Last week, the Federal Trade Commission (the “FTC” or “Commission”) released legal multi-level marketing (“MLM”) guidance for direct sellers, providing important practice insights for those that follow the space.
What are the key takeaways for MLMs?
Legal Multi-Level Marketing Campaign vs. “Pyramid Scheme”
On January 4, 2018, the Commission issued non-binding guidance in question-and-answer format regarding legal multi-level marketing – the practice of distributing products or services through a network of salespeople who are not employees of the company and do not receive a salary or wages. The FTC condemns so-called “pyramid schemes,” which are MLMs where participants pay for product and the right to receive rewards for recruiting other participants into the program which are unrelated to the sale of the product to ultimate consumers.
The publication highlights two factors that the Commission is likely to consider when evaluating whether a direct seller is engaging in legal multi-level marketing or an illegal pyramid scheme:
- Whether the MLM’s compensation structure incentivizes or encourages participants to purchase product for reasons other than satisfying their own personal demand or actual consumer demand; and
- Whether particular wholesale purchases by participants were made to satisfy personal demand, or amount to mere “inventory loading” in an attempt to advance in the marketing program.
Because the compensation structure of a legal multi-level marketing program must be based on actual sales to real customers, the FTC stressed the importance of MLMs properly creating and retaining documentation of actual sales.
The FTC’s recent guidance stresses that MLM advertising and other messaging “must be truthful and non-misleading to avoid being deceptive under Section 5 of the FTC Act.” The Commission offered guiding principles for representations by legal multi-level marketing enterprises, including refraining from:
- Presenting generally unachievable results to participants (e.g., presenting themselves as a get-rich-quick scheme or sustainable career);
- Sharing misleading endorsements and testimonials; and
- Using unrealistic hypotheticals in recruitment materials (e.g., “if you recruit 30 people who each sell $1,000 of product each month, you will earn $1,500 a month”).
The FTC’s recent publication calls on consumers to seek out and report MLMs who they believe do not comply with one or more of the various laws and regulations enforced by the Commission relating to advertising, marketing, sales, billing, privacy, data security, franchises and business opportunities, among other topics.
While properly-structured legal multi-level marketing campaigns can be lucrative and efficient, applicable MLM regulations are complex and nuanced. The FTC’s recent guidance in this space serves to reinforce the importance for MLMs to engage knowledgeable marketing counsel to review program terms and conditions and related marketing materials prior to launch to determine whether the subject campaigns comply with applicable law.