Op-Ed by Jeff Babener in the World of Direct Selling: The New FTC Guidance…Imperfect, But a Good Start

January 23, 2018

Guest author Jeffrey A. Babener, of Portland, Oregon, is the principal attorney in the law firm of Babener & Associates. For more than 30 years, he has advised leading U.S. and foreign companies in the direct selling industry, including many members of the U.S. Direct Selling Association. He has served as legal advisor to various major direct selling companies, including AvonAmway, HerbalifeUSANA, and Nu Skin. He has lectured and published extensively on direct selling.

Jeff is a graduate of the University of Southern California Law School. He is an active member of the State Bars of California and Oregon.

Guest Post by Jeff Babener
The New FTC Direct Selling Guidance… Imperfect, But a Good Start

By Jeffrey A. Babener

© 2018

(First Published in World of Direct Selling)

Ring the bells that still can ring
Forget your perfect offering
There is a crack in everything 
That’s how the light gets in
Leonard Cohen… Anthem

The new FTC Direct Selling Guidance arrived in January, 2018. It built on the goodwill dialogue between the FTC and the direct selling industry that was ushered in by a well-received DSA presentation of acting Chairperson Maureen Ohlhausen in November, 2017.

Was it helpful to the conversation on “personal use” and “pyramid?” Yes. Was it perfect? No. There are two major ambiguity flaws (likely inadvertent) in the Guidance that must be discussed. Are these “cracks” in this Faberge Egg? Yes, but, that’s how the light gets in.

1. Did the FTC recognize that this area should be governed by 40 years of case authority rather than FTC administrative fiat? Absolutely. Did it miss a major characteristic of this well established industry? Yes. Even in this friendly guidance, the FTC was tone deaf to the reward tracking model used by leading direct selling companies (including Amway, Mary Kay, Shaklee, Tupperware) for more than 50 years, and never questioned by the courts, that follows wholesale movement of product with an underlying assumption that companies are capable of mandating, incentivizing and encouraging that product is accounted for: resold to ultimate users, personally used by distributors as ultimate users or returned under liberal one year buyback/refund programs. Should a successful half century model be upended…if the idea is to support an established industry, probably not.

2. The Guidance employs the term “driven by consumer demand” multiple times. The inadvertent implication is “driven by retail sales.” This semantic term is at odds with actual detailed Guidance discussion that concurs with the industry position that the pyramid test is “driven by sales to the ultimate user,” meaning that sales to distributors in reasonable amounts, for either personal use or resale, should be placed in the category of “sales to the ultimate user.” Perhaps the simple fix is a document global search and replace of “driven by consumer demand” with “driven by ultimate user demand.”

Is more FTC/Industry dialogue and adoption of H.R. 3409 (anti-pyramid bill) a good next step? For sure.

How we arrived at this dialogue…

The direct selling industry search for certainty in proposed H.R. 3409 has some real basis in the vacillating positions of the FTC. After the initial success of a MLM structure, by Amway, Mary Kay and Shaklee, in the 1950’s and 1960’s, the appearance of a true pyramid in Koscot and Dare to be Great, prompted the FTC to challenge the entire MLM concept, and specifically Amway, as being a pyramid. In 1979, an FTC administrative law judge rebuked the FTC, holding that Amway was a legitimate business opportunity, principally because it adopted what has come to be known, in all subsequent cases, as the Amway Safeguards:

1. A retail customer mandate that demanded distributors to enroll retail customers.

2. A 70% rule that demanded that product reordering was prohibited unless a distributor had sold or personally used 70% of product purchases.

3. A buyback policy for terminating distributors that offered a repurchase of product from terminating distributors.

4. Following up on Koscot’s requirement that MLM commissions should relate to sales to ultimate users, the Amway case also recognized that personal use in reasonable amounts constituted “sales to ultimate users.”

Little substantive legal precedent occurred for the next 20 years, after which the FTC started urging courts, ultimately unsuccessfully, that distributor personal use should not be viewed as a sale to the “ultimate user.”

