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FTC Commissioner Phillips’ Thrashing of The DSA

A virtual event was held October 15, 2020 in which one of the five FTC Commissioners addressed the DSA: Link: Keynote Remarks of Commissioner Phillips at the DSA Legal & Regulatory Summit ( Screen shot: Keynote Remarks of Commissioner Phillips at the DSA Legal & Regulatory Summit

Below is the text of the Zoom-like talk, minus the footnotes, which can be found at the above links, and my comments after each paragraph after the ===> symbol.

Federal Trade Commission

Keynote of Commissioner Noah Joshua Phillips
Seller Beware ===> Nice title, let’s see whether there is action behind it, as there wasn’t after Edith Ramirez’s strong statement after going after Vemma and Herbalife in 2016 and then cut-and-run to the private and much more lucrative revolving door between government and the private legal sector.

DSA Legal & Regulatory Summit
Washington, D.C. (virtual)
October 15, 2020

Thank you for the introduction. I am happy to be here today, albeit virtually. ===> A sign of 2020.

The last several months have been challenging as we all try to navigate this pandemic and stay safe. I hope that all of you, and your families, are doing as well as can be expected under the circumstances. ===> The velvet hammer technique.

Today I am here to talk about Federal Trade Commission enforcement in the direct selling area and my take on agency cases and guidance. One caveat: the remarks I give today are my own and do not necessarily reflect the views of the Federal Trade Commission or any of my fellow Commissioners. ===> Can we knock off using the “direct selling” term, as most DSA members, and the most illegally operating ones, are MLMs and most of their distributors sell little to no products/services to outside customers? While the usual “these are just my opinions” statement is made keep in mind many of the cases below were slam dunk cases and/or 5-0 votes by the FTC commissioners.

This past year has been an active one for the FTC on many fronts, but in particular with respect to activities involving illegal multi-level marketing. Sellers beware: we’ve been aggressive in the cases we’ve been pursuing, the remedies we’re seeking, and our willingness to go to court. Some watching today may not like everything we’ve been doing, and I regret that my remarks are unlikely to put them at ease. ===> There is not much new that the MLM scams are doing, they have always been opportunistic and the beer virus is the theme of this year. You better be willing to go to court, almost all of you are lawyers, you have virtually infinite funding compared to the MLMs, and it’s your job. It’s not “some” of them don’t like what you have been doing (in a much too limited fashion), it is almost universal they don’t like it. Why do you regret that you’re putting the heat on MLM scams, it’s your job?

For table setting purposes, it might be helpful to define some terms.  ===> It would have been helpful to define an illegal pyramid, but you didn’t. An illegal pyramid is when there are little to no retail sales to non-distributor customers and most, if not all MLMs fit this definition. While we’re at it, let’s define the MLM RICO fraud of tool scams, the massive and hidden profit from the BSM (Business Support Materials) made from meetings, books, recordings, phone apps, website access, voice mail, etc.

Generally, a multi-level marketer distributes products or services through a network of salespeople who are not employees of the company and do not receive a salary or wage. Instead, members of the company’s salesforce usually are treated as independent contractors, who may earn income depending on their own revenues and expenses. Typically, the company does not directly recruit its salesforce, but relies upon its existing salespeople to recruit additional salespeople, which creates multiple levels of “distributors” or “participants” organized in “downlines”. A participant’s “downline” is the network of his or her recruits, and recruits of those recruits, and so on.  ===> I can’t think of a single exception to the MLM distributors being independent contractors, why use the word “Generally?” Also, why use the word “salespeople” when very little of the products and/or services are sold to outside customers? They are getting their downline to buy the products for their own use and/or load up their garages. Why use the term “who may earn income” when very few make a net profit after subtracting the overhead costs?

The FTC has historically recognized that multi-level marketing is not monolithic, with various participants employing many different structures and methods of selling to distribute all manner of products. Multi-level marketing may have certain benefits over traditional retailing, because it depends on direct relationships between sellers and consumers, can help companies to reach consumers that they would not otherwise be able to reach, and may allow for sales to consumers or communities who might be underserved by traditional retail. Multilevel marketing also can give consumers the opportunity to try to supplement their income.  ===> The FTC needs to recognize that regardless of the “different structures and methods of selling,” very little selling to outside customers occurs, which means most, if not all, MLMs are illegal pyramid scams. Party plan MLMs have a higher probability of significant retail sales, but it should not be an automatic conclusion. An MLM that does sell products to outside customers is operating at a competitive disadvantage to MLM scams as they must lower prices in order to do so, which results in some combination of less profit for the company and less distributor bonus opportunity. With online purchasing options, there are very few communities underserved by traditional retail, as online IS the new traditional retail. While MLMs give consumers the opportunity to TRY to supplement their income, most lose money while trying to make it.

