By David VanSambeek, Esq.*
A few months back the FTC and Herbalife concluded an investigation that many projected would “reshape the MLM regulatory landscape.” The Herbalife settlement just reconfirmed many of the regulatory principals that we have been advising on for years. The biggest, or most unusual, industry-relevant component of this settlement was Herbalife’s acquiescence to a 2/3 outside sales volume requirement for downline commissions. This means that commissions can be earned on downline sales volume ONLY if at least 2/3 of the volume was purchased by consumers that are not distributors. This has NOT been the industry standard used by companies or the FTC in the past. The FTC has historically (and still does) look for a “majority” or “substantial” or “predominant” sales volume from outside the distributor field, i.e. more than half. The Herbalife settlement restated many of the pre-existing MLM regulations and set forth some Herbalife specific requirements (i.e. the 66.66% retail sales requirement).
Now comes Vemma’s settlement with the FTC. Filed on December 15, 2016, the FTC and Herbalife have come to terms on a mutually acceptable settlement. You can read the entire filed settlement HERE . Upon review, you will note that the qualification requirements for downline commissions require that a “majority of the total revenue generated… is derived from sales to persons who are not [Vemma distributors].” (see FTC Stipulated Order. ORDER, Section II.C.).
The Vemma case is clearly telling us that the FTC still wants to see more than half of the sales volume coming from real, retail customers. The Herbalife requirement of 66.66% retail sales only applies to Herbalife.
The remaining provisions of the Vemma stipulated order are typical with the exception that: (a) BK Boreyko is not prohibited from participating in or acting as an officer for an MLM company or Vemma; AND (b) Vemma must prohibit distributor compensation that is linked or tied to that distributor’s product purchases.
In many cases, the owners/operators/promoters of an alleged illegal pyramid scheme will be prohibited from participating in future MLM companies as a part of a final order or settlement. In Vemma however, BK Boreyko was able to escape this form of enjoinment. He is not prohibited from participating in Vemma operations in the future provided that Vemma and Boreyko do not violate the terms of the agreement.
The next item in the settlement that may appear out-of-the-ordinary is the prohibition of a compensation plan that “links or ties” compensation or compensation eligibility to that distributor’s purchase(s). This is NOT unusual! The FTC has historically wanted to see distributor compensation and eligibility tied to CUSTOMER SALES NOT DISTRIBUTOR PURCHASES. Do you remember Jewelway (1997), Omnitrition (1996), and Koscot (1975)? The FTC has always wanted to see commissions based on retail customer sales rather than internal distributor purchases. The FTC has usually allowed distributors to purchase a reasonable amount of product for personal consumption and upline compensation could utilize this volume as a portion of the commissionable volume, provided that there was still a significant amount of customer purchases. Moreover, the distributor’s individual qualifications for downline compensation should NOT be based on that distributor’s purchases, rather qualifications should be based on customer sales. The Vemma settlement is not changing this, an MLM can still include distributor purchases in downline volume calculations provided that such purchases are not just matched, but exceeded by retail customer purchases.
Completely absent from the Vemma settlement is any mention of “autoship.” The ability to use autoship is not dead nor is it legally prohibited. The purpose of an autoship in a MLM company has always been (and still is) only to provide an option that allows distributors and/or preferred customers to automatically receive a specified product order on a recurring monthly basis. Note, I used the term “OPTION.” Subscribing to an autoship order CANNOT be a requirement for the distributors. Any autoship orders from a customer should be counted as retail customer volume for the selling distributor. Any autoship orders placed by a distributor will qualify as customer sales volume only if the distributor can prove that she/he has sold the product to retail customers. A downline distributor’s autoship order will be counted in your downline commission calculations only if that downline distributor’s autoship order is sold to retail customers or if the distributor purchase is exceeded by retail customer purchases. This is not new law. However, after Vemma and Herbalife, the FTC is making it clear that they want to see MLM companies actually monitoring distributor purchases (this would include distributor autoship orders) to ensure that these products are being sold substantially to retail customers.
So, the reality is… not much has changed. If you don’t have a business that is based on retail customer sales, then you still have an issue. Companies that have not taken steps to enforce regulatory sales compliance need to do so. If you are realizing that you have an issue, we can help. Feel free to give us a call to discuss your situation.
* David VanSambeek is the senior MLM associate at Wellman & Warren, LLP. Wellman & Warren specializes in the representation of multi-level marketing companies and Mr. VanSambeek has successfully resolved many MLM regulatory disputes and investigations with US regulatory agencies.