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You are here: Home / Archives for FTCby Kevin Grimes on January 22, 2015 1 Comment Federal Cooling Off Rule
The Thermonuclear, Scorched-Earth, Mother-Of-All Best Practices Series
By Kevin Grimes
Virtually everyone has heard something about some mysterious state or federal law or regulation that provides some buyers under certain circumstances the ability to cancel some types of purchases or contracts within three days.
But . . . most folks are rather hazy on the details.
On January 6, 2015, the FTC made a change to the federal “cooling off” rule[i] (which is actually a federal regulation). Although the change is not tremendously significant, direct sellers and their independent contractors (“ICs”) need to be aware of the change . . . as well as the other pieces of the Rule.
The Cooling-Off Rule is a federal trade regulation rule that was published by the FTC to address unfair and deceptive practices in sales conducted at locations other than the fixed place of business of the seller. In other words, if you’re marketing products or services for a network marketing company, this federal regulation applies to YOU and the company. Even though the vast majority of sales are not made on a door-to-door basis, the Rule calls all such sales “door-to-door sales.” In addition to sales at consumers’ homes, door-to-door sales include sales at facilities rented on a temporary or short term basis, such as hotel or motel rooms, convention centers, fairgrounds and restaurants; or sales at the buyer’s workplace. The Rule requires door-to-door sellers to provide consumers with written and oral notice of a buyer’s right to unilaterally rescind a contract within three business days from the date of the transaction. Additionally, sellers must provide buyers with a completed receipt, or a copy of the sales contract, containing a summary notice informing buyers of the right to cancel the transaction.
Under the new rule, the revised definition of “door-to-door sales” distinguishes between sales at a buyer’s home and those at locations outside the home. The revised definition retains coverage for sales made at a buyer’s home that have a purchase price of $25 or more, and it increases the purchase price to $130 or more for all other covered sales.
When is the Change Effective?
The change becomes effective on March 13, 2015.
What Do Companies and ICs Need to Know?
The Rule is applicable to the:
Sale, lease, or rental;
Of consumer goods or services;[ii]
With a purchase price of:
$25 or more for sales made at a buyer’s residence;[iii] or
$130 or more for all other temporary locations;
In which the seller[iv] or his representative personally solicits the sale;[v] and
The buyer’s agreement or offer to purchase is made at a place other than the place of business[vi] of the seller (e.g., sales at the buyer’s residence or at facilities rented on a temporary or short-term basis, such as hotel or motel rooms, convention centers, fairgrounds and restaurants, or sales at the buyer’s workplace or in dormitory lounges).
This means that certain sales to customers will fall within the scope of the Rule, and some will not. In addition, if the enrollment of a new IC exceeds the applicable threshold ($25 for sales made at the buyer’s residence and $130 for sales made at all other temporary locations), the Rule will apply.[vii] Whether a particular sale is or is not subject to the Rule depends on the facts involved. Because it’s difficult (and sometimes impossible) to know whether the Rule is applicable to a particular transaction, it’s simply a “best practice” to insure that your documents, corporate practices, and your ICs’ practices always meet the requirements of the Rule.
There are six exemptions to the Rule, however, most of them will be inapplicable to direct selling companies and their ICs . . . most of the time.[viii]
What Do Companies and ICs Need to Do?
The Rules requires “sellers” (direct selling companies) and “their representatives” (ICs) to:
Furnish the buyer with a fully completed receipt or copy of any contract pertaining to the sale at the time of its execution;
Which is in the same language, e.g., Spanish, as that principally used in the oral sales presentation;
Which shows the date of the transaction;
Contains the name and address of the seller, and
In immediate proximity to the space reserved in the contract for the signature of the buyer or on the front page of the receipt if a contract is not used and in bold face type of a minimum size of 10 points, a statement in substantially the following form:
“You, the buyer, may cancel this transaction at any time prior to midnight of the third business day after the date of this transaction. See the attached notice of cancellation form for an explanation of this right.”[ix]
Furnish the buyer with two copies of the Notice of Cancellation[x] at the time the buyer signs the contract or otherwise agrees to buy the consumer goods or services;
Before furnishing copies of the “Notice of Cancellation” to the buyer, complete both copies by entering the name of the seller, the address of the seller’s place of business, the date of the transaction, and the date, not earlier than the third business day following the date of the transaction, by which the buyer may give notice of cancellation;
Exclude in any contract or receipt any confession of judgment or any waiver of any of the rights to which the buyer is entitled under the Rule, including the buyer’s right to cancel the sale in accordance with the provisions of the Rule;
Inform each buyer orally, at the time the buyer signs the contract or purchases the goods or services, of the buyer’s right to cancel;
Not misrepresent in any manner the buyer’s right to cancel;
Honor any valid notice of cancellation by a buyer and within 10 business days after the receipt of such notice, to:
Refund all payments made under the contract or sale;
Return any goods or property traded in, in substantially as good condition as when received by the seller; and
Cancel and return any negotiable instrument executed by the buyer in connection with the contract or sale and take any action necessary or appropriate to terminate promptly any security interest created in the transaction;
Not negotiate, transfer, sell, or assign any note or other evidence of indebtedness to a finance company or other third party prior to midnight of the fifth business day following the day the contract was signed or the goods or services were purchased;
Notify the buyer, within 10 business days of receipt of the buyer’s notice of cancellation, whether the seller intends to repossess or to abandon any shipped or delivered goods.
The FTC expects that companies will inform (and remind) their independent contractors of the requirements that are applicable to them. Accordingly, these requirement should be set forth in the Policies and Procedures. In addition, companies should remind their independent contractors of these requirements not less than annually.
Is there a potential downside to violating the Rule?
Yes, there is. A few of the cases the Federal Trade Commission has pursued include:
$22,000 – FTC v. Vision Group of America, Inc., for alleged violation of the Cooling-Off Rule and deceptive income claims.
$40,000 – FTC v. College Resource Management, Inc., for alleged violation of the Cooling-Off Rule and deceptive claims.
