Ramblings Of A Tired Lawyer, or Where Have All The Products Gone?

by louabbott on August 29, 2012

In this article, MLM attorney Gerry Nehra explains one of the first and most important aspects to a network marketing or MLM program for it to pass legal scrutiny and laments the seeming decreasing percentage of the good plans.  Please take the time to understand it and follow his advice.

by Gerald P. Nehra, Attorney-at-Law

I am tired of the wrong idea for starting a company – and I do not mean “To make money.” That will always be at the core of a new company launch. But how will the company make money? By selling something. Great. That is also proper planning. Something people want and are willing to pay for. We are still on the right track. But now the train is about to get derailed.

What do people want the most? A way to make lots of money with little effort. So we will sell them a way to do that! WRONG – TILT – STOP! Start over. Income opportunities CANNOT be sold. A company that is in business to provide income opportunities CANNOT survive. Distributors who believe their mission is to provide income opportunities to everyone they come in contact with, and who will sign the always ready application, CANNOT, long term, survive. Products or services that no one will buy, unless an income opportunity is attached, DO NOT a company make. Let me explain.

The great song of the sixties has a line, “Where have all the flowers gone?” Well, I ask, “Where have all the products gone?” (and services). The first and paramount mission of every direct selling company and its independent contractor sales force MUST BE to place as many of its “better mousetraps” in the hands of as many end user consumers as possible. An end user consumer is a customer who is buying the “better mousetrap” for its intrinsic value or worth, and NOT to participate in an income opportunity. The argument that purchases are for intrinsic value is seriously weakened if the purchases are: ”    Required to be made to be allowed to sign up as a distributor.

  • Required to be made by a distributor to “open a product center.”
  • Required to be made by a distributor to qualify for a compensation plan payment.
  • Required to be made by a distributor to advance in the compensation plan.
  • Required to be made by a distributor to “re-enter” the same or a different “phase” or “cycle” of the compensation plan.
  • Required to be made by a distributor to “buy in” to a higher compensation plan title or pay level.

The above list includes an assumption that the products stay with the distributor and are not consumed or do not move on to an end user consumer. Of course, distributors can “certify” that they consumed themselves or sold to customers X percent, and/or they have on file or have sent to the company the names of Y numbers of their retail customers. (My personal view is that personal consumption in reasonable quantities and not for qualification is a retail sale and fully commissionable. Al Sheldon, California Deputy Attorney General, said as much at the first MLMIA conference I attended, and referenced the AuQuest Settlement with specific language on personal consumption. Not all state Attorney General Offices agree.)

Note that this list DOES NOT exclude ALL purchases by distributors. In some programs the company itself has proof of “purchases for intrinsic value” by the nature of the ordering system and compensation plan. For example, all companies who direct ship to customers who are linked up to the company by their representatives can easily verify that they are shipping products to a non-representative name and address. A strong presumption is raised that these are purchases for intrinsic value.

Another example would be the second and subsequent purchases by representatives who have not sponsored anyone. I concede the first purchase by a distributor is most often made with the intent of “making money” or “working the program.” But if they make a second purchase, and have not sponsored anyone, they cannot be making the purchase to qualify for any portion of the multi-level aspects of the pay plan, since, by not sponsoring, they have chosen to not participate in the multi-level aspects of the program.

Yet another example would be a company with a pay plan where say $45 of personal volume is all that is ever required to be classified as “active” and eligible to receive commissions on downline volume. If the average order size is $81, a strong presumption is raised that all purchases, or at least the amounts over $45, are purchases for intrinsic value.

But I am rambling. Back to my point. I want to leave for another day and another article the issue of WHAT PERCENT of the company’s sales or an individual distributor’s sales should be “for intrinsic value.” What I am really tired about is when the percent is ZERO. First, the most obvious: the “bad design” programs. Another name I give to such programs is “Representative only” programs. The company is really trying to enter the income opportunity business. The products or services are an afterthought, and purchased by the representatives to “play the game.” There are NO true customers. Regulatory actions in numerous states have sent the strongest message possible: “Such programs will not be tolerated.”

The less obvious, but also “in jeopardy,” programs are those that have a “good design,” but bad implementation. Company executives and their marketing and legal advisors can only go so far in setting up the program. It then comes down to what the field forces, especially the leaders, do with the program. If they take a properly designed program and implement it as a “Representative only” money game, it is doomed. I have had regulators from seven key states say to me personally or to an audience I was in, the equivalent of, “We look past the paper to what is really going on in our state.”

