The Multi-Level Marketing Pandemic

Abstract

Among the many societal effects of the COVID-19 pandemic has been a sharp rise in the activities of multi-level marketing companies (MLMs). MLMs are business enterprises in which participants seek not only to sell products to friends, family, and social media contacts, but also to recruit them as MLM participants, with the promise of “building their own business from home.”

False promises often pervade MLM sales pitches. Evidence shows that few participants see even a dollar of profit from their MLM work; the vast majority of recruits quickly abandon their MLM dreams and lose their investments. Yet the pitch has become all the more appealing in the course of the COVID-19 pandemic. Many people are desperate—unemployed and in need of immediate earnings and also in need of flexible, at-home work due to health concerns and family responsibilities. MLMs have been particularly appealing to the working mothers who, evidence shows, have borne the brunt of the impact of COVID-19 both on employment and on childcare and other household-related responsibilities.

Regulators have long scrutinized and fought the worst abuses of MLMs. They have sought to find and shut down the unscrupulous MLMs that are in fact nothing more than fraudulent pyramid schemes, and also to curtail the misrepresentations and exaggerations that are all too often the stock-in-trade of participants in more legitimate MLMs. But regulators, including the Federal Trade Commission, face significant legal and practical limitations in their ability to promulgate and enforce MLM regulations.

This Article examines how regulators have addressed MLM activity and proposes means of stemming the pandemic-driven expansion of unlawful MLM activities. It assesses efforts by regulators, by social media companies, and by self-regulatory organizations set up by MLMs themselves. Comprehensive, long-term success at curbing the abuses of MLMs will require more significant regulatory action that is currently permitted by law. But immediate steps outlined here can provide some much-needed relief for consumers harmed by the unlawful MLM activities that have been fostered by the COVID-19 pandemic.

Keywords: multi-level marketing, direct sales, pyramid schemes, commercial law, business law, consumer law, consumer protection

JEL Classification: K12, K22, K42, K32, L22