In the settlement announced yesterday, the US Federal Trade Commission alleged that Advocare, which sells a variety of dietary supplements, foods and personal care products, had operated an illegal pyramid scheme and had made misleading income representations.
One level only in future
The settlement, in which Advocare admitted no wrongdoing, means that going forward AdvoCare can still use independent distributors to sell its products. But it must compensate them based solely on sales to consumers. Distributors may not get commissions on sales made by other distributors, and the customers in this case may not have been associated with the business in the prior two months.
Herbalife settled a similar FTC pyramid scheme case a few years ago by paying a $200 million fine. After that settlement Herbalife started quoting the earning potential of its distributors more forthrightly. In one company document, Herbalife stated that 88% of the more than 400,000 distributors on the company rolls that year earned nothing at all. Of the more than 80,000 distributors that had achieved ‘Sales Leader’ status, almost 95% earned $7,000 a year or less on average. The chart in that document does not include commission on sales directly to consumers, but in most multi-level organizations this amounts to a small fraction of overall income.
More recently, Herbalife had been quoting an average of about $1,700 a month for its more active distributors.
In a company document, AdvoCare stated that in 2017 about 98% of its distributor network (which that year totaled 387,372 distributors) earned $2,000 a year or less.
In addition to the changes in how AdvoCare compensates its distributors and what it says to new recruits about the income opportunity, the agreement also prohibits former CEO Brian Connolly (who is ‘jointly and severally’ on the hook for payment of the fine) from future work at an MLM. Connolly has also agreed to keep FTC updated on his contact info and his business dealings.
The settlement requires AdvoCare to mail a letter to all of its employees and distributors that lays out the terms of the settlement. The letter also states that distributors may return unsold products for a full refund, and if any distributors have lost money in their work with Advocare they may be entitled to a refund from FTC.
Company disagrees with FTC statements
Despite having signed the agreement and having agreed to mail the letters, AdvoCare is taking a much different view of the import of the settlement on its website. The company makes the following points:
- “The FTC incorrectly stated in a press conference that AdvoCare had admitted to operating as a pyramid. This is categorically false. AdvoCare forcefully rebutted this charge in its discussions with the FTC. To this day, AdvoCare denies it operated as a pyramid.
- “Additionally, the FTC incorrectly stated that AdvoCare is considering additional sales channels such as GNC, Walmart or others. This is absolutely not true as we are not considering retail channels and remain committed to our distributors and customers.”
Advocacy group applauds settlement
The National Consumers League, an advocacy group, applauded the settlement. It also noted that the MLM industry has continued to shop a bill among members of Congress called the Anti-Pyramid Promotional Scheme Act that would make such enforcement actions much more difficult in the future.
“Today’s settlement once again highlights the central role that the FTC plays in protecting Americans from illegal pyramid schemes. The FTC has a 45-year track record of winning favorable settlements and court judgements against pyramid schemes,” said John Breyault, vice president of public policy, telecommunications and fraud at the National Consumers League.
According to industry publication Direct Selling News, AdvoCare had $473 million in revenue in 2017.