Redress checks and compliance checks: Lessons from the FTC’s Herbalife and Vemma cases

As part of the FTC’s historic $200 million settlement with Herbalife, about 350,000 Herbalife distributors should be watching their mail for a partial refund check. The FTC has more information about the refunds and advice for people thinking about investing in a multilevel marketing opportunity. But it’s also a good time for some straight talk with members of the MLM industry.

The FTC has a more than 40-year history challenging unfair and deceptive MLM practices, including recent law enforcement actions against Herbalife and Vemma. The specific terms of those orders – which require the companies to restructure their operations from top to bottom – apply just to Herbalife and Vemma. But industry members can learn a lot by reviewing the conduct the FTC says violated the law and understanding the principles underlying those orders.

Here are some lessons MLMs can take from those lawsuits.

False or unsubstantiated earnings claims violate the FTC Act. Established truth-in-advertising standards apply to all companies within the FTC’s jurisdiction, and that includes MLMs. Every MLM case the FTC has brought to date has alleged – among other things – misleading money-making representations. Some MLMs use limos, luxury, and lavish lifestyles as the bait to lure consumers, but their pie-in-the-sky promises turn out to be half-baked. Others try a subtler approach, appealing to consumers’ desire to be their own boss, spend more time with their children, or secure their families’ financial future. Regardless of whether it’s hard sell or soft soap, deception is deception. And let’s face it: The facts bear out that very few MLM participants earn more than a small amount of supplemental income. That’s why it’s unwise for MLMs to make earnings claims – expressly or by implication – that don’t reflect what typical participants achieve.

Monitor the claims your distributors are making. Some industry members may respond, “We never make earnings claims!” Maybe not, but what are your distributors saying? Even a truthful income testimonial can be misleading if typical distributors are unlikely to achieve those results. And if your distributors are making misleading claims, you could be liable. MLMs should have an effective monitoring program to ensure that distributors comply with the law and aren’t conveying misleading claims. In addition, MLMs should provide sufficient information and training so that prospective recruits have a realistic picture of the business.

At the heart of a legitimate MLM are real sales to real customers. For companies acting within the law, the business is driven by selling products to real customers. Who do we mean by “real customers”? People unaffiliated with the company who actually buy and use the product the MLM sells – real retail sales, in other words. And by “real sales,” we mean sales that are both profitable and verifiable – retail sales that can be confirmed. Contrast that with MLMs built primarily on bringing in more and more recruits and racking up sales to other insiders. Very few people are going to make money and most participants will be left in the lurch.

Make sure compensation and other incentives are tied to real sales to real customers. The FTC complaints against Herbalife and Vemma challenged compensation structures that rewarded distributors without regard to retail sales. The court-enforceable orders in those cases require the companies to dismantle those systems. In their place, Herbalife and Vemma must implement systems that incentivize participants to sell products to people outside the network. Is it time to take a closer look at your MLM’s compensation structure?

For more information see this response to a letter from the Direct Selling Association.