In its 1979 decision In re Amway Corp., 93 F.T.C. 618, the Federal Trade Commission ruled that Amway was not an illegal pyramid scheme because three internal policies tied distributor rewards to real product sales rather than to recruitment. The same decision found Amway had illegally fixed prices and misrepresented what distributors could expect to earn, and it ordered the company to stop. The case set the framework regulators and courts still use to sort lawful multi-level marketing from unlawful pyramids, though the safeguards it approved have proven far weaker in practice than the industry’s shorthand version suggests.
The Legal Test the Case Applied
Four years before the Amway ruling, the FTC decided In re Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975), which set the test for identifying a pyramid. Under Koscot, an illegal pyramid exists when participants pay money for two things: the right to sell a product and the right to receive rewards for recruiting others that are “unrelated to sale of the product to ultimate users.” The Commission described that structure as “nothing more than an elaborate chain letter device” in which people who join expecting to earn through recruitment “are bound to be disappointed.”1Federal Trade Commission. In the Matter of Koscot Interplanetary, Inc., et al.
The Koscot test became the measuring stick for Amway. The central question was whether Amway’s compensation plan rewarded distributors for signing up recruits or for moving products to people who actually wanted to use them.
The FTC’s Complaint Against Amway
The FTC filed its complaint on March 25, 1975, with five counts.2Federal Trade Commission. In the Matter of Amway Corporation, et al. Counts I through III alleged that Amway controlled how distributors operated in the marketplace: fixing the retail prices they could charge, allocating customers among them, restricting the outlets they could sell through, and limiting how they could advertise. Counts IV and V went after the recruitment pitch, alleging that Amway misrepresented the income participants could earn through geometric growth in recruitment and failed to disclose the substantial expenses of running a distributorship and the high turnover rate among distributors. Behind all five counts sat the larger question of whether the entire model functioned as a Koscot-style pyramid.
The Three Safeguards That Saved the Model
Amway’s defense on the pyramid question rested on three internal policies it argued kept its compensation structure tethered to genuine retail activity.2Federal Trade Commission. In the Matter of Amway Corporation, et al.
The 70 Percent Rule
Distributors had to sell or consume at least 70 percent of the products they purchased each month before ordering more. The point was to stop “garage loading,” where participants stockpile inventory they cannot realistically sell just to hit volume targets and qualify for bonuses. Forcing product to move out of a distributor’s hands each month was supposed to ensure that purchases reflected actual demand.
The Ten-Customer Rule
Each distributor had to make at least one retail sale to ten different customers per month to remain eligible for performance bonuses. Where the 70 percent rule focused on inventory flow, the ten-customer rule focused on proving a real consumer base existed outside the distributor network.
The Buyback Policy
Amway agreed to repurchase unsold, marketable inventory from departing distributors at 90 percent of original cost. In a true pyramid, people who quit lose whatever they spent on unsellable product. A working buyback removes that trap and reduces the incentive for upline distributors to push recruits into buying more than they can move.
What the Commission Decided
An Administrative Law Judge issued an initial decision on June 23, 1978, finding that FTC counsel had proven the price-fixing charge but “had failed to establish that respondents had committed other violations of Section 5.”2Federal Trade Commission. In the Matter of Amway Corporation, et al. The Commission reviewed the case and issued its final decision in 1979.
On the pyramid question, the Commission agreed Amway was not one. Because the company did not charge a high entry fee and did not pay distributors simply for signing up recruits, the reward structure was tied to product sales rather than headhunting. The 70 percent rule and ten-customer rule functioned as barriers against the recruitment-fee model that had defined Koscot, and the buyback policy prevented the financial devastation typical of pyramid collapse.
The ruling did not declare MLM inherently legal. It said this particular company, with these particular safeguards in place, had stayed on the right side of the pyramid line. That distinction gets lost in how the case is cited today.
What the Commission Still Found Amway Did Wrong
Escaping the pyramid label did not mean escaping liability. The final order required Amway to stop fixing wholesale and retail prices, stop allocating customers among distributors, and stop retaliating against distributors who refused to comply with price or customer restrictions.2Federal Trade Commission. In the Matter of Amway Corporation, et al. Distributors had to be told they were free to set their own retail prices.
