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