This week’s featured article is a brief compilation of industry news of significance from 2019. As you scroll down, I am sure you will agree with me that it was most certainly another exciting year for the industry with all the positives and the negatives.

I have also included articles from The World of Direct Selling that attracted much interest last year.

> Herbalife CEO Richard Goudis Resigns Over Comments He Made Before Taking the Job
> New Avon Names Laurie Ann Goldman CEO
> Stella & Dot to Exit European Market
> China Launches Campaign to Regulate Health Product Market
> Nerium Gets New Name
> Jeunesse Posts Record Year with $1.46B in Annual Sales
> Mary Kay Celebrates 50 Years of an American Icon – the Mary Kay Pink Cadillac
> LuLaRoe Founders Accused of Hiding Millions to Avoid Creditors

Most-Read Article in January on The World of Direct Selling:
What Direct Sellers Can Learn from the Corporate Training Industry (Vince Han)

> Amway Reports Sales of $8.8 Billion USD in 2018
> USANA Posts Another Sales Increase as China’s Direct Selling Clampdown Looms
> Avon Sees Revenues Decrease in Q4, Full Year 2018
> Herbalife Neared $5 billion Mark in 2018; Waits for Other Shoe to Drop in Goudis/China Probe
> Medifast Announces 87% Revenue Increase in Q4 and 66% for the Full Year
> Nu Skin Expands to Peru
> Skin Care Billionaires Rodan and Fields Return to the Teen Acne Market

Most-Read Article in February on The World of Direct Selling:
The 7 Giants’ 2018 Growth Review (Hakki Ozmorali)

> Fact or Fiction? Let’s Set the Record Straight – US DSA President
> Brazil’s Natura and Avon Confirm Deal Talks
> Nature’s Sunshine Reports $365 Million Sales for 2018, Up 7%
> Tupperware Parties: Suburban Women’s Plastic Path to Empowerment
> Two Mary Kay Executives Make Black Enterprise’s 2019 Most Powerful Women List
> Why Direct Sales Appeals to So Many Moms

Most-Read Article in March on The World of Direct Selling:
Common Pitfalls that Prevent Profitability in Direct Selling Start Ups (Dan Murphy)

> DSN Announces the 2019 Global 100
> Young Living Celebrates 25 Years of Global Growth
> Amway Disrupts Its Own Beauty Business, Launching 50 New Mobile Apps
> More Than 100 LuLaRoe Sellers Have Filed for Bankruptcy
> How Blake Mallen Capitalized on the Gig Economy Before It Was a Thing
> Brazilian Cosmetics Giant in ‘Advanced Talks’ with Avon
> Mary Kay Recognized by Forbes as One of America’s Best Midsize Employers 2019

Most-Read Article in April on The World of Direct Selling:
Marketing’s New Role to Keep A Direct Selling Company Relevant (Jonas Hedberg)

> Oriflame’s Co-Founder Jonas af Jochnick Has Suddenly Passed Away
> Nu Skin Named the World’s #1 At-Home Beauty Device System Brand by Euromonitor
> Tupperware Names CEO Tricia Stitzel Chairman of the Board
> AdvoCare Business Changing
> Founding Family Offers to Buy Out Oriflame
> It’s Official: Natura Buys Avon

Most-Read Article in May on The World of Direct Selling:
AdvoCare Abandons MLM: Uncertainty Returns to Direct Selling (Jeff Babener)

> WFDSA Announces Record-setting 2018 Direct Selling Business Results
> LG to Acquire New Avon North America
> US DSA Announces 2019 Awards Winners and Highest Performing Companies
> Natura’s Avon Acquisition Creates the First Latin American Beauty Powerhouse
> Retail Was Never in Our Plan and It Won’t Happen in Future Also: Frederic Widell, Oriflame VP
> Kirsten Dunst Is Making a Show About a Cult-Like MLM Company
> Amway, the Family Business that Became Global (Google-Translated Text)

Most-Read Article in June on The World of Direct Selling:
2019: The Year Direct Selling As We Know It Changed Forever (Brett Duncan)

> Happi Magazine Announces Top 50 Household and Personal Products Companies
> Canada DSA’s Recipients of the 2019 DSA Awards
> Amway Sues Sellers for Trademark Infringement, Faulty Product Distribution
> As India Hicks Closes Her Luxury Label, Is This the End of Tupperware-Party Shopping?
> USANA: China’s 100-Day Crackdown Has Damaged Consumer Confidence; Sales Drop by 15%
> Mary Kay Champions Business Excellence, Ethics and Social Responsibility, Reaps Rewards in Europe
> Nature’s Sunshine Announces New Global Leadership Structure and Appointments
> Pampered Chef Succeeds in Trademark Infringement Battle