$972,000 – FTC v. Screen Test U.S.A, for alleged violation of the Cooling-Off Rule and deceptive claims.
Violation of the Rule can be very expensive.
If you’re bored and want to see the entire text of the Rule, click here.
The Thermonuclear, Scorched-Earth, Mother-Of-All Best Practices SeriesTM is a collection of articles, reports, and blogs that articulates, educates, and advocates the absolute highest and best business and legal practices for direct selling companies and their independent contractors. We invite and look forward to your feedback.
End Notes———————–
[i] The actual title of the federal cooling-off regulation is Trade Regulation Concerning Cooling-Off Period for Sales Made at Homes or Certain Other Locations, and is found in Title 16 of the Code of Federal Regulations, Part 429.
[ii] “Consumer goods or services” are defined in the Rule as “goods or services purchased, leased, or rented primarily for personal, family, or household purposes, including courses of instruction or training regardless of the purpose for which they are taken.”
[iii] This is true regardless of whether the transaction is consummated under single or multiple contracts.
[iv] A “seller” is defined as “any person, partnership, corporation, or association engaged in the door-to-door sale of consumer goods or services.”
[v] Such solicitations include those in response to or following an invitation by the buyer.
[vi] The “place of business” is defined in the Rule as “the main or permanent branch office or local address of a seller.”
[vii] How do I know that the Rule applies to Starter Kits and Enrollment Fees? I have talked with multiple FTC staff attorneys. Even though the enrollment of an IC involves the commencement of a business, the FTC’s position is that it involves the sale of “consumer goods or services.”
[viii] The term door-to-door sale does not include a transaction:
(1) Made pursuant to prior negotiations in the course of a visit by the buyer to a retail business establishment having a fixed permanent location where the goods are exhibited or the services are offered for sale on a continuing basis; or
(2) In which the consumer is accorded the right of rescission by the provisions of the Consumer Credit Protection Act (15 U.S.C. 1635) or regulations issued pursuant thereto; or
(3) In which the buyer has initiated the contact and the goods or services are needed to meet a bona fide immediate personal emergency of the buyer, and the buyer furnishes the seller with a separate dated and signed personal statement in the buyer’s handwriting describing the situation requiring immediate remedy and expressly acknowledging and waiving the right to cancel the sale within 3 business days; or
(4) Conducted and consummated entirely by mail or telephone; and without any other contact between the buyer and the seller or its representative prior to delivery of the goods or performance of the services; or
(5) In which the buyer has initiated the contact and specifically requested the seller to visit the buyer’s home for the purpose of repairing or performing maintenance upon the buyer’s personal property. If, in the course of such a visit, the seller sells the buyer the right to receive additional services or goods other than replacement parts necessarily used in performing the maintenance or in making the repairs, the sale of those additional goods or services would not fall within this exclusion; or
(6) Pertaining to the sale or rental of real property, to the sale of insurance, or to the sale of securities or commodities by a broker-dealer registered with the Securities and Exchange Commission.
[ix] I call this paragraph “the Pointer.”
[x] The seller may select the method of providing the buyer with the duplicate notice of cancellation form, provided however, that in the event of cancellation the buyer must be able to retain a complete copy of the contract or receipt. Furthermore, if both forms are not attached to the contract or receipt, the seller is required to alter the last sentence in the Point to conform to the actual location of the forms. You can find the Notice of Cancellation in §429.1 of the Rule.
See below for a nicely formatted copy of the article:
Filed Under: mlm legal, MLM startup Tagged With: Federal Cooling Off, FTC, Kevin Grimes, Kevin Grimes MLM, mlm attorneyby Kevin Thompson on December 10, 2014 8 Comments MLM Special Deals: The Fraud Ends Now We’ve been tip-toeing around this issue for years.
The first question: Is it legal to offer distributors special incentives (in addition to the pay plan) to join a company? Yes. Just like it’s legal to hire the services of a doctor to promote a new medical device.
The second question: Is it legal when the company / distributor fail to disclose the existence of these deals? No. Actually, it’s fraud. And as an industry, it’s been going on for years. We’ve known about it, yet we’ve done very little to stop it (or even slow it down). I tried humor when I wrote why more disclosure is bad. I addressed it more assertively in my “Is It Better to Raid In Plain Sight” article when Epic was aggressively cutting deals. I addressed it from an academic standpoint four years ago in my article “Master Distributors: good or bad?”
I’ve been dancing around it for years.
Here’s the bottom line: FAILURE TO DISCLOSE IS FRAUD! IT’S DECEPTIVE. In the competitive landscape of MLM, in order to stimulate recruitment, companies with cash are tempted to drink from the fraud-cup and poach from the more seasoned companies. When the “top leaders” make their move and boast of the benefits of the product and company, it creates synthetic success stories. It creates the appearance of momentum, which creates a more favorable recruiting environment.
What Do These Deals Look Like?
Distributors are paid in a multitude of ways. I’ve seen countless deals, and no two are the same. These distributors are incentivized by way of the following methods (or a combination):
Given a “power-leg” of volume, which makes it much easier for the distributor to derive income via the pay plan (easier path to larger commissions);
Given a percentage override on top of their entire organization i.e. 2% on all gross revenues accumulated in their downline;
Given monthly pay IN ADDITION to the payout of the compensation plan i.e. $10,000 per month on top of the payout;
Given a percentage of the enrollment fees captured by new participants in their organization;
Given preferred compensation based on gross volume i.e. the typical pay plan is disregarded, and a new one is used that pays out more based on gross volume for a specified period of time (“50% of all CV paid out as dollars);
Given substantial signing bonuses;
Given cash advances against future commission cycles.
If companies are building their organizations the right way, brick by brick, deal-free…they’re having the fruits of their labor stolen. And because there’s so little discussion about this practice, it creates an environment where companies can raid effectively without consequence. The non-deal receiving distributors (“lemmings”) follow the distributors because, in most cases, these deal-receiving distributors are great communicators and great recruiters. The lemmings TRUST their upline. But if the lemmings actually knew there was a little extra in it for the promoters….it would slow things down dramatically. The magic would vanish and people would be in a better position to make informed decisions.
