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After what seems like an eternity, the FTC has issued guidance to multilevel marketing (MLM) companies. As guidance, the document issued on January 4, 2018 does not carry the force of law, but is instead intended to help MLMs to “apply core consumer protection principles to their business practices.” The guidance itself is a series of questions followed by the FTC’s answers, purportedly designed to help MLM companies adhere to the said core consumer protection principles. To view the actual guidance document, click here.
Those who were hoping that this long-awaited guidance would provide objectively measurable guideposts to MLM companies will be sorely disappointed; and those who are familiar with the legal issues confronting MLMs will find much that there is really nothing new in the guidance. For example, in response to the ultimate question “How does the FTC distinguish between MLMs with lawful and unlawful compensation structures?”, the guidance pretty much tells us what we have always known:
The FTC recently announced that it has finalized the amendments to the Federal Cooling-Off Rule, (aka Door-to-Door Sales Rule). The amended Rule will go into effect on March 13. When the proposed amendment was published, there was some anticipation on the part of the direct selling industry that sellers would be granted some relief from the Rule.
For those not familiar, the Rule requires that customers (including new distributors or consultants) be given two copies of the 3-day Notice of Right to Cancel whenever a purchase transaction for consumer goods or services takes place at a location other than the seller’s place of business. While there are some possible exemptions, for the most part the rule covered many transactions between distributors and their customers and between distributors and their newly recruited distributors.
Some of you may have heard of the recent enforcement action taken by the Montana Securities Commissioner against a start-up MLM program known as “Funky Shark”. Funky Shark was a penny auction MLM program based in Bozeman, Montana that began operations in the Fall of 2012, but never actually launched its auction website before being shut down.
In an effort to raise capital to support the launch of the new venture, the company recruited distributors to participate in its Founders Program. In exchange for a non-refundable payment of $1,000, “Founders” were entitled to receive a share of the profits generated by the company’s penny auction program. In addition, they earned bonuses for every new distributor that they recruited.
Before Funky Shark could launch its penny auction website, the Montana Securities Commissioner filed a lawsuit against it and its owners and obtained a Temporary Restraining Order (“TRO”).
Yes, you just may have to—and in states other than where your business is located.
Most entrepreneurs and business people understand that if they have a business location, employees, or business assets or property in a state, they will be required to collect sales taxes on the sales made to the residents of that state—provided the product or service that they are selling is subject to sales tax. Unfortunately, there seems to be a rather pervasive belief among new-comers to the direct selling industry that direct selling companies do not need to collect and remit sales taxes in those states in which they have no business locations, employees, assets or property, but are doing business through their distributors. At least half of the new start-up direct selling companies that we meet with seem to be under this mistaken impression.
The FDA may be ramping up enforcement against cosmetics marketers the agency says are making claims that move their products out of the cosmetics category and into the drug category. With notices sent October 5 to Avon Products and Bioque Technologies, the FDA now has issued seven warning letters since June, citing what it says are drug claims “associated with topical skin care, hair care, and eyelash/eyebrow preparations, noted on both product labeling and Web sites.”
On the Wednesday before Thanksgiving, the FDA gave the owners of ATF Fitness Products, Inc. (ATF) and Manufacturing ATF Dedicated Excellence, Inc. (MADE) little to be thankful for. On that day, the Justice Department, on behalf of the FDA, filed legal action against the Oakmont, Pennsylvania companies seeking a permanent injunction that would stop them from manufacturing and distributing over 400 different dietary supplement products.
The action was based on alleged violations by ATF and MADE of the current Good Manufacturing Practice (cGMP) regulations for the manufacture of dietary supplements. According to the Complaint filed by the Justice Department, ATF is the sole distributor of dietary supplement products manufactured by MADE. Also named in the complaint is James G. Vercelotti, the owner and operator of both entities.
