Why should a network marketing company be ethical in its operation? My short answer is that what makes a network marketing company “ethical” is also what keeps it legitimate and legal. So, what is it? What makes a network marketing company ethical or legitimate? It is often not clear cut, but these applicable legal standards have been in use for decades. To survive scrutiny, a network marketing company and its income opportunity must:
1. Involve the sale of a real product or service;
2. Not require a commissioned fee solely to participate; and
3. Maintain operational integrity.
Product or Service
The product or service must have real value to end-use consumers who are not affiliated with the company. Further, the product or service must actually be sold regularly to non-participant buyers.
It is, of course, an acceptable practice for participants to purchase the company’s products or services for their own use or to accumulate an inventory of products for ready resale, so long as the inventory quantities remain reasonable and the company adheres to acceptable product return and buyback policies.
Fee to Participate
Another name is a “headhunting fee,” which is a payment required to be made by a prospective participant for the right to earn compensation, of which compensation is derived from the recruitment of others who also pay the fee. There cannot be a fee to participate, other than an at-cost starter kit purchase requirement.
It is a central element of virtually all statutes defining what is an illegal “pyramid.” The key to understanding this issue is that, to be legitimate, a program must focus on selling products or services. It must not engage in selling the right to participate in the income opportunity for a fee.
Operational Integrity
Many companies have been attacked because of their failure to maintain operational integrity—that is, rigid adherence to acceptable standards of business practice. Some standards applicable to network marketing include:
1. Product advertising: Many laws regulate both content and performance claims for products and services, whether those claims are made on labels, in sales literature, on web sites, or orally by independent resellers. These laws are enforced by agencies at all levels of government and generally require that all claims regarding performance be truthful and accurate and capable of substantiation by competent evidence.
2. Program advertising: There are specific laws governing the making of income claims. These restrictions apply to specific earnings representations, such as the display of checks, sales and recruiting projections, and lifestyle profiles. Accuracy and truthfulness are a must.
3. Sales field enforcement: Well-managed companies impose and enforce upon their sales force legal and ethical standards of conduct. These include the product and program advertising standards described above, as well as customer protective requirements, such as use of retail sales receipts and adherence to return policies. Regulators have made it clear that a company will be held responsible for known independent participant behavior in violation of such regulations.
4. Home office legal compliance: Network marketing companies, like all business enterprises, are faced with a further array of laws and government agencies regulating many aspects of their internal office operations. These include hiring and payroll practices, employee safety, taxation, accounting, and financial affairs. Network marketing companies must meet unique customer service criteria in the form of product returns and inventory repurchase policies. Competitive market pressures have caused most large and successful companies to provide their product users with some form of personal satisfaction money back guarantee. Those that fail to conduct their internal operations in compliance with the standards imposed in this environment are at significant exposure to damaging, perhaps fatal, regulatory attack.
The commitment to ethical marketing starts at the top and goes all the way down to the very newest participant. The long-term viability of the company requires it, drives it, and ultimately is the glue holding everything together. Slip ups in ethical behavior hurt everyone and must be immediately addressed, so those watching from the outside see what we know on the inside—it will not be tolerated.
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Mr. Nehra is an Attorney in private practice in Muskegon, Michigan. He is one of a very few attorneys nationwide whose practice is devoted exclusively to direct selling and multi-level marketing issues. His 34 years of legal experience includes 9 years at Amway Corporation where he was Director of the Legal Division.
Richard W. (“Rick”) Waak has been working as a lawyer in the field of network marketing and direct selling for more than 30 years, including more than 20 years as in-house counsel to some of the most prominent companies in the industry, with much of that time serving as chief legal officer. In 2001 he began his private practice, and soon renewed a collaboration with Gerry Nehra first developed in the 1980s while at Amway. In 2006 he began serving as Of Counsel to the Nehra Law Firm, and he is now committed to supporting this firm’s clients as a Member of the renamed firm.
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