Most-Read Article in July on The World of Direct Selling:
Five Ways the Direct Selling Industry Can Achieve Sustained Growth (Ben Gamse)

> New Amway CEO Shares Digital Vision
> doTERRA CIO Todd Thompson: Social Selling Is Taking off
> Executive Changes at Scentsy
> LG Closes $125M Acquisition of New Avon
> Coty and Younique to Part and Focus on the Development of Their Respective Strengths
> US Direct Selling Association CBD Memo: Ingestible CBD-Infused Products Violate DSA Code of Ethics
> “Tupperware-Style” Retail Makes a Comeback with 27% Growth in UK

Most-Read Article in August on The World of Direct Selling:
Why Are They Leaving Our Company? (Hakki Ozmorali)

> DSA Canada Responds to Globe & Mail Article
> Natura Lands in Asia and Starts Operations in Malaysia
> Tracy Britt Cool to Leave Pampered Chef to Start New Venture
> Rodan + Fields to Launch in Japan
> WorldVentures Expands to Brazil
> Nature’s Sunshine Announces Entry into CBD Market
> MONAT Expands into Europe with Its Launch in Ireland and Poland
> Amazon Challenges Amway, Modicare and Oriflame Ruling in Supreme Court

Most-Read Article in September on The World of Direct Selling:
Natura and Avon: Will This Acquisition Work for Both Sides? (Hakki Ozmorali)

> AdvoCare Will Pay $150 Million To Settle FTC Charges
> FTC v. AdvoCare: Enforcement Action Demonstrates Importance of Compliance Programs
> Uber Is Launching a New App That Matches Freelance Workers with Businesses
> Herbalife Announces CEO Succession Plan
> How Mary Kay China Is Trying to Stay Relevant with Younger Beauty consumers
> Beautycounter Appoints COO and CCO
> Origami Owl CEO Chrissy Weems Explores the Roots of a Successful Business
> USANA Announces Appointment Promotion of Walter Noot to Chief Operating Officer
> Oriflame to Focus on Wellness, Position as Healthy Lifestyle Brand: CEO Magnus Brannstrom

Most-Read Article in October on The World of Direct Selling:
FTC vs. AdvoCare: A Teachable Moment for Direct Selling (Jeff Babener)

> Neora Files Suit Challenging FTC’s Attempt to Change Direct Selling Laws
> Herbalife, Younique, LuLaRoe And Other MLMs Suddenly Under Fire
> LuLaRoe: From Startup to Over $1 Billion in Less Than 4 Years. Lessons and Growing Pains
> Tupperware Appoints Chris O’Leary Interim CEO
> U.S. Charges Two Former Herbalife Executives in China over Bribery Scheme
> UK DSA Announces 2019 Star Award Winners
> Jeunesse Enters Global Essential Oils Market

Most-Read Article in November on The World of Direct Selling:
AdvoCare, Neora, an Ever More Aggressive FTC! What Now? (Alan Luce)

> Kyani Founders Identified as Victims in Plane Crash
> Former New Avon CEO: Company Reneged on $1M Severance
> USANA Announces Retirement of Founder and Chairman, Myron W. Wentz
> Why Market America Is a Legitimate and Thriving Business
> US DSA  2019 Sales and Marketing Conference Reveals New Data on Direct Selling and Independent Work
> The 10 Beauty Brands That Defined the 2010s

Most-Read Article in December on The World of Direct Selling:
5 Keys to Communications Confidence in 2020 (Crayton Webb)

…..

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 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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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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Guest Post by Brett Duncan
2019: The Year Direct Selling As We Know It Changed Forever

I know. It has quite an ominous sound.

And then, it also seems a tad presumptuous and oddly grandiose.

Of course, it could also just be another click-baity, news-jacky headline whipped up by a consultant trying to drum up business ;-).

I guess all of the above is possible. But none of it can dismiss the point that 2019 may indeed be the year we look back and realize it all changed. Direct selling as we’ve known it will never be the same. And I think I’m OK with that.

There’s a quote I’ve been thinking about a lot lately: “the revolution you’ve always wanted never looks like what you thought it would.” Isn’t that the truth?!? We’ve been talking about the eminent changes coming to direct selling for several years now. And we’ve certainly seen the shifts roll out steadily during that same time frame. To pin a date on when “it all changed” is silly.

But I must say, after leaving this year’s US DSA Annual Meeting in Austin, I felt the difference like I never have before. It was something in the air. You could see it in people’s eyes. It became quite clear in the conversations. It wasn’t fear, but it want’s certainty, either. Companies and executives seem to be more open to anything and everything than ever before. Even if it denies what we’ve regarded as sacred in direct selling crowds for some time.

No one was talking about the changes that were coming; we were all talking about the changes that are happening right now.

