Guest author Alan Luce is Co-Founder and Managing Principal of Strategic Choice Partners (SCP), a consulting firm that provides strategic support and services to help today’s direct selling companies thrive.
Alan is a US DSA Hall of Famer, and member of the DSEF’s Circle of Honor. He’s served in executive roles at Tupperware, PartyLite, DK Family Learning and other companies, and has been a part of launching more than 30 direct selling companies over his career.
Guest post by Alan Luce
AdvoCare, Neora, an Ever More Aggressive FTC! What Now?
In recent weeks, the direct selling industry has been shocked by one revelation after another involving the Federal Trade Commission’s actions against direct selling companies. The stunning transformation of AdvoCare from a marketer with an MLM compensation plan to a single level plan due to an FTC enforcement action was still being absorbed when, BANG!, along comes the FTC action against Neora (formerly “Nerium”) and Jeff Olson and the counter civil suit by Olson and Neora challenging the FTC’s actions. Adding to the confusion was a recent address to DSA members by Andrew Smith, Director of the FTC Bureau of Consumer Protection wherein Mr. Smith expressed the agency’s belief that MLM is a legitimate business model, while then spotlighting fundamental areas of direct selling as we’ve known it as problem areas. (*) Wow! Where did that come from?
Industry legal advisors tell us that there is no case law to support the position that simply having a compensation plan that pays more than two levels deep may be enough to make the company a target of FTC enforcement. There is no FTC Trade Regulation Rule to that effect either. What’s more, just last year the FTC sent a letter of guidance to DSA setting out the parameters of what companies should and should not do to operate legally and there was no mention that “more than two levels of compensation” absent any other evidence could put a company in jeopardy. Rather, it seems that this idea, along with several others expressed by Mr. Smith, in his address to DSA are new unpublished standards that are being applied retroactively by the FTC staff in enforcement actions.
Applying new “standards or rules” that have never been published retroactively seems more than a bit bizarre as a rule making process, not to mention unfair to direct selling companies that may be held liable for violating a rule that they did not know existed. That such an unusual process violates basic fairness and due process is a significant theme in the Olson/Neora civil suit against the FTC.
In time the courts will rule on whether the FTC has the authority and power to create new rules and apply them retroactively without notice in enforcement actions against companies and individuals. As an industry direct selling companies are going to have to challenge the FTC for over reach and abuse of its power. All of this will be worked by individual company cases and the industry trade associations.
BUT, in the meantime what should companies do to protect themselves?
How do they organize their marketing programs and plan for the future? Direct selling, like any form of business, needs clarity as to what the “rules of the road” are for their form of distribution and certainty that the published guidelines, by agency rule making or court precedent, will be in place for a reasonable period of time. Many believed that the FTC’s letter to DSA last year was intended to provide some of that certainty and predictability. It didn’t as the recent actions against AdvoCare and Neora make abundantly clear. So, what now?
Well if you want legal advice, you need to go to the attorney who advises your company. But if you want some practical management advice, let me offer a few ideas of things you can/should do now to protect your company from an unwanted and unexpected challenge by the FTC or a similar state agency.
1. FTC actions are still most often initiated due to exaggerated earnings and opportunity claims and/or complaints from former distributors. And when the FTC does move it is usually when if finds a number of issues with company and/or distributor actions. For example, exaggerated earnings and life style claims coupled with not have enough retail sales to end users who are not participants in the compensation plan, plus paying commissions on kits, etc, etc.
So, step one in my play book would be to take a hard look at company literature and social media messages delivered by the company. Are any claims made about income factual with full disclosure about what percentage of the field makes that income? Does your corporate material focus too much on mansions, and exotic cars and travel? Do a full review with your company attorney and compliance folks and try to look at the material as the FTC would. If its questionable, change it quickly.
Now, review your policies to ensure that it is a clear violation of company policy to make exaggerated earnings and lifestyle claims. Working with the advice of counsel, it may be necessary to republish revised company policies.
2. Actively monitor materials that your distributors produce on their websites, webinars and social media. The FTC will hold the company, as well as the individuals as they did in AdvoCare, liable for offending independent distributor communications. Move quickly to have them removed and take disciplinary action if they violated existing company policies.
3. If your compensation plan pays commissions on the kits, samples and self-purchases bought by newly recruited sellers to their uplines, consider whether you want to continue that feature of your plan. That seems to be a red flag to the FTC and other regulators. What the final rules may be on this issue is unclear at this time.
4. Is your company able to accurately and easily produce data that unequivocally demonstrates that 70% or more of your sales are made to retail customers who are not participants in the compensation plan? If so, keep that date up to date and easily accessible. Review your compensation plan, recruiting literature, fast start programs, social media to be sure that your material focuses on retail sales. Monitor your field materials to be sure that they are following the company lead on communicating about retail sales to end users.
If you do not have accurate data about retail sales and/or your plan and communications do not focus on retail sales, you may want to consider adding a preferred customer club for lower level sellers to convert to and looking to ways to incent retail selling and the enrollment of preferred customers.
5. If you are in good shape on items “1” through “4” above, then you may want to hold fast for the time being on your compensation plan if it pays overrides on more than two levels. At this point, while Smith’s recent comments do not directly express the opinion that a compensation plan of more than two levels may be considered an illegal pyramid scheme, many experts have interpreted this nonetheless based on the statements relative to compensation plans that are overly dependent on recruiting for success in the business. (*)
Remember, the FTC and other agencies tend to focus their enforcement activities against companies where they can allege multiple violations of existing standards as well as in recent actions trying to establish new standards and rules. So, review the recent enforcement actions and settlements with a qualified attorney who works with FTC cases to be sure that your corporate and field practices are in full compliance with the established case law and published agency trade regulation rules.
If you are a new company, just getting started and seeking to avoid any of these conflicts, there are consultants and industry attorneys who can advise you as to the best practices and policies that will protect you from conflict with regulatory agencies going forward.
This is a fast moving and confusing time for direct sellers. Do what you can to ensure that your company is focused on retail sales, makes honest and accurate income claims that do not exaggerate the possibility of making high incomes or enjoying an extravagant life style. And make sure that your sales force members are not making inappropriate claims either. Encourage your trade association to take action to protect legitimate direct sellers and, if you possibly can, help provide the funds necessary to mount that defense.
(*) These statements have been updated since the original publishing of the article to clarify the intent of the author.