FTC’s five accusations filed in 1975 against Amway were quite severe:

* Amway was engaged in resale price maintenance.
* Amway allocated customers among distributors and restricted distributors’ source of supply as well as outlets through which they may resell.
* Amway restricted the distributors’ advertising.
* Amway misrepresented that substantial income may be obtained from geometrical increases in the number of distributors in the chain.
* Amway misrepresented the profitability of a distributorship and the potential for recruiting new distributors and failed to disclose the substantial business expense involved and the high turnover of distributors.

After four years in 1979, it was ruled that the company had been conducting a legitimate business but not a pyramid and Amway prevailed.

The significance of this decision for the rest of the direct sales community was that the FTC was making distinctions in its ruling between an illegal pyramid and a legitimate multilevel marketing program. The FTC said “Amway differed in several ways from pyramid schemes that the Commission had challenged. It did not charge an up-front ‘head hunting’ or large investment fee from new recruits, nor did it promote ‘inventory loading’ by requiring distributors to buy large volumes of nonreturnable inventory.”


This did not mean that the FTC had left Amway free of any orders to follow: Amway had to stop retail price-fixing; misrepresenting profits, earnings or sales; allocating customers among their distributors; and had to print a specific disclaimer on its suggested retail price lists. In other words, the ruling didn’t make Amway look very good, but it provided an essential shield to network marketing companies, including Amway itself.

The famous “70% rule” has also been an industry standard or a “Golden Rule” following this case. Amway was requiring from its distributors to sell or personally use a minimum of 70% of any previously purchased products before placing a new order. And this was recognized by the FTC as one of the signs of not being a pyramid scheme.

This case has been considered as the most significant cases in the history of direct selling by many. Jeff Babener, a well-recognized authority in legal issues whom we sadly lost last year, had said, “Had Amway lost, MLM history after 1979 may have been nonexistent. Amway’s victory paved the way for hundreds of MLM companies that would follow. So significant was the decision that the FTC during the next 20 years focused on ‘deceptive’ practices of MLM companies such as earnings representations or medical claims rather than attacking the ‘structure’ of MLM programs.”

The FTC’s Former General Counsel Debra A. Valentine commented in a speech in 1998, that FTC’s decision in 1979 was a “landmark decision” that distinguished an illegal pyramid from a legitimate multilevel marketing program.

(*) The Federal Trade Commission or the FTC in short, has the regulatory authority over direct selling businesses in the U.S. It sets anti-pyramid standards and determines the business standards to be used by legitimate companies.

…..

Hakki Ozmorali is the Founder of WDS Consultancy, a management consulting and online publishing firm in Canada, specialized in providing services to direct selling firms. WDS Consultancy is a Supplier Member of the Canada DSA. It is the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.

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Ben Woodward

Ben Woodward
The Joy and Pain of New Opportunities

I once watched my stepdad grimace as he sat down at the kitchen table with the most foul-smelling fish pie I’ve ever come across in my life. Every bite that he took looked painful. I asked him what he was doing, and he cringed as he replied, “I bought it and don’t want it to go to waste.” Even worse, it had been on sale for about fifty cents.

How often do we feel obligated to get value out of what we’ve sunk time and money into, long after the value is gone? Far beyond fish pie, we do this in misaligned business plans, off target projects and a hundred other strategies, commitments, choices and decisions. Companies pour thousands of dollars, sometimes millions, into projects (or people) that have failed beyond reason, and will keep investing in them for thousands more, all for fear of losing what has already been spent.

We have an inbuilt mechanism within us that tries to get the maximum value out of things, and another to avoid loss whenever possible. When those mechanisms are at war, we’re left with the sunk cost fallacy. We’re doing what we can to avoid loss of what has already been invested, even when it creates more loss than redirection might.

Frustratingly, we often persist even when it ceases to return benefits, simply because of what it meant to us in the past. And the cost doesn’t have to be great for this to be true, either. Yet when we cling unhealthily to the past, we’re likely to miss present opportunities and future possibilities.

Once we’ve put our heart and soul into something, we don’t want to admit when it’s time to move on. We want to save face—to believe that it’s going to work, not because of where it’s taking us but because of what we’ve put into it.

This, at its core, is ego. It’s a distorted view of reality that tells us doing what we’ve done will get us something other than what we’ve already gotten.

So here’s a critical question. What are you refusing to recognize or admit isn’t working in your business in spite of your persistent investment of time, money and resources?

Let me confront the elephant in the room of Network Marketing. We aren’t collectively doing a great job of being customer centric. Sure we talk about it. And yes, we make policy changes to keep up with changing regulations, and yes, perhaps we are now starting to segment our data better than in the past, but let’s be serious here. It isn’t enough! Too many companies in our industry are grimacing while they eat fish pie on this issue. I had one new senior employee of a large MLM say to me, “I knew there was a problem when I saw the size of their legal team.” Ouch! Are we just used to getting a bad rap? There is an old poem by Alexander Pope that applies here:

“Vice is a monster of so frightful mien
As to be hated needs but to be seen;
Yet seen too oft, familiar with her face,
We first endure, then pity, then embrace.”

We wouldn’t have the FTC on our backs like we do, or companies like TINA.org keeping watchful eyes on us if we were world leaders of customer experience. And we wouldn’t be watching the court cases of other MLMs so closely when they happen if we didn’t see the seeds of their issues sprouting in our own backyards. Have we not seen the trends in the courtrooms? What are the typical issues? Customer vs Distributor ratios, earnings opportunities for the masses, product claims and product prices.

Now, please don’t misinterpret my strong words here as unhealthy criticism. I love our industry, yet I think we have an opportunity to really transform and become better. Much better. We see the trends. We see what technology is offering the consumer and we know how entrepreneurship is evolving. To anyone who wants a business that matters in the future – this is a transformation journey you cannot ignore. Where-ever we are on the road to better customer acquisition, retention and engagement – we need to level up. What’s the biggest barrier? Culture. This kind of change for many is very uncomfortable, will take a long time and will require support and engagement at all levels – both in the corporate office and in the field. But it is possible. And not only is it possible – it can be a thrilling experience too.

If the thought of confronting these issues seems a little daunting, you’re not alone and it isn’t unnatural to feel. Author Daniel Kahneman once explained that all decisions involve uncertainty about the future, and in response, the human brain has evolved an automatic and unconscious system to protect against potential loss. Our default setting becomes a focus on the loss rather than potential future gains. Of our naturally inclined perspectives, he writes: “Organisms have placed more urgency on avoiding threats than they did on maximizing opportunities, and these are more likely to be passed on in our genes. Over time, the prospect of loss has become a more powerful motivator to our behavior than the promise of gain. Wherever possible, we try to avoid losses of any kind, and when comparing losses to gains, we don’t treat them equally.” Knowing this, we must fight against our instincts and march uphill to the higher ground where throngs of loving customers reside.

When we can reward distributors better and support them more in the acquisition, retention and engagement of customers we will see the culture of the business start to shift. The message will align more appropriately between the office and the field. The right behaviours will start to duplicate. Earnings will reflect effort more healthily and industry reputation will evolve. Regulators will have less concerns and companies and distributors will have more freedom.

Let’s not sit here eating fish pie when there is so much more on the table up for the taking.

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Alan is a US DSA Hall of Famer, and member of the DSEF’s Circle of Honor. He’s served in executive roles at Tupperware, PartyLite, DK Family Learning and other companies, and has been a part of launching more than 30 direct selling companies over his career.

Guest post by Alan Luce
AdvoCare, Neora, an Ever More Aggressive FTC! What Now?

In recent weeks, the direct selling industry has been shocked by one revelation after another involving the Federal Trade Commission’s actions against direct selling companies. The stunning transformation of AdvoCare from a marketer with an MLM compensation plan to a single level plan due to an FTC enforcement action was still being absorbed when, BANG!, along comes the FTC action against Neora (formerly “Nerium”) and Jeff Olson and the counter civil suit by Olson and Neora challenging the FTC’s actions. Adding to the confusion was a recent address to DSA members by Andrew Smith, Director of the FTC Bureau of Consumer Protection wherein Mr. Smith expressed the agency’s belief that MLM is a legitimate business model, while then spotlighting fundamental areas of direct selling as we’ve known it as problem areas. (*) Wow! Where did that come from?



Industry legal advisors tell us that there is no case law to support the position that simply having a compensation plan that pays more than two levels deep may be enough to make the company a target of FTC enforcement. There is no FTC Trade Regulation Rule to that effect either. What’s more, just last year the FTC sent a letter of guidance to DSA setting out the parameters of what companies should and should not do to operate legally and there was no mention that “more than two levels of compensation” absent any other evidence could put a company in jeopardy. Rather, it seems that this idea, along with several others expressed by Mr. Smith, in his address to DSA are new unpublished standards that are being applied retroactively by the FTC staff in enforcement actions.

Applying new “standards or rules” that have never been published retroactively seems more than a bit bizarre as a rule making process, not to mention unfair to direct selling companies that may be held liable for violating a rule that they did not know existed. That such an unusual process violates basic fairness and due process is a significant theme in the Olson/Neora civil suit against the FTC.

In time the courts will rule on whether the FTC has the authority and power to create new rules and apply them retroactively without notice in enforcement actions against companies and individuals. As an industry direct selling companies are going to have to challenge the FTC for over reach and abuse of its power. All of this will be worked by individual company cases and the industry trade associations.

BUT, in the meantime what should companies do to protect themselves?

How do they organize their marketing programs and plan for the future? Direct selling, like any form of business, needs clarity as to what the “rules of the road” are for their form of distribution and certainty that the published guidelines, by agency rule making or court precedent, will be in place for a reasonable period of time. Many believed that the FTC’s letter to DSA last year was intended to provide some of that certainty and predictability. It didn’t as the recent actions against AdvoCare and Neora make abundantly clear. So, what now?

Well if you want legal advice, you need to go to the attorney who advises your company. But if you want some practical management advice, let me offer a few ideas of things you can/should do now to protect your company from an unwanted and unexpected challenge by the FTC or a similar state agency.

1. FTC actions are still most often initiated due to exaggerated earnings and opportunity claims and/or complaints from former distributors. And when the FTC does move it is usually when if finds a number of issues with company and/or distributor actions. For example, exaggerated earnings and life style claims coupled with not have enough retail sales to end users who are not participants in the compensation plan, plus paying commissions on kits, etc, etc.

So, step one in my play book would be to take a hard look at company literature and social media messages delivered by the company. Are any claims made about income factual with full disclosure about what percentage of the field makes that income? Does your corporate material focus too much on mansions, and exotic cars and travel?  Do a full review with your company attorney and compliance folks and try to look at the material as the FTC would. If its questionable, change it quickly.

Now, review your policies to ensure that it is a clear violation of company policy to make exaggerated earnings and lifestyle claims. Working with the advice of counsel, it may be necessary to republish revised company policies.

2. Actively monitor materials that your distributors produce on their websites, webinars and social media. The FTC will hold the company, as well as the individuals as they did in AdvoCare, liable for offending independent distributor communications. Move quickly to have them removed and take disciplinary action if they violated existing company policies.

3. If your compensation plan pays commissions on the kits, samples and self-purchases bought by newly recruited sellers to their uplines, consider whether you want to continue that feature of your plan. That seems to be a red flag to the FTC and other regulators. What the final rules may be on this issue is unclear at this time.

4. Is your company able to accurately and easily produce data that unequivocally demonstrates that 70% or more of your sales are made to retail customers who are not participants in the compensation plan? If so, keep that date up to date and easily accessible. Review your compensation plan, recruiting literature, fast start programs, social media to be sure that your material focuses on retail sales. Monitor your field materials to be sure that they are following the company lead on communicating about retail sales to end users.

If you do not have accurate data about retail sales and/or your plan and communications do not focus on retail sales, you may want to consider adding a preferred customer club for lower level sellers to convert to and looking to ways to incent retail selling and the enrollment of preferred customers.



5. If you are in good shape on items “1” through “4” above, then you may want to hold fast for the time being on your compensation plan if it pays overrides on more than two levels. At this point, while Smith’s recent comments do not directly express the opinion that a compensation plan of more than two levels may be considered an illegal pyramid scheme, many experts have interpreted this nonetheless based on the statements relative to compensation plans that are overly dependent on recruiting for success in the business. (*)

Remember, the FTC and other agencies tend to focus their enforcement activities against companies where they can allege multiple violations of existing standards as well as in recent actions trying to establish new standards and rules. So, review the recent enforcement actions and settlements with a qualified attorney who works with FTC cases to be sure that your corporate and field practices are in full compliance with the established case law and published agency trade regulation rules.

If you are a new company, just getting started and seeking to avoid any of these conflicts, there are consultants and industry attorneys who can advise you as to the best practices and policies that will protect you from conflict with regulatory agencies going forward.

This is a fast moving and confusing time for direct sellers. Do what you can to ensure that your company is focused on retail sales, makes honest and accurate income claims that do not exaggerate the possibility of making high incomes or enjoying an extravagant life style. And make sure that your sales force members are not making inappropriate claims either. Encourage your trade association to take action to protect legitimate direct sellers and, if you possibly can, help provide the funds necessary to mount that defense.

(*) These statements have been updated since the original publishing of the article to clarify the intent of the author.

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He has lectured and published extensively on direct selling. Jeff is a graduate of the University of Southern California Law School. He is an active member of the State Bars of California and Oregon.

Guest Post by Jeff Babener
FTC vs. AdvoCare: A Teachable Moment for Direct Selling 

History is Written by the Victor

Ring the bells that still can ring
Forget your perfect offering
There is a crack, a crack in everything 
That’s how the light gets in
– Anthem, Leonard Cohen

Quiet Uncertainty

It was like the calm of quiet uncertainty before the storm. In May, 2019, 26-year-old leading direct selling company, AdvoCare, announced that it would exit MLM in favor of a one level direct sales model. It indicated that it was doing so, and “had no choice,” after confidential talks with the FTC. That was it. No other explanation. And the industry asked: What is this all about? It may be true, as T.S. Elliot said, “the world will end in a whimper, not a bang.” For a detailed article on the May withdrawal and ramifications, see AdvoCare Abandons MLM: Uncertainty Returns to Direct Selling.

A Jarring Dissonance

The FTC Speaks

And then, in October 2019, a cacophony, as the other shoe dropped. The FTC announced a stipulated judgment in which AdvoCare was proclaimed online and in newspapers across the country as a pernicious pyramid scheme that had swindled hundreds of thousands.

The settlement came with a $150m fine, life time MLM bans for AdvoCare’s CEO and top distributors, and the FTC spiked the ball in the end zone, noting at its press conference, “It is significant that we have a large and well known multilevel marketing company that is admitting that it operated as a pyramid… “

Sending an underlined message across the bow of the direct selling industry, the FTC online blog labeled the case as “the landmark settlement.”

Buyer’s Remorse

“Foul!,” called AdvoCare in an immediate responsive press release:

“The FTC incorrectly stated in a press conference that AdvoCare had admitted to operating as a pyramid. This is categorically false. AdvoCare forcefully rebutted this charge in its discussions with the FTC. To this day, AdvoCare denies it operated as a pyramid.”

Actually, AdvoCare was technically right… No such admission had been given (although it had stipulated to the veracity of the factual allegations in the Complaint), prompting the Director of the FTC Bureau of Consumer Protection to later apologize at the Washington, D.C. DSA Legal and Regulatory Conference.

A pyrrhic victory for AdvoCare, whose marketing program and opportunity for thousands of distributors was totally gutted. “Elvis had left the building.”

FTC Has Non-Legal Leverage. What Now?

