ICCA In the News
FTC urged to investigate multilevel marketing firms such as Herbalife
Los Angeles Times – October 25, 2013 Stuart Pfeifer
FTC urged to crack down amid Herbalife controversy
New York Post – October 24, 2013 Michelle Celarier
Billionaire Ackman trims CP railway stake, adding to fund’s cash pile
Reuters – Fri Oct 25, 2013 Svea Herbst-Bayliss and Euan Rocha
The FTC is standing in a shrinking circle of grey
Financial Times – October 24, 2013 Dan McCrum
We come from different backgrounds, experiences and political persuasions, but we share a concern that the MLM industry has become a substantial cause of injury to consumers. The MLM industry has proven incapable of regulating itself, is rife with fraudulent and deceptive earnings claims and has caused – and will continue to cause – untold financial harm and misery to the poorest and most vulnerable of the consumers whom the Commission was formed to protect.
The petition itself is a detailed list of practices that are unfair and deceptive, referencing over 50 different multi-level marketing schemes, and is signed by 1,029 people from more than 30 countries. The document makes concrete the often abstract concerns about pyramid schemes, showing the ways in which a model of individuals selling products to friends and acquaintances can be corrupted and exploited. Its 20 pages are worth reading in full. For our part, having focused on the legal and regulatory questions for pyramid schemes, we would pick out section four:
There is a patchwork quilt of federal and state laws and regulations which affect the MLM industry. These laws and regulations are inadequate to protect consumers for the following reasons: • There is substantial confusion concerning how to determine whether an MLM is operating as an illegal pyramid scheme. • The determination that a particular MLM is operating as a pyramid scheme may not be made until the scheme has been running for years, with thousands of victims suffering millions of dollars in losses, most of which will prove to be unrecoverable. • Whether or not they constitute pyramid schemes under any definition, MLM firms and their high level distributors continue to make deceptive earnings claims and engage in other unfair and deceptive practices, as described in this Petition. • MLM firms have avoided the requirement for making pre-sale disclosures under the Franchise Rule by the simple expedient of keeping the initial fees under $500. • The MLM industry obtained an exemption from the Business Opportunity Rule and its pre-sale disclosure requirements, after extensive lobbying of the Commission and Congress.
In essence, current safeguards are not sufficient. But the petitioners are not finished there. They turn to an issue that we have been arguing is at the heart of the questions surrounding Herbalife: who are its customers, and what constitutes a true retail sale? Without retreading the case law in full, there is a lot of confusion about what constitutes a pyramid scheme, and that confusion is largely the FTC’s fault. As the petition aptly summarises, some case law requires that any commissions paid to sales people (distributors in the jargon), must be based on “actually consummated” sales to customers. But a 2004 staff advisory opinion muddied the waters. As the petitioners write:
This language has been used by the Direct Selling Association and others to support the proposition that sales to Multi-Level Marketing participants for their “personal use” do satisfy the retail sales requirement.
As we have noted before, Herbalife’s defence that it is wholly legitimate rests on the idea that three-quarters of its distributors are not actually sales people trying to make money. The company sees this as a confusion caused by the jargon, and describes them as purely discount customers. It has told us:
The make up of the customer base is not at the heart of the question of pyramid schemes and it demonstrates a lack of understanding of the law to suggest it is.
We disagree, but the situation is definitely confused and the petitioners, above all, are asking the FTC for clarity.
If the existence of substantial retail sales is to be the touchstone of whether an MLM is a pyramid scheme, the determination cannot be made until the scheme has been operating for a substantial period of time and only after an extensive investigation. The Commission needs to address and clarify this situation. In our view, any MLM program which permits unlimited recruiting and rewards distributors with commissions paid on the purchases of other distributors should be deemed to be a pyramid scheme without the need for further analysis. Such a bright line rule will provide essential guidance to consumers, regulators, investors and the MLM industry.
Such a bright line will have a dramatic effect on the industry as a whole, however. Note this point from Jeffrey Babner, a long time lawyer to the direct sales industry in a piece addressing short seller arguments (our emphasis):
This is a critical question, because at the core of the short seller accusation is the claim that a purchase for personal use by distributors (otherwise known as internal consumption) cannot be considered a sale to an ultimate user. If this standard were to be adopted, it would cast a cloud over many well-established direct selling companies, particularly those that sell consumable products such as health, home and personal care.
