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by on December 2, 2011 Leave a Comment

FTC Targets Acai Seller

The Federal Trade Commission has filed a complaint to stop LeanSpa, a weight loss company that has allegedly used fake news websites from affiliate marketers to promote its acai products.  LeanSpa parties apparently used affiliate marketers to drive interest to their program.  Allegedly, the affiliates used “fake news sites” to fein credibility about the products and drive traffic to the main site; thus, earning themselves commissions.  In its press release, the FTC states,

The complaint alleges that the defendants hired affiliate marketers who used fake news websites to promote the defendants’ products. The fake news websites used domain names that appear to be objective news or health sites, such as channel8health.com, dailyhealth6.com, and online6health.com. . . The fake news sites had links to the defendants’ own websites, where consumers were offered trial samples of two weight-loss dietary supplements: an acai-berry product and a colon cleanse product. The affiliate marketers earned a commission for each consumer who landed on their sites and signed up for a trial.”

There are three things that stand-out with this lawsuit that are relevant for the MLM community.

First, never outsource the creation of marketing materials without proper guidelines.

In the case mentioned above, the FTC highlighted the marketing practices leveraged by the affiliates.  The affiliates were obviously creating their own marketing materials, leading them to pretend to be objective reporters and using with legitimate-looking domain names. Although they were not agents of the company, the behavior still got the company in serious trouble.  With MLM companies, it’s more complex than a simple affiliate model.  With a MLM model, it’s specifically designed to not only recruit and retain first level affiliates, it’s designed to empower those individuals to sponsor and train other people. It’s an affiliate model on steroids.  With this in mind, it’s imperative for companies to at least maintain approval-rights before a leader can develop MLM training.  This includes restraining the field’s ability to create internet landing pages.  It seems harsh, but it’s the irresponsible 1% that can lead to the ship burning down.

Second, when making endorsements, affiliates must disclose their relationship

In the past, I wrote about the revised FTC guidelines.  In these guidelines, the FTC makes it painfully clear that when there’s a financial connection between an endorser and a business, the endorser is obligated it disclose the relationship.  Specifically, it requires disclosure when: “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.”  With LeanSpa, the affiliates were trying to pretend to be objective reports, which put the company at substantial risk.

Third, avoid the “Negative-Option Continuity” plan

This one is just plain common-sense.  A negative-option plan is one where a participant is automatically enrolled in an autoship and they need to specifically opt-out. With LeanSpa, apparently people were enticed into purchasing small samples of the product.  However, they failed to realize that they were also committing to a monthly $80 purchase of inventory. If a MLM business has an autoship program, it’s vital to ensure the distributor specifically chooses to participate in the program.  Do not allow the sponsor to enroll the distributor into an autoship program without express consent.  And be candid about the financial commitment involved.

Bonus: Playing dumb never works.

It would be easy for a company like LeanSpa to say, “we’re not able to control how these people market our products.”  At the end of the day, the FTC is not going to buy the argument. Companies cannot reap the benefits of misrepresentation without accepting responsibility from the methods by which the benefits were obtained. While it’s hard to run a tight ship, it’s incumbent upon every MLM company to do it right given the high stakes. MLM compliance departments are very important.

What are your thoughts?  Do you see any poorly run websites out there run by distributors?  How should the company monitor the web to prevent it?

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by on June 20, 2011 1 Comment

FTC’s tips for discerning good companies from bad

Debra Valentine, General Counsel for the FTC, provided the following tips for consumers when discerning good companies from bad ones.  She gave the speech in 1998, which makes it a little dated.  BUT, I was doing some research and found this article interesting and thought you might find it informative. To read the complete article, go here.

START

Here are some tips that consumers and business might find helpful.

1. Beware of any plan that makes exaggerated earnings claims, especially when there seems to be no real underlying product sales or investment profits. The plan could be a Ponzi scheme where money from later recruits pays off earlier ones. Eventually this program will collapse, causing substantial injury to most participants.

2. Beware of any plan that offers commissions for recruiting new distributors, particularly when there is no product involved or when there is a separate, up-front membership fee. At the same time, do not assume that the presence of a purported product or service removes all danger. The Commission has seen pyramids operating behind the apparent offer of investment opportunities, charity benefits, off-shore credit cards, jewelry, women’s underwear, cosmetics, cleaning supplies, and even electricity.

3. If a plan purports to sell a product or service, check to see whether its price is inflated, whether new members must buy costly inventory, or whether members make most “sales” to other members rather than the general public. If any of these conditions exist, the purported “sale” of the product or service may just mask a pyramid scheme that promotes an endless chain of recruiting and inventory loading.

