Front loading generally refers to a process in which a MLM company, or a sponsoring distributor, encourages a new distributor to purchase far more product than is commercially reasonable under the circumstances. Often the “push” is explained to the recruit as necessary to qualify in the plan. This is an unacceptable practice is often one indicia of a pyramid scheme.

On the other hand, virtually all regulatory agencies recognize that a purchase of an “at cost” sales kit is an acceptable practice in the mainstream of leading direct selling companies. Such mandated kits are typically in the $50-$100 range. They generally entail “hard copy” or online supply of sales and marketing materials as well as ongoing sales and marketing materials updates for a year. Typically the mandated sales kit does not include product and generally a company offers an optional deluxe kit that may include product. Such an optional kit, which is often referred to as a “fast start” kit, may contain several hundred dollars of product. This is not unusual. Although the same regulatory standards on upfront mandated purchases are applicable to party plan companies as they are to other companies, it is not unusual to see party plan companies mandate a beginning starter kit that contains a wide array of products, with a price tag several hundred dollars. Regulatory agencies are very liberal in their view of such mandated purchases in party plan companies because party plan companies are so overwhelmingly retail oriented and the movement of product to retail customers is the norm, and not the exception, for party plan companies.

Sign up FREE for our newsletter, MLM News Global, and keep updated on industry news, scams, video highlights, and relevant articles.

Learn more about the network marketing business at www.mlmlegal.com and www.mlmattorney.com.

If you are interested in attending the Starting and Running the Successful MLM Company conference visit our conference page, view our speaker list, or get more details. All executives/owners of direct selling companies are welcome to attend. Call 800-231-2162 to register.

Our next Starting and Running the Successful MLM Company Conference takes place October 22 and 23, 2015 in Las Vegas. View our conference flyer and speaker list online. Participate in our Innovation Campaign for your chance to receive TWO FREE TICKETS to attend our next conference.

If you’re reading this blog post and the conference dates above have passed, check our website for the current conference dates.

Visit us at www.mlmlegal.com to learn more.

By Jeffrey A. Babener

© 2019

(First Published in World of 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. (World of 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.

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.

See Original FTC Advocare Documents:

FTC v. Advocare Complaint

FTC v. Advocare Stipulated Order for Permanent Injunction and Monetary Judgment

FTC v. Advocare Press Release and Blog Announcement

Jeffrey A. Babener, of Portland, Oregon, is the principal attorney in the law firm of Babener & Associates. For more than 30 years, he has advised leading U.S. and foreign companies in the direct selling industry, including many members of the Direct Selling Association. He has served as legal advisor to various major direct selling companies, including Avon, Amway, Herbalife, USANA, and NuSkin. He has lectured and published extensively on direct selling and many of his writings will be found at mlmlegal.com, of which he is Editor. He is a graduate of the University of Southern California Law School, where he was an editor of the USC Law Review. Post USC Law, he served a one-year term appointment as a law clerk to Hon. David W. Williams, U.S. District Court, Central District of California. He is an active member of the State Bars of California and Oregon.

Read the article and supplemental material at www.mlmlegal.com.

Visit us at www.mlmlegal.com to learn more.

MLM Expert Attorney, Jeff Babener offers ten FTC vs. Vemma litigation bullet points.

On August 17, 2015, the FTC filed a complaint in U.S. District Court in Arizona, seeking a permanent injunction against Tempe-based Vemma International Holdings, Inc., a long-time direct selling marketer of health-related products. The FTC was successful in obtaining a temporary restraining order, which shut the company and froze its assets. Further proceedings for a hearing on a preliminary and permanent injunction and other relief were set to the future.

Such a scenario has been a common approach for the FTC. The most recent actions resulted in permanent injunctions against BurnLounge and Fortune Hi-Tech Marketing. For a summary of the most significant federal actions during the past few decades, please see:

Herbalife: What Short Sellers Missed on the Way to the Press Conference…

Jeffrey Babener (2013)

The primary accusation against Vemma is that its program focused on recruitment rather than sale of product to the ultimate user, thus rendering the program a pyramid scheme and a deceptive practice under FTC legislation. In addition, the FTC has charged that Vemma is deceptive in its earnings representations.

FTC vs. Vemma Litigation Bullet Points:

1. (a) This case affirms the BurnLounge standard requiring emphasis on sales to ultimate users, which includes nonparticipant retail customers and personal use in reasonable amounts. Primary motivation for distributor purchases should be destination to ultimate users and not to qualify in the plan for compensation.

See: BurnLounge Appeal Decision: Guidance on Pyramid v Legitimate MLM and the Role of Personal Use in Pyramid Analysis

Jeffrey Babener (2014)

(b)       Contrary to some industry comment, autoship is not under attack, but rather the method of its promotion and implementation and amount, which suggests the primary motivation for purchasing is not for sales to retail customers/ultimate users or reasonable amounts for personal use, but rather to induce purchasing to qualify for commissions in the plan.

