New York v. Phase II , 109 Misc.2d 598 (1981)

Was Phase II an illegal chain referral program?


The Court held that Phase II was a chain referral program in violation of state statute and that its activities should be enjoined because of a substantial likelihood of future harm. Phase II sold cosmetics through a MLM structure. Distributors made a commission based on their sale of products to downline distributors, and to the general public. A recruitment bonus and associated commissions were paid for every new recruit that a distributor signed up. The Court reasoned that because recruitment bonuses and commissions were paid on the signing up of a downline distributor, not on the sale of actual product by that distributor, and that it was possible to make money just by bringing in additional distributors, the program met the statutory definition of a chain referral sales program and was illegal. An injunction preventing the company from operating was appropriate because the Attorney General had shown a likelihood of success on the merits and a probability of future harm.

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Reference Info:State, 2nd Circuit, New York | United States

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