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Americon Dream: Social Pressures and Lackluster Regulation Allow Multi-Level Marketing Companies to Function as De Facto Pyramid Schemes

By Lindsay R. Maher. Full Text.

The entrepreneurial spirit goes to the heart of the American Dream. Pull yourself up by the bootstraps. Put your nose to the grindstone. If you could just be given the tools to get started, you, too, can make something of yourself with hard work and perseverance. This mindset drives millions of people each year to participate in Multi-Level Marketing companies (MLMs), which are advertised as an opportunity to start your own business, sell products, and work on your own schedule. MLMs are also designed to reward sellers each time they successfully encourage another person to join, so much so that the reward for recruitment nearly always becomes more lucrative than selling the product. This business structure not only leads many participants to turn little, if any, profit, but also encourages manipulative and aggressive recruitment tactics to be used in order to bring in new recruits and earn a bonus.

If it was enough to point out that the statistical probability of financial success in an MLM was small, or that many of its defining characteristics reflect those of illegal pyramid schemes, participation in these companies may not be so high. However, MLMs simultaneously provide and rely on participants’ personal communities in order to maintain the number of people involved. This reliance on community weaves the personal and professional together in such a way that makes it even more difficult to leave the company. These behavioral considerations—combined with case law that has produced broad standards and enforcement mechanisms that are difficult to successfully utilize—have created a predatory industry that is rarely held accountable.

This Note argues that the distinction between legal MLMs and illegal pyramid schemes is so ill-defined that illegal and deceptive practices dominate the MLM industry. The use of traditional consumer protection laws and private litigation requires intensive fact discovery and litigation costs that are often prohibitive to pursuit of a claim. This Note concludes that, in order to successfully protect participants and consumers, two solutions should be pursued. The first is a federal statute providing a nuanced definition of an illegal pyramid scheme that can be utilized by public and private legal entities. The second is a change to the Business Opportunity Rule—enforced by the Federal Trade Commission—that would include MLMs and require them to disclose potential earnings to new participants before they join.