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.

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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.

Almost all major direct selling companies have defined “retail sales” to include sales to non-distributors, as well as sales to distributors for actual use or consumption (distributors like to use the products they sell too). Many regulatory officials, however, have maintained that the “mark of legitimacy” is found in the programs where primary sales revenue comes from sales to non-distributors, i.e. consumers.

As a theoretical goal, the regulatory position is admirable. The fact is that personal use in the direct selling business creates high sales revenue for many companies from the moment of their inception.

For many years after the 1979 Amway decision, a “live and let live attitude” prevailed between the MLM industry and regulatory community. Although periodic legal skirmishes occurred, the industry and regulators appeared to be content to “agree to disagree.” Instead, the focus on legal investigation was upon inventory loading, cash pyramids, phony products, and earnings hype.

The comments of a federal appeals court in a 1996 class action case involving a company called Omnitrition invigorated the debate on personal use. In that decision, which involved an interim ruling in the case, the federal appeals court questioned whether or not a network marketing company could be viewed as legitimate if its sales were not derived from nonparticipant customers (i.e. distributors). The language in the decision was heavily criticized by the MLM industry, and the Direct Selling Association (DSA), in fact, filed an amicus brief citing the importance of personal use in direct selling marketing programs. However, the decision stood firm. In the trial court’s ruling, the court recognized that products purchased for personal use by distributors constituted a retail sale in the same fashion that sales to nonparticipants would constitute a retail sale.

In the aftermath of the decision, both state and federal regulatory agencies were emboldened to sue or obtain consent decrees against network marketing companies which contain very restrictive requirements regarding recognition of personal use by distributors. State agencies were all over the board on their position. Some demanded 50 percent sales to non-distributors. Some demanded 70 percent sales to non-distributors. Some demanded 80 percent to non-distributors. Even the FTC awakened after 20 years of dormancy and demanded that more than 50 percent of sales be to non-distributors in various consent decrees.

The aggressiveness of government activity was alarming to the industry. The industry quickly marshaled forces, and in short order, at least four states adopted legislation specifically recognizing personal use as a legitimate end destination for products. Other states were likewise targeted for such legislation and the industry was of the belief that a trend would be started that ultimately would be recognized by all state and federal agencies. So strongly did the industry feel about it, that its leading trade association, the DSA, undertook consideration of a formal amendment to its ethics code which would recognize that, for purposes of a pyramid analysis, a retail sale would include sales to nonparticipants, as well as sales to participants for actual use or consumption.

Notwithstanding the ongoing debate on personal use, the industry seems to thrive in almost all states. These is no question; however, that the “personal use” issue is a thorny issue and one issue upon which the industry and regulators must carry on an earnest ongoing dialog to reach a consensus that protects consumers, distributors and network marketers.

Learn more about the multilevel marketing industry and personal use. Watch expert Attorney Jeff Babener’s videos:

What Is the U.S. and International Trend in Recognizing the Validity of Personal Use by Distributors in Pyramid Cases?

Is There a Message to the Direct Selling Industry on Next Steps after the Burnlounge Case on Personal Use?

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

Workplace Prospects:

– People who need to earn extra income

– People who are intrigued by new opportunities

– People who are in a similar line of work, like sales

– People who are high-energy and gregarious

Neighborhood Prospects:

– College students looking for extra money

– Stay-at-home moms/dads who are looking for extra money

– Landlords/tenants

– Members of Neighborhood Watch

– Retired people looking to supplement their income

– Members of community organizations

– People you commonly run into at the grocery store, post office, library…

Service-Provider Prospects:

– Diaper service delivery

– Dry cleaners

– Meter readers/electricians

– Exterminators

– Firemen/policemen

– Gardeners

– Housekeepers

– Postal employees

– Salespeople

Religious Organization Prospects:

– Minister/rabbi/priest

– Ministers of music

– Religious educational directors

– Youth workers

– Members of the religious organization

– Religious community outreach opportunities

Professional Prospects:

– Accountants

– Attorneys

– Dentists

– Doctors

– Nurses

– Hairdressers and salons

Athletic Prospects:

– Clubs

– Fitness centers

– Teammates

– Athletic partners

– Competing teams and their families

School Prospects:

