FTC to MLMs: You Lie, You Pay
The agency puts the MLM industry on notice.
TINA.org files comment in support of applying rule to direct selling industry.
| Bonnie Patten
Every year millions of Americans, mostly women, many of them in precarious financial situations, pay to become sellers for multilevel marketing companies, or 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. Enticed by tales and images of lavish income or by the prospect of at least making a living while working on one’s own schedule, the reality for those who join MLMs is often bleaker. Few of them will make a living, much less realize fabulous riches; about half will actually lose money, as they struggle to recoup their initial investment through further spending on inventory, training and marketing, leading to loss of savings, debt accumulation and – not infrequently – bankruptcy.
While deceptive earnings claims made by MLMs clearly violate laws against unfair and deceptive conduct, MLMs remain largely unregulated. The lack of regulation at the federal level is a consequence of the FTC’s decision – under heavy lobbying pressure from the direct selling industry – to largely exempt MLMs from the requirements of the 2012 Business Opportunity Rule (BOR), which, among other protections afforded to potential recruits, prohibits deceptive earnings claims by sellers of “business opportunities” and requires sellers to furnish specified written disclosures to potential buyers – and allow them time to review the disclosures – before entering business with them. In cases where the seller makes any earnings claims, the mandated disclosures must include specified earnings information.
As has only become clearer in the intervening years, all the reasons necessitating a rule to protect purchasers of business opportunities from unfair and deceptive recruiting practices apply at least as urgently to MLM recruitment. That is why TINA.org this week is filing a comment urging the FTC to include MLMs in the BOR.
A “serious informational imbalance” exists between prospective distributors — who often lack business sophistication and cannot obtain information about typical earnings, expenses or workload except from the MLMs themselves — and the MLMs recruiting them. (The earnings data that a small number of MLMS do provide, in the form of income disclosure statements, are often presented in misleading ways.) Misrepresentations, including unfounded “get rich quick” claims and unsubstantiated and atypical claims of profitability, abound. Prospective recruits are often manipulated into enter agreements or incur expenses that they are likely to quickly regret. The potential for serious economic injury is as great for MLM participation as it is for most business opportunities as MLMs afford a strong likelihood of not just failing to earn money, but of actually losing money.
None of the reasons for exempting MLMs from the BOR have withstood the test of time. TINA.org has found that false and unfounded earnings claims – explicit and implied – are not just prevalent, but almost universal. The costs of applying the rule to the direct selling industry is not high, particularly in comparison to the significant harm that could be averted to millions of potential participants, or in comparison to the costs of legal actions against individual companies.
Targeted enforcement has proven far from sufficient to curb industry abuses, and has become even less viable since the Supreme Court foreclosed the principal avenue the commission had relied on to seek monetary relief from offenders. Moreover, subjecting MLMs to a formal rule can make it more feasible to bring legal actions when necessary, as well as provide guidance on its own. Additionally, direct selling self-regulation, which is focused exclusively on health and income claims and is continuously engaged in a game of whack-a-mole with the industry, is no substitute for including MLMs in the BOR. And if – as the commission concluded in 2011 – the disclosures required under the BOR are not a perfect fit for MLM distributors, that is no reason to abandon millions of financially desperate and unsophisticated businesspeople to be victimized by deceptive MLMs. Rather, it is a reason to craft a rule that makes more sense for MLMs, as the commission did for other business opportunities, when it determined that the disclosures required under the Original Franchise Rule were not a good fit.
Now, as the FTC undertakes its review of the BOR, is the time to remedy the information deficit and surfeit of misinformation by which MLMs take advantage of millions of recruits. The commission should amend the rule so that it applies to MLMs. Requiring truthful, understandable disclosures about typical earnings and time for prospective new distributors to consider them, while prohibiting misleading earnings claims, is a way of protecting participants that respects the autonomy of all involved.
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