Another reason why companies should care: the pressure of these deals leads distributors to play the “my company is better than your company game” in an effort to raid their old groups. It’s like throwing red meat to hungry lions…it causes people to go on a recruiting frenzy, making aggressive claims along the way. In some egregious cases, the leaders are given authority by the company to cut individual deals at the leader’s discretion. This gives the leader more ammunition to raid deep.
Regarding undisclosed deals, it’s fraud. And it’s getting worse, not better. I’ve flirted with the subject in the past, without much luck. Troy Dooly has published some content about it, without much luck.
It’s time to be more direct. It needs to stop.
Back to the law: In their Testimonial and Endorsement Guidelines, the FTC states, “When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed. . . . “ These special deals are absolutely material and they absolutely affect the “credibility of the endorsement.” The FTC goes on to provide the following example:
In their FAQs on the subject, the FTC adds extra insight by answering related questions:
A famous athlete has thousands of followers on Twitter and is well-known as a spokesperson for a particular product. Does he have to disclose that he’s being paid every time he tweets about the product?
It depends on whether his readers understand he’s being paid to endorse that product. If they know he’s a paid endorser, no disclosure is needed. But if a significant number of his readers don’t know that, a disclosure would be needed. Determining whether followers are aware of a relationship could be tricky in many cases, so a disclosure is recommended.
I have a small network marketing business: advertisers pay me to distribute their products to members of my network who then try the product for free. How do the revised Guides affect me?
It’s a good practice to tell participants in your network that if they get products through your program, they should make it clear they got them for free. It also makes sense to advise your clients – the advertisers – that when they give free samples to your members, they should remind them of the importance of disclosing the relationship when members of your network praise their products. You might consider putting a program in place to check periodically whether your members are making these disclosures.
Based on these examples, it’s clear: if the FTC expects people to disclose that they received free product, they will certainly expect companies and distributors to disclose the existence of non-public financial arrangements.
And let’s not forget common sense: If someone is proclaiming the greatness of a company while under the influence of a special arrangement that’s NOT AVAILABLE TO THE PEOPLE THEY’RE RECRUITING, it’s misleading.
Ask! Just ASK. When you see a networker making a move, never feel embarrassed to ask “Were you given extra incentives to switch over? Did the upline kick in extra incentives to get you to switch?” If they actually answer, ask, “If not for the incentives, would you join this company as a new distributor?” I’m sure you’ll be attacked, because you’ll be honing in on a very sensitive subject. Basically, you’ll be questioning their integrity because deep down, they know its shady to withhold that kind of information.
Where should you start? Whenever you see an announcement on Business for Home, ask in the comments. Ted Nuyten over at Business for Home is a friend. I like him personally. But his site frequently gets used by companies looking to create a sense of momentum when, in some cases, the momentum is fabricated. When you see announcements about big moves, ask.
If the company cutting undisclosed deals is a DSA member, file an online Code of Ethics complaint here. Reference Section A of the Code of Ethics (available here). Section A prohibits unethical recruiting practices. As a corporate leader, if you refuse to cut deals, stand up and make yourselves known. Let people see that you’re willing to forgo quick cash for an honorable organization. The average distributor will trust you more, creating more long-term value in your company. I’ll recognize those companies on this site in a separate page.
If this is the first time you’re learning of this issue, how does it make you feel? How can we work together to stop it?
If you’re reading this via email, the video can be viewed here.
Filed Under: mlm attorney, MLM Consulting, mlm legal, MLM News, MLM startup Tagged With: FTC, FTC testimonial and endorsement guidelines, MLM law, MLM master distributors, MLM special dealsby Kevin Thompson on November 3, 2014 4 Comments Herbalife Settles Bostick Class Action Case Herbalife announced its settlement to a class action lawsuit. The case was filed within months of Bill Ackman’s initial presentation where he announced his short position, so it could be an example of a law firm seizing on “blood in the water.” But I digress…
The settlement basically amounts to two things: (1) $15,000,000 in cash for product refunds and remuneration for excessive business expenses (with $5M of that fund going to the lawyers); and (2) Several reforms to Herbalife’s marketing practices. Candidly, Herbalife is already doing most (if not all) of the reforms required as part of this settlement. The cash portion of the settlement was quite smaller than I anticipated, given the size of Amway’s settlement to a similar lawsuit a few years ago ($60,000,000). Already, there’s a group that’s announced they’re going to oppose the settlement. Brent Wilkes, the director of the League of the United Latin American Citizens (“LULAC”) said via a NY Post Article, “We plan to object to the settlement because it won’t begin to pay for the true damages that Herbalife has caused this class.” On a related topic, I have for a few months suspected that Bill Ackman promised to contribute some of his gains (if the bet goes his way) to various civic organizations. I suspect that LULAC is on that list. I sent both Brent Wilkes and LULAC a message via Twitter on Monday morning asking if any funds were promised. I have yet to receive a response. The question is relevant, in my opinion, because it’s important for all material facts to be fully disclosed. If there’s financial motivation in the background, the public deserves to know so the attacks can be judged accordingly. Again, it’s an unconfirmed suspicion. When I get a response, I’ll update the article. UPDATE: See below. Brent Wilkes denies having any financial motivation in his attacks against Herbalife.
@1mlmattorney @LULAC Kevin, neither Bill Ackman nor PQ have promised to contribute anything to LULAC nor would we accept funds from them.
— Brent Wilkes (@BrentWilkes) November 4, 2014
The required corporate reforms are included below. h/t to Seeking Alpha contributor, Ben_Nimaj for typing it up.
1) Simplified Pricing Structure: combine “Package & Handling” and “Order Shipping Charge” into a single “Shipping & Handling” charge
2) Differentiate “Members” and “Distributors”
3) Discourage members from incurring debt to buy product
4) Pay return shipping charges for legitimately returned product
5) Prohibit members from selling “leads” to or purchasing “leads” from other members
6) Prohibit the purchase of product as a condition of being a member
7) maintain procedures for enforcement of these and other rules, ie. implement a member compliance department
8) Include the Statement of Average Gross Compensation (SAGC) of member with any membership application
9) Require any applicant to actually acknowledge having reviewed the SAGC
10) The SAGC must contain the total number and percentage of all members who do not receive any compensation payment directly from Herbalife, [not just numbers from members that actually made money].
