In the first Star Wars, the evil empire reveals its master plan of subjugating the galaxy with its awesome weapon: the Death Star. We all know how it ends, Luke Skywalker, against all odds, blows it up. 1 shot…in some sort of vent, triggers a chain reaction that destroys the entire thing. Needless to say, someone likely got fired (or force choked) for that design oversight.
In normal circumstances, that would’ve been enough to end the conflict. The good guys win. Bad guys lose. Prosperity reigns. But the evil empire was not so easily squashed. They came up with a brilliant response, a response that nobody anticipated: they just built another one!
Spoiler alert: that one blew up too in “Return of the Jedi.” Then they built another one that blew up in “Force Awakens.” Then they basically built another one that blew up in “Rise of Skywalker.” Say what you will about the evil empire, but they loved their death stars.
FTC’s Death Star
And by now you’re asking, “Kevin…what in the world does this have to do with MLM law?” Fair question.
The FTC had its own death star. They used it for over 40 years, pointing it at unsympathetic operators, blowing up companies mercilessly without spilling valuable federal resources. They were able to circumnavigate the annoying “due process” thing and destroy companies with minimal effort. Their rationale: the ends justified the means. Their allies cheered them on, they boasted of their numerous successes in court even though the contests were never fair (not even close).
On April 22, 2021, the FTC’s death star blew up. And just like Luke Skywalker sending the tiniest of missiles into the tiniest of targets, an unlikely litigant ruined the FTC’s favorite tool.
The FTC Strikes Back
After facing a humiliating defeat before the Supreme Court, the FTC has decided to build another weapon of mass destruction. Obviously, the FTC cannot exist in a world where its targets are given opportunities to defend themselves. The standards of “unfair and deceptive” are too amorphous. The career employees at the FTC need to have broad discretion to blast companies they personally deem offensive. The FTC must, at all costs, find another way to easily “put down” companies they deem to be bad actors.
This weapon is referred to as the “Penalty Offense Authority” (hereinafter POA). The Penalty Offense Authority, as written about in an article by a Washington DC employee, and current FTC commissioner, Rohit Chopra, is a power that’s been hiding in plain sight since 1975. In a nutshell, the POA gives the FTC the power, Chopra claims, to put entire industries on notice of improper behavior. Then, when a company violates the standard (e.g. makes an inappropriate income claim), the FTC can immediately levy a penalty. Unlike in the old days when the FTC was limited in the amount of funds it could recover, the POA opens up the door for the FTC to recover funds dramatically in excess of what was collected by the business. This, Chopra argues, would serve as a deterrent for actors in the space. Violate the rules, get your planet blown up.
In his article titled “Lessons in Missing the Point,” brilliant legal mind, and Thompson Burton partner, Kevin Grimes illustrates the threats posed by POA. Grimes wrote,
The FTC has spoken clearly that: it intends to use a new strategy (the POA) to deal with widespread offenses of the FTC Act; it intends to target income claims; it intends to target income claims within the MLM industry; and one of the top five industries on its hit list is multilevel marketing. . . [Under the POA], every time a distributor shares an income testimonial or shows a check, and every time a company website, video or marketing resource (without a proper IDS) is viewed by a prospect that makes income, it constitutes one violation of the FTC Act – with a possible maximum civil penalty of $42,000 per violation. Let us assume that a moderate size company and its distributors make 1,000 income claims per day. That is a maximum daily penalty of $42,000,000. Multiply that by 365 days, and you understand the potential penalty exposure a company can have.
Can the FTC Be Trusted?
In my opinion, the answer is no. This lack of trust is reasonable given the FTC’s violent mood swings about the industry.
They claimed Herbalife was not-not a pyramid scheme (odd language, I know); forced Herbalife to change to “operate legitimately;” and Herbalife…exploded in growth. If Herbalife was a pyramid, they would have dissolved within months after changing their business model to better account for customers;
They said that they prefer it when a company generates the majority of its revenue via retail sales. Neora had 60%+ in VERIFIED retail sales and the FTC sued them anyway. They did so using a nebulous standard that nobody had ever heard of concocted by a discredited academic from an obscure university.
The list goes on. Instead of pushing for clear legislation that delineates what is and is not a pyramid scheme, the FTC wants to maintain its broad powers that they can use to sucker-punch whoever they want.
What does all of this mean?
It’s all up in the air. The language coming out of the FTC seems ominous and downright frightening. My gut instinct tells me that the FTC will NOT be rewarded with new, more destructive powers after their humiliating loss before the Supreme Court. But I’ve been wrong before, once in 1990. It can happen again. While individual commissioners seem keen on vigorously getting involved in the network marketing industry, the new Chairwoman, Lina Kahn, seems hyper-focused on big tech. And this focus, in my view, makes a lot of sense. Amazon, Facebook, Apple, etc have all changed the structure of our economy in the span of a few years. The FTC will get more “bang for the buck” focusing on meaningful issues instead of suing companies that the FTC thinks are overcharging for face cream.