Crazy Times in Direct Selling

The last eight weeks have been relatively crazy ones for our industry, even for direct selling. AdvoCare is moving into a single-level compensation structure after ongoing conversations with the FTC. Stream is selling its energy business to NRG. Avon, both old and new, is forming new alliances with companies all over the world. It’s a lot to digest.

On top of it all, companies are pioneering new ways to combat today’s most popular challenges. Some have found the best way to fight Amazon as a direct seller is to join them. Others have embraced an omni-channel existence, where direct selling is one way their product is taken to the market. Complicated compensation plans are being traded in for something that looks more like affiliate marketing and rewards programs. Even Amway has a CEO with a last name other than DeVos or Van Andel.

The times, they are a changin.’

As tempted as I am to ramble on in a puddle of speculation, I will resist. Instead, I’d like to look at the three forces that are causing the shift, and that have, in my mind, made 2019 the milestone year we will remember in the future. While none of us will agree as to the year the changes began (did they ever stop?), I do believe we can all agree that the change is unmistakably upon us in 2019. Here are the market forces that have made it so.

My goal in pointing out these rather obvious forces is not to exhaustively describe them as though they are new. Rather, I want to remind us all of what they are, so that we can take a fresh look at our new world through the lens of these three viewpoints. Sometimes taking a new look at what you’ve always known is the ultimate form of innovation.

Market Force #1 = New Regulations

No reader of this newsletter is a stranger to all of the updates in our regulatory world. There’s no need to rehash that here. The government forces at play have certainly changed how they think of direct selling. And it’s forcing the way we have to think about it, too.

When I think of regulations, I think of rules. And when I think of rules, I think of a game, or a sport. Every game has rules. It’s what makes the game fair, clear and competitive. The rules are actually what makes a game fun.

I’m a big football fan. In the NFL, a committee meets every year to suggest, discuss and vote on new rules and updates. Over the past few years, some significant decisions have been made, all in a spirit to make the game better. There have been pretty significant changes to how kickoffs will work in an effort to improve the safety of the game. They moved the PAT (point after touchdown) back several yards a couple years ago to make that part of the game more engaging (and boy, has that worked!). They’ve gotten more sensitive on pass interference to … well, I’m still not sure what they’re doing with that one!

As you can imagine, coaches and players alike have all kinds of opinions about every rule change. And there’s no shortage of their expression of these opinions, either. But I can promise you this: they adjust their style of play pretty quickly to adhere to the new rules. It would be foolish not to. Their success is dictated by how well they play the game within the confines of the current rules.

The rules of direct selling are changing. And it’s not those of us in the industry that are making the changes, for the most part. I personally don’t agree with all of the rule changes, and I bet you struggle with them, too. I find myself trying to figure how and when to fight back and appeal, and when to take note and adjust accordingly.

But here’s what I do know: the rules have most definitely changed. The term “game changer” is almost cliché and certainly misused, but that’s exactly what we are experiencing in direct selling due to these new regulations. The game has changed.  For me to play my best game, I better figure out how to play within the confines of those rules. Otherwise, I’m not even playing the right game!

It doesn’t help that the interpretation of the rules is murky right now. Where we want clear boundaries, we get “guidance” instead. Maybe that’s just the process. In the meantime, I know there are plenty of no-brainer areas where embracing the shift whole-heartedly would not only be prudent, but even opportunistic.

It really comes down to where we want to invest our best efforts. Do you want to spend your resources getting better at playing yesterday’s game, or preparing to play the new game?

Market Force #2 = The Consumer Marketplace

I think I’ve used the word “marketplace” more in the last year than I have in all the other years of my life combined. That’s because the marketplace is a powerful force. And it’s one that is begging direct selling to change so it can continue to be relevant for decades to come.

Even if the regulatory environment was not forcing certain changes, the consumer marketplace most certainly still would. And in many cases, the changes would be the same.

I’ve distinguished this as the “consumer” marketplace for reasons you’ll see shortly down below. I think of the consumer marketplace in these main areas:

1. The way people want to shop and buy.
2. The access consumers have to brands and options.
3. The way people want to interact with brands.
4. The shorter lifespan of success for any brand.

Firstly, the marketplace is telling us it wants to shop for and buy stuff in a new way. And it goes way beyond ecommerce. From curated subscriptions to marketplace apps to influencer marketing to so much more, the actual experience and psychology of shopping is changing. It’s not just about simple checkout processes and payment options. In a world with so many choices, what the consumer experiences during the buying process on an emotional level is just as important as the functional level.

Access to more brands, more products and more options has compounded with the onset of the Internet. And since access to brands has gotten easier, the quantity of brands has increased. It’s easier than ever to create new products and offer them to a market. And because there are so many options for so many specific products, building actual brands that connect has become more important than ever. When 30 different companies are trying to build a better mousetrap, it’s the mousetrap that finds a way to connect with me emotionally and align with my worldview that gets my vote, and my money.

