MLMs and Why They Matter
DoTERRA essential oils and other multi-level marketers (MLMs) are in trouble. Their social media presence during the COVID-19 crisis provoked Federal Trade Commission (FTC) enforcement action in late April.
But what exactly are MLMs and why are they particularly relevant during the COVID-19 crisis? MLMs sell their products directly to consumers, but, rather than using a central distribution system, they rely on a representative network for sales and recruiting. This system creates multiple levels of “participants” who sometimes have “downlines” composed of their recruits, their recruits’ recruits, and so on.
MLMs become harmful and unlawful when they are structured like pyramid schemes, where the participants and their recruits are pressured to buy (and even stockpile) company products in hopes of selling them for profit. A participant’s success depends on convincing more recruits to stockpile because, in a pyramid scheme, there is little to no real consumer demand for the product. The participants are the only significant source of demand. The participant is the buyer, but the participant believes him or herself to be the seller. Not all MLMs are structured as pyramid schemes. For most MLMs, the participant at best makes little to no profit, sometimes loses money, or at worst unwittingly falls into a pyramid scheme, losing everything.
Sinking time and money into an MLM can be catastrophic, especially during an economic recession when they have historically thrived. For instance, when the economy collapsed in 2007, the MLM company AdvoCare experienced a boom in business. But in the fall of 2019, the FTC announced a $150 million settlement, labeling AdvoCare a pyramid scheme and effectively ending the company. Today’s MLMs could face a similar boom-and-bust fate as this COVID-19 recession seems to have created conditions ripe for an MLM resurgence.
When people are desperate and stuck at home, they are attracted to promises of quick riches. It’s human nature. Perhaps aware of this pattern, FTC responded to the COVID crisis by cracking down on MLMs.
Coronavirus MLM Crackdown
On April 24, 2020, the FTC sent warning letters to ten MLMs for using social media to make misleading coronavirus related claims. The social media posts at issue suggest that MLM products could cure the coronavirus or that participants could generate substantial stay-at-home income by selling their products.
For instance, the FTC letter to doTERRA alleges that a company representative strongly suggested certain doTERRA essential oils could “beat corona virus” (sic) by altering the body’s pH levels. No scientific evidence was cited. Another doTERRA representative seized on the moment of mass unemployment and made the following pitch: “Need to make extra money? Find it difficult to pay your bills? Were you laid off/ #fired? Be your own Boss w/doTERRA essential oils. Msg me to achieve financial independence #laidoff #unemployed #cantpaymybills #cantpaymyrent #student #sales #sidehustle #makemoney #stayathomemom.” If these claims, and the others like them, are unsubstantiated, they create a problem for MLMs: any false, misleading, or unsubstantiated health or earnings claim violates the FTC Act. The FTC holds MLMs responsible for representatives’ statements and demands a response within 48 hours.
MLMs might choose any of three paths. First, they might comply with the FTC, instilling discipline among their participants and monitoring their statements. Second, they might fight the FTC in court. Or third, they might feign compliance, evade FTC detection, and go underground by using only group messaging apps. This third path could have intriguing privacy implications if the FTC somehow obtains access to Facebook private messaging.
What are the takeaways for the rest of us? Consumers should beware. If anything looks or smells like multi-level marketing, consult FTC’s guidance. Moreover, in addition to an uptick in MLMs due to their work-from-home appeal, consumers, lawyers, and regulators should expect to see a correlative increase in FTC enforcement. The coronavirus stay-at-home orders are forcing MLM participants to recruit online, instead of in-person. Unlike face-to-face sales pitches, MLM social media posts are publicly available statements, easily trackable by the FTC. Given the ease of enforcement and apparent increase in social media presence during the COVID-19 recession, we can expect the battle between MLMs and the FTC to occur on social media.
Erik Birnel is a 2020 graduate (summa cum laude) of Gonzaga University School of Law. He recently accepted a job as an attorney for the U.S. Army Judge Advocate General (JAG) Corps. Until he begins active duty service, Erik continues to live in Spokane, Washington, where he plans to take the bar exam and where he lives with his wonderful wife (and hospital nurse), Rebecca.
This post represents Erik Birnel’s own opinions. It does not represent the opinions of the U.S. Army or any other institution.