4. Beware of any program that claims to have a secret plan, overseas connection or special relationship that is difficult to verify. Charles Ponzi claimed that he had a secret method of trading and redeeming millions of postal reply coupons. The real secret was that he stopped redeeming them. Likewise, CDI allegedly represented that it had the backing of a special overseas bank when no such relationship existed.

5. Beware of any plan that delays meeting its commitments while asking members to “keep the faith.” Many pyramid schemes advertise that they are in the “pre-launch” stage, yet they never can and never do launch. By definition pyramid schemes can never fulfill their obligations to a majority of their participants. To survive, pyramids need to keep and attract as many members as possible. Thus, promoters try to appeal to a sense of community or solidarity, while chastising outsiders or skeptics. Often the government is the target of the pyramid’s collective wrath, particularly when the scheme is about to be dismantled. Commission attorneys now know to expect picketers and a packed courtroom when they file suit to halt a pyramid scheme. Half of the pyramid’s recruits may see themselves as victims of a scam that we took too long to stop; the other half may view themselves as victims of government meddling that ruined their chance to make millions. Government officials in Albania have also experienced this reaction in the recent past.

6. Finally, beware of programs that attempt to capitalize on the public’s interest in hi-tech or newly deregulated markets. Every investor fantasizes about becoming wealthy overnight, but in fact, most hi-tech ventures are risky and yield substantial profits only after years of hard work. Similarly, deregulated markets can offer substantial benefits to investors and consumers, but deregulation seldom means that “everything goes,” that no rules apply, and that pyramid or Ponzi schemes are suddenly legitimate.

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by on June 10, 2010 1 Comment

Revised FTC Endorsement Guidelines: Part 1 (Master Distributors)

As I was reviewing the revised FTC endorsement guidelines, I ran across several provisions that would impact the direct sales industry. When people read the word “impact,” I think they naturally assume it’s a negative thing. Undoubtedly, the revised FTC guidelines calls for more disclosures from network marketing companies. In a multi part series, I’m going to hash out the provisions that network marketing companies need to pay special attention to.

I recently wrote an article about “Master Distributors” and explained the pros and cons of cutting special deals with top networkers. In the end, I see nothing wrong with businesses cutting favorable deals with top performers. HOWEVER, I think it’s important for companies that cut these deals to disclose the relationship to the public. There’s a provision in the guidelines that’s directly on point:

§ 255.5 Disclosure of material connections

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. . . . Additional guidance, including guidance concerning endorsements made through other media, is provided by the examples below.
. . .
Example 4: An ad for an anti-snoring product features a physician who says that he has seen dozens of products come on the market over the years and, in his opinion, this is the best ever. Consumers would expect the physician to be reasonably compensated for his appearance in the ad. Consumers are unlikely, however, to expect that the physician receives a percentage of gross product sales or that he owns part of the company, and either of these facts would likely materially affect the credibility that consumers attach to the endorsement. Accordingly, the advertisement should clearly and conspicuously disclose such a connection between the company and the physician.
End Quote

Analysis

With master distributors, assuming a special deal has been cut, there’s certainly a material connection that would not be expected by the audience. In this case, as stated by the guidelines, the connection would need to be disclosed because absent a disclosure, regulators will perceive the endorsement as deceptive or misleading. In example 4 above, the endorsing physician was earning a cut of gross sales of the product. In that context, the guidelines clearly state that his relationship with the company should have been disclosed.

Let’s play around with the characters in the example 4 hypothetical. Instead of an anti-snoring product, let’s say it’s a water filtration system sold via network marketing. And instead of a physician, let’s say she’ a distributor. We’ll call her Susan. Additionally, as with the physician in the above example, let’s say Susan is receiving a percentage on the gross revenue of her downline volume. Since Susan is getting a special deal that’s not available to the public (again, there’s nothing wrong with this), let’s call her a master distributor.

Now that the scene is set, let’s play around with some facts. Susan is at a convention talking about the incredible benefits of the walter filters and about how they zap salmonella and chlorine. She also talks about the incredible financial opportunity referencing the unique binary/two-up/matrix/unilevel hybridization, patent pending, copyrighted pay plan. Since Susan is the recipient of a lucrative deal (percentage on gross revenue), it could be perceived as a fact that would “materially affect the credibility that consumers attach to the endorsement.” If consumers knew about Susan’s deal, they would be in a better position to weigh in on the veracity of the endorsement being made. Consumers might think to themselves “Of course this is the opportunity of a lifetime…for her!” Or, if Susan and the company handle it well, Susan can build trust with her organization from a position of full disclosure whereby her endorsement would still merit attention.

