U.S. MLM companies face new regulatory uncertainty in 2022. The FTC has adopted a new enforcement strategy utilizing its Penalty Enforcement Authority to target MLM companies. In October 2021, the FTC sent “notice of penalty offense” letters to hundreds of companies. These letters rely on old FTC determinations of what constitutes a deceptive business practice and are a statutory prerequisite to FTC seeking civil penalties of $46K per violation. The notice letters do not identify conduct by a recipient company that the FTC views as illegal. This strategy is problematic because the notice letters fail to give fair notice of alleged violations before subjecting a company to potentially significant civil penalties.
— Brent Kugler, partner, Scheef & Stone, LLP
The biggest legal issue facing the direct selling channel this year is certainly increased regulatory risk from the FTC. The Commission has shown increased scrutiny of the channel in the form of warning letters and investigations. But the FTC has also sought greater power by: (1) lobbying Congress for express authorization for monetary relief under Section 13(b) of the FTC Act; (2) announcing its intention to revisit the Business Opportunity Rule’s application to direct sellers; and (3) stating that it will utilize old orders to apply the Penalty Offense Authority Rule to levy fines against direct selling companies. Companies must closely watch these initiatives and react accordingly.
— John Sanders, partner, Winston and Strawn LLP
There are certainly many legal threats to the DS channel. However, in my opinion, the one that stands above the rest is the near-universal corporate mindset that expends enormous time and effort to find new ways to do things the old way rather than seeking ways to legitimately comply with the legal paradigm that favors retail sales and frowns on rep self-activation through their own purchases. This legal challenge will persist until direct sellers put real effort into compliance with the current paradigm rather than simply making cosmetic changes to the old ways of doing business.
— Spencer Reese, partner, Reese Richards PLLC
Plus ça change, plus c’est la même chose. “The more things change, the more they stay the same.” As evidenced by its public sabre rattling, the FTC is smarting from the comeuppance given to it by the Supreme Court. Though, undoubtedly, the agency will bring a few test cases to flex its post-13(b) muscles, those cases will be fiercely litigated and take time. In the meantime, the agency’s prosecutorial priorities remain unchanged, as should the mission of direct sales companies. Establish a sincere and genuine culture that there is no business advantage (and substantial legal jeopardy) to exaggerating your company’s business opportunity, and continue to educate, police, and discipline your field. This was good strategy before AMG Capital, and remains good strategy today.
— Larry Steinberg, Chair MLM Industry Group, Buchalter law firm
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