I’ve always thought MLMs and Pyramid Schemes were the same thing. But it seems Amway is the former but not the latter. Would be interested to understand the differences
MLMs are often accused of being pyramid schemes, but they usually defend themselves by pointing to the fact that they sell real products. This argument traces back to a 1979 FTC case against Amway which I mention. The FTC ruled that Amway was not a pyramid scheme because it had actual consumer products, and because distributors were required to make retail sales, not just recruit others. That ruling created what’s now called the "product-based exception".
Under this exception, an MLM is considered legal (i.e. not a pyramid scheme) if compensation comes mainly from retail sales to people outside the recruitment chain, not from signing up new members or selling products just to other recruits. On paper, this draws a clear line. In practice, it’s barely enforced.
The truth is that most MLMs still rely heavily on internal consumption and constant recruitment. The products often serve more as a cover than a real business. As long as there’s something physical being sold, even if it mostly moves within the distributor network, companies are rarely challenged. The product-based exception has become more of a loophole (or legal fiction) than a meaningful check on pyramid-style operations.
I’ve always thought MLMs and Pyramid Schemes were the same thing. But it seems Amway is the former but not the latter. Would be interested to understand the differences
Thanks so much for your thorough reply Paul! That makes good sense, but as you say not a clear distinction in practice.
MLMs are often accused of being pyramid schemes, but they usually defend themselves by pointing to the fact that they sell real products. This argument traces back to a 1979 FTC case against Amway which I mention. The FTC ruled that Amway was not a pyramid scheme because it had actual consumer products, and because distributors were required to make retail sales, not just recruit others. That ruling created what’s now called the "product-based exception".
Under this exception, an MLM is considered legal (i.e. not a pyramid scheme) if compensation comes mainly from retail sales to people outside the recruitment chain, not from signing up new members or selling products just to other recruits. On paper, this draws a clear line. In practice, it’s barely enforced.
The truth is that most MLMs still rely heavily on internal consumption and constant recruitment. The products often serve more as a cover than a real business. As long as there’s something physical being sold, even if it mostly moves within the distributor network, companies are rarely challenged. The product-based exception has become more of a loophole (or legal fiction) than a meaningful check on pyramid-style operations.