Multi-level marketing, legal or not?

By Fong Tsz Kuen, Justin

Introduction:

DCHL is a multi-level marketing company and a former distributor of Lampe Berger Paris.  Recently Lampe Berger claimed publicly that they wanted to sue DCHL for the infringement of intellectual property and expressing their dissatisfaction about the multi-level marketing scheme of that company being legal.  Later news reported DCHL was trying to reform its controversial marketing tactics, amid allegations it exploited a loophole in Hong Kong’s laws regulating multi-level sales.  Being legal according to the companies ordinance while not being agreed by the public.  How should the government decide if this kind of act is legal or not?

Info of multi-level marketing:

Multi-level marketing is a marketing strategy by which the sales force is compensated not only for sales they generate, but also for the sales of sales they recruit.  Nowadays multi- level marketing is being prohibited in many countries like mainland, Australia but not Hong Kong.  The only thing being banned in Hong Kong is the pyramid selling scheme meaning a participant will be granted a license to introduce another participant into the scheme who is also granted such license. Secondly, the participant will receive reward on or after the other sale is being introduced.

Multi-level marketing is being prohibited in many countries meaning this kind of act is harmful to the society and citizens.  The government did in order to protect us from these schemes, set up regulations to prevent pyramid selling scheme (one of the ways of multi-level marketing).  However, starting from 2007 to 2010, 10 complaints in total have been received while 27 people have been arrested and finally no prosecution has been made.  This statistics provide us a clear picture that the regulations and laws towards pyramid selling is not enough.

Opinions:

Multi-level marketing is a kind of directing mind strategy which the board of directors of a company should be holding the final decision to undergo this scheme and thus should be subjected to criminal liability to the company and public most.  According to an article, Ponzi’s directing mind scheme has made him sentenced eight years to jail, emphasizing directing others’ mind should be illegal.  Moreover, law states directors should be subject to criminal liability if they failed to prevent the crime by neglecting to control the misconduct of those subject to their control.  Although the government wants to retain Hong Kong’s free market, multi-level marketing should be prohibited especially when those directors do harm to the society.

Reference:

Tsang,E (2013, September 30). DCHL ‘looking to clean up its image’.
Retrieved 30th September, 2013, from

http://www.scmp.com/news/hong-kong/article/1320807/dchl-looking-clean-its-image

Tsang,E (2013, September 30). Perfume boss says Hong Kong laws ‘too lax’ for it to sue ex-distributor in brand row. Retrieved 30th September, 2013 from

http://www.scmp.com/news/hong-kong/article/1320909/perfume-boss-says-hong-kong-laws-too-lax-it-sue-ex-distributor-brand

Yau,KC (2010, October 7). Public consultation on proposed legislative amendments to eradicate pyramid scheme. Retrieved 30th September, 2013 from http://www.legco.gov.hk/yr10-11/english/panels/edev/papers/edev1025cb1-707-1-e.pdf

Cheung,J (1993). Multi-level marketing in Hong Kong: an unique direct, marketing strategy. Retrieved 30th September, 2013 from http://hub.hku.hk/bitstream/10722/37931/1/FullText.pdf?accept=1

Slate,D (2011, February 12). $37.5-million Ponzi scheme’s ‘directing mind’ sentenced to eight years. Retrieved 1st October, 2013 from http://news.nationalpost.com/2011/12/02/37-5-million-ponzi-schemes-directing-mind-sentenced-to-eight-years/

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12 Responses to Multi-level marketing, legal or not?

  1. Ng Hooi Jia Yvonne (2011533272) says:

    Thank you for your post, Justin.

    First, I would like to address the key difference between MLM and pyramid scheme. Products or services are involved in MLM and commission will only be paid to distributors when there is transactions. However, no real product is sold under pyramid scheme and commissions will be received only when new members joint he scheme. Basically, pyramid scheme is fraudulent and is a fake investment(Diffen, 2013).

    Under Trade Description Ordinance Chapter 362, “trade description” means any indication, direct or indirect and by whatever means given, with respect to any goods or parts of goods(HKSAR, 2013), is legal. Hence, in my opinion, MLM is legal since it involves in read products transactions and what’s more, the products are useful and already become part of consumers’ life, such as the products selling by Amway, an American direct-selling company using MLM strategies.

    Get back to the DCHL case, it should be sued under the intellectual property law by infringing the brand name and trademarks of Lampe Berger, but personally think that there is no problem for its MLM scheme. Publics should be educated and raise the awareness on how to differentiate Pyramid Schemes and MLM so that they will not be trapped.