In closing, “How much retailing?” and “What is a retail sale?” is a serious issue for all legitimate MLM companies, and is probably the number one legal issue for MLM direct sellers. I am not addressing that issue here. BUT – The existence of ZERO retailing MLM companies just gives the regulators sitting ducks, AND the opportunity to paint all companies with the same brush. The plea from this tired lawyer to company entrepreneurs is, “Do not start yet another such venture.” The plea from this tired lawyer to distributors is, “Do not work such a program expecting it to be long term, as it cannot survive, and do not distort the properly designed program you are working into a ‘Representative only’ program.”

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Gerald P. Nehra is a private practice Attorney at Law. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multilevel marketing legal issues. He began his legal career in 1970, and from 1982 to 1991 was the Director of the Amway Corporation Legal Division.

He can be reached at Nehra & Waak, Attorneys at Law, 1710 Beach Street, Muskegon, Michigan 49441,  231-755-3800 . His e-mail address is gnehra@mlmatty.com. You are invited to visit the firm web site at www.mlmatty.com.

Remember all, in the worst case, running or working an illegal pyramid or Ponzi scheme can land you in jail, even if you are not the owner, only a top level leader!

Permission to reprint explicitly granted by Gerry Nehra.

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{ 7 comments… read them below or add one }

Maggie Pimm September 4, 2012 at 2:41 am Thumb up 0 Thumb down 0

I believe, that the MLM business is a “microfranchise” business, where every representative is the owner of their business with set rules, regulations and policies for using the product as the tool to do the business with and generate income. This does not mean in anyway, that the purpose of any MLM company is or should be selling a franchise without a product. Nobody would go and purchase a McDonalds franchise without the option of selling hamburgers, or would they?
Re Intrinsic value of the products purchase: I guess before I proceed with my comments, it may pay that we look together at what actually Network Marketing is.

We have to stand to what Networking Marketing means. Network Marketers are not retailers. And I refuse to have it listed under this category, even though some may elect to recommend it to others, rather than or in addition to sponsoring others.
We are not a retail shop. We do not have shops in Henderson Square where people come to see our products. We sell our products by means of recommending them to people whom we know and who trust that our recommendation is of value and elect to try the product. And if they like what they see, they may continue to take it and even further recommend it to others and become distributor. We may also equally expose people to the business aspect first, and in the process to the products, if they are looking for an opportunity.
Network Marketing is a distinct business model than retailing and it should be treated and considered with different glasses. Of course, if I recommend to none, I earn no money, and if I recommend to many I earn a lot. If my client likes the product and likes to recommend it, I deserve a royalty from his activity, for I have done a good job. This is the basis of Network Marketing and it is legitimate to do so. If you want to cancel the principle of royalty, then go to Pretty Woman and tell her that. I think a whole industry would go on strike if this happened. .

Here I would like to go to the first clause about the intrinsic value, which says it is weakened if the rep is required to purchase products so that they become distributors: Well, let me ask you, have you ever seen a beauty therapist at the counter servicing customers who is NOT perfectly made up? Or may be a sales person selling fashion jewellery WITHOUT dangling earrings at her ears? We are Network Marketers. We sell by means of recommending something we know. If I do not use the product, how will I know how good it is? How can I service it? A Network Marketer who does not use their product is worse than a beauty therapist who comes to the counter really badly looking and at the same time inviting people to have beauty therapy sessions.
Is there anything worse than the customer asking the rep how they feel about the product and they would not know to answer? Or having to be honest to tell them they do not use it, would this not raise the question in people’s minds whether the product is good at all?
Network Marketing companies elect Network Marketing as a business model because of the extent of people penetrating the community and the power of recommending the products to the public. When the reps do not use the products and recommend them, they are jeopardizing their relationship with their friends and family, and simply, they are bad sales people, trying to sell something they do not know. How do you think would a new distributor start their business and recommend the product without knowing how it feels to use it? how it tastes? what are the benefits of the products?
Of course, a distributor can register with the company, but do you think they will be successful? They need to decide, do they want to distribute it or not. If not, then they can become customers. But if they want to distribute it, then they should use it. And if they want to use it,, then they should order it. As simple as that.

Re the second clause about the products intrinsic value: that it decreases if distributors are to buy the products in order to open a product centre. Yes, I agree totally that overpurchase of a product should not happen and should not be encouraged by the company, by means of bonuses, especially when it involves a whole lot of one product and when there are company offices available in the country.
However, and here I would like to go back to the Amway times, when we started the business with the business pack. The first lesson that I learned there that I need to exchange all the laundry and household products with the Amway products, not because they want me to buy the business pack, but because they want Mrs Smith to see me using the products so that I can recommend them to her. Here again, it is about using the products, liking them and recommending them which is in the core of Network Marketing.