Although there may be significant differences in how multi-level marketers sell their products or services, the FTC’s work over the last year illustrates the importance of hewing to the one of the most basic consumer protection principles: tell the truth.  ===> Exactly, and the truth is mainly lacking in telling the level of retail sales to outside customers and how much is being made from the above-described tool scams.

Representations – by MLMs or their distributors – must be truthful, nonmisleading, and substantiated. Some of the most shameless violations of this core principle over the last year have come up in the context of companies and distributors taking advantage of the COVID-19 pandemic.  ===> This is only the most recent example of what has been happening for decades, where have you been?

In April and June 2020, the FTC sent warning letters to a number of multilevel marketing companies to remove and address claims that they or their participants were making to tap into consumers’ fears about their economic wellbeing and health during the pandemic. Many distributors – and one company – capitalized on these fears and made clearly suspect and in all likelihood illegal claims about consumers’ abilities to earn substantial income. The letters highlighted problematic language and reminded companies that express and implied earnings claims must be truthful and non-misleading to avoid being deceptive, and therefore unlawful under the FTC Act. This means that claims about the potential to achieve a wealthy lifestyle, career-level income, or significant income are false or misleading if business opportunity participants generally do not achieve such results. By generally, I do not mean the average or mean of what participants in a specific company earn – I mean what the typical distributor earns, which should factor in expenses rather than reflect gross income.  ===> The “substantial income” claims are nothing new, although it is good to see the FTC is holding both the distributors AND the companies responsible, as it should be, as the companies can easily train their distributors and monitor their behavior to take appropriate action and terminating them, including notifying the remaining distributors that there will be zero tolerance. A required income disclosure document that shows various income levels, including the overhead costs based on the recommendations from the upline/company, versus the percentage that fall within each level.

It’s worth pausing on the important issue of earnings claims among MLM participants. DSA itself has acknowledged that most MLM participants will not realize more than a very modest income. And the law says that even truthful testimonials from participants who do manage to earn significant income or more will likely be misleading unless the advertising also makes clear the amount earned or lost by most participants. Again, this would require laying out what the typical participant can expect to earn after expenses – generally very little. ===> Generally, most MLMers lose money, they do not make very little, when overhead expenses are factored in.

Based on testing done by the Commission, qualifications such as “results not typical” or “results based on experiences of a few people” are not enough to make clear that otherwise truthful statements about significant income are not the typical experience. In fact, after a consumer sees a claim about atypical earnings, it will likely be difficult to correct that consumer’s impression with a disclaimer so that you leave him or her with a truthful net impression. It all depends on the details, but it may be a difficult task to pull off. This is why the FTC advises that “it’s unwise for MLMs to make earnings claims – expressly or by implication – that don’t reflect what typical participants achieve.”  ===> The FTC needs to make up its mind, and keep in mind that if earnings claims are not made very few people would join and the quitting rate would result in any given MLM collapsing. Prospects are told many distributors quit, which is true, and the bar for being considered active is very low, which works to the advantage of the MLM scams, as they tell their prospects and downline any numbers are skewed downward. Instead, the focus should be on properly reporting retail sales and tool profits.

Now, back to the warning letters. In addition to earnings claims, the marketplace was also rife with claims about certain products’ ability to treat or prevent COVID-19. That is dangerous stuff. Warning letters we sent cautioned these MLMs that it is unlawful under the FTC Act for them – or their distributors – to advertise that a product can prevent, treat, or cure COVID-19 unless they possess competent and reliable scientific evidence. This includes, when appropriate, well-controlled human clinical studies, substantiating that the claims are true at the time they are made. For COVID-19, no such studies existed for any of the products at issue. The FTC warned the letter recipients immediately to cease making the unsupported COVID-19 claims.  ===> Did you follow up on your warnings? did and found many of the MLMs and/or their distributors are still cheating: MLMs Continue to Break the Law Despite FTC Warning | Truth In Advertising

These letters also set forth another important reminder – companies are responsible for the claims of their business opportunity participants and representatives. The compensation structure of a multi-level marketing entity may create incentives for its participants to make certain representations to current or prospective participants. The FTC has cautioned MLMs that they are therefore obliged not only to instruct their participants not to make false, misleading, or unsubstantiated representations but also to monitor their participants so they do not make such misrepresentations.  ===> As mentioned above, it is a good thing the companies are being held accountable for the actions of their distributors, but it needs to be more than talk.

