Sorting out What’s Legal and What’s Not in The MLM Industry; A Question & Answer with MLM attorney, Kevin Thompson

An actual real-life Multi-level Marketing (MLM) attorney! 

Recently I connected with an MLM attorney, and I was so excited to be able to ask him questions! Most people probably think I’m crazy to be so excited to talk to an attorney, but what a great opportunity!

Since I had the opportunity to do so, I want to share the answers with you.

Kevin has an extensive experience helping entrepreneurs launch their businesses on a secure legal footing.

As I’m sure you know, there is a ton of misinformation, confusion, and misunderstanding in the MLM industry among network and affiliate marketers.

What’s legal?  What’s not legal?   

I’ve paraphrased our question-and-answer session below.  You can also listen to the podcast here or watch the video here to hear our whole conversation.

Question: I had a leader tell me that all travel companies that charge a monthly membership fee and then pay affiliate/distributor commissions from that membership fee are doing something illegal. Is this true?

Answer: That's false. It is legal to have a multi tier pay structure. The FTC even acknowledges it on their website, therefore network marketing in general is legal. Full stop.

The misconception comes from the people out there who hate the whole industry and want it to burn. But that doesn't make it illegal.

Question: What IS illegal? Where are the boundaries?

Answer: It's really about what is driving the reward. If the reward is driven by a product sale, it's okay. This industry is one where people are rewarded in direct relation to their production, not in direct relation to their desire or their effort.

The court has a way to determine if a product has legitimate value.  That's what is important for companies to show. That really is the fundamental key that separates good companies from bad.

Question: Going back to my original question about travel companies paying a membership fee for a travel portal and paying commissions to affiliates on that fee, how would you describe it being legal?

Answer: There's value in that membership fee. If the portal has value for people outside the network, it's fine. In this case, if the members can access the benefits, it’s legal. That is a legitimate product sale.

So, it's not true that if there's a membership fee and people are being paid commissions from that membership fee that it's illegal.

Question: Are matrix compensation plans illegal?  I had another leader tell me that recently.

Answer: We would like to think that the courts are like the FDA - very precise on what they demand, and very precise in language. The reality is there's never been a court that has said a matrix plan is illegal.

What courts care about is behavior. What behavior is driving the plan? Is it an opportunity driven demand or is it product driven demand?

Matrix plans are not de facto illegal; however, they do tend to incentivize recruitment.  This is where the company really has to train people properly, because there's a spectrum in this industry of what's acceptable and what's not. And usually, it's not just one factor that sinks the ship.

Question: I recently read Tim Ritter's article on required purchases and the MLM pay to play dilemma. He basically says in that article that you can't be forced to have minimum monthly auto ship in order to be an active affiliate and get paid. But don't 95% or more of network marketing companies require a minimum monthly auto ship in order to be an active affiliate and to get paid commission?

Answer: I support the article. What the article doesn't say is - hey, if you're doing this, it's illegal. The article calls for a discussion. It suggests maybe we should do away with what we call MVRs (minimum volume requirement).

Right now, they are legal. So, you can have, as an example, a 100-point MVR, and it can be satisfied by selling product to a customer or a purchase in a lot of companies.

People just get in, and they just purchase just that amount. And in our view, that makes it very easy for a court to say they’re not buying less than the MVR and they're not buying any more.  That that shows that people are buying primarily just to qualify.

And so, in the article, it's just a suggestion that maybe we should get away from this in the industry.

Diving in deeper to this, let’s use an example. The 4 horsemen of death of humankind are cancer, heart disease, diabetes, and mental problems (such as Alzheimer's and dementia). If you can offset just one of those risk factors, you can extend your life significantly.

That's the MVR concept of a company. It's not very popular, and companies know their competitors are doing it, so they think they're fine.  However, there is inherent risk using MVRs with companies.

If companies are going to use MVRs, we recommend that they make sure that customer sales are incentivized.  If 90% of the company volume comes from distributor or affiliate purchases, that can be a problem.

