FTC Issues Long-Awaited Guidance to Multilevel Marketing Companies

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:

At the most basic level, the law requires that an MLM pay compensation that is based on actual sales to real customers, rather than based on mere wholesale purchases or other payments by its participants. In evaluating MLM practices, the FTC, in accord with established case law, focuses on how the structure as a whole operates in practice, and considers factors including marketing representations, participant experiences, the compensation plan, and the incentives that the compensation structure creates. The assessment of an MLM’s compensation structure is a fact-specific determination that the FTC makes after careful investigation.

Unfortunately, the FTC only adds to the already considerable confusion by making no effort to define what is meant by “real customers”, although in discussing the issue of internal consumption it intimates that a distributor for an MLM may be such a creature if she/he purchases and consumes products to satisfy her/his own “genuine product demand.” But, the guidance does not tell us what the FTC means by “genuine product demand” beyond telling us what it is not: “products purchased by participants that is not resold.” Useful guidance would have provided some definitions or discussion of these terms.

Although the guidance does not contain any earth shaking new pronouncements, there are some nuggets in the document that are somewhat noteworthy.

It appears that the FTC is backing-off from some of the more strident MLM-unfriendly pronouncements of the FTC under its previous Chairperson. Notably, the FTC appears to have reversed course (and brought itself back into alignment with controlling caselaw) by acknowledging that under proper circumstances, the payment of multilevel compensation on the internal consumption of products by distributors for an MLM is not necessarily indicative of a “problematic MLM compensation structure.” As many of you will know, this is consistent with the BurnLounge decision and the 2004 Advisory Opinion issued by the FTC to the DSA. Click here to view the 2004 Advisory Opinion.

While this will appear to be good news to many MLMs, the FTC goes to great lengths to temper any enthusiasm by stating that its 2004 Advisory Opinion should not be interpreted as validating the practice of paying multilevel compensation on internal consumption in all cases. Rather, internal consumption is acceptable only if participants (distributors) are purchasing their MLM’s products to satisfy their own genuine product demand or actual consumer demand in the marketplace. If distributors are purchasing products for other purposes (such as to meet qualification quotas or because the plan incentivizes distributor purchases), then the payment of MLM compensation on such internal consumption likely would be viewed by the FTC as “problematic.”

Also of note is the apparent repudiation by the FTC of one the core elements of the so-called “Amway Safe Harbor”. In response to the question “Do buyback provisions cure inventory loading?”, the FTC responds that, “as a general matter, money-back guarantees are not defenses for violations of the FTC Act.” Those MLMs that have relied upon an inventory repurchase clause in their distributor agreements as a defense to their inventory loading practices would be well-advised to re-configure their compensation plans and/or practices.

Ultimately, the best guidance that MLMs can hope for is federal legislation or a federal regulation that removes the uncertainties that are inherent in the current enforcement environment. While the FTC apparently sees no need for legislation or regulation (see the response to Question 11 in the guidance), we can all keep our fingers crossed.

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