re: federal trade commission guidance to the direct ... ... marketer vemma and have published...

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November3,2017

TheHonorableMaureenOhlhausen

ActingChairman

FederalTradeCommission

600PennsylvaniaAvenue,NW

Washington,DC20580

TheHonorableTerrellMcSweeny

Commissioner

FederalTradeCommission

600PennsylvaniaAvenue,NW

Washington,DC20580

RE:FederalTradeCommissionGuidancetotheDirectSellingIndustry

DearActingChairmanOhlhausenandCommissionerMcSweeny:

Theundersignedconsumerprotectiongroups,civilrightsorganizationsandacademic

leadersurgetheFederalTradeCommission(“FTC”or“Commission”)toensurethatany

additionalguidanceitprovidestothedirectsellingindustryisconsistentwithexistingcase

lawandpreviousCommissionguidance,addressestheindustry’spositionregarding

internalconsumption,andreaffirmstheneedforincomeandproductclaimstobe

substantiated.Anythingless,wefear,willnotadequatelyprotectconsumersfrom

deceptivemulti-levelmarketing(“MLM”)companies.

TheFTCregularlyprovidesguidancetoindustriesitoversees,whichhelpsbusinessesto

betterunderstandtheirresponsibilitiesandcomplywiththelaw.Thisguidanceisprovided

inavarietyofforms,includingletterstoindustryassociationsbyCommissionersandstaff,

blogpostings,remarksprovidedbyCommissionersatindustryevents,aswellasconsumer

andbusinessguides.

WhentheCommission’ssettlementwithHerbalifewasannouncedinJuly2016,theformer

ChairwomanpubliclystatedthattheCommissionalsointendedtoprovideadditional

guidancetothedirectsellingindustry.iThismessagewasreiteratedinremarkstothe

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DirectSellingAssociation(“DSA”)inOctober2016iiandinalettertoDSA’sPresidentin

January2017.iii

Itiswiththisgoalinmindthatweseektoprovideyouwithourviewsregardingwhat

productive,pro-consumerguidancetothedirectsellingindustrywouldbestinclude.

Specifically,theFTC’sguidanceshould:

• Relyonexistingcaselawaffirmingtheprimacyofretailsalesforpurposesof

fundingdistributorcompensation.Formorethanfourdecades,theFTChasrelied

onguidancefromthecourtstoinformitsenforcementactivitiesinthecontextof

protectingconsumersfrompyramidschemes.ThiscaselawisbasedontheFTCAct

andthe1975Koscotdecision.ivThisfoundationalcaselawrequiresthatdistributor

compensationbetiedprimarilytothesaleofgoodsandservicestoretailcustomers

externaltothebusinessopportunity.Theprimacyofretailsalesformsthecoreof

the“Koscottest,”whichhasbeenupheldconsistentlybythecourts,mostrecentlyin

theVemmavandBurnLoungevicases.Assuch,theCommission’sguidanceshouldre-

affirmthat“alegitimateMLMshouldnotusetargetsorthresholdsforcompensation

oranyotherbenefitthatcanbemetbymereproductpurchases.Rather,business

opportunityparticipantsshouldbuyproductonlyinresponsetoactualcustomer

demand.”vii

• DrawonpreviousFTCinvestigationsandsettlements.ThemajorityofFTC

investigationsofpyramidschemeactivityinthedirectsellingindustryareresolved

bysettlements.Insuchcases,thepartiesagreetobusinesspracticechangesand,

often,compensationpaiddirectlytovictimsofallegedlyfraudulentbehavior.While

thefactspertainingtorespectivesettlementsaretypicallyuniquetoeachcase,the

Commissionhasalsocommunicatedthatthesesettlementsaremeantasguidance

forwhatbusinessactivitiesmayviolateSection5oftheFTCAct.Forexample,the

Commission’ssettlementwithHerbaliferequiredthecompanytoimplement

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systemsthataccuratelytrackreceiptsofsalestoretailconsumersofthecompany’s

product.Sucharequirementisabasicbusinessactivitythatalignswiththe

Commission’sguidancethatMLMsshouldincentivize“profitableandverifiablesales

-torealcustomers-specifically,thoseoutsidetheMLMnetwork.”viii

• Reiteratethatcompensationbasedoninternalconsumptionofproductsor

servicesshouldbesubjecttoreasonableandtransparentlimits.Thedirect

sellingindustryhasfrequentlymisinterpretedthefindingoftheBurnLoungecourt

regardingthevalidityofinternalconsumptionofproductandservicesforpurposes

ofdeterminingdistributorcompensation.ixTheappellatecourtinBurnLoungefound

thatinternalconsumptionalonedidnotconstituteconsumerdemandforpurposes

ofmeetingtheKoscottest.xTherefore,theCommission’sguidanceshouldreiterate

itsandthecourts’well-establishedskepticismregardingthevalidityof“internal”or

“personal”consumptionasabasisformulti-levelcompensation.

