On January 29, 2018, the Federal Trade Commission went after the company Digital Altitude. The FTC’s pursuit represents the first enforcement action against a network marketing company under the Trump administration. Reading between the lines, there are some key takeaways — some familiar and some new — for how the FTC will police network marketing companies in the future.
The Lack of the “P” Word
Similar to its settlement with Herbalife, the “P” word was noticeably absent from the FTC’s complaint against Digital Altitude. Instead of a pyramid allegation, the FTC simply levied the charge of operating a “fraudulent scheme” against Digital Altitude. I’ve written in the past about the difficulty the FTC has in proving pyramid accusations, as decades of case law offers imprecise help towards a clearly defined distinction between pyramid schemes and legitimate network marketing. Instead of trudging through mud by alleging Digital Altitude operated as a pyramid scheme, the FTC’s actions signal a more simplistic approach towards fraudulent schemes based almost exclusively on (1) inappropriate income claims and (2) deceptive marketing on the products and services offered.
Traditionally, the FTC has always had inappropriate income claims to fall back on in its actions against MLMs. As Edith Ramirez, former Chairwoman of the FTC, said in a speech to the DSA in the fall of 2016, “In all of [the FTC’s] cases against multi-level marketers, the FTC has alleged that the defendants made false earnings representations.” Inappropriate income claims act as easy ammunition. Deceptive marketing, on the other hand, simply means a company’s product or service offering wasn’t what it was made out to be. In Digital Altitude’s case, their purported business-coaching services didn’t actually help people build profitable businesses. Shocking, I know. We could have told you that . . . oh wait, we did. In September of 2016, we gave Digital Altitude free legal advice in the form of a detailed memo. The memo was also shared with various regulators, including the FTC.
The Scorched Earth Method
The FTC once again made use of its tried and true “Scorched Earth” method against Digital Altitude. By “Scorched Earth,” I mean successfully sought and received a Temporary Restraining Order (“TRO”). The FTC asked a federal court in California for this relief on January 29; relief was promptly given three days later. As a result, the TRO halts the Digital Altitude business and freezes assets. The hearing for injunctive relief was originally scheduled for February 15, but recent court filings show the hearing was pushed to March 5th. Until the hearing, the injunction remains in place. The Receiver (the entity appointed by the Court to oversee the assets) generally wrecks the company from the inside during this period.
Traditionally, the FTC’s use of a TRO euthanizes the target business. For 99.9% of companies in the network marketing, a TRO represents a death knell. The question for Digital Altitude isn’t IF the TRO will kill the company, but how long they flounder until their timely end.
The FTC is in a state of transition. With the five-seat Commission set to introduce an entirely new crop of Commissioners (3 Republicans and 2 Democrats), the directives issued by the previous administration could significantly change. In the network marketing space, my prediction would be that the FTC more selectively pursues bad actors based on fraud allegations rather than pyramid. Further, the FTC will support self-regulation and governance. This means the regulatory body will expect the DSA to more actively police its own. With a less than stellar track record of doing so, let’s hope the inmates don’t once again return to running the asylum.