Re the third to fifth clause about the intrinsic value – that it would decrease if the purchase has to do with the compensation plan and making money. I do not think this is the responsibility of the Network Marketing company and if the reps do that, then this is their cup of tea. In every company, you have measures to encourage performance. In a Network Marketing company you have a point system.
In the corporate world it may be, if you make 3 telesales, you get a free trip to Hawaii. If people have done 2 sales, and want to go to Hawaii, they are tempted to do the third sale to their grandmother. I guess, no corporate company will have any objection doing this. They will tell him Thank you and happy trip.
If you elect to cancel the performance measures from the company, then you are clipping the wings of the company and the reps.
One thing you need to consider, that it is up to me how I do business. It is up to me how to advertise and get it to people. Do you mind if I used the third packet to make samples and give it to customers to try them? I mean, you really do not need to clip our wings with misconceptions and prejudgements. I legitimately may purchase one or two packets just to sample them. If I have money I may purchase a whole business pack for the purpose of sampling them – but it is my judgement what I am financially capable of and I do not think that you should think ill of the product or of me if I purchase a business pack in order for me to sample it.
Having said that, this should not be the every day rule and the only way of doing business. It should be left to people to decide whether they need to purchase a business pack, to sell or sample it and we should have a variety of ways of doing business depending on our circumstances. We definitely need to be flexible there.

Re the rep’s second order, and whether it reduces the intrinsic value of the product or not, I have the following to say. A rep should not be obliged to sponsor anybody, unless they wish to do so. In the absence of them sponsoring anybody, they can recommend the product to people and sell. If they ordered for the second time in a month, without sponsoring anybody, this does not make the product of less intrinsic value. They may order it even to have it delivered to their own address, and then give it later to the neighbour. It may be they reordered for the purpose of sampling it. There are many other reasons for a rep to make a second or a third order without this being a proof of anything, that may come across your minds.

Re the zero value of the product, I just wonder who will decide about the value of the product? It is the public. If the public takes the product, enjoying it, and are happy to pay for it, then it is of value to them. It is a matter of awareness, sooner or later, the public will be aware of it and they will withdraw.

RE “How much retailing?” and “What is a retail sale?” We are not retailers. A rep should not be obliged to sell the product to anybody, over and above their monthly requirements, unless they elect to do so. However, they may sponsor people to do business. Sponsoring people to do the business is also part of the business. If the reps sponsor people to business and do not retail it, it is perfectly legitimate – simply, if the minimum requirements have been two packets, or 100 points, then Thank You should be said to them, for they have distributed 2 packets, regardless whether it is to themselves or to the neighbour.
I am not sure, how I interpret your questions: are they after increasing the amount that we have to purchase, as a minimum, in order for us to be allowed to be Network Marketers. And let us put the ‘dots’ on the ‘i’s, If they think of this, and if they increase the Networker’s requirements to purchase or retail, less people will become Networkers. less people become Networkers means less penetration in the community and less recommendation power. In whose interest is this? Neither to the company, nor to the public, including Network Marketers who are nothing else but public.
What else can I say? for the time being it is enough, thanks for reading

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Alan Eames September 4, 2012 at 2:03 am Thumb up 0 Thumb down 0

LOL! Perfect comeback, Lou!

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D. Vondell Smoak September 3, 2012 at 11:02 pm Thumb up 0 Thumb down 0

Dear Lou and Gerald,

I hear you both and can see where you are coming from. But I sincerely believe neither one of you have taken the time to really understand ZeekRewards or Zeekler. Either that or you are just talking theory and not actuality. Then I can go along with what you are saying and agree for the most part. But none of what you are saying relates to or is about zeekRewards

Zeek as a promotional business needs thousands of individuals doing what they are doing, is an incredibly successful business. The figure I remember is that the number of regular customers is over ten times the number of IBOs. At best regular MLMs that depend on many of their customers being IBOs have less than five times regular or preferred customers. Zeek is the best in that.

Success with ZR requires far more than just doing the one ad a day thing. That is for the very broke to start small or those who are part time and are content not to be in a hurry to build their business..

So go and learn what ZeekRewards was truly doing and the complexity of it all. Then look at the charges that have been made against them. If you don’t get it at that point, you will need to read the response given clearly line by line to refute the charges by one of the major leaders.

But really, how anyone who is supposed to fully understand such things as the stock market, then looks at ZeekRewards and think it is the same thinf . . . . Well .. they never looked at the ZeekRewards I know.

Perhaps, our government just doesn’t want us to make a good living and they are willing to look like stupid, brain dead robots. That is what it looks like from where I sit.