This was the third major DSA member company hit by the FTC in less than 5 years. And the FTC accomplished its goals, without litigation, but rather the sheer leverage it had over the companies and individuals based on their unique factual situation. For Vemma, an asset freeze. For Herbalife, the overriding need to address its position as a publicly traded company. For AdvoCare, industry speculation about the unstated jeopardy of owners and board members, as well as existential threat to the business. For better or worse, the FTC accomplished its objectives in all three cases without taking the matter to formal adjudication. Therefore, the new quasi legal standards were set by FTC leverage, without firing a litigation shot, rather than by actual case law. Case law did not change.

Serious? To paraphrase a general counsel of one of the industry’s largest MLM companies: “Our first priority is not to prepare for a FTC confrontation, but rather to use our best efforts to stay off their radar in the first place.”

More to come? Could well be. The industry was left with a choice. It could wring its hands or treat this as a teachable moment for its future. As they say, a new reality, and “it is what it is.”

From the industry’s perspective, were the penalties draconian? Absolutely. Might it have been more appropriate to adopt a remedial solution rather than ban the entire MLM model? Absolutely. But that is another issue for another day.

The initial instinct of the industry was to recoil from a near death blow to a 26-year-old industry leader and longtime DSA member, complaining of a new era of FTC bullying. But, as the facts unraveled, some real concerns arise as “the crack in the bell lets the light in.” Maybe, it was not about bullying after all. The industry needs to pay serious attention and self- reflection about guidance it provides to its own companies.

Fact Checking the FTC and AdvoCare

What were the facts in issue from the standpoint of the FTC and AdvoCare? Well, as far as AdvoCare, we will never know. The company capitulated, without even filing one defensive document. And so, all we really can discern is what the FTC alleged. And from a legal standpoint, their version “stands” because, notwithstanding a preamble that states that AdvoCare neither admits nor denies any of the allegations in the Complaint, the stipulated order for permanent injunction and monetary judgment, recites:

VI.(D) The facts alleged in the Complaint will be taken as true, without further proof, in any subsequent civil litigation by or on behalf of the Commission against Settling Defendants…”

And so, we won’t really hear AdvoCare’s explanation. All we have is the uncontested FTC Complaint allegations. And history suggests that this “neither admit nor deny” stipulated order will morph into a “de facto” FTC guidance in the future.

The big picture said the FTC is that the facts support that AdvoCare crossed the line from operating a legitimate MLM program to a program that was instead an illegal pyramid scheme.

For the uncertainty created by no clear adjudication of such important issues, the industry owes “no thanks” to AdvoCare for its decision to merely “roll over,” despite contending after the settlement order that it had forcefully rebutted the pyramid charge in pre-settlement discussions with the FTC. Unfortunately, the “game over buzzer” had already sounded.

History Repeats Itself: Omnitrition Déjà Vu…

Other than ramped up aggressive enforcement and penalties (life time MLM bans for the CEO and lead distributors and forcing AdvoCare to abandon the MLM model), those looking for new insight in the AdvoCare prosecution, will not find it.

This was the opinion of the FTC and its Director of the Bureau of Consumer Protection, Andrew Smith, and a historical legal perspective would come to the same conclusion.

The AdvoCare prosecution can be summed up in a few words:

1. Inventory Loading. In other words, “pay to play,” “buy in to active qualification for “active” rank commissions and rank advancement commissions; purchasing far more product than realistically needed for either personal use or to meet resale demand to customers, focusing on recruiting business builders who buy inventory and encourage others to do the same.

2. Exaggerated Earnings Claims. It is eerie, but this is a “history repeats itself” moment. In 1996, in Webster v. Omnitrition, (79 F.3d 776) the U.S. Court of Appeals for the 9^th Circuit, held Omnitrition to be a pyramid scheme based on the company recruitment of business builders qualified with  inventory loading, who in turn, did the same. Omnitrition was co-founded by Charlie Ragus. In 1993, Ragus founded AdvoCare. It is a sad irony that 26 years later, the Ragus founded AdvoCare MLM program would be shuttered by similar inventory loading accusations as in Omnitrition.

The Omnitrition Court held that the well venerated Amway safeguards meant nothing if not enforced and if, in the presence of inventory loading:

The promise of lucrative rewards for recruiting others tends to induce participants to focus on the recruitment side of the business at the expense of their retail marketing efforts, making it unlikely that meaningful opportunities for retail sales will occur. Koscot, 86 F.T.C. at 1181. The danger of such “recruitment focus” is present in Omnitrition’s program. For example, Webster testified that Omnitrition encouraged him to “get to supervisor as quick as [he] could.” Ligon states:

[T]he product sales are driven by enrolling people. In other words, the people buy exorbitant amounts of products that normally would not be sold in an average market by virtue of the fact that they enroll, get caught up in the process, in the enthusiasm, the words of people like Charlie Ragus, president, by buying exorbitant amounts of products, giving products away and get[ting] involved in their proven plan of success, their marketing plan. It has nothing to do with the normal supply and demand in this world. It has to do with getting people enrolled, enrolling people, getting them on the bandwagon and getting them to sell product…

FN3… First, Omnitrition produced evidence of enforcement only for its ten customer rule. Even assuming that Omnitrition’s enforcement measures are effective, it is not clear that these measures serve to tie the amount of “Royalty Overrides” to retail sales. The overrides are paid based on purchases by supervisors. In order to be a supervisor, one must purchase several thousand dollars’ worth of product each month. That some amount of product was sold by each supervisor to only ten consumers each month does not insure that overrides are being paid as a result of actual retail sales.

Fast Forward 23 years and it all sounds the same. Said the FTC in its Press Release and Blog about AdvoCare:

Press Release:

AdvoCare operated an illegal pyramid scheme that pushed distributors to focus on recruiting new distributors rather than retail sales to customers. The compensation structure also incentivized distributors to purchase large quantities of AdvoCare products to participate in the business and to recruit a downline of other participants with the same incentives. The clear directive of this structure was, as one AdvoCare distributor explained during the company’s Success School training, to “recruit business builders who recruit business builders who recruit business builders…”

The FTC alleged that under the AdvoCare compensation plan, participants were charged $59 to become a distributor, making them eligible to receive discounts on products, and to sell products to the public. To earn all possible forms of compensation, however, participants had to become “advisors,” which typically required them to spend between $1,200 and $2,400 purchasing AdvoCare products and accumulate thousands of dollars of product purchase volume each year, according to the complaint. The FTC alleged that the income of AdvoCare advisors was based on their success at recruiting, with the highest rewards going to those who recruited the most advisors and generated the most purchase volume from their downline.

To recruit people, the FTC alleged, AdvoCare and the other defendants told distributors to make exaggerated claims about how much money average people could make—as much as hundreds of thousands or millions of dollars a year. The FTC alleged that distributors were told to create emotional narratives in which they struggled financially before they joined AdvoCare, but obtained financial success through AdvoCare. Distributors were also allegedly told to instill fears in potential recruits that they would suffer from regrets later if they declined to invest in AdvoCare.

The FTC alleged that the defendants told consumers that they could realize large incomes by promoting AdvoCare and that their earning capacity was limited only by their effort. For example, AdvoCare promoter Diane McDaniel told consumers that “the sky is the limit. I’m the variable. I get to decide what I truly want according to the effort I put forth” and that “there is incredible profit that can be made through infinity.”

In reality, the FTC alleged, AdvoCare did not offer consumers a viable path to financial freedom. In 2016, 72.3 percent of distributors did not earn any compensation from AdvoCare; another 18 percent earned between one cent and $250; and another 6 percent earned between $250 and $1,000. The annual earnings distribution was nearly identical for 2012 through 2015.

FTC Blog:

… people paid AdvoCare thousands of dollars to become “distributors,” buy inventory, and become eligible for cash bonuses and other rewards. But, the FTC says, AdvoCare rewarded distributors not for selling product but for recruiting other distributors to spend large sums of money pursuing the business opportunity. That push to recruit is a classic sign of a pyramid scheme.

On the earnings front, the FTC also alleged that AdvoCare earnings disclosures played fast and loose with earnings averages by extrapolating data of one month’s earnings into an annual earnings average, when in fact, the month chosen might not be a recurring event.

Legal observers are perplexed how it could happen after Omnitrition litigation that the same “front loading” fact pattern might occur again in a related successor company. Probably, the answer is that, unless one is extremely careful, these things just “creep up on you.

Unfortunately, the cultural problem was not new and was a bit of a “tiger by the tail.” The focus on recruiting and duplicating “front loading” business builders was suggested by a legal expert, who was also a former insider knowledgeable observer, to predate the FTC Order by more than a dozen years:

AdvoCare leaders encouraged new distributors to “buy their Advisor order” ($2,000) so they could begin earning commissions sooner. This was ingrained in the distributor culture… there were efforts made to discourage this and ensure that products purchased through “advisor orders” were sold to retail customers. …AdvoCare was a victim of its own success and it was unable to reign in leaders… Existing problems only become magnified when you go through a period of hyper-growth similar to what AdvoCare experienced.

Based on the “uncontested” alleged facts set forth by the FTC, serious pyramiding issues are raised. And that is all we have. Without a vigorous defense by AdvoCare, or, in fact, any defense at all, and based on the FTC Settlement Order providing that “facts alleged will be deemed to be true,” it is far more than a challenge for industry supporters to come to the support of AdvoCare in this dispute. This is a true loss for the direct selling industry. The silence of AdvoCare left the industry in an awkward uninformed position with no arrows in its quiver, akin to a performer on stage pleading, “Throw me a bone, I’m dying up here.”

State of the Law

The FTC and the direct selling Industry are totally in sync on one point:

Nothing about the FTC/AdvoCare settlement changes the existing legal standards for pyramid vs. legitimate direct selling. Those case law standards weave their way in FTC cases from the Koscot case through Amway through Burnlounge:

Koscot: Multilevel commissions must be based on sales to ultimate users.

Amway: Multilevel companies must adopt procedures that encourage retail selling.

Omnitrition: (9^th Circuit Class Action): In the presence of front-loading and lack of enforcement of the Amway standards, companies can expect pyramid challenges.

Burnlounge: The primary incentive to distributor purchases or payments should be a genuine need, whether for resale or personal use, as opposed to qualification in the compensation plan. Are distributor payments and commissions driven by recruitment and qualification in the plan, on the one hand, or sales to ultimate users?

Andrew Smith, FTC Director of the Bureau of Consumer Protection, was in total agreement, in his presentation to the October, 2019 Washington D.C. DSA Legal and Regulatory Conference.

In a well-received presentation, and to the surprise of many attendees, he emphasized multiple times that the FTC is supportive of the MLM model. He went out of his way to express his opinion that, in some ways, MLM is a superior business model because:

1. It provides flexibility and opportunity to individuals to earn extra income.

2. It provides a warm and attentive experience, and qualify products, to retail consumers.

He stated that the FTC welcomes compliant MLM companies. And his standards were not measurably different than existing case law.

The FTC seems to have retreated from its all-out assault on recognition of personal use, as argued and rejected by the BurnLounge court. Its attention is now turned to the basic question of whether a MLM program is placing its focus on sales to ultimate users, which includes personal use purchases in reasonable amounts and wholesale purchases for resale, in amounts reasonably calculated to fulfill retail consumer demand and for which the company can track the flow of product to ultimate users such that compensation reasonable relates to sales to ultimate users. (As an aside, the Director played slightly “fast and loose” in describing the Koscot test as paying compensation “unrelated to product sales,” omitting three key words of Koscot, “to ultimate users,” thus leaving the erroneous impression that only product sales to non-participant retail customers should count. Such a position would be a misrepresentation by omission of the Koscot/BurnLounge standard.

But overall, Director Smith’s description of the state of the law seemed consistent with case law. He suggested this analysis:

1. Does the scheme emphasize recruiting over sales to consumers? Are compensation results driven by recruiting others? Are distributors focused on recruitment and duplication rewards arising from recruiting other distributors to “buy?” Does that plan have a qualifier relating to recruitment?

2. Does the program have incentives to buy goods that are not based on satisfying a distributor’s own personal needs or reasonable inventory to supply retail customers? A telltale pattern would be monthly purchases just enough to meet compensation qualification activity requirements. Another would be front-loading which Director Smith indicated as an attribute of pyramid schemes. His observation of AdvoCare was that distributors were encouraged to buy and did buy for more than they reasonably needed or could use.

 He stated that the FTC key questions are:

1. How do distributors really make money in the plan?

2. Does the company have incentives that promote recruiting and purchasing over sales?

3. Is the company gathering data to track product sales to end consumers?

Director Smith stressed:

1. At the FTC, we want you to be successful as a MLM.

2. However, we also want you to be in compliance as an MLM.

3. Effectively, he said, “we are not looking for a fight, and we want you to stay off our radar,” and he implored companies to examine and reexamine their programs to remove any practices that would put a company on the FTC radar.

4. He stated the FTC position, which no one in the industry disputes, is that a pyramid headhunting inventory loading recruitment scheme is unsustainable as a business model.

Unless completely cynical, given the tenor of his presentation, it seems fair to take Director Smith at his word. Refreshing! The industry can live with this going forward.

Guidance for Radar Avoidance in a Post-AdvoCare World

Every breath you take
Every move you make…
I’ll be watching you
– Every Breath You Take, Sting, The Police

If you are looking for life in a post-FTC vs. AdvoCare/Herbalife/Vemma world, here are some common sense guidelines to create the strongest defense to your MLM program and for promoting anti-pyramid practices aimed at staying off the FTC radar:

1. Overriding Goal… The Big Picture.

The compliant MLM “acid test” will be a mandate and demonstration of significant sales to non-participant retail customers. Bottom line analysis by FTC and state AGs:

A product or service with real retail customers and a good ratio of retail customers to distributors to demonstrate that people buy the product because they want it, and not just to qualify in the marketing plan.

Upline commissions must derive from sale of product to ultimate end users.

With a high retail customer to distributor ratio, experience suggests that most other legal issues (assuming no outrageous earnings or product claims) tend to recede into the background.

2. Track. Track… Flow of Product to and Use by the Ultimate User.

After Vemma, Herbalife and AdvoCare, few priorities are as important as tracking and verifying the flow of product to and use by the ultimate user, whether it be a nonparticipant retail customer or distributor for personal/family use. The short answer: Track the flow and use of product to both nonparticipant retail customers and distributor personal/family use. In fact every company and the DSA should launch a joint initiative with leading direct selling software companies to develop software which accurately tracks the flow of product such that a company can demonstrate that distributor purchases are, in fact, in reasonable amounts for distributor personal use and reasonable inventory quantities for resale, calculated to meet the ordering needs of retail customers. And software should track that every product sold is used by the ultimate user, whether for personal use by distributors or use by non-participant retail customers.

3. Promote Non-Participant Retail Sales and a Preferred Customer Program.

It is in everyone’s interest, the company, distributors, the industry and regulators, to place an emphasis on retail sales to non-participant customers. After all, the business is called “direct selling,” and not “direct consumption.” The promotion of retailing should find a thread through every piece of company literature and advertising.

In addition the gold standard of retailing is the presence of non-participant preferred customers, i.e., those retail customers that are provided incentives and discounts to commit to monthly or orderly product purchases. From a legal standpoint, a robust preferred customer program makes the statement that there is a real market for the product and purchasers are purchasing because they want the product as opposed to being motivated by qualifying in the business opportunity.

4. Time to Rethink Personal/Group Volume Qualification Requirements for Active Status, Rank Status, Rank Advancement Commission Payout if the Volume is Based on Distributor Purchases that are Not Clearly Documented as End User Personal Use of Distributors or Retail Customers.