(c)        A similar analysis is applicable to up-front, fast-start packages.

2. The FTC alleges several accusations that Vemma is not complying with the BurnLounge standard, and, thus is a pyramid.

(a)       Emphasis not on use or retail but purchasing to qualify.

(b)       Distributors are told to give away product.

(c)        Little evidence of retailing or emphasis on retailing or teaching or training to retail.

(d)       Up-front emphasis on buying fast-start packs of $500-$600, plus sign up for $150 per month autoship to qualify for commissions, rather than servicing an actual need.

(e)       The FTC asserts that the Vemma program emphasis was about distributor purchasing and getting recruits to do the same, rather than sale of product in reasonable amounts for the needs of retail sales and personal use by distributors.

(f)        And the FTC no doubt had complaints from parents of college students, and parent lawyers, for targeting vulnerable college age students with promises of fast wealth from working “the system” of buying and recruiting. The FTC complaint focused heavily on accusing Vemma of abuse by targeting young individuals. Clearly, this is a sore point for the FTC, and it has been a concern of some industry observers even prior to the FTC case. The last time this criticism was made was when Equinox and Trek Alliance were shut by the FTC for the same reasons. In a way, this action is Equinox redux.

3. The FTC does not condemn, nor attack the MLM model (nor personal use), but rather goes out of its way to call out Vemma practices, which it contends makes Vemma an illegitimate pyramid. (See the FTC press release and complaint for FTC’s highly pejorative characterization of the facts.)

“…an alleged pyramid scheme, Vemma Nutrition Company, that lures college students and other young adults with the prospect of getting rich without having a traditional 9-to-5 job.”

‘Rather than focusing on selling products, Vemma uses false promises of high income potential to convince consumers to pay money to join their organization,’ said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection.”

4. Vemma is accused by the FTC of deceptive earnings claims, potentials and hypotheticals as to how distributors could earn substantial income. Vemma published an earnings disclosure, but it was inadequate and deceptive to show the entire picture by limiting disclosure to earnings of active distributors rather than disclosing earnings of all individuals who signed up, of which the vast majority had no income.

5. Autoship: Rumors of its demise are exaggerated. In the future, autoship will continue as a form of orderly ordering… the legal key will be “tracking” how that product is consumed or sold to ultimate users. After the Vemma case, all other cases will demand “tracking” evidence to determine what will clearly become cases that are “fact driven.”

6. As the FTC v. Vemma action unfolds, the outcome will be “fact driven” on the issue of “primary motivation” for distributor purchasing. The FTC has made it clear that it believes that the facts show that Vemma operated a “recruitment” machine that targets college age students with promises of wealth for merely using the system to “buy and recruit” rather than “sell and use,” i.e., per BurnLounge, the product was incidental to the opportunity. The FTC’s complaint does its best to present a factual picture that the Vemma program implementation and distributor purchasing patterns are dominated by “recruitment and qualify” motivation rather than sales to be used by “ultimate users,” whether they be outside retail customers or distributors for personal use.

7. Of course, Vemma will argue a completely different characterization of the facts. Vemma will be obliged to prove the opposite. The “facts” will determine the outcome.

If the FTC allegations on incomplete earnings disclosure are correct, the FTC has a point that merits correction… But certainly not a shut down.

If the FTC is factually supported that distributor purchases are “dead ended” to garages and basements or given away, then there is a real pyramid problem. 

However, if Vemma can demonstrate that distributor purchases actually make their way to “ultimate users,” whether retail customers or personal use in reasonable amounts, then the wholesale ordering mechanisms of fast start packages and autoship subscriptions are not really a challenge for pyramid analysis.
The entire direct selling industry has been offering fast start packages and autoship ordering for a half century. If product is making its way to a destination to be used by ultimate users, then a program is a legitimate direct selling/MLM program, and not a pyramid.

8. How will the facts play out? Without extensive discovery, it cannot be determined at this stage. (Presumably, in its sealed filing, the FTC provided significant fact scenarios to support its position). However, if extensive discovery is needed at this point, a temporary restraining order and preliminary injunction seem inappropriate on the pyramid issue, particularly for a company, Vemma, whose roots, including its predecessor company from which Vemma was “spun out,” New Vision, go back almost 25 years. Nevertheless, this is a reality of this matter. Historically, the FTC has done a good job on the “fact gathering” even though it has been wrong on or misstated the state of pyramid law. (It was roundly rebuked by the U.S. Court of Appeals for the Ninth Circuit for its stated legal position that distributor “personal use” should not be considered in pyramid analysis.)

