What is Amway?
Amway is an American multi-level marketing organization that sells health, beauty, and home care products. They are most known for winning a case against the FTC in regard to being an illegal pyramid scheme.
Amway VS FTC-(1975-1979)
In 1975, the FTC accused Amway of operating an illegal pyramid scheme. The accusations from the FTC included things such as, resale price maintenance, restricted distributors advertising, and failure to disclose the high turnover rates of distributors. In 1979, the courts ruled that Amway was running a legitimate business and they ultimately prevailed. Although ruled in Amway's favor, the FTC still had orders for the company to follow. Some of these orders were ceasing retail price-fixing, and to create specific disclaimers on suggested retail price lists.
What is the 70% Rule?
The Seventy Percent Rule states that in order to qualify for downline bonuses, Distributors had to move 70% of their existing inventories to customers or other distributors. This 70% that is being moved must be sold at either wholesale and/or retail. This is required in order to receive a performance bonus on all of the products that were purchased within the monthly order.
The term coined for this process is known as inventory loading. Inventory loading is the requirement of distributors to purchase large sums of inventory, ultimately exceeding any possibilities of being able to move, resell, or consume the products. The rule was initially designed in order to be sure that distributors were not just sitting on their inventory and still qualifying for bonuses. In other words, the inventory had to be moving through various people. This process became one of Amway's safe harbor rules.
How Does the FTC Use the 70% Rule?
The FTC uses a multitude of factors in order to determine whether or not a MLM is a legitimate business. The 70% rule as described above is one of those rules. Although used to establish legitimacy of a business, the 70% rule is not termed or required by federal law.
Policies and Procedures
Given this, it is common to have policies and procedures for distributors, notifying them that they must sell or consume a certain percentage of their monthly inventory in order to be eligible for monthly performance bonuses. It is also common for MLM businesses to approach this issue by prohibiting over-purchasing of inventory and recommending the retail sale of their products/services supply inventory.
Enforcing the 70 % Rule
Some companies require distributors to provide sales receipts, while others just put it in their regulation manuals. Each company will have their own approach to ensuring that the products are in fact being sold and are abiding by the 70% rule. Due to the fact that the 70% rule is not a federal law or statute, the way one monitors and regulates how they are verifying the 70% rule is being followed is solely up to the company.