TODAY’S GENER AL COUNSEL SUMMER 2018
Compliance
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product to ultimate users” (in re Koscot Interplanetary, Inc., et al., 1975). The underlying supposition was that an MLM that did not pay compensation based on actual retail sales to actual consumers did not sell products that were in consumer demand. These MLMs, colloquially known as pyramid schemes, would not survive because eventually downline distributors would run out of new individuals to recruit and could not earn money or recover their costs through the sale of product or services alone. The analysis of whether an MLM met the Koscot standard evolved as courts and companies developed new benchmarks to show that the MLM based its compensation structure on the sale of product to ultimate users (i.e., was not a pyramid scheme). The prevailing standard for many years — Amway’s “10 customer rule,”
“70 percent rule” and its buy-back policy — was based on the assumption that MLMs that had a policy to buy back unused product and paid compensation to participants that sold at least 70 percent of the product purchased in a given month to at least 10 different customers had lawful compensation structures. Subsequent courts and FTCs refined this standard by considering the compensation that an MLM could pay on wholesale sales to new recruits and on product purchased by the participant for personal consumption. Although the analysis evolved, the inquiry remained focused on the sustainability of the business model. HERBALIFE, LTD. AND VEMMA NUTRITION COMPANY STIPULATED ORDERS
In 2016, the FTC signaled a shift away from an analysis of the sustainability of the compensation structure to a
fact-based analysis of the totality of the MLM’s business practices by entering into stipulated orders with Herbalife, Ltd., a global nutrition and weight management company, and Vemma Nutrition Company, a company that sells energy drinks, nutritional beverages and weight management products. The two orders, which were drafted to the particular circumstances of each company, included commitments related to the compensation structure, representations made by the company and its participants, and ongoing monitoring. The orders imposed certain commitments that were designed to ensure that the companies paid compensation based on actual retail sales. For example, both companies were prohibited from paying compensation for recruitment of new participants and were limited in paying compensation for purchases for personal use. The orders also imposed obligations