The FTC. v. Burnlounge decision is expected to be published any day now. The court’s decision, depending on which way they decide, could dramatically impact the network marketing industry. It’s not very often that a network marketing case goes the distance to the point of a final decision from a court. Usually, these things get buried in confidential arbitration proceedings.

I’ve made 2 predictions about how this decision will go down:

1) Companies cannot pay commissions on sales aids.

In Burnlounge, the company charged $450 at registration. With that fee, distributors had the rights to use a personal website to sell music. Customers could hit the site, download music, and the distributors got paid. However, the majority of money in BL’s compensation plan allegedly came from the registration fees from distributors, not from customer sales.

Issue being decided: Can a company pay a commission on items that are only relevant for its distributors i.e. sales aids?

Prediction: No. Companies can only pay commissions on items that have a legitimate market value outside the distributor network. Most companies understand this already. If you purchase a sales kit from Avon, Mary Kay, Amway, etc, there is no point value assigned to it…they’re “non-commissionable” because they’re only relevant for the sales force, which means you would only be able to make money from selling it by recruiting more distributors, which should not be the proper emphasis.

2) Compensation plans need to be driven primarily by customer sales.

Issue being decided: What is the definition of “customer?” 

Prediction: Customer will be defined as someone outside the distributor network. There’s currently a huge split in authority over this issue, so any clarification from the court in Burnlounge will go a long way.  I agree with Gerald Nehra, fellow MLM lawyer, about his definition of “Customer.”  He defined customer as “an end user consumer of the products or services of the company, and in this strict definition, does not have any opportunity to make money with the company through any later action or conduct.”  I think that sort of definition will be held as the standard.

On July 22nd, David Vladeck, the FTC’s Director of the Bureau of Consumer Protection, testified before a senate subcommittee about the need for more resources to combat fraudulent and deceptive advertising.   In the press release, it states,

The testimony also discussed Commission’s efforts to update its Guides Concerning the Use of Endorsements and Testimonials in Advertising. Based on the prevalent – and sometimes deceptive – use of third-party endorsements in advertising, the FTC adopted the Guides in 1980. Although the basic principles of the Guides still hold true, dramatic changes have occurred during the last three decades in how products are marketed – most notably, program-length infomercials, Internet advertising, word-of-mouth or viral marketing, and consumer blogs have all become commonplace. Vladeck testified that it also has become clear that “results not typical” and other disclaimers of typicality commonly used in endorsements and testimonials are not working as intended to prevent consumer deception.

The FTC’s efforts recently clearly demonstrate that they’re ramping up their efforts to police all forms of marketing.  How does this affect your business?  Is it too little too late?  Are they overreacting?

The FTC prepared a video to educate consumers about fraudulent business opportunity schemes. In the video, the former con-artist gives an insider account of how these operations use high-pressure tactics and celebrity endorsers to trick cash-strapped consumers, and how consumers can protect themselves by demanding sales data.

FTC Cracks Down

See my notes below. They’re not edited, so be nice;)

Steve, conference all operator.
Press conference at the Federal Trade Commission office in D.C. Lots of chatter in the background.
Claudia: intro

David Vladeck, Director, FTC’s Bureau of Consumer Protection

Consumers are under tremendous anxiety for making ends meet. But for con artists, there’s an opportunity to exploit fears.

Promise to make a living while working from home, guaranteed jobs…

Promises them hope while driving them deeper in a hole.

Working with 14 states.

Massive coordinated crack down on scams that rip off financially strapped consumers.

Beverly Stewart, victim, will tell her story.

Federal government is committed to protect consumers.

“Seize on the economic stimulus dollars.” “Help consumers get free gov’t grant money for personal expenses.”
“Paying $ for job.”

John Beck was shut down today for his real-estate educational program. “Mentoring of America” His real estate system consisted of monthly website subscriptions for information that extracted money from victims.
“People want to believe that there is an opportunity that will guarantee financial success. There is no sure deal.”

“Best advice to anyone in an opportunity is fast no and slow yes.”

www.ftc.gov/moneymatters gives tips on how to recognize fraud and how to report them to the FTC.

Federal and state law enforcement officers are on the front line.

Tony West, Assistant Attorney General,
U.S. Department of Justice

Talks about collaboration b/w department of justice and FTC.
We’ve all heard of the opportunities that are “just too good to be true.”
Unfortunately, many opportunities are just that “too good to be true.” These schemes have caused consumers millions. Justice must be served to those who are partaking in these activities.

He oversees the office of consumer litigation. It has criminal and civil jurisdiction.

Justice can be brought to those that seek to defraud the public.

Schemes do not discriminate. They target everyone.

Many cases launched by the FTC end up as felony indictments.

Grand jury indicted individual for criminal contempt banning him from being involved in selling business opportunities again.
“If you operate an illegal biz op scheme, we will punish you if you break the law and seek to take advantage of the American public.”

Roy Cooper, Attorney General of North Carolina

People are losing everything. For a con artist, a bad economy is like a gold rush. Families often let their guard down. “A gold mine for scammers.”

We want to clamp down on con artists that get rich on other people’s misery.

They want you to pay cash up front. Con artists are clever and convincing.

Complaints are up 27% compared to a year ago.

N.C. has taken action against 19 companies.

i.e. concert promoter wanted to get up front fee before hiring.

Another company promised large income by starting online business…prospects had to pay for software.

Property investment schemes.

A victim of an employment scam

President has proposed a new consumer protection agency.

Right now, they need all hands on deck to fight fraud and protect consumers.

Education is important.

Don’t pay any money up front to someone that can cure your financial problems.

Beverly Stewart, victim

Single mother of two. She wanted a job and saw ad in Washington Post. It was for a cleaning position.

Asked to call a number, told to go online and download her certification, and gave her a bank account number for $89. She was told “we’ll get to you as soon as we can.” The website looked great, anyone would have fallen for it.

They depend heavily on consumer complaints. The FTC wants the complaints from other states.

They’re working to make the path easier for consumers.

“Get angry and do something.”

After she realized it was a scam, she called local authorities and the BBB…got no help.

The Washington Post said “we can’t control the ad.”

She called the FBI, consumer fraud, the US attorney’s office. She called the FTC. That’s when the help began.

When you take someone, even for a little bit of money, it takes a piece of their dignity.

QUESTIONS FROM THE PRESS

Can you really say that “fraud is up” during the economic downturn? Yes.

Reporter from the Detroit Press asked if Michigan was a part of the effort. Answer: No.

I asked if the network marketing industry would be more thoroughly regulated. Answer: we will not comment on ongoing investigations but we will pursue any company that seeks to exploit consumers. They are looking for scammers at large. They’re not looking to exclude any kind of scam. “We are not passing on any kind of scam that presents a danger to the American people.”

Boogie Man and the FTC