Education on Proper Weight Loss Claims

    Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

    In a society that places a strong emphasis on appearance and in a country where a high percentage of Americans struggle with their weight, the U.S. market for weight–loss products is a booming industry. The FTC, along with other local and state consumer protection agencies, has recently started aggressively enforcing inappropriate claims for weight–loss products. Dependent on the circumstances, penalties for false or misleading claims can be severe. Regulators have made it clear that they’re taking these claims seriously. With this in mind, it’s time we all become more informed about the basic rules.

    Marketing Challenges

    Remember 7 minute abs? While hilarious, the famous scene in “There’s Something About Mary” reminds us that marketing for weight loss products can get a bit ridiculous. The temptation is to appeal to peoples’…well…laziness. And in a competitive landscape, with countless weight loss products, companies are pressured into stretching the truth, implying that results are significant and EASY compared to the competition.

    Since the rules are somewhat strict when it comes to weight loss claims, marketing these products effectively presents a serious challenge. It’s obviously easier to market a product as a “quick-fix” without adding the phrase “combined with diet and regular exercise.”  This is known as a “buzz-kill” for marketers.

    Real Claims, Real Problems

    “U.S. patent reveals weight loss of as much as 28 pounds in 4 weeks…Eat all your favorite foods and still lose weight. The pill does all the work.”

    “Lose up to 2 pounds daily without diet or exercise.”

    “Thigh Cream drops pounds and inches from your thighs.”

    “Lose excess body fat. No willpower required. Works for everyone no matter how many times you’ve tried and failed before.”

    “The Super Fat Fighting Formula inhibits fats, sugars and starches from being absorbed in the intestines and turning into excess weight, so that you can lose pounds and inches easily.”

    FTC Rules

    Under the Federal Trade Commission Act, claims made in an advertisement must be truthful and the advertiser must be able to substantiate the claims with proof of their truthfulness. “A deceptive ad is one that contains a misrepresentation or omission that is likely to mislead consumers acting reasonably under the circumstances to their detriment.” (more here: FTC’s An Advertising Guide for the Industry)

    The FTC evaluates ads based on how a reasonable customer would respond to or interpret the information in the ad.

    Proper Disclosures

    The FTC regularly pursues weight loss products that overpromise results in their advertisements. Under Section 5 of the FTC Act, if an ad or an element of an ad could be misleading in the absence of disclosure, then that information should be disclosed within the advertisement to clarify.

    As an example, a weight loss supplement ad claims that a study found that individuals could lose “seven pounds in seven days.” The advertisement does not mention that the study participants also exercised and starved themselves for the duration of the study. That the participants exercised and dieted would need to be disclosed within the advertisement to avoid the ad potentially misleading consumers about the supplement’s effectiveness. Additionally, if the results represented are not typical, then the ad must have a disclosure stating what result a consumer could typically expect from using the product. And the disclosures need to be specific. Long gone are the days when “results may vary” was enough.

    Regarding disclosures, there’s a right and a wrong way to do it. I once had a client try to insert a disclosure in white font on a white page. Unfortunately, it takes more than simply throwing a disclosure on a page to “check that box.” It needs to be placed in a way that is easy for a consumer to find and must also be phrased in a way that would be easy for a consumer to understand. Avoiding lengthiness and ambiguity is key. In the words of the FTC, disclosures must be “clear and conspicuous.”

    Ensuring that Claims and Representations Are Substantiated

    An advertiser must be able to substantiate any material claim or representation about a product that is made in an advertisement or potentially face liability. A company must have a “reasonable basis” for any express or implied claims or representations prior to the advertisement running. The company must have derived this “reasonable basis” from objective evidence that proves the claim, such as a scientific study. Generally, the FTC Commission determines what constitutes a “reasonable basis” for a claim by considering a variety of factors, which include: 1) the type of claim in the ad; 2) the type of product the advertisement is marketing; 3) the consequences of a false claim and the benefits of a true claim with regard to the type of product; 4) what amount of substantiating evidence experts think is necessary; and 5) the cost of procuring the appropriate amount and type of substantiating evidence.

    There is typically a higher burden for claim substantiation for products related to health or safety, such as dietary supplements. The FTC generally requires that claims for weight loss products be substantiated by reliable scientific evidence. “Reliable” means the data must be collected using methods that experts in the field of weight loss accept as reliable and that qualified individuals must review the data. Letters or testimonials from satisfied customers are not enough to support a claim made about a weight loss product. Sensa and HCG Platinum were also fined for misrepresenting scientific studies as supporting their claims.

    Conclusion: Do’s and Don’ts

    Don’t

    Imply that weight loss will result without adjustments to diet and exercise;
    Use consumer testimonials containing above-average results without disclosing average results;
    Make specific claims about the product without proper substantiation (i.e. “9 out of 10 doctors endorse our product,” “The average person loses 10 pounds in 3 weeks,” etc.);
    Overstate the benefits of the product;
    Ignore what’s happening in the field. The company is judged based on activities from the field.

    Do

    Collect data supporting all of the potential claims that are being made by distributors;
    Educate distributors to provide proper disclosure while marketing the weight loss products. This can be done via videos, email newsletters and content on the website;
    Pay attention. The company is obligated to monitor distributor behavior to detect any issues.
    Disclose the average results on all marketing material that contains above average weight loss claims.
    Provide disclosures in a clear and conspicuous format, easy to read by all prospective customers.

    There is serious demand for weight loss products in this country.  Those that market or advertise these products have great opportunities for success.  In order to reap the full benefit of these opportunities and to avoid the steep penalties being imposed by the FTC, complying with some of these rules is vitally important.

    Jason Caramanis Lawsuits Revealed

      Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

      Jason Caramanis, through his entity Online Communications, LLC, has filed several lawsuits against networkers in Orange County, California over the past few years (9 lawsuits that I could find, though I’ve heard there might be more). Jason Caramanis is a well-known networker known for his aggressive pursuit of other networkers via private deals.