Bostick v Herbalife_Preliminary Settlement by kevin_thompson
Filed Under: Distributor Resources, mlm attorney, MLM Consulting, mlm legal, MLM News, MLM Video Blog Tagged With: ackman, Bostick, FTC, herbalife, LULACby Kevin Thompson on June 16, 2014 Leave a Comment (ARTICLE FEATURED IN SEEKING ALPHA) Battle Over BurnLounge: Both sides claim victory Below is an excerpt from my article about the Ninth Circuit opinion on BurnLounge. The article can be read in full over at Seeking Alpha. It’s an important subject. Click here to read it.
The Court successfully threaded the needle on the issue of “ultimate users,” essentially creating two classes of participants.
The Court provided several factors throughout the opinion to help outsiders deduce the motivation driving consumption. This is especially helpful in assessing $HLF.
The Opinion will require the FTC’s pyramid scheme expert to create another analytical framework to distinguish pyramid schemes from legitimate direct selling companies (assuming they need one).
The Court adopted the logic provided by the FTC in its 2004 Staff Advisory Opinion.
The Court eliminated all confusion regarding Omnitrition as it completely ignored the widely referenced dicta that consumption from participants cannot count as sales to “ultimate users.”
On June 2nd, 2014, the Ninth Circuit published its long awaited BurnLounge Opinion. Within hours, both sides of the Herbalife battlefield issued statements claiming victory about the decision. I’ve taken the week to process the opinion. During this time, I’ve tried to keep up to speed with the online chatter regarding various interpretations. One thing is clear: the gray space in MLM law separating legitimate direct selling companies from pyramid schemes has been minimized considerably.
On the one side, Bill Ackman’s Pershing Square spun it as validation of its argument that commissions in the Herbalife plan were derived primarily by opportunity driven demand (recruitment rewards) instead of legitimate product consumption. On the other side, the MLM industry (myself included), breathed a sigh of relief, submitting that the decision validates a lot of our main points in responding to common criticisms of the model. This article is intended to cull out the key nuggets in the BurnLounge decision and interpret what it means going forward.
Click here to read the rest of the article on Seeking Alpha. Seeking Alpha is a news site dedicated to publishing content about publicly traded companies. The article took me quite a bit of time to prepare. I hope you find it informative.
Filed Under: mlm attorney, mlm legal, MLM News, MLM startup Tagged With: bill ackman, BurnLounge, FTC, pyramid scheme, seeking alpha, Ultimate Usersby Kevin Thompson on May 14, 2014 7 Comments PRESS RELEASE FROM THE FTC: “When it comes to pyramid schemes, don’t be in denial” If you’re reading this via email, please click the image above to view my video on the subject. The FTC is finally starting to talk, and we better pay attention. The FTC has recently announced a “Stipulated Order for Permanent Injunction” in its case against Fortune Hi Tech. There’s no surprise here…the founder of FHTM has recently passed away and there was not much to fight over once the initial injunction was in place. The injunction is what we’ve been expecting: the company is prohibited from operating as an MLM and they’re ordered to pay cash to the government. In its announcement, the FTC communicated in plain English. Instead of giving you my perspective, I’m going to share their statement in full. It’s easy to read and it’ll give you an idea of what they find offensive. If I were to summarize (I know I told you I wouldn’t give my perspective, but I can’t help it), I’d say there were three things that caught the FTC’s attention regarding FHTM: (1) aggressive income claims with inadequate substantiation; (2) the emphasis of the marketing pitch was on recruitment instead of product value; (3) (you’re not going to deduce this from their statement below, but it was certainly a factor) the majority of the pay plan was driven by the volume from new participants i.e. front loading.
BEGINNING OF PRESS RELEASE, included in full
Promotional materials and live presentations for Fortune Hi-Tech Marketing used a lot of organizational jargon to recruit new people. The first step: Shell out start-up fees and monthly charges. Next: Recruit enough “independent reps” so you can work your way up through the ranks to Regional Sales Manager, Executive Sales Manager, National Sales Manager, Platinum Sales Manager, and ultimately “Presidential Ambassador.” But the FTC and the State AGs of Illinois, Kentucky and North Carolina have another term for FHTM’s convoluted system of recruiting and compensation: They call it a pyramid scheme.
Last year, the FTC and the states sued FHTM, related companies, and individual defendants, alleging they deceptively claimed people would make big bucks by signing up to sell FHTM’s health and beauty products and services from other vendors. What kind of bait did they dangle before would-be entrepreneurs? According to one video, “Four months in . . . I had actually quadrupled what I have ever made as a Registered Nurse.” One of FHTM’s Platinum Sales Managers said in a video that people who reach the upper levels were making between $30,000 and $70,000 per month. During a recorded conference call posted on a team website, an FHTM Presidential Ambassador claimed that a colleague involved for only six months “earned over $50,000 in one month” and “millions and millions beyond that.”
Ultimately, more than 350,000 people enrolled, but the FTC and State AGs say the bottom line was a far cry from FHTM’s bluster. After conducting its own investigation, the court-appointed receiver concluded that FHTM’s main business was recruiting new members and not selling stuff – a key factor in differentiating a pyramid scheme from a legitimate multi-level marketing plan. For example, 98% of participants lost more money than they made and at least 88% didn’t even recoup their enrollment fees. To the extent people made any money, 81% of the payments to FHTM participants came from recruiting new members, not from sales.
To settle the case, the defendants have agreed to a lifetime ban from multilevel marketing. The stipulated order imposes a judgment of more than $169 million, which will be partially suspended when they surrender certain assets with an estimated value of at least $7.75 million, including property from the estate of defendant Paul Orberson, who died while the case was pending. What kind of valuables are we talking about? A farm in Kentucky, a Florida condo, a house in South Carolina, a BMW, a Jeep, two boats, a sports memorabilia collection, coins, and bullion. The jet skis? They’re going, too.
