Latest FTC guidance to MLM industry emphasizes retail sales
One of the more frustrating aspects of covering MLM regulation and litigation is a tendency for people to ignore what’s currently happening, in favor of past legal opinions and decisions from the past.
Some of these opinions and decisions are decades old but people still cling to them as gospel.
One of the more common citations I run across is a 2004 staff advisory issued by the FTC. Yes that’s 2004, some thirteen years ago.
In the advisory the FTC reiterate the legality of internal consumption, that is affiliates purchasing product from the MLM company they’re in.
The amount of internal consumption in any multi-level compensation business does not determine whether
or not the FTC will consider the plan a pyramid scheme.
Somehow this got turned into “you can have as much internal consumption as you want, no worries.”
While internal consumption is of course legal, in the absence of retail sales it’s a good indicator of a product-based pyramid scheme model.
Internal consumption alone might not be a determining factor for the FTC, but retail sales certainly are.
Retail revenue and affiliate revenue (internal consumption) are part of the same revenue chart pie. If you were to graph out an MLM company with little to no retail activity, you’d find revenue would primarily be sourced via affiliates.
Proponents of pyramid schemes have argued this isn’t illegal since 2004.
Unfortunately the FTC advisory didn’t clarify as much and aside from common sense, the only clarification the industry has had in the last thirteen years has been a handful of regulatory actions.
These two settlements were so prominent that it was impossible for even the 2004 advisory supporters to ignore.
What we’ve since been left with is a state of confusion. Not that there wasn’t confusion before, it’s just that now most rational people have come to accept that internal consumption is not a substitute for genuine retail sales activity.
For whatever reason the FTC have been sluggish to clarify this matter outside of lawsuits filed against specific companies.
That ends today, with a new Business Blog entry clarifying the need for retail sales in MLM.
At the heart of a legitimate MLM are real sales to real customers.
For companies acting within the law, the business is driven by selling products to real customers.
Who do we mean by “real customers”? People unaffiliated with the company who actually buy and use the product the MLM sells – real retail sales, in other words.
And by “real sales,” we mean sales that are both profitable and verifiable – retail sales that can be confirmed.
Contrast that with MLMs built primarily on bringing in more and more recruits and racking up sales to other insiders. Very few people are going to make money and most participants will be left in the lurch.
Forget about what you think you know about MLM compliance. Here in 2017, there it straight from the horse’s mouth.
Proponents of pyramid schemes will of course counter with “but the FTC isn’t a court of law” and “Donald Trump is going to change things!”
On the first sentiment, while it is true the FTC aren’t a court of law, the Herbalife and Vemma complaints both demonstrated that a lack of retail sales in MLM will trigger a regulatory response.
Herbalife is a billion dollar company. Vemma wasn’t quite that much but we’re still talking hundreds of millions of dollars.
Herbalife, as one of the largest MLM companies in the world, could have taken the matter to court. But they didn’t.
In an effort to save face, Herbalife management and affiliates might come up with all manner of reasons to explain why.
At the end of the day though, considering the serious nature of the FTC’s allegations and fact that a non-pyramid model will likely see Herbalife collapse in the US over the next few years, if there was even the slightest chance of winning in court, don’t you think Herbalife would have contested the matter?
The FTC complaints against Herbalife and Vemma challenged compensation structures that rewarded distributors without regard to retail sales.
The court-enforceable orders in those cases require the companies to dismantle those systems.
In their place, Herbalife and Vemma must implement systems that incentivize participants to sell products to people outside the network.
The reality is it’s a bit like Paul Burks criminal trial. He could have accepted he was going to jail and plead guilty back in 2012.
Instead he dragged it out for four years in court, only to lose anyway.
Neither Herbalife or Vemma had significant retail activity taking place and both companies knew it. Easier to settle now and accept a lesser punishment than to drag it out in court and face heavier penalties later on.
That’s the blunt truth of the matter, stripped of all it’s marketing spin.
As for Donald Trump. I don’t know how pro-business turned into pro-pyramid, but Trumps inauguration on January 20th isn’t going to usher in four years of pro-pyramid litigation.
Donald Trump doesn’t run the FTC, nor will the agency be run by someone who is pro-scam. It’s just not going to happen.
The sooner those in denial about the 2004 advisory cease being in denial about Trump’s presidency, the better for the MLM industry at large.
Back in the day, even as late as 2004 MLM marketing was for the most part localized. With the prominence of the internet, in particular social media, you’re looking at a truly global landscape.
The reason who is President or who is running the FTC doesn’t matter, is because ultimately victims cannot be ignored.
Pyramid schemes, however you dress them up, are unsustainable scams. People join and lose money.
Over time the amount of people who have lost money grows, until it reaches tipping point and triggers a regulatory investigation.
No matter how much effort you put in, no matter what your upline tells you and no matter what you might have been lead to believe by the company itself, chances are if you’re working an unsustainable business model you’re going to lose money.
As we’ve seen in the Herbalife settlement, victim numbers and monetary damages are quantifiable.
When we’re talking hundreds of thousands of victims collectively losing hundreds of millions of dollars through unsustainable business models designed to mask fraud, no court in the US is going to rule in favor of the scammers running the companies.
That’s the bottom line.
So what if you’re in an MLM company whose business model looks remarkably similar to that of Herbalife or Vemma’s post FTC settlement?
The good news is a number of MLM companies have taken the initiative to abolish mandatory internal consumption and/or retail disincentives.
Over the last few months I’ve received correspondence from affiliates in such companies asking for review updates pending compensation plan changes. And that’s been great to see.
For the rest of you, take a look at your companies’ compensation plan and first and foremost ask yourself if you’re required to purchase product each month.
This could be a mandatory requirement or defacto, based on a monthly PV requirement you and everyone you know in the company qualifying for via internal consumption.
Are you making retail sales each month? Is your upline? Are there genuine retail incentives in the compensation plan?
If retail sales are given little more than lip-service by your MLM company, ask them about it. Why isn’t there more of a focus on retail sales and why are they ignoring regulatory guidelines in the US?
This isn’t optional advice or a suggestion. If the company you’re in is asleep at the wheel you as an affiliate need to start making noise.
Otherwise your MLM company might very well be the next Vemma or Herbalife disaster. You’re left without an income and what’s worse, it makes it that much harder for legitimate MLM companies to operate without prejudiced discrimination.