      The lawsuits speak for themselves. Networker reaches terms with Caramanis, networker fails to produce, networker gets sued.

      Click through some of the lawsuits and you’ll find some of the specific deal structures utilized by Caramanis (attached as exhibits). The defendants are listed below, along with the year the lawsuit was filed. I’ve also listed the company Caramanis was building. There are four companies mentioned below: Zija, Xocai, Jeunesse and Call MD Plus. If I’m missing anything about these lawsuits, send me any clarifying pieces of intel and I’ll update the article.

      Scott Magers
      10/2011
      XOCAI
      https://www.scribd.com/doc/268101307/Caramanis-Seppinni-Magers-Xocai-XMI-Corp

      Michael Merino + John Does 1-10
      06/2012
      Jeunesse
      https://www.scribd.com/doc/268101302/Caramanis-Merino-Jeunesse

      Maria Rodriguez
      08/2012
      Zija
      https://www.scribd.com/doc/268101306/Caramanis-Rodriguez-Zija

      Elliot Tabron + John Does 1-10
      11/2012
      Jeunesse
      https://www.scribd.com/doc/268101308/Caramanis-Tabron-Jeunesse

      Santo Roberti
      10/2013
      Call MD Plus
      https://www.scribd.com/doc/268101297/Caramanis-2nd-Half-Roberti-Call-MD-Plus

      Daniel Ceja
      10/2013
      Jeunesse
      https://www.scribd.com/doc/268101299/Caramanis-Ceja-Jeunesse

      James and Karen Brinkerhoff
      11/2013
      Zija
      https://www.scribd.com/doc/268101298/Caramanis-Brinkerhoff-Zija

      Edel Valdes
      01/2014
      Jeunesse
      https://www.scribd.com/doc/268101309/Caramanis-Valdes-Jeunesse

      Idris Clark + John Does 1-20
      12/2014
      unkown company (possibly Call MD Plus)
      https://www.scribd.com/doc/268101300/Caramanis-Clark

      DSA Hints At Its Intentions of Publicizing Code of Ethics Violations

        Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

        Without question, self-regulation is better than government regulation. But when you remove the “regulation” out of “self-regulation,” it’s all sort of pointless. In other words, rules without penalties are meaningless.

        I was recently speaking at the Association of Network Marketing Professionals conference. It’s at these sorts of conferences where professionals get a sense of what’s really going on in the industry. We all get together, in casual environments, and compare notes about who’s crushing it, who’s cheating and everything in between. The common frustration throughout the years has been this yearning for improvement. People in the industry have a deep, deep desire to elevate the profession to a higher status. But in an environment where “anything goes,” this has been an insurmountable task. The words have fallen on deaf ears, yielding zero progress. After all, how can you elevate an entire industry without (1) a set of rules; and (2) consequences for when those rules are violated. Currently, we’ve got #1 covered. We’re working on the second.

        During my talk, I asked the audience of 500+ to raise their hands if they’ve heard of an industry-wide Code of Ethics. They all raised their hands. I then asked them to keep their hands up if they’ve heard of a single infraction of that Code.

        There was 1 person in the room with his hand up, and I’m convinced he thought he was going to win a prize.

        When people ask me how we can “elevate the profession,” the answer is crystal clear: we need to get more serious about self-regulation. It does ZERO good to have standards when it’s easy (and profitable) for people to infringe on those standards with no consequence. In an environment where there are no speeding tickets for driving 90 MPH in a 70 MPH zone, owners are forced to push the envelope, which leads to serious degradation in industry standards. We have good rules (that need to be improved). But once in, companies have never been…penalized. In an article written by DSA President, Joe Mariano, he makes it clear that better days are coming for ethics. In the article, he writes,

        Indeed, ours are some of the strictest membership standards of any industry association. Unlike many trade groups that throw out bad actors only after unethical or anti-consumer behavior has been identified, we vet our members on the front end.

        In other words, they place the priority on the front-end.

        Once a company is in the club, the DSA has been slow to penalize (candidly, I’ve never heard of a single penalty….ever). Based on statements from Mariano, this will soon change,

        . . . I nevertheless seized the moment during last month’s DSEF self-regulatory panel to commit DSA to greater transparency around Code enforcement actions, effective this year. We will undertake new yearly public reporting of complaints received by the independent Code Administrator, as well as the corrective actions taken to address the complaints.

        NFL and NASCAR

        Public enforcement. It’s a step in the right direction. The NFL is an example of an association that takes its rules seriously (at least lately). While they were not able to prove conclusively that Tom Brady had knowledge about deflated footballs, they suspended him for 4 games and fined the Patriots $1,000,000. The message was crystal clear: There’s no room for teams in the league that push the ethical boundaries. Zero tolerance. What about NASCAR? Same story. They repeatedly fine for questionable behavior.

        Spare the Rod, Spoil the Child

        And as we’ve seen with the NFL and other examples, when there’s a deep commitment to integrity, and that commitment is backed by enforcement, the end product is better. In the absence of penalties, trust erodes slowly over time as companies compromise on basic principles of decency to secure enrollments. Marketplace trust is crucial and it will never occur until we all get in sync on best practices.

        I firmly believe that our industry’s best days are ahead of it. Improvements when it comes to self-regulation are a crucial step in the right direction. If this new commitment to regulation lacks substance in the long term, we’ll be back to square one.

        MLM Special Deals: Disclosure Requirements (Part 2)

          Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

          Specific Strategies

          In Part 1 of our MLM Special Deal series, we covered the basic concepts about the need for disclosures when it comes to business development agreements. In this article, I provide specific strategies to help companies and distributors navigate the water.

          When does a deal need to be disclosed?

