The MLM Industry is Lobbying Hard to Prevent the FTC From Expanding the Business Opportunity Rule to Cover MLM Opportunities

The latest House appropriations bill, H.R. 4664, includes a provision designed to starve the Federal Trade Commission of the funds necessary to effectively regulate the multilevel marketing industry.   Section 531 of this massive bill provides that “[n]one of the funds in this Act may be used to finalize or enforce the “Trade Regulation on the Use of Earnings Claims” or the “Review of the Business Opportunity Rule” rulemakings without a clear statement of need or unless overlapping rulemaking and improvements in self-regulation and consumer protection of industries that would be impacted is considered.”   To appreciate the impact of this provision it is necessary to give some background on these rulemakings, and the responses of the MLM industry and its allies.

On March 11, 2022, the FTC released an “Advance Notice of Proposed Rulemaking” (ANPR) concerning deceptive earnings claims in a variety of industries, including the MLM industry. The Commission received over 1500 public comments, the vast majority (approximately 95% by my rough tabulation) from victims of MLM scams.   There were some responses by the MLM industry, including the Direct Selling Association and some of the members of the Congressional Direct Selling Caucus.   I will discuss these comments in an upcoming blog.  

On November 25, 2022, the Federal Trade Commission released an ANPR concerning its Business Opportunity Rule, pursuant to its policy of reviewing the “efficiency, costs, benefits, and regulatory impact” of its rules every ten years.  As part of this review process, the Commission solicited public comments on “whether the Rule should be extended to include business opportunities and other money-making opportunity programs not currently covered by the Rule, including business coaching and work-from-home programs, investment coaching programs, and e-commerce opportunities.”    The failure to mention multilevel marketing in this list is curious, especially since the Commission did not hesitate to include MLM among the industries targeted by its ANPR concerning deceptive earnings claims.

However one reads the tea leaves, it appears that the MLM industry believes that regulation is in its future, and its lobbying machine is thrumming in full gear to prevent this, including public comments from a variety of business organizations and political friends, including members of the Congressional Direct Selling Caucus.   The Commission’s effort to regulate MLM is shaping up to be a classic battle between slick, sophisticated, professional lobbying and a decentralized, modern day, grass-roots movement on social media.

The Biz Opp Rule became effective on March 12, 2012.   It requires certain business opportunity sellers to disclose five categories of information to prospective purchasers at least seven days before the purchaser signs any agreement or makes any payment.   The information required to be disclosed includes the seller’s identity, substantiation for any earnings claims, litigation involving the seller or key personnel, the existence and terms of any refund policy, and a list of prior purchasers of the opportunity.   Sellers of franchises were exempted from the Biz Opp Rule because they were already covered by the Commission’s Franchise Rule, which has been in effect since 1979.   Sellers of multilevel marketing opportunities were also exempted – even though they are not covered by the Franchise Rule, because – in my cynical view – they have an extremely effective and well-funded lobbying organization.

Is the Commission reconsidering the exemption of MLM from the Biz Opp Rule?   Possibly.   The ANPR only mentions “multilevel marketers” in a footnote.    The key sentence in the main text states that “[t]he Commission will also consider any comments previously submitted in response to the Advance Notice of Proposed Rulemaking Concerning Deceptive or Unfair Earnings Claims that are relevant to these questions or any other issues related to the Business Opportunity Rule’s current requirements.”  In footnote 8 the Commission explains that “[i]n that matter (i.e., the ANPR concerning deceptive or unfair earnings claims), No. R111003, the Commission solicited and received comments about the following industries: multilevel marketers, for-profit schools, and gig platforms. The Commission will consider whether to propose one or more rules addressing the topics raised in those comments as part of that rulemaking, where it may also address other topics raised in that advance notice of proposed rulemaking relating to deceptive or unfair earnings claims” (emphasis supplied).

The backstory here is that after the Commission issued its ANPR concerning deceptive earnings claims it received over 1500 public comments, of which approximately 95% were from individual victims of MLM scams urging the Commission to do something about MLM.  On the one hand, by stating that it will consider those comments as part of the Biz Opp Rule review, the Commission may be suggesting that it will address unfair and deceptive practices by MLM sellers in a revision to the Biz Opp Rule.   On the other hand, the reference to “that rulemaking” in Footnote 8 could be read to suggest that the Commission will only consider comments concerning MLM as part of its unfair and deceptive earnings claims rule-making, or perhaps an entirely new rule devoted specifically to MLM.    I have no idea whether this is strategic ambiguity or if the Commission has decided that expanding the Biz Opp Rule is off the table.