– Alumni associations

– Co-students

– Parents of other children

– Teachers/PTA

Social Contacts:

– New and old acquaintances

– Friends

– Social media networks

– Website networking

– Online forums and groups

Organizations:

– YMCA

– Lodges

– Boy/girl scouts

– Volunteer groups

Other prospects who may be interested in joining your organization:

– Babysitter/child care center

– Bakery

– Banker

– Builder/contractor

– Carpet cleaner

– Department stores

– Druggists

– Florist

– Gift shops

– Health spas

– And plenty more

Solicit the Solicitors:

– All door-to-door or party plan salespeople

– Other direct selling representatives

Relative Prospects:

– Distant relative

– In-laws

– Extended family members

Newspaper Prospects:

– People who are actively looking for part time work

Potential customers and distributors are everywhere. We hope that this extensive list will help to give you some ideas of where you can start to begin growing your network marketing business.

Just remember, you’re lucky to make one sale out of 10. Don’t get discouraged. Embrace rejection. Hard work and confidence will go a long way in your success!

Want to know expert MLM Attorney Jeff Babener’s advice on finding new leads? Watch this video:

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.

As you can see, a new and easy-to-use navigation bar helps visitors easily find what they are looking for, whether it be the blog, articles, videos, MLM resources, conference pages, or one of the many other resources we have on our website for direct sellers.

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

Let us be your guide through the education we provide throughout our website in the form of articles, videos, and MLM resources. Or, let us be your guide in helping you start or run your direct selling company; we advise in all of the legal aspects of starting up or running MLM, network marketing companies.

Our new homepage offers you quick and easy-to-find links so that you can easily contact us, request a free MLM Startup Manual, gather information regarding our next MLM Startup Conference, or subscribe to our new newsletter, MLM News Global.

The new MLMLegal.com homepage still features new content, this time under its own, clearly-outlined section.

Scroll down some more to find exactly what you were looking for, such as the free MLM Startup Manual. The articles inside are clearly outlined for you. And, you can click the image or the text links to be taken to the online form request page.

What else is important?

A scrolling carousal provides you with images taken of past conferences and directs your eye and mouse directly to the page where you can find out when the next conference takes place.

And now, you can find all of Jeff Babener’s videos (over 100!) 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! The Law Library is where you can 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 our new homepage! The end of each page has links to related material, or other related pages that we suggest that you visit while you’re here! On the homepage, we suggest that you visit the MLM Startup Conference page, request a FREE copy of the MLM Startup Manual, and visit our Contact Us page.

And finally, at the bottom of the pages at our new website are links to our social networking pages! Follow us on Twitter! Friend us on Facebook! Like our Facebook page! Visit us on LinkedIn or Google+! There are lots of easy ways to stay in touch with us and now we’ve made it easy for you to find us online!

We thought a lot about you when redesigning our new website. We hope you find it more manageable yet still famous for being full of lots of useful content!

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 February 25 & 26, 2016 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.

Our huge newsletter subscriber list of MLM independent consultants will enjoy this week’s video that discusses ‘Do Incentives Increase Sales? How Worthwhile Are Consultant Incentives?’ Expert Business Consultant and MLM Attorney Jeff Babener answers this question. Do incentives help you increase your sales? Watch this video to find out and comment below!

The company profiled in this week’s newsletter is The Fuller Brush Company. With a celebrated history that reflects over a 100 years of excellence, the Fuller Brush Company is one of the iconic names in American business. Read more about this MLM company in this week’s newsletter archive.

Like all other weeks, there is the latest scam news as well. Check out the company names popping up on MLM scam alert sites:

• Ariix Review: Affiliate restrictions & complex pay plan
• 3×9 Millionaire Machine Review: $435 million & terrible math
• ProfitShare 63 Review: French Ponzi reboot
• USFIA offices raided, SEC granted TRO
• Darryle Douglas ordered to surrender Zeek database
• iFunding Connect Review: $25 a month cash-gifting
• Speak Asia’s Harender Kaur wanted by Interpol
• Familia Unitas Review: $20-$200 a month recruitment scheme

What else is new in the direct selling industry this week? Check out all the top news stories that you are missing by not getting our newsletter in your inbox! Check out MLM News Global and sign up for our free e-newsletter! Cancel at any time. NO SPAM!

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.