Herbalife Announces FTC Investigation

Herbalife announced that the FTC has initiated an investigation. While it’s not pleasant to deal with a government subpoena, this gives Herbalife an opportunity to put this issue to rest. Watch the video below to get my thoughts. In summary, I believe the FTC will use the data it collects from Herbalife to sharpen its saw in an effort to create better guidelines for network marketing companies. They’re not going to sue Herbalife (though I’m sure they’re thinking about it). If you’re reading this via email, click here to watch the video. The paper referenced in my video can be found embedded below (or here).
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Senator Markey’s Letter to the FTC: Prediction

Recently, Senator Markey from Massachusetts called upon the FTC to investigate Herbalife.  His full letter is included below. Click here to read if you’re reading via email. It’s worth mentioning that that the letter was likely originated by someone at Pershing Square, as observed by John Hempton. Markey has useful letterhead, being a U.S. Senator and all. I digress…

These are my predictions:

  • The FTC will respond. While Markey’s letter called for a response by February 28, I’m guessing they’ll respond after the deadline but by late April.
  • The FTC is not going to respond specifically about Herbalife. Three points worth mentioning here: (1) The FTC lacks the data to provide any meaningful commentary about Herbalife; (2) If the FTC had a problem with Herbalife, they’re not going to announce same at the behest of a Senator; and most importantly (3) Herbalife is not a pyramid scheme.  Ackman is playing another confidence game, and the market has grown immune to his tricks.
  • The FTC is going to take this as an opportunity to start a broader discussion about the network marketing space.  There’s an ocean of gray that separates legitimate network marketing companies from illegal pyramid schemes.  As a result of this ambiguity, fraudulent programs are flying under the guise of network marketing, claiming legitimacy because they’re “just like Amway.”  In my opinion, this is the underbelly of the space that the FTC needs to address, not companies like Herbalife.  What will these guidelines look like in the future?  That’s a different set of predictions for another time.

The video is a short one. I hope you find it informative. If you’re reading this via email, please click here to view the video.

Update: Herbalife’s CEO, Michael Johnson, personally wrote a response to Senator Markey. It’s also included below.

So You’ve Heard I’ve Been Retained?

In this video, I explain what it means when our firm is retained by a network marketing client. The fact that I’m retained should never be viewed as an endorsement of the program. There’s a lot that goes one when I’m working with a client and I make it very clear that my name is never to be used in a promotional sense i.e. “We hired Kevin Thompson and he says we’re a great company.” I want you to have a better understanding of what it means when I’m retained by a client. Watch this video to understand more.

Is it better to raid in secret or raid in plain sight?

Epic Era_MLM_Pre-Launch Founding Leaders

If you’re reading this via email, click here to view the video.

The purpose of this article is to explore the current “deal making” culture in the MLM industry. Quite frankly, it’s getting pretty stupid.

Raiding in Secret

Another word for “raiding” is “stealing.” But I’m not taking it that far. “Raiding” typically occurs when a leader strikes a special deal with a new company, violates his contract with his or her existing company, solicits the downline for the next new thing, conveniently fails to disclose the existence of the special deal, generates a decent commission for a year or two, possibly gets sued, seeks out another deal, wash, rinse, repeat. This is what I call “raiding in secret.” It’s a dirty / uncomfortable secret we deal with in the industry. It’s one that rarely gets discussed outside of the inner-circle because both parties instinctively know that it’s wrong. In the scenario of the private deal, there exists an understanding between the company and the recipient that there’s going to be a contract violation somewhere between the networker and their existing (or previous) MLM. This contract violation can even be factored into the contract negotiations i.e. “if you get sued, we’ll cover the legal fees.” I have always known about this side of the industry. There are companies out there like to cut deals and then turn around and sue their own distributors when they leave for other deals. It’s naive for me to think that these sorts of deals will end. After all, there is the occasional special deal that’s legitimate i.e. the networker waits for his or her old contract provisions to expire, starts from scratch and leverages his or her skill to build a large downline FAST. But…that’s rare.

I’ve written about this process in the past in two separate articles. The first is titled Master Distributors: good or bad? In the article, I talk in general about these deals and discuss the importance of disclosing the existence of these deals. In the second article, titled Revised FTC Endorsement Guidelines: Part 1 (Master Distributors),” I talk about the new disclosure requirements published by the FTC when it comes to these sorts of deals. Bottom line: disclosure is key.

Raiding in Plain Sight

Epic has recently announced, very publicly, that they’ve got $100,000,000 available for “experienced networkers.” The payment terms are published in a separate PDF, found below. Basically, if leaders can keep up with various performance metrics, they can earn additional income. While it caps out at $20,000 per month, Epic leaves room for some negotiation:

Are these still not big enough for your dreams and what you know you are capable of? Contact us for details on Epic Performance Programs beyond our $20,000 program.

