#424 1979 · Amway Corporation · Direct selling / regulatory compliance
Amway wrote its own compliance test before the FTC could write one for it, and the FTC adopted Amway's version
the problem
The FTC filed a four-year case charging that Amway's recruitment-driven, multi-level payout structure was functionally an illegal pyramid scheme, with no statutory rule available that could clearly say otherwise
background
By the mid-1970s, Amway's business — a multi-level structure where distributors were paid partly on their own retail sales and partly on the sales of distributors they recruited beneath them — looked, on its face, indistinguishable from an illegal pyramid: money flowing upward chiefly because of recruitment rather than because any product ever reached a genuine end customer. No statute defined exactly where the line between a lawful multi-level marketer and an illegal pyramid sat; the FTC's own reasoning in the era's leading precedent, the 1975 Koscot case, asked whether rewards were tied to recruitment 'unrelated to sale of the product to ultimate users' but supplied no measurable test a company could point to and say 'we clear this.'
Amway had no existing rule to appeal to and no court test it could simply satisfy, because none existed in a form specific enough to apply to its own operations. Arguing about intent or definitions in front of the FTC, with an ambiguous standard and years of litigation already underway, offered no way to win outright.
what everyone would do
The available defenses were argumentative: contest the FTC's characterization of the business, lobby for a statutory definition favorable to multi-level marketers, or wait for the pending litigation to produce whatever test a judge eventually settled on and then adapt to it after the fact.
what they saw
Amway saw that the FTC's real difficulty wasn't proving Amway was suspicious — recruitment-weighted payouts obviously were — it was that the Commission had no workable, generalizable test for telling a real retail business apart from a recruitment scheme when both can look identical on an org chart. A regulator stuck without a measurable standard will adopt the first credible, auditable one offered to it, and there was no rule anywhere that said the company being investigated couldn't be the one who wrote it.
the move
Rather than wait for the FTC or a court to define what a legitimate multi-level marketing company had to do, Amway rebuilt its own compensation system, years before the case reached judgment, around three internally enforced and internally auditable rules with no basis in any existing statute: distributors had to sell to at least ten retail customers a month (the '10-customer rule'), had to resell at least 70% of what they had purchased before ordering more (the '70% rule'), and the company committed to buy back a departing distributor's unsold inventory. Amway effectively designed the exam before anyone else could write it, then made sure its own operations passed.
why it works
The 10-customer and 70% rules don't argue about Amway's intent; they generate a number — verifiable, auditable, hard to fake at scale — that stands as a proxy for the underlying question the FTC actually needed answered: is money moving because product is reaching real end users, or because people are being paid to recruit more people? By adopting the rules years before judgment and enforcing them internally, Amway turned an unresolved legal question into a pre-existing operational fact the FTC's own investigators could inspect and confirm, which is far more persuasive to a regulator than any argument made only in a hearing room after the fact.
the payoff
The 1979 FTC decision, In re Amway Corp., 93 F.T.C. 618, explicitly credited these three company-authored rules as evidence that distributor income was tied to real retail transactions rather than recruitment fees, and dismissed the pyramid-scheme charge (Amway was separately sanctioned in the same case for price-fixing and misrepresenting distributor earnings). That ruling, turning on rules Amway itself had invented and adopted before the decision was handed down, became the FTC's working template for distinguishing a lawful multi-level marketer from an illegal pyramid scheme; more recent FTC pyramid-scheme enforcement, including the 2020s cases against Success By Health and Neora, still argues its 'is this driven by real retail sales' analysis by direct reference back to the 1979 Amway ruling.
where it breaks
It only works if the self-authored rule genuinely measures the thing the regulator cares about and is actually enforced, not merely announced — a proxy that can be gamed (as later MLM defendants' disputed and diluted interpretations of the 70% rule show) invites exactly the scrutiny it was built to avoid. It also depends on getting there first, before a court or regulator has already committed to a different test, and works only against a regulator that lacks a bright-line rule already on the books; it does nothing against a violation of an existing, unambiguous statute, where self-authored compliance rules are simply irrelevant to the charge.
what came after
The Amway 'safeguards' — a resale threshold, a minimum retail-customer count, and a buyback guarantee — remain, more than four decades later, the standard menu of self-imposed compliance rules that direct-selling companies adopt specifically to keep their compensation plans defensible against a pyramid-scheme charge, even as attorneys and regulators continue to dispute exactly how the original rules were meant to apply.
references
- [1]FTC Order May Guide Cos. In Avoiding Pyramid Scheme Label (citing In re Amway Corp., 93 F.T.C. 618 (1979), as the operative precedent in 2023-era FTC pyramid-scheme litigation)Edgeworth Economics (Law360 republication), 2023edgewortheconomics.com
- [2]Historical Perspective on the Seventy Percent RuleThompson Burton PLLC (direct-selling and MLM law practice), 2016thompsonburton.com