DISCLAIMER: This article is not meant to be legal advice and shall not be construed as legal advice. These are my personal opinions and shall be construed as such.

A few weeks ago, the FTC issued two Staff Advisory Opinions, one to the Direct Selling Association (DSA), the other to the Direct Selling Self-Regulatory Council (DSSRC), a product of the DSA. Both, to my knowledge, were written without a direct inquiry from the DSA or the DSSRC seeking the FTC’s opinion, but rather the FTC found it their duty to chime in. They are the country’s white knight after all.  

I’ll address both of these letters in tandem with my current perspective on the overall regulatory environment, especially that within the FTC. As a result, this newsletter will be a bit longer than usual. But bear with me because the contents are of more importance than usual.

TLDR version: the FTC is objectively wrong on the law, but they seek to create a specter of fear upon the industry knowing that companies will comply rather than risk suit.

The first letter challenged the industry’s supposed reliance on a previous FTC letter titled “Staff AdvisoryOpinion – Pyramid Scheme Analysis” from January 2004. In that letter, the FTC addressed two primary industry concerns: (1) internal consumption; and (2) the legal significance of consent orders.[1] We will only deal with the first concern here.

In addressing the first, the FTC stated,

“The critical question for the FTC is whether the revenues that primarily support commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.”

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The FTC stated this as a response to internal consumption and has always been understood as being a response to internal consumption. If more individuals outside of the opportunity are purchasing product than inside of the opportunity, that’s an overall positive start. If the opposite is true, then that’s an obvious poor start and clear red flag of pyramiding.

The FTC then went on to call out monthly volume requirements, rightfully so in my opinion. The FTC stated on that aspect,

“Modem pyramid schemes do not blatantly base commissions on the outright payment of fees, but instead try to disguise these payments to appear as if they are based on the sale of goods or services. The most common means employed to achieve this goal is to require a certain level of monthly purchases to qualify for commissions.”

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We have always expressed that the FTC has not set forth a clear line delineating between pyramid or not, but we have established that 50% is obviously the minimum with the more, the better. There has never been an argument, to my knowledge, that 50% was the standard. The standard is whether or not customers outside of the opportunity find value and are purchasing product. It’s quite simple, really.

But the FTC is creating an issue where there is none in their most recent letter to the DSA. The FTC cites numerous well-known cases in the space: Koscot, Vemma, Burnlounge, Noland, but conveniently leave out Neora. The FTC states, the test outlined in Koscot“is not a percentage-based test” and then cites Burnlounge stating, “AnMLM operates as a pyramid where the ‘focus [is] in promoting the program rather than selling the products’.” This places the focus on how the company operates in practice as opposed to what is on paper.

Everything within the 2004opinion letter is quite clear, and the industry is well aware of the clarity. Yet the FTC has now took upon itself the mission of reframing the FTC’s position and “therefore rescind [the letter].”But reading further into the newest letter, the reasoning behind the rescission is the FTC’s attempt to reframe current case law, cherry pick those facts that support their radical position, and ignore the aspects of cases that contradict their opinion , while ignoring losing cases altogether.

The FTC has continued to move the goalposts of compliance as companies, especially within the direct sales space, prove that they can operate within the FTC’s regimented guidelines. For example, the Vemma case set forth an implicit 50% requirement because more customer purchases is a desirable effect than less. Companies complied, so the FTC pushed further withHerbalife when Bill Ackman went on his crusade. That consent order essentially required 80% non-participant sales. 80%! And Herbalife is doing just fine now.

These percentage-based tests were thought to be death sentences, but they haven’t been. As a result, the FTC is removing any notion of percentages and creating a shifting scale to be applied at their personal discretion on any given day.

As for the second letter to theDSSRC regarding income claims and the DSSRC guidance, I take a neutral position. The FTC is creating a typicality standard that cannot possibly be complied with because every claim an individual will make is inherently atypical. Think of it this way. Whenever you see a job posting for any job outside a restaurant, for example, how odd would it be to have an income disclosure statement for the prospective bartender? Please note to all applicants that we do not split tips, and the typical bartender makes X amount of money but if you are attractive, you may be tipped more. We apologize in advance to those less attractive, but we are telling you now you will make less. You may expect to have X amount of expenses to make yourself more attractive during your time working here.  Income disclosure statements are the world we live in, so we must learn to interact and apply them within direct sales. But from a policy perspective, it’s rather odd in itself if you think about it. But we will save that discussion for another day.

As for the DSSRC, they’ve been ignored and have not been given the chance to move the needle for the industry despite their attempts. I do not say this to ruffle feathers or to call anyone at the DSSRC out, but rather because the FTC, TINA, among others, do not respect their guidance. The DSSRC has recommended non-complying companies to the FTC, crickets followed. The DSSRC has done the best it can to provide guidance to an industry craving a set standard. The FTC denies this, so theDSSRC and others are left in the wind. The FTC is the joke, but they make those seeking to comply the butt.

‍Advisory opinions such as the FTC’s presented to the DSA and the DSSRC are not binding law. The FTC knows this, but they also know exactly what issuing these opinions will do, it will force an entire industry to seek to comply knowing that if they step out of line in the slightest they could be the next target in the regulatory crosshairs. It’s violative of the Administrative Procedure Act to put it mildly, and utterly unconstitutional to call it directly for what it is.These opinions cannot be challenged because they are not official action. Even when the opinions blatantly misstate the law or cherry-pick from the cases they like, there’s no recourse for the little guy.

Perhaps there are stupid people out there. Perhaps I’m one of them. But I’ve stated in Thoughts A Brewin’ countless times, failure promotes growth and weeds out the bad ideas. Sometimes good ideas fail and sometimes bad ideas survive, but the ability to fail should be present within a prosperous society, not prevented from a regulatory leviathan seeking to rewrite the social contract based on their opinion on any given day.

Courts and rules are law, not these advisory opinions.

DISCLAIMER: This article is not meant to be legal advice and shall not be construed as legal advice. These are my personal opinions and shall be construed as such.

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[1]The main conclusion as to consent orders is that they are not binding and are limited in scope to the particular defendant(s) at hand but are important nuggets into the minds of regulators.

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