In fact, some leading direct selling companies have already initiated elimination of volume requirements for active status, fast start commissions, rank status, rank advancement and payment of enhanced commissions. The FTC has long expressed a deep concern for volume requirements that tend to trigger inventory loading or distributor purchases that are not driven by consumer demand, but instead for purposes of qualification.

Said Former FTC Commissioner Edith Ramirez in her remarks at the DSA Business and Policy Conference in September, 2016: “Any requirements or incentives that participants purchase product for reasons other than satisfying genuine consumer demand – such as to join the business opportunity, maintain or advance their status, or qualify for compensation payments—are problematic.”

In Vemma and Herbalife, companies were restricted on credit that could be accorded to distributor purchases, whether for personal use or resale. Many companies are reconsidering volume requirements that are documented as reasonable personal use or retail sales. Unless a company is prepared to track end destination of product, it should reconsider volume requirements that cause suspicion that the products are purchased to qualify and not driven by consumer need.

Above all, rewards should reasonably relate to sales to end users (personal use plus retail customers.

There are multiple approaches to compensation for multilevel payments on downline purchases.

(a)      The Herbalife settlement limited credit to downline distributor purchases (only about one-third of distributor purchases qualified for credit for MLM commissions.)

(b)      Pay MLM commissions only after verification of personal use or sale.

(c)      Pay MLM commissions at time of purchase, but absolutely track and verify personal use and sale of product purchased for resale.

5. Rethink Distributor Ordering Methods that Produce “Inventory Loading” Accusations. Use a Ramp-Up Authorization Approach that Authorizes Increasing Wholesale Orders Based on Demonstration of Retail Sales.

Above all: Do not allow distributors to purchase more than they can use for reasonable personal use and/or quantities for there is a realistic resale to retail consumer need.

Actually, in today’s world of next day UPS and FedEx, online ordering and direct to consumer shipping, there really is no need any more for large inventory purchases or stocking distributors.

Approaches for Avoiding Inventory Loading:

(a)      Eliminate or reduce volume requirements for active, rank, rank advancement.

(b)      Allow volume, but track and pay only on personal use level of volume or wholesale for resale volume that is verified sold to retail customers.

(c)      Limit amount of inventory or, at least, install a ramp-up authorization based on demonstrated sale and/or personal use.

6. Bulletproof Yourself on Earnings Claims. Don’t be the Nail that Sticks Up and Gets Hammered Down.

Avoid earnings hype in advertising, testimonials and lifestyle presentations. Scuttle the Maserati and the Tuscan villa images. Be realistic… this is the anomaly and not the norm. Take the bullseye off your forehead. In almost every FTC case, the first invitation to regulators is unrealistic earnings claims. The hype “opens” the door or lifts the canopy of the tent. And, as they say, “Once the camel has his nose in the tent, you can be assured that his ‘body’ will soon follow.”

In other words, don’t be the low-lying fruit. Don’t effectively, and unintentionally, “bait” the FTC to initiate an enforcement action by over-aggressive hype and promises.

Absolutely do not make claims of wealth, fast wealth, easy money or sure-fire systems, nor effectively invite the FTC to inquire into a program based on earnings hype and systems based on distributor “purchasing” rather than distributor “selling” and “using.”

And whether legal or not, now is the time to “ditch” the pictures and videos of distributor mansions and luxury cars. Since such MLM-driven lifestyles are clearly the exception to the rule, why wear a red flag in front of a “bull.”

7. Post a Transparent Earnings Disclosure.

As a general matter, the FTC is all about disclosure so that consumers can make informed decisions. Once you have a track record, post a simple and transparent average earnings disclosure. At a minimum, you should disclose:

(a)      What percentage of distributors who have signed up are active, i.e., earning any income?

(b)      Of those that are active, what is the average earnings?

(c)      If any example, testimonial or illustration of a particular income, bonus or lifestyle award is presented, what percentage of active distributors earn at least that amount or above?

(d)      Unless the company surveys average costs of doing business by distributors, earnings averages should be represented as “gross earnings” and that they are not “net earnings.”

(e)      Absolutely disclaim that any earnings illustrations are representations of an expectation of earnings.

(f)       “Pepper” promotional material with average earnings disclosures and disclaimers at every instance that an illustration/testimonial of earnings potential is
provided.

(g)      Either calculate average business costs to disclose net earnings or specifically disclose that average earnings are presented as “gross,” as opposed to “net” and do not take into account distributor business costs.

Irrespective of the depth of the earnings disclosure, do not ever play fast and loose with earnings disclosures, nor “parse” to exaggerate the opportunity.

During his presentation to the DSA Legal and Regulatory Conference, FTC Director raised a new “ask” by the FTC. He suggested that companies should not only present gross earnings, but should also present net earnings which take into account costs of doing business by distributors. Upon questioning, he recognized that this may be a daunting task. At the very least, he suggested that companies should disclose that their typical average earnings disclosures are “gross earnings” and, not net earnings, i.e., they do not take into account distributor costs of doing business. Look for more of this “ask” in the future.

8. Adopt, Follow and Enforce the Amway Safeguards.

The Amway safeguards have been the gold standard and been honored in case after case going on 40 years. Although the FTC may wish to pivot away from the Amway safeguards, the courts have not done so.

(a)      70% rule to avoid inventory loading… no ordering unless 70% of previous orders have been sold or used for personal/family use. Place lids on initial orders and allow a ramp up of size of order over time. Never mandate monthly autoship to qualify for commissions. And avoid front-loading. In the famous Omnitrition case, the court noted that the Amway safeguards are rendered ineffectual as a defense to pyramiding if a company encourages or allows front-loading of product because it becomes clear that commissions are not related to sales to ultimate users when distributors are incentivized to buy huge amounts of inventory that are out of proportion to needs for resale or the needs of personal and family use.

(b)      Adopt and enforce an actual nonparticipant retail sales mandate to qualify to receive commissions. Over the years, that number has been expressed in numbers from five to ten or in sales volume … often with an allowable ramp up over time.

(c)      Honor a buyback policy on inventory and sales support materials for terminating distributors… no less than 90% for 12 months.

9. Consider a Reclassification Program to Convert Non-Earning Distributors to Preferred Customers.

In a new FTC enforcement era, the “name of the game” is demonstrating high ratios of non-participant retail customers to active distributors. In the retailing analysis, non-participant retail customers, who are provided discounts or other incentives in exchange for signing up as “preferred customers,” are like “gold” in “upping” the ratios. Watch for direct selling companies to use major initiatives to convert to preferred customers distributors who are loyal product purchasers, but who are not really “working the opportunity,” i.e., low or no earning in the direct selling opportunity.

The conversion can be voluntary or non-voluntary.

1. Voluntary.

For instance, in the Herbalife settlement, Herbalife was given nine months to work on a reclassification of brand loyal, but low earning distributors, to preferred customers so that the non-participant retailing ratios would be increased for personal use purchases. Other leading companies, such as USANA, followed suit, substantially increasing retailing ratios.

2. Involuntary.

Another path that companies may wish to consider is automatic involuntary conversion. Under this approach a company would adopt an automatic reclassification program that automatically reclassifies non-earning independent representatives to preferred retail customers, all the while providing superb discount pricing, special customer benefits, generous customer appreciation referral rewards. If the converted preferred customer later decides to reactivate, the company might even consider providing an option for the right, after a waiting period or based on customer referral activity, to re-sign up as an active independent representative in a reserved genealogical downline position.

10. Promote Industry Guidance on Compliant Compensation Plans.

Similar to the DSA initiative on earnings claims compliance of the Direct Selling Self-Regulatory Council (DSSRC), support the launch of a DSA task force to develop best practices compensation plan guidelines and to continuously audit and constructively advise member DSA companies for avoiding pyramiding accusations of the sort raised by the FTC in Vemma, Herbalife and AdvoCare.

11. Support Clear Federal Legislation on Direct Selling.

Companies should actively support DSA federal legislative action to set forth clear anti-pyramiding guidelines so that the FTC, states and companies are playing on the same field with the same rules and goalpost settings.

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The post FTC vs. AdvoCare: A Teachable Moment for Direct Selling appeared first on The World of Direct Selling.

Guest post by Steve Jamieson
AdvoCare’s Leadership Council: The Truth Behind Their Season Ending Story!

On the very same weekend distributors of AdvoCare saw their story come to an untimely end, Tyrion, one of the lead actors in Game of Thrones said to the Leadership Council in the show’s climactic final scene, “true power and lasting impact doesn’t rise from the ashes of what people are willing to die for… but in the powerful stories they live to tell”.

Will the story of AdvoCare be a turning point for network marketing? Based on the initial reactions from industry leaders, distributors and customers, I question whether we are all reading from the same page.

For many it is being read as a story of betrayal, for others a hollow victory for government regulation, callous mismanagement, a family dynasty taking the money and run, a bold and necessary decision to avoid litigation and protect the company, the “Armageddon of Network Marketing”… and then they told us what they really think.

Network marketing was borne out of the art of story-selling. Stories that begin with the origins of our products, the benefits from their effects, and the riches one may receive by sharing their story with others.

When personal and powerful stories were told in living rooms, remote meeting rooms and 3-way phone calls, stories were frequently told in careless whispers, grew in legend and overcame skepticism with infectious enthusiasm. Stories were sold and volunteer armies of impassioned story- sellers enlisted to spread the word for their respective cause… and this was even before the Kardashians invented influencer marketing!

As technology rapidly scaled network marketing’s exposure and duplication, people moved from hearing the stories at a private kitchen table to the public counter at Starbucks or on a Zoom Webinar across the country. We went from sharing our “Why”, to making sure they had Wi-Fi. Stories were no longer rumors that needed personal validation, but permanent testimonials broadcast simultaneously to thousands of potential customers and distributors, as well as government agencies and consumer watchdog groups.

Spontaneous selfie videos, internet marketing, and real-time social media postings changed the way we tell stories. It changed who saw them and changed how companies would be held accountable for their distributors who told them.

A huge part of AdvoCare’s final chapter is they could no longer empower their distributors to tell their best stories. “Do the products give you energy? Yes, but you can’t say it! Did you earn more than$10,000 last month? Yes, but don’t tell anyone! I heard there was a double-blind placebo study in Germany proving our products cause weight-loss? Yes, but I can’t share it with you!”

The government has gone so far in protecting people from lies and exaggerations that the unintended consequence is people can no longer hear the truth.

If like AdvoCare, we can no longer tell and sell “our” stories… can we still be the competitive network marketing industry we have come to know? Can we compete with the stories of Shopify, Uber and the alternative Gig economy if we can’t tell our best stories and they can? Do we as an industry have an alternative strategy to communicate?

Pharmaceutical companies adapted when they were told by the government, they had to tell people how their product could kill us as well as cure us in the same 30-second commercial. Wal-Mart adapted to a new strategy for free shipping that didn’t cost their customers a $119.00 membership fee. Legacy Airlines adapted to deregulation and low-cost start-ups by trading leg room and baggage fees for cheaper 3-hour plane ride loaded with reward miles. Costco adapted to an influx of Dollar Stores with bigger cash back amounts on their credit card programs instead of offering even bigger boxes of Cereal.

AdvoCare said “No!” to network marketing. More importantly, they said no to seizing the moment and showing us how a successful network marketing can adapt to today’s new regulatory, e-commerce and crowded competition from alternative income opportunities. This should have been our story. The new story for our industry to sell.

It is easy to criticize AdvoCare for the decision they made or how it was implemented. It is even more incumbent upon us to criticize those companies who continue to ignore the reasons AdvoCare felt compelled to address the very viability of our business model. At least AdvoCare didn’t look away, they just failed at looking hard enough to find the difficult answers.

What if AdvoCare was right in recognizing there are fundamental problems in our business model, but wrong in their solution?

Should they have considered adapting to a company-sponsored customer acquisition program, because distributors might be better suited to servicing customers than to finding them? Are exaggerated health claims or financial promises inherently unavoidable when accompanied by high-pressure sales goals and lofty expectations.

The difference between a taxi driver and an Uber driver is a taxi driver spends half his day looking for a customer and the other half driving them to their destination. An Uber driver spends all of his time getting paid for driving his customers to where they need to go!

Do we have the ability to drive customers to our network marketers?

Did AdvoCare discuss adapting to a simplified referral and instant cash-back customer program to create viral behavior among their 400,000 VIP satisfied customers, as has been done so successfully with popular websites and apps such as RetailMeNot and Dosh Cash?

Would a new compensation plan, designed towards most people’s needs instead of a few people’s wants, made AdvoCare seem relevant and credible alongside the competitive landscape of other alternative income opportunities?

AdvoCare is not alone in re-evaluating and making tough decisions. Some of the most iconic names in our industry have had difficult challenges in the past 5 years. In 2015, Avon split itself into two separate companies. 3 years later after a near 50% drop in sales, New Avon of North America sold to a South Korean consumer giant at a significantly lower price. Avon International is also entertaining takeover offers. Herbalife went through a bruising government investigation and wall street challenge to its business model. Amway had 4 consecutive years of declining sales until stemming the tide this past year.

The story of AdvoCare is a message to all of us to embrace the changes that are inevitably coming. There is nothing wrong with network marketing! There is only something wrong in missing the opportunity to elevate it to the forefront of the Gig economy.

Great leadership, great ideas, and great companies are not born out of momentum but out of moments of disruption and transformation.

Many AdvoCare loyal distributors as well as those from other companies throughout the industry, cannot help but feel like we were all scorched by a fire breathing dragon today. It is up to all of us to use this story to make us stronger, make us more determined to make our industry the most powerful story in the new gig economy.

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The post AdvoCare’s Leadership Council: The Truth Behind Their Season Ending Story! appeared first on The World of Direct Selling.

Jeff is a graduate of the University of Southern California Law School. He is an active member of the State Bars of California and Oregon.

Guest Post by Jeff Babener
The New FTC Direct Selling Guidance… Imperfect, But a Good Start

Ring the bells that still can ring
Forget your perfect offering
There is a crack in everything 
That’s how the light gets in
Leonard Cohen… Anthem

The new FTC Direct Selling Guidance arrived in January, 2018. It built on the goodwill dialogue between the FTC and the direct selling industry that was ushered in by a well-received DSA presentation of acting Chairperson Maureen Ohlhausen in November, 2017.

Was it helpful to the conversation on “personal use” and “pyramid?” Yes. Was it perfect? No. There are two major ambiguity flaws (likely inadvertent) in the Guidance that must be discussed. Are these “cracks” in this Faberge Egg? Yes, but, that’s how the light gets in.

1. Did the FTC recognize that this area should be governed by 40 years of case authority rather than FTC administrative fiat? Absolutely. Did it miss a major characteristic of this well established industry? Yes. Even in this friendly guidance, the FTC was tone deaf to the reward tracking model used by leading direct selling companies (including Amway, Mary Kay, Shaklee, Tupperware) for more than 50 years, and never questioned by the courts, that follows wholesale movement of product with an underlying assumption that companies are capable of mandating, incentivizing and encouraging that product is accounted for: resold to ultimate users, personally used by distributors as ultimate users or returned under liberal one year buyback/refund programs. Should a successful half century model be upended…if the idea is to support an established industry, probably not.

2. The Guidance employs the term “driven by consumer demand” multiple times. The inadvertent implication is “driven by retail sales.” This semantic term is at odds with actual detailed Guidance discussion that concurs with the industry position that the pyramid test is “driven by sales to the ultimate user,” meaning that sales to distributors in reasonable amounts, for either personal use or resale, should be placed in the category of “sales to the ultimate user.” Perhaps the simple fix is a document global search and replace of “driven by consumer demand” with “driven by ultimate user demand.”

Is more FTC/Industry dialogue and adoption of H.R. 3409 (anti-pyramid bill) a good next step? For sure.