    Reference:

    Diffen. (2013). MLM vs Pyramid Scheme. Retrieved 4th October, 2013, from http://www.diffen.com/difference/MLM_vs_Pyramid_Scheme

    HKSAR. (2013). Protection of Consumers’ Rights – the Trade Descriptions Ordinance, Chapter 362. Hong Kong The Government of Hong Kong Special Administrative Region Retrieved from http://www.customs.gov.hk/en/whats_new/tdspg/.

  2. Chong Chun Sing Louis (3035016979) says:

    Thank you Justin for this interesting news entry, of which provoked me ponder on the commonly-encountered problem – Multi-Level Marketing.

    First of all, Multi-Level Marketing (MLM) and Pyramid Scheme should be well defined so that they would not be mixed up. Two operating concepts seem to be similar as the so-called workers under the scheme are promised of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same. But the Pyramid Scheme is ILLEGAL and a non-sustainable business that involves money exchange like sign-up fees. On the other hand, MLM is legal and its model can make income through the company’s products or services without signing up any new members.

    After understanding the nature of MLM, I personally see it as a legit business strategy as the major source of income are from the company’s own products or service, without a need to sign up any new members or to force them pay fees. Some may think that the government should tighten the regulations up MLM so that merchants would not take advantage of such tricky business model. Yet, infringement of intellectual property, DCHL infringing brand names and treademarks are criminal acts that should be well punished.

    What’s wrong with Multi-Level Marketing?

    http://www.vandruff.com/mlm.html

    Ways to Distinguish Pyramid Scheme

    http://www.wikihow.com/Distinguish-Between-a-Pyramid-Scheme-and-Multi-Level-Marketing

    HKSAR. (2013). Protection of Consumers’ Rights – the Trade Descriptions Ordinance, Chapter 362. Hong Kong The Government of Hong Kong Special Administrative Region Retrieved from http://www.customs.gov.hk/en/whats_new/tdspg/.

  3. SUGIYAMA Yuriko says:

    Thank you for your post as well as inspiring pinion.

    Here I would like to discuss more about the multi-level marketing and direct selling. As you mentioned in your post, many countries prohibit the former marketing strategy including Mainland China. It can be due to emphasis on recruitment of others over actual sales, the company making major money off its training events and materials and so on. Actually, most MLM companies originally used direct selling (single level marketing) to sell their goods. Direct selling is legal in Mainland China as long as the companies apply for and obtain direct selling license from the Ministry of Commerce. However, the laws regarding this kind of marketing are quite strict. The companies with the license will still bear a risk of being sued for involvement in multi-level marketing. There is the related example of Avon China provided in the following.

    Direct selling in China:

    http://www.lehmanlaw.com/practices/direct-sale.html

    Regulation on Direct Selling Administration:

    http://www.lehmanlaw.com/resource-centre/laws-and-regulations/direct-sales/regulation-on-direct-selling-administration-page-1.html

    Avon China Investigated For Multi-level Marketing:

    http://www.chinaretailnews.com/2009/07/06/2798-avon-china-investigated-for-multi-level-marketing/

    Name: SUGIYAMA Yuriko
    UID: 2011520005
    E-mail: h1152000@hku.hk

  4. Tang Man Ki Maggie (3035018264) says:

    Thanks for your post Justin, MLM (multi-level marketing) is a real issue in Hong Kong that I have seen many posts online by the victims.

    From another perspective, I think MLM itself needs not be illegalized as it is just a business model that enables the firms to enhance sales through expansion of networks while allowing more people to have a way to earn more money.

    The problem lies in the way this tactic is enforced such as the bombardment of customers to listen to the promotions of products, the high costs the new salesperson needs to pay for the products before actually learning how to sell and the lack of guarantee that the new salesperson could keep contact with the person whom he/she buys the goods from, and these are the real scenarios I heard.

    So the solution is to tighten the control over MLM, for instance, ensure the firms do not over-charge participants for the sales training classes and sets up a department that allows victims to sue the company in case of frauds to protect them.

    Reference
    Phong, L., 2013. Ministry tightens control on multi-level marketing firms.

    http://www.saigon-gpdaily.com.vn/Business/2013/9/106186/

    Miller, J., 2011. Lies about multi-level marketing.