Sufficient concern, in the industry, caused the industry to seek the 2004 FTC Advisory that seemed to guardedly recognize personal use.

However, the FTC drumbeat against personal use continued in court arguments and consent judgments. A reading of oral argument transcripts in the BurnLounge and Vemma cases demonstrates this animosity to personal use. In what some industry observers view as an opportunistic moment, in the Herbalife settlement, the FTC took advantage of the company’s need to achieve stability in financial markets, to achieve, what many industry observers viewed as a draconian settlement, shifting the test to a “percentages test,” effectively calling out “personal use” as a “second class” sale to “ultimate users” which did not deserve full recognition.

In what many viewed as an intimidating (but well-articulated) 2016 presentationEdith Ramirez to the DSA, Chairperson Edith Ramirez, effectively stated that there was a new “sheriff in town,” and that the FTC regarded the Herbalife settlement as the new FTC guidance.

Under the new proposed paradigm, “ultimate user” was to be viewed as “non-participant retail customer” and the Amway Safeguards, so often cited in 40 years of case authority, was thrown “under the bus.” Long established and accepted industry practices, autoship and wholesale tracking, were deemed persona non grata.

See: Fact Checking the FTC and also see: Searching for Certainty: H.R. 3409

Again this vacillation and, upending of case authority, caused great uncertainty in the industry. So much so, that the industry sought a bi-partisan introduction of H.R. 3409 to return the pendulum to the middle.

And then came the 2016 presidential election, the drive for less regulation, likely change of FTC commissioners, and suddenly, the FTC vacillated once again, walking back the Ramirez doctrine. In an extremely well-received November 2017 DSA presentation, Acting Chairperson, Maureen Ohlhausen, perhaps, in response to new proposed federal legislation (H.R. 3409) and a new anti-regulatory climate, pivoted away from a “take it or leave it” policy to one of cooperation, and one that recognized that case authority ruled the day as opposed to FTC guidance, which can change from staff to staff and commissioner to commissioner.

“There are a lot of nuances” packed in the Koscot Standard and analysis of legitimacy vs. pyramid, Chairperson Ohlhausen, importantly, noted, “I have instructed the FTC staff to meet with the various stakeholders, including the DSA, to discuss those nuances. We anticipate applying the information we’ve gained to issue future guidance, as well as to guide future law enforcement decisions.”

See: Stakeholders Come to the Table: H.R. 3409 

Old Common Ground; New Common Ground

And true to the Ohlhausen presentation, within two months, in January, 2018, the FTC announced its new formal Guidance, leaving Ramirez in the rearview mirror and culminating months of productive dialogue between the DSA and the FTC. Importantly, the FTC went on record as recognizing that case law trumps all, that every case is to be “fact driven,” that an “ultimate user” means “a real user” and recognizing the validity of personal use purchases so long as they are driven by “actual need” for product as opposed to driven by desire to qualify in the MLM compensation plan.

Old Common Ground

First, it is worthwhile to note those items in the new FTC Guidance for which the FTC and direct selling industry have long been on the same wavelength, and for which industry trade organizations, such as the DSA, have undertaken self-regulation.

1. Inventory loading is totally unacceptable. Its existence, even in the presence of a buyback policy or other consumer safeguards, will likely render a program to be a pyramid.

2. Unsupported earning representations, hypotheticals, potentials and lifestyle representations, in the absence of average earnings disclosures, are deceptive.

3. Industry self-regulation and regulatory cooperation is always welcomed.

4. Deceptive activity is never acceptable.

5. Individual company consumer safeguard compliance programs serve a very salutary purpose.

New Common Ground

Appreciated by the industry is the FTC Guidance published clarification on multiple points:

1. FTC Guidance is “non-binding.” The only authoritative guidance must come from case authority. And also, FTC Guidance is “staff guidance” and does not bind the FTC or its commissioners or the direct selling industry in any way.