Because the experience of shopping has fundamentally changed, and because access to the products I want is overflowing, the expectations I have as a consumer in terms of how I interact with a brand has also fundamentally changed.  Sure, social media has a lot to do with this, but it transcends social media. Simply “meeting expectations” no longer meets expectations. Consumers expect to be rewarded for their loyalty and patronage. We expect to be treated as a precious gift. In addition, consumers are just as interested in what their association with a brand says about them as what the product does for them.

Finally, with the added importance of the shopping experience, increased access and higher consumer expectations, you see a shorter lifespan for most brands. Of course, it’s not impossible to build long term brands right now; it’s just less likely. And that’s because consumers are constantly looking for new experiences, access to new brands and interactions that exceed their perpetually growing expectations. In a world where overnight sensations sometimes don’t even take a night to go viral, we also see brand lifespans shortening at an alarming rate.

There are other components of the consumer marketplace, of course. But to think about these four areas are enough to prompt some deep thought. Direct selling could claim both advantages and disadvantages in every area. Here are some quick advantages:

• Shopping Experience: the in-person, community-centric shopping experience could actually become more attractive to some shoppers.
• Access: we provide curated access to unique products, typically not available anywhere else, with a personal touch.
• Interaction: what’s more interactive than an Independent Distributor with a customer?!?
• Lifespan: direct selling is a great go-to market strategy. In a world where everyone is trying to figure out how to go to the market, could we have a secret weapon?

Now, let’s look at some disadvantages:

• Shopping: direct selling companies are notorious for creating complicated shopping processes, mostly due to components of their compensation plan, hostess perks, etc.
• Access: Distributors may not be willing to compete with a seemingly endless list of options and marketplaces (e.g. Amazon, eBay, etc.)
• Interaction: Direct selling companies have long relied on their Distributors to interact with consumers. Now, consumers expect more, and that’s new ground for many of us.
• Lifespan: To be honest, direct selling companies have always struggled a bit with this one. But in a world where the competition compounds every day, could that lifespan shorten even more?

How is your company addressing these four areas?

Market Force #3 = The Entrepreneur Marketplace

I actually believe this market force could be the most powerful of them all, and have the greatest direct impact on our industry.

It wasn’t long ago that direct selling wasn’t only the best gig in town, but it was just about the only gig in town. It seemed ridiculous that anyone could start their own business for only hundreds of dollars. When compared to options like franchises, direct selling was the hands-down winner.

In addition, there weren’t so many direct selling companies. Once I was convinced that direct selling was a great option for me to earn some more income, I had a relatively limited menu to choose from.

Not so anymore. First, the number of active direct selling companies continues to grow. Even if direct selling was the only option, there are now hundreds of options within that one option. I don’t think that’s a bad thing, but it has impacted how we position our opportunity.

Most importantly, direct selling is definitely NOT the only gig in town anymore. As you well know, the “gig” has evolved into its own economy now. The “free agent nation” has emerged. The side hustle has taken center stage. There are endless opportunities for today’s entrepreneur.

There are better resources to explain what the Gig Economy actually is and what it looks like today (take a look at ultimategigbook.com – it’s fantastic) than I can offer here. Suffice it to say that direct selling isn’t exactly the belle of the ball in this space right now. That sounds bad, but I think many of us are beginning to see that we could truly position ourselves as the Ultimate Gig. It will require some fundamental changes in how we approach this entrepreneurial segment, but we definitely have some unfair, and under-leveraged, advantages in our corner.

Let’s briefly take a look at a few of the factors we must consider when thinking about the Entrepreneurial Marketplace:

1. The entrepreneurial options are endless.
2. Most people aren’t looking to “start a business” anymore.
3. The ease of earning trumps the volume of earning.
4. Customer acquisition is now on the home office.

Amazon. Uber. Etsy. Freelancing. Virtual employees. Affiliate marketing. The list is endless in terms of how easy and accessible it is for anyone to find a way to be entrepreneurial. Whether you’re looking to strike it  rich starting a business, or just make $50 today to pay for dinner tonight, it’s pretty easy to do it. So where does direct selling stand out in a sea of entrepreneurial opportunities?

While direct selling companies keep promoting “business opportunities,” the Gig Economy keeps showing us just how many people aren’t interested in that. In fact, it may actually turn them off. Making an extra $300 a month isn’t typically considered “a business” by a normal person. Sure, it technically is a business, but that’s not how most people think about it. So why do we keep pushing it?