Under the cGMPs for dietary supplements (found at 21 C.F.R. § 111), dietary supplements must be manufactured according to processes that incorporate controls in the design and production process to assure a quality finished product. The purpose of the cGMPs for dietary supplements is to ensure quality and safety. According to the Complaint, ATF and MADE failed to adhere to the cGMPs in the manufacture of over 400 dietary supplement products. The Complaint alleges a number of deviations from the cGMPs at pages 3 through 5 of the Complaint. You can access the Complaint here.
In addition to the alleged deviations from the cGMPs, the Complaint alleges that the defendants misbranded their dietary supplement products by substituting ingredients for those listed on the product labels. Finally, the Complaint alleges that the defendants failed to submit Serious Adverse Event reports to the FDA as required by the Dietary Supplement and Nonprescription Drug Consumer Protection Act (21 U.S.C. §§ 379aa – 379aa-1). As an example of this failure, the Complaint alleges that the defendants received a report of a serious adverse event from a consumer who claimed that one of their products caused a high blood pressure spike requiring hospitalization and subsequently caused a mild heart attack. The defendants failed to submit a report of this event to the FDA as required by the Act.
According to the press release issued by the FDA, this is the first time that the agency has sought a permanent injunction against a dietary supplement manufacturer of this size.
The Federal Trade Commission (“FTC”) announced on September 28, 2011 that it has entered into a stipulated judgment with Reebok to settle false advertising claims brought against the company by the FTC. In the settlement, Reebok agreed to cease making muscle toning and other claims for its toning shoes and agreed to pay $25,000,000 into a fund administered by the FTC for the compensation of consumers. Although Reebok admits no wrong-doing in the settlement, in addition to agreeing to deposit the $25,000,000 into the fund, the company also agreed that it would not:
- make claims that toning shoes and other toning apparel are effective in strengthening muscles, or that using the footwear will result in a specific percentage or amount of muscle toning or strengthening, unless the claims are true and backed by scientific evidence;
- make any health or fitness-related efficacy claims for toning shoes and other toning apparel unless the claims are true and backed by scientific evidence; and
- misrepresent any tests, studies, or research results regarding toning shoes and other toning apparel.
Among the claims that the FTC took issue with were advertisements for Reebok’s EasyTone walking shoes, RunTone running shoes, and EasyTone flip flops that stated that the soles of the shoes feature pockets of moving air to create “micro instability” that tones and strengthens muscles as you walk or run. According to the FTC Complaint, the company made unsupported claims that walking or running in its shoes would strengthen and tone key leg and buttock muscles more effectively than walking or running in regular shoes. The FTC’s complaint also alleges that Reebok falsely claimed that walking in EasyTone footwear had been proven to lead to 28 percent more strength and tone in the buttock muscles, 11 percent more strength and tone in the hamstring muscles, and 11 percent more strength and tone in the calf muscles than regular walking shoes.
Although Reebok denies any wrong-doing, it is clear from the terms of the settlement that the company did not possess the necessary evidence to substantiate the advertising claims that it was making for its products. As such, this case serves as a timely reminder to all marketers of health related products, whether they be nutritional supplements, weight loss products, or toning footwear, that they must have “competent and reliable scientific evidence” in their files to support the claims that are made in advertising materials for their products. Bear in mind that anecdotal evidence such as customer testimonials does not satisfy this standard. Nor do purported scientific studies that are of dubious quality. Competent and reliable scientific evidence is defined in FTC cases as “tests, analyses, research, studies, or other evidence based on the expertise of professionals in the relevant area, that have been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results.”
To view the FTC’s complaint and the stipulated judgment, go to http://www.ftc.gov/os/caselist/1023070/index.shtm.
Just last week, the Food & Drug Administration issued draft guidelines for when manufacturers and distributors of dietary supplements need to notify the FDA of so called “new dietary ingredients” and to provide the agency with evidence of the safety of the ingredient. The requirement to provide the FDA with notification of new dietary ingredients and evidence of their safety has been around since the Dietary Supplement Health and Education Act (“DSHEA”) was enacted in 1994. However, it appears that there has been a substantial lack of compliance with this legal requirement. According to various media reports, the FDA has received around 700 such notifications since the law went into effect in 1994. Additionally, a law enacted just this past January (the FDA Food Safety Modernization Act) required FDA to issue the guidelines.