How is this raiding in plain sight?

Watch the video above, titled Epic Puts $100,000,000 on the table for deals. In my opinion, there’s more to this than “paying for performance.” When you offer networkers $20,000+ per month in addition to commissions in exchange for 120,000 group volume points in six months….you know it’s quite likely (I’m putting it mildly) that the networker is transitioning distributors from another downline. And when that happens, it’s likely the distributor has some contractual restrictions for that kind of activity i.e. non-solicitation, non-compete, etc. There’s a better way to go about building a business. Plus, this sort of activity will invite mass litigation from the industry in general as leaders start migrating towards Epic (if that ever occurs). The claim will likely be “tortious interference,” which occurs when one company encourages people under contract with another company to violate the agreement.

Is this good for the industry?

In my opinion, it’s not. Companies invest years (sometimes decades), thousands of hours and millions of dollars building up their brands and goodwill with its leaders. If all of that effort can be taken by way of a confidential agreement with one of its top leaders, it’s bad for our profession. And what about the distributors in the downline? They’re the people that trust the leader to make good decisions. If they’re not in the know on the special deal, they’re really not in a good position to make an informed decision. They get lost in the shuffle. They get used. Is it in their best interest to uproot their organizations and follow the leader? In most cases, the answer is no.

Disclosure: I’m a conservative, free-market man. I believe in the power of the markets. However, in order for markets to work, information needs to be freely exchanged. In the case of these special deals, the public is never made aware of the deals; hence, the public / distributors are at a significant disadvantage. The market is manipulated.

Conclusion

There are no shortcuts to success. When I competed in the decathlon in college, I was met each year with one or two athletes that talked big. They were motivated for a month, bragging about their inevitable success. Within months, they quit. Success is a grind over time. It’s a long, arduous process. Through week after week, year after year of work, the power of compounding takes over. When I see a company trying to skirt around the work, I just shake my head… If you’re not willing to grind it out, you’re not developing the muscles necessary to win. Cutting these sorts of deals to take advantage of the investments made by other companies…it’s dishonorable.

What do you think? We’ve never had a company publish these sorts of deals before. Is it good or the industry? Bad?

+Kevin Thompson

If you’re reading this via email, please click this link.

FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 2)

This article was written by +Kevin Thompson in collaboration with our stellar summer associate, Jake Perry.

FTC Disclosure GuidelinesIn the last article, FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 1), we walked through the Federal Trade Commission’s recently published .com Disclosure Guidelines (fully included below). In this installment, we’re going to walk through five hypothetical examples of common marketing claims made in the MLM industry. The goal of this post is to provide you with practical, easy-to-understand tips on how to make proper claims.

The format is simple: I’m going to give you common fact patterns of how claims are made in the MLM industry. Then I’ll show you what most distributors would WANT to do as far as making disclosures. Then I’ll show what they SHOULD do, as per the .com Disclosure Guidelines. These guidelines apply whether the company is an MLM startup or a well-established company.

Ready? Go time!

UPDATE: This article has been updated after further research.  The .com Disclosure Guidelines are over 50 pages and it never mentions income claims.  The analysis below is based on my interpretation of their guidelines.  

EXAMPLE 1: CHECK WAVING

check

Fact Pattern:

Kyle is very excited about his involvement in a new cosmetics company, Wrinkles-B-Gone. After six months of hard work, he received his first check in the mail for $4,500. Overcome with excitement, Kyle gets an idea. He decides to post a picture on his Facebook profile showing off his check. Kyle figures it’ll be a great way to “flex his muscles” while demonstrating the power of his new company. It is clearly visible in the picture that the check is for $4,500. In his Facebook post, Kyle says, “Boom, playa! Check me out! Want to learn why this company is throwing money at me? Give me a call.”

Kyle does not include a disclosure of the average earnings for Wrinkles-B-Gone distributors. The average is $345 per month per distributor.

What Kyle wants to do:

Kyle, in no attempt to be deceitful, would want to provide a naked link to the company’s income disclosure in the caption. He figures, “Hey, they can click on the link and see all of the numbers at their leisure.”

