Direct Sales and MLM

Historical Perspective on the Seventy Percent Rule

By
Kevin Thompson

Out of all of the topics covered in MLM law, there is not a single topic more obfuscated and misinterpreted than the 70% Rule. This rule has been purposefully screwed up by MLM critics in an effort to craft a narrative that suits their agenda. Candidly, I'm shocked that neither myself nor my peers have addressed this sooner. The rule is incredibly easy to understand ONCE YOU UNDERSTAND THE HISTORY.

The Origins of the Seventy Percent Rule

The Seventy Percent Rule was one of the "Amway Safeguards" that the court highlighted in 1979 when it found that Amway was NOT a pyramid scheme. The summary of the rule: In order to qualify for downline bonuses, Distributors had to move 70% of their existing inventories to customers OR distributors. The spirit of the rule is designed to ensure that Distributors were not "garage qualifying" and sitting on inventory. The inventory had to MOVE to other people.

Contrasting Interpretations

The popular interpretation inside the MLM industry is simple: The 70% rule, where it exists in other companies' Policies and Procedures, can be satisfied by way of personal consumption i.e. the individual distributor needs to certify that they're using or selling 70% of their own personal inventory.If you're asking yourself, "I thought they had to MOVE 70% of inventory to other people," you've identified the source of confusion.

Historical Perspective on the Seventy Percent Rule

I learned this almost a decade ago while talking to a long-standing Amway Diamond. During that discussion, he educated me on the origins of the Seventy Percent Rule. I recently called him to confirm my understanding and, lo and behold, my memory served me well.Believe it or not, there existed a time before companies could directly ship small parcels of product to individual homes. This concept of "direct fulfillment" really took off in the mid-80s. Before "direct fulfillment," Amway relied on what is called "Standard Fulfillment." In this environment, the Amway "DIRECT" would directly receive and DISTRIBUTE product to his entire organization. These Amway Directs were high ranking leaders in the Amway organization. This is very important to understand. In those days, the Directs bought and housed the inventory FOR THEIR ENTIRE DOWNLINES. This is where the memories of garages full of inventory originated. The Directs served as Amway's mini-fulfillment centers (hence the term "distributors"). In that environment, Amway implemented 3 key policies to prevent inventory loading: (1) 70% of THAT inventory had to move to people, whether via wholesale to the downline or retail to customers; (2) 10 customer sales had to be achieved; and (3) Distributors could send back the inventory for a twelve-month period. Understand, these people were on the hook for several thousand dollars worth of inventory. They were required to show that 70% was moving to the downline or customers.It's not that each distributor had to move 70% of their individual orders, as interpreted by some today. It was that the DIRECTS had to move 70% of their bulk order. The distributors HAD NO WAY TO MAKE INDIVIDUAL ORDERS from Amway; thus, the 70% rule did not apply to them.

Misinterpretation of the Rule

People today, even a former FTC economist, Peter VanderNat, believes that the 70% rule means that each individual distributor has to move 70% of his or her individual orders. VanderNat has written, "Upon closer analysis [the Amway decision] allows for up to 30% of any month’s purchase to be used for a distributor’s own use and/or inventory holdings." In an era where the distributor can now order product in a quantity unique to him or herself, the 70% rule is completely irrelevant unless people order excessive quantities that cannot be consumed or sold in a month (inventory load). The bastardization of this rule has led to some nonsensical conclusions i.e. it's ok for individual distributors to consume 30% of their personal orders, but the rest needs to go to the downline or customers (KEEP IN MIND, DISTRIBUTORS (and most customers) CAN NOW ORDER THEIR OWN PRODUCT!). Does anyone really expect people to sell 70% of a tube of toothpaste? Does anyone expect people to sell 70% of a one-month supply of supplements?On occasions, judges get it wrong. We have a very recent example of a judge completely bonking the issue. In an Order in the Vemma case where the Judge denied Vemma's modified pay plan, the Court held, "Vemma’s proposed compensation plan would give Affiliates full bonuses for meeting a lower threshold of sales to customers—51% in the Vemma plan versus 70% in the Amway plan." Where in the Amway case did it say that 70% of all individuals orders had to go to customers? The Judge compared Vemma's proposed 51% customer rule against the old 70% Amway rule and got it wrong. Would the Judge have reached a different decision if he better understood the Amway rule? It's unlikely.

Conclusion

As stated above, the 70% rule was one of the "Amway Safeguards" responsible for Amway's victory over the FTC in the 70s. Courts today regard the Amway safeguards to be effective as a matter of fact and not of law, meaning that the safeguards are not one-size-fits-all. In other words, companies are not required to copy the Amway Safeguards. But...companies are required to do SOMETHING to meaningfully prevent inventory loading and protect consumers. Personally, I always recommend companies have a 70% rule because the concept is familiar to most regulators. But candidly, the rule is outdated and unnecessary, especially after the BurnLounge case.Any questions? What do you think?

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