And since most people aren’t interested in starting a business, they definitely aren’t interested in investing in a business. As you compare yourself to the other options in the Gig Economy, ask yourself this: how many of them require an upfront purchase to take part in it? In other words, what is their “Starter Kit?” When choosing between a side hustle that’s free for me to start and one that costs $50, most people go with the free option without even considering the benefits of the $50 investment. What should direct selling companies be doing about this?

So, in a world where the entrepreneurial options are endless, and where “starting a business” isn’t that attractive, then it only makes sense that what most people are looking for is the easiest way to make that side income in a way that fits their schedule the best. The majority of your Distributors, and definitely those who choose an option outside of direct selling, are looking for the easiest, quickest, most streamlined and hassle-free way to earn a modest amount ($100?). And they also want to get paid for it immediately. Sure, there are still some who will realize that, “If working 3 hours got me $100, then I wonder what 10 hours could get me?” But that’s not most people.

And, by the way, direct selling has always been its best and most fruitful when you get a lot of people sharing a little bit of product. If you have lots of Distributors meeting a need by earning an extra $250 a month, you’ll have no problem developing a subset of leaders who can earn substantial incomes that would compete with a full-time job. But we can’t expect everyone to become a leader. I would go so far as to say we should shift our focus to generating the $250 monthly earners.

Finally, the role of customer acquisition is increasingly falling on the home office instead of the Distributors. This is completely new terrain for direct selling. You could easily argue it’s a foundational shift. The whole idea (simplified) around direct selling originally was that the home office would create the products, ship the products and mail the checks, and the Distributors would find the customers and make the sales. Not anymore. As we continue to compete with more and more entrepreneurial opportunities that actually don’t expect the entrepreneur to handle customer acquisition, we must realize how the expectations of the entrepreneurial mindset has shifted away from the traditional form of direct selling I described above. On top of that, the home office now has to find the budget to generate customer acquisition while still funding the rich compensation plans we’re known for.

How is your company attracting today’s entrepreneur? Do you spend your time trying to convince this growing audience of why your way is better? Or are you finding ways to align your business model with what this marketplace is telling you it wants?

Moving Forward With Confidence

So, it’s all here upon us, right now in 2019. The change we’ve been discussing for years is here. Does it look like you thought it would? More importantly, what will your company look like in response to it?

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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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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
AdvoCare Abandons MLM: Uncertainty Returns to Direct Selling   

The Answers are in the Shadows

In a legendary exchange about the genius of his music, Mozart noted that, if you are looking for the real music, you will find it in the silence between the notes.

On May 17, 2019, out of the blue, a 26-year-old Texas-based MLM/direct selling company, AdvoCare, respected in the industry for its business and products, announced, after “confidential talks with the FTC,” its only “viable choice” was closure of the MLM aspect of its business, with its attendant negative impact on the livelihood of all those distributors who worked hard to build downline sales organizations.

The Internet lit up.

MLM distributors decried betrayal, and they also may have wondered if this was merely step one to go directly into retail stores or online as Slick50 and Metabolife did after their MLM sales force created a market and brand.

Other leading direct selling companies were stunned. And distributors of those companies wondered, “Are we next?”

What happened? We may never know. Should the $30 billion MLM/direct selling industry be worried? With the power and leverage of the FTC over the fate of any one company it is important to understand as “best as possible” what happened here.

We only know one thing after the AdvoCare MLM abandonment: that uncertainty has surfaced again in the direct selling industry about the MLM model. And because this issue is existential for MLM/direct selling, it should be a priority for leaders in the direct selling industry.



AdvoCare Announces MLM Closure

In its May 17, 2019 Press Release, 26 year old AdvoCare upended its business model and, at least momentarily, caused the industry to ask if there was something afoot that could upend the entire industry direct selling/MLM model. This follows a similar momentary concern after the 2016 FTC Herbalife settlement.

AdvoCare Press Release

AdvoCare to Revise Business Model

New Compensation Plan to Focus on Direct-to-Consumer Sales

PLANO, Texas (May 17, 2019) – Today, AdvoCare International announces a revision of its business model from multi-level marketing to a direct-to-consumer and single-level marketing compensation plan. AdvoCare has been in confidential talks with the Federal Trade Commission about the AdvoCare business model and how AdvoCare compensates its Distributors. The planned change will impact Distributors who have participated in the multi-level aspect of the business. Those who currently sell only to customers will not be impacted and there will be no impact on Preferred Customers or retail customers’ ability to purchase products.

“Over the years, we have made many changes to the AdvoCare policies as the regulatory environment has shifted. Based on recent discussions, it became clear that this change is the only viable option,” says Patrick Wright, AdvoCare’s Chief Executive Officer… The company gave notice to its more than 100,000 Distributors on May 17 that, effective July 17, 2019, AdvoCare will revise the business model to a single-level distribution model, paying compensation based solely on sales to direct customers. The Retail and Preferred Customer programs will remain intact…

For the Industry: A Roller Coaster of Certainty and Uncertainty

Did the industry place too much reliance on its recent quiet period with the FTC? It is hard to say.

