The BBB National Programs’ Direct Selling Self-Regulatory Council (DSSRC), in partnership with the Direct Selling Association (DSA) announced the release of the guidance this week. The guidance is billed as the most comprehensive of its sort. It comes at a time of renewed enforcement action against these kinds of companies on the part of the Federal Trade Commission.
Network marketing companies, also known as multi level marketing companies (MLMs) have formed an increasingly large share of dietary supplement distribution channels. Some of the biggest sellers of supplements, including Herbalife, Amway via its Nutrilite division, and Usana pursue this model.
There can be a fine line that separates a legal MLM from one that crosses over into an illegal pyramid scheme. One of the tests FTC applies when making this distinction is whether the commissions paid to distributors are based mostly on actual sales of products to end users and not primarily on signing up new participants in the scheme.
Another focus for FTC in recent years has been on outlandish earnings claims, where MLMs will tout the spectacular success of certain individuals without disclosing that 99% or more of distributors don’t make anything close to that level of income and many earn little to nothing.
Herbalife, Advocare consent decrees
This formed part of the consent decree that Herbalife entered into when it paid a $200 million fine in 2016. The company agreed to certain modifications of its business practices, which included backing off on the earnings claims. These had featured glitzy pictures of Herbalife distributors posing on yachts and cavorting in luxury travel locations. In the wake of the affair the company shares an expectation with new distributors that the average part time seller of its products might aspire to earn as much as $1,700 a month. The company also disclosed that around the time of the consent decree that 88% of the distributors on its roles earned no commissions at all.
FTC takes the matter seriously. In June last year Advocare, another dietary supplement MLM, agreed to pay a $150 million fine and to dismantle its MLM structure in via a settlement that included an allegation of exaggerated earnings claims. In the future Advocare may still sell its products via individual distributors, but those distributors can be compensated solely on the basis their own sales alone, with no residual commissions on the sales made by distributors they may have recruited into the business and no bonuses paid on those recruitments.
Guidance includes sample social media posts
The new guidance is meant to help other MLMs steer clear of such pitfalls and avoid costly litigation and fines. The new guidance cautions companies from using statements such as “quit your job” or promises that distributors can “be set for life,” or “make more money than you ever have imagined or thought possible.” Earnings claims must be backed by documentation, the guidance asserts. It includes a list of qualifiers for earnings statements, and includes a number of hypothetical social media posts companies can refer to to see what would constitute a compliant claim and what crosses the line.
“This new guidance will complement the obligations that DSA members commit themselves to under the DSA Code of Ethics regarding fair and accurate income claims. This DSSRC guidance provides all direct selling companies and salespeople — even non-DSA members — clear direction as how to best ensure that earnings claims are fair and accurate, and helps individuals make fully informed decisions when considering a direct selling opportunity,” said Joseph Mariano, president of the Direct Selling Association.