9. How long will this litigation process take? Had the FTC merely asked for injunctive relief and a preliminary injunction, Vemma would be in a stronger position to see through the litigation. However, the fact that the court ordered an asset freeze and appointed a receiver does not bode well for Vemma. And although a preliminary injunction hearing was set for a very short period of time after the temporary restraining order, case history suggests that most companies, including Vemma, are not prepared to present factual testimony at a preliminary injunction hearing on short notice. The net result is that companies often stipulate to continue the temporary restraining order for months while they gather evidence. And the remainder of the litigation may go on for months or years all the while that a company is shut down and not in control of its assets. Similar scheduling scenarios for companies such as BurnLounge, Fortune High Tech Marketing, Equinox, Trek Alliance, spelled a death knell to the future of those companies, all of whom became “dead man walking.”

In the last two decades, MLM companies, which have been subject to a receiver and asset freeze at the commencement of FTC litigation, have not emerged “alive.” If Vemma survives the process, it may be viewed by some as an outlier. Unless Vemma can immediately compile a mountain of evidence to refute the FTC fact allegations on “product movement,” it is more than an uphill battle.

10. Lessons learned for the future for MLM companies… and for which they should start “yesterday:”

(a) Track product to its final destination. Bottom line, is that companies should be able to document that product makes its way on to and is used by ultimate users.

(b) Marketing emphasis should always be on product first, and opportunity second.

(c) Employ procedures to avoid inventory loading.

(d) Employ procedures to mandate and guarantee retailing.

(e) 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.”

(f) Do not boldly target demographic markets that the FTC might view as vulnerable to hype and abuse. Such groups may be young people or poor populations.

(g) Do not play fast and loose with earnings disclosures. To be transparent, always indicate the percentage of new sign ups who have no earnings, i.e., what percentage of new distributors actually make money.

In FTC vs. Vemma, who owns the facts?

BurnLounge set the standard for years to come. The decision in case after case, including FTC vs. Vemma, will be “fact driven“… is distributor behavior driven by product sales to the ultimate user or is it driven by recruitment?

In the end, he, who owns the facts, will prevail.

Stay Tuned.

For detailed analysis of the Vemma case and an actual copy of the FTC vs. Vemma lawsuit, please visit www.mlmlegal.com 

Jeffrey A. Babener, of Portland, Oregon, is the principal attorney in the law firm of Babener & Associates. For more than 30 years, he has advised leading U.S. and foreign companies in the direct selling industry, including many members of the Direct Selling Association. He has served as legal advisor to various NYSE direct selling companies, including Avon, Herbalife, USANA, NuSkin, etc. He has lectured and published extensively on direct selling and many of his writings will be found at www.mlmlegal.com , of which he is Editor. He is a graduate of the University of Southern California Law School, where he was an editor of the USC Law Review. Post-USC Law, he served a one-year term appointment as a law clerk to the Hon. David W. Williams, U.S. District Court, Central District of California. Mr. Babener is an active member of the State Bars of California and Oregon. He has served as trial counsel in numerous direct selling cases in federal and state courts for 30 years.

If you are interested in attending the Starting and Running the Successful MLM Company conference visit our conference page, view our speaker list, or get more details. All executives/owners of direct selling companies are welcome to attend. Call 800-231-2162 to register.

Our next Starting and Running the Successful MLM Company Conference takes place October 22 and 23, 2015 in Las Vegas. View our conference flyer and speaker list online. Participate in our Innovation Campaign for your chance to receive TWO FREE TICKETS to attend our next conference.

If you’re reading this blog post and the conference dates above have passed, check our website for the current conference dates.

Sign up for the MLM News Global newsletter for top headlines, news stories, scam alerts, videos, articles, and more information on the network marketing industry.

Visit us at www.mlmlegal.com to learn more.

Multi-level marketing is a diverse and varied industry, employing many different structures and methods of selling.

Although there may be significant differences in how multi-level marketers sell their products or services, core consumer protection principles are applicable to every member of the industry. The Commission staff offers this non-binding guidance to assist multi-level marketers in applying those core principles to their business practices.

The FTC offers 18 common questions about MLM and running a direct selling business.

1. What is direct selling? What is multi-level marketing?

Direct selling is a blanket term that encompasses a variety of business forms premised on person-to-person selling in locations other than a retail establishment, such as social media platforms or the home of the salesperson or prospective customer.

Multi-level marketing is one form of direct selling. Generally, a multi-level marketer (MLM) distributes products or services through a network of salespeople who are not employees of the company and do not receive a salary or wage. Instead, members of the company’s salesforce usually are treated as independent contractors, who may earn income depending on their own revenues and expenses. Typically, the company does not directly recruit its salesforce, but relies upon its existing salespeople to recruit additional salespeople, which creates multiple levels of “distributors” or “participants” organized in “downlines.” A participant’s “downline” is the network of his or her recruits, and recruits of those recruits, and so on.