          In their FAQs, the FTC provides some practical tips for when to disclose and how. Note, after my original article was published in December of 2014, the FTC has since updated their website with more content specifically for network marketers (which means they’re paying attention). The page is titled The FTC’s Revised Endorsement Guides: What People Are Asking. On this page, the FTC writes, “If there’s a connection between the endorser and the marketer of the product that would affect how people evaluate the endorsement, it should be disclosed.” The main question: In a network marketing context, when does a “connection” affect how people would evaluate the networker’s endorsement of the company? The answer, in my opinion: When the connection involves EXTRA COMPENSATION that’s not available to average participants considering the program.

          It’s a point worth repeating: Disclosure is required when the connection involves EXTRA COMPENSATION that’s not available to average participants considering the program.

          This brings up another question…how is “extra” defined? If a networker was flown in by the company, is this extra? If a networker is given a monthly budget to fly around America to recruit leaders, is this extra? If a networker purchased a position and is given a serious advantage by way of the placement, is this extra? In the FAQ document, the FTC offers a little guidance by writing, “[W]hat’s clear to you may not be clear to everyone visiting your site, and the FTC evaluates ads from the perspective of reasonable consumers.” When in doubt, the FTC recommends disclosure. In my opinion, “EXTRA COMPENSATION” should be defined as additional revenue opportunities that are not available in the general pay plan.

          It’s another point worth repeating: “EXTRA COMPENSATION” should be defined as additional revenue opportunities that are not available in the general pay plan. This would include being given volume in a leg, signing bonuses, additional pay on gross volume points, extra cash for travel, being able to work multiple positions, etc. This would not apply to a corporate fly-in, free convention tickets or even being given free product (in my opinion). It boils down to a simple question: What fact, if known by a reasonable consumer, would affect the endorsement? If those being recruited knew of the existence of a special deal, they’d be in a better position to make a decision. The FTC views marketing from the perspective of a “reasonable consumer.” If a reasonable consumer would be intrigued to know the existence extra incentives, disclose

          The FTC provides another example to give us guidance on when disclosure is required. The FTC writes, “A famous athlete has thousands of followers on Twitter and is well-known as a spokesperson for a particular product. Does he have to disclose that he’s being paid every time he tweets about the product? [Answer] It depends on whether his readers understand he’s being paid to endorse that product. If they know he’s a paid endorser, no disclosure is needed. But if a significant number of his readers don’t know that, a disclosure would be needed. Determining whether followers are aware of a relationship could be tricky in many cases, so a disclosure is recommended.

          Now What?

          This is where the rubber meets the road. I have written ad nauseam about the requirements for disclosure. I have even shed some light as to WHEN disclosure is required. It’s now time to discuss HOW the disclosures should happen.

          The FTC specifically has a section on its page titled “How Should I Make the Disclosure?” The FTC writes, “It’s always been the law that . . . if an endorser has been paid or given something of value to tout the marketer’s product – the ad is misleading unless the connection is made clear.” What does “clear” mean? In the FTC’s disclosure guidelines, they require “Clear and Conspicuous” disclosures and explain that disclosures need to be “as close as possible to the triggering claim.” When it comes to the definition of “clear,” it boils down to readability.

          This likely raises the question: How often does a networker need to disclose that he or she received additional compensation? Is a networker required to constantly disclose this fact every time he or she recruits someone? Remember, disclosures need to be close to the triggering claim. So the unfortunate answer is “yes.” In its FAQ, the FTC posed a question about whether a single disclosure on a website would work when there were several “triggering claims” throughout the site. The FTC writes, “A single disclosure doesn’t really do it because people visiting your site might [see individual statements] or watch individual videos without seeing the disclosure on your home page.” This rule is consistent with the FTC’s position with income claims. If a fact would weigh into a prospect’s decision to join, it needs to be disclosed.

          Am I naive enough to think that networkers will constantly disclose their special deals? No. But if these deals are going to continue, and if there’s a company out there that really wants to disclose the existence of deals, I would recommend the following: they create a special designation for deal recipients.

          We can start with a simple symbol, like a Plus sign i.e. Bronze Plus (or Bronze+). They should list all of their + people on a separate page on the website. The + distributors could promote their presence on the page as a badge of honor. This would remove pressure from the networker to constantly disclose and transfer pressure to the company. It can also be added to the enrollment process where the prospect checks a box, confirming that they understand their sponsor is receiving compensation beyond the traditional pay plan. The company will need to make it clear that the “+” is a sign that signifies payment terms beyond the compensation plan. The specifics of the deal, though material in my opinion, need not be mentioned. The message will spread and prospects will be in a position to discover the existence of deals. This simple measure would be a large step forward in the right direction. Candidly, I’m hopeful the DSA takes measures to end the practice completely. We’ll see.

          Conclusion

          Is it perfect? No. Is it better than nothing? Yes. Is it easy to implement? Absolutely. There’s no need to make it complicated. In fact, the FTC has said that simple is good. They wrote, “What matters is effective communication, not legalese. A disclosure like “Company X sent me [name of product] to try, and I think it’s great” gives your readers the information they need.”

          It’s that simple.

          This is a word for prospective distributors: DO NOT JOIN A COMPANY THAT YOU KNOW CUTS DEALS, BUT REFUSES TO DISCLOSE. DO…NOT…JOIN!! It’s a symptom of cancer.

          What do you think? Do you have any suggestions?

          MLM Special Deals / Business Development Agreements: Disclosure Requirements (Part 1)

            Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

            ftc-endorsement-twitterIn December of 2014, I wrote an article titled “MLM Special Deals: The Fraud Ends Now.”  The article was about “Business Development Agreements” / confidential deals used by MLM companies to attract networkers.  The more success in prior companies, the sweeter the terms.  After reaching a deal, the networkers publicly announce, “After some serious due diligence and deep reflection, my heart has led me to join Company ABC….I find their products to be best in-class and their compensation plan to be the most rewarding I’ve ever seen.”  And since the private deals typically require aggressive volume goals, it naturally leads networkers to raid their prior organizations (or cut private deals of their own).  

