FTC Expresses Concern with MLM Component

The FTC announced a settlement with Fortune Hi-Tech Marketing, its related companies and its principals regarding a multi-level marketing (“MLM”) program that the FTC contended was a pyramid scheme. In particular, the FTC challenged its practices of making false earnings claims and targeting Hispanic and immigrant communities, in addition to the fact that fees were earned on recruiting, not on the sale of product or services. Moreover, the FTC claimed that 98% of participants lost more money than they made.

The settlement includes a ban on operating MLM programs. While this is likely due to the alleged missteps by defendants, the settlement goes beyond MLM programs to bar defendants from engaging in a “Prohibited Marketing Program.”

Specifically, a prohibited marketing program is defined as “any marketing program or plan in which any participant pays money or valuable consideration in return for which the participant receives the right to receive rewards in return for recruiting other participants into the program or plan, which are unrelated to the sales of products or services to ultimate users.” For the purposes of this definition, “sale of products or services to ultimate users” does not include sales to other participants or recruits or to the participants' own accounts.

The definition of “Prohibited Marketing Practices” is perhaps the most interesting take-away from the settlement. The FTC has previously raised concerns with the common direct sales program practice of paying commissions on sales to persons within the network, wanting participants to only receive commissions on true third-party sales. Indeed, this restriction is the same one contained in the “Prohibited Marketing Scheme” provision contained in the federal district court order in Burn Lounge, which also prohibits earnings from sales to participants or other recruits.

While neither the Fortune Hi-Tech settlement nor the Burn Lounge order are binding on persons other than the defendants, the fact that the FTC uses the term “prohibited marketing practices” or “prohibited marketing scheme” to prohibit the paying of commissions to persons within the network clearly indicates its concern with this aspect of direct sales programs. As such, direct sales operators should closely evaluate this aspect of their program, in addition to the other more controversial aspects, such as earnings claims and targeting minority community members.

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