D-Day: Direct Selling v. FTC

A Resilient Industry Fights Back

The assault was not on the beaches of Normandy, but nonetheless thousands of direct selling distributors and scores of direct selling companies scaled the cliffs of the FTC’s regulatory bunker to knock out the imminent threat to the direct selling industry, the FTC Proposed Business Opportunity Rule. In July, 2006, the mail room and internet repository of the FTC was inundated with letters and comments of thousands of individuals and scores of leading companies, representing 14 million home based-businesses that contribute $30 billion to the U.S. economy.

Along side the charge were detailed commentaries by industry professionals and experts, as well as trade groups such as the Direct Selling Association and the Multilevel Marketing International Association. Their message to the bureaucracy: the proposed FTC rule, although well-intentioned to protect the American consumer, misses the mark and, in fact, through onerous regulations, may well significantly impair the likes of Mary Kay, Tupperware, Shaklee, Quixtar, NuSkin, National Companies, Primerica, Herbalife, and so many other contributors to small business opportunities in America.

Major companies did not mince their words in requesting the FTC to withdraw its proposal: Mary Kay, “impractical, unnecessary and burdensome compliance requirements which would devastate our 43 year old company”; Avon, “overly broad and unduly burdensome”; Primerica, “The proposed Rule, if adopted, would cripple many direct selling businesses and would impair the livelihoods of millions of Americans who work in the industry.”

The Issues in a Nutshell

An excerpt from formal comments of Babener and Associates, legal advisor to many of the companies in the direct selling industry, filed with the FTC, echoes industry opposition to the FTC Proposed Business Opportunity Rule:

  1. The underlying assumptions regarding the size and scope of the direct selling industry and the adverse impact on the industry are grossly underestimated in the FTC staff report on the proposed rule.
  1. Requiring prospective sales recruits to wait seven days after a recruitment presentation to join a direct selling company will stifle recruitment in an industry that depends on an orderly development of a sales organization. A better approach would be to allow a seven day right of rescission, paralleling the FTC Cooling Off Rule.
  1. Requiring direct sellers to provide information and identity of 10 sales associates, in close geographic proximity to a prospective salesperson, will be a logistical nightmare and a dramatic invasion of privacy of those whose information is shared. The proposed disclosure lays a foundation for identity theft and, in an industry where the majority of sales people are women, the disclosure of their identity information to “strangers” creates unwelcome opportunities for sexual predators.
  1. Requiring direct sellers to release any information regarding prior litigation, whether or not at fault, is not only onerous and unfair, but creates an unwarranted stigma for legitimate companies involved.
  1. In the course of crafting a separate business opportunity rule, elimination of the historical $500 expenditure threshold for triggering applicability of the FTC franchise rule is inconsistent with state business opportunity legislation, FTC franchise rules, and causes direct selling companies with minimal investments to be subjected to onerous record keeping and disclosure rules that will become a major inhibitor of small business, a major contributor to the U.S. economy. In fact, after a few decades, in light of inflation, the threshold should be raised, not lowered.  In reality, as is the case today, the frauds and cheats will not bother to comply with the proposed rule and the burden and damage of the new bureaucratic rules will be borne by legitimate businesses.
  1. If the goal is to attack sleazy “fly by night” marketers of false and deceptive direct selling practices, a long line of FTC enforcement actions demonstrates that the FTC has the current authority, mandate and capability to attack fraudulent and deceptive practices.

What Next?  We will fight on the beaches…

The industry was forcefully heard in the thousands of well-articulated formal comments to the FTC. Congressional delegations have been briefed by industry representatives. A hearing and/or workshop process is projected to last 18 months to three years. The industry has called out “big guns.”  The most recently retired chairman of the FTC has been engaged by Primerica to lead a battle to convince the FTC staff to withdraw its proposed rule or dramatically modify the proposal to respond to industry needs. Industry experts, associations and professionals will dialog with the FTC staff. Industry associations, such as the DSA, have placed this issue as their number one priority. Industry representatives are extremely well prepared for any adversarial hearing process. Companies and trade associations are geared to challenge in court the legality and overreach of the proposed rule.

Obviously, no one can predict the outcome, but knowledgeable industry experts are optimistic that the end result will be quite workable for the industry. If all else fails, in a similar fashion to the health products industry response perceived overreaching by the FDA, which resulted in Congressional protection under DSHEA, the Dietary Supplement Health Education Act, the direct selling industry, through its companies, sales forces, lobbyists and numerous Congressional allies, will be prepared for “nuclear option,” remedial federal legislation in the event of the adoption of an unsatisfactory rule by the FTC. Although not beyond the realm of possibility, the FTC may withdraw its proposed rule or amend it before proceeding further. More likely, however, a combative process will occur during the near term. Until, and unless there is a modification in the existing rule, distributors and companies should clearly understand that “nothing has changed” that will affect their business.  A modest prediction: “things will work out okay in the end, but it will be a long process, perhaps years.”

PS. Although the formal comment period is over, individuals who wish to file comments with the FTC may still do so.  In fact, continued expression of concern by interested individuals cannot help but be heard by the staff at the FTC. FTC internet contact information can be found at www.ftc.gov.  The industry and the FTC are not enemies.  They both seek consumer protection, but the direct selling industry objects to unnecessary overregulation that can destroy an important channel of distribution.  Please follow ongoing updates and discussions on the status of the FTC Proposed Business Opportunity Rule at www.mlmlegal.com.

Visit these pages for the latest information on the direct selling industry and the FTC:

FTC v. BurnLounge: Lessons Learned for MLM/Direct Selling

FTC Guidelines on Endorsements and Testimonials
FTC Guidelines Resource Center
FTC Guidelines Endorsements and Testimonials: Detailed Analysis
FTC News Release on Endorsements and Testimonials
FTC Complete Guidelines Release
FTC Short Version Guidelines Release
FTC Examples of Material Connection
FTC Regulation of Advertising

FTC Proposed Business Opportunity Rule: Analysis and Updates:
The FTC Final Business Opportunity Rule: Still Work to Do
FTC Exemption Draft Falls Short … MLMLegal.com and DSA Suggest Revisions
FTC Exempts MLM from Proposed Business Opportunity Rule
DSA Position on FTC MLM Exemption Proposed Business Opportunity Rule
Analysis and Industry Response
Actual Text of Proposed Rule
FTC Speaks Out
DSA Speaks Out
DSWA Speaks Out
MLMIA Speaks Out
DRA Speaks Out
MLMLegal.Com Speaks Out

Or, watch the video: What is the Relationship between MLM and the FTC?

This entry was posted in Consulting, Direct Selling, Distributor Education, Endorsements, FTC, Home-Based Business, Legal, MLM, MLM Articles, MLM in the News, Network Marketing, Party Plan, Personal Use, Products, Pyramid, Recruiting, Testimonials and tagged , , , , , , , , , , , , , . Bookmark the permalink.