The nature of the network marketing industry has evolved over the last several decades with new and innovative business models, yet the regulatory landscape has remained quite stagnant and vague. We are all aware of the landmark cases of Koscot and BurnLonge, FTC v. BurnLounge Case Summary, along with company specific settlements such as Vemma, Vemma Settlement Analysis, and Herbalife, Herbalife Settlement Analysis. However, the FTC’s action on October 6, 2021, putting 70 for-profit universities on notice of previous administrative decisions, welcomes an old power that the agency is resurrecting from the dead to re-establish its relevance in this new age of online commerce. This power is known as the Penalty Offense Authority (“POA”) found in Section 5 of the FTC Act, § 5(m)(1)(b) Federal Trade Commission Act; 15 U.S.C. § 45(m)(1)(b).
The POA is nothing new within the FTC’s arsenal but took a backseat to Section 13(b) until the Supreme Court axed that angle earlier this year. The FTC is now seeking to utilize the POA in order to seek and receive extensive damages (up to $43,792 per each violation) and enhance the Commission’s deterrence abilities. The strong call for the POA’s return originated most recently in an article by Commissioner Rohit Chopra, soon to be Director of the Consumer Financial Protection Bureau, and now Director of the Bureau of Consumer Protection at the FTC, Samuel Levine, entitled The Case for Resurrecting the FTC Act’s Penalty Offense Authority and may be read here. We have mentioned this article previously to discuss our position that the tides are changing at the FTC.
Until now, we all had to use our imaginations as to how this would work in practice. I’ve spoken with many experienced attorneys within the industry, including our very own Kevin Thompson, and none of them have seen the POA utilized. But the FTC has removed all doubt as to how they intend to implement the POA: On October 6, 2021, they sent “notice letters” to over 70 for-profit universities putting those entities on notice of industry infractions. The Notices are meant to serve as a warning for what the FTC has found to be violative conduct in the past. The Notice referenced three cases in particular dated from 1951, 1971, and 1980.
Following the FTC’s announcement of sending Notices of Penalty Offenses, Commissioner Chair Lina Khan tweeted her support for the POA’s return and even directly linked Chopra and Levine’s article.
1. @FTC is resurrecting its Penalty Offense Authority to put companies on notice that certain practices are unlawful and violators will be hit with significant financial penalties. We've started by putting 70 for-profit colleges on notice. https://t.co/UwMha3mTyI
— Lina Khan (@linakhanFTC) October 6, 2021
As a result, we find the article to be not only indicative of these Notices sent to for-profit universities, but also a roadmap for what’s to come for all within the FTC’s jurisdiction, which obviously includes the network marketing industry.
For-profit universities are undoubtedly an easy target to which the FTC is able to test this new strategy. Jason Altmire, President and CEO of Career Education Colleges and Universities (a for-profit lobbying group) said in response to these Notices that “[They] were also surprised that only for-profit institutions will be subjected to these enhanced civil monetary penalties, while other bad actors under the FTC’s jurisdiction will not be held to the same standard.” Our message to Jason: Don’t worry, this is just the start. Your industry is an easy target, it’s as simple as that. This is no longer the world of this is how it’s always been. This is Lina Khan’s world, and we best learn how to move with the current and not against it. As Samuel Levine stated, “To be clear, sending notices to the 70 for-profit schools, does not indicate that they are currently engaged in any wrongdoing… we are sending a decisive message to the industry at large that the conduct described in our notice of penalty offenses, is a violation of the FTC Act. . . If your school engages in that conduct, we can take action, and we will.”
A Notice of Penalty Offenses is meant to put an ENTIRE industry on notice, meaning this Notice is your warning so you best beware they are watching. This is why continuing the integrity of the industry is so important. In our view, the majority of companies in the sector are acting in good faith with good intentions. Nonetheless, regulators do not take the time to understand the nuances. This is politics after all and this approach generates good headlines.
So How Does It Work?
A simplified version of the steps through this process are:
(1) The FTC believes that one is violating Section 5 of the FTC Act through unfair or deceptive practices and sends a complaint to those alleged violators;
(2) Those violators are granted the opportunity to present their case for why the FTC is wrong at a hearing and also in writing (sounds like rubber stamping a previous decision to send the complaint but we will assume in good faith that it is not);
(3) The materials from the hearing are reviewed and the FTC determines whether there is sufficient evidence to proceed;
(4) If the FTC believes that there is enough evidence they will issue a Cease and Desist order outlining the violative conduct and ordering those violators to stop;
(5) These final Cease and Desist Orders are what the POA statute refers to, thus these orders may be sent to other violators and they become binding despite the recipients of these Notices not being parties to the original dispute;
(6) There are appeal procedures to the United States Court of Appeals for the original violators, but we will set that avenue aside for purposes of this article.
When it comes to Consent Orders (settlements such as Herbalife and Vemma), they are still only binding to those applicable companies as stated within the FTC’s 2004 Advisory Opinion regarding Pyramid Scheme Analysis. What truly matters is how active the FTC is wanting to make these Notices of Penalty Offenses. This statutory provision permits the Commission to make sweeping guidance avoiding the ordinary rulemaking procedures of the Administrative Procedure Act or continued lobbying of Congress. Yes, there are guidelines and safeguards, but this is an evolving trend that those in power within the regulatory space are beginning to revisit. We have continued to state that Section 13(b) removed an arrow from the FTC’s quiver, but the Supreme Court did not take away their bow as we have previously explained here: Invest in Yourself: AMG Capital Alone Will Not Save You. Section 13(b) lasted for decades in violation of the word of the law, do not think that regulators will “learn their lesson” and prevent that abuse of power from occurring again.
At Thompson Burton we remain vigilant of the regulatory environment across the board. When an industry has limited guidance or public action over the course of years, it can be easy to think you are sliding under the radar. The POA changes this and Notices no longer permit companies to play dumb. Compliance is key and it’s imperative that companies, candidly, start taking measures to minimize (or prohibit) income claims. If companies are unable to train their field to provide income disclosures 100% of the time when income claims are made, income claims should not be allowed at all. We’ll keep following the signals coming out of the FTC and providing content as needed.