Moving Forward, Here’s What the FTC’s Order Requires Herbalife to Do

Kevin Thompson Shares His Legal Insight To The Herbalife Settlement

Herbalife

After a two year investigation, Herbalife has agreed to pay a $200 million fine to the FTC and act in accordance with prescribed measures. With this morning’s announcement of a settlement, investors and proponents/opponents of the MLM industry alike are attempting to process what it all means for the Company’s future. Before we provide you an in-depth analysis of the stipulations found within the FTC’s Order for a Permanent Injunction and Monetary Judgment, it’s important to remember that these prescribed actions only apply to Herbalife and not multi-level marketing companies collectively. In response to a question in which she was asked what kind of implications the settlement will have on the network marketing industry , FTC Chairwoman Edith Ramirez stayed mum on its long-term implications and stated rather plainly that the FTC would soon be providing additional guidance on legitimate network marketing companies. That aside, let’s get down to business and clarify what the FTC’s order does and does not say.

THE BIGGEST TAKEAWAYS

Macro Perspective

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FTC Settlement with Herbalife – OMG!!!!

Network marketing is in the midst of a rapidly advancing Orwellian era.

herbalife

Network marketing is in the midst of a rapidly advancing Orwellian era. It’s been slow to develop, starting in 1996 when the Ninth Circuit Court of Appeals issued its decision in Webster v. Omnitrition, but it’s snowballed in the past two years.  Today the snowball grew exponentially with the announcement that the Federal Trade Commission and Herbalife have reached a settlement agreement.

Watch for detailed updates and analysis on the settlement. We’ll break it down into many little pieces to determine how it will impact your business. But today we just have time for a broad sweep so I’m just going to address some critical topics.

The obvious first question is: “Does this settlement affect my business?” It’s certainly an important question. After all, the FTC was investigating Herbalife and analyzing Herbalife’s program, so why should it apply to any other company? The answer is two-fold. There’s the technically correct answer, and the real-world practical answer. The technically correct answer is that the FTC settlement with Herbalife has no binding impact on any other network marketing business. The real-world answer is quite different.  The changes that Herbalife must implement offer a clear roadmap to the standards that the FTC expects all direct sellers to conform, and those are the standards that it will pursue in future cases against direct sellers.

There’s no law that requires direct selling companies to adhere to all of requirements in the Herbalife settlement. But those who stick their head in the sand and ignore the messages in the Herbalife settlement agreement do so at great peril. By now you’re certainly wondering what the settlement agreement requires. Here’s a high level summary of the most critical issues that will impact every network marketing program:

  1. The FTC has asserted a new basis upon which to attack MLMs under Section 5 of the FTC Act. They claim that Herbalife was “promoting participation in a multi-level marketing program with a compensation structure that causes or is likely to cause harm to participants.”

This is a groundbreaking position. Historically, the FTC has attacked MLM programs as pyramid schemes, but in the Herbalife settlement there’s no assertion that Herbalife is an illegal pyramid (that’s great news for Herbalife!). Rather, the settlement agreement asserts “the compensation structure is likely to cause harm.” This is a new angle of attack that requires a new analysis of compensation plans and programs. The legal standard of what constitutes a harmful compensation plan is not defined in any case law. The Herbalife settlement is the first glimpse we’ve had into what is a “harmful compensation structure.”

  1. Sales to non-participants in the business opportunity remain foremost in the FTC’s consideration of what constitutes a legitimate multilevel opportunity. The FTC acknowledges that some personal consumption of products by Herbalife distributors is appropriate. What’s critically important is that the settlement agreement specifies that no more than one-third of multilevel compensation may be paid from sales to distributors. Conversely, the FTC expects at least two-thirds of product sales to be to customers (i.e., those who are NOT distributors). Also of critical importance is that the settlement agreement very clearly delineates distributors from customers. The argument that distributors who don’t earn anything but who to buy products are “discount buyers” and not distributors will not hold water.
  1. To the extent that the program required distributors to meet minimum quotas to qualify for compensation, the minimum quotas MUST be met through sales to customers who are not distributors. This is a CRITICAL takeaway from the settlement because it stabs directly at the heart of the very common element of multilevel compensation plans that set minimum personal volume quotas necessary to be “active,” which is a prerequisite to being eligible for compensation.
  1. Distributors are PROHIBITED from participating in an auto-ship program. Yes, you read that correctly. Stop and take a deep breath. Now read it again. I don’t need to expound on that one.

There are A LOT of other elements to the settlement that are incredibly significant, and much further analysis needed on the points addressed in this blog. We’ll focus on the many facets of the settlement agreement in the very near future. But the above are such foundational concerns that every company using a multilevel compensation structure must be thinking about how to deal with this NOW. If these are the standards that the FTC will seek to impose on all multilevel marketers (and I fully expect that they are), it will impact EVERY direct seller and the structure of the overwhelming majority of direct selling businesses.

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Herbalife to Restructure Operations, Pay $200 Million to Settle FTC Charges

Herbalife States USA Revenues Only 20% Of Total Company Revenues!

Angle Of Justice

Note: See an overview of how this settlement affects network marketers, and watch out blog for detailed analysis and updates.

Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd. will restructure their U.S. multi-level marketing business operations and pay $200 million to compensate consumers to settle the FTC complaint that the Herbalife companies deceived consumers into believing they could earn substantial money their products.