  5. Samson YIP(3035016357) says:

    Thank you Justin for your post.
    The controversy of multi-level marketing has been existing for years in Hong Kong. To me, if the government has set up regulation to combat pyramid selling scheme due to its harmful effect to the society, it should also prohibit multi-level marketing activities, which has the similar impact. However, regulation alone is not sufficient. The authority must impose a better regulation environment by either deterring penalty or stringent enforcement.
    Although I agree that some multi-level marketing activities are unethical and should be prohibited, multi-level marketing itself is a very efficient marketing strategy. I do doubt if we should impose measures to stop it from happening. All our regulations are aiming to protect the public from getting into any fraud. Should we prohibit everything that may become a fraud or should we educate and remind people to be aware of the thief? For a visionary government, the latter should be a better and more efficient option.
    It is true that we sometimes need regulations to protect the underprivileged and the basic right of everyone but we, especially the government, should not overuse it.

    Reference:
    CHEUNG PUI LIN JOSEPHINE. (1993). MULTI-LEVEL MARKETING IN HONG KONG: ; A N UNIQUE DIRECT MARKETING STRATEG. Available: http://hub.hku.hk/bitstream/10722/37931/1/FullText.pdf?accept=1. Last accessed 6th Oct 2013.
    Dean Van Druff. (1990). What’s Wrong With Multi-Level Marketing?.Available: http://www.vandruff.com/mlm.html. Last accessed 6th Oct 2013.
    Joseph Kwan. (2011). The Pyramid Schemes Prohibition Ordinance Cap 617. Available: http://www.deacons.com.hk/eng/knowledge/knowledge_457.htm. Last accessed 6th Oct 2013.

  6. Lai Hiu Ling (2010568139) says:

    Thank you Justin for your post.

    MLM distribution, however, might not be as bad as you see it. One should note the difference between the legal MLM and the illegal pyramid distribution. In a MLM distribution, values increase when it flows down to the next level of customer. However, in the pyramid distribution, there are not much value left when it flows to the lower levels of customers, it is always the upper levels who are creating value for themselves. (Lou Abbott, 2011)

    As there are actual products or services selling in MLM, it should be considered as a legal transaction. The chief problem that sometimes leads to failure is the design of the distribution. (Dean V.D., 1990) The “sellers” in a MLM is often inexperienced in marketing, and the number of customers (who may eventually turn into a seller) is growing way too fast. The more sellers who do not really understand the products, the more misleading information might be spread, while the sellers might not have the intention to lie.

    All in all, the MLM is legal, but the design of the distribution is problematic. Company has no control over the lower levels, and the spread of falsehoods sometimes may risk the company running into litigations.

    Lou Abbott, 2011. Illegal Pyramids vs. Legal Multilevel Marketing MLM Companies.

    Dean V.D., 1990. What’s Wrong With Multi-Level Marketing?

    http://www.vandruff.com/mlm.html

  7. Chau Ka Chun, Ernest (2011715349) says:

    Thank you for your post, Justin.

    Although the design of MLM and pyramid distribution are similar in the money flow, they are both different in the value providing to customers. In MLM distribution, customers will obtain value by providing real products and services, whereas pyramid distribution offers no actual sales and value to lower levels of customers but making money from exploiting the sales members in terms of training events and supporting services.

    In terms of the intention of MLM distribution, I think there is no problem for MLM to remain legal as it does not exploit or cheat any sales members and customers. However, given that misleading information may be distributed as the company itself has limited control to the sales force, especially when the sales force population and customer base are getting wider, stricter regulations are suggested for monitoring the information claimed by MLM distribution. Education to customers about the false information should be also implemented as well.

    Reference
    HKSAR. (2013). Protection of Consumers’ Rights – the Trade Descriptions Ordinance, Chapter 362. Hong Kong The Government of Hong Kong Special Administrative Region
    Retrieved fromhttp://www.customs.gov.hk/en/whats_new/tdspg/.

  8. Cheung Oi Nei Olivia (3035017571) says:

    Thank you for the post regarding multi-level marketing.

    In response to your point that multi-level marketing should be banned in Hong Kong, same as pyramid schemes, I personally think it is not appropriate. First, multi-level marketing is different from pyramid schemes. In a pyramid scheme, people pay to participate and are rewarded by finding others who are willing to pay to join (Multilevel Marketing: The bottom line, 2013). However, multi-level marketing relies on sales of real products for the income, not on fees charged to new recruits. In my opinion, multi-level marketing is just a business model of relationship referrals and word-of-mouth marketing. Salespeople can earn income based on their ability to sell the company’s products instead of persuading their friends and relatives to join as salespeople of the company. Therefore, it is proper for the Hong Kong Government to legalize the multi-level marketing but not pyramid schemes.