There has always been a cordial tension between the FTC and the direct selling industry. Each has had its view of an acceptable business model, and from time to time, they clash. The result has been a roller coaster of certainty and uncertainty for the direct selling industry.

In 1975, the FTC decided that the MLM model of Amway was a pyramid and pursued litigation against Amway for four years, ultimately resulting, in 1979, in the validation of the Amway model as a legitimate business opportunity rather than a pyramid. The favorable attributes of the Amway model, buyback policy, 70% rule and retail customer mandate, were then referenced for the next four decades by courts as the “Amway safeguards.”

After a nearly 20 year quiet period, the FTC and the industry were again at odds in the late 90’s and beyond regarding how they view the legitimacy of “personal use” by distributors as a legitimate sale to an end user per the universally recognized legal standard set forth in the seminal Koscot case. The uncertainty caused the industry to secure legislation in many states recognizing “personal use” as legitimate. To this date, the industry has failed to secure federal legislation on this point, although the U.S. Court of Appeals for the Ninth Circuit, in BurnLounge, rejected the FTC argument that personal use purchases should not count and gave a minor win to the industry.

The uncertainty continued, and, in 2016, the FTC successfully caused Herbalife to change its MLM model to give limited credit for personal use purchases. Other companies did not follow the Herbalife model and the tension continued. Riding high on the Herbalife settlement, the then FTC Commissioner Ramirez announced that there was a new “sheriff in town” and the tensions and uncertainty surfaced again as the industry felt that it was about to be upended.

(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 which specified that 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.

Following the 2016 Presidential Election, a new anti-regulatory climate set in and the tension and uncertainty subsided with the subsequent Acting Chairperson asking the industry to come to the table with the FTC as stakeholders, again accepting a “going  forward” FTC policy based on long established case authority and principles of government/industry collaboration rather than top down directives.

And then, out of the blue, comes the May 17, 2019 Press Release of AdvoCare abandoning its multilevel program, based on confidential discussions with the FTC and deciding that abandonment was its only “viable choice.”

And it is here that the roller coaster is again on the on again/off again track of uncertainty.

What next?



An Enigma Wrapped in a Mystery Wrapped in a Riddle

Why did AdvoCare capitulate and abandon its core business and its MLM distributors?

Doing the Right Things

Actually, it seemed like one of the least likely candidates. In fact, it seemed to be a poster child for adopting major consumer safeguards found in case authority and the DSA Code of Ethics.

1. It adopted the classic legal safeguards called out in case after case, all patterned after the famous Amway “safe harbor” rules, first noted in Amway’s successful litigation with the FTC in 1979 and heralded over and over in case authority.***

a. A complete inventory refund for terminating distributors for product purchased within 12 months of termination.

b. A prohibition on inventory loading and the adopting of the classic Amway 70% rule, prohibiting new purchases in the absence of use or sale of 70% of previously purchased product.

c. A five retail customer rule which conditioned payout of downline commissions unless distributors made at least five non-participant retail customer sales per pay period.

d. It followed FTC and DSA initiatives that encouraged and incentivized retail selling by adopting a preferred retail non-participant customer program that was subscribed to by thousands and thousands of preferred customers.

e. It published average earnings disclosures that exceeded most state and FTC standards.

***Of course, the assumption here is that AdvoCare lived up to those consumer safeguards. If the FTC had cogent information that the above promised consumer safeguards were not enforced or implemented, it would be a new game, and a new strong explanation for any pressure felt by AdvoCare management to make a statement like “we had no other viable choice”. On this point, since the discussions were “confidential”, the answer is unknown unless either the FTC or AdvoCare elaborates further.

f. Even one of the MLM industry’s harshest watchdog critics, BehindMLM.com, seemed favorably impressed in its 2015 AdvoCare review, a rare happening:

AdvoCare has one of the strongest retail focuses I’ve seen in MLM yet.

Affiliates are required to submit retail customer details to the company, with fixed numbers of retail orders required on an ongoing basis…. (“made at least five (5) retail sales to at least five (5) different customers (other than yourself) in each pay period”)

From time to time, AdvoCare may contact the customers listed on your Retail Sales Compliance form to verify that the sale took place as reported.

If you provide false or inaccurate information, your Distributorship may be suspended or terminated, at the sole discretion of AdvoCare.

Do note that I couldn’t find any information on how frequently or widespread AdvoCare verify submitted retail customer information.

Theoretically an affiliate could rig the retail requirement, but the hassle of setting up five bogus customers just to qualify for commissions seems hardly worth it.

You’d be far better off actually retailing AdvoCare’s products, failing which you probably should instead find a company whose products interest you.

