Personal Perspectives on Critical Direct Selling Issues

Welcome to the President’s Papers, a series of personal perspectives on the most important issues confronting our industry.  

These are my views and opinions, and this paper is not intended to constitute the Direct Selling Association policy position of legal advice of any kind. As is the case with any legal matter, I would recommend that individuals or organizations seek the advice of their own legal counsel.

A Discussion about the October 2, 2019, Federal Trade Commission (FTC) Announcement

The October 2, 2019, announcement by the Federal Trade Commission (FTC) in the AdvoCare matter has been anticipated since AdvoCare’s own announcement about changes to their marketing and compensation plans early this summer. 

I thought it would be helpful to share some of my personal observations as we anticipate hearing more from Andrew Smith, the FTC’s Director of the Bureau of Consumer Protection at next week’s DSA Legal and Regulatory seminar.

While I don’t have all the facts that resulted in the October 2, 2019, announcement by the Commission, based on my personal experiences with some of the principals involved, it is difficult for me to believe the investigators got all of the facts right. 

Some of the executives involved have been strong and public proponents of the decades-long efforts of the Association to ensure that our customers and salespeople are treated ethically and fairly.

Nonetheless, it is my job at DSA to evaluate and report on cases like this without regard to personal feelings and to analyze the impact on the entire direct selling channel and assist our members in charting a way forward.

In all of our conversations with FTC representatives, and even in the October 2nd press conference, the FTC has acknowledged that multilevel companies can be and frequently are operated legitimately.  

Since AdvoCare’s announcement, there has been much speculation about the position of the FTC vis-a-vis multilevel companies.

I have heard reports of FTC staff’s purported antipathy, even hostility, to multilevel marketing being expressed in private conversations and negotiations related to pyramid investigations. Some observers have suggested that the FTC is engaged in a campaign to eliminate multilevel companies and is retreating from its own guidance on multilevel practices issued last year. 

In response to these reports and concerns, I and my DSA colleagues have met repeatedly with FTC officials -- from career staff to the top appointed officials -- to express our concerns about possible government misinterpretation and misapplication of the law, as well as about potential government and investigator overreach in pyramid and related actions. 

In all of our conversations with FTC representatives, and even in the October 2nd press conference, the FTC has acknowledged that multilevel companies can be and frequently are operated legitimately. And in our private meetings, they have unequivocally rejected the idea that there is any coordinated campaign to target or eliminate direct selling or MLM companies, or that they have retreated from their earlier guidance. 

Indeed, the details of the complaint and settlement issued on October 2nd reflect no new standards of law regarding what constitutes a pyramid scheme. Additionally, Mr. Smith’s comments at the press conference regarding the standards for earnings claims, and appropriate sales base compensation are consistent not only with their earlier guidance but also with DSA’s own Code of Ethics and our understanding of the law. 

I am anticipating with great interest our opportunity to ask Mr. Smith some direct questions about this during his appearance at next week’s DSA Legal and Regulatory Conference.

Specifically, the complaint against AdvoCare and Smith’s remarks at the press conference outlined three key issues that should be familiar to all DSA members. They are issues about which DSA has issued repeated guidance and information, and are matters addressed with specificity in DSA’s own Code of Ethics:

• Compensation must be based on product sales and not on recruitment;
• Required inventory purchases are suspect and evidence of recruitment-based compensation, rather than compensation based on use by real consumers, and are indicative of a pyramid scheme; and,
• Earnings claims touting large potential earnings are inconsistent with relatively low average distributor earnings, and thus are misrepresentative.

There’s an old adage that “bad facts make bad law.” As I stated previously, I don’t know all the facts in this case. We have only the allegations, which AdvoCare did not agree to, even as they settled the case and paid a large fine, though without admitting wrongdoing.

For example, AdvoCare did not admit to being a pyramid scheme, contrary to the FTC’s assertions in the October 2nd press conference. While I was surprised that the company chose not to litigate the matter based on their apparent disputation of some of the FTC’s allegations, I have witnessed many parties to such actions (from many industries) choose to avoid the cost and tribulations of litigation for a variety of reasons unrelated to the veracity of the charges. 

I am also keenly aware that direct selling companies are acutely sensitive to even clearly wrongheaded allegations of pyramiding because of the possible reaction of members of the salesforce. Still, full-throated litigation can reveal the flaws in both the factual allegations and legal arguments sometimes put forth in cases like these.

We share the FTC’s stated goal of protecting consumers and salespeople from shady operators, which pretend to be legitimate direct selling companies.  We will continue working cooperatively with the FTC and other government and non-government bodies to eliminate true pyramids from the marketplace.

Irrespective of the important questions of facts, in this case, I believe that the principles of law set out generally by the complaint are consistent with DSA’s own standards, and thus highlight areas about which DSA and the FTC are in agreement. 

We share the FTC’s stated goal of protecting consumers and salespeople from shady operators, which pretend to be legitimate direct selling companies, and we will work cooperatively with the FTC and other government and non-government bodies to eliminate true pyramids from the marketplace. 

More importantly, we are committed to addressing real and perceived problems even among otherwise legitimate companies. That’s why we followed the counsel of the FTC in establishing the Direct Selling Self-Regulatory Council (DSSRC), a program that Mr. Smith himself recently publicly lauded. 

Nonetheless, I remain concerned that the FTC might shoehorn its own version of the facts in cases such as these to fit a predetermined narrative that reflects skepticism about the direct selling channel, particularly multilevels. We cannot accept inconsistent government application of the law, confusing public statements, or errant prosecutions based on inaccurate allegations, faulty economic analyses, or hidden hostility to our model based on old biases’ or lack of knowledge.

As we go forward, I make this pledge to all DSA members, our salesforces, member of the public, and all interested observers, including policymakers and regulators:

• We will vigorously defend the direct selling model and make clear the benefits it provides to millions of people;
• We will equally vigorously establish, promote, and enforce standards of marketplace behavior that protect our customers and salespeople;
• We will support enforcement of the law against true pyramid schemes, and other bad actors pretending to be legitimate direct selling companies;
• We will work to address real and perceived problems among otherwise legitimate direct selling companies;
• We will hold DSA member companies accountable for inappropriate marketplace behavior;
• We will support the enactment of strong consumer protection laws that set out clear, consistent standards for direct selling companies, salespeople, customers and the public;
• We will ensure that the standards of appropriate behavior are understood by direct selling companies and their salespeople; and,
• We will work with government officials to improve their understanding of the direct selling business model so that their actions support and do not hinder the effective functioning of legitimate direct selling companies while working with them to eliminate fraud and consumer abuse.

Of course, DSA will continue to monitor and inform DSA membership about these and other upcoming regulatory actions. I anticipate the FTC and other federal and state government regulators will continue enforcement actions against other operators making misrepresentative earnings and/or product claims, and that we could see these related actions announced in the coming weeks or months. 

In the meantime, I trust the October 2nd announcement will serve as a clear signal to direct selling companies about the importance of adhering to and enforcing the standards set out in the DSA Code of Ethics, their own company policies, and of course, the law.