The role of the distributor network in the persistence of legal and ethical problems of multi-level marketing companies
- For policymakers
- Summary created: 2025
Investigates the role of distributor networks in the persistence of legal and ethical issues within multi-level marketing companies (MLMs) such as Amway, Herbalife, and Tupperware.
This summary, including its recommendations and ideas, was created by Claudia Groß and is based on original research. The original research itself was conducted in collaboration with the following researcher.
Multi-level marketing companies (MLMs) like Amway, Herbalife, and Tupperware have grown significantly, with over 103.3 million people involved globally in 2015, generating a retail turnover of approximately 183.7 billion US Dollars. MLMs operate through self-employed distributors who sell products directly to consumers and recruit new distributors, creating a hierarchy of sellers. Despite the industry’s growth, MLMs face ongoing legal and ethical challenges, including accusations of operating as pyramid schemes, misrepresenting income opportunities, and making exaggerated product claims. Regulatory bodies and industry associations have implemented measures such as Codes of Ethics and complaint procedures to address these issues, but problems persist, as evidenced by the temporary shutdown of Vemma in 2015 and the Herbalife settlement in 2016. Critics argue that central aspects of MLMs’ business models need reform, including shifting focus from recruitment to product sales and increasing transparency about income opportunities.
The research highlights that existing measures may not adequately address the root causes of these problems, particularly the influence of distributor networks (DNs) on distributor behavior. DNs, often overlooked, play a crucial role in training and socializing distributors, potentially perpetuating unethical practices. The study suggests that a better understanding of DNs and their relationship with MLM headquarters, individual distributors, and external parties is necessary to address the persistence of legal and ethical issues. The paper proposes an extended MLM model that includes DNs to shed light on the sources of these problems and suggests additional countermeasures to mitigate them.
Key findings
In MLMs recruitment, selection, and socialization of participants is done but formally self-employed high-level distributors who form a distributor network (DNs). This unique way of operating, significantly influences the persistence of legal and ethical problems in MLMs. Headquarters profit from how DNs work while distancing themselves for any harm caused.
Evidence
The study identifies that DNs, managed by high-level independent distributors, are responsible for training and socializing new distributors. Here, unethical and even legally problematic practices are taught and passed on. As DNs are formally independent, headquarters can distance themselves from problematic practices, while profiting financially from them. For example, headquarters can present themselves as emphasizing product sales, modest product claims, and the sales of products as a means to achieve a side income. In practice, DNs make and teach misleading income claims ('get rich quick'), exaggerated product claims (heals cancer, COVID-19 etc.), and teach that not retail sales but recruiting others is core to earn money. Despite these claims and practices being ethically and partially legally problematic, they create revenue for headquarters and a few upline members. However, headquarters and upline members are often able to avoid responsibility and accountability by highlighting that all participants are formally independent contractors. Blame is shift to individuals despite the system being designed in problematic ways.
What it means
The influence of DNs can protect headquarters and upline participants from being held accountable for inherent ethical and legal issues in the industry.
Existing countermeasures fail to address how MLMs operate, in particular the role of DNs in MLMs.
Evidence
Current regulations and Codes of Ethics primarily target the relationship between MLM headquarters and distributors, neglecting the impact of DNs. The study notes that DNs allow headquarters to misuse Codes as a way to present themselves as good corporate citizens despite incentivizing and profiting from problematic practices and promises.
What it means
To effectively address legal and ethical issues, countermeasures must take into account the organizational structure and design of MLMs, including the DN. Existing regulations do not cover MLMs' unique ways of operating and fail to deal with how malpractices are embedded in how they work.
Misrepresentation of business opportunities is prevalent due to DN practices.
Evidence
DNs motivate distributors through success stories and exaggerated income potential, while actual attrition rates and average earnings are not discussed. In addition, misleading product claims are passed on. Headquarters profit from these practices but, due to the DNs formal independence, can often avoid accountability.
What it means
The unique way of operating through DNs contributes to the persistence of the longstanding and widespread ethical and legal issues of the MLM industry.
DNs allow headquarters to both profit from misbehavior and avoid accountability for the misbehavior.
Evidence
MLMs encourage distributors to leverage personal relationships for sales and recruitment, a practice taught and reinforced by DNs. This approach can restrict consumer autonomy and lead to ethical concerns. In addition, legal concerns persist as most MLMs focus on recruitment instead of retail sales of products or services.
What it means
In MLMs, DNs teach participants how to use and misuse their social relations, necessitating targeted countermeasures.
Strong socialization within DNs can create 'total institutions,' often called a 'cult-like culture.'
Evidence
DNs employ strong socialization techniques, promoting a corporate culture that may restrict distributors' ability to critically reflect on the company's practices. This can lead to a normalization of unethical behavior.
What it means
The risk of MLMs functioning as total institutions highlights the need for regulations addressing the socialization practices within DNs.
Proposed action
Policy making needs to take into account the unique way in which MLMs operate.First, MLMs should be required by governments to provide key performance figures, such as income opportunities, income likelihood, attrition rate, and average earnings.Second, based on our analysis of how MLMs operate in practice, such regulations need to be supplemented with clear accountability of DNs.Third, headquarters should be held accountable for re-occuring misbehavior of their self-employed contractors.Fourth, better consumer education.
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