What the FTC wants to see:

In the caption of the photograph: Please click this link to see our average earnings: www.wrinkles-b-gone.com/earningsdisclaimer

Lesson Learned:

The FTC allows marketers to provide a link to a disclosure IF the disclosure is not integral to the claim being made. “Integral” as defined by meridian is “essential or fundamental.”  Is an income disclosure integral to an income claim?  Sadly, the FTC does not give us any examples that involve income claims.  But they did specify that issues related to health or higher costs would certainly require disclosure near the claim itself (not via a hyperlink).  In an example in the guidelines, there was a refrigerator that was unable to maintain a cold enough temperature to prevent bacteria growth.  In that example, a disclosure by the ad itself is required.  Is the risk associated with an earnings claim on par with food borne illnesses?  I doubt it (but I’m open for a discussion).

The FTC further states that disclosures made via hyperlinks are permissible when the data is too complex to disclose next to the ad itself.  With income disclosures, the data can be very complex.  Plus, the average earnings changes each month; thus, making it nearly impossible to get the entire field to properly disclose the averages immediately after their claims.  It’s only practical, in my opinion, to get the field to provide a link to a full earnings disclosure.  Keep in mind, providing the link by itself is insufficient.  The link must be clearly labeled to adequately inform consumers.  Inserting “Please click this link to see our average earnings” sends a clear signal.

If you allow your distributors to make income claims, it’s imperative that you educate them on the proper ways to make those claims.  Also, it’s a good idea to display the income disclosure form at some point during the enrollment process.  This will help “clean up” in the event your leader fails to provide a disclosure.

EXAMPLE 2: Weight Loss Claim

Weight Loss Example -  | MLM attorneyGronk has been using “Slim-Me-Cave” for the past 30 days. Miraculously, Gronk lost 30 pounds in this short period of time. Incredibly happy with this weight loss product, Gronk decides to post a blog on the Internet. In the article, he writes, “I lose 30 pounds in 30 days with Slim-Me-Cave! It best weight loss product!!” The average customer of Slim-Me-Cave loses about 1 pound per week, so Gronk’s results are certainly above average.

What Gronk wants to do:

*Results Not Typical.

What the FTC wants to see:

Typical loss is 1 pound per week for Slim-Me-Cave customers. Results will vary depending on diet and exercise.

Lesson Learned:

Your disclosures must give a “reasonable customer” sufficient information to make a decision. “Results Not Typical” does not provide enough information. When making a testimonial about a product that’s “above average,” the average needs to be disclosed (as per the FTC guidelines). Back in the old days, “Results Not Typical” used to work. But now since everyone is a potential marketer, the FTC wants disclosures to be more specific. Does “Results Not Typical” mean a customer will lose only 20 pounds in 30 days? 15 pounds in 30 days? What results can the average customer expect? When possible, provide the averages.

EXAMPLE 3: YouTube Income Claim

youtube_logo_635

Fact Pattern:

Stephanie is giving a video testimonial on YouTube about the benefits of her network-marketing company’s pay plan. She states that “In this business, when I recruited just 20 people, I was making over $2,000 per week!” In that particular program, the average distributor earns $235 per month.

What Stephanie wants to do:

Stephanie would probably not want to provide an income disclosure at all. I’m just being candid. Rarely in videos prepared by distributors do you see any kinds of income disclosures.

What the FTC wants to see:

The FTC states that the manner you communicate your claim should also be the manner you communicate your disclosure. Therefore, a YouTube video should contain a disclaimer in both video and audio formats. Where should the disclaimer be? Sadly, there’s no clear answer. But if we look at the FTC’s definition of “Clear and Conspicuous,” I think the safest bet is a text disclosure displayed simultaneously to the claim in question in addition to a more detailed audio and video formatted disclosure at the end of the testimonial. Or Stephanie could provide a “visual cue” during the video to communicate to the viewer that disclosures can be found at the end of the video.

Without question, it’s now required (in my opinion) that distributors end their videos with a properly formatted video segment. At the end of the testimonial video, a separate video disclosure should be included to illustrate the average incomes. The video file should include an image of the company’s income disclaimer (usually in spreadsheet format). While the image is on the screen, there should be audio narration regarding the average earnings. If a company is going to permit distributors to use YouTube to promote their businesses, the company should provide this kind of file freely on its website AND educate distributors on how to use it.

While it sounds complicated, it’s not difficult for companies to provide this sort of video file. However, if the company is unwilling to properly arm the distributors with sufficient tools to make good claims, they should restrict distributors from using YouTube (which is not realistic AT ALL).

There are several questions this kind of hypo raises:

Should companies require leaders to insert a clear and conspicuous textual disclosure to appear on the screen when the claim is being made?

It depends. In a perfect world, yes, it’s a good idea to provide the disclosure during the claim. But in reality, most reps lack the technical skill to do this right. This is what we know: disclosures should be as close as possible to the claim being made. Is it sufficient to provide a video file containing a full disclosure at the end of the video? In my opinion, the answer is yes. But in the abundance of caution, it would be better if there were a text disclosure provided during the video in addition to a video file being used at the end.

