|An historic opportunity faces the network marketing industry. With a Republican Congress and a Republican President who is empowered to appoint FTC Commission members, the industry should be in a position of strength to reverse several years of assault on the legitimacy of "personal use" in the MLM model by the FTC.||
Would you rather
Former FTC official humorously making the case for FTC regulation instead of states' attorneys general.
It has been approximately seven years since the obscure language in a U.S. Court of Appeals decision prompted the FTC to commence a string of cases challenging the structure of MLM programs that did not derive more than 50 percent of income from sales to nonparticipants. This so-called "attack" on personal use has fueled much concern in the industry and caused many leading companies to perceive a cloud of uncertainty over their head.
During these years, the principal spokesperson for the industry, the Direct Selling Association, has been very timid on this subject. Only recently has the Direct Selling Association, at the request of leading commentators, considered amendment of its code of ethics to recognize the legitimacy of "personal use" and to initiate dialog with the FTC, and to consider lobbying for federal protective legislation on this subject.
Although recent discussion with the FTC have not been fruitful, the DSA has finally reluctantly agreed to examine amendment of its code of ethics to recognize the importance of personal use by MLM companies, as well as to consider introduction of legislation in Congress to provide some relief and certainty to MLM companies. Now is the time for corporate executives of leading network marketing companies and their distributors to press the DSA to embolden its position and to support any protective legislation in Congress that may arise during the next year.
THE FTC RULES
The FTC made its first full scale assault on the MLM model, accusing Amway of being an illegal pyramid scheme, and thus, a "deceptive trade practice" under FTC federal legislation. From 1975 to 1979, the FTC and Amway were engaged in litigation, climaxing with a historic loss of the FTC in 1979. In a landmark administrative law decision, an FTC administrative law judge ruled that Amway was a legitimate business opportunity as opposed to an illegal pyramid scheme based on three primary consumer safeguards: (1) a reasonable buyback policy for terminating distributors; (2) the 70% rule, which prohibited purchases of new inventory before old inventory had been sold or used; and (3) the ten retail customer rule, which required sales to ten customers. (Interestingly today, the Amway 70% Rule defines a retail customer to include purchases for personal or family use, or sales to nonparticipants).
The FTC v. Amway case became known for its "Amway safeguards," the general rules honored by courts, legislators and enforcement agencies to uphold legitimacy of MLM type organizations. The FTC was quiet on this subject for the next twenty years.
In the aftermath of odd language in a civil case against an MLM company, Omnitrition, in 1994, the FTC began a new assault. In the Omnitrition case, the U.S. Court of Appeals for the Ninth Circuit in language known in legal circles as "dicta," i.e., language unnecessary to the ruling in the case, challenged the concept of personal use by MLM distributors as not fulfilling the mandates for retail sales in evaluating pyramid schemes versus legitimate direct selling. A new generation of FTC officials were emboldened to revisit the legitimacy of the MLM model.
From 1996 through and into the new millennium, in a series of FTC filings involving such companies as Fortuna Alliance, World Class Network, JewelWay, Futurenet, Equinox and 2Xtreme, in a step-by-step and case-by-case assault, the FTC challenged the MLM model and the Amway safeguards.
THE NEXT FTC CHALLENGE
THE CURRENT ENVIRONMENT
The assault on the MLM model by the FTC has occurred over a several year period. Unfortunately, it has been virtually unresponded to by the direct selling industry. And, who is the proper party to speak out on behalf of the industry and to lobby the FTC, congressional and legislative agencies, the Direct Selling Association?
The Direct Selling Association has among its members the largest of direct selling companies in the world, including Avon, Tupperware, Amway, Mary Kay and Shaklee. Among it members, the MLM model is the dominant model for sales. No other entity, neither a group of lawyers, individual companies, nor individuals are in a position to dialog with the FTC or to have the standing to seek administrative, enforcement or legislative relief.
To its credit, the DSA spoke out in an amicus brief, although unsuccessfully, in the Omnitrition case and then proceeded to secure very admirable legislation in a few states, including Texas, Louisiana and Montana, which now recognize personal use as being as valid as a retail sale.
But, apart from the isolated local success, the DSA has adopted no formal written position nor changes in its code of ethics on this subject. Signs are good, however, the change is coming.
The vast majority of FTC actions, to its credit, are against what the industry would refer to as "bad actors," the legal position of the FTC on personal use, and abandonment of the Amway safeguard rules, leaves virtually every major direct selling company with the MLM model at great risk and legal exposure. Companies that believe the risk is limited to a direct assault by the FTC, are not being realistic. The attack begun in the Omnitrition case on personal use and carried forward without opposition by the FTC for several years, manifests itself in enforcement activity by state attorneys general, litigation in cases such as International Heritage by the Securities and Exchange Commission, class action suits against such companies as Melaleuca and NuSkin, and even protracted litigation in which leading companies such as Amway are the target of accusations by critics such as Proctor and Gamble. Not only has the entire direct selling industry been placed at risk, but major direct selling companies have been forced to spend millions of dollars in legal fees to defend their models, dollars that could have gone instead to reward their loyal distributor forces.
Those defending themselves are left naked because the industry, through the Direct Selling Association, has not yet adopted a formal position in its code of ethics or otherwise, on the issue of personal use, and one which can be referenced by companies seeking to defend themselves based on an industry standard. Interestingly, one former FTC litigator indicates that the FTC pays attention to such formally adopted standards.
AN ACTION PLAN
What can the direct selling industry do to ensure survival of the MLM model? Here are several concrete actions that the industry, through the Direct Selling Association, should immediately implement:
The slow creeping FTC threat to the MLM model is real. Good people can differ on these issues. The FTC has proceeded in good faith, slowly but surely, to impose its position. Probably, part of the reason for its course, has been a lack of response or feedback from the industry.
The DSA has been an extraordinarily effective advocate for the direct selling industry in the past. It has an articulate and highly professional staff. And yet, for whatever reason, at the end of the millennium it did not act decisively.
Now is the time for companies and distributors in the industry to tell the DSA not to look back, but to look forward. First, the DSA should amend its code of ethics to recognize the legitimacy of personal use and, second, it should seek federal legislation to clarify the issue and prompt dialog with the FTC to change its enforcement position.
|Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
|Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.|
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