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

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

1 This document is focused specifically on MLM practices that may violate the FTC Act. It does not address other types of unlawful structures that do not involve the right to sell a product or service, such as chain referral schemes (sometimes called “chain letters”) and Ponzi schemes.

3. How do MLMs with unfair or deceptive compensation structures harm consumers?

READ MORE.

Visit us at www.mlmlegal.com to learn more.

Ring the bells that still can ring

Forget your perfect offering

There is a crack in everything

That’s how the light gets in

Leonard Cohen… Anthem

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

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

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

How we arrived at this dialogue…

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

Read the full article at MLMLegal.com.

Visit us at www.mlmlegal.com to learn more.

Everything dies baby, that’s a fact.

But maybe everything that dies someday comes back.

Bruce Springsteen, Atlantic City

By Jeff Babener, Copyright 2017

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

The contrasting messages:

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

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

Came floating on a lemon leaf

Flying in on a jasmine wind

The Band’s Visit, Broadway Show, 2017

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

(1)      The former chairperson “termed out.”

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

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

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

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

Point/Counter-Point: Contrasting Punch Lists

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(a)      Low startup costs;

(b)      Administrative and logistical support from their companies;

(c)      Promotion of efficiencies in the marketplace for friends and families and consumers;

(d)      Varied and diverse products and services;

(e)      Innovations in selling using internet and social media and technology.

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

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

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

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

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

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

(d)      Does the FTC assume or believe that every multi-level company is a pyramid scheme? Responded Ohlhausen, “The answer to that question is also no…we recognize the direct selling model has a lot to offer the marketplace and consumers.”

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

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

To read the full article, visit mlmlegal.com.

Visit us at www.mlmlegal.com to learn more.

Executive Summary: The legal environment and the accepted business model of leading direct selling companies has been relatively stable for 50 years. That equilibrium was upset by the regulatory proposals of a former FTC commissioner to upend that environment with new arbitrary rules that lack a basis in case authority or legislation…creating confusion in today’s direct selling market place. H.R. 3409, a mirror of many established state anti-pyramid statutes and the language of long adopted case authority, is intended to return predictability and stability and certainty to that market.

Like a poem poorly written

We are verses out of rhythm

Couplets out of rhyme

In syncopated time

Paul Simon, The Dangling Conversation

How We Got Here …Talking Past One Another

Creating Uncertainty and Confusion in an Established Market

He was born on third, but thought he hit a triple.

In July, 2016 the FTC concluded an investigation and settlement with Herbalife, without formal prosecution or litigation. No finding of wrong doing was made and no finding of “pyramid.” A substantial fine was paid. More significantly, Herbalife was obliged to radically change its MLM operating model to an extent that differentiated it from most other leading direct selling companies.

Industry observers postulated that the FTC had achieved by settlement a result that it could not have achieved through protracted litigation. And so why the result? Many experts, who follow the industry and FTC, understood the dynamics of why a publicly traded company, in the midst of a multi-year short seller attack (where its stock had spanned a volatile range of $27 to $80 over a four year period) might accede to onerous terms to bring an end to a cloud of uncertainty over its business. Many would argue that it was just a prudent move at a particularly vulnerable point of time in the financial markets.  Interestingly, the fine paid was eclipsed by the surge in market cap and stock valuation as a result of the settlement, a fact that did not elude Wall Street.

Herbalife may have prevailed financially, but the FTC was playing “long ball” in terms of its long term legal position. Would the bevy of operating restrictions carry over to a change in the legal environment for the entire direct selling industry? Was the FTC emboldened to approach the direct selling industry as if it had just changed the direction of direct selling law unilaterally by settlement as opposed to achieving a change in the law by persuading a court to change the rules?  Absolutely. Did it really change direct selling law? Well, sometimes history is written by the victor, whether correct or not. Or maybe that’s for the historians.

Post FTC/Herbalife Settlement, former FTC Chairwoman, Edith Ramirez, in her October, 2016 presentation to the U.S. Direct Selling Association, announced a vision for a new FTC paradigm outlook on legitimate direct selling that was totally at odds with decades of case authority, state legislation and operating models of a 50 year old industry. To many observers, her position seemed to be drawn from “whole cloth” and fashioned as a “top down” bureaucrat “take it or leave it” style, i.e., “that’s the way it is, live with it!,” and “we know better than you…too bad.” Her position stunned CEOs of major direct selling companies. (The anxiety was heightened by another long time, and industry criticized, tactical practice of the FTC, referenced in the industry as “trial by ambush,” in which the FTC filed for a temporary restraining order and asset freeze at commencement of suit…leaving a company without any funds to defend itself….another issue for another day…)

My Way or the Highway…Bending the Arc of Direct Selling History

Her new theory of legitimate (vs. pyramid) direct selling was premised on a percentage analysis of non-participant consumption (perhaps mandating as high as two-thirds requirement to meet the FTC’s new standards), i.e., that the acid test for pyramid was demonstration of consumption by non-participants rather than the 40 year case standard established in the famous Koscot case, demonstration of consumption by the “ultimate user,” which could be either a non-participant or a participant….in one “fell swoop” distributors who used product became “second class” ultimate users and direct selling companies were on notice that their model, one that long recognized personal use and one that the FTC as late as its 2004 Advisory opinion recognizing personal use, was in jeopardy.