            Two things: (1) It’s fraud.  It’s a material fact that, if known, affects the credibility of the networker. Absent a disclosure, it’s fraud. (2) It has led to a massive feeding frenzy within the industry.  There are some (dozens) that throw their hands up saying, “It’s just how business is done these days.  In order to be competitive, you’ve got to pay the experienced networkers under the table so they’re motivated to recruit the non-experienced.”  I find this rationale pathetic. The path to riches does not need to be an overnight journey. (3) It leads to non-sensical terminations and massive manipulation in the genealogy. In order to entice a networker, a real spot with real volume is oftentimes given. And if there’s no position available with real volume, fake volume is created. And when the fake volume runs dry with no new volume to take its place, there’s pressure on the company to do one of two things: (a) continue to create fake volume (which costs real money); or (b) find real volume that belongs to someone else, terminate and transition the volume to the networker. With option (b), the company takes a measured approach and thinks “If we terminate, what are the odds they’ll file a lawsuit? And if a lawsuit is filed, what’s the ultimate cost.” This calculation ignores the enormous cost incurred by the distributor and his or her family, devastated by the rapid loss of income.

            The Problem

            In an environment where there are no consequences for this conduct, owners are engaging in a risk / reward analysis that steers them towards compromising on basic principles of decency. If you look historically at the companies that have been aggressive with deals, there’s always a massive POP followed by a massive DROP. Who gets hurt? The average distributors that joined under the pretense that success was easier with Company ABC. Being surrounded by “successful networkers,” they think surely this piece of real estate is more valuable than others. When they learn the truth, they leave feeling like failures.

            In a perfect world, the DSA would demonstrate leadership over this issue and create some standards.  There’s a chance changes are coming on this front. I’ve seen statements from the DSA regarding their desire to be more transparent with code enforcement actions. DSA Chairman Joe Mariano has said, “As expectations for consumer protection evolve, so does our Code of Ethics . . . Later this year, we will further strengthen these best-in-class consumer protections by introducing greater transparency around enforcement and enhancing protections against false earnings claims.” In NASCAR, when people cheat, they get fined. h/t to Troy Dooly for the NASCAR analogy. With the Code of Ethics, I have yet to speak with a single person that’s familiar with a single Code of Ethics violation. I’m hopeful this changes in the near future, and I’m hopeful the penalties are serious.

            Currently, in the absence of such leadership, there’s a growing number of people that want to see improvements NOW.  This group of professionals, both distributors and company owners alike, would like to see some consistent standards when it comes to business development arrangements. I’m not suggesting that deals should stop. I’m not naive enough to think this is even possible. This industry attracts a special breed of owners. There are always going to be deals. I get it. And if done right, perhaps there’s a place for them. If someone wants to spend money and “invest in their business” by cutting deals, they can do it. But, the deals need to be disclosed. Irrespective of the requirements under the law, cutting private deals should defy a person’s common sense of decency. In network marketing, networkers leverage their reputations and goodwill to recruit other participants. These enrollees are real people that TRUST their sponsors. When companies pay networkers for their allegiance, they’re essentially leveraging this goodwill by creating faux allegiance with trusted distributors.

            Justifying deals, I’ve seen networkers compare this practice to that of paying professional athletes. After all, if Darrelle Revis can “change a jersey” in exchange for $70M, why can’t a networker change a jersey for a fee? This sort of analogy is like comparing Apples to Airplanes…there’s zero similarities. Darrelle Revis is not being paid to recruit other football players. Darrelle Revis is not saying “I’m choosing the NY Jets because their style of play is better.” Darrelle Revis’s fan club is not saying “Darrelle is making more money with the NY Jets because they’re better than everyone.” And…this is the sticky part…Darrelle Revis’s deal is fully disclosed. While some networkers have skill, and that skill might be worth some extra money, there’s no excuse for the networker to pretend that they’re building under the same set of rules like everyone else. It’s just not true. I’ve also seen statements like “As a private company, they can do what they want.” True, so long as the activity is legal. And confidential deals are not.

            How should deals be disclosed?

            First, in my opinion, if companies were forced to disclose these deals, the deals would stop. Once the illusion is gone, there’s less of an incentive to create the faux allegiance / excitement.

            Second, assuming I’m wrong and a company is actually ok with disclosure, part 2 was written to cover specific strategies. But before you skip ahead to the strategies, it’s important to understand the concepts.

            The Rule

            In their Testimonial and Endorsement Guidelines, the FTC states, “When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed. . . . “ These special deals are absolutely material and they absolutely affect the “credibility of the endorsement.” The FTC goes on to provide the following example:

            Example 4: An ad for an anti-snoring product features a physician who says that he has seen dozens of products come on the market over the years and, in his opinion, this is the best ever. Consumers would expect the physician to be reasonably compensated for his appearance in the ad. Consumers are unlikely, however, to expect that the physician receives a percentage of gross product sales or that he owns part of the company, and either of these facts would likely materially affect the credibility that consumers attach to the endorsement. Accordingly, the advertisement should clearly and conspicuously disclose such a connection between the company and the physician.

            Example 3: During an appearance by a well-known professional tennis player on a television talk show, the host comments that the past few months have been the best of her career and during this time she has risen to her highest level ever in the rankings. She responds by attributing the improvement in her game to the fact that she is seeing the ball better than she used to, ever since having laser vision correction surgery at a clinic that she identifies by name. . . . The athlete does not disclose that, even though she does not appear in commercials for the clinic, she has a contractual relationship with it, and her contract pays her for speaking publicly about her surgery when she can do so. Consumers might not realize that a celebrity discussing a medical procedure in a television interview has been paid for doing so, and knowledge of such payments would likely affect the weight or credibility consumers give to the celebrity’s endorsement. Without a clear and conspicuous disclosure that the athlete has been engaged as a spokesperson for the clinic, this endorsement is likely to be deceptive.. .

            Assume that instead of speaking about the clinic in a television interview, the tennis player touts the results of her surgery – mentioning the clinic by name – on a social networking site that allows her fans to read in real time what is happening in her life. Given the nature of the medium in which her endorsement is disseminated, consumers might not realize that she is a paid endorser. Because that information might affect the weight consumers give to her endorsement, her relationship with the clinic should be disclosed.

