Company and Former CEO Ordered to Pay $150 Million Fine
by Rick Redding, Social Selling News Contributor
In May, AdvoCare International announced it was changing its compensation plan for distributors under pressure from the Federal Trade Commission (FTC). It ended its use of multi-level marketing compensation model. It was, at the time, a shocking development in the industry.
AdvoCare, which markets “innovative nutritional, weight-management and sports performance products,” said it would continue to market its products directly to consumers. AdvoCare is a well-known brand, counting New Orleans Saints quarterback Drew Brees among a list of famed endorsers, and it sponsors a college football bowl game and other athletic events.
But then the hammer came down Oct. 2, when the FTC announced penalties it is enforcing against the Texas company that include a $150 million settlement and an agreement to stay out of multi-level marketing permanently.
The FTC charged AdvoCare was operating a pyramid scheme based on three assertions. One was that its compensation depended on a distributor’s ability to recruit, that it required product purchases that were considered excessive, and that its recruitment tools included a claim that one could become wealthy.
Company Challenges Pyramid Claim
However, within hours of the FTC announcement, AdvoCare released a statement saying that the agency had some facts wrong in its announcement.
First, AdvoCare objected to a statement that it had admitted operating as a pyramid, a charge the company said “is categorically false.” And the company disagreed with an FTC statement that it would be considering marketing its products in retail stores such as GNC or Wal-mart.
“We strongly disagree with the FTC allegations, but we are committed to abiding by this agreement and moving forward. The strength of AdvoCare is and always has been our highly-valued health and wellness products, which remain in great demand by our hundreds of thousands of loyal customers,” AdvoCare CEO Patrick Wright said in the release. “We will continue to stand behind our distributors, employees and customers and to uphold our values of integrity and transparency, as we have for over 25 years.”
The statement continued to explain that its business model revision earlier in 2019 has resulted in strong sales and that it has invested in new products.
The company also made it clear that its products’ effectiveness was not part of the FTC ruling, which dealt exclusively with its multi-level compensation model.
The FTC reported that 72 percent of AdvoCare distributors earned no compensation, and another 18 percent earned less than $250 annually.
“Legitimate businesses make money selling products and services, not by recruiting. The drive to recruit, especially when coupled with deceptive and inflated income claims, is the hallmark of an illegal pyramid.” said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. “The FTC is committed to shutting down illegal pyramid schemes like this and getting money back for consumers whenever possible.”
Smith said the $150 million will be distributed over the next several months to individuals who lost money through AdvoCare’s multi-level marketing plan.
The announcement prompted plenty of reaction from multi-level marketing industry attorneys. AdvoCare had no previous flirtations with FTC violations and has been considered one of the industry’s most successful organizations.
Attorney John Villafranco of firm Kelley Drye said for other companies operating in the direct selling space, the message is clear.
“The FTC might move slowly, but it definitely moves,” he said. “It’s clear the kind of practices it considers to be unfair and deceptive. They’ve made it clear where the lines are. There is no question there’s a role for direct selling, but for those who proceed without observing what the FTC is saying, they do so at their own peril.”
So why did Advocare run afoul of the FTC?
Attorney John Sanders, who has represented AdvoCare and other direct selling companies, said it may have begun with some adverse media attention—a high-profile investigation that aired on ESPN in the spring of 2016. That piece highlighted an individual who quit his job and borrowed $50,000 to pursue riches as an AdvoCare distributor, in part because of the company’s high-profile endorser, quarterback Drew Brees.=
“The FTC says they started it in November 2016 after a flurry of inaccurate claims regarding the business opportunity,” Saunders said of the FTC inquiry, indicating that is was just six months after the ESPN piece aired.
Saunders’ law partner, Katrina Eash, said that the FTC appears to have its eyes on the industry and is making good use of the media.
“The FTC is using this as a media platform,” she said. “They’re saying nothing new, they’re focused on the same issues they’ve been focused on for years — that is false and misleading statements about the opportunity; pushing recruitment over retail sales, and that distributors had to purchase product every month.
Not the End of the Model
Eash says, “The key message is that this is not the death knell to multi-level marketing. The FTC said it is not illegal and can be done right. But companies should double down on their Policy and Procedures with a compliance team that has power to enforce the policies, and they need to monitor and document compliance.”
Given the FTC attention, many MLM companies have done just that—adjusted their policies and emphasized the importance of following bylaws to distributors, who have often operated independent of the parent company. In some cases, distributor actions have attracted FTC attention, and investigations have been launched without the parent company being aware of the rogue distributors’ actions.
“In the industry people could view this as a hallmark, a new day in the industry,” said Saunders, who represents more than a dozen direct selling companies. “We don’t view it that way. There have always been these issues. They need to be careful and put in place robust policy and procedures as far as income and lifestyle claims, and watch statements made by both executives and top-level distributors.”
For leaders of direct selling companies, the AdvoCare episode is fair warning that the scrutiny of business practices is at a higher level.
“I’m not surprised the FTC held a press conference,” said Eash. “It surprised me that the amount of materials they released. The FTC seems to be riding a press wave to help consumers understand where a legitimate MLM company ends and a pyramid scheme begins.”
Executives and Leaders Sanctioned
The news included another aspect that focuses on the relationship between companies and their distributors. The FTC’s individual charges are against former CEO Brian Connolly and four other individual distributors, two of whom settled for $4 million. The other may still go to litigation.
As emphasized above, Villafranco said companies must keep a close eye on the activities of their distributors.
“It has to be clear that if you have distributors making claims it puts the company and themselves at risk,” said Villafranco. “The law doesn’t impose upon a company the need to have complete vision over distributors, but it does require training, monitoring and enforcement. A company can’t turn a blind eye when it comes to earnings representations.”
The result for companies moving forward, he said, is that having good products and a strong base of distributors is not enough to evade the eyes of the FTC.
Social Selling News will be following this important story in the coming days and weeks. Watch for our print publication and SocialSelllingNews.com.
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