Is it a good idea to even allow reps to make these sorts of claims to begin with?

Are you able to produce a quality disclosure for your distributors to use? Do you trust your distributors to “color within the lines” and end their videos with a video? Do you have a solid compliance department to catch and correct the distributors that do this poorly? If the answer to those questions is “yes,” then you’ve got a shot. If, on the other hand, you answered “no” to any of those questions, it might not be worth the risk.

Lesson Learned:

If you are going to allow reps to make videos that contain income claims, be careful! When it comes to videos, it’s difficult to walk the tight rope. When it comes to income claims in videos, there’s not much margin for error. With this in mind, I would advise companies to require tight compliance. At a minimum, companies should provide distributors with a professionally produced video file that all distributors can include at the conclusion of their videos. If you know leaders are going to make claims in YouTube videos, or any other video platform, it’s wise to properly arm them with adequate disclosures. A video file will give the needed audio disclosure as well as additional visual disclosure to the income claim in question.

EXAMPLE 4: YouTube Product Claim

Product Claim Example | MLM attorneyFact Pattern:

“Sports Minded” is a company that sells organic products that improve mental focus during physical activity. Adam is a distributor for Sports Minded and he decides to do a self published a YouTube video to give a testimonial about how he can now focus for 8 hours straight while playing golf without additional supplements. However, studies performed by Sports Minded indicate users can experience an average of 4 hours of improved focus. Adam is being honest regarding his experience with the product. He’s like Mr. Miyagi for 8 hour straight! Since it’s a true statement about his personal experience, is he required to provide substantiation and disclose the average results?

What Adam wants to do:

Adam would likely try to provide a disclosure via a hyperlink in the video description, in text at the end of the video or in a brief audio message at the end of the video.

What the FTC wants to see:

They want a “clear and conspicuous” disclosure that contains the average results. Just like with the income claim example above, the disclosure needs to be in both audio and visual format.

It would be ideal if the distributor had the skill to inject the disclaimer immediately after making the claim i.e. “I know that the company says the average person experiences 4 hours of increased focus, but that was NOT the case for me!” In order for this to happen consistently in the field, the company needs to take compliance education very seriously.

Lesson Learned:

As you can see with all of these disclosures, it’s a lot more art than science. We previously mentioned that the manner you communicate your claim should also be the manner you communicate your disclosure. Technically, the FTC wants to see the disclaimer in both audio and visual formats (even for videos produced by the field). With that being said, it’s unrealistic to expect sales people to get this right when they’re making product testimonials. And I think the FTC understands this (I’m at least hoping they do). With product testimonials, I think a text disclaimer inserted into the video would be a sufficient disclosure. But this approach would NOT be sufficient for income claims. Because money clouds judgment, the FTC is much more strict in that category (and they should be).

EXAMPLE 5: Tumblr Blog

Tumblr - MLM exampleFact Pattern:

Mary publishes an article on Tumblr about “N-ERGY SAVER,” a utility service MLM where customers can save money on their electric bills throughout the year. Mary, a representative, claims that she saved $50 per month by signing up with the company. While Mary’s claim is 100% true, the company’s data shows that the average homeowner saves $15 per month on their electric bill.

What Mary wants to do:

She wants to tell her story! She wants to say “I saved $50 a month with this service and so can you!” Since it’s a true story, Mary sees nothing wrong with her sharing her personal experience.

What the FTC is looking for:

The FTC wants to see a disclosure in close proximity to her claim. So if she has written text about her savings with N-ERGY, she needs to include a disclaimer in the same font and format as the text that triggered the claim. The disclaimer can say “The average homeowner saves between $10 and $20 per month, depending on their energy consumption patterns.”

BONUS EXAMPLE!

bonus

Fact Pattern:

Same as Example #2, except suppose Gronk wants to make the same claim via Twitter.

What Gronk wants to do:

I saved 30 LBS w/ Slim-Me-Cave in 30 days! bit.ly/f56/productinfo [linking to the product page that includes the average results]

What the FTC wants to see:

Twitter allows for 140 characters per tweet. If there’s sufficient space for a disclosure, it’s ok to use to twitter. Otherwise, it should be avoided. With Gronk, providing a link is insufficient. But the FTC provides a little hope in this category: as long as the average results are provided in the tweet, twitter can be used. The FTC provides an example of a permissible weight loss claim below:

Untitled

Should Twitter be allowed for income claims?

No! There’s just not enough real estate to provide an adequate income disclosure. As I mentioned above, providing a hyperlink by itself is insufficient.