I am pleased that others – in particular, the BBB’s Direct Selling Self-Regulatory Council and the Direct Selling Association (DSA) – recognize the importance of reiterating these same messages to members of the direct selling industry. In early April, they cautioned direct selling companies and their salesforce members to ensure that all claims made about health-related products are accurate. I commend both organizations for reinforcing the important message that, because claims made by salesforce members are attributable to direct selling companies themselves, it is incumbent upon selling companies to educate their individual sellers about best practices with respect to product and earnings claims.  ===> The FTC still doesn’t fully understand the DSA is the MLM companies, banded together as their lobbying arm, so there is no excuse for the MLMs themselves to be ignoring the FTC directives.

As I mentioned earlier, multi-level marketing – done correctly – can benefit distributors and consumers. But an overemphasis on recruiting can easily turn a multilevel marketing company into a pyramid scheme. A pyramid encourages recruitment of new participants into the business opportunity, without regard to whether those new participants have a meaningful retail sales opportunity, and rewards participants for recruiting rather than for real sales made to real customers.  ===> It’s not the overemphasis on recruiting that’s the problem, it’s the under-emphasis, and to be more correct, the lack of retail sales to customers who are not distributors. That, plus the tool scams being eliminated is what is meant by MLMs being “done right.”

Over the last year, several cases filed by the FTC have alleged illegal pyramid schemes, along with deceptive earnings claims. Even though some of these cases are currently in litigation, highlighting some of the facts alleged can be useful in identifying some of the “red flags” of pyramid schemes and deceptive earnings claims.  ===> The pace has picked up, but it has a long way to go.

While the AdvoCare matter was announced right around the time of last year’s regulatory summit, I think a brief overview might be useful. Last October, the FTC announced the filing of a complaint against AdvoCare International, its former chief executive officer, as well as four of its top promoters. In the three-count complaint, the FTC alleged that defendants operated an illegal pyramid scheme, made income misrepresentations, and provided the means and instrumentalities for its distributors to do the same.  ===> Good, when you’re done patting yourselves on the back, go after the rest of the MLM scams, it’s like shooting fish in a barrel.

As set forth in the complaint, under the AdvoCare compensation plan, participants were charged $59 to become a distributor, making them eligible to receive discounts on products, and to sell products to the public. To earn meaningful compensation, however, participants had to become “advisors,” which typically required them to spend between $1,200 and $2,400 purchasing AdvoCare products, and accumulate thousands of dollars of product purchase volume each year, according to the complaint. The income of AdvoCare advisors was based on their success at recruiting, with the highest rewards going to those who recruited the most advisors and generated the most purchase volume from their downline.  ===> Those with the most downline should make the most money and it would be legal if most of the downline had lots of retail sales, but they didn’t.

With respect to earnings claims, the complaint describes how the defendants told consumers that they could realize large incomes by promoting AdvoCare and that their earning capacity was limited only by their effort. However, the reality was quite different. As detailed in the complaint, in 2016, 72.3 percent of distributors did not earn any compensation from AdvoCare; another 18 percent earned between one cent and $250; and another 6 percent earned between $250 and $1,000. The annual earnings distribution was nearly identical for 2012 through 2015. It’s important to note that none of these calculations factored in the expenses distributors incurred from participating in AdvoCare.  ===> Lots of distributors in any MLM do hardly anything, so not earning income is not the point. Again, the key metric is the amount of retail sales, not the earnings breakdown. Focus on the root cause, not symptoms. It’s a good reminder to factor in the expenses, and just as important to note the massive profit made by the upline and the fact the MLM makes more when people stay in longer because of the tools, so it’s a win-win-lose scenario between the upline, company, and downline, respectively.

AdvoCare and its former CEO agreed to pay $150 million and be banned from the multi-level marketing business. Two of its top distributors also settled charges that they promoted the illegal pyramid scheme and misled consumers about their income potential, also agreeing to an MLM ban and a judgment of $4 million that was suspended when they surrendered substantial assets. Litigation is ongoing with the other two distributors.  ===> Good, now go get the rest of them.

I think the messages from this case are pretty clear – when an MLM is an illegal pyramid, defendants – including senior management, promoters and distributors – can expect to be named personally, to face bans, and to be required to turn over their ill-gotten gains. I think a case like this also shows the incredible amount of effort that the FTC staff is willing to put into bringing illegal pyramid cases, and the resolve at the Commission level. Ours is sometimes a fractious commission, but the AdvoCare votes were unanimous.  ===> I can’t think of a split decision regarding MLMs ever.

