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?

    Thoughts about the Power 50

      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.

      Direct Selling Live_Cover (2015)

      If you’ve been following me, I think you’ll agree that I never self-promote. Ever. I just try to create relevant material that helps people better understand the issues around network marketing. If those people see fit to share the content, it’s great. If not, no big deal. It’s a pretty simple (and pure) marketing strategy. This post might be a bit out of the ordinary.

      Joe Signaigo

      I’m going to tell you about my grandfather, Joe Signaigo. He would often say, “When you get in the end zone, act like you’ve been there.” He was my father-figure, and he taught me the importance of speaking more through actions and less with words. As the son of immigrants, he had to produce his own results because nobody was doing him any favors. I guess that hustle in him found its way to me. He was a WWII veteran, Marine Corp Golden Glove champ, all-

      Father-Son Banquet

      Father-Son Banquet

      American football player at Notre Dame and later served in the Korean war. He later found a way to acquire a beer business in Memphis. When my mother was on her own, the smartest thing she ever did was move closer to her parents. I latched onto Joe Signaigo and modeled him as best I could, until the day he died.

      He told me something that left a mark after I got into trouble at school with a bunch of other kids: “I expect you to be better. You’ve got to be able to burn hot without exploding.” The “burning hot” remark was about the ability to absorb pressure without crumbling.

      I get asked by people “Why do you care? Why do you bother?” The answer: Because I do and because I can. I learned from the best. If I’m not burning a bit, I’m not doing enough. We’re not on this earth to live in the lap of luxury, we’re here to grow and improve. If I see a problem that affects real people, I’m not going to sit there and pretend everything is fine. I’m going to be the one that injects clarity. And after all, how hard is it to write a few articles and steer a conversation towards improvement? As a lawyer in this space, I see some nasty stuff. And I’m in a position to talk about it on a broad scale. It’s not like I’m pretending to be Batman.

      Defining the Gray

      Six years ago, I wrote an ebook titled “Saving the industry by defining the gray.” I recognized that if scams were allowed to proliferate unchecked, all while pretending to be legitimate network marketing companies, it would inevitably lead to problems.

      And it has!

      So I push.

      I was recently recognized as “2014 Person of the Year” in the 2015 edition of Distributor Magazine (published by Direct Selling Live). It’s an undeserved title, for sure. There were 49 people in the Top 50 that deserve the distinction more, along with over 100 people that were not even on the list. But…it’s encouraging to see that being an advocate can be good for business.

      The more I communicate, the more I realize that there are a bunch of people, scattered throughout the industry, that sense the need for us to “grow up.” I’m not alone.

      Why was I chosen? I believe it had to do with the fact that I threw some punches in 2014 and took some shots of my own. Keeper Catran-Witney, editor at Direct Selling Live and fellow puncher, noticed. Keeper is a no-nonsense kind of man, the kind of man that stands for truth and lets the chips fall.

      Advocacy

      These are some of the chances I took in 2014:

      I went on Bloomberg TV to discuss Herbalife.
      I gave an honest assessment of reasons why Avon left the Direct Selling Association. This led to a lot of high-fives, some “eat garbage” emails and a threat (Thanks, TalkFusion).
      I got an anti-pyramid bill passed in Tennessee. It’s not perfect, but it’s better than nothing.
      I provided several suggestions on ways to improve the Code of Ethics, with the main suggestion revolving around the need to disclose private deals with networkers.
      I wrote about the futility in sending Cease and Desist letters to distributors, unless there’s serious harm being done.
      I provided an in-depth review of the BurnLounge case, written in plain-English.
      I ended the year with the most viral post I’ve ever published. It was about the need for MLM special deals to end. These deals are blatantly fraudulent, toxic and need to stop. It’s like steroids in baseball: it’s a material advantage that creates a false-impression of success. The distributors that follow the leader, without any idea of the existence of a special deal, eventually end up as road-kill. The cure: DISCLOSURE. That’s it. (Jeunesse, I’m talking to you)

      Conclusion

      Check out the article below (or click the link here if you’re reading this via email). Keeper asked some great questions, which led to a great discussion about the serious issues. We also chat about our thoughts about the future of the industry. I hope you find it helpful and informative.

      Federal Cooling Off Rule

        Kevin Grimes is one of the most experienced and accomplished MLM attorneys in America. Over his 22 career as a network marketing attorney, he has represented and advised the proverbial “Who’s Who” of direct selling and multilevel marketing including Herbalife, Shaklee, Tupperware, USANA, Metabolife, MonaVie, and hundreds more.

        Wedding

        The Thermonuclear, Scorched-Earth, Mother-Of-All Best Practices Series

        By Kevin Grimes

        Virtually everyone has heard something about some mysterious state or federal law or regulation that provides some buyers under certain circumstances the ability to cancel some types of purchases or contracts within three days.

        But . . . most folks are rather hazy on the details.

        On January 6, 2015, the FTC made a change to the federal “cooling off” rule[i] (which is actually a federal regulation). Although the change is not tremendously significant, direct sellers and their independent contractors (“ICs”) need to be aware of the change . . . as well as the other pieces of the Rule.

        Introduction

        The Cooling-Off Rule is a federal trade regulation rule that was published by the FTC to address unfair and deceptive practices in sales conducted at locations other than the fixed place of business of the seller. In other words, if you’re marketing products or services for a network marketing company, this federal regulation applies to YOU and the company. Even though the vast majority of sales are not made on a door-to-door basis, the Rule calls all such sales “door-to-door sales.”

        In addition to sales at consumers’ homes, door-to-door sales include sales at facilities rented on a temporary or short term basis, such as hotel or motel rooms, convention centers, fairgrounds and restaurants; or sales at the buyer’s workplace. The Rule requires door-to-door sellers to provide consumers with written and oral notice of a buyer’s right to unilaterally rescind a contract within three business days from the date of the transaction. Additionally, sellers must provide buyers with a completed receipt, or a copy of the sales contract, containing a summary notice informing buyers of the right to cancel the transaction.

