Four reasons why MLM companies end up in court

Business

Did you know that more than half of US MLM companies have had a lawsuit in the last 10 years? Find out the four reasons for this – and what usually happens to those cases.

On October 2, 2019, the Federal Trade Commission served AdvoCare its justice.

AdvoCare is now banned from multi-level marketing because of its pyramid scheme practices, and it owes the FTC $150 million. Two of their top-level reps are also banned from multi-level marketing for making misleading income claims. (And a case is continuing against two more.)

And while pyramid scheme allegations are one legal issue MLMs encounter, network marketing companies see more than just the FTC in court.

I recently looked into 100 MLM companies as part of a larger study on income disclosure. But I ended with an interesting byproduct finding: 57% of US MLMs have had a lawsuit in the past 10 years.

Before you clutch your pearls, be aware that this is somewhat par for the course in US business. A 2005 study found that 30 to 50% of small businesses are in at least one litigation a year.

Another study by Fulbright is less optimistic, noting that 90% of US corporations are battling some kind of litigation. So what’s different about the lawsuits of multi-level marketing companies?

Four reasons why MLM companies end up in court

MLM lawsuits typically come in four flavors:

  1. Individuals or the FTC suing MLMs for being pyramid schemes.
  2. Individuals suing MLMs for false product claims.
  3. MLMs suing individuals for defamation.
  4. MLMs suing each other for infringing on one another’s territory. 

Legal issues can last years, and most class action lawsuits against MLMs are quietly settled outside of court, because the cost and risk of a lengthy legal battle would squeeze the poorest party dry – and that’s usually the individual standing against an MLM.

Let’s look at each reason why MLM companies end up in court in more detail.

1) Pyramid scheme lawsuits

To be a pyramid scheme, a multi-level marketing company has to emphasize recruitment as the only legitimate way to earn money through the business model.

The converse implies that reps who sell products and make a profit from product sales, emphasizing this over recruitment, are in a legitimate MLM model.

My study of MLM income disclosure found that 80% of reps are in the bottom tier of their MLM and make $0 in revenue. If you don’t recruit, you don’t earn. But once you build that downline, you can jump to a higher tier in the business and typically start making a few hundred dollars annually. Or you can get lucky and make it to the top, siphoning off others’ sales.

The FTC has hit more than AdvoCare for being a pyramid scheme.

Let’s take a look at the irony of Herbalife’s settlement against the FTC for its pyramid scheme allegations. According to the FTC, it “charged that the multi-level marketing company’s compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products.”

Have you ever known a multi-level marketing company not to encourage this? They must be a rare breed.

Most companies (67%, according to my research) have personal volume or recruitment requirements on their income disclosure statements to qualify distributors as eligible for commission. Both of these reward recruitment and selling products to your downline, incentivizing distributors for recruiting others who will buy $100 of product a month.

Then there’s this juicy ruling against Herbalife: “The company will now differentiate between participants who join simply to buy products at a discount and those who join the business opportunity.” 

About one third of income disclosure statements I studied had a disclaimer somewhere that overall earnings may be low because some people join for a discount. They are counted in the same tier as those who join to make money, intentionally obfuscating a company’s data with this claim.

If Herbalife set a precedent, the FTC has a lion’s share of MLM companies it could crack down on. If you do a breakdown of a company’s earnings, it seems like you can often catch wind of pyramid scheme practices.

It’s not just the FTC that is attempting to hold some MLMs accountable for their business model; Washington state attorney general has also filed a lawsuit against clothing MLM LuLaRoe, alleging the company is an illegal “pyramid scheme”.

2) Product warnings and lawsuits

Multi-level marketing products have a different quality from run-of-the-mill retail offerings, don’t they?

In a way that often merits FDA warnings and consumer lawsuits, yes:

  • In 2014, the FDA warned essential oils companies Young Living and doTERRA against marketing products with unverified health benefits, such as fighting Ebola, arthritis, and diabetes.
  • In 2015, the FDA warned TruVision for combining DMBA and synephrine in their weight loss supplement, which can have adverse or life-threatening health effects.
  • In 2018, consumers banded together to sue Rodan+Fields for failing to disclose the side effects that come with an ingredient in Enhancements Lash Boost. Isopropyl cloprostenate can cause burning eyes and blurred vision to go with your enhanced eyelashes.
  • Consumers have also joined action in a class case against Monat for alleged damage caused by their products. A jury trial looks set to take place in 2021.
  • And if you used Younique’s Moodstruck 3D Fiber Lashes in a select 11 US states between 2012 and 2015, a class action lawsuit on your behalf has determined that Younique intentionally misled you to believe it was made of natural fibers, not its true shredded nylon.

