FTC Proposed Business Opportunity Rule

FTC Exempts MLM/Direct Selling from FTC Revised Proposed Business Opportunity Rule

By Jeff Babener, Copyright 2008

In April 2006, the FTC released a sweeping proposed change in its FTC Business Opportunity Rule. The proposal was immediately and strongly criticized by representatives of and experts in the MLM, Direct Sales, Direct Selling, Network Marketing and Party Plan industry. The process to a completed Rule was expected to last 18 months to 3 years. For extensive analysis, text of the actual FTC Proposed Business Opportunity Rule and ongoing updates, please visit www.mlmlegal.com.

During the following two year period, the FTC received more than 17,000 comments on its proposed rule, the majority of which were from companies, representatives and distributors in the MLM industry. The vast majority of comments raised serious concerns regarding the onerous and burdensome nature of the proposed rules as well as extending the scope of the rule to the MLM /Direct Selling industry. In addition, scores of members of Congress weighed in with concerns about the impact on a well-established industry that involved millions of home-based businesses.

On March 18, 2008, the FTC responded favorably to constructive criticism, and announced that it was seeking to modify the Proposed Business Opportunity Rule to exempt MLM companies. (As part of its explanation of MLM exemption, the FTC cited comments from the editor of www.mlmlegal.com, Babener & Associates.) The FTC issued a Revised Proposed Business Opportunity Rule for comment. The revised draft, announced with the intent of exempting MLM companies, is still flawed in that its wording may still inadvertently create applicability to many leading MLM companies because proposed "definitions" section 437.1(c)(3)(ii) may mistakenly include MLM/Direct Selling companies that assist in customer gathering on the web, in print, institutional or co-op advertising campaigns or other customer lead generation programs. However, the proposed rule represents a good faith start to narrow the scope of the Proposed FTC Business Opportunity Rule and invite comments from the public to assist in this process. At the very least, the FTC was unequivocal in its stated intent to exempt the MLM industry, noting in its public statement:

On balance, based on this record and its law enforcement experience, the Commission does not believe it is practicable or sufficiently beneficial to consumers to attempt to apply the proposals advanced in this rulemaking against multi-level marketing companies, particularly when considering the burdens upon industry. The Commission, therefore, has determined that at this point, it will continue to use Section 5 to challenge unfair and deceptive acts or practices in the MLM Industry.

The actual text of the FTC Press Release is set forth below and a link is provided to the actual language of the FTC formal Publication discussing its rationale, and Invitation to submit comments on the FTC Revised Proposed Business Opportunity Rule.

For Your Information: March 18, 2008

FTC Approves Federal Register Notice Seeking Comments on Revised Proposed Business Opportunity Rule

Commission approval of Federal Register notice: The Commission has approved the publication of a Federal Register notice seeking comments on a revised proposal for a new trade regulation rule governing business opportunities. Dating from 1978, the FTC historically has had a single rule covering two distinct types of offerings: franchises and business opportunity ventures. Many of the very familiar national fast-food restaurants and hotels, for example, are franchises, business opportunity ventures include vending machine routes, rack display operations, and medical billing schemes ventures. These ventures, unlike franchises, typically do not involve the right to use a trademark or other commercial symbol. Nevertheless, they do call for the opportunity seller to provide purchasers with locations for machines, or with accounts, or clients, and have been covered by the Franchise Rule.

In April 2006, the Commission proposed a separate Business Opportunity Rule that would cover just business opportunities ventures. Part of the proposal was to expand coverage to business arrangements that were not formerly covered by the Franchise Rule and to streamline disclosure obligations. (Business opportunities formerly covered by the Franchise Rule remain covered under an interim Business Opportunity Rule.) The revised notice announced today modifies the April 2006 proposal for the Business Opportunity Rule. The revised notice of proposed rulemaking (RNPR) will be published soon and is available now on the FTC’s Web site and as a link to this press release.

After evaluating the comments received on the April 2006 notice, the Commission has decided to issue an RNPR that is more narrowly focused than the April 2006 proposal. As proposed now, the Business Opportunity Rule would still cover those schemes currently covered by the interim Business Opportunity Rule, and it would expand coverage to include work-at-home schemes. The revised proposal, however, would not reach multi-level marketing companies or certain companies that may have been swept inadvertently into scope of the April 2006 proposal. The revised proposed rule also streamlines the requirement to disclose material information by eliminating requirements to disclose the number of cancellations and refund requests that a business opportunity seller receives or the litigation history of sales personnel.

The Commission will be accepting comments on the RNPR until May 27, 2008. Thereafter, rebuttal comments can be made by June 16, 2008.

The Commission vote approving publication of the notice was 5-0. (FTC File No. R511993; the staff contact is Monica E. Vaca, Bureau of Consumer Protection: 202-326-2245.

Link to Actual Text of FTC Revised Notice of Rulemaking on the Proposed Business Opportunity Rule, complete with detailed explanation and analysis and proposed revised language: PDF Document.