In Part 1, we presented our belief that there is soon to be a shifting tide of regulatory attitude from empowering the consumer to now empowering the government. Such empowerment has morphed into the idea that consumers are now unable to protect themselves due to the constant barrage of information, e.g., misleading/deceptive income claims, no true customer base, defrauding via a pyramid scheme. It is our belief that this shift will likely cause significant restructuring within the MLM/network marketing space. Companies operating within this space best be prepared. Regulatory action can arguably be construed to now be driven significantly from an emotional perspective, remember our global community mantra from Part 1?
If you have read any of our previous scholarship or are familiar with the basics of this industry, you are well aware of the landmark In re Koscot decision that set forth the standard for a pyramid scheme
(1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of products to ultimate users.
This is a completely rational approach. Individuals cannot buy into an opportunity with the expectation, or even having the end result, of making money outside of sales to actual consumers. One can buy a $1,000 pencil, but it’s self-evident that there is no legitimate value in that price.
This origin story now circles us back to the premise outlined within Part 1 of this series, times they be a changin’. The evolving argument goes something like this: a consumer may be harmed or was actually harmed and should be made whole. The how behind the harm takes a backseat, regardless of whether the entity or individual involved truly violated any type of law or has a violative model in practice. A consumer was harmed; thus, remedies for consumers and penalties for violators are morally obliged. Questions may be asked later as to the genuineness of the regulatory action taken. Someone needs to pay first.
The FTC has heavily focused on labeling network marketing companies as pyramid schemes, while coupling such allegations with misleading/deceptive income claims to put genuine entities on a one-way trip to insolvency. There are individuals who run entities within the network marketing space that undoubtedly operate in violative manners and deserve to be punished, but the manner in which these conclusions are determined should be based upon well-established and understandable rules, not arbitrary adjudication. Adjudication that permits the FTC to make up rules as they go but then claim that these rules won’t necessarily be used against others because they aren’t “official.”
Now that the Supreme Court recently limited the FTC’s golden child of 13(b), the future of FTC enforcement is evolving before us. The FTC’s consternation, although the result was arguably predictable, with the AMG Capitaldecision continues to be apparent through then-Acting Chairwoman Slaughter claiming that the Supreme Court ruled in favor of criminals but she also stated that “[p]rotecting America’s consumers from unfair and deceptive practices is more challenging than ever, so we need to harness all the tools at the FTC’s disposal, including rulemaking.” Setting aside the extensive lobbying campaign the FTC and others are putting before Congress to reinstate 13(b) via new legislation, the rulemaking angle could be encouraging. The FTC announced that it will establish a new rulemaking group within the FTC’s Office of General Counsel. What this particular group will do in practice is not yet known, as the official rulemaking processes can take considerable time. Rules for how the game are played would be received with open arms for many within the industry who seek to ensure its viability through permitting the provision of genuine products to genuine retail customers within a sound business model. No one roots for crooks who scam others out of their hard-earned money and push bogus “business opportunities”. To argue that the industry is an advocate of such conduct or that the Supreme Court’s commitment to the law as it is written favors such a stance is revelatory as to how the FTC generally has viewed the industry as a whole.
The regulatory push as of late appears to be deeply rooted in the depths of Washington politics with a partiality towards Big Tech. Last week, President Biden nominated, and the Senate shortly thereafter confirmed, Professor Lina Khan to become the next Chair of the FTC, we introduced you to her in Part 1. The hesitancy presented within Part 1 focused on the idea that a Big Tech obsessed FTC could have negative repercussions for the network marketing industry, but the strive for clearer rules and less case-by-case adjudication could actually prove beneficial for the network marketing industry. An industry that has operated with no clear rules and at the whim of expert economist testimonies for decades is due reform, reform for which Chairwoman Khan has advocated in her writings. We anxiously await what is to come next, for an agency that seeks to promote aspiring businesses as opposed to shutting down an entire industry due to ill-informed economic analysis and manipulative data is what we seek. We see no panacea in the future, but maybe, just maybe there is light at the end of the tunnel.
As President Reagan stated in his second Inaugural Address, “Freedom and incentives unleash the drive of entrepreneurial genius that are the core of human progress. . . . Freedom is one of the deepest and noblest aspirations of the human spirit.” The FTC and other regulatory agencies are on the precipice of removing freedom from the equation with their consumer centric focus. Innovation and new companies must be highly encouraged as well. Consumers make bad choices. It’s not always the model or the entity’s makeup that resulted in harm. Everything comes with a risk, but freedom to take such risks also permits individuals to take control of their own lives. We encourage all of our clients to be compliant within the realms of the law, but to also be innovative in their approach. New entrants are removed from the market before they even start due to the fear of not being aware of what is or is not a violation. Risking it all in a field of unknowns where the rules can change overnight is not a sustainable model and not an example of good governance. Our firm is here to help cut through the nuance to turn the unknown unknowns into a compliant business model that seeks the best for our clients and inherently, as the line goes, deliver genuine marketable products to genuine retail customers. But the FTC needs to do its part too. A new generation is taking control, we would be wise to be encouraged by this shift. But it would also be prudent to remain cautious of a wolf that calls itself a sheep until you’re sure you won’t be eaten.
In future parts of this article series, we will address the future of FTC enforcement under new Chairwoman Lina Khan and lay out the main avenues of enforcement the FTC currently has at its disposal and how clients and others within the industry are able to navigate these waters, while also being enabled to release that entrepreneurial genius of freedom.