• Affirmthatproductandincomeclaimsmustbesubstantiated.The

Commission’sinvestigationshaveoftenfoundevidencethatfraudulentMLM

companiesattempttoattractnewdistributorswithincomeandproductclaimsthat

cannotbesubstantiated.xiInaddition,researchbyTruthInAdvertising.orghasfound

thattheproductssoldbyashockinglyhighpercentageofDSAmembercompanies’

distributorsaremarketedwithdeceptivehealthclaims.xiiGiventhisevidence,the

Commission’sguidanceshouldmakeclearthataMLMcompanymustpossess

substantiationforanyofitsincomeandproductclaims.Publicstatementsmade

regardingthedistributionofrewards(e.g.,earnings)todistributorsmustconveyan

accuratepictureofdistributorrewardsovertime,includingtheextenttowhich

significantrewardsaccruetothesameparticipantsfromoneyeartothenext.

Regardingdistributors,MLMcompaniesmustnotonlyprohibitanyfalseclaimsby

theirdistributorsbutmustalsomonitordistributorstoenforcesuchprohibitions.

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Directselling,atitsbest,canbeanalternativetotraditionalretailchannels.Unfortunately,

thepotentialbenefitsprovidedbythisindustryhavebeenmarredbyrepeatedincidentsof

pyramidalactivitythathaveharmedmillionsofconsumers.Astheagencywithprimary

responsibilityforpolicingthedirectsellingindustry,itisimperativethattheguidancethe

Commissionprovidesbeclear,unambiguous,andconsistentwithexistingprecedents.On

behalfofmillionsofconsumersnationwide,ourorganizationslookforwardtocontinuing

toworkwiththeCommissionasitcraftsitsguidance.

Sincerely,

ConsumerAction

ConsumerFederationofAmerica

ConsumersUnion

ConsumerWatchdog

LeagueofUnitedLatinAmericanCitizens

MANA,ANationalLatinaOrganization

NationalAssociationofConsumerAdvocates

NationalConsumerLawCenter(onbehalfofitslowincomeclients)