        What is New?

        Under the new rule, the revised definition of “door-to-door sales” distinguishes between sales at a buyer’s home and those at locations outside the home. The revised definition retains coverage for sales made at a buyer’s home that have a purchase price of $25 or more, and it increases the purchase price to $130 or more for all other covered sales.

        When is the Change Effective?

        The change becomes effective on March 13, 2015.

        What Do Companies and ICs Need to Know?

        The Rule is applicable to the:

        • Sale, lease, or rental;
        • Of consumer goods or services;[ii]
        • With a purchase price of:
          • $25 or more for sales made at a buyer’s residence;[iii] or
          • $130 or more for all other temporary locations;
        • In which the seller[iv] or his representative personally solicits the sale;[v] and
        • The buyer’s agreement or offer to purchase is made at a place other than the place of business[vi] of the seller (e.g., sales at the buyer’s residence or at facilities rented on a temporary or short-term basis, such as hotel or motel rooms, convention centers, fairgrounds and restaurants, or sales at the buyer’s workplace or in dormitory lounges).

        This means that certain sales to customers will fall within the scope of the Rule, and some will not. In addition, if the enrollment of a new IC exceeds the applicable threshold ($25 for sales made at the buyer’s residence and $130 for sales made at all other temporary locations), the Rule will apply.[vii] Whether a particular sale is or is not subject to the Rule depends on the facts involved. Because it’s difficult (and sometimes impossible) to know whether the Rule is applicable to a particular transaction, it’s simply a “best practice” to insure that your documents, corporate practices, and your ICs’ practices always meet the requirements of the Rule.

        There are six exemptions to the Rule, however, most of them will be inapplicable to direct selling companies and their ICs . . . most of the time.[viii]

        What Do Companies and ICs Need to Do?

        The Rules requires “sellers” (direct selling companies) and “their representatives” (ICs) to:

        • Furnish the buyer with a fully completed receipt or copy of any contract pertaining to the sale at the time of its execution;
          • Which is in the same language, e.g., Spanish, as that principally used in the oral sales presentation;
          • Which shows the date of the transaction;
          • Contains the name and address of the seller, and
          • In immediate proximity to the space reserved in the contract for the signature of the buyer or on the front page of the receipt if a contract is not used and in bold face type of a minimum size of 10 points, a statement in substantially the following form:

        “You, the buyer, may cancel this transaction at any time prior to midnight of the third business day after the date of this transaction. See the attached notice of cancellation form for an explanation of this right.”[ix]

        • Furnish the buyer with two copies of the Notice of Cancellation[x] at the time the buyer signs the contract or otherwise agrees to buy the consumer goods or services;
        • Before furnishing copies of the “Notice of Cancellation” to the buyer, complete both copies by entering the name of the seller, the address of the seller’s place of business, the date of the transaction, and the date, not earlier than the third business day following the date of the transaction, by which the buyer may give notice of cancellation;
        • Exclude in any contract or receipt any confession of judgment or any waiver of any of the rights to which the buyer is entitled under the Rule, including the buyer’s right to cancel the sale in accordance with the provisions of the Rule;
        • Inform each buyer orally, at the time the buyer signs the contract or purchases the goods or services, of the buyer’s right to cancel;
        • Not misrepresent in any manner the buyer’s right to cancel;
        • Honor any valid notice of cancellation by a buyer and within 10 business days after the receipt of such notice, to:
          • Refund all payments made under the contract or sale;
          • Return any goods or property traded in, in substantially as good condition as when received by the seller; and
          • Cancel and return any negotiable instrument executed by the buyer in connection with the contract or sale and take any action necessary or appropriate to terminate promptly any security interest created in the transaction;
        • Not negotiate, transfer, sell, or assign any note or other evidence of indebtedness to a finance company or other third party prior to midnight of the fifth business day following the day the contract was signed or the goods or services were purchased;
        • Notify the buyer, within 10 business days of receipt of the buyer’s notice of cancellation, whether the seller intends to repossess or to abandon any shipped or delivered goods.

        The FTC expects that companies will inform (and remind) their independent contractors of the requirements that are applicable to them. Accordingly, these requirement should be set forth in the Policies and Procedures. In addition, companies should remind their independent contractors of these requirements not less than annually.

        Conclusion

        Is there a potential downside to violating the Rule?

        Yes, there is. A few of the cases the Federal Trade Commission has pursued include:

        $22,000 – FTC v. Vision Group of America, Inc., for alleged violation of the Cooling-Off Rule and deceptive income claims.

        $40,000 – FTC v. College Resource Management, Inc., for alleged violation of the Cooling-Off Rule and deceptive claims.

        $972,000 – FTC v. Screen Test U.S.A, for alleged violation of the Cooling-Off Rule and deceptive claims.

        Violation of the Rule can be very expensive.

        If you’re bored and want to see the entire text of the Rule, click here.

        Let’s do it right!

        ———————–
        The Thermonuclear, Scorched-Earth, Mother-Of-All Best Practices SeriesTM is a collection of articles, reports, and blogs that articulates, educates, and advocates the absolute highest and best business and legal practices for direct selling companies and their independent contractors. We invite and look forward to your feedback.

        End Notes———————–

        [i] The actual title of the federal cooling-off regulation is Trade Regulation Concerning Cooling-Off Period for Sales Made at Homes or Certain Other Locations, and is found in Title 16 of the Code of Federal Regulations, Part 429.

        [ii] “Consumer goods or services” are defined in the Rule as “goods or services purchased, leased, or rented primarily for personal, family, or household purposes, including courses of instruction or training regardless of the purpose for which they are taken.”