Certainly, the MLM industry appears to believe that the Commission may be considering a regulation that would affect MLM companies, and that the MLM exemption in the Biz Opp Rule might be in jeopardy.   The concerns of the MLM industry are expressed in four letters that were submitted to the Commission in connection with its announcement about the Biz Opp Rule, including a letter from the Direct Selling Association, a letter from the Chamber of Commerce, a letter from Senators Michael Lee, Mitt Romney and Marsha Blackburn, and a letter from Representatives Richard Hudson, Marc Veasey and Tim Walberg.    All of these letters argue against regulation of MLM companies, and their basic arguments are similar.  

MLM Industry Argument #1 – Regulations Will Cause Conflict and Confusion

All of the letters complain about the Commission’s parallel rulemakings concerning unfair and deceptive earnings claims and the Biz Opp Rule.  The letters warn in the most dire terms that these regulations, which have yet to be proposed, will subject MLM businesses to conflicting standards and will cause great confusion.  The letters uniformly argue that the Commission should go forward with a rule regarding earnings claims before proceeding with its review of the Biz Opp Rule.

The solution to this imaginary quagmire is quite simple.   Any rule regarding deceptive earnings claims should exempt sellers which are covered by the Franchise Rule or the Biz Opp Rule.   Both the Franchise Rule and the Biz Opp Rule include detailed provisions concerning earnings claims, so there is no need for a new rule that would prohibit deceptive earnings claims by businesses subject to these rules.   The Commission’s rule-making proposal concerning earnings claims is clearly intended as a catch-all, covering a wide range of industries that are not already subject to a more specific rule, including coaching or mentoring, education, work-from-home, “gig” work and other job opportunities, multilevel marketing, franchise, e-commerce and other business opportunities, chain referral schemes, other investment opportunities.   In fact, one of the questions for which the Commission sought public comment in the earnings claims ANPR was “Should a rule addressing [unfair or deceptive earnings claims], exempt from its coverage businesses or individuals that are subject to the Business Opportunity Rule, the Franchise Rule, or the Telemarketing Sales Rule?”  (question 18).   Drafting this sort of exemption is very easy, and the Commission knows how to do it.   For instance, the definition of “business opportunity” in the Biz Opp Rule is broad enough to include some businesses that are already covered by the Franchise Rule.   Accordingly, the Biz Opp Rule includes a provision which exempts businesses that are governed by the Franchise Rule.   The MLM industry’s ominous forecast of conflict and confusion is overblown.

Protect Micro-Entrepreneurs?

In making their conflict and confusion arguments, the DSA letter and the Hudson/Veasey/Walberg letter refer to “millions of micro-entrepreneurs.”  Similarly, the Lee/Romney/Blackburn letter refers to “millions of small businesses.”   These phrases are clearly intended to suggest that the burden of potential MLM regulations will fall entirely on the backs of hapless MLM distributors.   Of course, it is true that in MLM schemes, the distributors are also the recruiters of new distributors, who are trained to use scripts and techniques developed by the MLM company and its high level distributors.  The specter of low level distributors having to comply with a complex pre-sale disclosure rule would be alarming if that is what the Commission intended.   But, of course, that is not what the Commission is intending.   The targets of the proposed regulation are the MLM companies, not the millions of distributors who are trained to parrot standard recruitment pitches.   Again, this is an issue which can easily be addressed through appropriate drafting.   The burden of any regulation should be squarely placed on the MLM companies, not only in preparing the disclosure document but also in developing procedures to ensure that the disclosure document is timely provided to the prospective distributor and enforcing rules prohibiting deceptive earnings claims.

MLM Industry Argument #2 – Don’t Mess with the MLM Exemption!

All of the letters argue that the Commission should not expand the scope of the Biz Opp Rule to cover MLM opportunities.   They assert that the Commission made the correct decision when it exempted MLM from the Biz Opp Rule and there is no reason to take a second look at the issue.   In essence they are arguing that the MLM exemption is sacrosanct. 

The purpose of the FTC’s ten-year review program is “to systematically review regulations to ensure that they continue to achieve their intended goals without unduly burdening commerce” and to determine whether a regulation should be “modified, streamlined, expanded, or repealed.”  No regulation is fixed in stone, or immune from reconsideration in light of experience.   Here, in the ten years following the adoption of the Biz Opp Rule the Commission has had substantial experience in bringing enforcement actions against MLM companies, including cases against:

These enforcement actions involve MLM companies from across the spectrum of the MLM industry, ranging from large, well-established MLM stalwarts like Herbalife, to relatively new start-ups founded by MLM veterans like Vemma and Success by Health.   They demonstrate that unfair and deceptive practices, including outrageous earnings claims, are endemic in the MLM industry.   Given that there are somewhere between 700 and 1,000 MLM companies operating at any given moment, the Commission’s current, case-by-case enforcement approach to MLM cannot possibly address all of the harm caused by these companies.