So unless you, too, are a part of the trashing machine, go do your homework.

And Lou, I hear your concerns about all of the customers paying out their hard earned money and only one will get the prize. I feel that way too. That is why I don’t do penny auctions OR GAMBLE. I have known more than a few people who go to Vegas to relax, enjoy the great shows and food, gamble until they’ve spent the limit, and go home very happy with it all. I’m told penny auction bidders have the same kind of fun. So stop feeling sorry for them.

Really. People do a lot of stuff I don’t want to do, But they are not stupid. Some of us get hooked in addictive patterns, but we can do that over a lot of very healthy activity, too.

I would really like to see the two of you keep your good names and good intentions and ask some of Zeeks’ great leaders to teach the system to you. I don’t know it well enough you talk you through it, but I am really pissed at how stupid or out-right mean the people are who shut us down. Then you can help support our getting our great jobs back. There are far too few of them.

Sincerely,
Smoak

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louabbott September 3, 2012 at 11:41 pm Thumb up 0 Thumb down 0

Interesting. Seems even hindsight isn’t 20/20.

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Larry August 31, 2013 at 9:44 pm Thumb up 0 Thumb down 0

D. Vondell Smoak… what you have to say now that Zeek turned out to be a BIG Scam. Don’t run your mouth you know nothing about just because you are blinded by your own greed to make “do nothing money”. That’s why you do what you do and they do what they do.

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David W Johnson September 3, 2012 at 9:49 pm Thumb up 1 Thumb down 0

It is unfortunate the little guy doesn’t have the lobbying clout to politicians. In some sense, a mlm distributor is much like a franchisee. But the franchisee has a franchise industry with very deep pockets who can lobby to get regulators to keep their noses out of their business.

Sadly, MLM companies are so busy trying to run away from the MLM nomenclature, they’ve effectively stripped away any clout they collectively could of had with the regulators.

So MLM companies are looked upon as “one of those things”. It’s not the distributors fault, it’s also the MLM companies fault.

My company is a fine company and I like their products very much. But if there was no opportunity behind it, I wouldn’t buy them.

For 37 years, I lived just fine using Prell, Right Guard, and Tide with no ill effects. But when other products came along with a value-added proposition attached to it, I was willing to upgrade.

One might think that I am with my company for all the wrong reasons.

To that I would say, “Sometimes a cigar is just a cigar.”

To a degree, I feel the same way about shampoo, deodorant, and laundry detergent.

But when a company says, “for a few pennies more” we’ll add the opportunity for you to create a living to last a lifetime, I’m willing to switch.

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Roberto September 3, 2012 at 7:49 pm Thumb up 0 Thumb down 0

“What do people want the most? A way to make lots of money with little effort. So we will sell them a way to do that! WRONG – TILT – STOP!”
What ever happened to Freedom? When I see people, who are supposed to be defending MLM, making statements like the one quoted above, it makes my blood boil. The FTC has no right to decide if an Income Opportunity is a product. Pet Rocks were a big hit. An income opportunity IS a product. A franchise, such as Mcdonalds or Jiffylube IS AN INCOME OPPORTUNITY. The Trillion dollar investment companies are selling AN INCOME OPPORTUNITY to investors.
As far as what constitutes a “retail sale”, If an MLM distributor earns a retail commission from a purchase made by a distributor that he recruited, then that is a retail sale. The FTC does not see it that way, and MLM advocates should be on the side of the MLM industry in protesting that, not just accepting anything the FTC says without challenging it.
MLM companies that say that their #1 focus is the product, and not the Income Opportunity are just plain Liars. If it was mainly about the product, those products would be on the shelves of Walmart & Target. They are selling an income opportunity first and foremost, and they should stand up to the government to defend the right to do so.
The FTC can set standards to define what is a legal Income opportunity and what is an illegal one (Such as Zeek Rewards). If they say that selling ANY income opportunity is illegal, then it should be illegal to buy or sell ANY business, from dry cleaning shop to a Wendys Franchise.
The main Product of ALL MLM companies IS THE INCOME OPPORTUNITY. Let’s stop lying to ourselves about that fact and start defending our right to sell an Income Opportunity as our main product, as long as it is done in an ethical and legal manner.
The MLM industry needs Heroes who will stand up to the regulators. Look at the Crowdfunding industry. They are holding congressional hearings and lobbying for their right to do what they do. MLM needs a movement like that.
I hope you don’t ban this post just because it is contrary to some of your beliefs. I still think you are one of the few people that are really trying to rescue the MLM industry, and I only mean to be constructive with my comments.

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