The Commission also addressed the misleading earnings pitch. Amway’s promotional materials had featured income figures only a small fraction of distributors ever reached, giving new recruits an inflated picture of their prospects. The order prohibited the company from making income claims unless those claims included a clear disclosure of the average earnings of all active distributors.2Federal Trade Commission. In the Matter of Amway Corporation, et al. If the typical distributor earned little or lost money, prospective recruits had a right to know before joining.
How Later Courts Have Tested the Amway Safeguards
The 1979 decision handed the direct-selling industry a template, and companies rushed to adopt the three safeguards. Having the rules on paper turned out to be very different from following them, and courts have spent decades working through that gap.
Webster v. Omnitrition (1996)
The Ninth Circuit examined Omnitrition International, an MLM that had adopted all three Amway safeguards almost verbatim. The court held that the mere existence of the policies did not shield a company from pyramid liability. Omnitrition could not show it actually enforced the 70 percent rule, that the rule effectively deterred inventory loading, or that the company genuinely repurchased unsold inventory from departing distributors. Without enforcement, the safeguards provided no defense, and the Koscot test remained the controlling standard.
FTC v. BurnLounge (2014)
The Ninth Circuit returned to the pyramid question when BurnLounge, a company selling music download packages, argued that participants’ own purchases should count as legitimate retail sales. The court rejected that, finding participants bought packages primarily to qualify for recruitment rewards, not because they wanted the music. Internal consumption does not count as a retail sale to an ultimate user when the motivation is qualifying for compensation rather than genuine demand for the product.3United States Court of Appeals for the Ninth Circuit. FTC v. BurnLounge, Inc.
Herbalife (2016)
The FTC’s action against Herbalife produced a $200 million settlement without a formal pyramid label, but the restructuring told the real story. The order required Herbalife to stop rewarding distributors primarily for building a downline and to tie compensation to verifiable retail sales. At least two-thirds of rewards for business-opportunity participants had to come from retail sales, with no more than one-third from personal consumption. The company also had to ensure that 80 percent of net sales represented genuine purchases and had to hire an independent compliance auditor for seven years.4Federal Trade Commission. It’s No Longer Business as Usual at Herbalife
Current FTC Guidance
The FTC’s current guidance makes clear there is no percentage-based safe harbor for MLMs. A company cannot point to a ratio of retail to recruitment revenue and declare itself compliant. The agency uses a “fact-intensive analysis” of how the compensation plan actually operates.5Federal Trade Commission. Business Guidance Concerning Multi-Level Marketing
Internal consumption sits at the center of the modern debate. Purchases by participants for genuine personal use are not automatically a problem, but they are not automatically safe either. The FTC looks at whether the plan pressures participants to buy products to maintain a rank, qualify for bonuses, or help their upline hit targets. Monthly purchase quotas that can be satisfied by a participant’s own buying are a red flag, because they create an incentive to load inventory regardless of demand.5Federal Trade Commission. Business Guidance Concerning Multi-Level Marketing
On earnings disclosures, the agency’s position has hardened since the original Amway order. Any income claim must account for participant expenses, including product purchases, travel, conferences, tools, and training. Calling payments to distributors “income” or “earnings” without subtracting those costs is considered deceptive. If most participants spend more than they receive, an income disclosure must reflect that they lost money rather than earned zero.5Federal Trade Commission. Business Guidance Concerning Multi-Level Marketing
What the Amway Ruling Means for MLMs Today
The 1979 decision is still the foundational case in MLM law, but its legacy is narrower than the industry usually suggests. It did not bless multi-level marketing as a category. It found that one company, operating under three specific safeguards that it actually enforced, had not crossed the Koscot line. Every enforcement action since has driven home the same point: the safeguards work only when they are real. Companies that put the 70 percent rule, the ten-customer rule, and a buyback policy on paper while building compensation structures that reward recruitment have lost when the FTC arrived.
The safeguards still work as a diagnostic for anyone evaluating an MLM opportunity. Ask whether the company enforces minimum retail sales requirements, whether bonuses depend on selling to people outside the distributor network, and whether departing participants can return unsold inventory for a meaningful refund. If the answers are vague, or the policies live only in a distributor agreement nobody reads, the protections the FTC recognized in Amway are not actually there.