Participants accuse channel executives and representatives of a lack of transparency and ineffective self-regulation
By: David Bland
On June 11–12, critics of the direct selling channel gathered for a second year in a row for their virtual conference – Multilevel Marketing: The Consumer Protection Challenge.
Hosted by The College of New Jersey School of Business and organized by William Keep, a professor of marketing and former dean of business at the college, the conference saw the return of several long-time detractors of multilevel marketing as well as first-time appearances by speakers from a wide range of professions and connections to direct selling.
Similar to the inaugural conference in 2021, this year’s conference excluded direct selling advocates, industry partners and the Direct Selling Association (DSA).
This year’s meeting also, once again, included input from regulators, academics, journalists, former direct selling distributors, consumer advocates, and social media content creators, including an international contingent of speakers representing Australia, the Netherlands, Poland, and Ireland.
Bonnie Patten Gives Keynote Address
TruthInAdvertising.org (TINA.org) Executive Director and Co-Founder Bonnie Patten provided the keynote address for this year’s conference. Titled, Self-Regulation in the Direct Selling Industry: Can it Ever Be More Than Symbolic?, Patten’s address targeted the Direct Selling Association (DSA) as well as the Direct Selling Self-Regulatory Council (DSSRC).
Patten began her keynote by questioning the usefulness of the DSA’s Code of Ethics, citing examples of violations of some of its member companies. She touted a 2016 TINA.org study of DSA member companies’ compliance with advertising laws and claims that over a two-year span her organization had logged more than 5,000 examples of deceptive marketing claims from over 130 companies.
“These are the kind of data TINA.org has collected over the past nine years, which makes it readily apparent that the DSA code of ethics has been used to give the appearance of self-policing while the trade association has instead served the private interests of its members at the public’s expense.
“Despite the fact that the DSA boasts that its code of ethics ensures standards of conduct more stringent than the law for years, member companies have maximized their profits by violating advertising laws while simultaneously touting the benefits of the code of ethics, Patten said.
Next, Patten cited a TINA.org study from 2017 focusing on DSA member companies’ marketing of their business opportunities. She advised conference attendees that “more than 97% of DSA member companies were making deceptive earnings claims to recruit distributors and convince low level distributors to stay with the company.”
She then turned her attention to the DSSRC, accusing the Council of shielding the direct selling channel from scrutiny rather than increasing accountability and protecting consumers. While recognizing beneficial actions of the DSSRC, including the speed of action in eliminating problematic claims and flexibility in addressing changing market dynamics, TINA.org’s core problem with the regulatory council is its failure in most cases to disclose the names of culpable companies as well as their problematic marketing materials that initiated the investigation.
Patten also lamented the DSSRC’s lack of enforcement options, as the Council does not have the power to expel member companies or issue penalties or restrictions.
“The vast majority of wrongdoers identified by the DSSRC are never subject to any sort of a public accountability, which runs counter to the council state admission and must negatively impact consumer and governmental confidence in this self-regulatory process,” Patten advised.
Patten closed her remarks by expressing hope that the Federal Trade Commission’s (FTC) recent actions to consider a new earnings claims rule, as well as its recent penalty offense warning to hundreds of direct sellers, will enhance compliance within direct selling companies and reinvigorate the self-regulatory process.
Regulators Provide Input
While the number of state, federal and international regulators participating in the conference was less than the year before, a few officials participated in this year’s event.
Kathleen Daffan, Assistant Director, Division of Marketing Practices at the FTC, returned for her second year at the conference. Daffan spoke about anti-pyramid prosecutions, a new wave of pyramid-type schemes and also expressed concern over cryptocurrency scams set up as direct selling companies.
Daffan acknowledged the difficulty in legally establishing that a company is a pyramid scheme and urged consumers to review the FTC website for guidance and red flags to watch for.
Making his first appearance at this conference was Dariusz Łomowski, Director of the Office of Competition and Consumer Protection at the Gdansk Branch Bureau. Łomowski has experience in product safety and consumer law enforcement and more recently focused on market practices involved in consumer finance and alternative investments, including promotional and pyramid schemes.
Direct Selling Companies Again Painted as Cults
For the second year, the conference featured cult and undue influence expert Steven Hassan, who has authored several books and peer-reviewed papers on the subject. Hassan maintains that direct selling companies using multilevel compensation plans are by their very nature cults. His website states, “To better understand how MLMs recruit and maintain participants requires we examine them as cults.”
Joining Hassan in suggesting that direct sellers use cult-like recruitment tactics was Josie Naikoi, a former direct selling distributor and now a YouTube content creator. Her video, “Why I Quit the MLM Industry At The Top,” has been viewed over 1 million times. Naikoi continues her work today by creating documentaries on scams and cults to alert consumers about the tactics of undue influence used by companies.
