“Shake-y Ground”: Multi-Level Marketing, Pyramid Schemes, and False Advertising

October 23, 2014

Multi level marketing in courtOn August 19, the U.S. District Court in New Jersey denied a motion to dismiss made by the defendant, MonaVie, Inc. in a putative class action by consumers. Pontrelli v. MonaVie, Inc., 13-CV-4649-WJM-MF, 2014 WL 4105417 (D.N.J. Aug. 19, 2014).

The plaintiff consumers alleged that MonaVie, a manufacturer and distributor of juice products, engaged in false advertising. The plaintiffs claim that MonaVie advertised that their featured ingredient (acai berry), provided incredible health benefits, such as preventing blood clots and treating Alzheimer’s. Such an incredible product of course, doesn’t come cheap – a 25 ounce bottle sells for $40.

MonaVie distributes its juice products through a multi-level marketing business model where the company sets up a network of Distributors who pay MonaVie for the right to sell their products as independent, individual businesses. The Distributors sell the products, but also recruit more individuals to be Distributors. The plaintiffs also claim that MonaVie intentionally uses the MLM business model to avoid liability for Distributor’s false claims. Despite company policy forbidding distributors from making medical or disease-curing claims regarding their products, executives are aware such claims are made. The court held that the Distributors are agents of MonaVie for the purposes of vicarious liability based on misrepresentation.

Have similar claims been made before as to whether or not the MLM model creates a “liability shield” for claims, particularly in regards to false advertising?

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Our initial results include the MonaVie case, as well as:

Kugler v. Koscot Interplanetary, Inc., 120 N.J. Super. 216, 293 A.2d 682 (Ch. Div. 1972) – Manufacturer, operating a multi-level distribution system, could not avoid liability for misrepresentations made by distributors by arguing that distributors were independent agents.

Fed. Trade Comm’n v. Equinox Int’l Corp., CV-S-990969JBR(RLH), 1999 WL 1425373 (D. Nev. Sept. 14, 1999) – Defendant  could not “shield itself from liability merely by arguing that current misrepresentations are made by independent contractors.”

It sounds like the MLM structure doesn’t necessarily provide foolproof protection for the company from the misrepresentations of its distributors.

The MonaVie case mentioned that company policy forbade distributors from making certain types of claims. I decided to see if WestlawNext contained any secondary materials or forms about advertising or marketing policies. I ran the following query in the Advanced search template on WestlawNext: 

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Some of the secondary source results that appeared included:

E. Thomas Sullivan, The FTC’s Deceptive Advertising Policy: A Legal and Economic Analysis, 64 Or. L. Rev. 593 (1986)

Charles Shafer, Developing Rational Standards for an Advertising Substantiation Policy, 55 U. Cin. L. Rev. 1 (1986)

3 Successful Partnering Between Inside and Outside Counsel § 56:34 Overview of Advertising law – Regulations and guidelines – FTC guides and enforcement

The same advanced template query in Sample Agreements pulls up:

SCHEDULE 5.7 TELEMARKETING POLICY DIRECTV, INC. “POLICY STATEMENT” Statement for Independent Retailers Regarding DIRECTV’s Policies Relating to Telemarketing, Internet Marketing, and Home Solicitation, MULTIBAND CORP, September 20, 2011

Exhibit 14 AMENDED AND RESTATED BUSINESS ETHICS POLICY AND CODE OF CONDUCT FOR BRONZE MARKETING, INC. (As amended and restated on January _____, 2007), SUTOR TECHNOLOGY GROUP LTD, February 2, 2007