Last November, again unanimously, the FTC filed a five-count complaint against Neora, LLC, formerly known as Nerium International, LLC, and its chief executive officer, Jeffrey Olson. Neora is an MLM that sells supplements, skin creams, and other products through a network of “brand partners.” Our complaint alleges that Neora’s compensation scheme emphasizes recruiting new “brand partners” over the retail sale of products to consumers. The complaint also alleges that the defendants made false earnings claims that consumers who become Neora brand partners are likely to earn substantial income. However, rather than making substantial income, the complaint describes how Neora’s business model makes it unlikely that brand partners can earn money by selling product to outside consumers in response to genuine demand—most make little or no money, and a substantial percentage lose money. Instead, purchases by brand partners and fees paid by brand partners accounted for more than half of all company revenues.  ===> Over half? How about at least 90%?

As we saw more recently with MLMs that took advantage of the COVID-19 crisis, in addition to the illegal pyramid scheme and false earnings claims, the defendants also are charged with deceptively promoting their supplements. Here the FTC alleges that defendants deceptively claim their products are an antidote to concussions and chronic traumatic encephalopathy, as well as Alzheimer’s disease and Parkinson’s disease, and misrepresent that they had scientific proof. Because Neora provided its brand partners with promotional materials that contained deceptive representations about the supplements, the complaint also charges them with providing their brand partners with the “means and instrumentalities” to deceive others.  ===> Why not go for the common cold, heart attacks, strokes, etc.?

This case is currently in litigation and the court has not ruled on the merits. However, the language of the FTC complaint is a useful tool to illustrate some of the types of acts and practices that the FTC is likely to find problematic. For example, the complaint alleges that Neora incentivizes recruits to make a substantial upfront investment in Neora products and then commit to additional product purchases each month.  ===> This wouldn’t be nearly as bad of an issue if they sold the products to outside customers.

The complaint alleges that according to Neora’s own recent reporting, less than 5% of brand partners in the United States earn more from Neora than they pay in fees and product purchases. That allegation raises an important compliance point – providing a truthful and substantiated income claim requires that an MLM will need to know – and be able to show – that the outcome it or its distributors are claiming, is the generally expected achievement of distributors after  taking into account expenses.  ===> How about a new guideline that the company, upline, downline, i.e., EVERYBODY should be making at least 50% of their gross profit from product/services sales to outside customers, inclusive of the tool profit? That would keep the joining/renewal fees low, tool prices down, and create a legitimate MLM with retail sales to non-distributor customers? It’s SO SIMPLE.

The complaint is also illustrative of another fact – when the FTC investigates, it does a thorough job in uncovering and pleading deceptive acts and practices. Not only could defendants be on the hook for an illegal pyramid scheme and deceptive earning claims, other advertising and marketing practices will come under the microscope as well. For example, does the product actually do what it is claimed to do, and do the defendants have the substantiation to support the marketing claims that they are making? If defendants offer a refund policy or a guarantee, do they stand by it?  ===> it’s good that the FTC is addressing all of the issues, but the free market can handle product claims, since you can fool only some of the people some of the time, but not most of the people hardly any time, and that is what would be required if retail sales were required to be documented, as was done with Vemma and Herbalife. It would save the FTC a LOT of time and effort.

Sometimes, in addition to filing a complaint, the FTC asks for immediate relief. In January 2020, a federal court granted the FTC’s request to temporarily shut down an alleged pyramid scheme known as “Success By Health,” appoint a receiver for the company, and freeze the assets of the company and its executives. “Success By Health” sold coffee, tea, and dietary supplements through a network of independent distributors, called “Affiliates.” In a separate action, we also allege that individual Jay Noland, along with two other Success By Health executives, should be held in contempt for violating a 2002 court order against Noland related to another pyramid scheme against which the FTC took action, known as BigSmart.  ===> Immediate relief should be the rule, not the exception.

As you can see, the FTC is fully engaged in this area and is determined to protect hard-working consumers from losing money to illegal pyramid schemes or other business opportunities that make deceptive earnings claims. I caution you to stay on the straight and narrow because now, more than ever, this is a top enforcement priority for me, and I hope the agency.  ===> Let’s hope this talk is back up with action. I’ll be the one not holding my breath.

And with that, I’ll end. Thanks very much for your time today.  ===> Me, too. Let’s hope this isn’t another Charlie Brown/Lucy football holding event: charlie brown lucy football – Bing images

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