Companies like Mary Kay, Amway and Herbalife will be paying close attention to today's news from the FTC.
In a series of Q&As, the FTC issued guidance to help MLMs apply core consumer protection principles to their business practices. The Q&A addresses questions about how the FTC distinguishes between lawful and unlawful compensation structures; how the FTC views personal/internal consumption of the products by the participants in evaluating whether the compensation structure is appropriate; and how an MLM should make representations to its participants and prospective participants about the business opportunity, such as about participants' earning potential.
Now that the FTC has issued this guidance, is enforcement activity on the horizon?
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.
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