        [iii] This is true regardless of whether the transaction is consummated under single or multiple contracts.

        [iv] A “seller” is defined as “any person, partnership, corporation, or association engaged in the door-to-door sale of consumer goods or services.”

        [v] Such solicitations include those in response to or following an invitation by the buyer.

        [vi] The “place of business” is defined in the Rule as “the main or permanent branch office or local address of a seller.”

        [vii] How do I know that the Rule applies to Starter Kits and Enrollment Fees? I have talked with multiple FTC staff attorneys. Even though the enrollment of an IC involves the commencement of a business, the FTC’s position is that it involves the sale of “consumer goods or services.”

        [viii] The term door-to-door sale does not include a transaction:

        (1) Made pursuant to prior negotiations in the course of a visit by the buyer to a retail business establishment having a fixed permanent location where the goods are exhibited or the services are offered for sale on a continuing basis; or

        (2) In which the consumer is accorded the right of rescission by the provisions of the Consumer Credit Protection Act (15 U.S.C. 1635) or regulations issued pursuant thereto; or

        (3) In which the buyer has initiated the contact and the goods or services are needed to meet a bona fide immediate personal emergency of the buyer, and the buyer furnishes the seller with a separate dated and signed personal statement in the buyer’s handwriting describing the situation requiring immediate remedy and expressly acknowledging and waiving the right to cancel the sale within 3 business days; or

        (4) Conducted and consummated entirely by mail or telephone; and without any other contact between the buyer and the seller or its representative prior to delivery of the goods or performance of the services; or

        (5) In which the buyer has initiated the contact and specifically requested the seller to visit the buyer’s home for the purpose of repairing or performing maintenance upon the buyer’s personal property. If, in the course of such a visit, the seller sells the buyer the right to receive additional services or goods other than replacement parts necessarily used in performing the maintenance or in making the repairs, the sale of those additional goods or services would not fall within this exclusion; or

        (6) Pertaining to the sale or rental of real property, to the sale of insurance, or to the sale of securities or commodities by a broker-dealer registered with the Securities and Exchange Commission.

        [ix] I call this paragraph “the Pointer.”

        [x] The seller may select the method of providing the buyer with the duplicate notice of cancellation form, provided however, that in the event of cancellation the buyer must be able to retain a complete copy of the contract or receipt. Furthermore, if both forms are not attached to the contract or receipt, the seller is required to alter the last sentence in the Point to conform to the actual location of the forms. You can find the Notice of Cancellation in §429.1 of the Rule.

        See below for a nicely formatted copy of the article:

        We Got it Done. DSA Model Legislation Passes in Tennessee

          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.

          We got it done. I’ll be honest with you. Four years ago, when I originally tried to pass MY version of the anti-pyramid bill, I would never have guessed that I would’ve successfully collaborated with the DSA to get a bill passed. The DSA and I were on opposite sides of the aisle at that time. But…people grow. We grow wiser, experience things, we learn and we develop. The DSA Model Legislation was passed in my home state (Tennessee) with an overwhelming majority in the state house and senate. The DSA announced the good news today (and I got a little ink…as a Supplier Member, that’s a big deal;)

          Click here for the full text of the Tennessee Anti-Pyramid Bill.

          I’m going to share with you what led me to pick up the phone and reach out to Joe Mariano about this effort. I was watching the movie “Lincoln” starring my favorite actor, Daniel Day Lewis. There was a scene where Lincoln was chatting with staunch abolitionist Thaddeus Stevens. Stevens wanted Lincoln to draw a firmer line with respect to slavery. Lincoln’s words made sense to me:

          “A compass, I learned when I was surveying, it’ll… it’ll point you True North from where you’re standing, but it’s got no advice about the swamps and deserts and chasms that you’ll encounter along the way. If in pursuit of your destination, you plunge ahead, heedless of obstacles, and achieve nothing more than to sink in a swamp… What’s the use of knowing True North?”

          In life, it’s unwise to take extreme “I’m right, and you’re wrong!” positions. This is especially true with politics when it comes to language in a bill. Is the bill PERFECT? No. But legislation is not about perfection. Legislation / politics is about compromise. It’s about identifying shared goals with parties with unique interests and working towards those mutual goals, regardless if your personal preferences are fully met. 80% of something is better than 100% of nothing. At this juncture in the industry, it’s more important now than ever that PEOPLE WORK TOGETHER. This bill legitimizes the practice of paying commissions on internal consumption. It also has requirements for solid consumer protections i.e. 12 month buyback policies.

          In this industry, battle lines are drawn between companies, vendors, distributors and Wall Street investors. With so many contrarian views, it’s impossible to pull out anything actionable that we agree on. At a time such as now, we all need to support a consistent vision that network marketing, when done appropriately, is a legitimate and viable means of distributing goods and services. The “when done appropriately” part is the part that trips us up. What’s appropriate? What distinguishes good from bad? There’s no consensus and, in my opinion, there’s never going to be a consensus without federal guidelines. In the meantime, groups in the industry need to LEAN IN and take some positions. At a minimum, people need to get behind the idea that paying commissions on internal consumption is legitimate provided that consumer safeguards are in place. Companies MUST refrain from encouraging/incentivizing distributors to load up on inventory they don’t really want in quantities they can’t really justify.

          With other leaders in the industry, I want you to take a position. Don’t just talk about “elevating the profession.” I challenge you to propose some concrete ideas about how you intend on making it happen. As a unified front, there’s no stopping from advancing. But as a dispersed band of competitors, we’re weak.

