Direct Sellers Update: Regulation, Law & Policy

Direct sellers can breathe easy for the time being. On August 20th, Judge Ada Brown for the United States District Court for the Northern District of Texas set aside the Federal Trade Commission’s (FTC) rule imposing a national ban on noncompete agreements, preventing the rule from taking effect across the country.

The recent FTC approval of a final rule banning non-compete agreements has sparked concern and uncertainty among direct sellers. Understandably, many are wondering how this ruling will impact their businesses and what steps they can take to protect themselves against unfair competition and misuse of their intellectual property. However, amidst the apprehension, it’s essential to remember that there are avenues for safeguarding your interests, and the FTC’s rule may not be as set in stone as it initially appears.

In part one of our series about the pivotal decision in the Neora case, we provided a high-level overview of the court’s decision and its potential widespread effect on the direct sales industry.

In a long-awaited decision, last week Judge Barbara Lynn in the United States District Court for the Northern District of Texas granted Neora, LLC (formerly, Nerium) a victory, denying every single claim the FTC brought, including the FTC’s argument that Neora was operating an illegal pyramid scheme and made deceptive income and product claims.

A federal judge in Arizona recently rendered a 131-page order setting forth his findings of fact and conclusions of law following an 11-day bench trial, explaining why he believed that the Federal Trade Commission (FTC) had proven that defendants Success By Health (SBH) and various related entities and individuals had engaged in a pyramid scheme, made false income claims, and committed various other violations of the FTC Act. SBH’s conduct was particularly egregious and far out of step with best practices in the direct selling industry. That said, the court’s analysis of SBH’s conduct contained many sweeping statements that the FTC has already begun—and will certainly continue—to wield as a sword against legitimate direct sellers. 

The Federal Trade Commission (FTC) has taken yet another step in its campaign against misleading and deceptive claims. Recently, the FTC sent notice letters to hundreds of businesses with a clear warning: avoid making deceitful and/or unsubstantiated product claims or face substantial civil penalties. The notice has significant implications for direct sellers, particularly those involved in the marketing of over-the-counter (OTC) drugs, homeopathic products, dietary supplements, or functional foods. Let's take a closer look at the impact of this FTC notice on recipients.

The lawsuits, filed by the Department of Justice, on behalf of the Federal Trade Commission, alleged that the distributors, who styled themselves as “wellness advocates” and touted their expertise as medical practitioners, made numerous claims during webinars conducted in 2022 that doTERRA’s products could prevent, treat, or cure COVID-19.

Direct sellers should take note of recent Federal Trade Commission enforcement actions and a proposed FTC rule which could fundamentally change the legal landscape for non-compete clauses. Under the FTC’s new approach, companies would not be permitted to enforce non-compete clauses against their workers. And yes, that includes independent contractors.

A year after the Supreme Court’s AMG Capital decision put a halt to the Federal Trade Commission’s (FTC) power to seek monetary relief under Section 13(b) of the FTC Act, the Commission is deploying new tools to seek such relief.

Most direct sales companies have arbitration agreements and class action waivers in their distributor and consumer agreements these days.  Those provisions go a long way in making sure your company is protected from bet-the-business, expensive, and time-consuming class actions and other litigation.  But a recent decision out of California, Sellers et al. v. JustAnswer, LLC, 289 Cal. App. 5th 444 (2021), underscores the importance of ensuring your company’s registration process is appropriately structured, especially if your online registration processes involve click-wrap agreements.

In 2020, the Federal Trade Commission (“FTC”) sent letters to a number of direct sellers, alleging that they or members of their sales force had made false or misleading health and earnings claims related to COVID-19. Then in 2021, Congress enacted the COVID-19 Consumer Protection Act (the “Act”), providing for civil penalties of up to $46,517 for every misleading claim about the treatment, cure, prevention, or mitigation of COVID-19. And just recently, many of our direct selling clients received letters from the FTC reminding them of the FTC’s authority under the Act.

In April of this year, the Supreme Court’s unanimous AMG Capital decision significantly limited the FTC’s enforcement power by ending its ability to recover monetary damages against defendants under Section 13(b) of the FTC Act. 

The AMG Capital decision was certainly a win for the direct sales channel, removing the primary tool the FTC has used over the past several decades to win money on behalf of consumers in court, § 13(b) of the FTC Act.

2020 and 2021 have brought an unprecedented amount of FTC scrutiny to the direct selling channel. With some companies under formal investigation and many others receiving warning letters, it is no surprise that industry leaders want to better understand what the FTC is looking for and ways to prevent becoming an FTC target. 

The Business Opportunity Rule is up for its scheduled 10-year review, and the results could have a dramatic impact on the direct sales channel.

Justice Breyer wrote for a unanimous Supreme Court on Thursday in AMG Capital Management v. Federal Trade Commission, holding that § 13(b) of the Federal Trade Commission Act (FTCA) does not allow the Federal Trade Commission (FTC) to recover “equitable monetary relief such as restitution or disgorgement.”

COVID-19 continues to impact much about our daily lives – from the way business is conducted to how we communicate with friends and family. As a result of COVID-19, companies must adapt to and remain mindful of the shifting environment in which they conduct business. Indeed, the COVID-19 pandemic has created a complicated and risky compliance environment for companies. That is certainly true for direct selling companies, who remain on the radar of the Federal Trade Commission (FTC).

The direct-selling industry is paying close attention to the Orage lawsuit because if Amway’s IBOs are deemed employees under either standard, many other MLMs will likely see challenges to their independent-contractor classifications.

A recent paper by members of the Federal Trade Commission’s (FTC) Bureau of Economics describes a new pyramid-scheme hallmark to add to the FTC’s growing list: A pyramid scheme creates and exploits overly positive recruitment expectations to increase the company’s profits. In other words, by misleading potential participants about the earning potential from recruitment-related rewards, pyramid schemes induce participants to join even if they have no expectation of earning a profit from retail sales.