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Health and wellness products MLM allegedly rewarded recruitment over product sales.
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When AdvoCare announced in May that it was abandoning its multilevel marketing business model for a direct-to-consumer compensation plan amid “confidential talks” with the FTC, the Texas-based nutritional supplement company framed the move as the “only viable option.” What exactly the agency had on AdvoCare that prompted the company, which is one of the largest Multilevel Marketing – a way of distributing products or services in which the distributors earn income from their own retail sales and from retail sales made by their direct and indirect recruits.s in the country and is seen as an industry leader, to make such an extraordinary announcement wasn’t known at the time. It is now.
Today, the FTC announced that AdvoCare has agreed to pay $150 million to settle charges that it operated an illegal pyramid scheme that rewarded recruitment over product sales and that deceived consumers into believing they could earn significant income, as much as millions of dollars a year, as distributors of its health and wellness products, such as its Spark energy drink. In reality, the FTC alleged in a complaint filed simultaneously with the settlement on Wednesday, the vast majority of AdvoCare distributors have earned no money or lost money. But that did not stop AdvoCare from falsely claiming to offer “a life-changing financial solution that would allow any ordinary person to earn unlimited income, attain financial freedom, and quit their regular job,” the FTC said in a press release. Under the settlement, AdvoCare, the company’s former CEO, Brian Connolly, and two top promoters are permanently banned from multilevel marketing.
The settlement requires that AdvoCare and Connolly notify distributors about the action and to advise them that:
“Legitimate businesses make money selling products and services, not by recruiting,” Andrew Smith, director of the FTC’s Bureau of Consumer Protection, said in the press release. “The drive to recruit, especially when coupled with deceptive and inflated income claims, is the hallmark of an illegal pyramid. The FTC is committed to shutting down illegal pyramid schemes like this and getting money back for consumers whenever possible.”
At a press conference Smith said the settlement was significant in part for the “real money” the FTC was able to obtain. “Frequently, with pyramid cases, there’s not a lot left over,” Smith said. AdvoCare may be different because the company plans to continue operations under its new business model. At the press conference the FTC said it started looking into AdvoCare in 2016, a year in which the company had an A rating with the BBB.
AdvoCare CEO Patrick Wright responded to the FTC actions in a video posted Wednesday on the company’s Facebook page in which he said while AdvoCare “strongly disagreed” with the agency’s conclusions it will fully comply with them.
AdvoCare marks the 28th case the FTC has filed against an MLM alleging it was operating an illegal pyramid scheme in the last 40 years. In all 28 of the cases, the FTC has either won on summary judgment or at trial, or obtained a favorable settlement, with most settlements occurring within a year of the FTC filing its case.
The FTC Dallas office that filed the lawsuit Wednesday is the same office that recently reached a settlement with various defendants operating a series of cryptocurrency pyramid schemes. And in 2016, this same office obtained a $238 million consent order against Vemma Nutrition Company, an Arizona-based dietary supplement MLM, over similar recruitment-focused business practices.
The settlement comes two years after a class-action lawsuit filed by two former AdvoCare distributors, who said they lost thousands of dollars pursuing the business opportunity, alleged that the company’s compensation plan rewards recruitment far more than retail sales, which as Smith point out is one of the hallmarks of a pyramid scheme. AdvoCare in a public statement called the 2017 lawsuit “frivolous and rife with false allegations” and countered that “while recruiting other Distributors is part of the direct selling business model, AdvoCare does not compensate Distributors based on recruiting, but based on only the sales of products.” Later that year, TINA.org published a database of inappropriate income claims touted by AdvoCare distributors as part of an investigation into the marketing of Direct Selling Association (DSA) members. Despite changing its business model, not to mention the FTC actions announced today, AdvoCare is still a top 20 member of the DSA trade group as of this writing. The DSA, which has said “[p]yramid schemes and other fraudulent scams are ineligible for DSA membership,” is reviewing the actions and determining “next steps,” according to a statement from its president Joe Mariano.
According to AdvoCare’s 2017 income disclosure statement, which is its most recent, 67 percent of distributors earned nothing that year and 87 percent earned $200 or less.
AdvoCare was founded in 1993 by Charles Ragus, who before founding the company was an officer of Omnitrition International, an MLM that the U.S. Court of Appeals for the Ninth Circuit determined bore the characteristics of a pyramid scheme after members sued in 1992. He was also a distributor for Herbalife, which in 2016 agreed to implement vast changes in its business structure to settle an FTC pyramid scheme complaint.
AdvoCare was the subject an ESPN investigation that explored its use of big name athletes to expand and promote its business. The company is endorsed by a wide variety of athletes including New Orleans Saints quarterback Drew Brees, who is its national spokesman. It also sponsors a NASCAR Sprint Cup car and is the “official sports nutrition partner” of Major League Soccer, among other athletic enterprises.
AdvoCare, which has seen its distributor numbers drop by the hundreds of thousands in recent years — from around 390,000 in 2017, according to that year’s income disclosure statement, to “more than 100,000” in 2019, according to the announcement earlier this year — is emblematic of an MLM industry in decline.
UPDATE 10/24/19: Danny and Diane McDaniel, two additional top AdvoCare promoters named in the FTC complaint, have filed a motion to dismiss. “The FTC alleges, in conclusory form, that it ‘has reason to believe that [Defendants] are violating or are about to violate laws enforced by the Commission.’ However, all of the allegations of wrongdoing in the Complaint arise out of the Defendants’ past participation” in AdvoCare’s previous multilevel marketing program, the filing states.
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