          Conclusion

          I was pleased to get this effort going in Tennessee. And without the DSA communicating support, the effort would’ve died. Jeremy Durham, one of the bill’s sponsors said, “I was happy to work with Kevin Thompson and the DSA on this bill. Kevin’s credibility and expertise on the subject made it easier for us to get the support we needed for the bill. I’m always happy to serve my constituents and I’m very pleased with this result.”

          Special thanks also goes out to Senator Jack Johnson who co-sponsored the bill from the State Senate. One of the reasons Tennessee is tearing it up economically compared to the other states: we’ve got great, pro-business leaders.

          Direct Selling: The Great Equalizer and Opportunity

            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.

            This article was written by the former President of the DSA, Neil Offen. It was published in Direct Selling News magazine. The article was so well-written that I requested permission to republish on my site. In the article, Neil dispels of several myths about network marketing and he casts a strong vision on ways to improve its reputation. I’ll gladly share my site with anyone willing to LEAD the industry in a better direction. At a time when the industry is being attacked by people with a financial incentive to bring it all down, this content is important and it’s very worthy of your attention. +Kevin Thompson

            By Neil H. Offen

            Neil Offen New Perspectives Direct Selling

            It has been slightly over two years since I retired after 40 years with the Direct Selling Association (DSA), first as a staff attorney and lobbyist and eventually as President and CEO. In addition, I was there at the creation of the Direct Selling Education Foundation (DSEF) and the World Federation of Direct Selling Associations (WFDSA), serving as Vice Chairman and Secretary General, respectively, of those two organizations.

            I have spent some 42 years in our industry—the reality is that it’s a method of distribution more than an industry per se—representing it, protecting it, promoting it and policing it. To say the least, I have seen much change, much adaptation, and much growth and innovation during that period. At the same time, I have seen the industry’s core values remain focused on empowering people one individual at a time, seen it being led by women and men of integrity and high moral character, and seen a continuing commitment to and passion for our distributors by corporate management.

            I have also witnessed a spirit of service by our industry and its companies, their personnel and their representatives in the field in the various communities in which they operate. Given all of the good that our industry represents, it is disappointing to see the negative attacks on it. At this juncture in the road, the direct selling industry faces the question: Do we let our critics define us or do we take steps to make sure we better control our own reputation?

            To explain what I mean, I will be focusing on four areas. One disclaimer that I need to make at the outset is that I am speaking for myself and only myself. I am not representing the DSA, the WFDSA or any other entity.

            The four areas I will discuss are the industry’s attributes, the negative myths and canards leveled against it, the actions that can harm the reputation of the industry, and finally, what I see as possible solutions and courses of action that will continue to protect, promote and enhance the reputation of the direct selling industry. I use the terms sales personsconsultantsdistributors and representatives interchangeably throughout the article.

            Do we let our critics define us or do we take steps to make sure we better control our own reputation?

            Direct Selling Attributes: What Are They?

            All of us working in direct selling believe in its positive attributes. I’ve listed here those truths about the direct selling opportunity that I believe are most powerful:

            1. It empowers people. Its diversity is without bounds. It offers opportunities for people to set their own objectives, great or small, through full- or part-time efforts, for career opportunities or merely for supplemental income. It is an industry that directly ties reward to effort. It does not discriminate based on race, gender, national origin, religion, age, physical condition, educational background, political beliefs or financial resources;
            2. It provides unlimited flexibility for the individual to achieve her or his own   goals and control the time spent in the business as well as how that time is spent;
            3. It drives micro-enterprise development wherever it operates—in a world seeking and needing such enterprises—and is a robust, grassroots source of business skills education, guidance and training;
            4. It motivates people through providing recognition, quality products and services, technical resources and an overall nurturing environment with ongoing symbiotic support;
            5. It provides opportunities with minimal capital investment or risk of loss;
            6. It provides consumers with outstanding product warranties and guarantees in each marketplace in which it operates;
            7. Its rules and standards, through company policies and through the independently administered direct selling associations’ codes of ethics, protect both salespeople and their consumers from abuse;
            8. It is a simple business, though not necessarily an easy one, and due to the independent contractor status of each salesperson, it allows great ease of entry and egress;
            9. It is global in nature and borderless in promotion of common core values and ethical standards;
            10. It is innovative, adaptive and technologically friendly;
            11. It has a strong public service and corporate social responsibility orientation at both the corporate management and the individual distributor levels;
            12. It offers social contacts in a world where more and more people are becoming isolated from one another;
            13. It is cause-oriented where its distributors believe in the product or service or opportunity and that they are helping to fill a valuable need of friends, family, neighbors and the public at large; and
            14. It is a source of social and economic stability and opportunity within all its markets

            “Direct selling motivates people through providing recognition, quality products and services, technical resources and an overall nurturing environment with ongoing symbiotic support.”

            Myths and Canards

            Several untrue assertions regarding our industry permeate the Internet and mainstream news media. The following are some of the misstatements or outright lies often attributed to our business model.

            Myth No. 1: All—or almost all—people who participate in direct selling lose money.

            In my experience, the reality is that an overwhelming majority of people who join a direct selling company to sell products and build a business do profit from it. DSA research shows that over 80 percent of business-oriented recruits have very modest goals when joining a company and the vast majority, whether still with the firm or no longer in the industry, have their expectations met or exceeded. The distributors earning the highest level of income are the business builders who typically spend significant time on the business selling, recruiting, motivating and training distributors and consumers in their organizations. They generally constitute between 10 percent and 20 percent of the salesforce. There is nothing wrong or unethical about this model, and this is similar to most non-direct selling retail sales organizations.

            In addition, the industry has implemented safeguards against financial loss. The biggest protection against financial loss for all participating in our business is the unconditional product money-back guarantees for consumers and, for sales people, our minimum 90 percent inventory buy-back. All DSAs require their member companies to offer buy-back protection to all their distributors. Membership in a DSA is an added protection from abuse for sales people, potential sales people and consumers.

