Mens Rea And Multilevel Marketing

Even a non-lawyer can appreciate the importance of Mens rea – “the mental element of a person’s intention to commit a crime; or knowledge that one’s action (or lack of action) would cause a crime to be committed.” But what if the person responsible denies the nature of the crime? Can corporate leaders and top distributors operating an MLM lack Mens rea just because they deny established case law? Recent regulatory enforcement and actions in the U.S. and elsewhere raise questions about intent with potential implications for the MLM industry.

In the last year [October 18, 2021 – October 21, 2022] the share prices of some well-known public MLM companies suggest that investors may no longer see the industry as a safe harbor: Herbalife (HLF) -55.5%, Nu Skin (NUS) -10.6%, Primerica (PRI) -20.5%, and USANA (USNA) -42.8%. Globally Amway, a company that presumably sought to get its distributors under control as far back as 1985, face regulatory actions in India and in Japan,

But the issue looms large than lower share prices and occasional (and repeated) government warnings. In spring 2022 the Federal Trade Commission issued an Advance Notification of Proposed Rulemaking (ANPR) regarding misleading income and earnings claims. The vast majority of more than 1,600 comments document continued widespread consumer harm caused by the MLM industry. The ANPR comes after three enforcement actions against award-winning member of the Direct Selling Association (DSA) – Vemma (2016), Advocare (2019), and Neora (2021).

The ongoing Neora case, involves an MLM claiming to “defend the rights of the Direct Selling industry” and comply “with all laws and the FTC’s most recent 2018 business guidance regarding direct sales business models,” while apparently admitting to less than 1% of rewards paid derived from sales to non-distributors. In other words, the company’s profits and top distributors reward derive almost entirely from distributor purchases for their own accounts.

Without irony, the company claims take on the FTC legally in order to be protect their many independent business owners while reporting the average earnings for 2021 to be $1,358 before expenses. Wonder what a peek at the underlying earnings distribution would show. A child’s lemonade stand could do better than $26.12 per week before expenses.

In a business world enamored with data, somehow the MLM industry-favored terms (e.g., free enterprise, entrepreneurship, business owners, etc.) have yet to ring as hollow as the data indicates. With participants making required ongoing purchases that flow money upline, paying to participate in their own retention efforts (i.e., events, training, etc.), ignoring the marketplace of competitive household products as the MLM company seeks a greater share of each participant’s wallet, and net positive earnings remain allusive and financial losses the norm, how exactly are they business owners? But I digress.

A recent MLM pyramid scheme case illustrates the role of Mens rea in criminal prosecutions. The scheme had all the hallmarks of any MLM – outsized rewards for successful recruitment, a product potentially useful to a broad audience, leaders with prior MLM experience, more products on the horizon, and the assurance that the model is designed to foster success for all. One could argue that only a faulty design and poor execution differentiate this MLM from some that have operated for decades.

All of which raises the question: Why do we see so few criminal pyramid scheme prosecutions? Two of the three DSA member companies mentioned above presented weak defenses and agreed to give up the MLM model. One, Advocare, operated for twenty-five years. What then was the intent of the owners and top distributors of Vemma and Advocare – the Mens rea – who were richly rewarded for operating a scheme they could not defend? When an MLM cannot compete by establishing consumer demand in competitive public retail markets then what is the intent? In the two cases cited the intent appears to have been a model where participants pay a valuable consideration (i.e., making required ongoing purchases) to obtain the right to receive rewards from recruiting others participant rather than to retail products to the public.

But is the MLM model truly designed to be an alternate to traditional retailing by using independent distributors to sell products to the public? In BurnLounge, the last fully litigated pyramid scheme case brought by the FTC, the lower court did not mince words: “For purposes of this definition, ‘sale of products or services to ultimate users’ does not include sales to other participants or recruits or to the participants’ own accounts.” And a long-time industry lawyer saw this language as a fundamental threat to the industry, “This last tagline, if adopted by other courts, is a “game changer” in analysis of pyramid vs. legitimate.” If excluding distributor purchases and those made by downline participants for their “own accounts” threatens the MLM model then what is the intent of those who promote and benefit from the model?

The appellate court in BurnLounge recognized distributors could be ultimate users but those purchases did not constitute consumer demand, a critical criteria in a pyramid scheme analysis.

The DSA claims retail sales to non-distributors should be irrelevant: “’The legal analysis should be: is the product being used by real consumers?’ he argues. Whether the consumer is a distributor is immaterial, he says.” Case law and dozens of successful enforcement actions tell a consistent story. The MLM model compels “business owners” to make ongoing purchases (a very non-free market thing to do) in an improbable pursuit of income. So I ask again, does operating, promoting, and benefitting from an MLM constitute intent or Mens rea to operate a pyramid scheme?