2. FTC settlements and enforcement orders are not binding, they are not “guidance,” but rather they are examples of the FTC position in various cases.

3. Koscot’s “based on sales to ultimate users” is the prevailing authority on pyramid analysis. “Ultimate user” does not mean “non-participant retail customer” (as promoted by Ramirez), but rather sales to “real users.” This is very helpful to the dialogue. “Real users:” an interesting new turn of phrase by the FTC.

4. BurnLounge is the most current explanation of Koscot, providing:

a. Analysis in all pyramid cases is “case by case” and “fact driven” in which the overall program is examined by “the economic reality” of the offering.

b. Purchases for personal use by distributors are deserving of recognition as a sale to “ultimate users,” with the caveat that predominant intent of the purchase is to satisfy their own real product demand, for example, for resale or personal use, as opposed to a purchase made with the predominant intent to merely qualify in the compensation plan for rewards.

5. It is reasonable to expect a company to develop mechanisms to encourage retailing and to adopt a compliance policy that demonstrates that distributors buy product for their own real product demand, either for resale or personal use in reasonable amounts. And there is no right “one way” to accomplish demonstration of product purchase for the “right reasons.”

On the new common ground, it is probably best to hear from the FTC in its own words:

“Under Section 5 of the FTC Act, what is an MLM with an unlawful compensation structure, which is sometimes called a pyramid scheme?”

The most widely-cited description of an unlawful MLM structure appears in the FTC’s Koscot decision, which observed that such enterprises are “characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the product to ultimate users.” In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975).

“How do MLMs with unfair or deceptive compensation structures harm consumers?”

An MLM compensation structure that incentivizes participants to buy product, and to recruit additional participants to buy product, to advance in the marketing program rather than in response to consumer demand in the marketplace, poses particular risks of injury. Where such an unlawful compensation structure exists, a participant is unlikely to be able to earn money or recover his or her costs through selling product to the public. In such circumstances, participants will often attempt to recruit new participants who will buy product, and pressure existing recruits to buy product, with little concern for consumer demand. Where an MLM has a compensation structure in which participants’ purchases are driven by the aspiration to earn compensation based on other participants’ purchases rather than demand by ultimate users, a substantial percentage of participants will lose money.

“How does the FTC distinguish between MLMs with lawful and unlawful compensation structures?”

At the most basic level, the law requires that an MLM pay compensation that is based on actual sales to real customers, rather than based on mere wholesale purchases or other payments by its participants. In evaluating MLM practices, the FTC, in accord with established case law, focuses on how the structure as a whole operates in practice, and considers factors including marketing representations, participant experiences, the compensation plan, and the incentives that the compensation structure creates. The assessment of an MLM’s compensation structure is a fact-specific determination that the FTC makes after careful investigation.

“How does the FTC treat personal (or internal) consumption by participants in determining if an MLM’s compensation structure is unfair or deceptive?”

Product that is purchased and consumed by participants to satisfy their own genuine product demand – as distinct from all product purchased by participants that is not resold – is not in itself indicative of a problematic MLM compensation structure. For example, the final order entered in FTC v. Herbalife permits the payment of compensation based on personal consumption, subject to specific limitations and verification requirements. However, the FTC’s law enforcement experience has shown that MLM participants may buy product – and recruit or pressure other participants to buy product – for reasons other than their own or other consumers’ actual demand, such as to advance in the marketing program.

This issue, like all issues concerning the evaluation of an MLM’s compensation structure, is fact-specific and usually involves a comprehensive analysis of a variety of factors. It is worthwhile, however, to highlight two topics that the FTC is likely to consider when evaluating an MLM’s payment of compensation that is premised, in part, on participants buying product that is not resold. First, the FTC staff is likely to consider whether features of the MLM’s compensation structure incentivize or encourage participants to purchase product for reasons other than satisfying their own personal demand or actual consumer demand in the marketplace. Second, the FTC staff is likely to consider information bearing on whether particular wholesale purchases by business opportunity participants were made to satisfy personal demand. The persuasiveness of this information in any particular case will depend on its reliability.