            “DSA research shows that over 80 percent of business-oriented recruits have very modest goals when joining a company and the vast majority … have their expectations met or exceeded.”

            Myth No. 2: Self-consumption by sales persons is a problematic practice.

            In fact, there is no binding precedent that establishes that a set amount of sales must be sold to persons outside the sales organization. The seminal FTC/Amway case in 1979 created a “70% rule,” but that rule only applied to the requirement that the distributors certify that they had sold at least 70 percent of their inventory in the prior month before they could be permitted to buy additional inventory. (Note: This case was long before the industry adopted the 90 percent inventory buy-back standard as part of the DSA Code of Ethics, which occurred in the mid-1990s.)

            Our industry’s standard of the buy-back removes the possibility of inventory loading if the firm is bound by the buy-back and it is properly administered. A distributor who purchases a product to personally consume it is a “consumer,” and there is nothing inherently wrong with paying compensation on these product sales.

            Myth No. 3: Multilevel direct sales firms will fail due to geometric progression and turnover rates.

            This simply may seem logical mathematically, but only if you start with the assumption that everyone is purchasing products solely to qualify to earn large amounts of compensation by creating a network and earning compensation on similar downline purchases. It does not occur in the real world because the assumption is faulty. Most persons signing up as salespeople in our industry are either seeking to buy product at a discount or for supplemental income, putting in less than 11 hours per week, and not that much in every week.

            The FTC tried to make the geometric progression argument to the Second Circuit Court of Appeals in the Ger-Ro-Mar Inc.  vs. FTCcase back in 1975. Ger-Ro-Mar sold bras and lingerie. In the words of the Second Circuit Court of Appeals:

            “We find no flaw in the mathematics or the extrapolation [presented by the FTC] and agree that the prospect of a quarter of a billion brassiere and girdle hawkers is not only impossible but frightening to contemplate, particularly since it is in excess of the present population of the Nation, only about half of whom hopefully are prospective lingerie consumers. However, we live in a real world and not fantasyland (emphasis added).”

            As stated above, the reality is that a majority join a direct sales firm either after having been a customer or wishing to buy its products at a discounted price. Most sales people and most direct sales firms market low-ticket, consumable products, and my educated guess is that over 50 percent of such sales people are sales people in name only. They buy the firms’ products at a discounted price for personal consumption and do not sell products or recruit other distributors. This percentage of “discount buyers” may approach over 90 percent of the salesforce of some firms and account for over 90 percent of product sales.

            As with any sales organization, the industry experiences a high rate of turnover in its salesforce, but people join and leave a salesforce for a variety of reasons. For example, if a woman was working only one month before Christmas to earn Christmas present money, she would contribute to the high turnover rate even though she might return year after year for decades during the Christmas season. In addition, based on data that I have seen over the years, many sales people sell for more than one direct sales firm during the year, either simultaneously or at different times. I believe that between 10 percent and 20 percent of the sales organization falls into this category, thereby overstating turnover rates.

            One final point on the geometric progression canard: I believe that the turnover rate of retail store personnel and franchise employees is very high. Strange that we don’t hear more about that and the fact that some work in retail stores because they are given employee discounts as part of their compensation plan. According to recent data, retail store employee discounts are often extended to the employee’s family and even sometimes to friends.

            “The percentage of “discount buyers” may approach over 90 percent of the salesforce of some firms and account for over 90 percent of product sales.”

            Actions That Can Harm the Reputation of the Industry

            The reputation of our industry can be negatively impacted by a number of factors including the following:

            1. Misconduct by a Member of a Salesforce

            As sales people in any industry, most participants in direct selling conduct business in an ethical and consumer- and recruit-friendly manner. It is unfortunate but true that the reputation of the industry is negatively impacted if a participant inappropriately markets products or the income opportunity in a misleading way. Given the millions of participants in the direct selling industry, even the acts of a small percentage of participants can create significant reputational harm. Examples of acts that can damage the industry’s reputation include:

            • Exaggerated earnings claims made to prospective recruits;
            • Exaggerated or false product claims;
            • High-pressure recruiting and sales tactics; and
            • Excessive non-corporate training/motivational expenses.

            2. Business Practices

            It is also important that companies properly evaluate business initiatives and compensation incentives before they are implemented to make sure they do not motivate or incentivize problematic behavior.  For example, I believe that compensating the salesforce for sign-up fees—which is one strong indicator of a possible pyramid scheme—as well as sales kits and aids, samples, and training fees and materials can create an incentive that increases the cost of the investment to join the business and the associated potential risk of loss to a new participant.

            “It is important that companies properly evaluate business initiatives and compensation incentives before they are implemented to make sure they do not motivate or incentivize problematic behavior.”

            3. Enforcement of Distributor Policies and Codes of Ethics

            If a company fails to diligently monitor the activities of its salesforce and enforce its ethical standards, regulations and policies, it will ultimately contribute to inappropriate actions that damage not only the reputation of the company but also the industry. A large number of participants join our industry each month, which makes it an imperative that companies adequately train the salesforce on marketing claims, legal requirements and the industry’s code of ethics. Companies cannot be passive in this effort.

            My Vision

            Having touched upon some of the attributes, myths and problematic practices, let me now turn to a view of the future that maximizes our positive attributes and potentially helps quash some of the negative stereotypes and myths that presently afflict us. Here are my high-level recommendations for the industry that I believe will further strengthen the industry and its reputation.

            1. Continue to Enhance Consumer Protective Measures

            I believe our industry has done a remarkable job developing consumer and distributor protective policies and codes of ethics. The industry standard of a 12-month return policy plays a critical role in protecting distributors from inventory loading risks. Unconditional 100 percent consumer product money-back guarantees should continue to be encouraged.

