SUMMER 2018 TODAY’S GENER AL COUNSEL
Compliance
Federal Trade Commission Guidance to Multi-Level Marketing Companies By JB Kelly and Bryan Mosca
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taff at the Federal Trade Commission (FTC), the federal agency tasked with protecting consumers from anticompetitive, deceptive and unfair business practices, periodically issues non-binding, plain-language guidance to help companies comply with matters under the agency’s enforcement authority. The topics and advice covered by staff guidance provide companies with valuable insight into the subject matter that is of interest to the FTC and its staff, who typically make day-to-day decisions regarding enforcement matters. FTC enforcement investigations will often target an industry that recently
An MLM is a type of direct selling company. Similar to other direct selling companies, MLMs rely on a network of participants (or distributors) to sell their products or services to consumers, typically through person-to-person sales made in the homes of participants or prospective customers, or through social medial platforms. With MLMs, participants can earn compensation based on their own sales as well as the sales of the other participants they recruit, called their “downline” distributors. The purpose of the structure is to increase the market for buyers of the company’s products by increasing the
documents and information from companies that they suspect are engaging in unfair or deceptive conduct. The FTC and state attorneys general can issue subpoenas or civil investigative demands requiring the production of documents, written responses to questions or interrogatories, or a witness to submit to testimony through a process similar to a deposition. Following an investigation, the FTC or a state attorney general can enforce its respective consumer protection laws if it believes a company has engaged in unlawful conduct. Enforcement can include filing a complaint or an administrative action against the
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In 2016, in a case involving Herbalife, the FTC signaled a shift to a fact-based analysis of the totality of the MLM’s business practices. has been the subject of staff guidance. For example, the FTC brought enforcement actions against “social media” endorsers and influencers shortly after reminding influencers to clearly disclose their relationship with companies that they endorse. Earlier this year, FTC staff issued Business Guidance Concerning MultiLevel Marketing to help members of the “diverse and varied” multi-level marketing industry comply with the law. The Business Guidance, offered as a list of frequently asked questions, describes the characteristics of lawful and unlawful multi-level marketing companies (MLMs). Although the FTC’s enforcement decisions are fact specific, the non-binding Business Guidance provides insight into the FTC’s considerations when evaluating MLMs.
number of salespeople that can connect to those buyers. The FTC and state attorneys general have concurrent authority to evaluate the business practices of companies and whether those practices harm the rights of consumers. The FTC evaluates whether a company’s business practices are “unfair or deceptive” through Section 5 of the FTC Act. Similarly, state attorneys general rely on their states’ consumer protection laws (sometimes called “mini-FTC Acts”) to scrutinize whether a company’s acts or practices are unfair, deceptive or misleading. In most jurisdictions, state attorneys general and courts consider the interpretations of the FTC to assess whether certain conduct violates state consumer protection laws. The FTC and state attorneys general have broad investigative powers to seek
company or reaching a settlement that resolves the investigation. Through these enforcement tools, the FTC and state attorneys general can seek redress for consumers, broad injunctive relief, attorneys’ fees and costs, and civil penalties (although the FTC can only seek civil penalties in court for violations of an FTC order). HISTORICAL ENFORCEMENT OF MLMS
Traditionally, MLM compliance with Section 5 of the FTC Act was evaluated by analyzing whether the MLM had an unsustainable compensation structure by requiring participants to pay “the company in return for . . . (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the