Screen a recruitment reward against the pyramid description
Key facts
- Human involvement
- YellowClose supervision
- How AI is used
- From the compensation plan, record what a participant pays, what right to sell a product the plan gives, what reward the plan pays for recruiting another participant, and whether the file says that reward depends on a sale of the product to an ultimate user. Record who the file says buys the product. Do not decide that the plan is a pyramid scheme.
- What the lawyer must review
- The lawyer applies the FTC's multi-level marketing guidance and section 5 of the Federal Trade Commission Act. The guidance says an unlawful compensation structure, sometimes called a pyramid scheme, is described in the Commission's Koscot decision as an enterprise characterized by the payment by participants of money to the company in return for which they receive the right to sell a product and the right to receive, in return for recruiting other participants into the program, rewards which are unrelated to the sale of the product to ultimate users. The guidance says there is no percentage-based test. It says an MLM is not saved by paying rewards primarily for retail sales to ultimate users, or by paying rewards from revenue that primarily comes from those sales. It says the question depends on what the compensation plan incentivizes and on the rights the plan offers, and it quotes FTC v. BurnLounge for a focus on promoting the program rather than selling the products. The guidance says the Commission looks at, among other things, the behavior the plan incentivizes, the income expectations created by the marketing, and how participants are trained and compensated. Section 5(a)(1), 15 USC 45(a)(1), declares unfair or deceptive acts or practices in or affecting commerce unlawful. The lawyer decides whether the rewards are unrelated to sales to ultimate users. The guidance is not a statute that lists elements to tick.
- Written for / version
- United States versionUS
Who does what
| Role | What they do |
|---|---|
| Assistance | Do not begin AI assistance until the responsible lawyer has defined and confirmed its permitted scope. |
| Lawyer | Set the scope, supervise the work closely, verify every part relied on, resolve omissions and exceptions, and approve the exact output. |
Checklist
- Trace every relied-on figure to its source, confirm dates and assumptions, and independently recalculate totals or derived amounts.
- Verify the applicable jurisdiction and the version of each relevant law, rule or instrument in force at the material time.
- Confirm the output against the client’s instructions and the complete relevant source material, including omissions or contradictions.
- Resolve exceptions and record the responsible lawyer’s approval of the exact output and intended use.