Lesson Learned:

Twitter is tricky. If the distributors are properly trained, they can use twitter for good product testimonials. But with respect to income claims, Twitter should not be allowed AT ALL.

Conclusion

It’s going to be tough for network marketing companies to walk this tight rope. On the one hand, they want to give their distributors the freedom and flexibility to aggressively market the products and pay plan. On the other hand, they need to “pump the brakes” to ensure that the distributors are doing things right. In my opinion, the real challenge is going to be with online video. While it’s very easy for anyone to create a video with a webcam, it’s very difficult for people to insert proper disclaimers during and/or after the video. In the future, proper education in the field is going to be absolutely crucial. Companies that commit to field education are going to be the ones that pass the scrutiny. Companies that take their hands off the wheel and expect leaders to get this stuff right are walking on thin ice. The FTC’s expectations are out there. Ignorance is no longer an excuse.

DSA Convention 2012 – Inspiring Entrepreneurs

This year’s DSA annual meeting was held in Dallas, Texas. It was a really cool event! We had phenomenal speakers, the best being none other than George W. Bush. I was skeptical before joining the DSA two years ago. I’m just not a “trade association” kind of guy. I’m so happy I joined! It’s a great organization charged with a complicated and important task of representing the interests of a very diverse industry. While I give the DSA a hard time about not doing enough with respect to the DSA’s pyramid legislation, I understand that it’s hard for a trade association to pivot when it’s trying to appease hundreds of companies, each with a unique set of needs and concerns.

Below are some of my favorite pictures from the DSA convention.

IMG 4896

I have a lot of respect for Richard Bliss Brooke. He’s been very supportive of my participation in the DSA.  He encouraged me to get involved in both the Ethics Committee and the Government Relations Committee.  As someone that wanted to positively impact the direct sales community, getting involved with those committees was a crucial first step. He also gave me a kick in the ass to get started on my book. I made a commitment to get the content done by September 3. I’ve got a lot of work to do!

IMG 4897

Joe Mariano is someone else I hold in high esteem.  As the president of the DSA, he’s got a very challenging job. As a trade association, the DSA is comprised of over 100 member companies and a few hundred supplier members.  He’s got the difficult job of aggregating the collective will of that community while leading a team that follows legislation all across the country.  It’s really incredible when you think about the complexity of the entire operation. Joe has been very generous in allowing me to be part of the important conversations about the industry.  

Gerald Nehra is one of the kindest men I’ve ever met.  He’s also a great competitor.  He was one of the original MLM attorneys.  Without him, I’m not sure if I’d be having as much fun right now.  And he’s got a very kind, loving and generous wife.  For two years straight, I’ve attended the convention stag.  I’ve never been able to bring my wife, which makes it weird showing up at a party solo.  Both years, Gerry found me and invited me to sit at his table. I always enjoy chatting with him and his partner, Richard.  In reality, there’s only a handful of competitors that are serious players in the industry. Nehra and Waak are two of them.

By far, The most moving moment was when Rich DeVos welcomed his two boys, Rich and Doug, into the DSA Hall of Fame. I’ll be honest….I shed a tear or two. As a father of three children, I was simply amazed at the unique moment Rich DeVos got to share with his two sons. It made me assess my path and wonder if I was on track to leave a lasting legacy for my children as Rich has done for his. With Rich on stage, telling stories about the start of Amway, and seeing the pride in his eyes when his boys took the stage…it was just awesome. I recorded his speech, without permission. I’m not sure if that’s ok. But until someone says otherwise, check it out below.

This is my full library of pictures from the DSA event.  Unfortunately, I didn’t take very many.

Distributor Spotlight – Bernie Bringhurst

I have the distinct pleasure of introducing my new friend, Bernie Bringhurst. As a top 10 earner for a network marketing company, Bernie and his lovely wife, Brenda, were both invited to an achievers trip in Phuket, Thailand.  Sharon and I really enjoyed the time we got to spend with this great couple.  They’ve been married for over 33 years and they’re obviously still very much in love.     

Bernie is an established networker with demonstrable results.  In the interview, we discuss the following:

  • History about his participation in one of the first weight loss MLMs in the country.  
  • As a married man of 33 years, he discusses ways to keep the relationship solid while building a big business.
  • The importance of focus

Bernie and Brenda are just good people.  I’m glad Bernie agreed to do the interview and I hope you take away some valuable nuggets.  If you have any thoughts or comments, please share them below.  And if you think Bernie did a great job, hit the Like or the +1 button for me please. Thanks.  