How we arrived at this dialogue…

The direct selling industry search for certainty in proposed H.R. 3409 has some real basis in the vacillating positions of the FTC. After the initial success of a MLM structure, by Amway, Mary Kay and Shaklee, in the 1950’s and 1960’s, the appearance of a true pyramid in Koscot and Dare to be Great, prompted the FTC to challenge the entire MLM concept, and specifically Amway, as being a pyramid. In 1979, an FTC administrative law judge rebuked the FTC, holding that Amway was a legitimate business opportunity, principally because it adopted what has come to be known, in all subsequent cases, as the Amway Safeguards:

1. A retail customer mandate that demanded distributors to enroll retail customers.

2. A 70% rule that demanded that product reordering was prohibited unless a distributor had sold or personally used 70% of product purchases.

3. A buyback policy for terminating distributors that offered a repurchase of product from terminating distributors.

4. Following up on Koscot’s requirement that MLM commissions should relate to sales to ultimate users, the Amway case also recognized that personal use in reasonable amounts constituted “sales to ultimate users.”

Little substantive legal precedent occurred for the next 20 years, after which the FTC started urging courts, ultimately unsuccessfully, that distributor personal use should not be viewed as a sale to the “ultimate user.”

Sufficient concern, in the industry, caused the industry to seek the 2004 FTC Advisory that seemed to guardedly recognize personal use.

However, the FTC drumbeat against personal use continued in court arguments and consent judgments. A reading of oral argument transcripts in the BurnLounge and Vemma cases demonstrates this animosity to personal use. In what some industry observers view as an opportunistic moment, in the Herbalife settlement, the FTC took advantage of the company’s need to achieve stability in financial markets, to achieve, what many industry observers viewed as a draconian settlement, shifting the test to a “percentages test,” effectively calling out “personal use” as a “second class” sale to “ultimate users” which did not deserve full recognition.

In what many viewed as an intimidating (but well-articulated) 2016 presentation to the DSA, Chairperson Edith Ramirez, effectively stated that there was a new “sheriff in town,” and that the FTC regarded the Herbalife settlement as the new FTC guidance.

Under the new proposed paradigm, “ultimate user” was to be viewed as “non-participant retail customer” and the Amway Safeguards, so often cited in 40 years of case authority, was thrown “under the bus.” Long established and accepted industry practices, autoship and wholesale tracking, were deemed persona non grata.

See: Fact Checking the FTC and also see: Searching for Certainty: H.R. 3409

Again this vacillation and, upending of case authority, caused great uncertainty in the industry. So much so, that the industry sought a bi-partisan introduction of H.R. 3409 to return the pendulum to the middle.

And then came the 2016 presidential election, the drive for less regulation, likely change of FTC commissioners, and suddenly, the FTC vacillated once again, walking back the Ramirez doctrine. In an extremely well-received November 2017 DSA presentation, Acting Chairperson, Maureen Ohlhausen, perhaps, in response to new proposed federal legislation (H.R. 3409) and a new anti-regulatory climate, pivoted away from a “take it or leave it” policy to one of cooperation, and one that recognized that case authority ruled the day as opposed to FTC guidance, which can change from staff to staff and commissioner to commissioner.

“There are a lot of nuances” packed in the Koscot Standard and analysis of legitimacy vs. pyramid, Chairperson Ohlhausen, importantly, noted, “I have instructed the FTC staff to meet with the various stakeholders, including the DSA, to discuss those nuances. We anticipate applying the information we’ve gained to issue future guidance, as well as to guide future law enforcement decisions.”

See: Stakeholders Come to the Table: H.R. 3409 

Old Common Ground; New Common Ground

And true to the Ohlhausen presentation, within two months, in January, 2018, the FTC announced its new formal Guidance, leaving Ramirez in the rearview mirror and culminating months of productive dialogue between the DSA and the FTC. Importantly, the FTC went on record as recognizing that case law trumps all, that every case is to be “fact driven,” that an “ultimate user” means “a real user” and recognizing the validity of personal use purchases so long as they are driven by “actual need” for product as opposed to driven by desire to qualify in the MLM compensation plan.

Old Common Ground

First, it is worthwhile to note those items in the new FTC Guidance for which the FTC and direct selling industry have long been on the same wavelength, and for which industry trade organizations, such as the DSA, have undertaken self-regulation.

1. Inventory loading is totally unacceptable. Its existence, even in the presence of a buyback policy or other consumer safeguards, will likely render a program to be a pyramid.

2. Unsupported earning representations, hypotheticals, potentials and lifestyle representations, in the absence of average earnings disclosures, are deceptive.

3. Industry self-regulation and regulatory cooperation is always welcomed.

4. Deceptive activity is never acceptable.

5. Individual company consumer safeguard compliance programs serve a very salutary purpose.

New Common Ground

Appreciated by the industry is the FTC Guidance published clarification on multiple points:

1. FTC Guidance is “non-binding.” The only authoritative guidance must come from case authority. And also, FTC Guidance is “staff guidance” and does not bind the FTC or its commissioners or the direct selling industry in any way.

2. FTC settlements and enforcement orders are not binding, they are not “guidance,” but rather they are examples of the FTC position in various cases.

3. Koscot’s “based on sales to ultimate users” is the prevailing authority on pyramid analysis. “Ultimate user” does not mean “non-participant retail customer” (as promoted by Ramirez), but rather sales to “real users.” This is very helpful to the dialogue. “Real users:” an interesting new turn of phrase by the FTC.

4. BurnLounge is the most current explanation of Koscot, providing:

a. Analysis in all pyramid cases is “case by case” and “fact driven” in which the overall program is examined by “the economic reality” of the offering.

b. Purchases for personal use by distributors are deserving of recognition as a sale to “ultimate users,” with the caveat that predominant intent of the purchase is to satisfy their own real product demand, for example, for resale or personal use, as opposed to a purchase made with the predominant intent to merely qualify in the compensation plan for rewards.

5. It is reasonable to expect a company to develop mechanisms to encourage retailing and to adopt a compliance policy that demonstrates that distributors buy product for their own real product demand, either for resale or personal use in reasonable amounts. And there is no right “one way” to accomplish demonstration of product purchase for the “right reasons.”

On the new common ground, it is probably best to hear from the FTC in its own words:

“Under Section 5 of the FTC Act, what is an MLM with an unlawful compensation structure, which is sometimes called a pyramid scheme?”

The most widely-cited description of an unlawful MLM structure appears in the FTC’s Koscot decision, which observed that such enterprises are “characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) 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.” In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975).

“How do MLMs with unfair or deceptive compensation structures harm consumers?”

An MLM compensation structure that incentivizes participants to buy product, and to recruit additional participants to buy product, to advance in the marketing program rather than in response to consumer demand in the marketplace, poses particular risks of injury. Where such an unlawful compensation structure exists, a participant is unlikely to be able to earn money or recover his or her costs through selling product to the public. In such circumstances, participants will often attempt to recruit new participants who will buy product, and pressure existing recruits to buy product, with little concern for consumer demand. Where an MLM has a compensation structure in which participants’ purchases are driven by the aspiration to earn compensation based on other participants’ purchases rather than demand by ultimate users, a substantial percentage of participants will lose money.

“How does the FTC distinguish between MLMs with lawful and unlawful compensation structures?”

At the most basic level, the law requires that an MLM pay compensation that is based on actual sales to real customers, rather than based on mere wholesale purchases or other payments by its participants. In evaluating MLM practices, the FTC, in accord with established case law, focuses on how the structure as a whole operates in practice, and considers factors including marketing representations, participant experiences, the compensation plan, and the incentives that the compensation structure creates. The assessment of an MLM’s compensation structure is a fact-specific determination that the FTC makes after careful investigation.

“How does the FTC treat personal (or internal) consumption by participants in determining if an MLM’s compensation structure is unfair or deceptive?”

Product that is purchased and consumed by participants to satisfy their own genuine product demand – as distinct from all product purchased by participants that is not resold – is not in itself indicative of a problematic MLM compensation structure. For example, the final order entered in FTC v. Herbalife permits the payment of compensation based on personal consumption, subject to specific limitations and verification requirements. However, the FTC’s law enforcement experience has shown that MLM participants may buy product – and recruit or pressure other participants to buy product – for reasons other than their own or other consumers’ actual demand, such as to advance in the marketing program.

This issue, like all issues concerning the evaluation of an MLM’s compensation structure, is fact-specific and usually involves a comprehensive analysis of a variety of factors. It is worthwhile, however, to highlight two topics that the FTC is likely to consider when evaluating an MLM’s payment of compensation that is premised, in part, on participants buying product that is not resold. First, the FTC staff is likely to consider whether features of the MLM’s compensation structure incentivize or encourage participants to purchase product for reasons other than satisfying their own personal demand or actual consumer demand in the marketplace. Second, the FTC staff is likely to consider information bearing on whether particular wholesale purchases by business opportunity participants were made to satisfy personal demand. The persuasiveness of this information in any particular case will depend on its reliability.

The FTC’s case against BurnLounge provides an example. BurnLounge argued that its participants bought product packages consisting of sales websites and music-related merchandise because they wanted to use the merchandise. When BurnLounge’s product packages were untied from the business opportunity, however, monthly sales of these packages plummeted by almost 98 percent. At most, actual demand was responsible for only a small minority of package sales, and BurnLounge was found to have an unfair or deceptive compensation structure.

“Is it still correct, as stated in the 2004 “FTC Staff Advisory Opinion – Pyramid Scheme Analysis,” that “the amount of internal consumption in any multi-level compensation business does not determine” whether the FTC will consider the MLM’s compensation structure unlawful?”

Yes. Personal or internal consumption – meaning product participants purchase and consume to satisfy their own genuine product demand – does not determine whether the FTC will consider an MLM’s compensation structure unlawful. As noted in the answer to question 5, when evaluating the issue of participants’ internal consumption, the FTC staff is likely to consider, among other factors, both (i) whether features of the MLM’s compensation structure incentivize or encourage participants to purchase product for reasons other than satisfying genuine demand; and (ii) information bearing on whether purchases were in fact made to satisfy personal demand to consume the product. When evaluating MLMs, the FTC focuses on how the structure as a whole operates in practice and considers factors including marketing representations, participant experiences, the compensation plan, and the incentives that the compensation structure creates.

The 2004 letter should not be misconstrued as suggesting that an MLM can lawfully pay compensation on wholesale purchases that are not based on actual consumer demand by characterizing such purchases as “internal consumption.” The 2004 letter itself does not support such a construction, nor do subsequent judicial decisions. For example, the court in BurnLounge held that, notwithstanding the defendants’ characterization that participants bought packages for “internal consumption,” the compensation paid on such purchases was not tied to consumer demand for the merchandise in the packages; instead, the opportunity to advance in the marketing program was the major driver of package purchases. Similarly, in granting a preliminary injunction against Vemma Nutrition Company, the court rejected the argument that individuals who had joined as business opportunity “Affiliates” only wished to purchase product for their own consumption, finding that this claim was “not based in fact.”

“Does the FTC Act require MLMs to retain sales receipts?”

No, there is no such requirement. However, as discussed above, to comply with the FTC Act, the compensation structure of an MLM must be based on actual sales to real customers. Thus, documentation of actual sales to real customers provides relevant information concerning an MLM’s compensation structure.

There is no single method for creating and retaining such documentation. Different MLMs employ a variety of approaches to demonstrate that their product is sold to retail customers, including collecting retail sales receipts created by participants; having retail customers buy product directly from the company, rather than from a participant’s inventory; and having product users sign up with the company as customers who are not participating in a business opportunity. Other MLMs use other approaches or a combination of approaches.

The most persuasive documentation is obtained through direct methods and used to verify that retail sales are made to real customers. Documentation obtained through indirect methods – such as policies requiring participants to attest they have sold a certain amount of product to qualify to receive reward payments – are less likely to be persuasive, with unsupported assertions being even less persuasive.

Ambiguities to Discuss

There are two major ambiguity flaws (likely inadvertent) in the Guidance that must be discussed.

1. Wholesale Tracking

Former Commission Chairperson Ramirez was quite clear that, even with use of consumer safeguards, the 50 year practice of leading companies to base qualification and reward structure, tied to tracking of wholesale product, was “out the window” and would be viewed as evidence of “pyramiding.” In the future, autoship and wholesale tracking would be prohibited. And she threw the famous In re Amway FTC decision on the “ash heap” of history as antiquated, out of date and no longer useful to the pyramid analysis. Her analysis was not supported by 40 years of case authority. And, in the absence of inventory loading and enforcement of the Amway safeguards, no court has ever rejected MLM programs that measure activity based on wholesale tracking. Such a model has existed for 50 years, starting with, and continued, with multibillion dollar direct selling companies such as Amway, Mary Kay and Shaklee.

Although the new FTC Guidance does not attack the Amway Safeguards decision, the standard and decision is conspicuously absent from the Guidance. One wonders why? And a real ambiguity is presented on the use of wholesale tracking:

Par. 14… “In addition, an MLM’s compliance program should ensure that compensation paid by the MLM is based on actual sales to real customers, rather than based on wholesale purchases or other payments by its participants.”

In fact, this statement is internally inconsistent with other discussion in the guidance. Did the FTC Guidance really intend to upend a 50 year model as argued by former FTC Chairperson Ramirez? Is this intentional or an oversight that deserves more dialogue between the industry and the FTC?

As to the buy-sell dealer arrangement, direct selling industry practices reflect virtually every other buy-sell dealer arrangement across many industries. Whether it be for incentives, volume pricing, discounting, rebates, rewards, measures of the relationships are almost always tracked with wholesale movement of product, with the underlying assumption that reordering occurs because product does, in fact, reach the ultimate user, whether it is resold, used for personal use, and if not, subject to buyback.

2. Semantics: Replace “Consumer Demand” with “Ultimate User Demand”

 As noted, the guidance employs the term “driven by consumer demand” multiple times. The inadvertent implication is that this means “driven by retail sales.” This semantic term is at odds with actual detailed guidance discussion that concurs with the industry position that the pyramid test is “driven by sales to the ultimate user,” meaning that sales to distributors in reasonable amounts, for either personal use or resale, should be placed in the category of “sales to the ultimate user.”

How did this term, “consumer demand,” come to be used? Although speculative, it is probably a throwback to the DSA presentation of former Chairperson Ramirez in which she effectively rejected personal use as a legitimate part of the ultimate user analysis and equated the term “driven by sales to the ultimate user” as meaning driven by “sales to retail customers.”

Said Ramirez:

I will start by explaining what we mean by “real customers.” Simply put, products sold by a legitimate MLM should be principally sold to consumers who are not pursuing a business opportunity… So, what does an MLM organized around real customers look like? You can see one approach laid out in the recent consent order we obtained in the Herbalife case. The order identifies two classes of people who are not pursuing the business opportunity: “retail customers” who simply buy product from Herbalife distributors and do not have any direct connection to the company; and “preferred customers,” who have registered with Herbalife as customers and do not participate in the Herbalife business opportunity.

In so doing, she rejected 40 years of case law and even the FTC’s own 2004 Advisory Opinion. As late as the BurnLounge case, the FTC actually argued this position, and it was rejected by the court.

Acting Commissioner Ohlhausen and the FTC Guidance repudiated that analysis and returned to definitions in case law, in the substantive discussion, that would include in “sales to the ultimate user” sales in reasonable amounts for personal use or resale. In fact, the FTC Guidance backs off the Ramirez’s use of the term, “real customer,” and, at times, replaces it with “real user,” which encompasses both personal use users and resale users.

