2020 to see issues stay at forefront; comp plan changes most urgent
By Teresa Craighead
What’s on the horizon for direct sellers at the beginning of 2020? Three issues that appear to stand above the rest are the growing regulations around the exploding CBD market, the direction and manner of Federal Trade Commission (FTC) scrutiny and where it will next focus, and the most problematic elements of complicated compensation plans.
The Federal Drug Administration (FDA) is struggling to develop regulations and guidance amdist the exploding demand for products containing cannabidiol (CBD).
In Nov. 2019, the FDA issued warning letters to 15 companies for “illegally” selling CBD products in ways that violate the Federal Food, Drug and Cosmetic Act (FD&C Act). The agency has approved only one CBD product for human consumption, a prescription product to treat seizures related to two rare forms of epilepsy.
Recently, the agency stated that it cannot conclude that CBD is generally recognized as safe (GRAS) for use in human food, citing a lack of scientific information.
Attorney Spencer Reese, partner at Reese Poyfair Richards, says using the GRAS argument is a new approach for the FDA. Nevertheless, Reese says the agency is only taking enforcement action against those making the most egregious claims, while companies continue to make and sell CBD products across the U.S.
He says, “Though the FDA wishes it could turn back the clock hands and get on top of this issue, it’s really not possible. The letters were sent to companies still making outlandish claims and appear to have no effect on the market demand for these products.”
Reese believes that CBD products will continue to gain consumer acceptance and regulators will continue to take action against fringe claims. The FDA has made its position clear. According to their website “CBD is an unapproved food additive, and its use in human or animal food violates the FD&C Act for reasons that are independent of its status as a drug ingredient.”
Kerry Brown, co-founder and CEO of CBD manufacturing company Factory6 says neither the recent warning letters nor the FDA’s stance on ingestible products with CBD has slowed demand.
“Nothing has slowed down. In fact, we’re seeing a boom right now and we expect that growth to continue, says Brown. “The FDA has still not released guidance around CBD, even though they have tremendous pressure from Congress and the other agencies to do so.”
Though the FDA states that CBD products cannot be marketed as supplements because they do not meet the regulatory definitions, Brown says the assumption is products “will be approved as dietary supplements of some sort, and we’re waiting for guidance around it. Meanwhile, monitor claims just as you would for any other dietary supplement.”
Agreeing with Reese, Brown says, “As far as consumers and manufacturers are concerned, CBD products are out of the gates. The horse has left the barn. There’s no way he’s going back in there. They key is to not make yourself a target.”
According to McKinley Oswald, president of global sales at Utah-based marketing firm Verb Technology, segmenting customers and distributors will be key to avoiding Federal Trade Commission (FTC) interference.
Oswald says, “We believe with what’s happened at AdvoCare and now Neora, it’s more important than ever that companies separate the customer journey from the distributor journey. From enrolling to communications, the entire experience should be treated differently.”
Oswald goes on to say from the FTC’s perspective, a company doesn’t have a strong “real” customer base if they are enrolled in the same manner as a distributor. His firm works with clients who have established completely separate marketing divisions for their customers and distributors in order to focus completely on the differing approaches.
“If we don’t take proactive steps now to adapt and shift where necessary,” says Oswald, “I believe someone else—like the FTC—will come in and take those steps for us.”
Gregg Corella, vice president of sales at software firm Exigo, agrees the primary way to avoid becoming an FTC target is to develop a retail customer strategy as opposed to a wholesale-buyer-as-distributor.
He says, “Today, there is absolutely no reason not to have a retail focus. And why not incentivize customers with loyalty points or discounts to share products they love? It’s a natural human behavior.”
Problematic Comp Plan Elements
The Securities and Exchange Commission (SEC) defines a pyramid scheme as an operation that focuses primarily on recruitment, has no genuine product sold to retail customers and promises a high return in a short period of time.
Though the SEC originated the concept of a pyramid scheme, the FTC applies this definition to any company that appears to perform similarly by emphasizing recruiting new distributors, lacks retail sales to those outside the compensation plan, and makes lavish income and lifestyle claims.
Legal actions against multiple companies in 2019, starting with the Washington state lawsuit against LuLaRoe in January, the FTC and AdvoCare settlement, and the Neora double lawsuits (Neora v. FTC and FTC v. Neora) all appear to hone in on particular elements of direct selling compensation plans.
Washington state and the FTC have alleged over the past year that such items as leadership bonuses, bonuses paid on starter packs, upline commissions on wholesale purchases, lack of participants outside the compensation plan and even recruiting hostesses to throw home parties evidence the operation of a pyramid scheme.
Attorney Kevin Thompson, partner in law firm Thompson Burton, believes the easiest thing a company can do to minimize their risk in 2020 is to eliminate monthly volume requirements (MVR) for distributors.
Whether the MVR is required to maintain active status or receive commission payments is irrelevant to Thompson who says, “Moving away from monthly volume requirements is the one thing that could move the needle in our industry.”
Thompson is quick to say that having monthly volume requirements is not illegal, just risky. He says, “Why give the FTC ammunition to allege that your distributors only hit their volume requirements to qualify for commissions? This is obviously a red flag for them.”
Though additional issues may emerge throughout the year, these three remain at the top of the watchlist for now.
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