The FTC’s case against BurnLounge provides an example. BurnLounge argued that its participants bought product packages consisting of sales websites and music-related merchandise because they wanted to use the merchandise. When BurnLounge’s product packages were untied from the business opportunity, however, monthly sales of these packages plummeted by almost 98 percent. At most, actual demand was responsible for only a small minority of package sales, and BurnLounge was found to have an unfair or deceptive compensation structure.

“Is it still correct, as stated in the 2004 “FTC Staff Advisory Opinion – Pyramid Scheme Analysis,” that “the amount of internal consumption in any multi-level compensation business does not determine” whether the FTC will consider the MLM’s compensation structure unlawful?”

Yes. Personal or internal consumption – meaning product participants purchase and consume to satisfy their own genuine product demand – does not determine whether the FTC will consider an MLM’s compensation structure unlawful. As noted in the answer to question 5, when evaluating the issue of participants’ internal consumption, the FTC staff is likely to consider, among other factors, both (i) whether features of the MLM’s compensation structure incentivize or encourage participants to purchase product for reasons other than satisfying genuine demand; and (ii) information bearing on whether purchases were in fact made to satisfy personal demand to consume the product. When evaluating MLMs, the FTC focuses on how the structure as a whole operates in practice and considers factors including marketing representations, participant experiences, the compensation plan, and the incentives that the compensation structure creates.

The 2004 letter should not be misconstrued as suggesting that an MLM can lawfully pay compensation on wholesale purchases that are not based on actual consumer demand by characterizing such purchases as “internal consumption.” The 2004 letter itself does not support such a construction, nor do subsequent judicial decisions. For example, the court in BurnLounge held that, notwithstanding the defendants’ characterization that participants bought packages for “internal consumption,” the compensation paid on such purchases was not tied to consumer demand for the merchandise in the packages; instead, the opportunity to advance in the marketing program was the major driver of package purchases. Similarly, in granting a preliminary injunction against Vemma Nutrition Company, the court rejected the argument that individuals who had joined as business opportunity “Affiliates” only wished to purchase product for their own consumption, finding that this claim was “not based in fact.”

“Does the FTC Act require MLMs to retain sales receipts?”

No, there is no such requirement. However, as discussed above, to comply with the FTC Act, the compensation structure of an MLM must be based on actual sales to real customers. Thus, documentation of actual sales to real customers provides relevant information concerning an MLM’s compensation structure.

There is no single method for creating and retaining such documentation. Different MLMs employ a variety of approaches to demonstrate that their product is sold to retail customers, including collecting retail sales receipts created by participants; having retail customers buy product directly from the company, rather than from a participant’s inventory; and having product users sign up with the company as customers who are not participating in a business opportunity. Other MLMs use other approaches or a combination of approaches.

The most persuasive documentation is obtained through direct methods and used to verify that retail sales are made to real customers. Documentation obtained through indirect methods – such as policies requiring participants to attest they have sold a certain amount of product to qualify to receive reward payments – are less likely to be persuasive, with unsupported assertions being even less persuasive.

Ambiguities to Discuss

There are two major ambiguity flaws (likely inadvertent) in the Guidance that must be discussed.

1. Wholesale Tracking

Former Commission Chairperson Ramirez was quite clear that, even with use of consumer safeguards, the 50 year practice of leading companies to base qualification and reward structure, tied to tracking of wholesale product, was “out the window” and would be viewed as evidence of “pyramiding.” In the future, autoship and wholesale tracking would be prohibited. And she threw the famous In re Amway FTC decision on the “ash heap” of history as antiquated, out of date and no longer useful to the pyramid analysis. Her analysis was not supported by 40 years of case authority. And, in the absence of inventory loading and enforcement of the Amway safeguards, no court has ever rejected MLM programs that measure activity based on wholesale tracking. Such a model has existed for 50 years, starting with, and continued, with multibillion dollar direct selling companies such as Amway, Mary Kay and Shaklee.