What can bizopp buyers and sellers take from the case?
Right on the money? Some bizopp sellers argue that earnings claims are just harmless puffery. Wrong. If you state – or imply – that people will achieve certain results, you need competent and reliable evidence to back up those promises. And don’t think that one person’s unusually successful outcome will be sufficient to support a general money-making claim. Save the cherry-picking for the pie. United we stand. The FTC and State AGs stand shoulder to shoulder to protect consumers from questionable money-making ventures. Sometimes the cooperation is behind the scenes; other times we’ll file a case jointly. Either way, we work together to ferret out fraud and deter deception. A ruse by any other name. The evidence showed that the FHTM defendants targeted Spanish-speaking consumers and members of immigrant communities for their shady pitch. Deception is deception, regardless of the language or demographics. A word for entrepreneurs. View business opportunity pitches with a skeptical eye, especally if the person making the promises stands to make money from your participation. Before investing so much as a nickel, run it past someone with proven business savvy who isn’t trying to sell you something. The FTC has free resources in English and Spanish to help you evaluate the options, with specific advice on multilevel marketing. One possible tip-off to a bizopp rip-off: If the focus is less on selling the product and more on recruiting new members.
If you’re reading this via email, click here to review the Stipulated Order for Permanent Injunction.
Filed Under: mlm attorney, MLM News, MLM startup Tagged With: FHTM, fortune high tech, FTC, MLM law, pyramid schemeby Kevin Thompson on March 12, 2014 1 Comment Herbalife Announces FTC Investigation Herbalife announced that the FTC has initiated an investigation. While it’s not pleasant to deal with a government subpoena, this gives Herbalife an opportunity to put this issue to rest. Watch the video below to get my thoughts. In summary, I believe the FTC will use the data it collects from Herbalife to sharpen its saw in an effort to create better guidelines for network marketing companies. They’re not going to sue Herbalife (though I’m sure they’re thinking about it). If you’re reading this via email, click here to watch the video. The paper referenced in my video can be found embedded below (or here).
Filed Under: mlm attorney, MLM Consulting, mlm legal, MLM News, MLM Video Blog Tagged With: FTC, herbalife, Herbalife investigation, MLM law, Peter Vander Natby Kevin Thompson on February 16, 2014 4 Comments Senator Markey’s Letter to the FTC: Prediction Recently, Senator Markey from Massachusetts called upon the FTC to investigate Herbalife. His full letter is included below. Click here to read if you’re reading via email. It’s worth mentioning that that the letter was likely originated by someone at Pershing Square, as observed by John Hempton. Markey has useful letterhead, being a U.S. Senator and all. I digress…
The FTC will respond. While Markey’s letter called for a response by February 28, I’m guessing they’ll respond after the deadline but by late April.
The FTC is not going to respond specifically about Herbalife. Three points worth mentioning here: (1) The FTC lacks the data to provide any meaningful commentary about Herbalife; (2) If the FTC had a problem with Herbalife, they’re not going to announce same at the behest of a Senator; and most importantly (3) Herbalife is not a pyramid scheme. Ackman is playing another confidence game, and the market has grown immune to his tricks.
The FTC is going to take this as an opportunity to start a broader discussion about the network marketing space. There’s an ocean of gray that separates legitimate network marketing companies from illegal pyramid schemes. As a result of this ambiguity, fraudulent programs are flying under the guise of network marketing, claiming legitimacy because they’re “just like Amway.” In my opinion, this is the underbelly of the space that the FTC needs to address, not companies like Herbalife. What will these guidelines look like in the future? That’s a different set of predictions for another time.
The video is a short one. I hope you find it informative. If you’re reading this via email, please click here to view the video.
Update: Herbalife’s CEO, Michael Johnson, personally wrote a response to Senator Markey. It’s also included below.
Filed Under: mlm attorney, mlm legal, MLM News, MLM Video Blog Tagged With: FTC, herbalife, Herbalife investigation, Kevin Thompson MLM attorney, Senator Markey's Letter to the FTCby Kevin Thompson on August 1, 2013 2 Comments Herbalife Distributors Continue to Win Despite War on Wall Street This post is for the unsung heroes carrying the Herbalife organization through this difficult period. Candidly, their distributors are dominating! 2nd Quarter Earnings are in for Herbalife. All of the major metrics are up. Despite the war on Wall Street over the fate of Herbalife between several notable players, the Herbalife distributors continue to produce results. In this video, I explain the importance of their achievement. I also give a few predictions about what this conflict means for the future of the industry.
If you’re interested in the financial elements surrounding Herbalife stock, check out the video below. Robert Chapman does a great job explaining the current and potential value of $HLF. He understands the network marketing model AND the markets, which makes his insight valuable. If you’ll recall, Robert Chapman was literally the first professional on Wall Street to question Bill Ackman’s analysis. His article titled “Herbalife: Why I Made It a 35% Position after the Bill Ackman Bear Raid,” let a lot of air out of Ackman’s proverbial tires. It moved the market. I’m proud to know him.
http://video.cnbc.com/gallery/?play=1&video=3000187031
Filed Under: mlm attorney, mlm legal, MLM News Tagged With: bill ackman, dan loeb, FTC, george soros, herbalife, mlm attorney, MLM law, mlm legal, robert chapmanby Kevin Thompson on July 2, 2013 1 Comment MLM Income Claims: Basic guidelines for companies and distributors | FTC Introduction
With the recent buzz of Federal Trade Commission v. Fortune Hi-Tech Marketing, Inc. slowly coming to a close, I wanted to write an article to reiterate the importance of proper income claims. Statements regarding a network marketing company’s income opportunity go to the heart of the Federal Trade Commission’s (“FTC”) mission to extinguish deceptive, unfair, or unsubstantiated claims made by a company and its distributors. And let’s be honest here, it’s not the distributors’ fault. The majority of income claims made by a distributor are more likely than not truthful statements, but the FTC is not JUST concerned with the truth. Promises of riches and an opportunity to live the American Dream can cloud even the most reasonable person’s judgment. With this in mind, the FTC wants to ensure that all potential distributors make a fully informed decision before choosing to join an MLM program.
