PETROWICH: Multi-level marketing companies have been around since the late 1800s but began picking up real steam following World War II in the 1950s, 60s and 70s.
MLMs presented an opportunity for women to gain some financial independence as they became increasingly interested in entering the workforce, and MLM’s target demographic remains the same today – often single women with children looking for financial freedom.
Big MLM names like Mary Kay and Avon, both beauty cosmetic companies, operate through a network of consultants who purchase products at wholesale price and profit by selling them directly to customers at retail.
But consultants can expand their income by recruiting others to join their sales teams, earning additional commissions on their downline sales.
MLMs gained a second wind following the boom of social media, allowing companies to recruit at higher volumes and sell products more effectively, but the spike has also led to more women coming forward about negative experiences.
While MLMs are a legitimate business model, some operate closer to what’s referred to as a pyramid scheme, which focuses primarily on recruiting new members and less on products.
KELLY: I was only 18 years old with two brand new babies to raise, all on my own when I was recruited into Mary Kay – bright-eyed, eager and completely unaware of the financial trap I was stepping into. I was sold a dream of financial freedom, community and empowerment.
What I got instead was thousands of dollars in debt, hours of unpaid labor and the shame of having unknowingly roped in friends and family who trusted me.
PETROWICH: That’s Christina Kelly, who spoke in favor of State Rep. Melanie Ross Levin’s bill during its committee hearing.
It’s stories like Christina’s that inspired Ross Levin to write the bill, which would mandate MLMs to disclose a complete description of its compensation plan, including inventory purchase requirements, before an individual signs on.
It would also allow participants to cancel their contracts for any reason within 3 months, and upon cancellation, require the MLM to repurchase all unsold goods in reasonable condition at at least 90% of the original price.
ROSS LEVIN: A lot of times, you're put under pressure to sign up, and you might have second thoughts. And I really want people to be able to financially recover from these situations, and be able to get out of these situations if they need to.
There's really a huge disadvantage to the consultants versus the company. The company makes money not only by selling product, but largely by selling product to consultants, and that's really why it's problematic.
PETROWICH: Ross Levin’s bill initially included a 48-hour “cool-off period,” which would have required a participant to wait two days before they could sign on with an MLM.
ROSS LEVIN: That was something that we had really strong opposition to, and just going through committee and talking to some of my colleagues, that piece, which no other state does, was going to be hard to kind of get to the finish line.
PETROWICH: The original bill also included a provision that would have required MLMs to provide a disclosure statement that the state of Delaware does not approve, recommend, endorse or sponsor any multi-level marketing program.
Committee members felt this type of requirement was unusual, and Rep. Ross Levin has since introduced a substitute version of the bill that removes both provisions.
She says while not all MLMs are acting in predatory ways, she feels legislation like this is important to make sure the good actors remain good actors and the bad actors are held accountable.
Douglas Brooks is a semi-retired Massachusetts-based lawyer who has litigated a number of class actions against MLMs and served as an expert witness during the bill’s committee hearing.
Douglas explains other types of businesses, like franchises, are subject to pre-sale disclosure rules, but MLMs are exempt because the initial payment is often below the $500 threshold.
BROOKS: In 2012, the Federal Trade Commission passed what's called a Business Opportunity Rule, similar to the Franchise Rule, it requires pre-sale disclosures, a waiting period before people sign on the dotted line. But the multi-level marketing industry heavily lobbied to get exempted from that rule, and they were exempted from that rule.
So where we are today is right now, multi-level marketing is the only type of business opportunity that is not subject to a pre-sale disclosure requirement. So I heartily support the Delaware bill, which would require pre-sale disclosures for prospective distributors.
I think that there's really no legitimate argument why the multi-level marketing industry should not be subject to this type of rule that every other business opportunity is subject to.
PETROWICH: Brian Harrison opposed the bill during its committee hearing. He’s with the government affairs team for Amway – an MLM that claims to be the world’s largest direct selling company via personal care and home products.
Brian argues it’s no longer common practice for MLMs to have inventory requirements and that most companies already have buyback policies.
He took particular concern with how an MLM would calculate expected compensation, which would be a disclosure requirement under the new law.
HARRISON: It's very important how you calculate this. Some people come to the party and only want to buy the product and go home, or they sign up because they want to get it at a discount. And so, do you factor the person in who never makes another sale into what the average person is [making]?