Anti-MLM YouTube Creators Given Platform
As previously reported in SSN, YouTube has served as the primary hub for long-form anti-direct selling content. Organizers of this conference tapped into this resource to feature several content creators with channels dedicated to persuading viewers to question opportunities provided by direct sellers.
Former MLM participant Taylor Leigh hosts a YouTube channel called “The Antibot” and focuses on investigating specific companies as well as exploring the intersection of the direct selling industry and religion.
Another former MLM participant and a return speaker to the conference, Alanda Carter, analyzes direct selling companies and interviews former distributors on her YouTube channel, “The Recovering Hunbot.”
Author and business owner Savy Leier was also featured as a YouTube creator. Her emphasis is on the exploitation of women, and she argues that many direct sellers are taking up resources in the business world and pushing false entrepreneurial goals to the detriment of women in particular.
DSA Responds to Conference, Announces Thought Leader Conference
The DSA released a brief synopsis of the anti-MLM conference, emphasizing that they, along with industry partners, were not invited to participate. In its overview, the Association stated that many of the direct selling companies accused of deceptive behavior during the conference were not DSA members. The Association also announced the Direct Selling Education Foundation (DSEF) National Thought Leaders Conference to take place Oct.13-14, 2022, at Emory University.
The announcement includes an invitation to all media, regulators, and bi-partisan policymakers who participated in the virtual anti-MLM Conference. The DSEF states that the goal of the thought leader conference is to provide field experts and academics the opportunity to “present research and data-driven materials to offer a balanced view of the channel.”
SSN ’s Q&A with Channel Critic William Keep
Organizer of Multilevel Marketing: The Consumer Protection Challenge Conference
William W. Keep, Ph.D., is a professor of marketing and former dean of business and interim provost at The College of New Jersey. He has assisted state and federal prosecutors in the prosecution of pyramid schemes and has been quoted in the press (The Atlantic, Wall Street Journal, Bloomberg/ BusinessWeek, Financial Times, New York Times, Forbes, etc.) as an expert on multilevel marketing.
SSN: How did direct selling get on your radar to the point that you began to challenge the industry?
William Keep: I actually focused on retailing somewhat in my graduate studies and then took a position at the University of Kentucky where I was their primary faculty teaching retailing. So, of course, direct selling has been part of retailing since the late 1800s.
Then in the mid-’90s, the Department of Justice came to the business school and asked for assistance. They were looking at an MLM called Gold Unlimited, and they said it was a pyramid scheme. I said, “I don’t know what a pyramid scheme is.” But they said, “Well, they claimed to be retailing.” So I said, “Well, I can tell you whether or not they’re retailing.” So, that was my first case, and then it kind of went from there.
SSN: In last year’s conference, Federal Trade Commission (FTC) Commissioner Noah Phillips said in his keynote address, “Multi-level marketing done correctly can benefit distributors and consumers.” Do you agree with that statement?
William Keep: Yes.
SSN: So, if companies are regulated correctly and self-regulate correctly, there’s daylight for you there?
William Keep: Well, I wouldn’t agree with self-regulation. I don’t believe that self-regulation in industry is proven to be very effective. Everybody likes to point to one specific example, which is distillers in the distilling industry, but there are lots of other examples where it has failed. So the fact that we can find one example in American business history, it actually doesn’t prove a point. So I doubt… I’m very skeptical of self-regulation in any industry and its effectiveness. I worked for a trade association for a few years, so it doesn’t mean that I think trade associations are somehow ineffective in helping the industry be aware of issues, or discussing the issues, or bringing in people to talk about the issues. But it, in and of itself, is not the same as regulations.
SSN: Why were direct selling advocates kept out of your conference? Would there have been a benefit to reserving part of the time for a debate, or a Q&A? What was the thought process behind setting up that conference in this way?
William Keep: Our conference is to give voice to people who have concerns about the industry. That concern can come from former distributors, academics who are doing research on it, lawyers who have been in cases about it, and a variety of people. So the point isn’t for us to get the industry to respond to us specifically, and the industry of course has lots of ways to get its own message out. So, we’re not trying to resolve a problem with these conferences. That’s not the point of the conference to say, “Well okay, we fixed something with this conference.” We are trying to give a vehicle for people to present their research, to present their concerns and experiences. So far it’s been pretty good.
SSN: Let’s talk about the FTC. They’re currently considering a new earnings claim rule and have recently closed the public comment period on that. Did you and your associates submit comments on that, and what do you want to see in a new rule?
William Keep: I submitted a comment, and I’m aware of some others who did. I can’t say everyone did. I didn’t take a poll or anything, but you can find it, they’re all public.