AdvoCare’s product lineup is in the health and wellness niche and is quite robust. Price wise you’re going to have to compare with what’s available locally.

Given the retail commission requirements and years AdvoCare has been around, there’s a good chance you’ll find them to be competitive.

AdvoCare’s compensation plan as a whole seems pretty well balanced, offering upfront retail commissions, a three-level unilevel and expansion based on a rank generation and 0.75% infinitely at the Platinum, Double and Triple Diamond ranks.

Note that recruitment is required to advance in AdvoCare’s ranks from Gold 3 Star, however chain-recruitment is not an issue due to no mandatory purchase of product and/or incentives for recruiting affiliates who purchase product.

Any recruited affiliate orders do count volume wise, but at the end of the day an affiliate’s own PV requirements must be satisfied in order to qualify for commissions.

$500 PV to qualify as an advisor is far easier achieved through retail sales over the ongoing self-purchase of product.

Furthermore, AdvoCare employ a 70% rule on top of the retail customer requirements already in place:

Overrides, Leadership Bonuses and the 70% Rule AdvoCare pays Overrides and Leadership Bonuses, and other bonuses and incentives based on your representation that you have sold or consumed 70 percent of all products purchased by you.

If AdvoCare later discovers that you did not sell or consume 70 percent of such products, AdvoCare may deduct the amount of the Override, Leadership Bonus or other bonus or incentive previously paid from compensation due to you in subsequent pay periods, or AdvoCare may deny payment of any Override, Leadership Bonus or other bonus or incentive in addition to any disciplinary action that may be taken, including suspension or termination.

How strictly the above rule is adhered to is unclear, but at least on paper AdvoCare work to prevent inventory loading.

I’ll point out again that an affiliate purchasing $500 of product each pay period is hardly going to be viable for most affiliates. Ditto having a recruited affiliate purchase the same.

Nonetheless, I would encourage a prospective affiliate to ask their potential upline for a copy of their last few Retail Sales Compliance forms.

Check the details don’t look suss (I’d advise against calling any of the customers due to privacy reasons), and ask the upline what the customers ordered, how long they’ve been customers and perhaps how they became customers in the first place.

That should eliminate any suspicion of shenanigans with regards to the details on the form being fudged.

All in all with AdvoCare you’re looking at a stable company that’s been around for twenty-two years, a large product lineup to market and a retail-orientated compensation plan that pays deeply at the upper tiers.

If you’re interested in the products, have checked out their viability against what’s available locally and think you can carve out a customer-base to market to, AdvoCare might be the MLM opportunity for you.

2. It is true that it faced criticism by watchdog organization, TINA, a perennial industry critic, and in a Texas class action, that, like most MLM companies, a very small percentage of active distributors made significant income. However, the FTC standard for deceptive or unfair practices is disclosure, as opposed to the amounts of earnings by distributors. And, in the case of AdvoCare, the company annually published one of the most robust and transparent earnings disclosure charts. (And it should be noted that, if the negative litmus test for a direct selling company is the fact that few distributors earn substantial income, then virtually every major direct selling company for 60 years has been illegal. The fact is that this industry, like others, offers an opportunity as opposed to a guarantee.)

 3. It was praised in the U.S. and abroad for its fine line of products and its branding of sporting events and personages was outstanding.

So What Happened? Who’s to Blame? Who Knows?

Victory has a thousand fathers, but defeat is an orphan.

John F. Kennedy

The answers are completely speculative, but to the extent that they may be based on non-legal factors, then, the entire industry should be worried.

And the primary answer lies in becoming a target of the FTC and its position of leverage.

1. AdvoCare was carrying on, under pressure on two fronts: the FTC and class action litigation. Since 2017, AdvoCare has attempted to fend off a class action in Texas which accused it of a myriad of offenses, from pyramid to fraudulent behavior. This sort of litigation is extraordinarily expensive, terrible public relations and always speculative as to outcome.

Might the litigation have been averted? Perhaps. If the company’s arbitration clause in its distributor agreement had been ruled enforceable, the class action might have been averted. However, the request to enforce arbitration was denied and the matter thrust back into federal court.

One industry legal advisor with knowledge of AdvoCare offers this opinion:

AdvoCare did not help itself by not updating its distributor agreement to prevent the class action lawsuit that has contributed to its current state of affairs.

The arbitration provision in AdvoCare’s lawsuit was unenforceable because it let AdvoCare amend at any time with no prior notice and was not limited to prospective conduct. This allowed the plaintiff to successfully argue that the arbitration provision is illusory.

