defines MLM. The current head of consumer protection at the FTC, appointed during the Bush administration, testified previously as a private "expert" on behalf of Equinox International in opposition to this FTC "market test."

Removing the retail criteria is the main goal of the Direct Selling Association, since it is the main criteria that the FTC and the courts have used to define a product-based pyramid. Buy-back provisions are just incidental to the fraud.

  See Amquix.info explains pyramid schemes.

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