National Consumers League

Consumer groups oppose H.R. 5230, demand real protection from pyramid schemes

June 2, 2016

Contact: NCL Communications, Cindy Hoang, cindyh@nclnet.org, (202) 207-2832

Washington, DC—The National Consumers League, and four national consumer groups, today called on members of the U.S. House of Representatives to oppose H.R. 5230, the Anti-Pyramid Promotional Scheme Act of 2016. The bill, which is currently pending before the House Energy and Commerce Committee, purports to strengthen consumer protections from fraudulent pyramid schemes. In reality, it would rob the Federal Trade Commission (FTC) of its ability to protect Americans from all but the most egregious forms of pyramid schemes.

The FTC has consistently stated that a critical difference between a legitimate multi-level marketing (MLM) business and a pyramid scheme is that an MLM succeeds primarily by retailing products and services. In contrast, an illegal pyramid scheme incentivizes recruitment over retail sales and induces participants to focus on recruiting distributors who typically must pay to join the business opportunity. This characterization has been developed and embraced by over 40 years of case law. Unfortunately, H.R. 5230 would remove this core tenet and instead provide numerous carve outs and exemptions for pyramid schemes masquerading as MLMs.

“Despite its positive name, H.R. 5230 undercuts the FTC’s ability to protect consumers from pyramid schemes disguised as legitimate direct sellers,” said John Breyault, NCL Vice President of Public Policy, Telecommunications and Fraud. “Consumers should not be put at risk by legislation designed to give a pass to all but the most blatant pyramid schemes.” 

The groups cited numerous ways that the bill would weaken current prohibitions on pyramid scheme activity, including: 

  • Relieving MLMs of the need to have actual customers outside the distributor network. This would allow MLM operators to simply sell distributors on the idea of joining an endless chain, instead of operating their own retail business.
  • Allowing an MLM parent company to profit off a churning base of recruits who, in an effort to qualify for rewards, are urged repeatedly to purchase directly from the parent company.
  • Eliminating anti-pyramiding safeguards that were put in place after the FTC’s landmark 1979 Amway decision. Those important consumer protections require companies that want to be regarded as legitimate MLMs ensure that sales by distributors are made primarily to customers outside of the distribution network.
  • Giving MLMs permission to engage in purchase and recruiting behaviors the courts have already identified as endemic to illegal pyramid schemes.

Signatories of the letter included Consumer Action, Consumer Federation of America, Consumer Watchdog, the National Consumers League and U.S. PIRG.

To read the full letter, click here.

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About the National Consumers League

The National Consumers League, founded in 1899, is America's pioneer consumer organization. Our mission is to protect and promote social and economic justice for consumers and workers in the United States and abroad. For more information, visit www.nclnet.org.