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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.
The Direct Selling Association’s recent Code Responsibility teleconference featured a presentation on deceptive representations in earnings claims by FTC attorney Janice Kopec.
An earnings claim is a statement made by a company or its representative about the income an individual can earn from a business opportunity. The FTC requires any earning claims be presented in writing; any claims not supported by written documents are illegal. According to Ms. Kopec, the Earning Claims Statement must include:
- The name of the person making the claim and the date
- The specifics of the claim
- The start and end date those earnings were achieved
- The number and percentage of your buyers who got at least that result
- Any information about the buyers who got those results that might vary from prospective buyers – for example, where they’re located
- A statement that prospective buyers can get written proof for your earnings claims if they ask for it
Kopec talked about how the FTC examines earnings claims to determine whether they comply with the rule. Aside from the basic criteria – whether a claim is material, whether the proper disclosure statements are provided, etc. – the FTC looks at how the typical consumer will perceive the claims.
The Federal Trade Commission has updated its online advertising disclosure guidelines to reiterate that just because the media are new or rapidly changing does not mean that the law and FTC regulations do not apply. “.com Disclosures: How to Make Effective Disclosures in Digital Advertising,” makes it clear that online advertising, whether desktop or mobile, large screen or small, must include “clear and conspicuous” disclosures, regardless of the space allotted by the medium.
The new guidelines explain the benchmark succinctly: if an advertisement without a disclosure would be deceptive or unfair, or would otherwise violate an FTC rule, and the disclosure cannot be made “clearly and conspicuously” regardless of the device or the platform, you should not run the ad.
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 Federal Trade Commission has released an updated version of the “Green Guides,” also known as 16 CFR Part 260: Guides For the Use of Environmental Marketing Claims. The revision modifies and clarifies sections of the previous Guides, and adds new sections, based on input from both consumers and industry.
The new sections cover carbon offsets, “green” certifications and seals, and claims regarding being “free-of” specific substances, being non-toxic, being made with renewable energy and being made with renewable materials.
Should company owners and managers hold genealogy positions? Here are seven reasons why it may not be wise:
- The financial benefit for owners to hold a genealogy position is a fallacy.
- Owners holding genealogy positions can inhibit an IPO.
- Minority shareholder rights may be violated.
- You may be unwittingly selling a security.
- Ownership of genealogy positions by owners can lead to an inequitable distribution of income.
- Ownership of genealogy positions can lead to conflicts of interest.
- Termination of a business relationship is made more difficult if management holds a genealogy position.
But the challenges associated with management holding a position in the genealogy can be overcome with proper planning and execution.
So if you are starting an MLM and are considering taking a position in the genealogy, read the latest addition to our MLM Startup Series that discusses these points and how to cope with them in more detail.
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.
As part of its effort to keep track of parents who are delinquent or dodging child support payments, California requires that anyone conducting business in California and which retains independent contractors (called “service providers”) must report the service provider to the state within 20 days after the service provider earns income totaling $600.00 or more in a year, or when the business enters a contract with the service provider which calls for paying the independent contractor $600.00 or more.
For details of the independent contractor registration requirement go to http://www.edd.ca.gov/pdf_pub_ctr/de542b.pdf and http://www.edd.ca.gov/payroll_taxes/new_hire_reporting.htm.
As of March 1, 2011, California made reporting easier by updating its registration process to provide for electronic registration through its eServices for Business Program. Electronic registration is available at: https://eddservices.edd.ca.gov/.
Not a week goes by that I’m not asked by an MLM marketer if their plan is legal. Sometimes the question is slightly different (“Is my plan a pyramid?”), but those asking still expect an answer based on a review of their compensation plan as it is presented on paper.
This highlights the overwhelming misperception among network marketing executives that they have nothing to worry about so long as their compensation plan is not a pyramid. In fact, regulators rarely initiate actions based on the plan’s structure. In determing if a company is engaging in unfair or deceptive consumer practices, they look first at the conduct of the company and its sales force.
In the last decade all of the major FTC lawsuits against network marketing companies were initially instituted under the broad umbrella of deceptive trade practices.