Congress would be right to define ‘pyramid schemes’ at the federal level

As an attorney who has helped companies, consumer groups and the public understand consumer law throughout my entire career, I was disappointed to read a July 18 op-ed in The Hill criticizing an amendment to the Financial Services and Appropriations bill involving pyramid promotional schemes.

The author, Dr. William Keep, asserted that the amendment “ties the hands of federal regulators.” But he did not justify that claim by explaining how the amendment would have any negative impact on regulators at all. 

In order to understand the amendment sponsored by U.S. Rep. John Moolenaar (R-Mich.) – as well as similar bipartisan legislation (H.R. 3409) introduced recently by U.S. Reps. Marsha Blackburn (R-Tenn.) and Marc Veasey (D-Texas) – you have to first understand the backdrop of pyramid law in the United States.

{mosads}Although everyone has heard the term “pyramid scheme,” few people realize that there is remarkably no federal statute that defines what is, and what is not, a pyramid. That does not mean, however, that there is no definition of the term. State laws define it, and the federal courts have handled pyramid cases for more than 60 years during which time they have explained, in a number of cases, what type of companies are pyramids.

This common-sense legislation seeks to avoid that waste of time by setting in statute a definition of “pyramid promotional schemes” that tracks the definition that has been used by most courts for over half a century and has been adopted by most states—i.e., in a nutshell it defines a pyramid scheme as a situation in which someone pays in order to get paid, not for selling product, or buying product to consume themselves, but for recruiting other people who themselves pay in order to get paid by recruiting more people.

Nothing in that definition “ties the hands of regulators.” To the contrary, if a company is a pyramid scheme the amendment specifically recognizes that regulators can bring a lawsuit; if a company is not a pyramid scheme the amendment simply does not apply. It is that simple. 

The column also made several statements about the Federal Trade Commission that were incorrect. In particular, that included a reference to “26 pyramid scheme cases” and the argument that the “FTC’s successful track record” in these cases showed the “quality and consistency” of plaintiffs’ legal arguments.

The “successes” referred to are mostly cases that the FTC settled instead of litigated. Settlements, of course, don’t reflect upon the quality or consistency of a party’s argument; nor do they indicate that one side succeeded. Indeed, parties settle for a variety of reasons – including when they believe that they are not likely to win a case if they go forward to trial.

Secondly, the column implied that the number of cases brought by the FTC proved the “egregious behavior of members of the [multi-level marketing] industry.” Assuming the FTC brought 26 pyramid cases over the past 21 years, it averages to 1.23 cases per year. From a practitioner’s standpoint that rate is no greater than what one would expect in a $35 billion yearly industry.

To put that number in context, it is important to remember that the FTC is the largest consumer protection enforcement agency in the world with 1,100 employees (mostly attorneys) and a budget of $313 million. The agency brought 248 enforcement actions in 2016 alone, and probably brought more than 3,500 enforcement actions during the time period in question.

With that backdrop, 1.23 pyramid cases per year hardly suggests that the FTC views the MLM industry as committing “egregious behavior,” and certainly does not evidence an investment of time or resources by the FTC that is disproportionate to what is spent in other industry sectors. Perhaps most telling is that the FTC keeps tabs on industries based upon how many complaints consumers submit to the government each year. While the FTC received more than 3 million complaints last year, less than 0.05 percent of those were about the multi-level marketing industry.

The efforts by Moolenaar, Blackburn and Veasey exemplify what legislators should be doing – looking for ways to simplify our laws, simplify legal process, and reduce enforcement costs by straightforward fixes. Their legislation does precisely that.

David Zetoony is a partner with Bryan Cave LLP and is the leader of the firm’s consumer protection practice, which includes corporate data security, data privacy, advertising, and marketing practices.

The views expressed by contributors are their own and are not the views of The Hill.