KEVIN P. THOMPSON T. (615) 472-1682Attorney at Law www.theadvocategroup.net F. (615) 807-3048E.kevin@theadvocategroup.net

The Boogie Man and the FTC: a networkmarketing company’s nightmare

As kids, we all had an idea of what a Boogie Man would look like. He was undoubtedlyhairy with big teeth and scary claws. He was unpredictable, ferocious and preyed on theweak and defenseless. We were scared of an attack but never knew where it would comefrom. Is he under the bed, in the closet, or behind the curtain? In the network marketingworld, the Boogie Man is known as the FTC.

Tale of two philosophies

Currently, it’s hard to understand how the Boogie Man goes about selecting his victims.He’s very unpredictable and there’s a split amongst smart people over two differentphilosophies of building network marketing businesses. One group argues that it’s ok topay commissions on downline volume

without

racking up sales to nonparticipants (peopleoutside the program). In other words, it's permissible for distributors to focus exclusivelyon recruiting participants to purchase products for personal use who in turn recruit othersto do the same. Recruitment efforts are primary while selling to nonparticipants issecondary.The second group, which is the group that's prevailing, says the majority of a company'srevenue must flow from nonparticipants, not distributors. In other words, the company'semphasis must be on selling to customers outside the program, not recruiting additionalparticipants for the sake of racking up downline volume for commissions. This sort ofrationale has been leveraged in numerous lawsuits filed by the FTC and by variousdistributors against their former companies. In Woodward, et al. v. Amway, a class actionlawsuit filed in 2007, several of the plaintiffs were high ranking Amway distributors. Theyalleged,Because [Amway]’s products are unmarketable, financial gains to [Amway]distributors are primarily dependent upon the continued, successive recruitment ofother participants who purchase [Amway] products in order to qualify forcommissions. Instead of selling the products to people unrelated to [Amway],distributors personally consumed them or discarded those they did not use. . . Thisfact alone renders [Amway] a classic recruitment pyramid scheme.

The Boogie Man is unpredictable

In 2004, in an advisory opinion, the Boogie Man reassured companies that the amount ofinternal consumption in any multilevel business does not determine whether or not it’s apyramid scheme. Companies in the industry read the statement as a green light to focus onrecruitment. The question of “How much volume from retail sales do we need?” was metwith a quick answer: who cares.Well as it turns out, the Boogie Man has eaten a company or two in recent years forfocusing predominantly on recruiting. Trek Alliance and Burnlounge to name a couple. InBurnlounge, the FTC’s chief economist, Peter Vander Nat, inserted the following statementin his affidavit:As recruitment continues, the number of people who are at or near the baseof the recruitment structure grows very rapidly, often at an exponential ratefor as long as a successful recruitment pattern is maintained.” He furtherstates, “[I]n a pyramid scheme, the number of people who lose moneyincreases exponentially for as long as a successful recruitment pattern ismaintainedIn light of the uncertainty, what is a network marketing executive to do? Should they all just get in the jewelry business and host party plans? Should they all chase the big bucksand encourage recruitment soirées, hoping that there’s at least one company out theredumber that gets eaten by the Boogie Man?

Retail, Retail, Retail...Recruit

The industry is undergoing a massive shift. The Burnlounge decision is expected to bepublished in early August. The ramifications of this decision will be huge because keyquestions plaguing the industry will be decided. I expect the Burnlounge decision to comedown in favor of consumers and hold that companies must accrue sales fromnonparticipants.California has publicly stated they will increase efforts to regulate the network marketingindustry. True to form, they have recently prosecuted YTB Travel Network, a very largeorganization in the industry. Over the past eight years, the Boogie Man has been relativelystatic, eating about one company per year. With the new commissioner appointed by thePresident, there are no impediments standing in the Boogie Man's way from exerting forcein the consumer markets.The writing is on the wall. Companies must accrue sales from nonparticipants. InEngland, Amway went so far as to require their distributors to accrue 200 points in

1 It reminds me of the old joke of what to do when hunted by a Grizzly bear. The best defense whenhunted by a bear is not to go toe to toe with the bear, it’s to make sure you can outrun the slowestmember in your group.

customer volume BEFORE they can sponsor a single person. In other words, it’simpossible for Amway distributors in England to pyramid by recruiting enormous, self-consumption downlines…they have to sell first. Although companies need not take thedrastic steps taken by Amway (their business had cancer in England), they need to takesteps to require their distributors to sell. And these steps need to go beyond talking aboutretailing…it needs to actually happen.

Company Culture

The company exists to assist the sales force in becoming successful distributors. Thisincludes helping the sales force rack up retail sales. Selling needs to be in the DNA of thesales force. It’s hardwired into an organization by crafting a compensation plan thatrewards the proper balance between selling and recruiting. If the rewards of recruitinglarge downlines dramatically outweigh the rewards of selling, guess what...you've got aproblem. Understandably, recruiting is an essential function as well, but in its properorder. And if the proper balance is lost, the Boogie Man is on to the scent.So how can the network marketing executive tell if his or her sales force is properlypromoting the business? Well for starters, he or she can investigate and see what’s comingout of the distributors’ mouths. If the message is about the opportunity to make money bysponsoring other participants, there’s a problem. And it goes back to the pay plan. If thebest way to earn income is to buy products and recruit other participants, there’s financialpressure for distributors to overstate the opportunity in order to sponsor the masses.When there’s a financial incentive to sponsor lots of people, distributors are tempted tooverstate the opportunity to avoid looking foolish and get the signatures. If you’re hearingthings like, “it’s not about the product, we’re solving world hunger,” the Boogie Man islurking. If you’re hearing things like “if you’re worried about the price of the product, you just don’t ‘get it’…”, nip it in the bud.

Print material

The Boogie Man will review your marketing materials. It's a fact. During the course ofoperating your business, a disgruntled customer/distributor will forward a complaint tothe Boogie Man or a state Attorney General's office. Someone in the office will take acursory review of your marketing materials to

check if type of behavior complained about is the type of behavior that you encourage

. It's imperative that your marketing materialsand compensation plan place a high value on selling the product.

Inventory Requirements

A lot of companies today require distributors to purchase product monthly in order toremain eligible for bonuses. If a distributor fails to purchase the specified amount,they're relegated to an "inactive" status and ineligible for bonuses. It's not illegal, per se,but it might give the Boogie Man another reason to pursue you.