Compensation Examinations and Compliance Examinations: Lessons from the FTC’s Herbalife and Vemma Cases

The approximately 350,000 Herbalife distributors should watch their mail for partial refund checks as part of the FTC’s historic $200 million settlement with Herbalife. The Federal Trade Commission provides more information about chargebacks and offers advice for people considering investing in multi-level marketing opportunities. But it’s also a good time to talk directly to members of the MLM industry.

The FTC has a more than 40-year history of challenging unfair and deceptive pyramid schemes, including recent enforcement actions against Herbalife and Vemma. The specific terms of those orders — which require companies to restructure their operations from the top down — only apply to Herbalife and Vemma. But industry members can learn a lot by examining what the FTC says are violations and understanding the principles behind these orders.

Here are some lessons MLMs can learn from these lawsuits.

False or unsubstantiated income claims are a violation of the Federal Trade Commission Act. The established truth-in-advertising standards apply to all companies under the FTC’s jurisdiction, which includes MLM companies. To date, every pyramid scheme case filed by the FTC alleges (among other things) misleading statements about making money. Some MLM companies use luxury cars, luxury goods and lavish lifestyles as bait to attract consumers, but their pie-in-the-sky promises turn out to be half-baked. Others have tried a more subtle approach, appealing to consumers’ desire to be their own boss, spend more time with their children or secure their family’s financial future. Whether it’s a hard sell or a soft soap, deception is deception. Let’s face it: It turns out that very few MLM participants make more than a small supplemental income. This is why it is unwise for MLM companies to make statements, either expressly or implicitly, that do not reflect the income achieved by typical participants.

Monitor dealer statements. Some in the industry might respond: “We never claim to be profitable!” Maybe not, but what do your dealers say? Even genuine proof of income can be misleading if the typical dealer is unlikely to achieve those results. If your dealer makes misleading claims, you may be held liable. MLMs should have an effective monitoring program to ensure dealers comply with the law and do not communicate misleading claims. In addition, MLM should provide sufficient information and training so that future recruiters have a realistic understanding of the business.

The core of legal MLM is real sales to real customers. For companies that act within the law, business is driven by selling products to real customers. Who are the “real customers”? People not affiliated with the company actually buy and use the products sold by the MLM—in other words, real retail sales. By “actual sales,” we mean sales that are both profitable and verifiable—confirmable retail sales. In stark contrast, MLM is primarily based on bringing in more and more new employees and increasing the sales of other insiders. Few people will make money and most participants will get into trouble.

Make sure compensation and other incentives are tied to real sales to real customers. The FTC’s complaints against Herbalife and Vemma raise questions about pay structures that reward distributors regardless of retail sales. In these cases, enforceable court orders require companies to dismantle these systems. Herbalife and Vemma must implement systems that incentivize participants to sell products to people outside their network. Is it time to take a closer look at MLM compensation structures?

For more information, see the response to the Direct Selling Association letter.