    In fact, many criticisms of multi-level marketing is not related to the way people sell the products and recruit new salespeople. They arise from the faulty management practices. High initial entry costs of marketing kit and first products, requiring members to purchase and use the company’s products and complicated and sometimes exaggerated compensation schemes are the examples of the criticisms. It is important to address these real problems and regulate companies operating multi-level marketing.

    References:
    Multilevel marketing: The bottom line. (n.d.). The Economist. Retrieved October 6, 2013, from http://www.economist.com/news/business/21569051-herbalife-shorted-bottom-line

    The Real Problem with Network Marketing and Multi-Level Marketing (MLM). (n.d.). Welcome to About.com Entrepreneurs. Retrieved October 6, 2013, from http://entrepreneurs.about.com/cs/multilevelmktg/a/problemwithmlm.htm

  9. Wu Tsun Kit Jack (2011528112) says:

    Thank you Justin for the post on this rather debatable marketing scheme. I do agree with you that multi-level marketing should be prohibited from our society.

    First, I would like to explain the difference between Multi-Level Marketing (MLM) and pyramid schemes as the public usually find it hard to tell which is which. Under MLM scheme, salespersons earn commission from selling products and also the sales made by others who were recruited by the salesperson. Similarly, under the pyramid scheme salespersons make money by getting commissions. However, while most effort has been put on recruiting more members, little is put on marketing the products.

    There is every reason for the banning of pyramid scheme as it is not a sustainable way to run a company. Claims are made about people can make endless earning under the pyramid scheme, however, such claim can be disproven by market saturation. For example, such scheme starts with one person, who recruit two people, while each recruits recruit another two, the cycle will be performed 28 times before the whole population of the US will be involved in the scheme.

    In addition, in most cases when such scheme is employed, only the top management will get any benefit out of it through entry fees and other required payments. Therefore, the Hong Kong Government should look into the possibilities of banning any form of MLM.

    Reference:
    Multi-Level Marketing or Illegal Pyramid Scheme? State of Michigan Attorney General Bill Schuette Official Website. Retrieved October 6, 2013 from https://www.michigan.gov/ag/0,4534,7-164-17337_20942-208400–,00.html

  10. Chow King Sang, Kingsley(2011536949) says:

    Thank you for your post.
    DCHL might be familiar for some of us, as there were already a number of cases regarding the marketing system of DCHL. Back in 2007, Ms. Lee, who was a former dealer, sued DCHL so as to reclaim her investment. In the end, DCHL was found not guilty, as it was said by the judge, that Ms. Lee knew that it was a risky investment in the first place.
    After all these years, pyramid schemes prohibition bills have been set up in different places, including our neighbor, Macau. However, none of the related ordinance and regulations has become applicable in Hong Kong. It is believed that there is a loophole in the regulations and government officials should learn from the European Union and Macau and introduce a strict ban on both multi-level operations and pyramid schemes.
    Reference:
    Tsang,E (2013, September 30). DCHL ‘looking to clean up its image’.
    Retrieved 30th September, 2013, from

    http://www.scmp.com/news/hong-kong/article/1320807/dchl-looking-clean-its-image

    judgment record
    DCCJ000013/2007 李美霞及另四人訴亮碧思集團(香港)有限公司

  11. Chan Sarah Tsz Ting (2011546310) says:

    Thank you for sharing such an interesting post on Multi-Level Marketing, Justin.

    Multi-Level Marketing (MLM) occurs when products or services are involved in the process and commission are paid to distributors when transactions occur. Whereas product pyramid scheme is a non-sustainable business where there are no products and services and commissions can only be received only when new members join the scheme and it will eventually collapse when the scheme can’t recruit more people. However, some critics remains strong and stand firms on the idea that there is no difference between the two, in which there is no such thing as a legitimate MLM and that the “industry’s secrets stay safe because of a cultlike mentality and a blind eye of regulators”.

    Some believes that there should be tighter regulations regarding the Multi-Level Marketing, where merchants will not be able to take advantage of these business models. On the other hand, I believe that it is unnecessary for Multi-Level Marketing to be illegalised as it solely is a business model that enable businesses nowadays to encourage sales through the enhancement of networking and to gain more profit in general.

    Yet, DCHL has been infringing other brand names and trademarks which are intellectual properties. Hence, I also believe that DCHL should be penalized for their actions.

    Reference:
    1. http://www.diffen.com/difference/MLM_vs_Pyramid_Scheme
    2. http://articles.chicagotribune.com/2013-02-10/business/ct-biz-0210-herbalife-20130210_1_pyramid-schemes-mlm-companies-multilevel-marketer
    3. http://mydreamspots.com/why-network-marketing/

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