            The DSA Code of Ethics establishes a baseline of important ethical practices for companies to follow. It is important that we continue to evaluate whether there are additional measures that can be adopted to further enhance the protection of consumers and distributors. The following are areas where I think additional protections may be beneficial to consumers, distributors and the industry:

            Compensation Summary: I believe the industry should adopt and implement an industry-wide standard of transparency and disclosure regarding various relevant aspects of compensation earned by its salesforce members. Many of our companies already make such disclosures, which provide prospective recruits with protection from misleading claims that could be made by a participant in the salesforce. No one can criticize us if we provide full disclosure of earnings. Presenting prospective recruits with detailed distributor earnings data during the recruiting process as well as on our websites and in our literature will eliminate most of the risk of the salesforce exaggerating the opportunities we are offering.

            It is important that such disclosure be complete and provide sufficient information to furnish a fair overview of the earnings potential. Creating an industry standard will assist other companies and provide a norm they can follow. Once in place, all companies taking this transparency approach would be free from any charges of financially misleading members and prospective members of the salesforce.

            Minimizing Risk of Loss: A critical component of the industry’s code of ethics is its 12-month inventory return policy, which was adopted to reduce the risk of loss for new participants. Salespeople utilizing the return policies should be able to do so easily and expeditiously. The industry also needs to remain diligent in monitoring and evaluating trends and developments in business practices and activities of direct sellers to identify additional measures that should be adopted to ensure the industry always has comprehensive measures to protect consumers and distributors.

            For example, I recommend that it should be made more clear that the current buy-back policy includes other purchases by new participants in the business such as sales aids, training costs and starter kits. I believe that DSAs should promulgate code provisions to codify some of the best practices in the industry, including restricting payments on certain types of compensation.

            “I believe the industry should adopt and implement an industry-wide standard of transparency and disclosure regarding various relevant aspects of compensation earned by its salesforce members.”

             

            2. Educate Our Constituencies

            • Members in the DSAs should take the opportunity to participate in industry research and surveys done by outside third-party firms retained by DSAs so that the industry will have accurate and credible data for use with the press, governmental entities, academia and other constituencies.
            • Member companies can further increase their focus on educating their salesforce and customers regarding compliance policies and codes of ethics. Having a salesforce that is knowledgeable about the code of ethics—and their responsibilities under such code—is important to the long-term success of our industry. Member companies should have the necessary compliance staff and provide the training to accomplish this. I believe the head of this function should report to the CEO or general counsel. Companies should also have a whistle-blower system in place.
            • Member companies should work to further improve their customer relations departments with a philosophy of total consumer and distributor satisfaction and excellent service. This is not just good business, it’s also smart business.
            • There should be ongoing and significant public education efforts portraying the industry as it truly is, through public relations efforts based on solid data and useful information, public service activities, promotion of quality research, excellent use of social media channels and targeted projects to educate key influencers in society (e.g., legislators, regulators, the financial press, the “style” and general news media, academia, think tanks and consumer protection organizations). We have an opportunity to tell “our story,” much more effectively. This will require substantially increased financial commitments by the companies to those efforts.
            • Annually, the WFDSA global “best practices” exchanges will ensure our industry is operating in all our markets on a consistent basis, at the highest ethical levels, and with the most effective ways to protect our corporate interests through taking the high road in building and sustaining our reputation, image and brand. Strengthening DSAs across the globe strengthens our industry. All industry firms should belong to the national DSA in the countries in which they operate.

            Conclusion

            Now is not the time to relax in our efforts to be a consumer-friendly, consumer-protective industry. This is critical to our long-term success and the success of the people who rely on this industry for income opportunities and life-enhancing products. We must constantly evaluate our business trends and practices and be willing to take additional steps to protect our industry and its participants.

            Having worked in 50 countries throughout my career, I have seen that the DSAs that are most successful are those with the support of the majority of companies in the country. I believe strong DSAs are critical to success, and I can’t emphasize enough that all industry companies should be members of the association in the countries in which they do business to most effectively do the job necessary on behalf of the industry.

            “Now is not the time to relax in our efforts to be a consumer-friendly, consumer-protective industry”

            Our business model not only works, but it is also a good thing for free enterprise, society and individual freedom. Its success is built on maintaining existing and establishing new personal relationships based on truth and trust. We and our sales people want happy customers and satisfied recruits. We and our sales people want to be good corporate citizens and contribute to society. In other words, we and our sales people want to do well while doing good.

            The original article is published on the Direct Selling News website. Direct Selling News is the trade magazine serving direct selling and network marketing executives since 2004. Subscriptions are available in the App Store and Google Play Store via this link: http://directsellingnews.com/index.php/dsn/app

            Mere Puffery or Misleading Promises: How Much of a Scandal Is Trump University for the New York Public?

              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.

              This article was written by +Kevin Thompson in collaboration with our stellar intern, Amber Lovelady.

              Trump - Schneiderman | MLM law

              In August, New York Attorney General Erick Schneiderman filed a $40 million lawsuit against Donald Trump for falsely promising as many as 5,000 students a successful real estate career if they enrolled in the unchartered, unlicensed Trump University. Schneiderman alleges that Trump engaged in “deceptive and unlawful practices,” including falsely representing the legitimacy of the school and false advertising in the newspaper and mail. People attended his one free class off those advertisements which led many of them into attending a $1495 three-day seminar, which enticed them into spending from $10,000 to $35,000 into higher-level Trump University programs. At the end, Schneiderman claims these experiences fell way short of teaching participants everything they needed to know about becoming billionaires. Several students are now mile high in debt, without jobs, and quite mad. According to the AG, dozens of attendees have complained to authorities all over the country about what they believed to be a scam.

               

              Personal Responsibility?

