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More FTC Guidance for MLMs Unlikely After Herbalife Settlement

<p>The Commission indicated in a letter last month to the Direct Selling Association that it&rsquo;s published ample guidance for multi-level marketers, casting doubt that a more comprehensive guidance will be issued any time soon under the Trump administration.</p>

A top federal regulator told reporters in July that the protections in place under an agreement with Herbalife Ltd. offered “important guidance" to multi-level marketers (MLMs) regarding areas of focus to avoid “unfair deceptive practices."

In the same press conference, and again during an event held in October by the Direct Selling Association (DSA), then-FTC Chairwoman Edith Ramirez said the Commission would issue further guidance for the MLM industry.

On Dec. 9, DSA President Joseph N. Mariano wrote to Ramirez in a letter, requesting an opportunity to meet with FTC staff or commissioners if the agency was considering issuing guidance for the industry.

Then on Jan. 10 in conjunction with a notice that checks were being mailed to hundreds of thousands of Herbalife distributors under the settlement, the Commission published on its website a one-page document, “Redress checks and compliance checks: Lessons from the FTC’s Herbalife and Vemma cases."

The Commission highlighted four points:

  • False or unsubstantiated earnings claims violate the FTC act;
  • Monitor the claims your distributors are making;
  • At the heart of a legitimate MLM are real sales to real customers; and
  • Make sure compensation and other incentives are tied to real sales to real customers.

While the terms of the Herbalife and Vemma orders only pertain to the two companies, “industry members can learn a lot by reviewing the conduct the FTC says violated the law and understanding the principles underlying those orders," an FTC senior attorney, Lesley Fair, wrote in the document.

The document’s publication raised the question. Did federal regulators plan to issue more comprehensive and formal guidance for an MLM industry selling nutritional supplements, skin care products, and other items?

Douglas Brooks, a lawyer in the greater Boston area who has studied the MLM industry for a quarter century and represented victims of deceptive MLM practices, said Ramirez’s comments during the Herbalife press conference sparked interest in forthcoming guidance and what form it would take.

He described the document or blog written by Fair as “probably the most informal type of guidance that the FTC could have issued," with negligible legal ramifications. It fell far short of a regulation, or even a staff advisory letter, he indicated.

“A regulation has the force and effect of law," explained Brooks, who was actively involved for the plaintiffs in a famous federal Ninth Circuit Court of Appeals decision, Webster v. Omnitrition International Inc., which examined the elements of a pyramid scheme. “You break a regulation. You’re breaking the law. A staff advisory opinion is not legally binding, but it is … a safe harbor if you comply with it, and if you don’t comply with it, you are treading on thin ice.

“This release really doesn’t do much more than what … anyone would have been advising their MLM clients after the Herbalife deal," he continued. “Which is basically, ‘You better study the Herbalife deal very carefully and … make sure that your system, your compensation plan and your compliance systems measure up to that … system.’"

On Jan. 19, Ramirez indicated in a letter to DSA’s Mariano that additional guidance was not in the pipeline. “To date, the Commission has issued substantial guidance detailing the key tenets legitimate MLMs must follow," she wrote.

Ramirez cited, for example, the Herbalife enforcement case and consent decree, her October remarks, a settlement involving Vemma Nutrition Company and several blogs. “To the extent that DSA and its members have additional questions about how to comply with the law," Ramirez recommended the industry contact an agency official, Lois Greisman with FTC’s Division of Marketing Practices.

A DSA spokesman had no immediate comment on the letter, and Herbalife did not immediately respond to a request for comment.

Responding to an inquiry from Natural Products INSIDER, FTC spokesman Frank Dorman described the redress checks and compliance checks release as a blog, and he said it functioned as additional guidance. He had no additional comment regarding guidance for MLMs.

Kevin Thompson, a lawyer in Tennessee who advises MLM firms, doesn’t anticipate additional guidance from the Commission any time soon.

“The FTC is done with ‘guidance’ for now," said Thompson of the law firm Thompson Burton PLLC, in an email. “It's the same movie, different year. The recent settlements are to serve as fence-posts for the industry moving forward.

“The real question is how active the FTC will be under the Trump administration," he continued. “It's pretty clear that they'll be less inclined to sue companies in the grey, i.e., Herbalife and Vemma. They'll likely return to old form where they go after the clear bad actors."

In her remarks at the DSA Business & Policy Conference, Ramirez emphasized, in part, the importance of MLMs generating actual retail sales. She resigned from the agency, effective Feb. 10, and the acting FTC chairwoman is Maureen K. Ohlhausen, a Republican who was sworn in to the Commission during the Obama administration.

Some lawyers expect an FTC that will be more friendly to business. That could be encouraging to the $36 billion direct selling industry but worrisome to consumer advocates who have criticized MLMs’ business practices.

Some prominent officials in the Trump administration—and the president himself—have ties to the industry, Brooks observed.

Education secretary Betsy DeVos is the daughter-in-law of Amway co-founder Richard DeVos, while Trump’s nominee for housing and urban development secretary, the neurosurgeon and former presidential candidate Ben Carson, delivered four speeches at Mannatech events and has purchased the company’s products, according to The Washington Post. Even President Donald Trump has been linked to an MLM—The Trump Network—that sold vitamins and other health products. 

“There’s a lot of pro-MLM folks in the administration," said Brooks, who expressed concern the Republican administration would reverse the progress that’s been made over the last year by Ramirez’s FTC. Still from his perspective, he acknowledged the Herbalife settlement was a positive and groundbreaking development.

“The Herbalife settlement really is the ultimate," the lawyer proclaimed, “in terms of enforcing the requirement that multi-level marketing compensation be based on actual, profitable retail sales."

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