PETROWICH: Parties are key to MLM’s business models. Distributors host gatherings, often in their home, as an opportunity to promote the company to a group of invited guests and encourage others to also become distributors of the products.
Paula Randazzo is a Wilmington resident who became involved with Melaleuca in 2008, an MLM focused on personal care and home products – she was recruited by one of the clients of a small business she was running at the time.
RANDAZZO: She showed me all the products and invited myself and my husband several times to her home with many people and showing videos and really sort of pushing – putting all the products out there all the time to show us how wonderful they were, health, beauty, household, that type of stuff.
So I finally thought, this could supplement the fact that I was trying to build a business of my own. Maybe this could supplement me to continue on. So I got involved in it, and before I knew it, I was buying hundreds and hundreds of dollars of products so that I would have them, so I could show them to people, so I could use them and tell them how they work and all of that.
So my closet was filling up with all of this stuff, and on top of that, I had to get others to be under me, and it would go up the line, and she would make more money. That's how it worked.
PETROWICH: Paula says when she scheduled meetings with her family and friends to sell the products or recruit others, she was not allowed to tell prospective distributors that the woman that recruited her also insisted on coming along.
Eventually, Paula and the recruiter went to visit Paula’s cousin in New Jersey, who reluctantly signed with the MLM after hours of pressure.
RANDAZZO: By 6:00 in the morning – she must have stayed up all night – she wanted out of it. So I contacted the person I was dealing with, and I said to her that ‘My cousin wants out, can you just– don't put it through today.’ I didn't think from 6:00 the night before to 6:00 in the morning that there would be an issue to cancel.
You can't cancel.
PETROWICH: Paula’s recruiter told her to instead tell her cousin to use the products and to then go back to Melaleuca, say she didn’t like them and return them.
Paula eventually found out her cousin returned the products at her own expense and received store credit that neither of them were initially made aware of.
After calling and writing a letter to the corporate side of the company, Paula’s cousin finally received her money back, but the incident has ruined Paula’s relationship with her family to this day.
RANDAZZO: She got her money back. She was done with them, but she was done with me because she somehow believed that I had done this.
So that took care of the mother, the children – my whole side of the family over there were gone because they thought– they were sure I had stolen the money from them.
PETROWICH: Paula eventually left Melaleuca, but all the products she paid for out of pocket she took as a loss.
She says although she feels embarrassed about the entire experience and regrets involving her friends and family, she feels it’s important to speak out about what she went through so more women can be made aware that they're not alone.
Deborah Costas is a Wilmington resident who got involved with MLM Color Street Nail Strips in 2019.
Although her experience wasn’t as negative as Paula’s, after months of not making nearly as much money as she’d hoped and being stuck with excess inventory, she left.
COSTAS: It’s not a small thing, and when you when it doesn't work out, I did kind of feel like I failed a little bit. Especially when I saw how I didn't make any money. It was fun. It was a learning experience. Like I said, for me, it was a distraction. But, you know, it's a big thing to feel like you started this thing, and then you don't make money, you kind of feel like you failed.
So having more– I think every company putting forth the sheet that says what the likelihood, the percentage of making money, I think that's crucial. I think people need to see that.
PETROWICH: Ross Levin’s bill only cleared committee with Democratic support.
Several of her male Republican colleagues argue the legislation is unnecessarily meddling in business operations and that not being successful is a risk all those involved in business take.
But Ross Levin believes a lot of these companies target vulnerable women and says there’s a gender divide when it comes to understanding that.
ROSS LEVIN: You know what's interesting is so many of these companies are women-focused, and actually, all of the MLM executives I've met with have been men. And all of the women I've met in terms of being consultants have been women, and so there's a bit of a gender divide.
So when I talk to my female colleagues, they get it. I mean, we're invited– As a woman, there's not a week that goes by that I'm not invited to a party or I'm not solicited online by someone from high school. So it's a very women-focused industry.
So what's interesting is that the women get it, and they've been supportive, and a bunch of the men have also been supportive, but – and this came up in committee – some of the men are just, they've never heard of this industry. It’s not on their radar, and so there does need to be a decent amount of education.
PETROWICH: Despite Republican opposition, Rep. Ross Levin is confident she can guide this bill across the finish line.
It awaits a full vote on the House floor, and if passed, it will need to clear the Senate before heading to Gov. Matt Meyer for signature.