Living the Island Life and 7 Traits of Successful Companies

IMG 3404I had the privilege of speaking at the Island Life launch party in Cocoa Beach, Florida. It was an exciting trip! I packed up the family and made a little vacation out of it. Buca and I have been friends for a couple of years and I was excited to hear the news about he and his partner starting their own company. Buca will tell you straight up, the Island Life culture is not for everyone. When the first item on the itinerary was a BBQ with an ocean view and the last item was a karaoke costume party, it was pretty apparent that Buca was injecting his signature in the DNA of the business. Because he’s so focused on a unique distributor experience, it just might work.

I also had the pleasure of hanging out with Doug Wead, networking great and Senior Advisor to the Ron Paul campaign.

At the event, I gave a talk about the seven traits successful companies have in common. I threw together the video below to serve as the highlights. It’s not the best production quality but I think you’ll enjoy the content. I’ll package this in a more professional manner in the future and re-ship. But for now, catch a glimpse. The seven traits are also listed below. Take care, for now.

1) Leadership
2) Product
3) Design
4) Systems
5) Compliance
6) Capital
7) Field

Self Deception: a cancer holding the MLM industry back

It’s a strong title, I know.  But it’s true.  We all suffer from “self deception” to a certain extent.  It’s a trick we play on ourselves to shift accountability. We tell ourselves that we’ll start that diet….next week.  We tell ourselves that we lack the time to read and learn new skills.  We tell ourselves that exceptional people are just born exceptional.  We tell ourselves that we need just a little more education and work experience before we start our own businesses.  We give ourselves every possible excuse to maintain our view of the world.  Change is scary.  It hurts; hence the saying “no pain, no gain.”  Yet, there’s no way around it.  Change is a prerequisite for progress.  Strong leadership is required to ensure that the RIGHT kind of change is being pursued.  Right now in the MLM industry, we’re heading in the wrong direction, in my opinion.  I’m just calling it like I see it.  I’ll admit, I’m part of the problem.  I’ve got leadership positions and I’ve done a poor job at communicating the scope of the problem.

So what’s the problem?

We need clearer standards.  The MLM industry is cloaked in a veil of ambiguous law where there’s an ocean of gray separating legitimate companies from pyramid schemes.  I was prompted to write this article based on the industry’s response to the BurnLounge Final Order (click here for a summary of the BurnLounge decision).  Since BurnLounge’s fate was officially sealed when the final order hit last month (pending an appeal), people are now figuratively saying “yeah, I always knew those guys were really stupid.  After all, their product could not really stand on its own in the marketplace.”  (See comment above about self deception).  And now, people are rightfully unnerved by some verbiage in the BurnLounge order.  In particular, the Order defines a “Prohibited Marketing Scheme” as:

[A]n illegal pyramid sales scheme . . . in which participants pay money or valuable consideration in return for which they obtain the right to receive rewards for recruiting other participants into the program, and those rewards are unrelated to the sale of products or services to ultimate users.  For purposes of this definition, a sale of products or services to ultimate users€ DOES NOT include sales to other participants or recruits or to the participants own accounts. (emphasis mine).

In other words, according to this Order, it’s illegal to pay commissions on volume consumed by other participants in the downline. This is a practice EVERYONE does, across the board. In fact, in it’s advisory letter to the DSA, the FTC has stated this is fine.

Consequence of the BurnLounge Order?

Before you lose sleep over the BurnLounge Order, keep in mind this definition is not automatically binding for future decisions.  It has no authoritative value beyond this Order.  But what if a judge with an axe to grind against the industry wants to adopt a similar interpretation of “Illegal Pyramid Scheme?”  And what about your future customers?  What if they come across this definition?  It could easily be interpreted as the law of the land, causing more confusion and disharmony in the industry.  Someone could very easily read it and falsely think, “Huh, that makes sense.” Whether it carries authoritative value or not, I’m not comfortable with this definition inked on an Order.

But here’s the kicker.  Given the ambiguity in the law, what do we expect?  What IS the definition of a pyramid scheme? It’s basically been boiled down to a “you know it when you see it” test.  Universally, we all agree that products in the industry need to have the ability to stand on their own in the marketplace irrespective of the compensation plan.  So we all admit that there’s needs to be SOME revenue attributable to outside customers i.e. people unaffiliated with the program.  In the BurnLounge case, only 3% of its revenue came from customers.  How much is enough?  There’s no firm answer.

Was BurnLounge really that different?

While we’re coming up with reasons to distinguish BurnLounge from the rest of the companies in the MLM industry, I see more similarities than differences.  While they made some very stupid mistakes, whether it be by bad counsel or corporate hubris, at the end of the day, they were buried by their paltry customer numbers.

So how do we respond?  How do we improve?