Although the new FTC Guidance does not attack the Amway Safeguards decision, the standard and decision is conspicuously absent from the Guidance. One wonders why? And a real ambiguity is presented on the use of wholesale tracking:

Par. 14… “In addition, an MLM’s compliance program should ensure that compensation paid by the MLM is based on actual sales to real customers, rather than based on wholesale purchases or other payments by its participants.”

In fact, this statement is internally inconsistent with other discussion in the guidance. Did the FTC Guidance really intend to upend a 50 year model as argued by former FTC Chairperson Ramirez? Is this intentional or an oversight that deserves more dialogue between the industry and the FTC?

As to the buy-sell dealer arrangement, direct selling industry practices reflect virtually every other buy-sell dealer arrangement across many industries. Whether it be for incentives, volume pricing, discounting, rebates, rewards, measures of the relationships are almost always tracked with wholesale movement of product, with the underlying assumption that reordering occurs because product does, in fact, reach the ultimate user, whether it is resold, used for personal use, and if not, subject to buyback.

2. Semantics: Replace “Consumer Demand” with “Ultimate User Demand”

 As noted, the guidance employs the term “driven by consumer demand” multiple times. The inadvertent implication is that this means “driven by retail sales.” This semantic term is at odds with actual detailed guidance discussion that concurs with the industry position that the pyramid test is “driven by sales to the ultimate user,” meaning that sales to distributors in reasonable amounts, for either personal use or resale, should be placed in the category of “sales to the ultimate user.”

How did this term, “consumer demand,” come to be used? Although speculative, it is probably a throwback to the DSA presentation of former Chairperson Ramirez in which she effectively rejected personal use as a legitimate part of the ultimate user analysis and equated the term “driven by sales to the ultimate user” as meaning driven by “sales to retail customers.”

Said Ramirez:

I will start by explaining what we mean by “real customers.” Simply put, products sold by a legitimate MLM should be principally sold to consumers who are not pursuing a business opportunity… So, what does an MLM organized around real customers look like? You can see one approach laid out in the recent consent order we obtained in the Herbalife case. The order identifies two classes of people who are not pursuing the business opportunity: “retail customers” who simply buy product from Herbalife distributors and do not have any direct connection to the company; and “preferred customers,” who have registered with Herbalife as customers and do not participate in the Herbalife business opportunity.

In so doing, she rejected 40 years of case law and even the FTC’s own 2004 Advisory Opinion. As late as the BurnLounge case, the FTC actually argued this position, and it was rejected by the court.

Acting Commissioner Ohlhausen and the FTC Guidance repudiated that analysis and returned to definitions in case law, in the substantive discussion, that would include in “sales to the ultimate user” sales in reasonable amounts for personal use or resale. In fact, the FTC Guidance backs off the Ramirez’s use of the term, “real customer,” and, at times, replaces it with “real user,” which encompasses both personal use users and resale users.

Unfortunately, the semantic term of “consumer demand,, chosen in the guidance muddies the water and really should be changed to reflect the intent of the guidance, and also to be consistent with case law. As noted, a possible fix is a document global “search and replace” of “driven by consumer demand” with “driven by ultimate user demand.”

Where Does This Leave Us?

As said in NY/NJ, if you are looking for a simple answer: “Fuhgedaboudit.” (Forget about it.)

As Acting Chairperson Ohlhausen noted, this entire area of interpretation is “nuanced.” Since the FTC Guidance is non-binding staff guidance, it is useful, but the case authority remains (in absence of passage of legislation such as H.R. 3409) as the real guidance:

Koscot: Pyramid is triggered by payment of consideration and a reward that is not based on “sales to the ultimate user.”

