FTC Updates Mergers & Acquisitions Guidelines
February 2024 Issue By Troy Keller, Michael Lindsay and Anthony Badaracco
Mergers and acquisitions is an important growth strategy in many industries, and the direct selling space is no different. Companies in this sector tend to embrace a variety of deal types. The higher-profile deals may involve a major player in the industry acquiring a peer company.
Perhaps the most common strategy is for a company to employ “bolt-on” programs through which it pursues targets that allow it to expand into new geographies or acquire new product lines and technologies. Joint venture structures are also used regularly, particularly for cross-border transactions.
Each of these strategies, however, will require more careful planning going forward as a result of new merger guidelines adopted jointly by the Federal Trade Commission (FTC) and Department of Justice (DOJ) on Dec. 18, 2023. The new guidelines seem to reflect the agencies’ expanded views of merger-related injuries to competition and signal more aggressive merger-control enforcement going forward, with expectations being that many deals will receive a closer look than they might have in the past.
The 2023 Merger Guidelines mark a shift toward more aggressive enforcement through a number of “principles-based” factors. For example, mergers by “already dominant” firms; mergers related to industry “consolidation,” patterns, or strategies of “serial acquisitions”; and mergers that threaten to eliminate “nascent competitive threats” are all principles that the new guidelines espouse. Historically, the agencies looked more closely at horizontal mergers, i.e., transactions involving companies competing in the same space. Vertical mergers, such as an acquisition of or by a supplier, were also examined, but those purely vertical deals were less likely to be challenged.
The agencies will presume that if a merger results in a firm having a 30% market share or more, it will be deemed to lessen competition, and the agencies will generally infer, absent countervailing evidence, that a merging firm has or is approaching monopoly power if it has a share greater than 50% in a market for a product, service, or route to market that its rivals use to compete with it. Many product categories that direct selling companies compete in (natural products, cosmetics, housewares, apparel) tend to be broad and deep markets. Perhaps for this reason, most deals in this space historically have not garnered significant regulatory review. However, as markets evolve, regulators may define markets more narrowly to cover specific types of natural products. A premerger notification filing is required only for transactions above a certain size (for 2024, the threshold is $119.5 million). Transactions below that threshold do not require notification to the agencies, and they are therefore less likely to be reviewed and are more likely to be able to proceed without regulatory delay.
As a final note, while there has not been significant consolidation in the direct selling space in recent years, it is conceivable that evolving market factors—such as slower growth or increasingly more expensive capital—could lead to consolidation in coming months and years.
As markets consolidate, deals become progressively harder to get cleared by regulators, and there can be something of a first-mover advantage. It is therefore prudent to have a clear strategy, coupled with a company’s best view of future market developments, in order to prepare contingency plans and be in a position to pivot quickly as markets change and evolve.
The Balancing Act of Noncompete Bans
May-June 2024 Issue By Brent Kugler
On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to issue a Final Rule banning the use of noncompete restrictions to prevent workers from joining competing companies. The FTC’s action marks the first time in more than 50 years that the Commission has issued a rule mandating an economy-wide change in how U.S. companies operate. The FTC’s ban on noncompete restrictions is the latest complication for direct sales companies seeking to balance incentivizing salesforce loyalty and restrictions on salesforce mobility. Salesforce mobility has long been, and remains, a unique issue (and concern) for direct sales companies. This is because, at one time or another, almost every direct selling company has experienced the disruption of a top leader leaving to join a competing company.
With the continued evolution of the gig economy and influencer/social-media-driven opportunities, there is a clear trend that company and brand loyalty have become less important to today’s workers, while flexibility and mobility have become more important. According to a wide-scale study conducted by consulting firm Deloitte, 46% of polled Generation Z workers and 37% of Millennials said that they worked a second part-time or even full-time job in tandem to their main work. Even if the FTC Final Rule is stayed by a court, five states currently ban the use of noncompete clauses. Moreover, even if a company’s noncompete restriction is legally enforceable, it may still be problematic because the noncompete restriction may be viewed as a control factor suggestive of an employment relationship.
The best solution for companies to prevent disruption from a leader’s exit is a non-solicitation restriction. Importantly, a non-solicitation policy does not prevent a consultant from working for another company. It does, however, prohibit a consultant from recruiting other consultants to leave for another company. Direct selling companies often “compete” with one another regardless of whether they market similar products or services. Indeed, several courts have recognized that in the multilevel business channel all multilevel-marketing companies compete with one another to develop and maintain an effective sales force.
Depending on the state, a reasonable post-termination restrictive period is usually between six months and two years. However, in some states post-termination non-solicit restrictions are much more scrutinized. In California, several courts have recently held that post-termination non-solicitation provisions are not enforceable.
Today’s workforce is demanding increased mobility. Contractual restrictions on consultant movement or involvement with other companies are increasingly more scrutinized. The FTC has declared war on noncompete restrictions. At the same time, states are rewriting their statutes to narrow the definition of “independent contractor.” Given the unique nature and structure of direct selling companies, it is critical to have enforceable contractual provisions to prevent the severe disruption that can occur when a top leader solicits other consultants to leave for another company, while also allowing consultants the freedom to work multiple business opportunities.