            The examples above speak for themselves. If a doctor selling retail products is required to disclose the existence of a revenue sharing arrangement….and if a tennis player talking about her eye surgery is required to disclose her contract with the clinic, networkers (without question) are required to disclose the existence of extra pay that’s not generally available to the public i.e. special deals.

            The original article I wrote about MLM special deals has been by far the most trafficked article I’ve ever written.  The market was clearly primed for the message.  There was significant frustration from both networkers and owners. As a result, the article spread. But, there were some that said, “Now what?” They also asked, “When does a deal need to be disclosed?” Part 2 of our MLM Deal Disclosure series is intended to address those questions.

            Skincare Products: When does marketing cross the line?

              Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

              786584004_be4c5d74e0_mSkincare has been a staple category in the network marketing industry for generations.  In 2013, the DSA reported that over 20% of all revenue came via the “personal care” category.  As the population continues to grow and people continue to age, these numbers are sure to increase.  As my grandmother used to frequently say, “Getting old sucks.”  People are willing to pay a premium to slow down the signs of aging.  Selling products into this massive market just makes sense.

              Marketing Challenges

              The challenge: if a product is not FDA approved as a drug, the marketers (the company and its distributors) cannot imply that the product can be used to “affect the structure or any function of the body.” This puts sellers of skincare products in a serious predicament: how can they tell the story of their products without implying that the products enhance the structure of the skin?

              I field a lot of questions from both clients and distributors alike about this question.  I figured it was time for a public analysis to help both distributors and companies get this right.

              FDA Rule

              The FDA provides a good article on the subject, titled: Are Cosmetics Promising Too Much? Federal law defines a cosmetic as a product designed for “cleansing, beautifying, promoting attractiveness, or altering the appearance.”  The law does not require FDA approval of cosmetics before they’re sold.  Drugs, on the other hand, must be FDA approved before they reach the market.  

              The word “Drug” is defined as a product “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease . . . or intended to affect the structure or any function of the body.”  When a company implies that its product can alter the structure of the skin, the claim would be considered an illegal “drug claim.”  See below for some real examples of drug claims made by skincare companies that got FDA attention

              IMPROPER CLAIMS

              “Clinically proven to change the anatomy of a wrinkle.”
              “This superb age-fighting serum is super charged with . . . potent elastin stimulating peptides.”
              “#1 selling neck cream.  Now even more tightening.”
              “Beta Glucan: Helps stimulate collagen production for added strength to the dermal matrix.”
              “Spanish Lavender … inhibit muscle fibers from contracting … ”
              “Stimulates the production of collagen . . ..”
              “TGF-b(1-3) (Transforming Growth Factor Beta) to help stimulate collagen, to help inhibit cellular breakdown…”
              “PDFG (Platelet Derived Growth Factor) to help activate wound healing fostering new skin growth, to help reduce scar tissue, and to help form stronger blood vessels.”
              “The at ­home answer to wrinkle­ filling injections. Start rebuilding collagen in just 48 hours.”
              Stimulate elastin to help improve elasticity and resilience.”
              Regenerate hydroproteins to help visibly minimize creasing.”

              As you can see, when a seller implies that the product can change the underlying structure of the skin, it leads to trouble.

              When the infractions are serious, the FTC can get involved and sue the company for deceptive advertising. L’Oreal recently settled a matter with the FTC related to their marketing of a cosmetic product. They marketed their “Genifique” product as being able to “boost genes’ activity” that would cause “visibly younger skin in just 7 days.”

              EXAMPLE OF PROPER CLAIMS

              “Cleanses skin”
              “Enhances beauty”
              “Promotes attractiveness”
              “Protects collagen from breakdown”
              “Boosts the skin’s natural repair mechanisms”
              “Reduces visible signs of aging.”

              It’s pretty boring, I know.

              What does this mean?

              Generally in the network marketing industry, the skincare products you see would be viewed by the FDA as “cosmetics.”  In the vast majority of cases, sellers of cosmetics cannot make disease / structure-function claims.  In rare cases, products containing very specific ingredients (i.e. benzoyl peroxide) in very specific quantities can market their products as Over The Counter drugs for purposes of treating specific problems (i.e. acne).  With products in the “anti-aging” category, I have yet to find a network marketing sell a product that fits within an OTC exception.

              This FDA rule puts a lot of direct sellers in a tough spot because in most cases, the cosmetic products actually work.  And when they work, distributors want to tell the story i.e. “I no longer do botox injections,” “The wrinkles on my face are gone,” etc.  Companies are required to strike a tough balance between giving distributors flexibility in telling their stories while ensuring those stories are compliant.  Based on what I’m seeing, most companies in the industry are failing in this regard. The FDA recently stated that they’re seeing a “proliferation of unlawful claims on the Internet and on product packaging.”  In the defense of companies, it’s a tough job.  And candidly, if I were to pick a poison between being labelled a pyramid scheme that sells products devoid of value or being labeled a company that’s aggressive with disease claims, I’d choose disease claims. The FTC shuts down pyramids while the FDA sends warning letters.

              I hope you’ve found this helpful. If you think this content would be beneficial for someone that sells cosmetics, pass it along.

              SEC Holds “Gatekeepers” Accountable for Fraud in Network Marketing

                Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

                Gatekeeper

                Andrew Ceresney, Director Division of Enforcement, testified before Congress regarding the SEC’s latest enforcement efforts. During his testimony, which can be reviewed here, Ceresney brought up the topic of pyramid schemes, stating that it’s one of the SEC’s top priorities. Ceresney stated,

                The staff also has recently seen what appears to be an increase in pyramid schemes under the guise of “multi-level marketing” and “network marketing” opportunities. These schemes often target the most vulnerable investors, and social media has expanded their reach. The Division is deploying resources to disrupt these schemes through a coordinated effort of timely, aggressive enforcement actions along with community outreach and investor education. We are also using new analytic techniques to identify patterns and common threads, thereby permitting earlier detection of potential fraudulent schemes.