In addition, these enforcement actions demonstrate the importance of ensuring the Commission’s ability to obtain restitution as one of the remedies it can obtain against an MLM company.  In the two actions which post-date AMG Capital Management, LLC v. FTC, 141 S.Ct. 1341 (2021), Neora and Success by Health, the FTC has been forced to concede that it cannot obtain restitution under the statute which gives it the right to obtain injunctive relief.   While the Commission has been creative in developing methods for obtaining monetary penalties notwithstanding AMG Capital, none of these procedural work-arounds is ideal and none permits the FTC to obtain restitution for victimized MLM participants. 

The DSA letter, presumably unintentionally, provides another reason for taking another look at the MLM exemption.   The DSA notes that “Direct selling in the United States has substantially increased in the last decade. [sic] Growing by almost 44% since 2011.”   This increase in MLM since 2011 is another change in circumstance that justifies reconsidering the MLM exemption.

The Commission’s enforcement experience following the adoption of the Biz Opp Rule justifies the elimination of the MLM exemption.   Why should MLM be the only type of business opportunity that is not subject to a pre-sale disclosure rule?  If there is such a thing as a legitimate MLM then it would not be unreasonable to expect the MLM to behave in accordance with the standards that guide other business opportunity sellers.   This would include not only refraining from making deceptive earnings claims but undertaking an affirmative obligation to provide complete, truthful information about the opportunity being offered.  The existence of a rule would address the serious consumer protection problem posed by the MLM industry.   A rule, preferably covering both earnings claims and the structure of MLM compensation plans, is clearly justified.  

MLM Industry Argument #3 – Self-Regulation is Enough

Three of the industry letters argue that existing consumer protection is sufficient.   One of these (Hudson/Veasey/Walberg) refers to improvements in consumer protection since the decision to exempt MLM from the Biz Opp Rule, but does not identify any such improvements.  Two of them (DSA and Lee/Romney/Blackburn)  point to the DSA’s development of the “Direct Selling Self-Regulatory Council” (DSSRC) as the supposed increase in consumer protection.   None of the letters references any other improvement in consumer protection that would obviate the need for the FTC to act.

Has the DSSRC resulted in additional, sufficient consumer protection?   The answer is no.   The DSSRC is simply the latest chapter in a long history of ineffective self-regulation by the MLM industry, as Bonnie Patten of Truth in Advertising (TINA) points out in a recent law review article.   Patten points out that the DSA has touted its “Code of Ethics” since 1970 as “stringent guidelines” for earnings claims, product claims and other practices.   Notwithstanding this, TINA has identified thousands of examples of deceptive earnings claims and product claims by DSA members.   The creation of the DSSRC in 2017 has not had a discernible impact on the prevalence of these claims.   The DSSRC has no effective enforcement power and its findings have been ignored by MLM companies, whether or not they are members of the DSA.

To provide one example of ineffective enforcement, consider my recent blog on the litigation between two MLM companies, Usana and Ariix (FTC Obtains Court Order Shutting Down “Success by Health” MLM and Prohibiting Defendants from Participating in Any MLM Program). In a nutshell, Usana, a DSA member in good standing, is alleged by Ariix to have secretly paid for favorable product reviews by a third party ratings service. There is no indication that the DSSRC has taken any action to investigate these claims, despite the devastating evidence of Usana’s deceptive claims that is set forth in Ariix’s court pleadings.

Patten explains that a key component of any industry self-regulation program is the threat of punitive enforcement; “[t]hreats alone will not suffice to persuade the industry; the FTC needs to take direct and forceful action that results in punitive enforcement – punishment severe enough to motivate the industry to want to work toward ending the constant and continual use of deceptive marketing within direct selling.”   Unfortunately, as Patten notes, “the Commission has yet to publicly pursue any DSSRC referral and as a result of this inaction, it appears that more and more direct selling companies faced with such a threat are defying the Council and playing the odds that the FTC will do nothing.” The DSA also points to this failure and argues that the FTC should bring more enforcement actions (implicitly against non-DSA members) rather than proceed with any rulemaking efforts. But this argument misses the point – any effective industry self-regulation program must carry with it the effective deterrent of agency enforcement actions, and FTC enforcement actions will be hamstrung without an effective rule giving it the right to seek restitution for ripped off MLM distributors.

