THE 70 PERCENT RULE - WHAT'S IT ALL ABOUT?
BY JEFFREY A. BABENER
ŠAUGUST, 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?

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 was not ordained by the gods, but it was the product of good common sense.

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:

1. The ten retail customer policy requiring ongoing sales to retail customers,
2. Its 70 percent rule requiring distributors to have sold 70 percent of previously purchased product before reordering, and
3. 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.

www.mlmlegal.com