Bottomline, companies need to acknowledge that there's risk in the plan, and they need to offset that risk.

Question: What percentage of sales from customers would you recommend a company maintain?

Answer: There’s no hard and fast rule. However, with case law, we know that 3% is not enough. The FTC and SEC have never given out a percentage.  They give you a feel for their vibe on what they perceive to be a problem.

But remember they can't make laws; however, they do have a lot of discretion in the kinds of companies that they pursue. And they'll give you a heads up in the form of speeches.

Edith Ramirez, who was the Commissioner under President Obama, gave a speech saying that the plan needs to be primarily driven by retail.  We would interpret primarily to be 51%. If a company has 51% or more, they're better than 90% of the of the companies out there.

Question: Did Herbalife get into trouble with the FTC? Because there was a perception by the FTC that Herbalife did not have more customers than distributors.

Answer: There's a book on it called When the Wolves Bite, written by Scott Wopner, who's a CNBC panelist. And that whole story is how I got on Bloomberg and CNBC.

It's a long story, so I’ll try to sum it up. Bill Akman said, this company is going down, and if he had done that with most other companies that are publicly traded in our industry, companies would have panicked. 

Herbalife, it turns out, actually did have a lot of retail. Bill was operating under the belief that they didn't, so he shorted the stock in 2012. He does this by betting that the company will decline, and then he went on a very public campaign to make that happen.

The FTC did step in, and they investigated Herbalife. They ended up settling with Herbalife.  Since then, their volume has increased. So, our industry does provide value to the marketplace. Herbalife's a good example of that.

Neora is another example. The FTC sued Neora about 3 years ago, and the FTC just assumes all the retail sales are nothing. I think that's very improper. And, in fact, Neora proved in court that they have over 70% of their volume as retail. But we're still waiting on that final decision.

So, to answer your question – more retail is better. Unfortunately, it’s not black and white. There’s nowhere you can go look this stuff up.  That’s why I have a job.

Question: Would you say these regulations are based on the political landscape?

Answer: Yes. These agencies are led by people appointed by the President. Therefore, if there is a Republican President, they tend to appoint Republican people in charge of these agencies, and vice versa. That means that these entities really shift over time. And there's not much continuity.

The SEC is a good example. Cryptocurrency is a new thing, and Congress just doesn't know what to do, so they're basically doing nothing. So, the SEC feels like they’ve got to do something.

Over time, these agencies flex their muscles, and they get involved in these industries, but the truth is - they don't really have authority. And now that the courts tend to be more conservative throughout the whole country, you're seeing judges push back. 

They’re even pushing back on the FTC. A couple years ago, the FTC lost an issue with the Supreme
Court unanimously.  The issue was the FTC pursuing monetary damages, which they'd been doing for 30 years. The court ruled that it doesn’t say anywhere in the statute that they have the power to do so.  They just assumed they did over time.

So, to your point - the regulatory environment is very confusing, especially right now.

Question: We hear that the FTC shut down companies such as Vema and AdvoCare to name a few, which leads people to think that the company was evil.  But the truth is, regulatory issues come up all the time with all kinds of companies. It’s part of doing business in the US.

So, when we hear about companies coming up against a regulatory issue with the FTC, it does not mean they’re a bad company. Correct?

Answer: Correct. I like to say that the bigger companies are like ATM machines. The FTC will knock on the door and pull out cash - a billion dollars here, 500 million dollars there.

In my opinion, the FTC is really setting its sites on larger issues. They're not so much focused on network marketing now. They could be waiting to see how this litigation pans out with Neora.  I believe it was overreach with Vema, Neora and AdvoCare.  The difference is Neora fought back.

I think it was overreach with Herbalife as well, because if Herbalife was a pyramid scheme they would have collapsed by now.  Pyramid schemes can't have retail sales. A pyramid scheme offers minimal value to the marketplace.

Question: So, does the FTC actually shut down companies? Or do the companies end up shutting down because of the penalties they have to pay or how they'd have to restructure?