Chamber of Commerce Invokes the Major Questions Doctrine

The Chamber of Commerce raised an issue not mentioned in the other letters concerning the application of the “major questions” doctrine, citing West Virginia v. Environmental Protection Agency, 142 St. Ct. 2587 (2022).   This is a frivolous argument, which is probably why it is not repeated in the other three industry letters.

Under the major questions doctrine, courts “expect Congress to speak clearly if it wishes to assign to an agency decisions of vast economic and political significance.” Utility Air Regulatory Group v. EPA, 573 U. S. 302, 324 (2014)   In West Virginia v. EPA the doctrine was applied to block an EPA regulation that the Supreme Court found would “substantially restructure the American energy market.”   Similarly, in Utility Air the Supreme Court rejected the EPA’s claim of “unheralded” regulatory power over “a significant portion of the American economy,” by regulating greenhouse gases.    In FDA v. Brown & Williamson Tobacco Corp., 529 U. S. 120 (2000), the Supreme Court reversed the FDA’s effort to regulate the entire tobacco industry. 

The FTC’s effort to regulate earnings claims or pre-sale disclosures in the MLM industry would not have anywhere near the economic impact of cases where the Supreme Court has applied the major questions doctrine.   The DSA claims that in 2022 total retail sales by the “direct selling” industry (which is essentially identical to the MLM industry), were $40.5 billion.  In contrast, according to the National Retail Federation, total retail sales in the U.S. in 2022 were $4.94 trillion.   Accordingly, MLM industry sales constitute less than 1% of total retail sales. 

A rule that MLM promoters refrain from making deceptive earnings claims would not be “unheralded.”    As set forth in its Notice of Penalty Offense dated October 26, 2021, the Commission has been bringing enforcement actions against business opportunity sellers for making deceptive earnings claims for over 80 years.  For instance, in Von Schrader Mfg. Co., 33 FTC 58, 63-65 (1941), the FTC sued a seller of commercial carpet cleaning equipment for making deceptive claims about the income purchasers could make.   Prohibiting deceptive earnings claims is part of the FTC’s bread and butter.

Similarly, a rule that MLM companies provide pre-sale disclosures to prospective distributors should not be controversial.   Franchisors have been subject to pre-sale disclosure requirements since 1979 and franchising remains an extremely popular and successful business model.   Sales by the franchise industry topped $800 billion in 2022, more than 20 times the sales claimed by the DSA.  Other business opportunity sellers have been subject to the FTC’s Biz Opp Rule since 2012.   The Biz Opp Rule includes both a pre-sale disclosure rule and a prohibition of deceptive earnings claims.  Business opportunity sellers have not provided any data that would support an adverse impact on them as a result of this regulation.

Finally, I note that there has been no successful challenge to the FTC’s authority to regulate franchising and business opportunity selling based on the major questions doctrine or any other Constitutional principal.   These regulations are well within the FTC’s specific grant of Congressional authority to protect the public from unfair or deceptive acts or practices in trade or commerce.  There is no reasonable argument that a prospective MLM regulation would run afoul of the major questions doctrine.

DSA Argues that Disclosure Regulation Will Discourage Prospective Distributors

The DSA argues that “the requirements that could have been imposed under the BOR substantially chilled the interest for being involved in direct selling.”    This is a head-scratcher.   If truthful disclosures discourage a prospect from joining an MLM, the regulation is doing its job.   If it really is a good opportunity, full disclosure should increase successful recruitment.  What is really behind this argument is the fact that the typical MLM recruitment process depends on the prospects not really understanding what they are getting into.   MLM trainers teach their recruits to avoid answering straight-forward questions; just get your prospects interested enough to come to an “opportunity meeting.”   Don’t tell the prospect that the opportunity involves selling or recruiting; in fact, don’t even tell them the name of the company or the fact that the company is engaged in MLM.   Complete and accurate disclosures will only interfere with this fundamentally deceptive process; for a more detailed discussion of the typical MLM recruitment process, see here.

DSA Argues that Disclosure Regulation is Outmoded – Just Use the Internet!

The DSA argues that disclosure regulation is unnecessary because “the internet and social media have resulted in more informed consumers who can easily and quickly research other consumer experiences in the business to make an informed decision.”  It also argues that consumers can search the internet for legal actions.   In other words, rather than get disclosures directly from the MLM company, prospective distributors should just do a google search.   This argument would be laughable if it weren’t being offered as part of a serious public policy proposal.   The information which would be the subject of any MLM disclosure regulation include the income and expenses incurred by MLM distributors, the numbers of distributors who achieve each level of the compensation plan, the attrition rates of distributors, and litigation involving the MLM company and its recruiters.   The MLM company is the exclusive source for most of this information.   Any information on the internet or social media is inevitably going to be incomplete or incorrect.  