                Since the Zeek Rewards shutdown, which occurred in August of 2012, the SEC has been very aggressive in shutting down several ponzi / pyramid schemes. Based on its history, the SEC seems to be more focused on ponzi schemes / scam-investment programs. Companies that sell tangible product or legitimate online services seem to stay out of trouble with the SEC (the FTC seems to have a larger interest with the network marketing companies that operate in the gray).

                If you’re a distributor for a network marketing company, and you’re selling something real, this information likely has little value for you.

                I’m mainly writing this because of the next part of the testimony. It’s titled “Gatekeepers” in the SEC’s document.

                A common thread throughout the priority areas identified above is an emphasis on the importance of gatekeepers to our financial system: attorneys, accountants, fund directors, board members, transfer agents, broker-dealers, and other industry professionals who play a critical role in the functioning of the securities industry. Gatekeepers are integral to protecting investors in our financial system because they are best positioned to detect and prevent the compliance breakdowns and fraudulent schemes that cause investor harm. When gatekeepers fail to live up to their responsibilities, the Division has held – and will continue to hold – them accountable.

                This applies to me and my competitors along with my fellow vendors that service network marketing companies. The bar is rising, and for good reason. We’ve seen separate scenarios where lawyers, banks, accountants, online marketers, and payment processors all get held responsible for purportedly greasing the wheels for ponzi schemes. In the past (pre-Zeek Rewards shutdown), ponzi schemes were difficult to spot. But today, we have crystal clear guidance on the subject. The SEC has sued a minimum of 8 companies in a few years, alleging them all to be pyramid / ponzi schemes. Also, they’ve provided numerous alerts on the subject, such as this Investor Alert titled “Beware of Pyramid Schemes Posing as Multi-Level Marketing Programs.” They’ve also recently provided an update regarding Ponzi Schemes Using Virtual Currencies (which is a space that’s sure to be heating up in the near future).

                Bottom line: it’s getting more difficult for vendors (payment processors, lawyers, accountants, etc) to service companies with eyes wide shut. This is especially true with ponzi schemes. When it comes to ponzi schemes, there is no gray. The patterns are clear: auto-reinvestments, limits on withdrawals, points that appreciate in value over time, emphasis of the ROI, steady returns over time, products that are never used, etc.

                Conclusion

                The SEC has expressed an interest in the network marketing industry, both in words and in action. Granted, they’re primarily suing ponzi schemes that masquerade as network marketing companies. But…that could change. They are currently consulting with notorious FTC economist, Peter VanderNat. In my opinion, Dr. VanderNat is not so much concerned with ponzi schemes as he’d be concerned with pyramid schemes in the MLM family (he was instrumental in several of the FTC’s cases against pyramid schemes).

                What should we do with this information? For starters, we need to get more serious about “self-regulation.” Currently, information is NOT being shared publicly when companies cross the line. As a result, we’re not really learning anything about what constitutes good behavior versus bad.

                (h/t to Patrick Pretty for bringing the SEC’s testimony to my attention)

                Academy of Multilevel Marketing Awards – 2014 Nominees

                  Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

                  TAMM logoThe Academy of Multilevel Marketing, TAMM for short, was started by Len Clements in an effort to create an objective process for recognizing the “best of the best” in the network marketing industry. TAMM honors those that exemplify the “gold standards” of the industry. I’ve been serving on the board since its inception two years ago, and I’m very proud of how much this organization has grown. It’s grown primarily through the hard work of a handful of people, grinding it out on conference calls (Len Clements, Mel Atwood, Doris Wood and others).

                  Len and the board have created a nomination and voting process to ensure transparency and fairness. It’s not designed to be a popularity contest. The end-result truly reflects the general sentiment shared by the 100+ academy members (all of whom are vetted professionals in the industry).

                  The 2014 nominations were released recently. If you’re an academy member, check your email and be sure to vote. To view the nominees, read below. There’s also a video presentation (below). If you’re reading this via email, the video can be watched here.

                  COMPANY OF THE YEAR

                  Isagenix
                  It Works!
                  Origami Owl
                  USANA
                  ForeverGreen

                  CEO OF THE YEAR

                  Cindy Monroe (Thirty-One Gifts)
                  Jim Coover (Isagenix)
                  Mark Pentecost (It Works!)
                  Jeff Olson (Nerium)
                  Steve Wallach (Youngevity)

                  PRODUCT OF THE YEAR

                  Instantly Ageless (Jeunesse)
                  Nerium AD (Nerium)
                  Protandim (LifeVantage)
                  Balanced Nutrition (WellnessPro)
                  Better Body System (Yoli)

                  BEST NEW START UP

                  Kannaway
                  XPS Nutrition
                  TruVision Health
                  Vfinity
                  Xseed Health

                  DISTRIBUTOR OF THE YEAR

                  Alex Morton
                  Jeri Taylor Swade
                  Jimmy Smith
                  Michael Linden
                  Mike Akins

                  TRAINER OF THE YEAR

                  Eric Worre
                  Tom Schreiter
                  Margie Aliprandi
                  Lisa Grossmann
                  Susan Sly

                  SUPPORT COMPANY OF THE YEAR

                  Thompson Burton (Kevin Thompson)
                  Prosperity Central
                  Sound Concepts
                  Home Business Advertiser
                  Hyperwallet

                  HUMANITARIAN OF THE YEAR

                  John Fleming
                  Pure Radiance
                  USANA
                  Nerium
                  Sarah Robbins

                  INDUSTRY ADVOCATE OF THE YEAR

                  Len Clements
                  Kevin Thompson
                  Eric Worre
                  John Fleming
                  Richard Brooke

                  HALL OF FAME INDUCTEE

                  Rich DeVos
                  Mary Kay Ashe
                  Jay Van Andel
                  Mark Yarnell
                  Niel Offen

                  Junkie See, Junkie Do – by Randy Gage

                    Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

                    Randy Gage wrote a tremendous article last week titled “Junkie See, Junkie Do.” It was regarding a recent acquisition in the industry. With his permission, I’ve posted it in full below. I’ve been a fan of Randy’s for a long time. He’s an outstanding networker with years of legitimate results. After following him for years, he strikes me as a guy that’s willing to grind it out and put in the hard hours to dig out results. He sticks, thus he succeeds LONG TERM.

