- When the DSA invites a speaker they should listen to what gets said.
- FTC Chairwoman Ramirez reminds the MLM industry that, indeed, Herbalife will have a new business model.
- New “guidance” for the MLM industry is outlined by Chairwoman Ramirez.
I always liked the word unambiguous. It is not often used in conversations, and even more rarely in conversations about MLM companies, their policies or practices. On October 25th, FTC Chairwoman Ramirez was unambiguous in her remarks to the Direct Selling Association (DSA), remarks that portend a future with an FTC attuned to the risk and harm foisted on consumers in the guise of an MLM business “opportunity.” While the FTC has yet to release its guidance for MLMs, a commitment made in conjunction with the Herbalife (NYSE:HLF) settlement, Chairwoman Ramirez laid out the framework.
First, she kindly complimented the DSA’s industry “self-regulation,” as I suppose might be expected from an invited speaker. She described their efforts as ” steps in the right direction,” recognized they “established a mechanism to handle complaints about the practices of member companies,” complimented “the willingness it has shown to continue to work on and improve the Code” and noted “plans to take further steps next year to bring greater transparency to the industry.” She certainly was more kind than I would have been, given the inconsistent gobbledygook messaging regularly promulgated by the DSA – particularly responses to my criticisms, which have been in line with the FTC enforcement record, pyramid scheme case law, and (I can now add) the Chairwoman’s October 25 remarks.
However, when it comes to self-regulation, Chairwoman Ramirez recognized “more needs to be done.” She calls for “self-regulatory initiatives to improve compliance and level the playing field” and when it comes to greater industry transparency “this work is far from finished.” But let’s face it, the DSA has been ineffective at industry self-regulation, giving awards to members who end up closed for operating a pyramid scheme and/or accused of misrepresenting their product, the business opportunity or both. Self-regulation versus self-interest? Which direction does the evidence show the DSA leans toward?
The core message that Chairwoman Ramirez delivered falls into two key areas: accurately representing the business opportunity and compensation, driven by sales to real consumers (not simply distributor purchases). Below I insert sizable quotes from her remarks.
Accurately Represent the Business Opportunity:
- Earnings claims, regardless of whether they are express or implied, are highly relevant to consumers in making their investment decisions. In fact, we find that earnings claims are often the single most decisive factor in those choices. So it should be no surprise that the FTC takes earnings misrepresentations very seriously.
- Practically speaking, this means that multi-level marketers should stop presenting business opportunities as a way for individuals to quit their jobs, earn thousands of dollars a month, make career-level income or get rich because in reality, very few participants are likely to do that.
- The fact that most MLM participants do not earn substantial incomes is not new. The low incomes received by most MLM participants is something that the DSA itself acknowledged more than a decade ago.
- It is time that MLM income representations matched the income reality of the majority of multi-level marketing participants.
- Now some of you may be thinking that what I am saying does not apply to you because you do not make income misrepresentations and you prohibit your distributors from making income misrepresentations. However, simply prohibiting your distributors from making income misrepresentations is not enough. MLMs must take reasonable steps to monitor and ensure that participants are not misleading others about the business opportunity.
Real Sales to Real Customers:
- A legitimate multi-level marketer must be focused on, and must pay compensation that is based on, real sales to real customers, not wholesale purchases by its sales force.
- You can find the concept embodied in Commission decisions reaching back more than forty years, like the 1974 Holiday Magic opinion, which stressed the importance of basing multi-level compensation on actual product sales rather than on purchases by recruits.
- As a practical matter, what does it mean for a multi-level marketer to base compensation on real sales to real customers? There are four aspects of this core principle that I want to highlight: First, a legitimate MLM must be focused on real customers; Second, a legitimate MLM opportunity must be based on sales that are both profitable and verifiable; Third, a legitimate MLM does not use targets or thresholds that are met by mere product purchases; and Fourth, the compensation paid by a legitimate MLM must be tied to retail sales.
- Simply put, products sold by a legitimate MLM should be principally sold to consumers who are not pursuing a business opportunity. For good reason, the law has always taken a skeptical view of paying compensation to someone based on the presumed “internal consumption” or “personal consumption” of recruits who are pursuing a business opportunity.
- An MLM that pays compensation based on claimed sales that do not generate a net profit for the individual making the sale, or that cannot be verified as sales, cannot reasonably be characterized as based on “retail sales.”
- Third, a legitimate MLM should not use targets or thresholds to satisfy eligibility for compensation or rewards that are met by mere product purchase
- I will highlight one in particular: at least two-thirds of the compensation paid by Herbalife must be based on sales to retail customers or preferred customers, not on consumption by business opportunity participants.
- Under the Herbalife order, the company is prohibited from imposing any requirement that a business opportunity participant purchase a minimum quantity of products.
- It also prohibits business opportunity participants from joining an automatic-shipment or similar program involving standing orders of product.
- If at least 80% of Herbalife’s wholesale revenue is not accounted for within these categories, the order imposes a cap limiting the total amount of compensation Herbalife can pay to its participants.
There are remarkable aspects to this speech. First, one has to wonder if ever in FTC history a Chairperson laid out for an industry the legal parameters for that industry’s fundamental business model. She uses the term “legitimate MLM” or “legitimate multi-level marketer” no less than thirteen times. She uses the word “must” fifteen times.
Chairwoman Ramirez also showed remarkable restraint. For example, instead of complimenting the DSA she could have pointed out how they have resisted defining what constitutes multi-level marketing, “everybody has their own definition of multi-level marketing;” uses the term “income” without recognizing the expenses incurred and, hence, the potential for financial loss; misrepresented the BurnLounge decision that (ala the DSA) “the Court affirmed that compensation in a multilevel marketing business must be primarily based on the sale of products and services to the ultimate consumer, whether or not that consumer is also a seller of the products” (it did not); published a for-hire consultant’s report that misrepresents decades of pyramid scheme cases; and recently actively lobbied for H.R. 5230. Inferable from her remarks, H.R. 5230 obfuscates the distinction between a customer and a distributor (and thus relieve distributors of any true retail sales obligation), and strongly misconstrues what legitimate multilevel marketing would be about. Of course, she did point out that misrepresentations are not uncommon in this industry.
Article Source: SeekingAlpha.com