Answer: It's a combination of things. Typically, the FTC will get an immediate injunction, and that is a shutdown during litigation. If that shutdown stays in place for 2 years, they can’t survive. Sometimes the company can get that injunction lifted by arguing that the injunction is too aggressive.  Yet that doesn’t happen often.

It happened in a company that was sued 2 years ago called Financial Education Services, and they were able to get the injunction lifted. They are still in business and doing quite well.  Vema was the same sort of thing. They got to the hearing and negotiated a settlement. They're still operational now. So, it really depends on the business.

Question: As distributors or affiliates, we always hear all kinds of things about what we can say and what we can't say.  I made a list of some of the things one company in particular told me the FTC will go after individuals or companies for.

First, we all know, or should know, that making deceptive income claims or lifestyle claims is a no-go. But I work with a company that has a list of words that they say are high risk words.  Some of them are:

• additional income
• be your own boss
• earn an extra income
• get paid what you're worth
• income that you deserve
• life changing income
• passive income
• pay debt
• plan B
• quit your job
• recurring income
• replacement income
• residual income
• retire early
• secondary
• significant income
• stay at home
• stream of income
• thousands of dollars
• thousands per month
• freedom
• top income earner

This particular company says, while you can't say recurring income, replacement income, or residual income - you CAN say ongoing income.

This list is long! My question is…how is the average affiliate supposed to protect themselves by knowing what they can and can’t say?

Answer: Companies have a lot of discretion on how they want to police their affiliates.  There is no magic formula.  The company you're talking about is obviously very conservative...And probably more likely than not they’ll survive regulatory trouble in the future.

Is it worth it to be this conversative? If it grinds sales to a halt, they may need to discuss it internally and ease up a little.

The real question is what is the rule?  Income claims by themselves are considered to be misleading unless the claim is of an average result.

Let’s take a different kind of claim and work it backwards.  If I take a weight loss product and, on average, people lose about a pound a month. That's reasonable.  I don't need to have a disclosure there.

It's when you show exceptional results that the problem arises. Let’s say I want to share that I lost 10 pounds in one week…that’s great but the average result needs to be disclosed also.

The same goes with income claims. Of course, most income claims are above average.  You can make the claim, but you also need to provide averages.  That’s hard for people to do and to do regularly and do it well.  You’d have to get the averages from the company. Most of us don't have a clue what the average income is.

So, that’s the rule.  But then the company can drill down a little deeper if it wants to control your language. All those words that you listed create an impression.  And that's what your company is trying to be sensitive to.

As an example, the impression created when you say residual income - that implies recurring income. Well, is it really?  You want the theme to be that the income is earned every month, but that’s not automatic. Same thing with passive income – it means you get paid for doing nothing.

The point is the company is just trying to steer the language.

Question: Can you use the term business opportunity?

Answer: I would advise against that because business opportunity is treated separately by the FTC. They have a Biz Opp Rule.  If something's considered a Biz Opp, they have all kinds of requirements for that.

Network marketing companies are exempt from those requirements because the cost of participation usually is under 500 bucks. So, we're not really part of that rule. 

Having said that, when you use the term, it makes it easier for the FTC to step in.

Question: Is it true that if the FTC does come after an affiliate or distributor that the penalty can be jailtime?  

Answer: If we're talking Ponzi schemes, then yes because that's criminal. And in those situations, people do go to jail.

If you're in a company that sells something real, then no.  There could be civil penalties, however. Usually, the FTC or a regulator will sue the company as well as some of the top leaders because the company provides the boat, and the field drives it, so they really need to link both together in a lawsuit.  That is really rare though.

If anyone would get in trouble with the FTC, they’d be sued. And the company might be terminated or suspended.

Last Question: Any last words of wisdom?

Answer: First, be passionate about the product that you're selling, not just the income opportunity.  Really understand the product and love it.  And success never happens fast, even if it looks easy on paper, it just takes time.  Find a company you like with good leadership and integrity. 

I absolutely loved being able to ask Kevin these questions.  I hope to pick his brain again in the future.