Archive for December, 2010

Intellectual Property – What is It?

Tuesday, December 28th, 2010

When you mention intellectual property, the odds are pretty good that you will be met with a blank stare. After all, our common perception of property is something that we can physically possess.

The law, however, has an entirely different concept of property. To the law, property is considered a bundle of rights, which include the right to use something, the right to possess that thing, the right to dispose of that thing, and the right to prevent other people from interfering with your rights respecting that thing.

Read more about intellectual property and how it affects MLMs here.

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FTC Staff Report Recommends Expanding Coverage of Business Opportunity

Tuesday, December 21st, 2010

The Federal Trade Commission has released a staff report that recommends expanding the coverage of the FTC’s Business Opportunity Rule include work-at-home opportunities such as envelope stuffing, medical billing, and product assembly, many of which have not been covered before. 

The FTC staff also recommends streamlining the disclosures required by the Business Opportunity Rule so that companies or individuals selling business opportunities make important disclosures to consumers on a simple, easy-to-read document. 

The purpose of the changes is to make it less burdensome for legitimate sellers to comply with the Rule, while still protecting consumers from “widespread and persistent” business opportunity fraud.  Public comments on the staff report will be accepted until January 18, 2011.

The current Rule is an interim rule dating to March 2007.  Up until then, the FTC’s  Franchise Rule covered both franchises and certain business opportunities.  Franchises typically are expensive, involve complex contractual relationships, and can include the right to use a trademark or other commercial symbol.  Business opportunities, on the other hand, often are less costly and involve simpler purchase agreements.

In 2006, the FTC proposed creating a separate Business Opportunity Rule. This staff report summarizes the rulemaking record to date, analyzes various alternatives, and presents staff’s recommendations for the proposed final Business Opportunity Rule and disclosure form.

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FDA Announces New Actions to Stop Tainted Products Marketed as Dietary Supplements

Thursday, December 16th, 2010

The Food and Drug Administration has announced new steps intended to keep consumers safe from harmful products that are marketed as dietary supplements and that contain undeclared or deceptively labeled ingredients.

According to the FDA, these products are often promoted for weight loss, sexual enhancement, and bodybuilding.

The new steps FDA has taken include:

  • A letter from Commissioner of Food and Drugs Margaret A. Hamburg to the dietary supplement industry emphasizing its legal obligation and responsibilities to prevent tainted products from reaching the U.S. market.
  • A new rapid public notification system (RSS Feed) on its website to more quickly warn consumers about these products.
  • A mechanism for industry to alert FDA about potentially tainted products and about the firms that make them.

Among the substances found in products that are marketed as dietary supplements and that contain hidden or deceptively labeled ingredients, the FDA cites:

  • the active ingredients in FDA-approved drugs or their analogs (closely-related drugs).
  • other compounds, such as novel synthetic steroids, that do not qualify as dietary ingredients.

Where FDA investigations have discovered tainted products marketed as dietary supplements, the agency has issued warning letters and conducted seizures and criminal prosecutions.

FDA has also alerted consumers to hundreds of products with these often deceptively labeled and harmful ingredients, including more than 80 products marketed for sexual enhancement, more than 70 products marketed for weight loss, and more than 80 products marketed for bodybuilding.

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Picking Your Partners

Tuesday, December 14th, 2010

Among the top reasons why MLM startups fail is clashes among the business partners. Did you put as much thought and planning into choosing the right business partners as you did working through the planning around your product line, your compensation plan, your marketing strategy, and the hundreds of other big and small decisions that you made along the way? Read more about the critical issues you should address before choosing your partners when you start an MLM in our MLM Startup Guide.

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Do We Really Need Policies and Procedures?

Wednesday, December 8th, 2010

A lot of distributors (and quite a few company executives) wonder whether Policies and Procedures are really necessary.  To the extent that some of these individuals might acknowledge the need for them, they are quick to qualify their approval by explaining – “The Policies and Procedures should not be more than four or five pages long.”

So, does any MLM company really need Policies and Procedures?

If the answer is “yes,” is it best to limit them to four or five pages?

As you are probably aware, the Policies and Procedures are a part of the Distributor Agreement.  In fact, they are invariably incorporated into the Distributor Agreement.  Instead of presenting prospective Distributors with a 20 or 30 page document, most companies elect to utilize a one page Distributor Application and Agreement.  The legal issues that cannot be addressed in the Distributor Application and Agreement (about 98% of them) are left for inclusion in the Policies and Procedures.

Contractual documents, like the Distributor Application and Agreement and the Policies and Procedures exist to accomplish several things.  First, the Policies and Procedures specify the rights and obligations of the parties.  The number of issues that can arise between a company and its distributors can literally be in the hundreds.  For example, what rights do distributors have to use the companies’ trademarks, copyrights, and other intellectual property?  What rights to they have regarding advertising, marketing, and other promotional activities? 

Well-drafted Policies and Procedures go beyond dealing only with legal matters.  They also address many of the administrative or operational issues that arise between distributors and companies.  How should product returns be handled?  How are renewals handled?  How should complaints be treated?

Additionally, Policies and Procedures provide three different types of protection.  First they protect the company and its distributors from legal and regulatory risks.  They do so by prohibiting activities that could lead to possible violations of consumer protection laws like anti-pyramid laws, franchise or business opportunity laws, or food and drug laws.  The wrong-doing of a handful of distributors can jeopardize a company’s ability to do business, and thereby, jeopardize the business of every distributor.

Second, the Policies and Procedures protect the company and its distributors from non-regulatory legal risks.  There are many activities that do not raise regulatory issues, however, they can pose significant threats to companies, distributors, their downlines, and their businesses.  An example of this type of risk using a downline or genealogy report to solicit a distributor’s entire downline to another company.  Such activities do not violate consumer protection laws, and thus, regulators have no interest therein.  However, these activities do pose substantial risks to distributors.

