Pyramid Scheme Protection Law Pits Legal Group Against Multilevel Marketers

Legal services provider LegalShield has tapped law firm Kelley Drye & Warren in response to a series of bills making their way through Capitol Hill that could weaken consumer protections against pyramid schemes and similarly deceptive direct sales initiatives often billed as “multilevel marketing” programs.

Pyramid schemes typically employ a business model wherein non-salaried members are recruited with the promise of financial returns in exchange for investing in a company’s products or services and then selling them directly to consumers in exchange for a commission. Many times, however, those sellers, now burdened with loads of unmovable inventory, are required to recruit additional sellers beneath them in order to make their initial investment back, let alone make a profit.

Last year, the Federal Trade Commission secured settlement agreements with two multilevel marketing companies totaling nearly $210 million: weight loss and nutritional supplement giant Herbalife and now-defunct retail services and products seller Fortune Hi-Tech Marketing. The FTC cut nearly 350,000 checks to sellers who lost money trying to run Herbalife businesses and mailed more than 285,000 checks totaling more than $3.7 million to those who lost money to FHTM.

Rep. Marsha Blackburn (R-TN)

LegalShield has retained KD&W to combat H.R.3409, or the Anti-Pyramid Promotional Scheme Act. That consumer protection bill, introduced in July by Rep. Marsha Blackburn (R-TN), seeks to amend the Federal Trade Commission Act, ostensibly to help would-be MLM investors avoid scams by providing the first federal definition of an illegal pyramid scheme.

However, critics say that deceptively titled bill would actually limit the FTC’s ability to enforce actions against those companies, because it redefines MLM and pyramid promotional practices in such a way that it allows many companies widely considered pyramid schemes to evade that definition, effectively granting them immunity from the government agency.

Because the bill considers pyramid operations legitimate as long as they abide by certain inventory provisions and implement “a bona fide inventory repurchase agreement,” critics charge that H.R.3409 is actually a pro-pyramid law.

FTC Commissioner Terrell McSweeny, in an August editorial for The Hill, wrote that H.R.3409 “would fundamentally damage the ability of the Federal Trade Commission to protect consumers from pyramid schemes.”

Critics also charge that much of the bill’s text was crafted by MLM trade group the Direct Selling Association. Herbalife, FHTM and energy drink seller Vemma Nutrition Company, all of whom were subject to recent FTC lawsuits, are DSA member companies.

In addition to H.R.3409, the FY 2018 Financial Services and General Government Appropriations bill, which was drafted by the House Appropriations Committee this summer, now contains a provision introduced by Rep. John Moolenaar (R-MI), stating that no funding for the Treasury Department, the Judiciary, the Small Business Administration, Securities and Exchange Commission or any other agencies for the fiscal year can be spent on enforcement actions against pyramid operations.

The DSA has endorsed the Moolenaar amendment, with president Joseph N. Mariano in July penning an editorial in The Hill titled “Direct selling is no pyramid scheme,” where he said the proposed amendment would “make clear that direct sellers buying products for their own personal use is a legitimate business practice,” and would also “do nothing to interfere with the Federal Trade Commission’s authority to prosecute pyramid schemes under Section 5 of the FTC Act.”

LegalShield develops and markets legal protection plans for individuals, families and small businesses through a network of about 7,000 independent provider attorneys across North America, as well as identity theft solutions. More than 500,000 customers enrolled in a LegalShield legal plan last year.

LegalShield CEO Jeff Bell

The Ada, OK-based company, which was founded in 1972, added direct sales to its sales force in 1984 and was formerly a member of the DSA. LegalShield left the organization earlier this year, however, with CEO Jeff Bell resigning his board of director position. In a blistering press release published on LegalShield’s site in March, Bell leveled a series of criticisms at the trade group, citing “concerns about the lack of enforcement of the DSA’s Code of Ethics for its members” as reasons for LegalShield’s exit, and claiming that “LegalShield feels the DSA does not stand up for or strictly enforce its Code of Ethics … therefore weakening the direct selling industry as a whole.”

Dana Wood, who was previously a staffer in Senator David Durenberger’s (R-MN) office, and Lee Terry, former Rep. for Nebraska’s 2nd district, manage the LegalShield account at Kelley Drye & Warren.

New York-based KD&W, which staffs more than 300 lawyers globally, was founded in 1836.