NationalConsumersLeague

PublicCitizen

U.S.PIRG

WilliamW.Keep,PhD,TheCollegeofNewJerseySchoolofBusiness

PeterJ.VanderNat,PhD,SeniorEconomist(retired),FederalTradeCommission

cc: TheHonorableRichardBlumenthal

TheHonorableShelleyMooreCapito

TheHonorableThadCochran

TheHonorableChristopherCoons

TheHonorableRodneyFrelinghuysen

TheHonorableTomGraves

TheHonorableBobLatta

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TheHonorablePatrickLeahy

TheHonorableNitaLowey

TheHonorableMitchMcConnell

TheHonorableJerryMoran

TheHonorableBillNelson

TheHonorableFrankPallone

TheHonorableNancyPelosi

TheHonorableMikeQuigley

TheHonorablePaulRyan

TheHonorableJanSchakowsky

TheHonorableCharlesSchumer

TheHonorableJohnThune

TheHonorableGregWalden i CommentsofFTCChairmanEdithRamirez.“FEDERALTRADECOMMISSION:HerbalifePressConference,”July15,2016.(“CHAIRMANRAMIREZ:WewillbeprovidingadditionalguidancetotheMLMindustrymoregenerallyfollowingthiscase.Ithinkwhatweachievedinthiscaseisunprecedented.Ithinktheprotectionsthatwehaveinplacehere,they'reaimedtoensurethatgoingforwardHerbalifeoperateslegitimately.ButIdothinktheyprovideimportantguidancetotherestoftheMLMindustryaboutwhattheyneedtofocusoninordertoensurethattheyarenotengaginginunfairdeceptivepractices.Butwedointendtoprovidefurtherguidancefollowingwhatwe'redoinginthisparticularcase.”)Online:https://www.ftc.gov/system/files/documents/videos/ftc-press-conference-herbalife/ftc_press_conference_on_herbalife_settlement_7-15-16_-_transcript.pdfiiFederalTradeCommission.“KeynoteRemarksofFTCChairwomanRamirezDSABusiness&PolicyConferenceWashington,DC,”October25,2016.(“Forourpart,theFTCwillbeissuingfurtherguidanceforMLMs,butIbelievetheprinciplesthatIhaveoutlinedtodayshouldprovideanimportantfoundationforstructuringbusinesspracticesintheMLMindustryinawaythatprovidesconsumerswithtruthfulinformationandhelpspreventconsumerharm.“)Online:https://www.ftc.gov/system/files/documents/public_statements/993473/ramirez_-_dsa_speech_10-25-16.pdfiiiFederalTradeCommission.“LetterfromChairwomanEdithRamireztoJosephMariano,”(hereafter“Ramirezletter”)January19,2017.(“Todate,theCommissionhasissuedsubstantialguidancedetailingthekeytenetslegitimateMLMsmustfollow.Thisguidanceincludesthe2016Herbalifeenforcementactionandconsentorder,aswellastheFTC'sotherlitigatedandsettledcases.MyOctober2016remarks,whicharenowpostedontheFTC'swebsite,arealsoinstructiveandsetforthadditionalguidancetotheMLMindustry,describingindetailhowindustrymemberscanenhancetransparencyandensuretheystayontherightsideofthelaw.Additionally,inDecember2016,weannouncedthesettlementofouractionagainstmulti-levelmarketerVemmaandhavepublishedseveralblogsreiteratingandreinforcingthecentraltenetslegitimateMLMsarerequiredtofollow.”)Online:https://www.ftc.gov/system/files/documents/public_statements/1068663/response_to_dsa_letter_ramirez.pdf

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ivInReKoscotInterplanetaryInc.,86F.T.C.11106(1975)Online:https://www.ftc.gov/sites/default/files/documents/commission_decision_volumes/volume-86/ftc_volume_decision_86_july_-_december_1975pages_1106-1202.pdfvOnline:https://www.ftc.gov/enforcement/cases-proceedings/142-3230-x150057/vemma-nutrition-company viOnline:https://www.ftc.gov/enforcement/cases-proceedings/062-3201/burnlounge-incviiRamirezletter.Pg.2.viiiibid.ixSee,e.g.Mariano,Joseph.“Courtrulingclarifiesprotectionsregardingpyramidschemes,”TheHill.June12,2014.(“...theCourtaffirmedthatcompensationinamultilevelmarketingbusinessmustbeprimarilybasedonthesaleofproductsandservicestotheultimateconsumer,whetherornotthatconsumerisalsoaselleroftheproducts.”)Online:http://thehill.com/blogs/congress-blog/judicial/209086-court-ruling-clarifies-protections-regarding-pyramid-schemes xBurnLoungeopinion,pg.19.(“WhethertherewardsarerelatedtothesaleofproductsdependsonhowBurnLounge’sbonusstructureoperatedinpractice.SeeOmnitrition,79F.3dat781.Inpractice,therewardsBurnLoungepaidforpackagesaleswerenottiedtotheconsumerdemandforthemerchandiseinthepackages;theywerepaidtoMogulsforrecruitingnewparticipants.ThefactthattherewardswerepaidforrecruitingisshownbythenecessityofrecruitingtoearncashrewardsandtheevidencethattheschemewassetuptomotivateMogulsthroughtheopportunitytoearncash.Rewardsforrecruitingwere‘unrelated’tosalestoultimateusersbecauseBurnLoungeincentivizedrecruitingparticipants,notproductsales.”)xiFederalTradeCommission.“KeynoteRemarksofFTCChairwomanRamirezDSABusiness&PolicyConferenceWashington,DC,”October25,2016.(“Unfortunately,however,ourlawenforcementexperienceshowsthatmanyMLMscontinuetomisrepresenttheamountofmoneyparticipantsarelikelytoearn.Infact,inallofourcasesagainstmulti-levelmarketers,theFTChasallegedthatthedefendantsmadefalseearningsrepresentations.Thesemisrepresentationscauserealharmtoconsumers,andtheyneedtostop.”)Online:https://www.ftc.gov/system/files/documents/public_statements/993473/ramirez_-_dsa_speech_10-25-16.pdfxii TruthInAdvertising.org“TINA.ORGINVESTIGATIONREVEALSMLMINDUSTRYRIFEWITHILLEGALHEALTHCLAIMS,”Pressrelease.November7,2016.Online:https://www.truthinadvertising.org/tina-org-investigation-reveals-mlm-industry-rife-with-illegal-health-claims/