Almost by fiat, she announced proposed upcoming FTC guidance (as of 2017, not yet issued) that would require complete overhaul of the model of many leading direct selling companies:

(1)      She renounced use of the famous Amway Safeguard 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.

(2)      She redefined the famous Koscot standard to require compensation to upline to be based on sales to the nonparticipant retailer customer rather than the Koscot’s language, ultimate user, effectively making distributors “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 operating restrictions imposed on Herbalife in its recent settlement.

(4)      She essentially described a new legal standard, the percentages test, an arbitrary new rule in which upline distributors were 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 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.

In the absence of “inventory loading,” almost all of the new restrictions on long standing industry “practices” had never been of particular concern in 40 years of cases or robust legislation at the state level.

All in all, a Molotov cocktail was thrown into the garden of direct selling occupied by icons like Avon, Mary Kay, Amway, etc.

Confusion Gives Birth to H.R. 3409? … Time for Clarity

Nature abhors a vacuum…

Markets abhor uncertainty…

It was, as if the former Commissioner was talking right past those companies and models that had marshalled an important American economic channel for decades. Actually, right past case history and precedent.

A $36 billion dollar industry had lived with and understood court guidelines for many decades, but the Chairwoman proposed to upend 40 years of legal precedent to bend the arc of direct selling history.

Did industry leaders feel ambushed?  Well, that is a “charged” word…but, yes.  Direct Selling executives were rooted in the stability of historical case authority and state legislation respecting the role of personal use and rooting legitimacy in the Koscot standard, rewards must be related to sales to ultimate users (which includes personal use in reasonable amounts by distributors), the Amway standard, which asks companies to mandate that distributors achieve some level of retail sales, adhere to the 70% rule which prohibits reorders unless distributors have resold product or used it for personal use in an amount of at least 70% and offer a reasonable repurchase policy for repurchase of inventory of terminating distributors, and the BurnLounge standard that rejected the FTC argument against recognition of the validity of personal use and opted for a case by case factual analysis of “primary intent” of distributor purchasing rather than a lock step rigid rule.

Was it a wholesale rejection of legal precedent and legislative standards? Probably. Did it veer away from standards carefully formulated in famous case precedents of Koscot, Amway, BurnLounge? Yes. Did it part company with the FTC’s own 2004 Advisory Opinion accepting the validity of “personal use” recognition, all the way to the point of even suggesting that the concept of MLM buying clubs was commendable?  With all due respect, Yes. Did the position even conflict with the BurnLounge deposition testimony of the FTC’s own economist, who recognized the validity of personal use? Yes. Did the Commissioner’s position ignore the clear and growing trend in at least a dozen states where legislation called out the recognition of distributor personal use as a valid end destination to the ultimate user? Yes. Again, respectively, this state trend was missed altogether. (Actually, the Direct Selling Association points out that at least 21 states have adopted anti-pyramid legislation that also mirrors the anti-inventory loading/repurchase requirements seen in H.R. 3409.) Whether or not this omission was merely an oversight, who knows?

A close point by point FTC “fact check” is worthy of a read and a cup of coffee:

Fact Checking the FTC’s New Legal Guidance 

Jeffrey Babener, 2016

For those of a more studious nature, check out the detailed analysis on the evolving legal standards in case authority (including Koscot, Amway and BurnLounge) and at the legislative level:

BurnLounge Appeal Decision: Guidance on Pyramid v. Legitimate MLM and the Role of Personal Use in Pyramid Analysis

Jeffrey Babener, 2014

Also see legal analysis of the FTC punch list of operational restrictions arising from the Herbalife settlement:

FTC v. Herbalife: Post-Settlement Legal Guidance for the Direct Selling Industry

Jeffrey Babener, 2016

Anxious is the understatement for the business environment promoted by Chairwoman Ramirez. Her position on legitimacy challenged the models of virtually every direct selling company. And with the foregone expectation that an even greater regulatory regime would inherit the White House in November, 2016, there was an expectation of “but wait there’s more, not less, regulation coming…so live with it.”

And then “poof,” the totally unexpected happened in the November, 2016 election. An anti-regulation President was elected with the opportunity to nominate a new majority of the FTC; the designated head of a “deregulation” task force was named, the largest shareholder of one of America’s leading direct selling companies; and within months of the election, the term of FTC Commissioner Ramirez came to an end.

