“Never take advice from anyone in a tie. They’ll bankrupt you. It’s very difficult to argue with salaried people that the simple can be important and the important can be simple.” –
Nassim Nicholas Taleb, author of the Incerto.
Lawyers in our industry have a knack for making the simple complicated, repeating the same tired points year after year.
Compliance, Compliance, Compliance.
I get it. We all get it. I preach it too. Compliance is important. Income claims without disclosure are bad. Properly categorizing distributors/customers is important. Culture is important. Monitoring the field is important. Yada Yada Yada.
Unlike a generic call to “get tough with compliance,” the industry needs something more concrete, real, and actionable. Whenever there’s an enforcement action against a company, the response is always the same: We need to get serious about compliance. Well no shit. We (I mean they) never take the time to explore the functionings of the pay plan that might contribute to the toxic cultures in those sales organizations. The problem with the generic “do more with compliance” message is that it makes it too easy for companies to change nothing. It’s not objectively observable. By telling clients to “just do your best,” lawyers in our industry are simply providing executives with a pacifier. Also, doing more with compliance is clearly not enough. Vemma had great compliance processes. So did Nerium. So did Herbalife. So did Advocare. They were all pursued by the FTC. Candidly, if those companies’ compliance measures are inadequate, odds are so is yours.
Income claims without disclosure is a problem. Yes. Absolutely. But it’s not the main element that drives a pyramid scheme argument. It’s important, not essential. The main, underlying element that drives a pyramid scheme case is LACK OF LEGITIMATE DEMAND for product. If people are purchasing product primarily to qualify for commissions, it’s known as OPPORTUNITY DRIVEN DEMAND and is proof of a pyramid. Period. You’re welcome.
In City Slickers, Jack Palance’s character talked about the “one thing” as being the “secret of life.” Billy Crystal, eager to learn, loses his mind when Jack’s character dies before sharing the secret.
In our industry, if I were to boil the ocean, the “one thing” that would (a) dramatically minimize the odds of FTC intervention; and (b) if adopted as an industry standard, would move the needle towards a more professional and integrous industry would be:
moving away from monthly volume requirements (“MVRs”).
Yes, the other areas are important too. Compliance, earnings claims, culture, properly coding customers, retail sales, all of it. But this is the “one thing” that would dramatically make a difference. And it cannot be faked.
After Vemma, I wrote about companies having 3 choices. Those choices: (1) doing nothing; (2) getting rid of monthly volume requirements altogether; or (3) if you’re going to have a monthly volume requirement, require some retail sales to go along with it. The majority of companies chose option 1, and continue to choose option 1.
Understand, it’s not illegal to have MVRs that can be met via autoship and/or customer sales. We explain this concept to clients frequently. But…there’s risk. And you need to understand the risk. And sadly, the influencers in our industry and the executives they serve have a financial incentive to make this risk as murky and gray as possible. If everyone else is doing it, it makes it easier to maintain (and harder to stop).
Again, if your company has an MVR, it’s not illegal. It’s not clear proof of a pyramid. But it just makes the FTC’s job that much easier to make pyramid scheme allegations. This is how it works:
The FTC can argue that the majority of distributors are subscribing to a monthly order just to hit the MVR to qualify for commissions;
The FTC can dig into the purchase patterns of both customers and distributors. If a large percentage of the field purchases the minimum amount to meet the MVR, and if customers purchase product in smaller quantities and with less frequency, it’s further proof of inventory loading (pyramiding). While it’s normal for distributors to purchase more product, the FTC will make the discrepancy look nefarious;
The FTC can cherry-pick the proof by pointing to several occurrences where people in the field improperly teach the MVR as a way to automatically qualify for commissions i.e. “Just get on autoship so you can safely qualify for your check.” While you can do your best to teach the field proper terminology, there will be some (enough) that screw it up. Since the FTC is not afraid to dig into your history dating back 7 years as they did against Advocare, it’s easy for them to find material helpful to their case.
I understand the arguments in favor of MVRs: distributors need to be on product for familiarity, it creates consistent volume in an organization, it helps corporate anticipate inventory amounts, it separates the serious networkers from the non-serious, it’s a minimal investment, it’s a reasonable expectation for distributors to buy from their own business…the list goes on. I understand. But see above. With the requirement, the FTC can assume (“play dumb”) that the main driver for consumption is the MVR. And with this assumption, they can use it to justify litigation.
The Direct Selling Association has an opportunity to lead here. They could update their code of ethics to where the MVRs are prohibited UNLESS there was a corresponding retail sales rule. When I wrote an anti-pyramid bill in Tennessee that had this sort of requirement, the DSA (along with, ironically, Herbalife) was quick to show up to kill the bill. If the DSA baked this into its code of ethics, it would give practitioners like myself and others a template to use to advise companies i.e. “this is the industry standard.” Since the DSA is not adept at assessing risk until it’s too late, I’m not too optimistic they’ll update anything. Without a standard, the lesson will continue until the lesson is learned. If you look at the settlements made between the FTC and Vemma/Herbalife/Advocare, all personal MVRs are completely prohibited.
With MVRs, we know the FTC finds it offensive. The FTC made its thoughts clear on the subject when FTC chairwoman Edith Ramirez said, “Legitimate MLM should not use targets or thresholds to satisfy eligibility for compensation or rewards that are met by mere product purchases. . . [B]usiness opportunity participants should buy product only in response to actual consumer demand.” She further said, “MLMs should not contrive ways to get their business opportunity participants to make purchases for reasons other than actual retail demand.” People in our industry read that sentence and scream “INCOME CLAIMS!” C’mon people.
I’m really proud of the community I’ve assembled over at Facebook MLM Legal. If you’re not following the page, you should. The feedback from the community there is valuable. These are people with real skin in the game, the risk-takers. I asked the smartest community in network marketing a very simple question: If the MVR went away, what sort of impact would it have on your business? The comments ranged from “screw the FTC, we should be free to do what we want” to “it would be the end of our business” to “we’d take a hit but still be fine” . . . See for yourself below. One thing is clear: there’s a lot of confusion on the subject and companies are doing a poor job at communicating the optionality of the MVR (which is a problem).
I represent all sorts of entrepreneurs. They all share one thing in common: if there’s no immediate pressure to change, they’re inclined to stand still and do what everyone else does. Call it competitive pressure. If we had some standards that we all could agree on, preferably led by the largest trade association in the industry (DSA), we could help elevate the profession. Giving people a choice to purchase product based on actual need without fear of missing out on a check…it’s not exactly a novel idea. In my opinion, this is the single-most important issue that triggers FTC angst and makes companies with MVRs easier targets. It’s the “one thing.” If a company has an MVR, they at least need to be aware of the risk and do a careful risk/reward analysis with a lawyer that’s not on a salary.