This line of argument also mirrors that in an informed comment to a Forbes blog post this year, following another discussion of FTC views set out in their prosecutions of BurnLounge and Fortune High Tech Marketing:
Granted this is my own speculation, but speculation based on the fact that virtually all 1,200 MLM companies do not meet the “customer” standards set in the BurnLounge and FHTM case, yet the vast majority have never been accosted by the FTC, nor any other state or federal legal authority, even those 83 that have existed for more than a decade, nor the eight that have operated for more than 40 years.
Sounds like a bright line on that issue would be a problem. But we would note that the petition does not take every direct sales company to task.
We do not claim that all MLM firms engage in all of these practices, but that they are prevalent in the industry. We note that one large direct seller, Tupperware, recently left the DSA. Tupperware’s CEO told theWall Street Journal “[w]e didn’t leave direct selling… Direct selling left us, because the industry became dominated by buying clubs and what look like pyramid schemes.”
The Direct Selling Association is at pains to emphasise the ethics of its members and what it sees as the real facts about the industry model, its benefits, and values. What is clear from all of this, however, is that the industry and its critics are lining up on different sides of the argument. At some point the FTC is going to have to say which one of them it thinks is right.
FTC Urged to Crack Down On MLM Industry Amid Calls To Probe Herbalife
ValueWalk.com – October 25, 2013 Marie Cabural
Herbalife is the center of controversy
Currently, Herbalife Ltd. (NYSE:HLF) is the center of controversy within the MLM industry. Hedge fund manager, Bill Ackman of Pershing Square Capital Management, accused the nutritional and weight management products company as a pyramid scheme… read more
MLM Petition – An International Coalition of Consumer Advocates
http://amthrax.wordpress.com – October 25, 2013
What No One Wants to Say about Herbalife
http://seekingalpha.com/article/1814782-what-no-one-wants-to-say-about-herbalife?source=email_rt_article_readmore – Seeking Alpha – November 6, 2013 Robert Fitzpatrick
New Efforts to Get the FTC to Regulate Direct Sellers
The petition’s primary goal is to protect would-be distributors, which the industry calls independent business owners, and momentum is building in signatories’ favor, says Douglas M. Brooks, a semiretired Concord (Mass.) franchise attorney who signed it. During his law career, Brooks says he brought 10 class actions against MLMs alleging that they defrauded distributors. “We’re an unincorporated, unfunded, and unorganized group that has been at this for a long time, but now victims are finding each other over the Internet, and opposition to this industry is starting to snowball,” he says. Ackman is not behind the petition, though his factsaboutherbalife.com website has included it, says Brooks. He notes that roughly 1,000 people submitted comments and/or added their names to an addendum filed with the petition. During 2013, hundreds of individuals as well as such groups as the National Consumers League, the Hispanic Federation, and the League of United Latin American Citizens called on the FTC to investigate the MLM industry in general or Herbalife specifically, prompted by member complaints and Ackman’s accusations. Federal, state, and local lawmakers have joined in as well. “As I have learned more about this issue from my constituents and from outside groups, I believe it is the Federal Trade Commission’s responsibility to examine these allegations,” Representative Linda Sanchez (D-Calif.) wrote in a June letter addressed to FTC chairwoman Edith Ramirez.
One of the individuals who lent support to the recent FTC petition is fraud investigator Tracy Coenen, 41, of Milwaukee. In 2006 she started the blog Pink Truth, which criticizes Mary Kay, one of the oldest MLM companies in the U.S. “I am lending my support and name to the petition effort because I believe what the organizers are doing is important,” Coenen writes in an e-mail. Industry representative Mariano says his organization meets regularly with lawmakers and the FTC to discuss the industry’s self-regulation standards and the contributions that MLMs make to the U.S. and the international economy. “I’m confident that the FTC, as well as other law enforcement agencies, understand the contributions that direct selling makes. We create a better life for all Americans, and the FTC has always recognized that,” he says. Industry critics are “trying to turn around a positive thing for people and translate it into something bad.”