                    It’s a very courageous article. I have a lot of the same feelings and thoughts, and I could not have expressed these thoughts any better. There’s something about this recent development that troubles me. Bottom line: Companies that rely on confidential deals to attract distributors are in for a rude awakening. The good news: the market is no longer blind to it.

                    —————Start of Randy’s article—————

                    Alas, the ongoing chronicles of the “MLM Junkies” continues repeating the pattern, year after year, company after company.

                    On Monday I got a message from Art Jonak that there was a live-stream of ABC company, announcing their sale to XYZ company. Company ABC had targeted my own company a few years back, buying off a top leader and attempting to get many others. In fact they laid a trail of destruction across the entire network marketing landscape, making sweetheart deals with every leader they could buy.

                    I’ve been witnessing this sad saga replayed over and over for more than 25 years. Five or six years ago, ABC company was the “hot” deal on the scene. One of their principals was sending his private jet around the globe, wining and dining leaders he wanted to poach away from other companies. And he got a lot. Sales were skyrocketing, shareholders were happy, most of the other companies were jealous. But a strange thing happened…

                    Those hired mercenaries turned out to be, well, mercenaries. And when DEF company came along and wanted to make a big splash, most of these “mercs” went with DEF for under the table deals and payoffs.

                    There is a morphing blob of a couple hundred thousand “MLM junkies,” who drift from deal to deal, every couple of years. They’re always jockeying for a better position, trying to flip their upline into their downline. Unfortunately for them, they have no idea that the game is rigged, so they can never win. Because if you’re not recognized as one of those “heavy hitters,” you don’t get the cooked line, master distributor position, or phantom positions in the tree for your spouse, mom, dog, cat, and parakeet that these manipulative deal-making insiders negotiate for themselves.

                    Eventually the junkies leave DEF company for GHI company, and two years later, they’re at JKL company. Until we get to where we are today….

                    Poor ABC company geared up staff and production to handle all that amazing growth they had for two years, but then the bottom fell out. Most of the mercenaries had moved on, and the company couldn’t slash overhead fast or deep enough. Finally the dealmaker was forced out in a desperate refinancing. Now company XYZ is buying the burnt out shell.

                    So I couldn’t help myself, and tuned in to see the carnage. But the presentation was amateur and cheesy and I had work to do, so I tuned out after two minutes. To paraphrase Dwight Yoakum, it was just another lesson about a naive fool that came to Babylon, and found out that the pie don’t taste so sweet.

                    Every couple years these junkies blow up whatever work they’ve done, destroy yet more of whatever waning credibility they have remaining, and jump to the next hot deal, thinking this time it will be different. But of course it never is.

                    Because you don’t reach success in MLM but getting in the hot deal at the right time, but by getting in the right deal and making it hot. By going to work.

                    Of course I’d love to tell you that my company is different and we would never do a deal. But that would be a lie. One of the co-founders was a dealmaker. And when I joined, most of the top income earners, including my sponsor, were on some kind of deal. I didn’t have a problem with it, because at least they were disclosed. And of course they were ready to offer me the farm. I think they were shocked that I didn’t want a deal of any kind. I bought a distributor kit and purchased the “everything but the kitchen sink” activation order for about $1,000. It was important to me that everyone I brought into the business could duplicate everything I was going to do. And they did…

                    I sponsored 11 people the first month. Each of them with no network marketing experience. Two more the second month. I went to work, driving depth, teaching them the basic skills of meeting people, working a candidate list, making invitations, and follow up. It was steady work, building block stuff, staying with each line until someone in that line took it away from me. Creating the team support structure required: a team website, training manuals, plug-and-play presentation tools, and live events where real people actually went in person and shook hands with other real people, instead of hiding behind their computer, “liking” cat videos on Facebook.

                    By year two, I was now the top income earner in the world. The next year, the former top income earner left – for a deal with ABC company. Meanwhile my company had made another deal and brought in another “heavy hitter.’ Because they had a cooked leg, within a couple years, they replaced me as the top income earner. For a few months at least, until they found a better deal and left. (Since then, they’ve been in at least eight other deals I know of.)

                    A couple years later, my sponsor negotiated a buyout to his deal and now makes his living as a generic trainer. In fact, within five years, every single person who had a deal with my company was gone. And the guy making the deals, was terminated by the board of directors. (And since then, he’s bounced around through about ten different deals.)

                    I don’t wish any ill for any of those people. I hope things work out the best for all of them. As for me, I’m just minding my own business; doing what I always do. I drive around town to new peoples’ homes, to be there for their first meeting, driving depth in the organization. I get on planes and speak at major events for my long distance lines. And last night, I had my latest prospect in front of a TV, watching a presentation.

                    Because this is how the business is built…

                    It is mindboggling to see how many people simply refuse to see this reality. And every couple of years, there is another inexperienced and gullible company owner who thinks they can jumpstart their growth and circumvent the time it takes to build a structure. So they pull out their checkbooks, and start buying mercs. They have a two-year run, become the next hot deal, and then cry foul when the next, next hot deal poaches away the very people they poached from someone else. Junkie see, junkie do…

                    Unfortunately here’s what other collateral damage happens along the way…

                    On every cycle of the process, there are thousands of junkies that burn out. They have been in so many deals, burned through so many contacts, and maxed-out so many credit cards that they simply give up the ghost. And that’s a heart-breaking tragedy.

