Multi-Level Marketing Misrepresentations

Recently, multi-level marketing company BurnLounge lost the case the FTC brought against it for allegedly being an illegal pyramid scheme. Multi-level marketing supporters would have you believe that BurnLounge is different from all the other “legitimate” MLMs. But that’s not the case.

The FTC accused BurnLounge of paying distributors for recruiting of new participants, rather than paying them for the retail sales of products or services:

According to the FTC, BurnLounge recruited consumers through the Internet, telephone calls, and in-person meetings. The sales pitch represented that participants in BurnLounge were likely to make substantial income. BurnLounge recruited participants by selling them so-called “product packages,” ranging from $29.95 to $429.95 per year. More expensive packages purportedly provided participants with an increased ability to earn rewards through the BurnLounge compensation program.

The BurnLounge compensation program primarily provided payments to participants for recruiting of new participants, not on the retail sale of products or services, which the FTC alleges would result in a substantial percentage of participants losing money.

The FTC specifically alleges that the defendants operate an illegal pyramid scheme, make deceptive earnings claims, and fail to disclose that most consumers who invest in pyramid schemes don’t receive substantial income, but lose money, instead. These practices violate the FTC Act, the agency alleges.

How is this different from other multi-level marketing companies? It’s not, in my opinion. Let’s take Mary Kay Cosmetics, for example. Distributors recruit women into Mary Kay. As soon as the recruit purchases inventory from the company, commission is paid to the upline. There is no concern or regard for whether the recruit actually sells the products to retail customers. Once the recruit places that order, commissions are paid.

It’s no wonder, then, that women recruited into Mary Kay Inc. are immediately pressured to purchase an inventory package. The typical packages pushed range from $600 wholesale ($1,200 retail value) to $3,600 wholesale ($7,200 retail value).

Thus, the compensation is paid for recruiting activities, not actual sales of products. Mary Kay will tell you what they (and many other MLMs) are doing is perfectly legal. By not paying commission until the recruit buys inventory, they are technically not paying consultants for the act of recruiting. Voila! Legal!

To me it’s all a shell game.

Back to BurnLounge… An order was entered, prohibiting BurnLounge and its founders from doing certain things. In addition, the company and its founders must pay a judgment of $16.2 million, plus other forfeitures.

The prohibitions in the text of the order were interesting to me. Every MLM that I’ve ever analyzed seems to have no shortage of representatives (and corporate employees!) making false and/or misleading claims about sales, income, and profits. Specifically, the companies that release Earnings Representations are known for giving numbers regarding commissions paid to distributors… while conveniently leaving out all the representatives who earn $0 in commissions. This gives a flawed picture and radically overstates average earnings.

Here’s the text of the BurLounge order. If you’re familiar with multi-level marketing, I think you’ll see familiar issues and wonder why all MLMs aren’t bound by such language:

IT IS FURTHER ORDERED that, in connection with the advertising, promotion, offering for sale, or sale, or assisting others in the advertising, promotion, offering for sale, or sale of any Multi-level Marketing Program or Business Venture, each Defendant and their officers, agents, servants, and employees, and those persons in active concert or participation with them who receive actual notice of this Final Order by personal service or otherwise, whether acting directly or through any entity, corporation, subsidiary, division, or other device, are permanently restrained and enjoined from making, expressly or by implication, orally or in writing, any false or misleading statement or misrepresentation of material fact including, but not limited to, the following:

A. Misrepresentations about the amount of sales, income, or profits that a participant in such Multi-level Marketing Program or Business Venture can reasonably expect to achieve;
B. Misrepresentations about the amount of sales, income, or profits that a participant or participants in such Multi-level Marketing Program or Business Venture have actually achieved;
C. Misrepresentations about the profitability of participating in such Multi-level Marketing Program or Business Venture
D. Misrepresentations that a person who participates in such Multi-level Marketing Program or Business Venture can reasonably expect to recoup his or her investment;
E. Misrepresentations of any reward offered to or earned by participants
in such Multi-level Marketing Program or Business Venture;
F. Misrepresentations of the legality of such Multi-level Marketing Program or Business Venture; and
G. Misrepresentations of any material aspect of the performance, efficacy, nature, or central characteristic of any good or service offered for sale through such Multi-level Marketing Program or Business Venture.

III. Prohibition Against Material Omissions
IT IS FURTHER ORDERED that (in connection with the advertising, promotion, offering for sale, or sale, or assisting others in the advertising, promotion, offering for sale, or sale of any Multi-level Marketing Program or Business Venture) each Defendant and their officers, agents, servants, employees, and attorneys, whether acting directly or through any entity, corporation, subsidiary, division, or other device, are hereby permanently restrained and enjoined from failing to disclose, clearly and conspicuously, to any participant or prospective participant in any Multi-level Marketing Program or Business Venture to whom any earnings, profits or sales volume claims have been made, the following historical information to the extent that such information is reasonably available to the business:

A. The number and percentage of participants in the Multi-level Marketing Program or Business Venture who have earned, profited or sold at least the amount represented; and
B. The number and percentage of participants in the Multi-level Marketing Program or Business Venture who have made a profit through their participation in the Multi-level Marketing Program or Business

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