In this article, we discuss the legality of income claims made by MLMs and their distributors while using the recent Fortune Hi-Tech (“FHTM”) case as a framework. In Part 2 of this series, we’ll use what we learn in this article to help develop solutions that meet the FTC’s requirements.
Among other reasons in its case against FHTM, the FTC alleged that FHTM’s distributors misrepresented the income opportunity. Specifically, the FTC argued that FHTM violated Section 5(a) of the FTC Act which prohibits “unfair or deceptive acts or practices in or affecting commerce” by misrepresenting or omitting material facts in its income claims. In my opinion, the FTC’s argument about FHTM operating as a pyramid was weak. There’s not much to be learned there. But there’s a lot that can be learned by analyzing its argument regarding improper income claims. The FTC based its allegations off of recorded video and audio presentations, pictures on social media networks, and Twitter posts uploaded by various distributors. These facts underscore the importance of properly educating distributors on how to make clean product and MLM income claims online.
Examples cited by the FTC include the following:
The FTC alleged one distributor claimed in a recorded video presentation on her Vimeo website dedicated to her FHTM business that “four months into the business [with FHTM]… I had actually quadrupled what I have ever made as a Registered Nurse.”
The FTC alleged a distributor claimed on her Vimeo site that distributors who reach the National or Executive Sales Manager levels “are making thirty-, forty-, sixty-, seventy-thousand a month.”
The FTC alleged distributors frequently made lifestyle claims, such as highlighting extended family vacations to exotic locations, driving nice cars, and purchasing large homes with luxurious amenities.
Recorded Audio Presentations
The FTC alleged a recorded conference call posted on distributor’s team website stated that another distributor earned over $50,000 in his sixth month with the company alone and that he “earned millions and millions beyond that” in subsequent years.
Regarding another conference call, the FTC alleged a distributor posted on his team’s website that another distributor was earning “over $100,000 a month” after three years with the company.
The FTC alleged a distributor posted on her Twitter account about a recruiting meeting, encouraging people to “Bring ur friends & learn how 2 make $100k aYR.”
The FTC alleged that at a national convention, 30 top earners were called to the stage to be presented with a mock check for $64 million to represent the amount of money they earned with the company. Several distributors later shared a photo of the presentation on social networking sites.
Sound familiar? No matter how long you have been involved in the network marketing industry, chances are you’ve heard claims similar to the examples above on a regular basis. I’m not trying to point any fingers at distributors. The statements referenced above could potentially all be true. The key is whether those distributors shared legally sufficient income disclosures to the prospects immediately after making the claims. When it comes to these income disclosures, the FTC preferences are confusing and they require a lot from all marketers. In most cases, distributors are simply unaware of how to promote their opportunities appropriately. That’s just the nature of the beast, and it all ties back to compliance training. It’s important to understand the FTC’s top priority is ensuring income claims are adequate. With that being said, the best place to start when learning how to play a game is studying the rules.
The FTC used the following legal argument to make its case against FHTM:
Any income claim that is considered to be deceptive needs a disclosure. The FTC considers an income claim deceptive where information that would affect a reasonable consumer’s judgment is misrepresented or omitted.[1] There is a presumption that all information regarding earning potentials affect consumer’s judgment, even when you do not guarantee they will make any money.[2] Out of those claims, it is also presumed to be reasonable for consumers to rely on statements you expressly make,[3] regardless of whether you tell them making “big money” is a sure thing or not.[4] In other words, all income claims that are atypical need adequate disclosures.
The FTC says that any income claim made is regarded as what consumers will “general[ly achieve . . . .”[5] In other words, what you represent as potential money to a prospect is what a reasonable prospect will expect to earn. IF YOU LACK SUBSTANTIATION (aka, you have no proof) that the majority of your distributors earn the amount represented by a few high earners, you must give a clear and conspicuous disclosure indicating exactly the percentage of distributors who earn at least the amount you represented.[6] And you must also disclose the average earnings. If you’re a distributor that’s working with a particular company, if they do not provide adequate income disclosures, DO NOT MAKE INCOME CLAIMS. The pressure is on them to provide the data.
If you are the motivated (or self-burdening) type, I’d like to challenge you with a little homework project. Look at the examples cited by the FTC against FHTM above and determine what type of disclosure is necessary using the rules we discussed in this article. In our next installment, we’ll discuss our own solutions and ideas for the proper ways to make income claims.
[1] See FTC v. Bay Area Bus Council, Inc., 423 F.3d 627, 635 (7th Cir. 2005); FTC v. World Media Brokers, 415 F.3d 758, 763 (7th Cir. 2005); Kraft, Inc. v. FTC, 970 F.2d 311, 322 (7th Cir. 1992), cert. denied, 507 U.S. 909 (1993); FTC v. QT, Inc., 448 F. Supp. 2d 908, 957 (N.D. Ill. 2006).
[2] FTC v. Febre, No. 94 C 3625, 1996 WL 396117, at *2 (N.D. Ill. July 3, 1996) (conditional earnings claims would be understood to represent typical or average earnings and are therefore deceptive).
[3] See World Travel Vacation Brokers, 861 F.2d 1020, 1029 (7th Cir. 1988).
[4] FTC v. Five Star Auto Club, Inc., 97 F. Supp. 2d 502, 528 (S.D.N.Y. 2000).
[5] 16 C.F.R. § 255.2(b) (Guides Concerning the Use of Endorsements and Testimonials in Advertising); see also In re Cliffdale Assoc., Inc., 103 F.T.C 110, 173 (1984), 1984 WL 565319 (F.T.C.), at *16 (testimonials presumed to represent typical experiences).
[6] In re Nat’l Dynamics, 85 F.T.C. 1052 (1975).
by +Kevin Thompson
Filed Under: Distributor Resources, mlm attorney, MLM Consulting, mlm legal, MLM startup Tagged With: federal trade commission, FTC, Income claims, MLM income claims, pyramid schemeby Kevin Thompson on June 18, 2013 3 Comments FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 2) This article was written by +Kevin Thompson in collaboration with our stellar summer associate, Jake Perry.
