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Pyramid Selling - When is it (legal) multi-level marketing? |
A recent court case has set an important precedent in distinguishing illegal pyramid-selling from legal multi-level marketing. |
The difference between pyramid- selling and multi-level marketing schemes is that the latter involve rewards derived for genuine sales of goods or services. |
Pyramid-selling, on the other hand, essentially involves payments when new participants are recruited into the scheme. |
In the recent case, independent reps signed up customers for a tele communications company. The company billed customers directly and paid the reps a commission on billings. To become appointed as a rep involved an initial payment and an annual renewal fee. It was accepted that these fees would meet most of the phone company's costs for such things as marketing brochures and customer service. |
Independent reps introduced others, who all paid their fees to the phone company, not to the rep who had introduced them. There were complex commission arrangements, but no commission or other reward was earned simply by recruiting downstream reps. |
The appeal court held that in this case the rewards were earned by the independent reps themselves and remuneration depended upon volume sales. It found that the real vice in pyramid-selling schemes is that rewards held out are substantially for the recruitment of others, who in turn get their rewards substantially for recruiting more members, and so on. Ultimately, the scheme collapses and many will have been induced to pay money for nothing. |