One option is to seek peace. To try to convince ourselves that the owners were simply reckless. The better option would be to seek improvement by having an honest conversation about the problem.  While we easily roll BurnLounge under the bus and reference their junk products as the main reason for their demise, we should at least acknowledge, industry-wide, the major importance of accruing revenue from external customers.  When proving the marketability of a product, the only metric that really matters is revenue from customers.  More is better.  While we all agree that BurnLounge was a bad business, we need to have an honest discussion about WHY it was a bad business.  And all roads leads to the offering of a legitimate product with true value.

Instead…

We’re trying to “get tough on crime” by passing legislation that would effectively legitimize a model very much like BurnLounge.  Instead of shrinking the gray and increasing the standards in the industry, we’re falling back to old tricks, talking about resurrecting old bills to “clarify” the ambiguity in the industry.  We all know the FTC and regulators want to see external sales.  So why are we even discussing old bills that obliterate all external sales obligations? The DSA model legislation, in my opinion, does not go far enough.  In the bill, it carves out an exception for an illegal pyramid scheme as:

(A) Nothing in this Act may be construed to prohibit a plan or operation, or to define a plan or operation as a pyramid promotional scheme, based on the fact that participants in the plan or operation give consideration in return for the right to receive compensation based upon purchases of goods, services, or intangible property by participants for personal use, consumption, or resale so long as the plan or operation does not promote or induce inventory loading and the plan or operation implements an appropriate inventory repurchase program.”  (emphasis mine).

Inventory loading is defined as:

The plan or operation requires or encourages its independent salespeople to purchase inventory in an amount, which exceeds that which the salesperson can expect to resell for ultimate consumption or to consume in a reasonable time period, or both.

It might take you a few times to read it to understand the gray area.  But basically, if the product gets consumed in reasonable quantities each month, the company is not a pyramid (in most cases).  Suppose we sell a membership to a Facebook-wannabe website.  In this business, we charge $10,000 per month to access a clunky social network, one that offers half of the features found on a free alternatives.  Is it “inventory loading?”  The site, after all, is being used.  What if we sold $10,000 shots of lemonade?  If people drink the lemonade, is it “inventory loading?”  Clearly, it’s a case of opportunity driven demand.  Clearly, it would be a BurnLounge-esque program where the lemonade is a token product concealing a money transfer scheme. I want to engage in a conversation with the DSA to simplify and tighten the current bill. One thing is for sure: nothing is going to get done on a legislative level without the DSA’s support.  

HR 1220

And what about the congressional bill that was proposed in 2003, titled HR 1220 Anti-Pyramid Promotional Scheme Act?  In that bill, a similar definition of “Pyramid Scheme” is illustrated:

The term `pyramid promotional scheme’ means any plan or operation in which a participant gives consideration for the right to receive compensation that is derived primarily from the recruitment of other persons as participants in the plan or operation, rather than from the sales of goods, services, or intangible property to participants or by participants to others.

Again, the bill creates a carve-out that would allow a company like BurnLounge to skate by with NO retail sales to customers.

Before we complain about a judge’s dangerous definition of a “pyramid scheme,” we need to acknowledge that we’re not exactly helping ourselves by fighting for fewer safeguards.  If we’re not able to get on the same page regarding sensible standards, a judge will do it for us at the stroke of a pen.  Somewhere along the way, we’ve been convinced that it’s in our best interest to push for these sorts of solutions.  I’m telling you, we NEED to do better.

Saving the industry by defining the gray

When I first started my practice, I wrote an ebook titled “Saving the network marketing industry by defining the gray.”  The thesis is right there in the title.  The industry needs saving.  And it can only be saved by creating clear standards to distinguish good companies from the bad ones. And it’s going to take courage and a little bit of sacrifice.

Conclusion

There’s a lot of people upset at the verbiage in the BurnLounge order. The outrage makes sense. But…I think this Order is just the tip of the iceberg if we’re not able to improve the standards. And in order to improve the standards, we need to stop with the self-deception, pull ourselves out of the box and acknowledge the problem. If we do not find a viable solution to the problem, a judicial body will!

Proposed Solution

The sponsor relationship between a distributor and a new participant is the foundational element in the industry. How a participant is recruited generally dictates how they build the business in the future. The idea of recruiting someone and training them to only get on autoship and recruit more people is broken. In theory, when someone sponsors someone else, they’re committing themselves to teaching that new person how to move product and build an organization. Before they’re allowed to build an organization, it makes sense that they demonstrate SOME proficiency in selling product. Before I teach you how to sell soap, I should at least have some demonstrable results doing the same, right?