              But was it really illegal? According to Trump, not everyone who participated in these opportunities is as disgruntled as Schneiderman asserts. Trump declares that more than 10,000 students praise the program and 98% of those students in a survey checked excellent to describe their experience. Further, Trump believes Schneiderman is using this suit as a publicity stunt for public office. “They meet on Thursday evening – I get sued by this AG Schneiderman… Saturday at one o’clock,” Trump said. “Think of it. What government in the history of this country has ever brought a suit on Saturday? I never heard of such a thing.”

              He’s got a point on the lawsuit being filed on Saturday. It adds a strange element to an already strange matter.

              Marketing Claims

              Although there are many things Schneiderman alleges in the lawsuit, I find that this case really hinges on the motivation leading people to attend the classes. What were they hoping to gain? Were their expectations consistent with the marketing message?

              How were they convinced? Schneiderman suggests it started with false advertisements. In New York, the test for false advertising is whether representations or omissions are “likely to mislead the reasonable consumer from acting reasonably under the circumstances.” Just for the record, this is pretty consistent with the Federal Trade Commissions definition of “false and misleading.” What was misleading? Some of the false advertisements Schneiderman alleges are:

              • Trump claimed he could “turn anyone into a successful real estate investor” and that students would learn “a systematic method for investing in real estate that anyone could use effective” even though dozens of students were unable to finish one real estate transaction.
              • Trump claimed he would “share [his] techniques, which took [his] entire career to develop” when the President of the University, Michael Sexton, could not describe any Donald Trump techniques taught at the university.

              Really?

              But really, was this misleading to the average American? When you’re watching a commercial where a bikini model vows that you’ll look just like her after a six week, $10 video series, do you buy it? Most of us don’t because we know it’s part of a sales pitch, mere puffery. And for those who do buy it, they know that it’s their hard work with the content that will bring them success. Of course a $10 investment is significantly less than a $35,000 one, but the principle remains. It’s ill-advised, in my opinion, to judge a program based on how customers leverage the content in their spare time. It’s a problem faced in the network marketing industry. Companies get routinely clobbered based on the low success rate of participants. But is that indicative of a bad program, bad product, bad culture…or could it simply be attributed to laziness? It’s hard to pin-point the root cause of failure.

              Reasonable Expectations

              A reasonable person understands that success takes effort…and lot’s of it. In this case, it was not unreasonable for a person to believe that Donald Trump and his trusted instructors could provide a foundation for real estate investing. It is completely unreasonable, however, for a person to believe that Trump could transform them into a real estate tycoon.

              Conclusion

              If you sell any kind of informational product, the odds of litigation go up. Consumers can always say “it’s crap, it never worked for me” and you’re unable to fall back on objective metrics like patents, science, etc. It’s one of the reasons why Amway tightened the screws on its tool systems several years ago. Since many consumers were complaining that the information was poorly crafted for their Amway businesses, Amway got more involved with quality-control.

              Network marketing companies that sell informational products have it more difficult because the exposure is two-fold: consumers can say the information was ineffective AND they can say they bought the information JUST TO PARTICIPATE IN THE COMPENSATION PLAN. And the latter reason opens the door up for pyramid scheme allegations.

              This lawsuit filed by New York is along the same vein as the lawsuits filed by disgruntled college graduates filed against their universities. They were sold a bill of goods, they graduated, they’re jobless. Who’s to blame? And actually, this lawsuit is of the lesser sort because it’s not the disgruntled consumers filing the lawsuit, it’s the government claiming to protect the little guy incapable of protecting him or herself.

              Predictions

              This case will settle on the eve of trial. Contrary to what the AG is saying, it’s not about the consumers. I do think it’s really about PR for him and a little grand-standing. With that in mind, the AG will settle for a reduced amount, take the favorable PR, Trump will claim a moral victory and the parties will go their separate ways.

              If you learned something new in this article, please share.

              If you’re reading this via email, please click this link to download the lawsuit filed against Trump University.

              Herbalife Distributors Continue to Win Despite War on Wall Street

                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.

                This post is for the unsung heroes carrying the Herbalife organization through this difficult period. Candidly, their distributors are dominating! 2nd Quarter Earnings are in for Herbalife. All of the major metrics are up. Despite the war on Wall Street over the fate of Herbalife between several notable players, the Herbalife distributors continue to produce results. In this video, I explain the importance of their achievement. I also give a few predictions about what this conflict means for the future of the industry.

                If you’re interested in the financial elements surrounding Herbalife stock, check out the video below. Robert Chapman does a great job explaining the current and potential value of $HLF. He understands the network marketing model AND the markets, which makes his insight valuable. If you’ll recall, Robert Chapman was literally the first professional on Wall Street to question Bill Ackman’s analysis. His article titled “Herbalife: Why I Made It a 35% Position after the Bill Ackman Bear Raid,” let a lot of air out of Ackman’s proverbial tires. It moved the market. I’m proud to know him.

                http://video.cnbc.com/gallery/?play=1&video=3000187031

                DS Edge Goes Country!

                  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.

                  DS Edge - Nashville | MLM Startup
                  I’m incredibly excited to announce the location of the next DS Edge conference: my city, Nashville, Tennessee! It’s the home of country music and for two days in September, its neighbor (Franklin, TN) will be the home of direct selling.

                  Come to Tennessee to learn how to start and grow your party plan or network marketing company at the Direct Selling Edge Conference on Thursday and Friday, September 26 and 27, 2013.

                  This two-day educational conference is the best for new and young direct selling companies because the quality of the content presented is excellent. It is pure education.

                  Students Deserve Vacations

                  After two full days of learning, as a student you’ll deserve a vacation, too.