And thus uncertainty replaced anxiety in the direct selling industry…which brings us to the legal and business rationale for pending H.R. 3409, denominated the Anti-Pyramid Promotional Scheme Act of 2017…for the first time in history, proposed federal anti-pyramid legislation:

Two Different Views of H.R. 3409…the Next Challenge

Can you hear me now?…the Verizon guy…

Pending before Congress is H.R. 3409, a bi-partisan bill entitled the Anti-Pyramid Promotional Scheme Act of 2017.

It is the first of its kind at the federal level. Interestingly, anti-pyramid statutes have been enacted in almost all states for half a century, and specific anti-pyramid laws that are almost identical to proposed H.R. 3409 have provided guidance for more than 20 years in more than a dozen states.

However, no federal anti-pyramid statute has ever appeared on the books. The FTC Act Section 5 broadly prevents “unfair or deceptive practices,” and yet it has been the principal vehicle for anti-pyramid enforcement other than the SEC and U.S. Department of Justice, whose mandate is to prosecute fraud, securities fraud and securities violations.

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

Now, does that sound any more controversial than the “mother and children protection act of _____.”  Well, guess again. Opponents of H.R. 3409 see a wolf in sheep’s clothing. They see it as a bill that seems innocuous on its face, but that is really intended to rob the FTC of its flexibility to chase after any pyramid scoundrel by actually defining the parameters of a pyramid rather than allowing the FTC to employ a vague statute, without specificity, to chase after direct selling businesses with assertions that their practices are “deceptive and unfair.”  In other less democratic countries, critics refer to such styles of governance as “a government of ‘men’ as opposed to a government of ‘laws.’”

The bipartisan sponsors of H.R. 3409 and the direct selling industry, led by the Direct Selling Association, assert that the legislation is anything but “flim flam.”  And quite honestly, a close look at H.R. 3409 does make it difficult to believe that it is anything other than robust consumer protection legislation…and that the “boogey man” is not hiding around the bend, ready to pounce on the innocent consumer. In fact, H.R. 3409 comes down like a sledge hammer on scams and schemes:

(1)      It condemns inventory loading;

(2)      It calls out as evil pyramid headhunting recruitment schemes;

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

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

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

If there is any new concession to the industry, it is that, in the course of protecting the consumer, H.R. 3409 also codifies case authority and state legislation in recognizing the legitimacy of reasonable personal use by distributors as being a sale to an “ultimate user.”

And there lies the rub…the parties are talking past each other…and in the words of Larry David’s grandmother…everyone is farmisht (confused as to what is the state of the law for legitimate direct selling).  It is difficult to imagine that anyone could cogently argue that “uncertainty” is a good thing for a 50 year old channel of distribution in the U.S. H.R. 3409, at the very least, provides a good starting template for input from all groups of good will, consumer groups, the FTC, Congress, the States and the direct selling industry. Perhaps, even the President, who has served as a spokesperson for at least two MLM companies, will place this issue on the Executive Branch anti-regulation task force agenda.

Why H.R. 3409? … Just One More Reason…Time for Clarity and Certainty in the Markets

It is hard to stand on shifting sands.

In the absence of some definitive resolution, the collision of the Ramirez FTC paradigm and the half century model of direct selling and 40 years of federal case authority and state legislative authority produces nothing but operational paralysis for a $36 billion industry and its 20 million participants.

Proponents and opponents of H.R. 3409 may debate ad infinitum on the goals of protecting the consumer or protecting the rights of direct selling distributors. But, a very clear unenunciated reason for passage of H.R. 3409 is that the overreaching positions of the FTC have created total uncertainty in the marketplace, and H.R. 3409 brings clarity and synchronicity to actual case authority and a clear federal standard that allows “business to be business” again. H.R. 3409 bursts the bubble of confusion.

Jeffrey A. Babener, of Portland, Oregon, is the principal attorney in the law firm of Babener & Associates. For more than 30 years, he has advised leading U.S. and foreign companies in the direct selling industry, including many members of the Direct Selling Association. He has served as legal advisor to various major direct selling companies, including Avon, Amway, Herbalife, USANA, and NuSkin. He has lectured and published extensively on direct selling. He is a graduate of the University of Southern California Law School, where he was an editor of the USC Law Review, followed by an appointment as a law clerk to the U.S. District Court for the Central District of California. He is an active member of the State Bars of California and Oregon.

Visit us at www.mlmlegal.com to learn more.

The FTC and the Direct Selling industry are clearly of the same opinion of the basic goal that the direct selling industry should prosper through effective and ethical practices. However, FTC Chairwoman Edith Ramirez emphasized new legal standards that would abandon a 40-year old gold standard, the Amway Safeguards Rule, and that would also upend and call into question decades of industry accepted business practices.

