Direct Sellers Update: Regulation, Law & Policy

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 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.

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.

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.

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).

On January 17, 2020, a federal judge in Arizona granted the Federal Trade Commission’s (FTC) request to both temporarily shut down the multi-level marketing company Success By Health, as well as taking the more extreme step to freeze the assets of top executives. Success By Health is best known for its mushroom-infused instant coffee product “MycoCafe.”

Last month, the District Court of Utah dismissed all but one claim filed against LifeVantage Corporation in a pending class action lawsuit. LifeVantage is a direct-sales company that distributes dietary supplements, including Protandim—a supplement consisting of a blend of five herbal ingredients.

Self-regulatory policing by an independent body is a longstanding tradition in many industries that has now made it to the direct selling world. But, since its inception, we’ve fielded many questions from our direct selling clients about what the Direct Selling Self-Regulatory Council (DSSRC) is and what its impact will be.

Two executive orders issued last month may decrease the FTC’s ability to regulate industries through informal guidance documents. Because the FTC’s regulation of the direct selling industry relies heavily on guidance, the orders are particularly relevant to our multi-level-marketing (MLM) and direct selling clients. Although any assessment of the practical impact of these orders is speculative at this point, we believe they may affect the FTC’s regulation of direct sellers in a few important ways.

A recent Memorandum Opinion and Order from the Northern District of Texas in Ranieri v. AdvoCare illustrates the challenges plaintiffs may face in alleging a RICO claim against a direct selling or multi-level marketing (MLM) company. In that Order, the Court dismissed the plaintiffs’ RICO claim against AdvoCare for failure to state a claim based on the argument in AdvoCare’s motion to dismiss—filed by Winston attorneys on behalf of AdvoCare—that the plaintiffs had failed to properly plead a RICO “enterprise.” 

On October 2, 2019, the FTC announced a settlement with AdvoCare International, L.P., in which AdvoCare, without admitting or denying the allegations in the order, agreed to abandon its multi-level compensation plan.[1] Under the order, AdvoCare must pay the FTC $150,000,000, which will be deposited into a fund for equitable relief.

We are pleased to announce the launch of our blog covering regulatory, legal, and policy issues affecting direct sellers. Our goal is to bring important legal, regulatory, and policy developments and updates straight to you.