Unfortunately, the semantic term of “consumer demand,, chosen in the guidance muddies the water and really should be changed to reflect the intent of the guidance, and also to be consistent with case law. As noted, a possible fix is a document global “search and replace” of “driven by consumer demand” with “driven by ultimate user demand.”

Where Does This Leave Us?

As said in NY/NJ, if you are looking for a simple answer: “Fuhgedaboudit.” (Forget about it.)

As Acting Chairperson Ohlhausen noted, this entire area of interpretation is “nuanced.” Since the FTC Guidance is non-binding staff guidance, it is useful, but the case authority remains (in absence of passage of legislation such as H.R. 3409) as the real guidance:

Koscot: Pyramid is triggered by payment of consideration and a reward that is not based on “sales to the ultimate user.”

Amway: Adoption of Amway Safeguards, including a retailing mandate, a 70% rule and a buyback policy, if enforced, tilts to legitimacy.

Omnitrition: In the presence of inventory loading (in that case, $5,000) and inadequate enforcement of the

Amway Safeguards, a presumptive pyramid is present.

BurnLounge: This is a synthesis of earlier cases and represents the state of the law today.  Added to case law is recognition of personal use, by a distributor, as a legitimate ultimate user, but an analysis must be made as to whether distributor purchases are driven by real demand of the distributor, for resale or personal use, or whether the predominant/primary motivation for purchases is to qualify in the compensation plan. And the analysis is one that is “fact driven,” “case by case” and should take into account a factual investigation of the basis of distributor purchasing and the “economic reality” of the overall program. The analysis will be a nuanced balancing test of “good factors” and “bad factors.”

A good summary of the balance of “nuanced factors” appears in an earlier discussion of BurnLounge: Analyzing BurnLounge

 BurnLounge Establishes a “Fact Driven” Balancing Standard: Recruitment v. Sales. 

The BurnLounge Ninth Circuit Appeals Court established a going forward pyramid test that is fact driven, and which balances whether distributor payments and commissions are driven by recruitment, on the one hand, or sales to ultimate users on the other hand, i.e.

Are distributor product/service purchases incidental to the business opportunity? Or rephrased: Is the focus in promoting the program, rather than selling products to ultimate users?

If one reads the trial court decision, listens to the oral argument before the Ninth Circuit or reads the Ninth Circuit opinion, the words “primarily” or “predominant” are frequently used to discuss the motivation of distributor purchasing, in order to determine if they should be included in the category of ultimate users. 

The central inquiry will always be: What do they pay, and why do they pay it?

And the ultimate standard of inquiry going forward in pyramid cases will be: What is the predominant or primary motive of distributors in making purchases? Is the primary motivation for purposes of resale or personal use or, as a gateway purchase to qualify for rewards in the MLM opportunity and compensation plan?

What is clear after the BurnLounge case is that “personal use” purchases become somewhat “neutral,” i.e., such purchases, which are not incidental to the opportunity, are not to be excluded in the analysis of sales to ultimate users. And, on the other hand, the mere presence of some personal use purchases or even some sales to retail customers, will not, in itself, be determinative of legitimacy. With that in mind, many other factors will need examination.

How will this work in future cases? It is fairly simple. Get out a piece of paper and make two columns for the “good facts” and the “bad facts.” In a simplistic sense, the winner of pyramid v. legitimate or recruitment v. sales, will be the dominant list. Well, actually, it is not all that simple, because a court will likely choose to ascribe more weight to designated items on each list.

Clearly, the “bad” list will include, but is not limited to, such factors as:

Front-end loading or inventory loading,

Large upfront fees,

Mandated purchases to qualify for commissions or rank advancement,

Bogus product or service,

Inflated prices,

No buyback policy,

No mandate for retail sales by distributors,

No restrictions on “over” ordering,

Unsubstantiated earnings representations,

No evidence of product consumption by ultimate users, either by outside      customers or distributors,

Payment of commissions for training or sales tools as opposed to being based on product sales to ultimate users,

Evidence of unsold product in the marketplace characterized by “garage loading,”

Actual headhunting or recruitment fees,

Mandatory purchases of peripheral or accessory products or services,

And the list will continue with any abusive practice that does not focus rewards primarily driven by sales to ultimate users,

And the “good list”…  again, some, but certainly not all the important factors:

High quality goods and services,

Demonstration of a “real world” marketplace for the product or service,

Goods and services that are fairly priced,

No upfront mandated investment or payment other than a modestly priced “at cost” sales kit,

No inventory requirements,

Demonstration that product/service is used by consumers, whether they be retail customers or distributors,

Sales commissions and rank advancement strictly based on sales of product or service to ultimate users,

Emphasis on sales and use to ultimate users, including retail customers and personal use by distributors,

Amway Safeguard: Buyback policy for terminating distributors,

Amway Safeguard: Anti-inventory loading rule, such as 70% rule, prohibiting purchases unless distributors have sold or used a specified amount of previously purchased product,

Amway Safeguard: Mandate of some specified level of retail sales to outside customers as a condition for qualifying for commissions and rank advancement,

Avoidance of Earnings Representations/Potentials/Hypotheticals/Testimonials unless a transparent average earnings disclosure is provided to potential distributors,

Above all, emphasis on rewards on sales of product/service to ultimate users (retail customers or distributor personal use in reasonable amounts) rather than rewards arising from recruitment of other distributors,

Requirement that any personal use purchases by distributors be in reasonable amounts,

Requirement that any product purchases for resale be in commercially reasonable amounts and subject to buy back policy for terminating distributors,

Quality training to distributors that emphasizes both product sales as well as recruit development.

In the end, any court will be required to conduct this balancing test. And it will seek assistance not only from the parties and the evidence, but, as noted in the BurnLounge Ninth Circuit decision, from qualified direct selling experts. Those experts will assist in fact finding, but they will not be the fact finder nor the author of the legal standard…this role is for the trial court.

Next Steps: Dialogue and Adoption of H.R. 3409

Kevin Lomax: Are we negotiating?
John Milton: Always.
Film, Devil’s Advocate

Two next steps are in order:

1. First, the industry and FTC are well served by continuing dialogue.

2. Second, given the vacillation of the FTC that has occurred over 40 years, this industry is deserving of some legislative certainty, so that it is not held hostage to the ever changing staff, commissioners and positions of the FTC.

The stated purpose of H.R. 3409:

To amend the Federal Trade Commission Act to prohibit pyramid promotional schemes and to ensure that compensation is not based upon recruitment of participants into a plan or operation, but on sales to individuals who use and consume the products or services sold, and for other purposes.

It is the first of its kind at the federal level. Interestingly, anti-pyramid statutes have been enacted in almost all states for half a century. And, anti-pyramid laws, similar to the current federal bill, have been adopted in more than 20 states, with almost identical legislation adopted in more than a dozen states.

H.R. 3409 is the “real thing” and it slams abusive pyramid scams. The core of the legislation, is rooted in a 40 year line of cases that emanate from Koscot, that Chairperson Ohlhausen describes as the backbone of “going forward” FTC policy, a rule that commissions paid to distributors must be based on sales to “ultimate users.”

Bottom line: The bill would finally give the industry certainty that is found in the line of cases from Koscot to Amway to BurnLounge that “ultimate users” include non-participant customers as well as participants who purchase in reasonable amounts for actual personal or family use. Language in the bill lines up perfectly with the established standard of the Koscot case.

Point by point, H.R. 3409 satisfies the goals of both the case law, the new FTC Guidance and industry standards that have been adopted long since in so many states. The bill:

(1)       Condemns inventory loading;

(2)       Calls out as “evil” pyramid headhunting recruitment schemes;

(3)       Per the Koscot case, forbids payment of commissions or rewards that are unrelated or not based on sale of products and services to the “ultimate consumer;”

(4)       Absolutely rejects programs in which distributor product purchases are made in unreasonable amounts, either for resale or actual personal and family use; and

(5)       Demands, as a condition of legitimacy that companies adopt a repurchase policy in which terminating distributors will be refunded for returned product inventory, in resalable condition, that has been purchased within 12 months of termination.

And the industry cannot sit on its “laurels.” Leading members of the industry are already implementing technology solutions to track the segmentation of distributors and non-distributor users of products. In addition, many leading companies have instituted reclassification programs in which distributors who use product regularly, but do not really “work the opportunity,” can be reclassified into “preferred customer” programs that carry favorable pricing and a host of consumer benefits and incentives. These efforts at self-regulation will continue, regardless of legislation, and are the type lauded by the new FTC Guidance.

For a full look at the new FTC Guidance, see: FTC Direct Selling Guidance 

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Following this introduction, let’s step back for a moment and see what pyramid schemes are.

According to the World Federation of Direct Selling Associations (WFDSA), “Pyramid schemes are illegal scams in which large numbers of people at the bottom of the pyramid pay money to a few people at the top. Each new participant pays for the chance to advance to the top and profit from payments of others who might join later.”

In her speech at a seminar in 1998, Debra A. Valentine, a former General Counsel at the U.S. FTC, says, “They (pyramid schemes) all share one overriding characteristic: They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public.”

In an article dated 2014, FTC’s Aditi Jhaveri advocates if “income is based mainly on the number of people one recruits, and the money those new recruits pay to join the company — not on the sales of products to consumers”, this is a sign that the company is operating a pyramid scheme.

As you see, despite all their efforts to disguise themselves and act as if they are legitimate businesses, pyramid schemes do share some common and if one looks carefully, obvious characteristics.

A few of the significant ones, below:

* The most important, if not the only, source of income for a participant is recruitment of new people.

* Participants’ earnings are based on application fees, unreasonably high-priced starter kits or initial product purchases that are either compulsory or “highly recommended” when joining the scheme.

* There are no competitively priced, good quality products that the participant can sell to other individuals. Plus, there is no product return policy in place.

* Income opportunity is over-exaggerated, efforts are there to convince candidates that everybody will earn huge amounts in a short period of time.

* The “business” is presented as a “once-in-a-lifetime” opportunity.

Basically, these are the common and hard-to-miss signs a candidate will need to look for. If any of these exist, the only prudent action is not to take the risk of joining that “opportunity”.

The risks involved in joining and promoting a pyramid scheme? Losing of substantial amount of money, time and losing of friends, relatives, coupled with facing legal charges that may very well end up with being imprisoned!

I do not expect either these fraudulent schemes to disappear anytime soon or individuals to cease showing interest in them. Having that said, we should use every opportunity to educate the society, including the regulators.

…..

Hakki Ozmorali is the Principal of WDS Consultancy, a management consulting firm in Canada specialized in providing services to direct selling firms. WDS Consultancy is a proud Supplier Member of the Canada DSA. It is also the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.

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Jeff is a graduate of the University of Southern California Law School. He is an active member of the State Bars of California and Oregon.

Guest Post by Jeff Babener
FTC and Direct Selling Come to the Table as Stakeholders: H.R. 3409

Everything dies baby, that’s a fact.
But maybe everything that dies someday comes back.
Bruce Springsteen, Atlantic City

What a difference a year makes. In a well-received presentation to the November 2017 DSA Regulatory Conference, FTC Acting Chairperson, Maureen Ohlhausen, struck a totally different tone in regard to forward looking FTC enforcement policy on direct selling, contrasted with the October 2016 presentation of former FTC Chairperson, Edith Ramirez.

The Contrasting Messages:

2016: Ramirez: We are the regulator, new rules to live by, just live with it, it’s our way or the highway…

2017: Ohlhausen: We are all in this together… We are all stakeholders… Let’s work together for the benefit of both, fostering the success of an entrepreneurial and small business direct selling industry, and protecting the security of consumers.

Came floating on a lemon leaf
Flying in on a jasmine wind
The Band’s Visit, Broadway Show, 2017

What happened? Why the rapprochement? Why the goodwill? Will it take hold? Well, it’s a guess, but there are many factors:

(1)       The former chairperson “termed out.”

(2)       A presidential election swept in with an anti-regulatory, pro-growth, pro-entrepreneurial and small business message.

(3)       The going forward composition of the FTC Commission will be Republican and more likely to be sensitive to the concerns of the “regulated.”

(4)       Importantly, the previous FTC aggressive position pushed the industry to seek certainty in their business that could only be achieved by federal anti-pyramid legislation firmly rooted in long standing case authority rather than arbitrary administrative enforcement, i.e., the bi-partisan H.R. 3409 Anti-Pyramid bill was introduced and gaining momentum.

(5)       Finally, the FTC may have realized that it had been heavy handed in recently announced enforcement positions.

Point/Counter-Point: Contrasting Punch Lists

It is worthwhile to contrast the “punch lists” of presentations and positions by the 2016 Ramirez and the 2017 Ohlhausen:

Former Chairperson Ramirez’s presentation followed the successful FTC prosecution of FTC v. Vemma and the overly rigid terms of the FTC vs. Herbalife settlement. Although very well-articulated, the presentation warned of potential future FTC guidance that was not rooted in 50 years of case authority, but rather in the newly adopted positions of the Chairperson and FTC staff… an enforcement policy that that would require a complete overhaul of the model of many leading direct selling companies:

(1)       She renounced use of the famous Amway Safeguards Standard, adopted in the landmark FTC case, In re Amway, 1979 as being irrelevant, overrated and not really relied on by courts in pyramid cases. (an unfortunate misinterpretation of case law).

(2)       She redefined the famous Koscot Standard to require compensation to upline to be based on sales to  nonparticipant retail customers rather than based upon Koscot’s language—ie., commissions must be based on sales to “ultimate users”, effectively reclassifying distributor users as “second class” “ultimate users.”

(3)       She pivoted away from a legal analysis in the most recent BurnLounge case, which demanded, in pyramid cases, a factual analysis of the “primary motivation” test in which a court asks “what is the primary motivation for distributors when they make purchases”… instead migrating to a punch list of inflexible operating restrictions imposed on Herbalife in its recent settlement.

(4)       She essentially attempted to create a new legal standard, the “percentages test”, an arbitrary new rule in which upline distributors would be limited to receive commission credit for only one-third of sales volume attributed to personal use by downline distributors, whether or not such purchases were reasonable in quantity and for actual use by the distributor “ultimate user.”

(5)       She announced that a long time practice of almost all leading direct selling companies, autoship to distributors, should, effectively, be prohibited.

(6)       She pivoted away from a well-established component of leading direct selling programs, stating that monthly activity volume requirements may not include any purchases by distributors.

(7)       She asserted that the long time practice of established direct selling companies, tracking of performance activity, connected to wholesale purchasing, should be banned.

Acting Chairperson Ohlhausen, on the other hand took the train in a totally different direction, rooting a going forward FTC policy on long established case authority and principles of government/industry collaboration rather than top down directives.

As acting chairperson of the FTC, Chairperson Olhausen underscored her goals for the direct selling industry… Gone were threats to upend long standing direct selling models:

(1)       One of her overriding goals, she said, “was to increase the FTC’s support of small business and entrepreneurs.”

(2)       She noted: “I recognize that at the heart of the direct selling model are entrepreneurs—those men and women who are out there innovating, taking risks, and trying to generate value.”

(3)       She stressed that the direct selling model offers “a lot” to entrepreneurs:

* Low startup costs;

* Administrative and logistical support from their companies;

* Promotion of efficiencies in the marketplace for friends and families and consumers;

* Varied and diverse products and services;

* Innovations in selling using internet and social media and technology.

(4)       She pointed out the importance of flexibility in regulation by the FTC and that it is important that the FTC stay away from rigid application of “one size fits all” regulatory enforcement, looking instead on “our case-by-case” enforcement process of “specific harm” in that particular case.