In the last article, FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 1), we walked through the Federal Trade Commission’s recently published .com Disclosure Guidelines (fully included below). In this installment, we’re going to walk through five hypothetical examples of common marketing claims made in the MLM industry. The goal of this post is to provide you with practical, easy-to-understand tips on how to make proper claims.
The format is simple: I’m going to give you common fact patterns of how claims are made in the MLM industry. Then I’ll show you what most distributors would WANT to do as far as making disclosures. Then I’ll show what they SHOULD do, as per the .com Disclosure Guidelines. These guidelines apply whether the company is an MLM startup or a well-established company.
Ready? Go time!
UPDATE: This article has been updated after further research. The .com Disclosure Guidelines are over 50 pages and it never mentions income claims. The analysis below is based on my interpretation of their guidelines. EXAMPLE 1: CHECK WAVING
Kyle is very excited about his involvement in a new cosmetics company, Wrinkles-B-Gone. After six months of hard work, he received his first check in the mail for $4,500. Overcome with excitement, Kyle gets an idea. He decides to post a picture on his Facebook profile showing off his check. Kyle figures it’ll be a great way to “flex his muscles” while demonstrating the power of his new company. It is clearly visible in the picture that the check is for $4,500. In his Facebook post, Kyle says, “Boom, playa! Check me out! Want to learn why this company is throwing money at me? Give me a call.”
Kyle does not include a disclosure of the average earnings for Wrinkles-B-Gone distributors. The average is $345 per month per distributor.
What Kyle wants to do:
Kyle, in no attempt to be deceitful, would want to provide a naked link to the company’s income disclosure in the caption. He figures, “Hey, they can click on the link and see all of the numbers at their leisure.”
What the FTC wants to see:
In the caption of the photograph: Please click this link to see our average earnings: www.wrinkles-b-gone.com/earningsdisclaimer
The FTC allows marketers to provide a link to a disclosure IF the disclosure is not integral to the claim being made. “Integral” as defined by meridian is “essential or fundamental.” Is an income disclosure integral to an income claim? Sadly, the FTC does not give us any examples that involve income claims. But they did specify that issues related to health or higher costs would certainly require disclosure near the claim itself (not via a hyperlink). In an example in the guidelines, there was a refrigerator that was unable to maintain a cold enough temperature to prevent bacteria growth. In that example, a disclosure by the ad itself is required. Is the risk associated with an earnings claim on par with food borne illnesses? I doubt it (but I’m open for a discussion).
The FTC further states that disclosures made via hyperlinks are permissible when the data is too complex to disclose next to the ad itself. With income disclosures, the data can be very complex. Plus, the average earnings changes each month; thus, making it nearly impossible to get the entire field to properly disclose the averages immediately after their claims. It’s only practical, in my opinion, to get the field to provide a link to a full earnings disclosure. Keep in mind, providing the link by itself is insufficient. The link must be clearly labeled to adequately inform consumers. Inserting “Please click this link to see our average earnings” sends a clear signal.
If you allow your distributors to make income claims, it’s imperative that you educate them on the proper ways to make those claims. Also, it’s a good idea to display the income disclosure form at some point during the enrollment process. This will help “clean up” in the event your leader fails to provide a disclosure.
EXAMPLE 2: Weight Loss Claim
Gronk has been using “Slim-Me-Cave” for the past 30 days. Miraculously, Gronk lost 30 pounds in this short period of time. Incredibly happy with this weight loss product, Gronk decides to post a blog on the Internet. In the article, he writes, “I lose 30 pounds in 30 days with Slim-Me-Cave! It best weight loss product!!” The average customer of Slim-Me-Cave loses about 1 pound per week, so Gronk’s results are certainly above average.
What Gronk wants to do:
Typical loss is 1 pound per week for Slim-Me-Cave customers. Results will vary depending on diet and exercise.
Your disclosures must give a “reasonable customer” sufficient information to make a decision. “Results Not Typical” does not provide enough information. When making a testimonial about a product that’s “above average,” the average needs to be disclosed (as per the FTC guidelines). Back in the old days, “Results Not Typical” used to work. But now since everyone is a potential marketer, the FTC wants disclosures to be more specific. Does “Results Not Typical” mean a customer will lose only 20 pounds in 30 days? 15 pounds in 30 days? What results can the average customer expect? When possible, provide the averages.
EXAMPLE 3: YouTube Income Claim
Stephanie is giving a video testimonial on YouTube about the benefits of her network-marketing company’s pay plan. She states that “In this business, when I recruited just 20 people, I was making over $2,000 per week!” In that particular program, the average distributor earns $235 per month.
What Stephanie wants to do:
Stephanie would probably not want to provide an income disclosure at all. I’m just being candid. Rarely in videos prepared by distributors do you see any kinds of income disclosures.
The FTC states that the manner you communicate your claim should also be the manner you communicate your disclosure. Therefore, a YouTube video should contain a disclaimer in both video and audio formats. Where should the disclaimer be? Sadly, there’s no clear answer. But if we look at the FTC’s definition of “Clear and Conspicuous,” I think the safest bet is a text disclosure displayed simultaneously to the claim in question in addition to a more detailed audio and video formatted disclosure at the end of the testimonial. Or Stephanie could provide a “visual cue” during the video to communicate to the viewer that disclosures can be found at the end of the video.
Without question, it’s now required (in my opinion) that distributors end their videos with a properly formatted video segment. At the end of the testimonial video, a separate video disclosure should be included to illustrate the average incomes. The video file should include an image of the company’s income disclaimer (usually in spreadsheet format). While the image is on the screen, there should be audio narration regarding the average earnings. If a company is going to permit distributors to use YouTube to promote their businesses, the company should provide this kind of file freely on its website AND educate distributors on how to use it.