The DSA’s “internet search” proposal is also disingenuous because MLM companies make every effort to prevent information they consider derogatory from remaining in the public domain.   This includes the use of a variety of search engine optimization techniques, non-disparagement clauses in MLM distributor agreements, and litigation against critics and whistleblowers.   Moreover, the standard MLM recruitment process includes “inoculation” against the recruit’s exposure to potentially negative information; recruits are commonly told that their friends and family may criticize their involvement in the MLM and that they should “avoid the dreamstealers.” 

DSA Argues that the Seven-Day Waiting Period is Unnecessary

One of the essential provisions of the Biz Opp Rule is the requirement that the required disclosures be provided to recruits at least seven days before the recruit signs any contract or makes any payment.   The Franchise Rule has a similar requirement; prospective franchisees must receive the disclosure document at least 14 days before signing any agreement or making any payment.    These waiting periods give the prospective distributor or franchisee time to research the opportunity, consult with advisors and other participants, and consider all of the relevant information without being pressured to make a decision on the spot.

It is difficult to make a cogent argument against requiring a waiting period.   If the opportunity is good today, it should still be good one week from today.   But the DSA makes a valiant effort, and argues that “[m]any direct sellers engage in the business for specific periods of time and purposes, such as around the holidays. Imposing a seven-day waiting period before being able to sell would delay the earning opportunities for potential participants who may want to start selling immediately to meet these needs.”    In other words, imposing a waiting period will result in the distributor losing seven days’ worth of sales.   The DSA, which could easily get supporting data from its members, does not provide any data supporting this argument.   Presumably, if there are “many” direct sellers who feel the urge to engage in business around the holidays we should see a bump up in U.S. sales around Christmas.   The available data does not indicate any increase in holiday sales; in fact, the opposite.  To take an example from one of the largest MLM companies, Herbalife’s quarterly U.S. sales in 2019 through 2022 were as follows:

2019

Q1       256,472

Q2       278,273

Q3       257,110

Q4       233,642

2020

Q1       277,734

Q2       385,959

Q3       398,703

Q4       310,527

2021

Q1       360,488

Q2       411,351

Q3       354,810

Q4       302,219

2022

Q1       326,186

Q2       343,505

Q3       317,532

Q4       274,979

In each year, without fail, fourth quarter sales, which would include Christmas holiday sales, were substantially lower than the previous quarter.   The DSA’s “holiday sales” argument was made up out of whole cloth. There is no serious doubt that the theoretical loss of seven days worth of sales by new distributors is far outweighed by the benefits of a seven-day waiting period.

The DSA also argues that the seven-day waiting period is unnecessary because its Code of Ethics require MLM sellers to repurchase inventory and sales aids at 90% of cost.    Of course, the DSA’s Code of Ethics only applies to the dwindling membership of the DSA.   There are hundreds of MLM companies which are not DSA members.   More importantly, the 90% repurchase requirement does not prevent losses to MLM participants; it does not apply to business expenses incurred by participants.   As Herbalife notes in its 2022 Form 10-K, “our Members also bear a portion of our consumer marketing expenses, and our sales leaders sponsor and coordinate Member recruiting and most meeting and training initiatives.”   None of these expenses are within the scope of the DSA’s Code of Ethics repurchase provision, which only applies to “inventory and sales aids.”   Moreover, many MLM distributors are urged by their upline to give products to prospects as part of their recruitment process.  Such products are expenses to the distributor but would not be reimbursable under any repurchase provision.

Most importantly, the DSA’s argument against the waiting period ignores the impact of the “sunk cost” fallacy, a well-known cognitive bias.   People who make the decision to spend money on a new MLM opportunity are likely to continue to spend money on it, even when they are losing money, rather than admit to themselves that they made a mistake.   One of the beneficial effects of a waiting period is to delay that initial investment, thereby lessening the impact of the sunk cost fallacy.   Of course, this is precisely the effect that the MLM industry wishes to avoid.

Another MLM Industry Tactic – Starve the Federal Trade Commission

If anyone ever doubted the power of the Direct Selling Association, the MLM industry’s lobbying machine, they are sadly mistaken.   Section 531 of H.R. 4664 is a prime example.   Here is a massive, comprehensive, “must pass” appropriations bill and the MLM industry has managed to insert a provision that would pull the rug out from under the FTC’s effort to protect consumers from MLM scams.   While the  policy arguments put forward by MLM proponents are extremely weak, they may succeed through the simple expedient of starving the FTC of the funds necessary for it to do its job.

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