(5)       Consistent with the views of leading companies in the direct selling industry, she applauded industry self-regulation with government oversight as a backup, while at the same time emphasizing that government enforcement powers should be “robust and judicious.” Why judicious? Said Ohlhausen, “Over-zealous government involvement can diminish industry members’ participation in the self-regulatory system, which reduces the system’s effectiveness. Businesses that believe government action is inevitable will not participate or invest in self-regulation.”  How true, and what a great prelude to cooperation between the FTC and the direct selling industry.

(6)       Chairperson Ohlhausen took the time to lay out several “bright line” markers intended to serve as FTC’s down payment on a cooperative relationship with direct selling:

* “The FTC and the DSA have a good working relationship, and for that, I thank you. We’ll continue to cultivate that relationship…”

* The FTC took special care to understand the dynamics of direct selling, and exempted multilevel marketing programs from its recently updated Business Opportunity Rule.

* Pivoting from Chairperson Ramirez’s comments that the Herbalife settlement terms may be the basis of future FTC guidance or rules, Chairperson Ohlhausen stated unequivocally that settlements and orders do not apply to the entire industry: “The answer to that question is ‘No’. Orders arising from FTC settlements are binding only on the entities and individuals identified in the order. The orders may of course, provide industry participants with additional data points on, for example, business structures that the FTC believes comply with the law. But that’s not to say the structures outlined in those orders are the only way the FTC believes companies can comply.”*

* Does the FTC assume or believe that every multi-level company is a pyramid scheme? Responded Ohlhausen, “The answer to that question is also ‘No’… We recognize the direct selling model has a lot to offer the marketplace and consumers.”

* After hearing from Chairperson Ramirez in 2016, what the industry heard, or inferred, was that the FTC was abandoning longstanding case authority for its own “punch list” of what does or does not fit within legitimate multilevel marketing vs. pyramid scheme. Not so fast, declared Chairperson Ohlhausen, i.e., the FTC is going back to basics… a refreshing comment from the industry’s perspective and one that is the driving force behind H.R. 3409. Said the Chairperson, “At the risk of getting into too much legalese, the FTC described an unlawful pyramid scheme in our case against Koscot Interplanetary, Inc. back in 1975. Most courts have adopted that description and it’s the description we have used in our recent cases. (Author’s comment: many industry observers might take exception to the observation that this approach has been the guiding FTC enforcement position in recent cases.) Under that description, unlawful multi-level marketing structures are “characterized by the payment of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive, in return for recruiting participants into the program, rewards which are unrelated to the sale of the product to ultimate users.” (emphasis added)” Citing, In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1180 (1975).

* And realizing that “there are a lot of nuances” packed in the Koscot Standard and analysis of legitimacy vs. pyramid, Chairperson Ohlhausen, importantly, noted, “I have instructed the FTC staff to meet with the various stakeholders, including the DSA, to discuss those nuances. We anticipate applying the information we’ve gained to issue future guidance, as well as to guide future law enforcement decisions.”

H.R. 3409: An Opportunity for both the FTC and the Direct Selling Industry

And now… an opportunity for the FTC and direct selling Industry to work together for certainty that they both deserve. A bi-partisan bill, H.R. 3409, the Anti-Pyramid Promotional Scheme Act of 2017.

The stated purpose of H.R. 3409: To amend the Federal Trade Commission Act to prohibit pyramid promotional schemes and to ensure that compensation is not based upon recruitment of participants into a plan or operation, but on sales to individuals who use and consume the products or services sold, and for other purposes.

It is the first of its kind at the federal level. Interestingly, anti-pyramid statutes have been enacted in almost all states for half a century. And, anti-pyramid laws, similar to the current federal bill, have been adopted in more than 20 states, with almost identical legislation adopted in more than a dozen states.

H.R. 3409 is the “real thing” and it slams abusive pyramid scams. The core of the legislation, is rooted in a 50 year line of cases that emanate from that case, Koscot, that Chairperson Ohlhausen describes as the backbone of “going forward” FTC policy, a rule that commissions paid to distributors must be based on sales to “ultimate users.” Bottom line: the bill would finally give the industry certainty that is found in the line of cases from Koscot to Amway to BurnLounge that “ultimate users” include non-participant customers as well as participants who purchase in reasonable amounts for actual personal or family use. Language in the bill lines up perfectly with the established standard of the Koscot case.

Point by point, H.R. 3409 satisfies the goals of both the case law, Chairperson Ohlhausen’s reliance upon Koscot and industry standards that have been adopted long since in so many states. The bill:

(1)       Condemns inventory loading;

(2)       Calls out as “evil” pyramid headhunting recruitment schemes;

(3)       Per the Koscot case, forbids payment of commissions or rewards that are unrelated or not based on sale of products and services to the “ultimate consumer;”

(4)       Absolutely rejects programs in which distributor product purchases are made in unreasonable amounts, either for resale or actual personal and family use; and

(5)       Demands, as a condition of legitimacy that companies adopt a repurchase policy in which terminating distributors will be refunded for returned product inventory, in resalable condition, that has been purchased within 12 months of termination.

All of this is not to say that the direct selling industry does not take self-regulation and protection of the consumer very seriously. The Direct Selling Association Ethics Code is replete with consumer protections, from prohibitions on inventory loading to unsubstantiated earnings claims to mandates of inventory buyback from terminating distributors. And leading members of the industry are already implementing technology solutions to track the segmentation of distributors and non-distributor users of products. In addition, many leading companies have instituted reclassification programs in which distributors who use product regularly, but do not really “work the opportunity,” can be reclassified into “preferred customer” programs that carry favorable pricing and a host of consumer benefits and incentives. These efforts at self-regulation will continue, regardless of legislation, and are the type lauded by Chairperson Ohlhausen. To some extent, such undertakings are a “down payment” on reciprocal cooperation by the FTC.

Carpe Diem… Seize the Day… We Are All Stakeholders

Just as Chairperson Ohlhausen has invited all stakeholders to the table to discuss how to implement the nuances of the Koscot line of cases, the direct selling industry should invite the FTC, as a stakeholder, to participate in the development and enactment of H.R. 3409.

Why is H.R. 3409 a great discussion topic for these “stakeholders?” Well, of course, cooperation and collaboration and good will are good goals.  But those lofty goals do not produce certainty and predictability if there is no objective standard or rule of law.

No one will argue with the fact that FTC staffs change; that, over time, FTC commissioners change; and that there is a long history of FTC vacillation on policy and enforcement. It is well past time for some objective guidance.

Will this dialogue go anywhere? Can the parties achieve some certainty for this channel of distribution? Hard to say… Hopefully, yes. We have been down this road before. But it is important to remember, as Prime Minister Indira Gandhi once said, “you cannot shake hands with a clenched fist.”

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As we come to the end of another year, I wanted to ask some of the prominent persons of the direct selling community what they see coming in 2017.

“What will be the most important issue, whether it be an opportunity or a threat, in the direct selling industry that will need a closer focus Next Year?” was the question.

You will read in this week’s article, their responses:

Oscar Cano Arias, Managing Director of Direct Selling Europe (DSE):

“Yet again, ethics will be a top issue in the year 2017. Due to the lack of serious and effective self-regulations in the US, the FTC is determined to react. In 2015, the FTC closes down Vemma accused of operating a pyramid scheme. Then, in July 2016,  it adopts a Resolution against Herbalife that could have not been tougher: “Herbalife is going to start operating legitimately, making only truthful claims”… “Herbalife will have to restructure its business so that participants are rewarded for what they sell”… “Herbalife will have to compensate consumers […] as a result of unfair and deceptive practices”. 2017 will see new FTC Guidelines for the US direct selling industry, likely to include main points of the Resolution against Herbalife. Direct Selling Europe (DSE) welcomes the FTC move and invites the FTC to publish its new Guidelines the earliest possible. In the meanwhile, DSE continues working with all stakeholders to make sure that the interests and image of the well reputed and sustainable companies are well preserved.”

Jeff Babener, Legal Counsel at Babener and Associates:

“The thrust of the message of the October 2016 presentation of the FTC Chairwoman, Edith Ramirez was “more FTC regulation is coming… live with it”. On notice going forward: The FTC would reject a legal standard accepted by courts for 40 years, The Amway Safeguards Rule, and proposes guidance to “upend and reject” decades of industry practices that recognize full credit for personal use by distributors, track qualification volume based on wholesale movement of product, allow for monthly sales volume activity qualification based on distributor purchase volume and encourage and reward autoship programs that deliver predictable volumes to distributors. A surprise: The 2016 Presidential election results may usher in an anti-regulatory climate. Sponsor of a bi-partisan anti-pyramid bill to codify recognition of personal use purchases and establish legitimacy standards acceptable to the direct selling industry, is Rep. Marcia Blackburn, member of the Trump transition team and potential Cabinet member. To its surprise, this may be the year of opportunity for the industry to seek refuge from over-regulation, with model legislation that has already been adopted as law in more than a dozen states.”

Jacques Cosnefroy, General Secretary of the France Direct Selling Association (FVD):

“In a world in constant transformation, where the cultural revolutions are exempted from principles of belongings of the majorities, where the faith in the other one has become a variable of adaptation, where the inherent values of our personal construction are no longer considered as sources of reference, where the fear of the next day is a component of the everyday life, where the transparency is not anymore an option, the direct selling industry creates for each and every one a solid bedrock for the future, which could be threatened by a lack of control of our communication. Communication has become an asset and a threat for our companies! An asset because it offers this incomparable universal dimension which connects the people, and a threat because if uncontrolled  it can convey unethical information that could severely damaged the image of the direct selling industry.”

Tamuna Gabilaia, Executive Director and Chief Operating Officer of The World Federation of Direct Selling Associations (WFDSA):

“2016 was a very exciting year for the industry. We saw sustained growth in all regions – global retail sales increased by 7.2% and the industry experienced 7.2% CAGR. We can see that people all over the world are increasingly interested in getting into business for themselves and we anticipate we will continue our growth pattern and will remain a vibrant industry bringing economic empowerment to people all around the globe. However, we still need to tell our story better. We need to align around messaging and a common narrative. There are widespread misperceptions and misunderstandings about direct selling. Explaining who we are and how our businesses work is an area we need to focus on. The WFDSA Messaging Guidebook developed under the WFDSA Advocacy Committee is a tool that will increase public understanding of direct selling and foster greater communication among member companies. Lastly, WFDSA World Congress XV “Rendezvous with the Future” which will be held in October 2017 will be an unforgettable event which will clearly demonstrate the key role our sector plays in the global economy.”

Brent Kugler, Partner at Scheef & Stone, LLP:

“The winds of change continue to grow stronger in the direct sales industry. Companies must be proactive in addressing changes that can now be seen as inevitable, if not mandatory, in light of recent FTC activity and comments from FTC Chairwoman Ramirez following FTC- Herbalife. The “wait and see what others do” approach is no longer a viable option in today’s regulatory climate. Companies must retool their compensation plans and reinvest in technology to track verifiable retail sales to non-distributor customers and calculate commissions and rank advancement based on those sales. Companies should also be wary of promoting “optional” high-priced enrollment bundles, as recent enforcement actions make clear that regulatory authorities are increasingly focused on the percentage of distributors who are unable to earn enough compensation to offset the cost of enrolling with a company.”

Alan Luce, Senior Managing Partner at Strategic Choice Partners:

“Rising to the challenge to provide world class access and service levels to end user customers and salesforce members will be the defining characteristic of successful direct selling companies in the future. Those companies that meet or exceed world class status in access and service will succeed. Those who do not raise their game will wither and fail as both customers and sales people choose to go elsewhere regardless of how good or unique their products and services may be.”

Nick Mallett, Director at Pan European Solutions:

“The Internet has reached the stage where established social media platforms are now less essential to new entrants to networking businesses. There will be increasing instances of ‘private’ networking portals, worldwide. These represent a competitive threat to established network marketing businesses. We see a serious risk from the spread of such platforms in the regulatory sense of their being somehow above the law, through operating in the ‘virtual world’. The viral spread of such businesses is such that they are subject to the laws of the many jurisdictions in which they operate. On the one hand, they may be able to carry on business in multiple jurisdictions despite being closed down in one or more where their operation contravenes local legislation; on the other, a regulatory challenge in one jurisdiction might just cause them to close down altogether. In the meantime, they may have given network marketing such a bad name – perhaps worldwide – that the various regulators introduce a more restrictive regime of control such as to restrict the previously legitimate activities of our established network business clients.  We must be vigilant on behalf of the legitimate industry.”

Katarina Molin, Executive Director of The European Direct Selling Association (Seldia):

“In 2017, we expect the positive growth for direct selling in the European region to continue, which shows that it continues to be a vibrant retail sector and enjoys high consumer trust. From a policy perspective, Seldia will continue its close dialogue with European policymakers on the EU consumer policy. It will be crucial to focus on the proper implementation and enforcement of existing EU legislation, an area that needs more attention in the future. Addressing issues such as non-tariff barriers as well as how to effectively put a stop to the practices of rogue traders must be prioritized. It is also time to step up our efforts to communicate better and more transparently on how the sector works, on what the channel is – and is not. We must also explain that it is not outdated channel of distribution, but on the contrary – very receptive to innovations and technological development. In terms of communication, it will be important to engage in a constructive discussion about segmentation of the people involved in direct selling, to keep a continued focus on ethics, and to collect independently verified data to share externally.”

Gillian Stapleton, Executive Director of the Australia Direct Selling Association (DSA):

“The Entrepreneurial Consumer is both an opportunity and threat. Great service has long defined direct-selling: establishing great rapport in-home, the personal delivery of products and follow up every season. Will that define the industry in the next 5 years? Direct-selling faces the biggest challenge in service it has ever experienced. Next day delivery, packaged in tissue paper, a hand -written note signed by the packer, establishes a good relationship for me with that company. An offer to exchange the goods or have three alternatives shipped at no cost to me and send back what I don’t want. That cements it. I am the Entrepreneurial Consumer and I could be your consultant. Will your company attract me?”

Bobbie Wasserman, Managing Director of Wave2 Alliances:  

“The FTC is now distinguishing between Distributors, personal consumption and customer purchases. Direct selling companies can harness this opportunity to engage and attract more customers – helping build each company’s credibility for its own brand and contribute to enhancing the industry’s credibility. Public relation campaigns focusing on executives’ leadership, premium products/services and entrepreneurial successes can provide a corporate narrative and business tools for Distributors. In the future, the industry can argue the semantics of purchase behavior via legal battles. However, now is the time to impact decisions being made in the ‘court of public opinion’ – those decisions are often made swiftly and without access to an appeal.”

The post In 100 Words: Looking Ahead to 2017 appeared first on The World of Direct Selling.

Guest Post by Jeff Babener
Fact-Checking the FTC’s New Legal Guidance

Sir, you are entitled to your own opinion. You are not entitled to your own facts.
Senator/Ambassador Daniel Moynihan

Shifting Sands

In her first post-FTC v. Herbalife settlement presentation, FTC Chairwoman Edith Ramirez argued that it was time to ratchet up regulation of the direct selling industry, and not a time to “put the brakes” on more regulation of the $36 billion industry and its 20 million strong sales force.

It was clear that the FTC and the direct selling industry are on the same wavelength as to a basic goal that the direct selling industry should prosper through effective and ethical practices. But there remains a respectful divergence on methodology. During her well-articulated speech to the October 2016 DSA Policy conference, she enunciated a wish list for new legal standard that would abandon a 40-year-old gold standard, the “Amway Safeguards Rule” and that would also upend and call into question decades of industry accepted business practices.

The Chairwoman argued for:

1. Abandonment of reliance on the Amway Safeguards Rule as a key test for legitimacy.

2. Effectively creating a new legal standard patterned after those requested by the FTC, in the FTC/Herbalife settlement, that, in reality may upend decades of industry accepted practices and rewrite 40 years of court legal standards.

a) The existing Court standard derives from:

(1) Koscot… Compensation to upline should be based on sales to the “ultimate user”.

