For years so-called multilevel or direct-selling marketers, which enlist individuals to flog vitamins, cosmetics, and weight-loss supplements to their friends and acquaintances, have drawn criticism from consumer advocates, who liken the businesses to illegal pyramid schemes. That’s because distributors also make money by recruiting other sellers and getting a cut of their revenue, and newcomers are often encouraged to invest in training materials and supplies. Those practices have led to class actions filed by former distributors who claim they were defrauded and calls for increased regulation to protect them.
Two years ago, Amway, among the largest and best-known direct sales retailers, agreed to settle a class action in California with a $56 million payment. (Amway did not admit any wrongdoing.) The Federal Trade Commission has brought more than a dozen actions against multilevel marketers since 1994. “Because [MLMs] don’t have to make disclosures, they’re widely deceptive,” says Robert FitzPatrick, who runs the nonprofit Pyramid Scheme Alert.