Amway: Adoption of Amway Safeguards, including a retailing mandate, a 70% rule and a buyback policy, if enforced, tilts to legitimacy.

Omnitrition: In the presence of inventory loading (in that case, $5,000) and inadequate enforcement of the

Amway Safeguards, a presumptive pyramid is present.

BurnLounge: This is a synthesis of earlier cases and represents the state of the law today.  Added to case law is recognition of personal use, by a distributor, as a legitimate ultimate user, but an analysis must be made as to whether distributor purchases are driven by real demand of the distributor, for resale or personal use, or whether the predominant/primary motivation for purchases is to qualify in the compensation plan. And the analysis is one that is “fact driven,” “case by case” and should take into account a factual investigation of the basis of distributor purchasing and the “economic reality” of the overall program. The analysis will be a nuanced balancing test of “good factors” and “bad factors.”

A good summary of the balance of “nuanced factors” appears in an earlier discussion of BurnLoungeAnalyzing BurnLounge

 BurnLounge Establishes a “Fact Driven” Balancing Standard: Recruitment v. Sales. 

The BurnLounge Ninth Circuit Appeals Court established a going forward pyramid test that is fact driven, and which balances whether distributor payments and commissions are driven by recruitment, on the one hand, or sales to ultimate users on the other hand, i.e.

Are distributor product/service purchases incidental to the business opportunity? Or rephrased: Is the focus in promoting the program, rather than selling products to ultimate users?

If one reads the trial court decision, listens to the oral argument before the Ninth Circuit or reads the Ninth Circuit opinion, the words “primarily” or “predominant” are frequently used to discuss the motivation of distributor purchasing, in order to determine if they should be included in the category of ultimate users. 

The central inquiry will always be: What do they pay, and why do they pay it?

And the ultimate standard of inquiry going forward in pyramid cases will be: What is the predominant or primary motive of distributors in making purchases? Is the primary motivation for purposes of resale or personal use or, as a gateway purchase to qualify for rewards in the MLM opportunity and compensation plan?

What is clear after the BurnLounge case is that “personal use” purchases become somewhat “neutral,” i.e., such purchases, which are not incidental to the opportunity, are not to be excluded in the analysis of sales to ultimate users. And, on the other hand, the mere presence of some personal use purchases or even some sales to retail customers, will not, in itself, be determinative of legitimacy. With that in mind, many other factors will need examination.

How will this work in future cases? It is fairly simple. Get out a piece of paper and make two columns for the “good facts” and the “bad facts.” In a simplistic sense, the winner of pyramid v. legitimate or recruitment v. sales, will be the dominant list. Well, actually, it is not all that simple, because a court will likely choose to ascribe more weight to designated items on each list.

Clearly, the “bad” list will include, but is not limited to, such factors as:

Front-end loading or inventory loading,

Large upfront fees,

Mandated purchases to qualify for commissions or rank advancement,

Bogus product or service,

Inflated prices,

No buyback policy,

No mandate for retail sales by distributors,

No restrictions on “over” ordering,

Unsubstantiated earnings representations,

No evidence of product consumption by ultimate users, either by outside      customers or distributors,

Payment of commissions for training or sales tools as opposed to being based on product sales to ultimate users,

Evidence of unsold product in the marketplace characterized by “garage loading,”

Actual headhunting or recruitment fees,

Mandatory purchases of peripheral or accessory products or services,

And the list will continue with any abusive practice that does not focus rewards primarily driven by sales to ultimate users,

And the “good list”…  again, some, but certainly not all the important factors:

High quality goods and services,

Demonstration of a “real world” marketplace for the product or service,

Goods and services that are fairly priced,

No upfront mandated investment or payment other than a modestly priced “at cost” sales kit,

No inventory requirements,

Demonstration that product/service is used by consumers, whether they be retail customers or distributors,

Sales commissions and rank advancement strictly based on sales of product or service to ultimate users,

Emphasis on sales and use to ultimate users, including retail customers and personal use by distributors,