While it sounds complicated, it’s not difficult for companies to provide this sort of video file. However, if the company is unwilling to properly arm the distributors with sufficient tools to make good claims, they should restrict distributors from using YouTube (which is not realistic AT ALL).
There are several questions this kind of hypo raises:
Should companies require leaders to insert a clear and conspicuous textual disclosure to appear on the screen when the claim is being made?
It depends. In a perfect world, yes, it’s a good idea to provide the disclosure during the claim. But in reality, most reps lack the technical skill to do this right. This is what we know: disclosures should be as close as possible to the claim being made. Is it sufficient to provide a video file containing a full disclosure at the end of the video? In my opinion, the answer is yes. But in the abundance of caution, it would be better if there were a text disclosure provided during the video in addition to a video file being used at the end.
Is it a good idea to even allow reps to make these sorts of claims to begin with?
Are you able to produce a quality disclosure for your distributors to use? Do you trust your distributors to “color within the lines” and end their videos with a video? Do you have a solid compliance department to catch and correct the distributors that do this poorly? If the answer to those questions is “yes,” then you’ve got a shot. If, on the other hand, you answered “no” to any of those questions, it might not be worth the risk.
If you are going to allow reps to make videos that contain income claims, be careful! When it comes to videos, it’s difficult to walk the tight rope. When it comes to income claims in videos, there’s not much margin for error. With this in mind, I would advise companies to require tight compliance. At a minimum, companies should provide distributors with a professionally produced video file that all distributors can include at the conclusion of their videos. If you know leaders are going to make claims in YouTube videos, or any other video platform, it’s wise to properly arm them with adequate disclosures. A video file will give the needed audio disclosure as well as additional visual disclosure to the income claim in question.
EXAMPLE 4: YouTube Product Claim
“Sports Minded” is a company that sells organic products that improve mental focus during physical activity. Adam is a distributor for Sports Minded and he decides to do a self published a YouTube video to give a testimonial about how he can now focus for 8 hours straight while playing golf without additional supplements. However, studies performed by Sports Minded indicate users can experience an average of 4 hours of improved focus. Adam is being honest regarding his experience with the product. He’s like Mr. Miyagi for 8 hour straight! Since it’s a true statement about his personal experience, is he required to provide substantiation and disclose the average results?
What Adam wants to do:
Adam would likely try to provide a disclosure via a hyperlink in the video description, in text at the end of the video or in a brief audio message at the end of the video.
They want a “clear and conspicuous” disclosure that contains the average results. Just like with the income claim example above, the disclosure needs to be in both audio and visual format.
It would be ideal if the distributor had the skill to inject the disclaimer immediately after making the claim i.e. “I know that the company says the average person experiences 4 hours of increased focus, but that was NOT the case for me!” In order for this to happen consistently in the field, the company needs to take compliance education very seriously.
As you can see with all of these disclosures, it’s a lot more art than science. We previously mentioned that the manner you communicate your claim should also be the manner you communicate your disclosure. Technically, the FTC wants to see the disclaimer in both audio and visual formats (even for videos produced by the field). With that being said, it’s unrealistic to expect sales people to get this right when they’re making product testimonials. And I think the FTC understands this (I’m at least hoping they do). With product testimonials, I think a text disclaimer inserted into the video would be a sufficient disclosure. But this approach would NOT be sufficient for income claims. Because money clouds judgment, the FTC is much more strict in that category (and they should be).
EXAMPLE 5: Tumblr Blog
Mary publishes an article on Tumblr about “N-ERGY SAVER,” a utility service MLM where customers can save money on their electric bills throughout the year. Mary, a representative, claims that she saved $50 per month by signing up with the company. While Mary’s claim is 100% true, the company’s data shows that the average homeowner saves $15 per month on their electric bill.
What Mary wants to do:
She wants to tell her story! She wants to say “I saved $50 a month with this service and so can you!” Since it’s a true story, Mary sees nothing wrong with her sharing her personal experience.
What the FTC is looking for:
The FTC wants to see a disclosure in close proximity to her claim. So if she has written text about her savings with N-ERGY, she needs to include a disclaimer in the same font and format as the text that triggered the claim. The disclaimer can say “The average homeowner saves between $10 and $20 per month, depending on their energy consumption patterns.”
BONUS EXAMPLE!
Same as Example #2, except suppose Gronk wants to make the same claim via Twitter.
I saved 30 LBS w/ Slim-Me-Cave in 30 days! bit.ly/f56/productinfo [linking to the product page that includes the average results]
Twitter allows for 140 characters per tweet. If there’s sufficient space for a disclosure, it’s ok to use to twitter. Otherwise, it should be avoided. With Gronk, providing a link is insufficient. But the FTC provides a little hope in this category: as long as the average results are provided in the tweet, twitter can be used. The FTC provides an example of a permissible weight loss claim below:
Should Twitter be allowed for income claims?
No! There’s just not enough real estate to provide an adequate income disclosure. As I mentioned above, providing a hyperlink by itself is insufficient.
Twitter is tricky. If the distributors are properly trained, they can use twitter for good product testimonials. But with respect to income claims, Twitter should not be allowed AT ALL.
It’s going to be tough for network marketing companies to walk this tight rope. On the one hand, they want to give their distributors the freedom and flexibility to aggressively market the products and pay plan. On the other hand, they need to “pump the brakes” to ensure that the distributors are doing things right. In my opinion, the real challenge is going to be with online video. While it’s very easy for anyone to create a video with a webcam, it’s very difficult for people to insert proper disclaimers during and/or after the video. In the future, proper education in the field is going to be absolutely crucial. Companies that commit to field education are going to be the ones that pass the scrutiny. Companies that take their hands off the wheel and expect leaders to get this stuff right are walking on thin ice. The FTC’s expectations are out there. Ignorance is no longer an excuse.
Filed Under: Distributor Resources, mlm attorney, MLM Consulting, mlm legal, MLM News, MLM startup, MLM Video Blog Tagged With: .com disclosures, federal trade commission, FTC, ftc guidelines, marketing guidelines, mlm attorney, MLM law, mlm legal, network marketingNext Page»	MLM Startup Conference
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