This analysis appears to reference the landmark Texas decision by the U.S. Court of Appeals for the Fifth Circuit, which struck down the “mandatory arbitration” clause for direct seller, Stream Energy, as unenforceable and illusory:

Under Texas law, a stand-alone arbitration agreement requires binding promises on both sides as consideration for the contract. “But when an arbitration clause is part of an underlying contract, the rest of the parties’ agreement provides the consideration.” Still, an arbitration agreement may be illusory if a party can unilaterally avoid the agreement to arbitrate. Here, Torres and Robison assert that the arbitration clause is illusory because Ignite could amend the clause “in its sole discretion” ….

It does appear that AdvoCare did ultimately update its arbitration clause, but post class action filing.

This prompted the same industry legal observer to opine:

It is a travesty what’s happened with AdvoCare. Almost all of its wounds appear to be self-inflicted.

Score one arrow in the quiver for FTC leverage.

2. Second non-legal arrow in the FTC quiver. One cannot underestimate the pressure on individual managers or owners when the FTC has the ability to threaten naming the individuals as well the company. Although entirely speculative, the above industry legal advisor offered a speculative opinion:

If you take AdvoCare’s public statement at face value then it is saying that any MLM comp plan is not a viable option. I think this was a fear-based decision in an attempt to ensure to the maximum extent possible that AdvoCare’s owners are immune from any potential fine from FTC as part of any potential settlement.

 Again, at best, this is speculative opinion. However, such a scenario is plausible in difficult legal circumstances.

3. Third FTC arrow in its quiver. The direct selling industry has long been critical of the FTC’s use of a temporary restraining order as its first litigation volley. It has sometimes been referred to as “trial by ambush.” In this scenario, the FTC walks into federal court ex parte (without the presence of other counsel) with a brief and motion that have been months in the preparation, requesting the court to temporarily shut the company down and to freeze the assets of both the company and its owner/managers. At once, the company finds itself out of business and also lacks access to its own funds to defend itself. Under such pressure, many MLM/direct selling companies have capitulated and entered into stipulated injunctions. This unique potential and historically employed leverage hangs like a “sword of Damocles” over every direct selling company, including AdvoCare. This makes negotiation very difficult.

4. Fourth FTC arrow in its negotiating quiver. The impact of an FTC suit on the branding, sales, marketing or public reputation of any company cannot be overstated. The recent FTC Herbalife settlement illustrates the pressure to achieve resolution by target companies. And, although AdvoCare is not at the same risk of exposure as that which may impact the stock price of a publicly traded company, the adverse publicity may easily be destructive of its brand and sales in the marketplace, i.e., need to move on.

5. We don’t know what we don’t know.

A Fifth speculative arrow for the FTC quiver:

This is new territory. Nothing like this has ever happened before to a 26 year old well established direct selling company. As they say in international intelligence circles, “We don’t know what “kompromat” (compromising materials)” the FTC has on AdvoCare. But when a company announces that scrapping its core marketing system is “the only viable choice,” eyebrows raise. What does that mean?

In the Absence of Clear Legislation, The Only Certainty is Uncertainty. What Next?

 The AdvoCare announcement of MLM abandonment has shocked the industry. Its public explanation of “after confidential discussion with the FTC, there was no other viable choice” raises a million speculative questions to which we may never know the answer.

We’re just dancing in the dark… Bruce Springsteen

 We can only know what we know and act on it. And this we know:

1. Nothing about the announcement changes the existing legal standards for pyramid vs. legitimate direct selling. Those standards weave their way from the Koscot case through Amway through Burnlounge. And the acid test is: Are distributor payments and commissions driven by recruitment and qualification in the plan, on the one hand, or sales to ultimate users.

2. Now is the time to support DSA dialogue with the FTC and also to support DSA sponsored federal legislation to provide clear explanation of the ground rules for legitimate direct selling, including recognition of the legitimacy of personal use by distributors as an end destination for product sales.

And if you are looking for life in a post FTC/Herbalife world, and in the absence of either capping credit for personal use (Herbalife) or abandoning your MLM altogether (AdvoCare), here are some common sense guidelines to create the strongest defense to your MLM program by clearly promoting anti-pyramid practices:

 1. 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.”

2. 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?

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

3. 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.

4. 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.

5. Track. Track. Track… flow of product to and use by the ultimate user.

After FTC v. Herbalife, 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. Although the FTC may wish to assert that the legal standard requires tracking to the nonparticipant retail customer, that assertion does not accurately state the case law in Koscot or BurnLounge, which speak in terms of compensation related to the sale of product to the ultimate user. The short answer: Track the flow and use of product to both nonparticipant retail customers and distributor personal/family use. If the FTC is desirous of a new legal standard, it will not achieve it by merely stating its position, but rather through case law, federal legislation or federal rule adoption. It is also worthy to note that more than a dozen states have adopted legislation recognizing personal use.

Either way, the time to start tracking is “yesterday.”

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