MLM Legality: The Amway Safeguards Rule
A Twenty Year Standard

by Jeffrey A. Babener
MLM Legal Attorney
©2011

No legal ruling has had more impact on the direct sales industry than the landmark FTC v. Amway decision.  (In the Matter of Amway.) In 1975, the FTC accused Amway of operating as an illegal pyramid. After four years of litigation, in 1979, Amway prevailed. An administrative law judge ruled that Amway's multilevel marketing program was a legitimate business opportunity as opposed to a pyramid scheme.

Had Amway lost, Multilevel Marketing (MLM) history after 1979 may have been nonexistent. Amway's victory paved the way for hundreds of MLM companies that would follow. So significant was the decision that the FTC during the next 20 years focused on "deceptive" practices of MLM companies such as earnings representations or medical claims rather than attacking the "structure" of MLM programs. (Only in recent years has the FTC begun to question the "personal use" component of the MLM model.)

The Amway Safeguards Rule
The FTC’s prosecution of Amway in the mid-1970s could have dealt a deathblow to the entire MLM/network marketing/direct sales industry. In The Matter of Amway, 1979, the agency attempted to make the case that Amway was a pyramid scheme and, therefore, a deceptive trade practice under FTC consumer laws.

The case lasted several years. Amway prevailed and, in the landmark 1979 ruling, its marketing method was ruled to be a legitimate business opportunity. This decision has become known as the "Amway Safeguards Rule," which is currently one of the most significant sets of legal standards by which courts and regulatory agencies determine the legitimacy of an MLM/network marketing/direct sales company.

In the administrative law judge's decision, three salutary features were pointed out with respect to the Amway program:

  1. Amway required its representatives to engage in retail selling, under the "ten retail customer policy," which appeared in the agreement that representatives signed upon enrollment. This rule required that representatives make 10 sales to retail customers as a qualification for eligibility to receive commissions and bonuses on sales/purchases made by other representatives in their personal sales organization.
  2. Amway required its representatives to sell a minimum of 70% of previously purchased product before placing a new order. (Amway’s rules recognize "personal use" for purposes of the 70% rule.)
  3. Amway had an official "buy-back" policy for unsold, unopened inventory. This policy had some reasonable restrictions, including a specified maximum length of time since the item was originally purchased by the representative and that the item was still current in the company’s product offerings to consumers. The policy also included a minimal "restocking" fee. (Buy-back policies are significant especially for their protection of representatives who choose to terminate their affiliation with a company, and do not want to be "stuck" with unsold inventory.)

By abiding by these three criteria, network marketing and direct sales companies provide themselves with an "umbrella of legal protection." The Amway Safeguards Rule has been successfully cited many times since 1979 in defense of legally operating companies.

The Amway Case is Still the Rule
More than two decades later, the Amway decision is cited in virtually every federal or state case involving an MLM company. Although tension will always exist between the industry and government over the definition of a "retail sale” [i.e., distributor personal use v. nonparticipant sales], the Amway safeguards test continues to be the "gold standard" in evaluating the difference between legitimate MLM v. illegal pyramids. To view the actual text of the landmark FTC v. Amway decision, please visit http://www.mlmlegal.com/amway.html.

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About the Author:

Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad. His firm has focus on startup and emerging MLM companies. He has been adviser to such companies as Avon, Nikken, Discover Toys, NuSkin, Excel, Fuller Brush, Cell Tech, Kaire, Sunrider, Melaleuca, etc. He is editor of the industry resource internet site www.mlmlegal.com.  He is a frequent lecturer and has been interviewed on the industry, and published, in many publications. Babener & Associates, 121 SW Morrison, Suite 1020 Portland, OR 97204, www.mlmlegal.com.

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