Legal Aspects of Multi-level Marketing (MLM) and Pyramid Schemes: Overview of the Ethiopian Legal Framework

Abstract

The Multi-level marketing (also known as Network Marketing) has evolved
as an alternative marketing strategy, modeled on the basic idea of the
classical direct selling-the door-to-door selling. The MLM design
compensates the door-to-door sellers not just for the sales they personally
generate but for the sales generated by the people they recruit. This
compensation scheme in MLM brought it close to pyramid scheme in design;
makes it prone to abuse in the form of pyramid scheme. Indeed, it has been
abusively used for operating pyramidal schemes; Regulators have been
plagued with the problem of distinguishing MLM from pyramid scheme and
sanctioning the misuses. No careful legal drafting is likely to provide a
simple solution but reduces the perplexity in the factual analysis and
enforcement decision making. The author in this article examined, using the
doctrinal research method, the position of Ethiopian law regarding network
marketing and how it deals with potential manipulation of network marketing
for operating pyramid scheme. Ethiopian law on pyramidal scheme is drafted
so generically and briefly, and without even mention of network marketing –
the very mask in which pyramidal schemes operate. The researcher found out
that such a design of Ethiopian law has resulted in legal uncertainty about
the implication of operating MLM. Essential parametrizations of what is
within the legal limit and when it is out there in the pyramid scheme are
either vague or omitted. The author recommended the need for further
elaborate rules on pyramid schemes and inclusion of some guiding standards
on network marketing.