One of the biggest arguments for multi-level marketing is that it frees up more of the companies’ budget away from marketing and into research and development. 

But if you want to take a close look at any particular MLM, check for product lawsuits and FDA warnings that may indicate that the freed up budget is going anywhere but product creation and improvement.

3) Legal action for defamatory remarks

In 2018, Monat sued a former MP for defamatory remarks when she claimed their products resulted in hair loss, an itchy scalp, and a plethora of other health concerns.

This isn’t the first time a concerned distributor created an online group to complain about their former company. And this isn’t the first time an MLM has sued a distributor for defamatory remarks.

If you’re wronged by an MLM, it’s best to immediately take legal action rather than complain online. As bizarre as it is, some multi-level marketing companies have never heard that truthful negative reviews are legal. 

But then the issue becomes whether the review is verifiably truthful. If a review can be proven as truth, it’s protected in US law. If it can’t, the review could be classified as defamatory. The results for lawsuits on defamatory remarks are mixed depending on how persuasive your lawyer is and what evidence you have.

If a network marketing company intentionally hides data that would allow a consumer to make a truthful negative review, presto! No one can give a truthful negative review, and the company has grounds to sue complaining former distributors for being defamatory.

This is why it’s important to get income claims, communications, and contracts in writing. 

As part of Jon Taylor’s study for the FTC, he also included a handy guide to taking action if you’ve been a victim of a fraudulent MLM. What his guide teaches is that government agencies expect victims to take it up with them. Online complaints (besides with the BBB) aren’t high on the list.

4) Lawsuits from one MLM to another

If it wasn’t obvious, MLMs also have reason to sue their competitors.

Young Living and doTERRA are competing for the same market share in a close geographic region. So it’s no surprise they ultimately battled it out in court over contaminated oils and a breach of employee contract (doTERRA leaders are former Young Living employees). 

And it’s no surprise that MLMs often take legal action against other MLMs for poaching distributors. You probably know a few reps who decide they have better chances with another company and hop from one to the other.

Melaleuca sued Max International in 2011 for poaching distributors. Many other companies have stood up for their valuable downline when they feel it’s being poached. 

With this being a pattern of MLM litigation, it seems to imply that product offerings aren’t always what makes you a threatening competitor in the multi-level marketing space: your downline is what makes you a threatening competitor.

This further reinforces the idea that many MLMs are emphasizing recruitment over product, leaning into pyramid scheme territory.

What happens to these cases?

As I mentioned earlier, many disputes are solved quietly and swept under the rug. Most of them are settled with money, rather than the resounding crackdowns delivered by the FTC to AdvoCare and Herbalife.

But what if the legal heat becomes too much? An MLM will simply lather, rinse, and repeat.

Many companies rebrand after a legal issue to avoid negative association. Finding court records and lawsuit resolutions is hard enough without the company operating under a new name. So if an MLM needs to escape a bad reputation, they’ll rebrand.

In 2006, two founders of Neways were jailed for tax evasion after over a decade sprinkled with legal issues. Neways was acquired by Golden Gate Capital, who owned Herbalife before taking it public. After changing hands and leadership, in 2013, Neways was Modere.

In 2017, Neurim faced a lawsuit with pyramid scheme allegations. In 2019, Neurim became Neora. To quote Neora founder Jeff Olsen in the press release: “We’re taking all of the experience we’ve gained in the previous seven years, hitting the reset button, and creating something even better.”

If you can dig up a company’s litigation and discover a clearly outlined resolution, it’s a rare find. But the legal greys of multi-level marketing are almost never as clean-cut as AdvoCare’s lawsuit. And bear in mind that a legal issue has to raise several alarms before gaining publicity.

Who can say how many MLM disputes are quietly resolved away from prying eyes? And who can say how many more never receive a satisfying resolution?

Read more about MLMs

Over the past two years, we’ve conducted research into the MLM business model as a whole, and individual companies. You can read some of our research here:

And here:

And you can learn more about how the MLM industry works here:

If you’d like to learn more about the history of MLMs, and theories as to why the business model has been allowed to continue despite an average of 99.6% of participants losing money once expenses are taken into account, we also recommend listening to the first series of The Dream podcast.

Rochelle Burnside is a content specialist for BestCompany.com, a review site with verified customer experiences. She manages the MLM category and writes for its MLM blog.

Photo by anthony mcgee