The FTC complaint also charged that Herbalife’s compensation structure was unfair because it distributors were rewarded for recruiting others to join and purchase products in order to advance in the MLM program, as opposed to actual retail demand for the product, causing economic injury to many distributors.

According to the complaint, Herbalife claimed that people could earn thousands of dollars a month or even get rich in the program. But the complaint alleged that the majority of distributors earn little or no money, with more than half the distributors known as “sales leaders” receiving less than $300 in rewards for 2014. According to a survey by Herbalife itself, Nutrition Club owners spent an average of about $8,500 to open a club, and 57 percent of club owners reported making no profit or losing money.

Those distributors who do make a lot of money, according to the complaint, are compensated for recruiting new distributors, regardless of whether those recruits can sell the products they buy from Herbalife.

As part of the settlement, Herbalife will change its compensation system so that it eliminates recruiting incentives and rewards retail sales to customers. As examples of the changes, the FTC says:

  • Herbalife will differentiate between participants who join simply to buy products at a discount and those who join the business opportunity.
  • At least two-thirds of rewards paid to distributors must be based on tracked and verified retail sales of Herbalife products. No more than one-third of rewards can be based on other distributors’ limited personal consumption.
  • I order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be to legitimate end-users. Otherwise, rewards to distributors must be reduced.
  • Herbalife is prohibited from allowing participants to incur the expenses associated with leasing or purchasing premises for “Nutrition Clubs” or other business locations before completing their first year as a distributor and completing a business training program.

In addition, Herbalife will pay a $200 million for consumer redress, including money for consumers, such as Nutrition Club owners, who purchased large quantities of Herbalife products.

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Crowdfunding and Network Marketing: Part II

Thomas Ritter Explains Title III Of The JOBS Act For Direct Selling

monopoly

In Part 1 of the crowdfunding series, I discussed the rise of the crowdfunding phenomenon and Title III’s recent enactment under the JOBS Act. While Title III may appear to be an attractive avenue  of capital fundraising for entrepreneurs and startups, founders of a network marketing company may find it a boardwalk littered with more stops than gos. As for crowdfunding as a MLM product service or offering, in my opinion, its a chance to go directly to jail. 

TITLE III CROWDFUNDING AS WAY FOR MLMs TO RAISE CAPITAL

If you remember, the benefits of a Company looking to use Title III appear numerous. Title III provides the ability to raise up to $1 million without having to deal with burdensome SEC requirements. For an MLM looking for startup funding, what’s not to like?  Well . . . er, money for one. The logic goes something like this: you have to have money if you want to raise money.

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Use of Provisions to Limit a MLM Distributor’s Claim for Damages

What Is A Wrongful Network Marketing Termination?

termination

When a distributor is terminated by his or her MLM company, he or she may claim breach of contract and seek recovery of his or her past and future commissions. After all, the distributor may have worked for months or years to build up his or her downline only to have its income stream summarily stopped and taken by the company.

Read more on Use of Provisions to Limit a MLM Distributor’s Claim for Damages…

The post Use of Provisions to Limit a MLM Distributor’s Claim for Damages appeared first on Wellman & Warren LLP | Business Litigation Law Firm.

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Need a Financial Jolt? Get a JOB(S): Part 1

Reward-Based Crowdfunding Network Marketing Companies Are They Legal?

Thomas

The term “crowdfunding” has been thrown around a lot over the past several years. But what does “crowdfunding” really mean? And how does crowdfunding, particularly the recent enactment of rules from Title III of the JOBS Act, relate to network marketing? 

At its most basic, crowdfunding is the pooling of financial contributions via the internet for a project or enterprise.  The ubiquitous nature of the term has led to a great deal of confusion. However, “crowdfunding” is most easily understood as an umbrella term referring to three different models for raising capital: donation-based, rewards-based, and equity-based. Before discussing the challenges more commonly associated with equity-based donations, let’s cover the more commonly known types of crowdfunding.

DONATION AND REWARD-BASED CROWDFUNDING

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The Federal Anti-Pyramid Law (Summary and Analysis)

The MLM Attorney Provides A Legal Analysis On Federal Anti-Pyramid Law

MLM Attorney Kevin Thompson

Congressman Marsha Blackburn, House Representative of the 7th District of Tennessee, has proposed the Anti-Pyramid Bill Federal that aims to clarify the differences between pyramid schemes and legitimate network marketing companies. If you’re connected to the network marketing industry, whether as a distributor, executive, vendor or owner, the importance of this bill (or a modified version of this bill) is vitally important.

The Need for Clarity

As many of my readers know, I have aggressively advocated for almost a decade for the need to create cleaner guidelines in the industry. The “ocean of gray” that has separated legitimate direct selling from pyramid schemes has predictably led to some very serious challenges. As I accurately predicted in my first e-book titled “Saving the industry by defining the gray,” the fuzzy lines that distinguish legitimate and illegitimate network marketing has greatly contributed to today’s problems. In an environment with ample wiggle room, pyramid schemes can operate under the guise of legitimate network marketing. Zeek Rewards, notable ponzi scheme, did this better than all others. The veneer of legitimacy offered by legitimate network marketing allowed Zeek to amass tremendous influence and inflict significant harm. This, in turn, affects the entire profession.

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