Amway Safeguard: Buyback policy for terminating distributors,

Amway Safeguard: Anti-inventory loading rule, such as 70% rule, prohibiting purchases unless distributors have sold or used a specified amount of previously purchased product,

Amway Safeguard: Mandate of some specified level of retail sales to outside customers as a condition for qualifying for commissions and rank advancement,

Avoidance of Earnings Representations/Potentials/Hypotheticals/Testimonials unless a transparent average earnings disclosure is provided to potential distributors,

Above all, emphasis on rewards on sales of product/service to ultimate users (retail customers or distributor personal use in reasonable amounts) rather than rewards arising from recruitment of other distributors,

Requirement that any personal use purchases by distributors be in reasonable amounts,

Requirement that any product purchases for resale be in commercially reasonable amounts and subject to buy back policy for terminating distributors,

Quality training to distributors that emphasizes both product sales as well as recruit development.

In the end, any court will be required to conduct this balancing test. And it will seek assistance not only from the parties and the evidence, but, as noted in the BurnLounge Ninth Circuit decision, from qualified direct selling experts. Those experts will assist in fact finding, but they will not be the fact finder nor the author of the legal standard…this role is for the trial court.

Next Steps: Dialogue and Adoption of H.R. 3409

Kevin Lomax: Are we negotiating?
John Milton: Always.
Film, Devils Advocate

Two next steps are in order:

1. First, the industry and FTC are well served by continuing dialogue.

2. Second, given the vacillation of the FTC that has occurred over 40 years, this industry is deserving of some legislative certainty, so that it is not held hostage to the ever changing staff, commissioners and positions of the FTC.

The stated purpose of H.R. 3409:

To amend the Federal Trade Commission Act to prohibit pyramid promotional schemes and to ensure that compensation is not based upon recruitment of participants into a plan or operation, but on sales to individuals who use and consume the products or services sold, and for other purposes.

It is the first of its kind at the federal level. Interestingly, anti-pyramid statutes have been enacted in almost all states for half a century. And, anti-pyramid laws, similar to the current federal bill, have been adopted in more than 20 states, with almost identical legislation adopted in more than a dozen states.

H.R. 3409 is the “real thing” and it slams abusive pyramid scams. The core of the legislation, is rooted in a 40 year line of cases that emanate from Koscot, that Chairperson Ohlhausen describes as the backbone of “going forward” FTC policy, a rule that commissions paid to distributors must be based on sales to “ultimate users.”

Bottom line: The bill would finally give the industry certainty that is found in the line of cases from Koscot to Amway to BurnLounge that “ultimate users” include non-participant customers as well as participants who purchase in reasonable amounts for actual personal or family use. Language in the bill lines up perfectly with the established standard of the Koscot case.

Point by point, H.R. 3409 satisfies the goals of both the case law, the new FTC Guidance and industry standards that have been adopted long since in so many states. The bill:

(1)       Condemns inventory loading;

(2)       Calls out as “evil” pyramid headhunting recruitment schemes;

(3)       Per the Koscot case, forbids payment of commissions or rewards that are unrelated or not based on sale of products and services to the “ultimate consumer;”

(4)       Absolutely rejects programs in which distributor product purchases are made in unreasonable amounts, either for resale or actual personal and family use; and

(5)       Demands, as a condition of legitimacy that companies adopt a repurchase policy in which terminating distributors will be refunded for returned product inventory, in resalable condition, that has been purchased within 12 months of termination.

And the industry cannot sit on its “laurels.” Leading members of the industry are already implementing technology solutions to track the segmentation of distributors and non-distributor users of products. In addition, many leading companies have instituted reclassificationprograms in which distributors who use product regularly, but do not really “work the opportunity,” can be reclassified into “preferred customer” programs that carry favorable pricing and a host of consumer benefits and incentives. These efforts at self-regulation will continue, regardless of legislation, and are the type lauded by the new FTC Guidance.


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