The Federal Trade Commission on Wednesday announced a major consumer protection law enforcement action and settlement against a Texas-based company for engaging in an unlawful pyramid scheme. The company, its former CEO, and two top promoters are banned from engaging in any multi-level marketing business. In addition, the company and CEO have agreed to pay $150 million.
During Wednesday’s press conference, Andrew Smith, director of the FTC’s Bureau of Consumer Protection, noted that “multi-level marketing is not inherently illegal.” An illegal pyramid scheme encourages new business opportunities involving without looking at whether participants have a meaningful opportunity for selling products. The company’s business directive was to “recruit business builders who recruit business builders.”
Mr. Smith further outlined the factors or “telltale signs” that a consumer may be dealing with an illegal pyramid scheme:
- The compensation depends on the recruitment of others
- Participants must purchase specific amounts of product to qualify for levels of compensation
- Participants should beware of earning or lifestyle claims
In determining the $150 million settlement, Mr. Smith commented that it can be a “difficult calculation.” The FTC’s Bureau of Consumer Protection, in conjunction with the Bureau of Economics, conducted analysis that determined an amount that would result in a fair resolution and allow a meaningful redress program to those consumers affected. In general, the FTC looks for the “top-line” harm that considers gross revenue less any refunds, along with looking at trends of gross revenue as collected over time while taking into account the groups of consumers who may not have been deceived.
The Plano company promoted energy drink products. The FTC did not challenge the products offered by the company or those claims made regarding the products. At issue was engaging in a deceptive practice concerning a deceptive business opportunity and the methods used to recruit individuals as participants. The company will continue to offer its products but must rely on traditional distribution methods that do not involve a multi-level marketing structure.