Briefly, the Chairwoman argued for:

1. Abandonment of reliance on the Amway Safeguards Rule as a key test for legitimacy.
2. Effectively creating a new legal standard patterned after those requested by the FTC in the FTC/Herbalife settlement that, in reality, may upend decades of industry accepted practices and rewrite 40 years of court legal standards.
3. The existing Court standard derives from:

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

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

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

1. On the FTC wish list for a new paradigm for legitimacy is:

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

(2)  Redefining Koscot to require compensation to upline to be based on sales to the nonparticipant retail customer rather than the ultimate user.

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

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

(b)    Autoship to distributors should be prohibited.

(c)    Monthly activity volume requirements may not include any purchases by distributors.

(d)    Tracking of performance activity connected to wholesale purchasing should be banned.

Leading MLM industry expert Jeff Babener takes a closer look at what this means for the direct selling and multilevel marketing industry. Read the full article: Fact Checking the FTC’s New Legal Guidance

Visit us at www.mlmlegal.com to learn more.

Portland, Oregon (PRWEB)April 15, 2016

MLM News Global newsletter offers recent news, videos, company profiles, and timely articles. The e-newsletter contains the top news stories from the network marketing industry, the most recent MLM scam alerts, timely articles on the direct selling industry, and so much more. Keep up-to-date on top MLM news headlines or to hear about the latest MLM scam alerts and pyramid scheme accusations. The timely headline reporting will keep subscribers up-to-date on stories that affect everyone in the network marketing industry. In addition, important press releases, directly from MLM/network marketing/direct selling, party plan companies, keep subscribers current on trends and direct selling company developments.

Subscribe and look forward to exclusive videos that laser-focus on industry-educational topics, such as distributor education, industry Q&A, direct selling executive interviews, MLM startup, and pyramid schemes.

The MLM News Global newsletter features industry-related articles in every issue, featuring MLMLegal.com’s perspective on FTC rulings, Burnlounge, Herbalife, Vemma cases, and more.

MLM News Global also highlights featured articles, from industry experts, on MLM industry-related topics, such as pyramid schemes, compensation plans, recruiting, lead generation, consulting, legal analysis, software, and more.

The MLM News Global Newsletter is presented by industry educator, MLM legal expert, and network marketing business consultant and lawyer, Attorney Jeff Babener.

Sign up today to receive valuable MLM, network marketing, direct selling content, an imperative to anyone in the direct selling industry.

Unsubscribe at any time. We guarantee a NO SPAM POLICY!

Check out our Archives for past issues.

The Starting and Running the Successful MLM Company conference will be held May 20, 2016.

How do you find out more information?

Visit the new website:

http://www.mlmlegal.com

Visit the blogs:

http://mlmlegal.com/MLMBlog/

http://mlmattorney.com/blog/

Contact MLMLegal.com: 503-226-6600 or 800-231-2162

Conference Information: The day will begin at 9:00AM and end at 5:30PM, then from 5:30PM-8:30PM there will be one-on-one time with the speakers. For more information visit our website or call 800-231-2162/503-226-6600. Registrations are taken exclusively by phone and questions are always welcome.

Presented by one of the most trusted individuals in direct selling and MLM, Jeffrey Babener, Editor of http://www.mlmlegal.com.
About Attorney Jeffrey Babener: Conference Host and Chairman, Editor of http://www.mlmlegal.com, as well as the leading direct selling attorney in the United States – With over 30 years of experience as a direct selling attorney, Jeffrey Babener has advised leading companies in the MLM/Direct Selling industry, ranging from Avon to Nikken, to Herbalife, to Melaleuca, to USANA, and to Excel Communications, Nerium International, plus many more. He has been published in national magazines such as Money, Inc., Atlantic Monthly, Entrepreneur magazine, Direct Selling News, Direct Sales Journal, Success magazine, Money Maker’s Monthly, among countless others. He’s authored several books, including his most popular Network Marketing: What you should know. Mr. Babener has chaired more than 70 national conferences on direct selling.

Learn how to receive two COMPLIMENTARY tickets to attend the next Starting and Running the Successful MLM Company Conference by visiting the MLMAttorney.com.

View the press release at PRWeb.

Visit us at www.mlmlegal.com to learn more.

Portland, Oregon (PRWEB)April 14, 2016

Come visit the new and improved MLMLegal.com! This is the first major renovation of MLMLegal.com. MLMLegal.com’s new face is easy to navigate and full of valuable and educational content, pertinent to direct sellers. And Babener & Associates is working on updating more pages throughout 2016.

A new and easy-to-use navigation bar helps visitors easily find what they are looking for, whether it is the blog, articles, videos, MLM resources, conference pages, or one of the many other resources available on the website for network marketers.

