MULTI-LEVEL MARKETING LITIGATION
Multi-Level Marketing In Georgia: A Brief Overview
THE 1980’S AND 1990’S
By most accounts the surge of interest in Multi-Level Marketing (“MLM”) on a national scale began in the late 1980’s with the emergence of high profile MLM Companies such as NuSkin, Melaleuca, and NSA. That era also introduced the “Infomercial” and MLM Companies began producing video tapes to be used in recruiting new Distributors. These video tapes, some hosted by well known entertainment personalities, often showed a lifestyle of beautiful homes located on exclusive intercoastal waterways with yachts cruising past. While the Companies and Products might have varied, the message of these video tapes was inevitably the same: “You can become financially independent through Multi-Level Marketing.” There were also lavish recruitment events.
The 1990’s saw legal action, both by Governmental Agencies and private lawsuits, against some of the more prominent MLM Companies. Typically, these legal actions involved allegations that the MLM Company was actually structured as an illegal “Pyramid Scheme” rather than a true business opportunity.
By most estimates there are over 800 MLM Companies operating in the United States today. Many of these companies conduct business in Georgia.
What separates MLM Companies from most businesses is that virtually the entire Sales Force is comprised of independent contractors (usually with titles like Associate, Representative, or Independent Marketing Consultant). For our discussion here, the term “Distributor” will be used. These Distributors are independent business people (i.e. not employees of the MLM Company) who have a contractual relationship with the MLM Company. While these MLM Distributor Contracts vary in content, they typically provide for (i) the Distributor’s right to purchase products from the MLM Company and to resell them, (ii) Policies and Procedures that the Distributor must follow, and (iii) the Distributor’s Termination Rights.
To become financially independent, a Distributor must overcome two very high hurdles. First, the Distributor must recruit other people in order to build a large and active “Downline”. Secondly, the Distributor must move a great deal of Product through their Downline organization (assuming that such a Downline can be built). Most studies indicate that less than 3% of all Distributors ever make any significant net income, much less achieve “Financial Independence”. Consequently, the Distributor attrition rate tends to be in the 70% + range during the first year (either through formal Termination of the Distributor Contract or simply by ceasing activity).
An increasing trend is for professionals such as Doctors, Airline Pilots and Professional Athletes to become MLM Distributors. These professionals will typically purchase a very substantial amount of Product Inventory from the MLM Company (even over $100,000 at wholesale cost) in order to “move up” their ranking in the Company’s Compensation Plan in anticipation of building a large Downline. When the active Downline does not develop, the Distributor ends up with a large, stagnant investment in Product Inventory. In many States, if the Product Inventory is more than a few months old, it cannot be returned to the Company for even a partial Refund. Fortunately, Georgia MLM Distributors often have a better option.
THE GEORGIA MLM STATUTE
Georgia is one of the few States that has a Statute directly setting out criteria that MLM Companies must meet to do business in our State. First, the Georgia MLM Statute makes it a violation of the law if the MLM Compensation Plan is predicated on “Front Loading” (i.e. the Independent Distributor has to buy an excessive amount of Product Inventory simply to qualify for a specific Compensation Plan Level). Secondly, the Georgia MLM Statute generally bars “Pyramid Schemes” wherein the real monetary rewards are based on recruiting new Independent Distributors rather than selling products to Retail Customers. Third, the Georgia MLM Statute also provides that MLM companies are required to Repurchase certain Products from the Georgia Distributor at a minimum of 90% of the Distributor’s net original Product cost. There is no calendar deadline for such Repurchase (even though Products that have exceeded the Expiration Date on the Product Package are typically excluded from Repurchase). Unfortunately, many Georgia MLM Distributors are unaware of their legal rights under the Georgia MLM Statute. This lack of knowledge is sometimes because the Georgia Distributor hasn’t adequately read the MLM Independent Distributor Contact. However, in other instances, it is because the Distributor’s Legal Rights have not been properly disclosed by the MLM Company.
Georgia Distributors enjoy legal rights that afford protection in their dealings with MLM Companies. However, it is important that the Georgia Distributor timely take action to preserve these legal rights. One of the best ways to accomplish this is by contacting a Georgia attorney experienced in MLM Law. We have extensive experience in representing Georgia citizens in protecting their legal rights as MLM company Independent Distributors.
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Multi-Level Marketing Litigation • Business Litigation • Protecting Consumer Rights