(2) Amway… A program that enforces the Amway Safeguards of a retailing mandates to qualify for mlm commissions, a 70% rule that prohibits ordering unless product is sold or used and a reasonable buy back policy for inventory for terminating distributors, if effectively enforced and, in conjunction, with avoidance of inventory loading, is indicative of legitimacy. (Also, Amway did not challenge recognition of distributor personal use purchases as legitimate sales to the “ultimate user”.)

(3) BurnLounge… The primary motivation for distributor purchases should be the purchase of product in reasonable amounts for resale or use as opposed to mere qualification in the program for rewards. A pyramid analysis will be “fact driven”.

b) On the FTC wish list for a new paradigm for legitimacy is:

(1) Abandonment of the reliance on the “Amway standard”.

(2) Redefining Koscot to require compensation to upline to be based on sales to the “non-participant retail customer” rather than the “ultimate user”.

(3) Adopting a FTC/Herbalife settlement “punch list” of mandates in lieu of the factual analysis of “primary motivation”, called for in BurnLounge, including:

a. Only one third MLM compensation to upline should come from personal use by downline distributors, whether or not such purchases are reasonable in quantity for use by the distributor “ultimate user”.
b. Autoship to distributors should be prohibited.
c. Monthly activity volume requirements may not include any purchases by distributors.
d. Tracking of performance activity connected to wholesale purchasing should be banned.

Query, are the premises for justifying the new FTC enforcement position well founded?

Although reasonable minds may differ, history does not necessarily support the Chairwoman’s position. Does it matter? Probably. Why? When a new proposed enforcement policy may so profoundly impact the business and legal landscape, it is worth visiting the issue. Although the “black and white” terms may have been quite acceptable to Herbalife in its own factual circumstances, those stringent mandates are at odds with how the mainstream direct selling industry has operated for many decades and may prove quite disruptive.

At a minimum, the threat of FTC prosecution, pursuant to the new suggested paradigm, has caused major uncertainty in the direct selling community… with attendant options of “fight”, “capitulate” or “find common ground”.

Abandoning Amway

In abandoning support for the Amway Safeguards Standard, Chairwoman Ramirez stated as a premise:

“I want to note that, although this is less common today, in the past some MLMs have sought to rely on policies similar to those referenced in the Commission’s 1979 Amway decision – specifically, the so-called “buy-back,” “70 percent,” and “10 customer” rules – as a sufficient basis for assuming that their product is purchased by real customers to satisfy genuine demand. This reliance is misplaced. The Commission found those policies were effective given the specific facts in Amway, but neither the Commission nor the courts have ever endorsed those policies for the MLM industry at large.”

FTC: Industry reliance on the Amway Safeguards standard is misplaced in that it is not such an important legal precedent to the courts.

Well, this is not quite accurate. Actually, Amway has been an integral part of a “gold standard legal analysis” for 40 years in most leading cases right up to, and including, the most recent case, U.S. Court of Appeals for the Ninth Circuit ruling, FTC v. BurnLounge, Inc., 753 F.3d 878 (9th Cir. 2014).

BurnLounge is typical of reliance on the Amway standard by courts in leading decisions. It is part of a fabric of decisions, such as Koscot, that contribute to the analysis, with the understanding that application of the Amway analysis was fact driven and, important, but not determinative, of the final conclusion.

For instance, the Omnitrition court noted that, in the presence of inventory loading, adherence to the Amway Safeguards did not guarantee “safety”. Similarly, where the evidence was that distributor purchases were primarily motivated by desire to qualify in the plan, no safety existed (BurnLounge). Or where there was no encouragement to mandate retail sales or promote retail sales, safety disappeared (Amway). And if a company failed to enforce the Amway Safeguards standard or fell short of its implementation, no safety existed.

But, nevertheless, courts embraced the Amway Safeguards standard and relied on it, along with the original Koscot mandate that compensation must be tied to sales to the “ultimate consumer” as a base starting point in pyramid cases. And whether or not the FTC future prosecutions move away from pyramid bases to mere allegations of “unfair practices that are likely to cause injury to the public”, it is difficult to imagine courts not returning to fifty years of pyramid case analysis when faced with prosecution of a direct selling company.

In actuality, the BurnLounge court cites Amway multiple times. Here, in the BurnLounge decision, the Court indicates that the Amway precedent is alive and well in current court analysis:

“In contrast, in Amway the FTC found that a MLM business was not an illegal pyramid scheme. In re Amway, 93 F.T.C. at 716-17. Though Amway created incentives for recruitment by requiring participants to purchase inventory from their recruiters, it had rules it effectively enforced that discouraged recruiters from “pushing unrealistically large amounts of inventory onto” recruits. Id. At 716. BurnLounge argues that “the only difference between Amway and BurnLounge is that BurnLounge did not require inventory purchases.” This argument is unpersuasive because BurnLounge required Moguls to purchase a product package to get the chance to earn cash rewards, provided cash rewards for the sale of packages by a Mogul’s recruits, and had no rules promoting retail sales over recruitment.”

And similar analysis and respectful reference to the Amway is to be found, over four decades of legal rulings, cited sometimes in passing, and also frequently in depth, in more than two dozen reported cases.

Creating a New Legitimacy Paradigm

FTC: The Settlement terms in FTC/Herbalife represent a more appropriate approach for the analysis of legitimacy:

Among those terms:

Only one third MLM compensation to upline should come from personal use by downline distributors, whether or not such purchases are reasonable in quantity for use by the distributor “ultimate user”.

In her presentation, notwithstanding almost 50 years of Koscot reference to “ultimate user”, the Chairwoman argues that “ultimate user” must be defined as a “real customer”, and that a “real customer” only “fits the bill” if that customer is a non-participant retail customer. This description represents a “sea change” in what is an “ultimate user”, defies codified recognition of “personal use” in more than a dozen states and goes begging for support in a long lineage of case law.

And the one case cited by the Chairwoman to demote legitimacy of personal use, Omnitrition, was actually a case that highlighted the major abuse of Omnitrition International, in failing the Amway standard, by requiring distributors to engage in “inventory loading”, buying “exorbitant amounts of products” and “thousands of dollars of products” in order to qualify for commissions in the program. Although a reference, in passing, is made to the effect that personal use alone may not satisfy sales to the “ultimate user”, no language in Omnitrition suggests or justifies devaluing “personal use” by two-thirds. Again, the gravamen of abuse in the case was promotion of inventory loading to qualify for commissions, and not “personal use”.

Other than the passing reference in Omnitrition, no court case has ever challenged the “giving of credit” for “personal use in reasonable amounts” as voiding the transaction as a sale to an ultimate user, let alone, limited such credit as drastically as the FTC suggests should be considered as the legal standard. It is true that courts have condemned inventory loading and have examined for factual evidence that purchases were for “qualification” rather than reasonable use. But they have not rendered personal use purchases “second class citizens” in the world of direct selling. In fact, as noted, more than a dozen states have codified the recognition of personal use purchases as legitimate end destination ultimate user purchases, which are due full credit.

The FTC is effectively proposing to reverse the presumption that one buys product to be used, until shown otherwise, into a presumption that if a distributor buys a product, the presumption is that the purchase is for nefarious qualification purposes of recruitment such that the purchase does not deserve full credit in the sales process.

The FTC is seeking to achieve by “guidance” what it could not get a court to accept in BurnLounge. In the BurnLounge appeal, the FTC argued against validation of personal use purchases. However, the FTC position was rejected by the U.S. Court of Appeals for the Ninth Circuit in BurnLounge as, “The FTC counters that “internal sales to other Moguls cannot be sales to ultimate users consistent with Koscot.” Neither of these arguments are supported by the case law.” (page 18 of opinion)

And this “scarlet letter” on personal use, is contrary to the FTC’s own position in its 2004 Advisory Opinion:

Internal Consumption

Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme, The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.

It is important to distinguish an illegal pyramid scheme from a legitimate buyers club. A buyers club confers the right to purchase goods and services at a discount. If a buyers club is organized as a multi-level reward system, the purchase of goods and services by one’s downline could defray the cost of one’s own purchases (i.e., the greater the downline purchases, the greater the volume discounts that the club receives from its suppliers, the greater the discount that can be apportioned to participants through the multi-level system). The purchase of goods and services within such a system can, therefore, be distinguished from a pyramid scheme on two grounds. First, purchases by the club’s members can actually reduce costs for everyone (the goal of the club in the first place). Second, the purchase of goods and services is not merely incidental to the right to participate in a money-making venture, but rather the very reason participants join the program. Therefore, the plan does not simply transfer money from winners to losers, leaving the majority of participants with financial losses.

And even the FTC’s primary expert economist in many of its pyramid prosecutions, including BurnLounge, Dr. Peter Vander Nat, has shrugged off the need to “penalize” or automatically stigmatize a personal purchase sale. Below is an excerpt from Dr. Vander Nat’s deposition in the BurnLounge case:

Vander Nat BurnLounge deposition on issue of internal consumption (November 12, 2008):

218-219

Q. Under the heading internal consumption, the second sentence:  “In fact the amount of internal consumption in any multilevel compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme.”  Do you agree with that sentence?   

 A. I think so. Yes. I think that that is consistent with what I said this morning on this point.     

 Q. What if the sentence read a little differently? What if the sentence read the amount of internal consumption in any multilevel compensation business is not a factor in the analysis of the FTC’s determination of whether or not a plan is a pyramid? Would you still agree with the sentence?     

 A. I think I would. I said this morning, when I think back on this testimony, that I expect there to be internal consumption in the organization and the fact that it’s there is itself not determinative one way or another. I think I said that

 220

Q. And that is the sales that you consider in your analysis. And you exclude from that sales within the distribution network.     

 A. I said I exclude from it those purchases that people are required to make in order to enter the business opportunity. That’s exactly what I said about it.      

 Q. And isn’t that at least some of what internal consumption is?

 A. No. I don’t think that that’s what’s being referred to here. I mean, normally when you’re talking about internal consumption, if you just use the word generally, it means people wanting to use the product for their own use just because they like the product. I mean, that’s normally what the phrase refers to. And I simply made this other qualifier about it.  Whatever you are required to purchase of consumable goods in order to enter the business opportunity, I count that as part of your business investment because you’re required to buy it as part of the investment

 228

 Q. Do you have any opinion as to a percentage of sales within a distribution network of a company that would not make it more likely that there be a finding of pyramid?

 A. No.  As I’ve said, internal consumption doesn’t count one way or another with me. I’ve given all the factors that I use. Internal consumption is itself not one of the factors.

And notwithstanding his declarations in many FTC pyramid prosecutions that “retail sales” are the dividing line, Dr. Vander Nat cuts to the chase in his BurnLounge deposition that, in fact, the acid test is whether or not distributors are making payments as a gateway to the business opportunity, i.e. purchases incidental to the business opportunity. In this regard, he is on the same wavelength as both the case law, 2004 FTC Advisory opinion and the position of the direct selling industry.

Page 130 of the Vander Nat BurnLounge deposition:

I believe in the Mogul program people are buying the product for the sake of a business opportunity. That’s why they’re buying it.  So the VIP package has a certain business value which is distinct from the exclusive package as a business value which is again distinguished from the basic package as a business value. I am basing the analysis on this basic premise in the Mogul program people are buying into a business opportunity. They’re paying what in essence is a business investment for them.  The fact that it has some consumable items in it, that may be beneficial to them, but they’re buying it for the sake of the business opportunity.Therefore the issue of whether they’re harmed is for me they went into a business in the hopes of making money but in fact they have a business loss.  So for me the business loss is the harm.

The Other New Legitimacy Rules on the FTC Horizon

How do those other new mandates, that upend decades of industry practice, fit into the legal landscape:

* Autoship to distributors should be prohibited.
* Monthly activity volume requirements may not include any purchases by distributors.
* Tracking of performance activity connected to wholesale purchasing should be banned.

Actually, in 50 years of case authority on pyramid schemes, the courts have condemned inventory loading, earnings misrepresentations, lack of incentives on retailing, absence of return policies, programs that inadequately enforce the Amway Rules or pay out rewards on sales to those who are not what Koscot referenced as “ultimate users”.

But in the presence of adequate safeguards under Koscot, Amway or BurnLounge, no court has insisted on the type of restrictions called for by the FTC. If the FTC has the muscle to impose such marketing prohibitions, it will likely be due to “extra judicial” factors rather than reliance on the existing legal standards of 50 years of case authority.

The FTC will also need to buck an opposite trend in more than a dozen states and a proposed congressional action, H.R.5230, a bi-partisan anti-pyramid bill to codify recognition of personal use purchases and establish legitimacy standards acceptable to the direct selling industry. The bill is sponsored by Marcia Blackburn, member of the Presidential-Elect Transition Team and other bi-partisan sponsors in a post 2016 election environment that is decidedly “anti-regulatory”, where one incoming cabinet member is a family owner of Amway, where a President-Elect was formerly the branded spokesperson for multiple direct selling companies and where one prominent congressional committee chair was a previously 10-year employee of a leading direct selling company.

And so, the question: Ratchet up the regulation or ratchet down the regulation? Only time will tell. Better yet… this is a good time for the FTC and direct selling industry to find common ground and workable rules that will allow the industry to prosper in an effective and ethical manner.

…..

Please click here to read FTC Chairwoman’s speech at the US Direct Selling Association’s Business & Policy Conference.

The post Fact-Checking the FTC’s New Legal Guidance appeared first on The World of Direct Selling.

The speech was given by the Federal Trade Commission’s Chairwoman Edith Ramirez. It was dedicated to the FTC vs Herbalife Settlement and more importantly, how the Commission would take it from there.

Highlights From What Edith Ramirez Said

The direct selling community often complains about the negative public perception about how the industry operates. However, the industry has a huge opportunity to address concerns by “enhancing transparency and fostering credibility”.

The (U.S.) Direct Selling Association works as the voice of self-regulation and its Code of Ethics can play a significant role in modeling behavior for its members. What has been done so far is good, but the work is far from finished.

There are two areas where the industry need to take effective actions to stop the practices that damage the credibility of the whole industry: Misleading income representations, and unfair or deceptive business structures that are not focused on real sales to real customers.

Whether expressed or implied, earnings claims play an important role in making investment decisions by the consumers. It is often the single most decisive factor in those choices. So, the FTC takes earnings misrepresentations very seriously.

In the FTC’s experience, many companies continue to misrepresent the amount of money participants are likely to earn. In all the cases against multi-level marketers, the FTC has alleged that the defendants made false representations. These cause real harm to consumers and they need to stop.

Direct sellers should stop presenting their business opportunities as a way for individuals to quit their jobs, earn thousands of dollars a month, make career-level income, or get rich. In reality, very few are likely to do that. It may be true that a very small percentage of participants do have success of this type. However, testimonials from these rare individuals are likely to be misleading because people generally do not realize similar incomes.

Income representations must match the earnings reality of the majority of participants. This includes both explicit statements about how much a person is likely to earn, as well as implied claims and also lifestyle claims.

Claims like “you can quit your job”, “fire your boss,” “become a stay-at-home parent”, “travel the world”, or “have the time and money to enjoy the ‘finer things in life’”, whether made through statements or images, are deceptive when made to a general audience. This is because individuals are unlikely to achieve them.

Simply prohibiting network marketers from making income misrepresentations is not enough. Companies must take reasonable steps to monitor and ensure that participants are not misleading others about the opportunity.

Alongside with income misrepresentations, the second main problem in the direct selling industry is that there are many structures that are unfair or deceptive because they are not focused on real sales to real customers.