                    Because these are not bad people, and they’re not lazy. They really wanted to succeed. They joined network marketing because they had a dream: They wanted to be their own boss, spend time with their family, drive one of those exotic bonus cars, take that trip to that glamorous locale, sponsor that orphanage, or simply break the bonds of debt. And when they throw away that last flipchart or distributor kit – their dream goes in the recycling bin with it.

                    Also on every cycle, there are some junkies that stay, because they have the security of the top-up or other fixed deal they were able to get as a mid-level merc. But alas, it turns out they can’t actually build a network marketing organization.

                    Because first of all, that takes honest work. Building a business in network marketing is simple, but it’s not easy. You do have to actually work.

                    Second it requires integrity and being able to look people in the eye and promise them that they have the same exact opportunity and pay structure that you began with.

                    And it means actually knowing the fundamentals of the business: how to meet people, make compelling invitations, use duplicable tools, and become great at teaching and mentoring.

                    If you want to truly develop – and lead – a large team, you have to create a support structure of marketing tools, training materials, and live and online events that nurture the team. This is sacrificial effort that doesn’t translate immediately into higher bonus checks early on, but creates true residual income and duplication for a lifetime.

                    I’d like to say my company has the best products in the entire world. But that’s not true. My company has some amazing products. Just like about three hundred other MLM and direct selling companies. I’d like to say my company has the best compensation plan in the world. But there are at least 100 companies with great pay plans. You probably want to be in the best company in the world. And for you, that’s probably the one you’re in right now.

                    Want to become an MLM Rock Star? Stop looking for the next hot deal. Stop looking for the next heavy hitter and become one yourself. Stay with your company, develop your skills and be willing to do the work it requires.

                    Otherwise you become the “mud against the wall,” in the saga with no end

                    Now company XYZ is just the latest entity to be running around the globe offering these backroom deals to anyone that will take them. So it was only fitting that they pick up the crumbs of company ABC for fractions of pennies on the dollar. The smoke and mirrors have all played out. Now all they’re buying is the wisps of leftover smoke and the shards of broken mirrors.

                    Meanwhile, all the parties involved are making proclamations of grandeur and world domination about their new, stronger entity changing the game forever. Please forgive us if we’ve seen this movie before.

                    How the story ends….

                    So about an hour later, Art messaged me to ask what I thought of the live stream. I told him I was preparing my leadership call for that night and had prospects to follow up with, so I had dropped off after two minutes. He insisted that I go back and watch it some more. So I was intrigued enough to comply, and was glad I did, because I got the biggest laugh of my week.

                    The main speaker still wasn’t giving up the ghost, beseeching some of the mercenaries that had left that, “You have my number!” But my favorite part was when he was thanking the “millions of viewers” around the world who were watching. The live feed had 278 people.

                    -RG

                    P.S. If you really believe in our profession – and doing it the right way – I hope you’ll share this post all over social media. The profession gets stronger every time you do. There are share buttons above.

                    —————End of Randy’s article—————

                    Follow Randy on Facebook at: https://www.facebook.com/randygage.

                    Nestler vs. Jeunesse

                      Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

                      It’s been close to five years since I’ve represented a plaintiff against a network marketing company. I rarely do it for a number of reasons. First, I tend to agree with companies. It’s a bias that I’ve formed over the years after representing close to 200 companies. Second, the economics rarely justify the effort. When networkers are earning less than $10,000 per month, it’s usually not in their economic self-interest to sue a company. It’s expensive and laced with uncertainty.

                      But I like this case.

                      It’s a very simple story. It involves a networker, Matt Nestler, that sponsors another networker, Kevin Giguere. And nine months later, Nestler was terminated for ostensible reasons (in our opinion). The lawsuit is included below, and it can be found here. All of the pleadings can be found here.

                      The facts are interesting. Nestler and Giguere both signed separate Business Development Agreements (“BDA”). The copy of Nestler’s agreement can be viewed here. BDAs are commonly used by Jeunesse to provide extra incentives for distributors to join their company. The terms of these deals are kept confidential, out of sight from the general public. They include various incentives, such as significant volume in the binary, additional cash on all CV generated in the pay-leg, “Top-Off” arrangements where networkers are guaranteed a certain sum of money each month (this was Nestler’s deal), cash advances, etc. With the assistance of their BDAs, Jeunesse can recognize numerous distributors as achieving rapid success when, in reality, the “success” was achieved with significant (and undisclosed) assistance. Based upon information and belief, Jeunesse, along with their distributors authorized to cut similar deals, have cut a number of these confidential deals with leaders all across the industry.

                      Within days of Nestler’s termination, two well-known and highly productive multi-level marketers, Rick Ricketts (“Ricketts”) and Cedrick Harris (“Harris”) became active in the Jeunesse organization. Ricketts was placed upline of Harris in Giguere’s downline. Contrary to its own Policies and Procedures, which expressly forbids Jeunesse participants from owning more than “one distributorship,” upon information and belief, it’s our view that Giguere, Harris and Ricketts were each allowed to accumulate over fifty positions between themselves in the Jeunesse genealogy. This provides them with a significant edge in their ability to dole out preferential placement for recruits. These participants are also expected to have received BDAs, with unique and undisclosed incentives that are generally not available to the public.

                      The facts continue, and I’m not going to bore you with details. In my opinion, this sort of controversy is the natural byproduct of a reckless, deal-oriented culture where whole genealogies are moved to satisfy networkers with the hot-hand. Nestler was road-kill.

                      Keep in mind, we’ve just filed a complaint. Jeunesse will have an opportunity to respond and if things come to light that refute our claims, we’ll respond accordingly and publish updates, but not here.

                      We’ve created a separate site that will contain information about the matter:

                      http://thompsonburton.com/jeunesselitigation

                      We’ve also created a brand page to make it easier for people to follow the progress:

                      https://www.facebook.com/jeunesselitigation

                      If you have information that might be relevant for the matter, we want to hear from you.

                      Nestler vs. Jeunesse by Thompson Burton