In recent weeks, the direct selling industry has been shocked by one revelation after another involving the Federal Trade Commission’s actions against direct selling companies. The stunning transformation of AdvoCare from a marketer with an MLM compensation plan to a single level plan due to an FTC enforcement action was still being absorbed when, BANG!, along comes the FTC action against Neora (formerly “Nerium”) and Jeff Olson and the counter civil suit by Olson and Neora challenging the FTC’s actions.
Adding to the confusion was a recent address to DSA members by Andrew Smith, Director of the FTC Bureau of Consumer Protection, wherein Mr. Smith expressed the agency’s belief that MLM is a legitimate business model, while then spotlighting fundamental areas of direct selling as we’ve known it as problem areas. Wow! Where did that come from?
One of the biggest issues among direct selling companies right now is that there seem to be new standards (or at least new interpretations of standards) that are being used for recent enforcements. Put another way, it seems the goalposts have been moved.
When the rules aren’t clear, the rumors run rampant. It’s difficult to discern what is reliable and what is pure speculation. When it seems that some standards that impacted recent enforcements aren’t clearly published, then it becomes difficult to know what “unpublished” standards to pay attention to.
Somewhere between the boundaries of “published fact” and “pure hearsay,” there have been those familiar with direct selling who now believe simply having a compensation plan that pays more than two levels puts you on regulators’ radar. It’s important for me to underscore this is not a published fact, but it’s also quite unbelievable that even a rumor to this degree can make its away around the direct selling community.
Industry legal advisors tell us that there is no case law to support the position that simply having a compensation plan that pays more than two levels deep may be enough to make the company a target of enforcement. There is no FTC Trade Regulation Rule to that effect either. What’s more, just last year the FTC sent a letter of guidance to DSA setting out the parameters of what companies should and should not do to operate legally and there was no mention that “more than two levels of compensation” absent any other evidence could put a company in jeopardy.
Rather, it seems that this idea, along with several others expressed by Mr. Smith in his address at an October DSA event, are new unpublished standards that are being applied retroactively by the FTC staff in enforcement actions.
Challenging the FTC
Applying new “standards or rules” that have never been published retroactively seems more than a bit bizarre as a rule-making process, not to mention unfair to direct selling companies that may be held liable for violating a rule that they did not know existed. That such an unusual process violates basic fairness and due process is a significant theme in the Olson/Neora civil suit against the FTC.
In time the courts will rule on whether the FTC has the authority and power to create new rules and apply them retroactively without notice in enforcement actions against companies and individuals. As an industry direct selling companies are going to have to challenge the FTC for over reach and abuse of its power. All of this will be worked by individual company cases and the industry trade associations.
BUT, in the meantime what should companies do to protect themselves?
How to Protect Your Company From a Challenge
How do they organize their marketing programs and plan for the future? Direct selling, like any form of business, needs clarity as to what the “rules of the road” are for their form of distribution and certainty that the published guidelines, by agency rule making or court precedent, will be in place for a reasonable period of time.
Many believed that the FTC’s letter to DSA last year was intended to provide some of that certainty and predictability. It didn’t, as the recent actions against AdvoCare and Neora make abundantly clear. So, what now?
Alan Luce, Co-Founder and Managing Principal of Strategic Choice Partners, offers a few ideas of things you can/should do now to protect your company from an unwanted and unexpected challenge by the FTC or a similar agency, gives five traits that every leader must possess in order to achieve success in his guest article on The World of Direct Selling titled, “AdvoCare, Neora, an Ever More Aggressive FTC! What Now?” Be sure to read the full article.
Covering All Your Bases
Want to make sure you are covering all your bases when it comes to avoiding an FTC challenge? We’re working alongside many direct selling leaders, helping them adjust their comp plans, marketing strategies and more to follow the new standards. We’d love to help you, too.
Contact us now, and let’s schedule some time to discuss your company and its best next steps.
About Alan Luce
Alan Luce is a veteran direct seller, formerly the senior management executive at major companies like Tupperware and PartyLite gifts.
He was the founder & CEO of Dorling Kindersley Family Learning, which became a $40 million business in its first four years. Today, he’s a consultant to more than a hundred direct selling companies, from startups to major powers such as Princess House, Avon and Amway.
An expert in compensation plans, startup strategies and sales management programs, Alan sits on the boards of numerous direct sales companies. His many honors include induction into the Direct Selling Association Hall of Fame and the Direct Selling Education Foundation’s Circle of Honor.
(*) These statements have been updated since the original publishing of the article to clarify the intent of the author.