The FTC’s New Business Guidance: Do You Need To Adopt All of It?
September 2024 Issue By John Sanders and Katrina Eash
The Federal Trade Commission (FTC) has faced several recent setbacks. Last year, in the Neora decision, a federal court rejected the FTC’s arguments that Neora was operating an illegal pyramid scheme and was making deceptive income and product claims. Then, in August 2024, a federal court in the Ryan decision enjoined nationwide the FTC rule that would ban worker noncompetes.
Despite these setbacks, in April 2024, the FTC issued new business guidance concerning direct selling companies. On June 28, 2024, the U.S. Supreme Court in the Loper Bright decision overturned Chevron, reversing four decades of courts’ deference to the interpretation of ambiguous statutes by federal agencies.
Much of the 2024 Guidance outlines areas the FTC will consider in evaluating whether direct sellers are pyramid schemes or have engaged in deceptive practices under Section 5 of the FTC Act. Some of the FTC’s guidelines are novel, while others retrench or even retract earlier positions previously taken by the FTC. For years, courts (and the FTC itself) have stated that an MLM is not a pyramid scheme when a seller’s compensation plan is connected with retail sales. Now, the FTC states that “[t]here is no safe harbor under the FTC Act for such a compensation plan.”
Courts have often considered purchases made by participants to be legitimate retail sales to “ultimate users.” The FTC confirmed as such in its 2018 Guidance. In a turn of events, the FTC’s 2024 Guidance now rejects its previous position, explaining that it will instead look to, among other things, whether purchases made by participants satisfy personal or retail demand and whether companies encourage participants to purchase products for reasons other than “true retail demand.”
The Supreme Court helped to answer that question with its June 2024 Loper Bright decision. After four decades of dominance, the Chevron doctrine died with Loper Bright. The Court reasoned that agencies have no special ability to interpret ambiguous statutes. Instead, courts do. Thus, courts should exercise their own judgment in interpreting ambiguous statutory provisions. Loper Bright represents a sea change in how courts view administrative law.
Still, much is uncertain about the standard of review adopted in Loper Bright. Lower courts will likely need to flesh out its contours over years—or even decades. Loper Bright holds that courts should give “due respect” to agency interpretations when those interpretations are longstanding and well-reasoned.
For direct selling companies assessing whether to adopt positions the FTC takes in the 2024 Guidance, the uncertainties inherent in Loper Bright are directly in play and must be carefully considered. For example, the FTC’s new pronouncements that direct sellers should avoid claims about even “modest” or “supplemental” income is far from “longstanding”—indeed, the FTC routinely suggested such language to direct sellers for many years prior to the 2024 Guidance.
Put simply, while the legal landscape appears more favorable to direct selling companies under Loper Bright, a post-Chevron world raises many new uncertainties for direct selling companies. Those uncertainties necessitate an individualized assessment of each position taken by the FTC in the 2024 Guidance to evaluate the extent to which your company is (or is not) at risk for failure to comply with a position taken in the Guidance.
Social Media Updates Pose New Risks, Opportunities for Direct Selling Companies
November 2024 Issue By Sam Hind
In today’s digital landscape, social media is evolving rapidly, with platforms like Meta introducing a range of new features—AI-powered content, Threads communities, advanced Reels options, and more. These updates bring exciting potential for the direct selling industry, creating fresh ways to engage audiences and build connections. But with these tools also come new risks: The potential for misuse, misinterpretation, and an overwhelming volume of options can quickly lead to unproductive habits. At its heart, direct selling is about relationships, and while digital tools can enhance these, they can’t replace the need for authentic connection. Leadership plays a pivotal role in steering efforts to keep this balance.
Meta’s recent AI-driven updates, which include comment summaries, content recommendations, and automated tools to enhance post engagement, bring an undeniable appeal. For busy consultants, these features provide a way to stay on top of interactions, reducing the time required to manage engagement. However, an over-reliance on these AI features risks diluting the unique voice and personality that consultants bring to their brand. As AI suggestions dominate, consultants might unknowingly slip into a pattern where they’re defaulting to using AI-curated posts rather than thoughtfully engaging their audience.
The introduction of Threads and Messenger Communities by Meta offers an exciting opportunity for consultants to cultivate meaningful relationships with their audiences. These platforms enable the creation of exclusive, tight-knit groups where consultants can connect more personally with customers and prospects. In a world of constant social media updates, one thing remains unchanged: the importance of leadership that provides clear, actionable guidance. Consultants look to their corporate teams for direction, and this support can shape the entire field’s momentum.
Without clear leadership, consultants can easily become overwhelmed by the array of tools and trends. When they’re unclear on how to achieve results, they’re more likely to disengage, leading to a cycle of low morale, inactivity, and frustration. With so many new tools at their fingertips, consultants face the risk of burnout from “always-on” marketing. Here, too, leadership has an essential role to play. By advocating for structured, balanced social media habits, corporate teams can protect consultants from burnout, empowering them to engage consistently without compromising their personal lives.
As social media platforms continue to evolve, the direct selling industry stands at a crossroads: Will we embrace these tools as a means to support genuine connections or risk losing the trust and authenticity that define us? With thoughtful leadership, consultants can learn to wield these tools with finesse, fostering relationships that resonate.