FTC outlines lessons for MLMs following Herbalife and Vemma cases

By Stephen Daniells

- Last updated on GMT

© iStock/pabradyphoto
© iStock/pabradyphoto

Related tags: Federal trade commission, Herbalife

The Federal Trade Commission has released guidance for MLMs based on lessons learned from the FTC’s cases against Herbalife and Vemma.

This week the FTC announced that it is mailing checks to nearly 350,000 people as part of the $200 million settlement with Herbalife. The July 2016 settlement between FTC and Herbalife was one of the largest redress distributions the agency has made in any consumer protection action to date.

“We are pleased to announce that hundreds of thousands of hard-working consumers victimized by Herbalife’s deceptive earnings claims will receive money back,” ​said Jessica Rich, Director of the agency’s Bureau of Consumer Protection. “Along with changes the company will make to its business structure, this is a win for consumers.”

To coincide with the redress announcement, FTC also said it was a, “good time for some straight talk with members of the MLM industry”​.

“The FTC has a more than 40-year history challenging unfair and deceptive MLM practices, including recent law enforcement actions against Herbalife and Vemma,” states the agency in a blog post​.“[I]ndustry members can learn a lot by reviewing the conduct the FTC says violated the law and understanding the principles underlying those orders.”

The four key lessons outlined by FTC are:

1.False or unsubstantiated earnings claims violate the FTC Act:“Established truth-in-advertising standards apply to all companies within the FTC’s jurisdiction, and that includes MLMs,” ​states the FTC. “Every MLM case the FTC has brought to date has alleged – among other things – misleading money-making representations.

“Regardless of whether it’s hard sell or soft soap, deception is deception. And let’s face it: The facts bear out that very few MLM participants earn more than a small amount of supplemental income. That’s why it’s unwise for MLMs to make earnings claims – expressly or by implication – that don’t reflect what typical participants achieve.”

2. Monitor the claims your distributors are making: “Some industry members may respond, “We never make earnings claims!” Maybe not, but what are your distributors saying?

“[I]f your distributors are making misleading claims, you could be liable. MLMs should have an effective monitoring program to ensure that distributors comply with the law and aren’t conveying misleading claims. In addition, MLMs should provide sufficient information and training so that prospective recruits have a realistic picture of the business.”

3. At the heart of a legitimate MLM are real sales to real customers:“For companies acting within the law, the business is driven by selling products to real customers”​, and that means the products is being bought and used by people unaffiliated with the company.

4. Make sure compensation and other incentives are tied to real sales to real customers:“The FTC complaints against Herbalife and Vemma challenged compensation structures that rewarded distributors without regard to retail sales. The court-enforceable orders in those cases require the companies to dismantle those systems. In their place, Herbalife and Vemma must implement systems that incentivize participants to sell products to people outside the network. Is it time to take a closer look at your MLM’s compensation structure?”

 

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