THOMPSON Attorney at Law

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The Boogie Man and the FTC: a network marketing company’s nightmare
As kids, we all had an idea of what a Boogie Man would look like. He was undoubtedly hairy with big teeth and scary claws. He was unpredictable, ferocious and preyed on the weak and defenseless. We were scared of an attack but never knew where it would come from. Is he under the bed, in the closet, or behind the curtain? In the network marketing world, 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 different philosophies of building network marketing businesses. One group argues that it’s ok to pay commissions on downline volume without racking up sales to nonparticipants (people outside the program). In other words, it's permissible for distributors to focus exclusively on recruiting participants to purchase products for personal use who in turn recruit others to do the same. Recruitment efforts are primary while selling to nonparticipants is secondary. The second group, which is the group that's prevailing, says the majority of a company's revenue must flow from nonparticipants, not distributors. In other words, the company's emphasis must be on selling to customers outside the program, not recruiting additional participants for the sake of racking up downline volume for commissions. This sort of rationale has been leveraged in numerous lawsuits filed by the FTC and by various distributors against their former companies. In Woodward, et al. v. Amway, a class action lawsuit filed in 2007, several of the plaintiffs were high ranking Amway distributors. They alleged, Because [Amway]’s products are unmarketable, financial gains to [Amway] distributors are primarily dependent upon the continued, successive recruitment of other participants who purchase [Amway] products in order to qualify for commissions. Instead of selling the products to people unrelated to [Amway], distributors personally consumed them or discarded those they did not use. . . This fact 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 of internal consumption in any multilevel business does not determine whether or not it’s a pyramid scheme. Companies in the industry read the statement as a green light to focus on recruitment. The question of “How much volume from retail sales do we need?” was met with a quick answer: who cares. Well as it turns out, the Boogie Man has eaten a company or two in recent years for focusing predominantly on recruiting. Trek Alliance and Burnlounge to name a couple. In Burnlounge, the FTC’s chief economist, Peter Vander Nat, inserted the following statement in his affidavit: As recruitment continues, the number of people who are at or near the base of the recruitment structure grows very rapidly, often at an exponential rate for as long as a successful recruitment pattern is maintained.” He further states, “[I]n a pyramid scheme, the number of people who lose money increases exponentially for as long as a successful recruitment pattern is maintained In 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 bucks and encourage recruitment soirées, hoping that there’s at least one company out there dumber that gets eaten by the Boogie Man?1 Retail, Retail, Retail...Recruit The industry is undergoing a massive shift. The Burnlounge decision is expected to be published in early August. The ramifications of this decision will be huge because key questions plaguing the industry will be decided. I expect the Burnlounge decision to come down in favor of consumers and hold that companies must accrue sales from nonparticipants. California has publicly stated they will increase efforts to regulate the network marketing industry. True to form, they have recently prosecuted YTB Travel Network, a very large organization in the industry. Over the past eight years, the Boogie Man has been relatively static, eating about one company per year. With the new commissioner appointed by the President, there are no impediments standing in the Boogie Man's way from exerting force in the consumer markets. The writing is on the wall. Companies must accrue sales from nonparticipants. In England, 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 when hunted by a bear is not to go toe to toe with the bear, it’s to make sure you can outrun the slowest member in your group.

customer volume BEFORE they can sponsor a single person. In other words, it’s impossible for Amway distributors in England to pyramid by recruiting enormous, selfconsumption downlines…they have to sell first. Although companies need not take the drastic steps taken by Amway (their business had cancer in England), they need to take steps to require their distributors to sell. And these steps need to go beyond talking about retailing…it needs to actually happen. Company Culture The company exists to assist the sales force in becoming successful distributors. This includes helping the sales force rack up retail sales. Selling needs to be in the DNA of the sales force. It’s hardwired into an organization by crafting a compensation plan that rewards the proper balance between selling and recruiting. If the rewards of recruiting large downlines dramatically outweigh the rewards of selling, guess've got a problem. Understandably, recruiting is an essential function as well, but in its proper order. 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 properly promoting the business? Well for starters, he or she can investigate and see what’s coming out of the distributors’ mouths. If the message is about the opportunity to make money by sponsoring other participants, there’s a problem. And it goes back to the pay plan. If the best way to earn income is to buy products and recruit other participants, there’s financial pressure 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 to overstate the opportunity to avoid looking foolish and get the signatures. If you’re hearing things like, “it’s not about the product, we’re solving world hunger,” the Boogie Man is lurking. 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 of operating your business, a disgruntled customer/distributor will forward a complaint to the Boogie Man or a state Attorney General's office. Someone in the office will take a cursory 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 materials and 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 to remain 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.

Inventory requirements for purposes of qualifying for bonuses leaves you exposed to inventory loading allegations. Courts have defined inventory loading as, "Occurring when distributors make the minimum required purchases to receive recruitment based bonuses without reselling the products to consumers.” Assuming the levels are low, a company can legally require inventory requirements. However, the risks might outweigh the benefits. In order to validly mandate inventory requirements for bonus purposes, the inventory requirements must be proportionate to the number of retail customers that a company requires its distributors to service each month. As an example, if you required distributors to purchase $200 in inventory each month, you would need to implement and enforce some type of customer rule that requires sales to nonparticipants. If you had a 5 customer rule, it would equate to $40 per month per customer. The amount would be deemed reasonable depending on the product and circumstances. However, if distributors are encouraged to purchase an inordinate amount of product, an amount rational people would never purchase without an income opportunity, the Boogie Man will come to the aid of consumers. Prior to Amway making its changes, members of its sales force produced a “300 PV household” brochure. It explained how the average distributor could purchase 300 points a month for their own household with no reference to selling. It ended up costing over $900 each month. Inventory requirements do serve a valid business function: people quit when members in their downline never buy. Again, it’s ok to require downline purchases, but within reason. Companies need to be careful to avoid the “300 PV household” promotions. Requiring excessive inventory requirements is sort of like water boarding. Distributors are forced to consume premium products at rapid intervals and the consumption pattern often outpaces their finances. Conclusion These are just a few suggestions to avoid the Boogie Man and his new found friends, the U.S. attorneys. Again, recruitment is an essential function for any network marketing endeavor. But as the saying goes, moderation in all things. If done appropriately, a company’s recruitment effort can greatly enhance the profitability of the business. If done improperly, company executives can face the shame of a regulatory shut down, or worse, jail time. It’s hard to maintain the appropriate balance between sales and recruitment efforts, but network marketing executives need to be valiant in the effort.

About the Author
Kevin is a MLM attorney, entrepreneur, and agent of change. He’s the founder and president of The Advocate Group that specializes in providing legal services for start-up network marketing companies. With a deep understanding of the changing legal landscape in the MLM industry, Kevin offers timely insights to help clients stay on secure legal footing. Prior to starting The Advocate Group, Kevin gained valuable experience while serving as Chief Counsel for Signature Management Team, LLC, also known as Team. Team is one of the largest providers of sales aids for distributors in the network marketing industry. While at Team, Kevin worked closely with Amway and Mona Vie’s compliance departments to ensure Team’s marketing materials passed regulatory review. Also during his tenure at Team, Kevin helped guide the company through commercial litigation with Amway. He’s recently published a widely read, 80 page ebook on the changing state of the law in the network marketing industry. Read the ebook here, free of charge, to learn more about the laws in the industry. For more information, please contact Kevin directly at: Kevin [at] theadvocategroup [dot] net. You can read Kevin’s commentary on his blog, Next Generation Law.

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