Under DSHEA, a manufacturer or distributor of a dietary supplement that contains a new dietary ingredient must provide FDA with pre-market notification of the new dietary ingredient together with “information, including any citation to published articles, which is the basis on which the manufacturer or distributor has concluded that a dietary supplement containing such dietary ingredient will reasonably be expected to be safe.” Where such notification is required, it must be given at least 75 days before the product is introduced into interstate commerce. If this is not done, the dietary supplement will be deemed to be adulterated.
So now, you are probably asking what is a “new dietary ingredient”? A new dietary ingredient is a dietary ingredient (a vitamin; a mineral; an herb or other botanical; an amino acid; a dietary substance for use by man to supplement the diet by increasing total dietary intake; or a concentrate, metabolite, constituent, extract, or combination of any of the foregoing dietary ingredients) that was not marketed in the United States in a dietary supplement before October 15, 1994. Note that the pre-market notification described above is not required if the new dietary ingredient has been “present in the food supply as an article used for food in a form in which the food has not been chemically altered.” In other words, the pre-market notification will not be necessary if the new dietary ingredient (a dietary ingredient that was not present in a dietary supplement in the U.S. prior to October 15, 1994) is derived from something that was in the food supply of the U.S. prior to that date and has not been chemically altered.
Because this is all somewhat confusing, the FDA has prepared the draft guidance, which you can view here. The draft guidance answers questions in a FAQ format to assist manufacturers and distributors in determining whether they need to file the pre-market notification and evidence of safety. It also contains templates for the preparation of a new dietary ingredient pre-market notification. In addition, if you are so inclined, you can even comment on the draft guidance, although in order for your comments to be considered by the FDA, they must be filed within 90 days of the date that the notification was published in the Federal Register. The notification was published on July 5, 2011—see here.
FDA hopes that with the publication of these guidelines that compliance with the pre-market notification requirements will improve. Only time will tell.
While the FTC settlement with Legacy Learning may seem unrelated to the direct selling indusry, the case actually is extremely relevant to MLM and direct selling companies.
Although you don’t typically see paid reviewers compensated for posting positive comments about direct selling companies’ products, it is common in the direct selling industry for companies to use testimonials to promote the sale of their products and services.
Oftentimes, those testimonials come from their distributors. Just as the Legacy “affiliates” benefited financially from their reviews, MLM distributors have a direct financial interest in the sale of the products.
As the Legacy Learning case clearly illustrates, whenever a direct selling company does this, it is extremely important that the company disclose the relationship between the company and the person providing the testimonial if that person is a distributor for the company. This can be accomplished by adding the title ‘Independent Company X Distributor’ to the identification of the person giving the testimonial.
Dietary supplement marketers need to be on the look-out not only for the FDA and the FTC, but for consumer protection organizations as well. Most recently, the National Consumers League sent a letter to the FTC urging the agency to take action against VitaminWater.
The NCL calls VitaminWater advertising and labelling claims “deceptive” and “dangerously misleading” and is urging the FTC to stop the manufacturer’s continued use of them.
The complaint cites VitaminWater promotions that say “flu shots are so last year,” implying, the NCL believes, that VitaminWater is being promoted as product that can replace flu shots or prevent illness.
In a television ad, a woman is shown at home watching TV instead of at work because VitaminWater helped her become healthier so that she can use unused sick days to play hooky instead of being ill.
The NCL complaint also wants the FTC to stop label statements for VitaminWater that describe the product as a “nutrient enhanced water beverage” and that claim “vitamins + water = all you need.”
According to NCL, the statements are deceptive because VitaminWater is more than just vitamins and water, but also are made with crystalline fructose or other forms of sugar, and contain 125 calories per bottle.
The FTC has not yet responded to NCL’s complaint.