When companies and distributors do not disclose these deals, it’s my opinion that’s it’s an abuse of goodwill accrued by the distributor. Clearly, their opinion means something or else they’d be unable to draw over the hundreds and thousands of new participants. People trust their leaders and that measure of trust has value for companies looking to beef up their sales. If new participants were aware of a special deal, they would at least be operating with all of the facts. And in most cases, the participants would still follow their leader.

What do you think about this FTC provision? Do you think companies should disclose their deals with master distributors?

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by on February 15, 2010 11 Comments

Making Sense of the FTC Staff Advisory Letter

How do you measure intent?

In 2004, the FTC attempted to clarify some concerns from the Direct Sales Association with respect to the issue of internal consumption. The letter is short and can be read in its entirety below. There’s one thing that’s noticeably absent from the letter: the basis upon which the FTC distinguishes the good companies from the bad ones. Still, there are some good nuggets to pull from the advisory letter.

Much Ado About Internal Consumption

In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions . . . are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture. A multi-level compensation system funded primarily by such non-incidental revenues does not depend on continual recruitment of new participants. . .

Translated in English, I read the above paragraph to mean that the “intent” behind the distributors’ consumption of the product is an important factor. If distributors are purchasing products merely to participate in the pay plan, there’s a serious problem. If distributors are purchasing items for the inherent value, it’s a different story. So how does the FTC measure intent? What’s the appropriate metric to use to read the collective minds of the sales force?

The FTC expresses its disdain for recruitment schemes when it further says, “A multi-level compensation system funded primarily by such non-incidental revenues does not depend on continual recruitment of new participants, and therefore, does not guarantee financial failure for the majority of participants.” Clearly, the FTC understands that programs that require endless recruitment in order for distributors to turn a profit are unsustainable and harmful. How does the FTC determine if a program is an endless chain that requires constant recruitment? In my view, the answer depends on the marketability of the product. If the product is unmarketable, then the only way to advance in the program is to focus on recruitment and exhaustive internal consumption, which brings us to our last and most important part of the letter.

Forced Inventory Requirements…a big no-no

On page 2, the FTC solidifies its position that “intent” is very important when distinguishing good companies from the pyramids when it writes:

The Commissions recent cases, however, demonstrate that the sale of goods and services alone does not necessarily render a multi-level system legitimate. Modern pyramid schemes generally do not blatantly base commissions on the outright payment of fees, but instead try to disguise those payments to appear as if they are based on the sale of goods or services. The most common means employed to achieve this goal is to require a certain level of monthly purchases to qualify for commissions. While the sale of goods and services nominally generates all commissions in a system primarily funded by such purchases, in fact, those commissions are funded by purchases made to obtain the right to participate in the scheme. Each individual who profits, therefore, does so primarily from the payments of others who are themselves making payments in order to obtain their own profit. As discussed above, such a plan is little more than a transfer scheme, dooming the vast majority of participants to financial failure.

Although it’s not explicitly written above, the word “intent” is there in spirit. If a company has a forced inventory requirement, it’s an immediate red flag because it’s an indicator that the product is serving as a subterfuge of the money transfer scheme. Additionally, it’s an indicator that the product lacks marketability and that the business depends upon constant recruitment of new participants to engage in the inventory requirements. Imagine a company that sold $1,000 bottles of lemonade and required its distributors to purchase a product a month. Clearly, the bottles of lemonade would be considered token products designed to conceal the money transfer scheme. Most companies are not foolish enough to have inventory requirements in order to participate. Additionally, most companies have some type of sales requirement to demonstrate that their products are in fact relevant for nonparticipants.

Measuring Intent…how do regulators do it?

So what are some common sense ways to measure the collective “intent” of the sales force?

  • Is there a prerequisite of selling before the commissions are paid out? This is known as one of the “Amway Safeguards” where the distributors earn commissions from downline volume only after hitting their retail sales quota. It demonstrates that the products are truly marketable because they’re moving to people outside of the compensation plan.
  • Do former distributors continue to buy the products? I know of several people that continue to purchase products from prior MLMs because they love the value of the product. If the answer is “no,” it would indicative that the distributors were purchasing the items largely to participate in the pay plan.

What do you think? What are some ways to measure the “intent” behind internal consumption?

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FTC Staff Advisory Opinion – Pyramid Scheme Analysis

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