The
70 Percent Rule – What's It All About?
by
Jeffrey A. Babener
MLM Legal Attorney
©1996
Network
marketers can hardly escape the term "70 percent rule." They see
it in distributor agreements and policies and procedures. The term is mentioned
on their product order forms. Regulatory agencies and better business bureaus
talk about the 70 percent rule, as do trade associations and consumer journalists.
What is this 70 percent rule and why is it so pervasive? What should companies
and distributors know about its history and its use today?
The 70 Percent
Rule in a Nutshell.
In a nutshell, the 70 percent rule is to be found in the distributor agreements
or policies and procedures of most leading network marketing companies. Its
intended purpose is to prevent purchases of inventory in unreasonable or excessive
quantities by distributors. As it is typically stated, the rule requires that
distributors procure orders for inventory only when they have disgorged themselves
of at least 70 percent of previously purchased inventory. The bottom line
is that the distributor should not reorder unless product which has been previously
purchased has been passed on to the ultimate users.
.
It Wasn't
Ordained in Heaven.
This rule is such a venerated rule that companies and distributors are tempted
to believe that it has existed from time in memorial in the direct sellin2
industry. Well, this rule didn't drop from heaven, it wasn't etched in stone
on Mt. Sinai, and it didn't even come to us by way of federal or state legislation.
The 70 percent rule achieved its notoriety in a landmark Federal Trade Commission
administrative case involving Amway. In about 1975, Amway was pursued by the
United States Federal Trade Commission as violating Federal Trade Commission
consumer laws. After several years of litigation, in 1979, Amway prevailed
and its method of marketing was held to be a legitimate business opportunity
as opposed to an illegitimate pyramid scheme.
In its decision upholding the Amway program, three salutary features were
pointed out with respect to the Amway program:
- The ten retail customer policy requiring ongoing sales to retail customers,
- Its 70 percent rule requiring distributors to have sold 70 percent of
previously purchased product before reordering, and
- Its buyback policy for the inventory of terminating distributors.
Over the years, these Amway policies and the FTC Amway case
have been cited time and time again as the Amway "safeguards." Companies
which have wished to place themselves under the "umbrella of legal protection"
of the Amway decision have generally sought to emulate the "Amway safeguards"
among which the 70 percent rule has been universally adopted in the direct
selling industry.
It Means
Different Things to Different People
While it all sounds simple, over the years, the 70 percent rule has come to
mean different things to different people. These different interpretations
lead to inconsistency in both regulatory policies and court decisions. The
inconsistencies have not been resolved over the years and, thus, from time
to time, network marketing programs find themselves, depending on who is the
observer, in the gray area or with a cloud over their head.
For instance, some attorneys general interpret the 70 percent rule to require
that distributors have sold to nonparticipant retail customers at least 70
percent of inventory before reordering. This interpretation is fairly rigid
and inconsistent with the definition of most leading direct selling companies,
which recognize the personal use component as an important component of their
sales. Thus, most leading direct selling companies provide in their rules
that the 70 percent rule requires that distributors are not reordering until
they have sold or personally used at least 70 percent of previously purchased
product. Some companies in their 70 percent rule go so far as to provide "that
70 percent sold" means product which has been sold to nonparticipants,
product which has been used for personal or family use, or product which has
been used for demonstration or for samples.
Since the 70 percent rule is not a statute, but is merely a concept to be
evaluated by the courts, whether it is the right 70 percent rule or the wrong
70 percent rule is often the result of the interpretation of an individual
case. Suffice it to say, that most knowledgeable observers would accept the
concept of the 70 percent rule as the rule which requires that distributors
have sold or used for personal or family use product which has been previously
purchased. If you keep in mind, the underlying policy to prevent front-end
loading, inventory loading or sales of inventory that are not in commercially
reasonable quantities, then this approach is a very fair approach.
Enforcing
the 70 Percent Rule.
Companies are all over the board in the way they implement their 70 percent
rule. Some companies demand sales receipts. Some companies merely place a
statement of policy in their rules and regulations manual. Many companies
ask distributors to certify on product order forms or at the time of ordering
that they are in compliance with the company's 70 percent rule. Some companies,
however, have been mandated as a result of consent decrees with various enforcement
agencies to specifically monitor distributors for compliance with the 70 percent
rule, as well as verify with their customers that the product has in fact
been sold. Again, since this rule is not to be found in a statute, there is
not necessarily a right or a wrong. Probably the certification approach at
the time of ordering is the fairest to all parties.
Stamp Out
the Front-Load.
The 70 percent rule dovetails well with other policies to prevent inventory
loading. Perhaps no practice has served the industry worse than on where companies
have allowed their distributors to be piled with unnecessary inventory in
order to qualify for higher levels in a compensation plan. The 70 percent
rule works well with respect to reordering. In the initial stages, however,
ethical companies seriously consider a lid on initial purchases during the
first 30 days and beyond. A policy which allows for a rising lid on purchases
is a good one and many companies have adopted screening policies to verify
that distributors who order large amounts of inventory can demonstrate that
they do in fact have a market for the inventory they are buying. This approach
serves both the industry, consumers and companies well.
The 70 Percent
Rule is a Sound Policy.
So, the next time you hear a reference to the 70 percent rule, you can put
it in its proper perspective. It was not ordained by the gods, but it was
the product of good common sense. (Obviously, it doesn't have a place in the
company that is selling services, but for companies that are selling inventory
of products.) The 70 percent rule has served well both the industry and the
public.
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad. His firm has focus on startup and emerging MLM companies. He has been adviser to such companies as Avon, Nikken, Discover Toys, NuSkin, Excel, Fuller Brush, Cell Tech, Kaire, Sunrider, Melaleuca, etc. He is editor of the industry resource internet site www.mlmlegal.com. He is a frequent lecturer and has been interviewed on the industry, and published, in many publications. Babener & Associates, 121 SW Morrison, Suite 1020 Portland, OR 97204, www.mlmlegal.com