                  We’ve got plans to take you an optional excursion to visit some of the most famous honky tonks in downtown Nashville after the first day of the conference. Stay the weekend if you’d like to enjoy all that Franklin and Nashville have to offer. In your free time, you can visit the Grand Ole Opry, the Country Music Hall of Fame, The Parthenon, and RCA Studio B in Nashville, but don’t miss the historic sites of Franklin, too.

                  What will you learn at this conference?

                  You’ll learn…

                  • how direct selling is different from other business models
                  • the differences and similarities between network marketing and party plan companies
                  • what recent Federal Trade Commission decisions means for you
                  • best practices and step-by-step instructions for creating an ethical and effective presence in the social media landscape
                  • the legal limits for raising capital and the legal rights inherent with stock ownership
                  • the differences between different types of compensation plans and how to assess which plan type is best for you
                  • the ABC’s of successful recruiting
                  • how to teach others how to sell
                  • the key behaviors we need to movivate in, and the building blocks of, compensation plans
                  • the science behind compensation plan design
                  • how Founder Programs work and why have one
                  • how to select the right MLM software
                  • why you need to have a distributor compliance system for your network marketing or party plan company
                  • all about sales tax, 1099′s, unclaimed property reporting, and state income taxes
                  • why one merchant account is not enough
                  • simple methods to keep your MLM or party plan company safe from federal and state regulators
                  • how the options of pilot programs, soft launches and hard launches can be used to ignite your growth
                  • common mistakes of startup companies
                  • 20 secrets of successful companies

                  and more!

                  Our 8 speakers will educate you in 16 sessions, plus there are 4 round table discussions that you will fill you with even more knowledge to give you the edge you need to be successful.

                  Personal Appointments

                  At the end of each day, from 5 until 7 pm, you’ll have the opportunity to meet with conference speakers for 20 minute appointments at no additional cost! Add the four hours up and you’re easily walking away with over $1,000 worth of consultation.

                  Where is the conference?

                  The Direct Selling Edge Conference will be held in Franklin, Tennessee (just 20 miles from Nashville) at the Drury Plaza Hotel Franklin on Thursday and Friday, September 26 and 27, 2013.

                  Built in 2012, the new 338-room hotel offers a daily free hot breakfast, free soda and popcorn, free food at 5:30pm, free local and long distance calls, free parking, and a microwave and refrigerator in every room.

                  We’ve negotiated excellent rates for you. Only $119.95 per night.

                  Where Do You Register?

                  Registration is fast and easy. For tickets, go to http://www.directsellingedge.com.

                  For lodging, go to https://wwws.druryhotels.com/Reservations.aspx?groupno=2181246

                  Questions? Call Jay or Victoria at Sylvina Consulting or email [email protected].

                  What is the Direct Selling Edge Experience?

                  Here is what you’ll get…

                   

                  Agenda

                  Our agenda is loaded with information specifically chosen to advance your business.

                  Reserve Your Seat

                  At $199 for your ticket and only $100 for each of your companions, this educational conference is a great value. Contact me to obtain a promo code to obtain a discount. Ignorance is more expensive than education. Information is the only asset separating you from your competitors. We guarantee you’ll get the edge you need. If you’re not satisfied with the program, we’re offering a 100% refund, no questions asked.

                  It’s easy to get to Nashville and the Direct Selling Edge Conference. Conference tickets are available now.

                  See You In Tennessee

                  Join me,+Kevin Thompson, and many of the top direct selling professionals at the Direct Selling Edge Conference. We hope to meet you there!

                  FTC’s Disclosure Guidelines for Online Marketing: How to get it right (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.

                    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.

                    BREAKING NEWS: FTC’s Case Against Fortune Hi Tech Removed to Kentucky

                      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 - FHTM case transferred to Kentucky | MLM AttorneyIn February of 2013, the FTC filed a lawsuit against Fortune Hi Tech Marketing. The lawsuit was filed in Federal Court in Chicago. The FTC is alleging that FHTM operates as a pyramid scheme. As mentioned in my last article, the FTC passed on the scalpel and picked up the sledgehammer. Basically, they departed from their traditional, math-based pyramid scheme arguments and went for a more generic approach. This new strategy is even worse than the other one. If it sticks, it represents a significant threat to the industry. Based on the FTC’s argument, rewards triggered via distributor consumption are illegal recruitment bonuses. This is a very important case.

                      Time for the Update

                      FHTM filed a motion to get the case transferred to federal court in Kentucky. Kentucky is the home state for the company and most of the principals. The judge in Chicago punted the file to Kentucky. The factors considered when deciding on such a transfer include:

                      (1) site of material events relative to the case;
                      (2) relative ease of access to sources of proof;
                      (3) convenience of the parties litigating;
                      (4) convenience for the witnesses.

                      This is big for two reasons. First, the judge in Chicago thought so little of the case that he sent it south. If he wanted it, he could’ve kept it. Second, the law in Kentucky is clearer with respect to pyramid schemes. It states:

                      Pyramid distribution plan” means any plan, program, device, scheme, or other process by which a participant gives consideration for the opportunity to receive compensation or things of value in return for inducing other persons to become participants in the program;
                      (5) “Compensation” means payment of any money, thing of value, or financial benefit conferred in return for inducing others to become participants in the pyramid distribution plan. Compensation does not include payment based on sales of goods or services by the person or by other participants in the plan to anyone, including a participant in the plan, who is purchasing the goods or services for actual use or consumption…..

                      Again, the FTC was initially arguing that commissions triggered via internal consumption are illegal bonuses. But the statute in Kentucky says the exact opposite. This case is FAR from over. There’s likely going to be a hearing next week in Kentucky regarding the injunction over Fortune Hi Tech. If FHTM wins, they’re back in business. The judge’s reasoning for sending the case to Kentucky is included below.

                      If you’re reading this via email, please click this link to read the judge’s opinion.