Certainly, transparency is a big deal, and in my comment, I try to highlight that this ground, in terms of a concern about a lack of transparency, is well trod. We’ve been talking about this for a long time. According to the FTC’s own consumer survey research,
victims of this industry occur in large numbers annually. So I started out by reinforcing the sense of a need there. I showed some examples of where I believe the current approach is ineffective. So, certainly, the presentation of data that helps a person appreciate a typical experience would be very helpful. But in any case, disclaimers generally aren’t effective and there’s research on that. So, it’s interestingly an industry that has a lot of data, but that shares no data, not in any meaningful way.
SSN: Any specifics on data sharing you would want to see? Are we talking just more of a deep dive into earnings for the whole cross-section of distributors? Where is it that the channel is coming up short in your view?
William Keep: Well, they’re coming up short across the board. This is not the industry that’s known for its transparency. So I can’t even verify the industry data itself, right? There’s no independent way to verify that. So the way the data is presented, for example, let’s just talk about earnings data right now. The way the earnings data is presented obscures the fact that all averages are created by distribution with underlying distributions, right? So when you say the average is 50, what does that mean? Does that mean everybody got 50 or does it mean somebody got 100 and somebody got zero? What does it mean?
So when you present earnings based on that approach, you really obscure the fact that there’s a very skewed distribution, underlying those earnings. They have the data, the data exists. I mean, they know who they pay, right? They know how often they pay. They know which geographic areas they pay. They know how long they’ve been paying somebody. There’s a lot of data, and it’s readily available and they choose not to use it.
SSN: Do you think that the consumers who sign up, with the sole intention of just acquiring product for themselves and not distributing, are being lumped in with the true distributors? Is there a segmentation problem that’s muddying up the data? Because there are a lot of people who choose the preferred customer option with these companies.
William Keep: Well, we don’t really know that for sure, do we? I mean, we don’t really know what that data looks like, and we don’t really have any way to verify that either? So again, the company is presenting to us a preferred picture. We can’t verify the picture. We don’t know how they segment. We don’t know when they segment. We don’t know to what extent they move people from one segment to another. You will have—I mean, the interesting thing is that this industry didn’t seem to care very much at all about preferred customers before the Herbalife settlement.
SSN: If we see the FTC finalize this new rule, and they incorporate strict enforcement of that rule—along with the civil penalties that they’ve recently sent out those letters on—going full bore in terms of enforcement, would that satisfy you and your colleagues?
William Keep: I can’t speak for all of the conference participants. There’s a lot of different views among the people who participate—some views that I don’t agree with. And some topics that I don’t claim to have any expertise on. So, I think it’s very hard to give a good answer to that because there’s a big difference in the distance between where we are now and where we would be, given what you just described, and we’ve never been there, ever. Any attempt to get there was fought by the industry in terms of the business opportunity role. So it’s not clear to me what that hypothetical action looks like. There are two components just as you described. There’s the component of what is the actual language of the rule, whatever that rule might be. Then the other one is the enforcement. It is easy to find MLM companies making statements like, “Well, we can’t be operating illegally because if we were, the government would shut us down.”
Well, we know that’s not the case. MLM companies operated for years before they got shut down. So what’s that enforcement look like? I’m not sure what rigorous enforcement is going to look like. I actually am not even sure if the FTC is willing to put the resources in to make it happen. I don’t know the inside operations of the FTC, but you’re really talking about an environment that this industry has never, ever seen.
SSN: You mentioned some things you may not agree with that came out of the conference. Several presenters at your conference suggest that MLMs are cults. What is your opinion on that and is that painting with too broad a brush?
William Keep: I think a reasonable position is to be careful about making really broad statements. So, some of the people who have a shared interest with me, in terms of being a critic of the industry, some of them are more willing to make broad statements than I am. You have never heard me or can find a piece that I’ve written where I’ve called an MLM a cult.
SSN: What are your thoughts on gig work, in general, and the phenomenon over the past 10 or 20 years of supplemental income being accessed by increasing numbers of people?
William Keep: I don’t think that gig work is as important to our economy as the media makes it out to be. It’s really a dinky, dinky part of our economy. It’s not something that I am overly excited about, that this is the new wave, or we’re all going to be doing gig work, or some ridiculous thing like that. So that’s part of it. The other part of it is, people have always been able to have, and have had, side gigs. They’ve made wax candles and sold them at the farmer’s market. So this notion of entrepreneurship, again, seems to be offered as an alternative for a socioeconomic environment that has offered less social mobility than it used to.
As if it’s a solution to a bigger problem. So there’s no doubt that we’ve lost social mobility. There’s no doubt that we have more unequal income distribution, and that’s coming mostly from differences in employment and those kinds of things. So the excitement about the gig community, sometimes this is to me, kind of a bit of an overlook about entrepreneurship in general. It’s a bit of an overlook of a bigger issue. Now hopefully, the economy will be cooking along. I’m not pessimistic like some people are, even though my retirement took a hit just like everybody else’s.
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