Community marketing has an inherent compliance problem

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Multilevel marketing, also known as network marketing (the term many of these companies prefer themselves) has become an important sales channel for nutritional supplements. A 2015 estimate put the sector at $ 4.4 billion of the $ 36 billion pie in the US dietary supplement market. And globally, the sector is even larger: the largest company exclusively focused on nutritional products, Herbalife, had sales of $ 4.5 billion in 2015 (Herbalife operates in more than 90 countries). New MLMs emerge and others die every year, but recent estimates show that at least 60 companies are currently selling nutritional supplements in this form in the US market.

Integrated compliance challenge

So what happens in this sometimes opaque sphere is important. MLMs often develop a messianic zeal among their distributors, asking their supporters to pay attention to information that comes from within the company rather than from outside sources, some of which, like friends and family, might question an individual distributor’s effort Business.

Kevin Thompson, an attorney based in Franklin, TN, has a special insight into the industry. Thompson, a partner in the law firm Thompson Burton, calls himself an “MLM Attorney” and specializes in helping multi-level marketing companies with their legal problems. Thompson spoke to NutraIngredients-USA about how the personal enthusiasm inherent in the multi-level marketing model represents an integrated compliance challenge for these companies.

“There is a higher risk when working with independent contractors. As well as controlling its own messages, a company has an obligation to train its contractors to color within the lines, ”said Thompson.

The wide variety of MLMs in the supplement business also means a multitude of compliance efforts, Thompson said. The sector ranges from the Amways, Herbalifes, and Usanas of the world (Usana has annual sales of $ 1 billion) offering many different products to the most recent MLM startups that focus on a limited range of products or perhaps just a single one Product focus on a specific condition.

“It is not uncommon for money-tight network marketing companies to neglect compliance efforts,” Thompson said.

The main risk for non-compliant messaging comes from the zeal of individual distributors, Thompson said. Some of the most active of them have found good results with the products they sell, in their opinion, and find it difficult to understand why, in some cases, it is inappropriate to share these experiences in a sales pitch. Many of these testimonials can lead to illegal statements about illness.

“You think my arthritis was bad and now it’s better. Why can’t I share this story? ”Said Thompson.

Allegations of the pyramid scheme

The sector has come into the spotlight in recent years mainly through the efforts of a single activist investor, Bill Ackman. In 2013, Ackman took a huge short position in Herbalife stocks valued at up to $ 1 billion through his investment firm Pershing Square and launched an unprecedented public information campaign attacking Herbalife as an illegal pyramid scheme and making illegal claims Products and exploitation of what he described as vulnerable minority communities.

Ackman’s campaign sparked an entire squad of online investment commentators who started telling somber stories about the legality of the practices of a number of MLMs, not just Herbalife. In 2014, the FTC announced (perhaps not by accident) that it was investigating Herbalife’s business practices. A resolution to this case has been reported in the press, although neither Herbalife nor the FTC have officially commented on it. Thompson said that while this was a painful episode for the MLM industry, there was a silver lining.

“I think recent regulatory activity is starting to scare some companies outright,” said Thompson.

FTC never released details of its Herbalife investigation other than to confirm that it was taking place, but it was widely believed that it was focused on whether the company’s business model was an illegal pyramid scheme. The key point is to what extent an MLM company rewards attendees for selling products and services to people outside the network, rather than primarily incentivizing new channel partner recruitment. This is more difficult to analyze than you might think, and Thompson said this indicates the need for a more definitive line of regulation on the matter. The FTC’s 2014 ruling in the BurnLounge (an MLM that allegedly sells music downloads) offers some clues, but an actual regulation or law would be an improvement, he said. A new bill presented to US Congress by Tennessee GOP MP Marsha Blackburn aims to clarify that definition, Thompson said.

“Since 2014 we have had a better idea of ​​what constitutes a pyramid system. The gray area has shrunk a bit, but needs to be defined better. It’s causing problems on both sides, for regulators and for companies trying to get things right, ”he said.

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