FTC Staff Publishes Guidance for Multi-Level Marketers

On January 4, the Federal Trade Commission (FTC) announced the release of a new guidance by FTC staff concerning Multi-Level Marketing (MLM). The guidance, in the form of questions and answers, addresses issues relevant for businesses evaluating their compliance with the FTC Act.

Multi-level marketing is a business model used in a wide variety of industries, including the dietary supplement and cosmetic industries. Generally, an MLM distributes products (or services) through a network of individuals.  These individuals essentially comprise the sales force.  They are not employees but independent contractors.  The business model relies on the sales people not only selling product but also recruiting additional individuals who, in turn, want to sell products and also recruit additional sales people.  Thus, the model results in multiple “levels” of distributors/members/participants.

The FTC has a long history of challenging unfair and deceptive MLM practices. Recent actions regarding MLM practices concerning dietary supplement companies include actions against HerbaLife International of America (July 15, 2016), and Vemma Nutrition Comp. (Aug. 26, 2015). The orders in these cases, as well as other  FTC documents, e.g., a 2017 letter by former FTC Chairwomen Edith Ramirez provide insight into FTC’s expectations regarding a lawful MLM business. The newly released Guidance memorializes and expands on the principles set forth in these documents and clarifies the factors that the FTC will consider in assessing whether a company has committed unfair and deceptive acts or practices in violation of the FTC Act.

Whether an MLM is lawful is a fact-specific determination. For FTC, primary issues are the compensation structure (which should be based on actual sales to actual consumers (rather than on purchases by distributors)) and the representations of earning potential by distributors/members/participants.  The guidance addresses specifics such as “internal consumption” (consumption by the distributors themselves), what evidence is needed to validate that sales are indeed retail sales and income and business opportunity claims used to recruit new distributors.  The guidance also addresses compliance programs.  An MLM should develop a compliance program.  The program should include monitoring of distributors/participants to ensure they also comply with applicable policies and procedures, particularly those related to claims, sales validation, and other consumer protection-oriented policies.

The guidance serves as an important reminder for MLM businesses. Companies would be well-served to (re)evaluate their business practices and compliance programs in light of the new guidance and other FTC materials, including the FTC orders.  (Unfortunately, the guidance does not link to that information.)

The guidance is final. It summarizes existing law or FTC cases, and provides tips and advice to consumers and businesses but is not itself binding.