Until someone provides a better idea, I’m a believer in a required retail sales rule. Before someone can earn a bonus on downline volume, they must make a single sale each month to a nonparticipant customer. Keep in mind, this is only an idea. It’s not currently the law, so it’s perfectly fine for companies to operate without a retail sales rule. If each distributor were required to sell something, they’d think long and hard before joining a company with gratuitously inflated prices on the products. When Amway got in trouble in the UK, they were saved by their decision to require $200 in retail sales before someone can sponsor other participants. This incredibly high standard is not necessary here, but we can learn from it. In the 70s when Amway got into some heat with the FTC, they were saved largely by their retail sales rule. I drafted a proposed bill for Tennessee lawmakers a couple of years ago. I still think it advances the industry in the right direction.

The alternative: nothing gets done. If you’re not supportive of higher standards in the industry, at least stop complaining when judges create their own definitions.

What do you think?

Does the BurnLounge order concern you? What can we do to improve? If you learned something in this article, please hit the +1 button or “Like” it.

VanderSloot Denies Melaleuca Operates as a MLM

SMH.  It’s a new acronym I’ve recently learned.  It means “Shaking My Head.”  And that’s what I immediately did when I read about Melaleuca’s CEO, Frank VanderSloot, denying all ties to the MLM industry.

While it certainly seems like a ridiculous exercise, I list a few obvious reasons in the video why VanderSloot is wrong to make such a distinction.

In the video, I reference his statement to the press (included below). I also reference the FTC’s definition of a “Multilevel marketing program” as per the FTC vs. FUTURENET case.

Note, this is not a controlling definition given the circumstances of the case; however, it gives us a good idea of how the FTC defines a MLM.

FTC’s definition:

“Multi-level marketing program” means any marketing program in which participants pay money to the program promoter in return for which the participants obtain the right to (1) recruit additional participants, or to have additional participants placed by the promoter or any other person into the program participant’s downline, tree, cooperative, income center, or other similar program grouping; (2) sell goods or services; and (3) receive payment or other compensation; provided that: (a) the payments received by each program participant are derived primarily from retail sales of goods or services, and not from recruiting additional participants nor having additional participants placed into the program participant’s downline, tree, cooperative, income center, or other similar program grouping; and (b) the marketing program has instituted and enforces rules to ensure that it is not a plan in which participants earn profits primarily by the recruiting of additional participants rather than retail sales.”

Essentially, it boils down to whether there’s a recruitment component to a pay plan. If there’s an an opportunity for an override commission from downline productivity, where participants can sponsor other participants and earn income from their sales, it’s a MLM. Using the factors above, and some of the obvious factors referenced in the video, Melaleuca would clearly qualify as a MLM. There’s an enrollment fee that gives people the right to sponsor other participants (element #1) and the right to sell products (element #2), which gives people the ability to receive payment for product volume (element #3) assuming the commissions are not driven by enrollment fees.

VanderSloot’s Statement

(emphasis mine)

“It’s unfortunate that someone would suggest that Melaleuca is something like Amway. It’s not. We started Melaleuca 26 years ago to market environmentally responsible products and to provide a business opportunity for folks who weren’t successful in climbing the corporate ladder and didn’t inherit wealth from their parents. We try to be champions of the little guy. My father was a little guy. And I still see myself as a little guy.

Contrary to those who do not know us, our business model is nothing like Amway or Herbalife. I challenge anyone to find any similarity whatsoever. There is no investment of any kind unless you want to call a $29 membership fee an “investment.” And anyone can get a refund on that by just asking.

We do offer a home-based business opportunity. But it is no “pyramid scheme.” We have long been critical of the many MLM/pyramid schemes operating in this country. I agree with those who say that typical MLM companies destroy people’s finances. Most are designed to attract people to “invest” in large purchases with the promise of “getting rich” quickly by getting others to invest. The guy at the top always wins and the guy on the bottom always loses.

In Melaleuca’s case there is no investment and no getting others to invest. We do pay commissions to those who have referred customers based on what those customers purchase. There is really no way to lose money on referring customers. And there’s no way for customers to lose either when they’re buying high-quality products at grocery store prices. Customers just order the products they use every month directly from the factory. We have hundreds of thousands of customers who buy from us each month. They don’t ever resell anything. They don’t invest in any inventory. There can be no pyramiding without some kind of investment. In 26 years, no one has ever complained that they lost money. It’s simply not possible.

Our business model works pretty well for most folks. We have already paid over $2.9 billion in commissions to households across the country. Our mission is to enhance lives by helping people reach their goals regardless of their beliefs, backgrounds, or affiliations. Last month we sent out almost 200,000 checks to American households alone. Members of those households tell us we are doing a pretty good job achieving that mission.”