The main homepage image was provided by expert MLM Attorney himself, Jeff Babener, while on a trip to Europe. These beautiful mountains provide the metaphor “Let Us Be Your Guide.” Let the Law Office of Babener and Associates, MLMLegal.com, guide clients through the sometimes difficult MLM industry and its legal climate. As experienced network marketing attorneys, who have been in the industry for over three decades, and who represent companies such as Melaleuca, Avon, Herbalife, NuSkin, USANA, Nerium, Excel, and Team National, our firm has the experience and credibility to help direct selling companies navigate the direct selling industry.

“Let us be your guide” through education provided throughout the website in the form of articles, videos, books, and MLM resources. Or,” let us be your guide” in helping to startup or run your direct selling company; Babener & Associates advises in all of the legal aspects of starting up or running MLM, network marketing, direct selling companies.

The new homepage offers quick and easy-to-find links so that visitors can easily contact Babener & Associates, request a Complimentary MLM Startup Manual, gather information regarding the next MLM Startup Conference, or subscribe to the newsletter, MLM News Global.

The new MLMLegal.com homepage still features new content, such as headline news and relevant articles, this time under their own, clearly-outlined sections.

Scroll down the homepage to find more educational video content and request a complimentary copy of the MLM Startup Manual.

What else is important?

A scrolling carousal provides visitors with images taken of past conferences and directs the eye and mouse directly to the page where one can find out when the next conference takes place and who will be included as expert speakers.

And now, visitors can find all of Jeff Babener’s educational MLM videos (over 140 videos) in one location, the homepage. …Right along with Mr. Babener’s most popular industry articles.

And don’t forget about the rest of the MLM, network marketing, direct selling content on MLMLegal.com. Use the Law Library to find all of Mr. Babener’s articles, federal and state cases, MLM law in 50 states, MLM business articles, IRS 911 Publication, and so many more article index pages that can be easily navigated.

Hint: Each new webpage now has related video and page content at the end of each webpage.

As does the new homepage. The end of each page has links to related material/videos, or other related pages that we suggest visitors look also to enjoy while at MLMLegal.com.

And finally, at the bottom of each webpage are links to social networking sites. Follow MLMLegal on Twitter. Friend MLMLegal.com on Facebook. Like the Babener & Associates Facebook page. Visit Babener & Associates on LinkedIn or Google+. There are lots of easy ways to stay in touch and now it’s made it easy to find and follow Babener & Associates/MLMLegal.com online.

MLMLegal.com and Babener & Associates thought a lot about visitors when redesigning the new website. MLMlegal.com is now more manageable yet still famous for being full of lots of useful content.

Potential attendees to the Starting and Running the Successful MLM Company conference are welcome to visit the conference page, view the speaker list, or get more details online. All executives/owners of direct selling companies are welcome to attend. Call 800-231-2162 to register.

The next Starting and Running the Successful MLM Company Conference takes place May 20, 2016 in Las Vegas. View the conference flyer and speaker list online. Participate in the Innovation Campaign for a chance to receive TWO COMPLIMENTARY TICKETS to attend the next conference.

Sign up for the MLM News Global newsletter for top headline news stories, videos, articles, and more valuable MLM, network marketing, direct selling content, an imperative to anyone in the direct selling industry.

The Starting and Running the Successful MLM Company conference will be held May 20, 2016.

How do you find out more information?

Visit the new website:

http://www.mlmlegal.com

Visit the blogs:

http://mlmlegal.com/MLMBlog/

http://mlmattorney.com/blog/

Contact MLMLegal.com: 503-226-6600 or 800-231-2162

Conference Information: The day will begin at 9:00AM and end at 5:30PM, then from 5:30PM-8:30PM there will be one-on-one time with the speakers. For more information visit our website or call 800-231-2162/503-226-6600. Registrations are taken exclusively by phone and questions are always welcome.

Presented by one of the most trusted individuals in direct selling and MLM, Jeffrey Babener, Editor of MLMLegal.com.
About Attorney Jeffrey Babener: Conference Host and Chairman, Editor of MLMLlegal.com, as well as the leading direct selling attorney in the United States – With over 30 years of experience as a direct selling attorney, Jeffrey Babener has advised leading companies in the MLM/Direct Selling industry, ranging from Avon to Nikken, to Herbalife, to Melaleuca, to USANA, and to Excel Communications, Nerium International, plus many more. He has been published in national magazines such as Money, Inc., Atlantic Monthly, Entrepreneur magazine, Direct Selling News, Direct Sales Journal, Success magazine, Money Maker’s Monthly, among countless others. He’s authored several books, including his most popular Network Marketing: What you should know. Mr. Babener has chaired more than 70 national conferences on direct selling.

Learn how to receive two COMPLIMENTARY tickets to attend the next Starting and Running the Successful MLM Company Conference by visiting the MLMAttorney.com.

See the Press Release.

Visit us at www.mlmlegal.com to learn more.