Finally, the Policies and Procedures protect distributors from legal risks posed by other distributors.  Again, these issues do not raise any regulatory issues.  Nevertheless, they can pose substantial risks to distributors.  A good example of this is an anti-cross-line policy.  One of the fundamental tenets of direct selling is that downline organizations must be inviolate.  The only party in the position to protect downlines is the company.  An anti-cross-line policy prohibits cross-lining (the solicitation of distributors from one downline organization within the company, to a different downline organization within the same company).  An effective anti-cross line policy will also provide sanctions and remedies to correct with cross-lining.

With respect to an appropriate length for the Policies and Procedures, we believe it takes between 30 and 35 pages to adequately address the breadth of issues that normally arise with companies and distributors.  One of our largest clients had what we would consider a very appropriate set of Policies and Procedures – about 30 pages.  Understandably, the company got a great deal of pressure from its distributor leaders about their desire for something considerably shorter.  Although we strongly advised against it, the company elected to “abridge” their Policies and Procedures.  They shrank from 30 pages to 5 pages.  With a year, the company had returned to its former 30 page Policies and Procedures.  It found that the “abridged” version simply was not workable.  It did not address all of the issues that needed to be addressed, and it forced the company to deal with these unaddressed issues in a very ad-hoc fashion.

In the final analysis, comprehensive Policies and Procedures that address the complete panoply of potential issues that arise relative to companies and distributors really are necessary.  If a company fails to address all of the potential issues on the “front-end” (namely, it the Policies and Procedures), it will be forced to address them on the “back-end.”  “Back-end” treatment of these issues unfortunately often ends up being very ad-hoc and can yield inconsistent (in not arbitrary) results. 

The bottom line is – comprehensive Policies and Procedures provide the very highest levels of protection, help level the playing field, and promote consistent and even-handed treatment for everyone.

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Melaleuca Suffers Setback in Lawsuit Against Former IMEs

Wednesday, December 8th, 2010

A Judge in Idaho has denied a motion for summary judgment filed by Melaleuca in litigation between the company and two of its former Independent Marketing Executives. 

Melaleuca filed the lawsuit against Rick and Natalie Foeller in April of 2009 after it learned that they had recruited other Melaleuca IMEs for a competing multilevel marketing program, a violation of the IME Agreement between Melaleuca and the Foellers.  In its lawsuit, Melaleuca is asking the court to order the Foellers to return commissions that Melaleuca had paid them dating back to June of 2008-the date that the Foellers first violated the nonsolicitation terms of the IME Agreement.  Because there was no apparent dispute between the parties regarding the Foellers’ violation of the nonsolicitation provisions, Melaleuca filed a motion for summary judgment for return of the commissions.

Like most MLM companies, Melaleuca’s IME Agreement contains provisions restricting IMEs from recruiting other IMEs or Melaleuca customers for competing MLM programs.  Unlike most MLM companies that we work with, the Melaleuca IME Agreement states that a violation of the nonsolicitation provisions constitutes “the forfeiture by the Marketing Executive of all commissions and bonuses payable for and after the calendar month in which the violation occurred.”  Based on this language, Melaleuca sought to claw-back all of the commissions it had paid to the Foellers after they first violated the IME Agreement. 

(more…)

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FTC Proposes Revised Green Guides

Monday, December 6th, 2010

The FTC has proposed revisions to the “Green Guides” designed to update them and make them easier for companies to understand and use.

The changes include new guidance on the use of product certifications and seals of approval, “renewable energy” claims, “renewable materials” claims, and “carbon offset” claims. The FTC is taking public comments until December 10, 2010, after which it will decide which changes to make final.

The revised Guides caution against making blanket, general claims that a product is “environmentally friendly” or “eco-friendly.” The FTC’s consumer perception study found that such claims suggest that the product has specific and far-reaching environmental benefits when very few products, if any, have all the attributes consumers perceive from such claims. Therefore, the FTC reasons, these claims are nearly impossible to substantiate.

The proposed Guides also caution against using certifications or seals of approval that do not specify the basis for the certification. The Guides state that unqualified product certifications and seals of approval likely constitute general environmental benefit claims and advise that the qualifications applied to certifications or seals should be clear, prominent and specific.

The proposed revisions advise marketers how consumers are likely to understand certain environmental claims, including that a product is degradable, compostable, or “free of” a particular substance. For example, if a marketer claims that a product that is thrown in the trash is “degradable,” it should decompose in a “reasonably short period of time” – no more than one year.

New information in the proposed revision includes advice about the use of “renewable materials” and “renewable energy” and carbon offset claims.

The proposed Guides do not address use of the terms “sustainable,” “natural,” and “organic” either because the FTC says it lacks a sufficient basis to provide meaningful guidance or because they want to avoid proposing guidance that duplicates rules or guidance of other agencies. Organic claims made for textiles and other products derived from agricultural products, for example, are covered by the U.S. Department of Agriculture’s National Organic Program.

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The Preeminence of Value

Wednesday, December 1st, 2010

Two of the first questions I love to ask prospective or current network marketing executives are, “What do you believe is THE most important factor in the long-term profitability, viability, and future of your company?” and “What is ‘the magic’ in the network marketing equation?” As you might suspect, the answers are all over the map. Owners and executives have responded with “the compensation plan,” “the products,” “the culture,” “the story,” “the sizzle,” “the excitement,” and many more equally erroneous answers.

One hundred and thirty six years of direct selling history in the United States absolutely establish that the most important factor is the value of the products. Value is not only a business issue, but it is also one of the most important factors affecting the legality of any network marketing program.  Read more about it here.

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