As the court decisions in Omnitrition and BurnLounge made clear previously, businesses that pay compensation for purchases by recruits, rather than for actual sales to customers, are unlawful.

There are four pillars in the principle of basing compensation on real sales to real customers:

1. The company must be focused on real customers.
2. The opportunity must be based on sales that are both profitable and verifiable.
3. Targets or thresholds that are met by mere product purchases should not be used.
4. The compensation must be tied to retail sales.

The idea behind “real customers” is that products should be principally sold to consumers who are not pursuing a business opportunity. The law has always taken a skeptical view of paying compensation to someone based on the presumed “internal consumption” or “personal consumption”. When a product is tied to a business opportunity, experience teaches that the people buying it may well be motivated by reasons other than the actual product demand.

What does a real customers look like? The order in the Herbalife case identifies two groups of people who are not pursuing the business opportunity: “Retail customers” who simply buy product from Herbalife distributors and do not have any direct connection to the company; and “preferred customers” who have registered with Herbalife as customers and do not participate in the opportunity.

The Herbalife order also reflects a skepticism of compensation based on the presumed “internal” or “personal” consumption. To address this, the order incorporates a number of provisions that impose limits on the compensation paid for the consumption of products by business opportunity recruits. For example, at least two-thirds of the compensation paid by Herbalife must be based on sales to retail customers or preferred customers, not on consumption by business opportunity participants.

“Real sales” are sales that are both profitable and verifiable. If a company pays compensation based on “claimed sales”, that cannot be characterized as a compensation based on “retail sales.” Herbalife is required to collect verification information for every claimed retail sale and take all reasonable steps to verify that these sales both occurred as reported and represent genuine purchases by a true customer.

Companies should not use targets or thresholds for compensation eligibility that are met only by product purchases. The focus of a legitimate MLM, and the basis for the compensation it pays, must be real sales to real customers. Participants should buy product only to meet an actual consumer demand. Existence of any requirements or incentives for product purchases for reasons other than satisfying genuine consumer demand – such as to join the business opportunity, maintain or advance their status, or qualify for compensation payments – are problematic.

Herbalife was prohibited from imposing minimum purchase requirements to business opportunity participants. The order also prohibited automatic-shipment or similar programs involving standing orders of products. Companies should not contrive ways to get their business opportunity participants to make purchases for reasons other than the actual retail demand.

The compensation paid by a company must be tied to real sales to real customers. If the participants buy product that does not result in real sales to real customers, this revenue should not be used to fund compensation.

A company should not pay compensation solely for enrolling or recruiting a new participant. This means there should be no headhunter fees, recruitment bounties, or anything else of the sort.

In Herbalife’s case, the FTC is requiring the company to track the percentage of revenues earned from product that is (i) sold to a retail or preferred customer, or (ii) within the limits established for compensating reasonable personal consumption by business opportunity participants. If at least 80% of Herbalife’s wholesale revenue is not accounted for within these categories, the order imposes a cap limiting the total amount of compensation Herbalife can pay to its participants. In practice, this means that if, hypothetically, only half of the product that Herbalife sells results in verifiable retail sales as defined by the order, the total rewards that the company can pay are limited to 50%. If the majority of product purchases are genuine retail sales, total compensation can be higher. If they are not, then the total compensation will be much lower.

All of the components of the Herbalife order are intended to operate in a combination to provide reasonable assurance that product purchases will be driven by real demand. This assurance is necessary and it is not enough for a company to simply assume the existence of sales to real customers.

Before, some companies relied on policies similar to the ones mentioned in the FTC’s 1979 Amway decision (e.g. “buy-back”, “70 percent” and “10 customer” rules)  as a sufficient basis for assuming their product was purchased by real customers to satisfy real demand. This reliance is misplaced. The FTC found those policies effective in that specific situation, but has never endorsed those policies for the whole.

The industry’s self-regulatory efforts to date are in the right direction, but more needs to be done. The FTC will be issuing further guidance, but the principles outlined should provide the foundation for structuring business practices.

Key Takeaways and Comments

* Whenever self-regulation does not fulfill the expectations of all parties, authorities’ intervention should not be a surprise.

* The FTC’s decision in Herbalife’s case was thought to be peculiar to that company, but the FTC will be enforcing it across the industry in the U.S.

* Direct selling companies in the U.S. will need to take the necessary measures to comply with the Herbalife order and with the points made clear by the FTC Chairwoman.

* A U.S. direct seller’s dispute with the FTC always has the potential of impacting its businesses in other markets in terms of negative publicity and subsequent financial problems that may arise.

* Companies that do not have any operations in the U.S. can naturally do “watchful waiting“ as the U.S. FTC’s decisions cannot be enforced in other markets. Even if an intention arises to revise a local legislation, this will take a considerable time.

Note: Please click here to read the FTC Chairwoman Edith Ramirez’s speech.

The post The FTC’s Perspective and the Key Takeaways appeared first on The World of Direct Selling.

For more than 25 years, he has advised leading U.S. and foreign companies in the direct selling industry, including many members of the Direct Selling Association. He has served as legal advisor to various NYSE direct selling companies, including Avon, Herbalife, USANA, and Nu Skin. Jeff has lectured and published extensively on direct selling. He is a graduate of the University of Southern California Law School. Jeff is an active member of the State Bars of California and Oregon.

Guest Post by Jeff Babener
FTC v. Herbalife Settlement: First Take

Is there a proper blessing for the Czar?

Of course. May God bless and keep the Czar…  far away from us.

Fiddler on the Roof

A Settlement is Reached

On July 14, 2016, the FTC and Herbalife concluded a multiyear investigation with a Stipulated Settlement that both, brought the investigation to a close, and delineated a going forward set of rules by which Herbalife would conduct its direct selling business. Given the fact that Herbalife is one of the largest global direct selling companies, the direct selling industry is quite focused on the meaning of the settlement to the industry, both short-term and long-term. And given the immense power of the FTC, the direct selling industry will wonder how much regulation it can withstand before it suffers irreparable harm.

Executive Summary

1. Herbalife indicates a satisfactory result, and that it is comfortable that it can live and thrive with agreed restrictions.

2. The settlement is not legal precedent beyond Herbalife, nor binding on other direct selling companies.

3. Forward Looking: The FTC will likely argue, in the future, that the Herbalife restrictions should be viewed as a new legal standard and guidance for the direct selling industry. In the absence of significant resistance by direct selling companies, the direct selling industry, the Direct Selling Association and clarifying federal legislation, the possible onerous legal standards, that may be urged by the FTC, will be very damaging to the business of direct selling companies … and, another example of over regulation of small business, to the detriment of the $36 billion dollar industry and its 20 million entrepreneurial participants.



 A Settlement Unique to the Facts and Parties

On its surface, the FTC/Herbalife settlement is an agreement, restrictions and all, unique to the parties’ negotiations.

1. This was a negotiation between equally sophisticated and strong parties, best characterized as serious “horse trading.”

2. Although there was a $200 million fine,  Herbalife stock  rose by  nearly  $1 billion the same day, the fine represented a mere two weeks of global sales … and a longstanding major hedge fund short challenge, which depended on an FTC shutdown scenario, appeared to be seriously impaired, certainly short-term, and possibly long-term.

3. Both sides could claim victory. To Herbalife’s benefit, the FTC specifically omitted an allegation of pyramid in its press release, press conference, complaint and settlement document. However, the language of the “unanswered” Complaint (including a litany of accusations of earnings misrepresentations, paucity of positive earners, challenges to viability of the stand-alone opportunity, questioning of the “real world” market for product and other deceptive practices, etc.) and permanent restrictions of the settlement, allowed it to claim a major accomplishment. Obviously, Herbalife disputed the myriad of allegations, but was ready to move on. The corollary of the FTC “chest thumping” was that Herbalife could claim vindication and strength in the settlement, and that any “model” restrictions in the Stipulated Order were clearly in its comfort zone, and are only applicable to the U.S. market, which accounts for only 20% of global sales.

4. The FTC noted that it was spared, possibly, years of litigation, and likewise, Herbalife was spared the unknown risk of a preliminary injunction request or a long-term litigation “cloud” that could dramatically impact its business and stock value.

The Settlement is Not Legal Precedent

Most importantly, this settlement is not case precedent, it is not an FTC rule, it is not a statute and it is not even consistent with case authority or previous FTC public positions on legal standards for pyramid.

Although the Settlement focused on restrictions for compensation plan credit for personal use by distributors, no statute or adjudicated case has called out specific percentages of “retail mandates” or “restrictions on credit for personal use” as a specific element of pyramid case analysis. The leading case, Koscot, stated the legal pyramid standard as a requirement that commissions be based on sales to ultimate users. In the  most recent legal precedent in BurnLounge, the court affirmed the Koscot rule and went on to state that pyramid cases are decided by a fact-based analysis of whether or not purchases by distributors are merely incidental to the business opportunity, or otherwise stated ” is the primary motivation for distributor purchases a need for the product for resale or personal use exhibited by purchases in reasonable amounts, or is the primary motivation to qualify in the opportunity for rewards and recruit others to do the same.”

More than a dozen states have explicitly recognized that distributor purchases in reasonable amounts should be recognized as sales to ultimate users. Even in its most aggressive posturing in litigation, where it has asserted that 50% of sales should come from nonparticipants, the FTC has never suggested that credit for distributor purchases should be limited to one-third of purchases, i.e., that nonparticipant sales must be 67%. In fact, in its 2004 Advisory Opinion, the FTC recognized the validity of personal use and even suggested the potential merit of an MLM buying club concept.

The direct selling industry, for 50 years, has tracked compensation on wholesale movement of product, with the assumption (accompanied by consumer safeguards such as anti-inventory loading rules, buyback policies, retailing mandates) that product is either resold or consumed by personal or family use. If it doesn’t fit one of these categories, longstanding industry practices provide that it is subject to refund for 12 months after purchase.  However, implicit in the FTC’s approach in the Herbalife settlement is that the decades old approach of tracking commissions, based on wholesale movement of product, should be revisited and even rejected. No court decision, statute or regulation has ever challenged this standard industry practice.  Rather, the going forward preference of the FTC may be that compensation should be tracked to sales to nonparticipants or limited personal use purchases. This “turnabout” would represent a wholesale change throughout the direct selling industry.  Hopefully, the chasm between these two positions can be bridged in coming years.

There is another good reason to be skeptical that the FTC’s position in a negotiated settlement is the “new gospel” of direct selling. In its 2004 Advisory Opinion, the FTC stated that it has a regular practice of overreaching and “fencing in orders” in such situations:

With regard to your second question, the Federal Trade Commission often enters into consent orders with individuals and companies that the Commission has determined have violated the FTC Act. To protect the public from those who have demonstrated unwillingness to follow the law, these orders often contain provisions that place extra constraints upon a wrongdoer that do not apply to the general public. These ‘fencing-in’ provisions only apply to the defendant signing the order and anyone with whom the defendant is acting in concert. They do not represent the general state of the law.

Forward Looking…  Searching for New Paradigms in Direct Selling

Because Herbalife had undertaken analysis to support its public assertion that more than 70% of its members join to be discount purchasers, as opposed to pursuing the MLM opportunity, the company appeared receptive to go forward redefining such individuals as nonparticipant retail customers and accept a rule that limited credit for distributor personal use at one-third of purchases, or that the majority of overall company sales should be to nonparticipants. In other words, it was “comfortable in its own shoes.”

Only time and data, following adoption of a preferred customer classification, will demonstrate the validity and accuracy of the Herbalife analysis of primary “motivation” as a desire to purchase at discount. Herbalife will have the opportunity to seek to convert discount buying motivated distributors to the status of preferred customers, but it will be the decision of the distributor. In public communication, Herbalife has been clear that it is confident of its position that the majority of its members have joined for “discount buying” status.

As to its comfort level, said Herbalife Executive Vice President, Global Corporate Affairs, Alan Hoffman, in a July 20, 2016 Business Wire press release:

After more than two years of working with the FTC, I think we understand the terms of the settlement agreement very well. We would not have settled unless we had the greatest confidence in our ability to comply with the agreement and grow our business and we believe this will be proven out over time.

Obviously, many direct selling companies will not feel comfortable with the FTC position of disqualifying substantial personal use purchases for purposes of determining compensable sales volume. Whether or not other companies, if forced, can live with an increasing nonparticipant retailing mandate is an open question. And, when and how far the FTC will pursue their new approach is also an open question. And, what legislative relief industry organizations, such as the Direct Selling Association, will pursue is also an open question.

As to several settlement “model” requirements, they seem “in keeping” with the direction of both industry and regulatory trends to reexamine and fine tune company models:

1. Requiring reps to track sales to nonparticipant retail customer/ultimate users.

2. Avoiding earnings or potential “lifestyle achievement” hype.

3. Taking care to monitor that participants (nutrition clubs in the case of Herbalife) do not make losing investments.

4. Revisiting the extent and use of autoship to avoid inventory loading.

5. Capping the monthly amount of allowed purchases for personal or family use to avoid inventory loading.

The Gathering Storm for the Industry

Obviously, the industry applauded an amicable resolution for one of its leaders, Herbalife. Although Herbalife was comfortable with operating under new marketing rules, several of the rules, if applied to other companies, would be extremely onerous and challenging to their business and to models that have been successful in the marketplace for 50 years, and will view the restrictions as another example of government micromanagement of the small business sector that has, in fact, responsibly self-regulated, voluntarily, and already adopted wide-ranging consumer safeguard “best practices” ranging from anti-inventory loading to prohibitions on earnings misrepresentations to one-year buyback policies for inventory and sales support materials:

1. A requirement that only one-third of distributor purchases for personal or family use may be credited for computing sales volume for commission purposes.

2. Distributors are limited to a “cap” amount of monthly product purchases.

3. Autoship programs, which allow orderly distributor product purchasing, via monthly “standing orders,” are prohibited. (Nearly all direct selling companies have employed “standing order” options for decades and “standing order” programs are commonplace in both the commercial and retail sectors.)

4. Distributor fulfillment of minimum personal sales volume requirements are prohibited, or must be fulfilled by sales to nonparticipants… again, excluding credit for personal/family use consumption.

5. Total company commission payments are limited, in the absence of demonstration of 80% sales to the combination of nonparticipants and allowable limits (one-third) of distributor personal consumption purchases.

6. Beyond the historical “pyramid” basis of prosecution, the FTC will now prosecute direct selling companies for deceptive/unfair practices if they deem that the marketing program is likely to cause “harm” to participants. This standard is subjective and arbitrary and may include a myriad of accusations such as “low distributor earnings” or claims that companies overstate earnings expectations. In other words, no certainty for businesses. Question: What is “actionable harm?” Answer: What day of the week is it?



Going Forward

It is a reasonable hypothesis that the Herbalife settlement, in the short term, will not change the business model of other leading companies, without further regulatory or legislative action,  but it clearly creates regulatory uncertainty for all companies. And, it certainly will be timely for all direct selling companies to discuss a preferred customer program, retailing mandates and product tracking to ultimate users.

Herbalife has indicated that it will be able to live with the new restrictions, as the negotiated settlement was tailored to issues between Herbalife and the FTC. It would have made no sense to agree to terms that would interfere with the viability of business. However, if the cumulative new restrictions were forced across the direct selling industry, might the result be severe damage to the direct selling industry?  Absolutely. Can an industry be “over-regulated to death?” Absolutely. The FTC’s next move will be keenly watched, as will the efforts of the Direct Selling Association to look out for the industry, either in dialog with the FTC or introduction of federal direct selling legislation that mirrors the MLM legislation of many states.  It is definitely a “fork in the road” time.

For actual copies of FTC v. Herbalife court documents and press releases, please visit www.mlmlegal.com.

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