Edith Ramirez, Commentary about Speech at DSA

Hi, every now there, Kevin Thompson here, MLM attorney and managing partner of Thompson Burton. Got a big update for you all out there. I was present at the DSA policy meeting in Washington, D.C. a couple days ago, and that's where the FTC chairwoman gave a fairly significant speech at the event. And her name was Edith. Her name is Edith Ramirez. And again, she's the chairwoman, which means she sets the policy agenda for the Federal Trade Commission. She's in charge. And I was sort of expecting not a whole lot of substance. Tell the truth, make sure you advertise appropriately, follow our guidelines. Typical government speak where they sort of reserve some wiggle room and you don't really learn a whole lot. But instead, she really provided a ton of substance and surprised a lot of people, myself included, and really explained her vision, her perception of where the MLM industry is today and where it needs to go moving forward to improve. So I cover a lot of content in the blog article because there's a lot of substance. So I'm not going to cover it all in detail here in the video, but I will say that she was respectful and she did give some complimentary or compliments to the dsa, which is what you would expect since she was an invited guest. But, you know, one of the last questions asked of her by Joe Mariano, he was like, look, do you hold animosity towards the industry? She says, no, we don't hold animosity towards the industry. We just want to protect consumers. And right now there's a problem. If I could summarize her presentation, it would be very analogous to a parent telling a child, I've had enough, I've had enough. That's basically what she said. I've said this in the past, that if we're not able to police ourselves, someone will step in and regulate for us. And you can't blame the DSA for all of our problems. The DSA is a trade association that represents lots of different companies. And those different companies have different owners and different beliefs and different philosophies, different models. And to get a cohesive strategy to raise the tide, I'm sure is a really hard task. So, bottom line, we haven't seen a lot of improvements led by the dsa. The DSA has been very reactionary, not because they're feckless leaders. I think they're really good people over there, but because it's leadership by committee. They've got to play the political game and progress has not evolved fast enough. So again, if we can't regulate Ourselves, someone will step in and regulate for us. And that's what's happened now. When regulators step in, oftentimes, they can overregulate. And I think that's happening here. It's an over correction. We had a problem. Over the past several years, a problem has developed in the industry. I cannot blame the ftc for wanting to get more involved. So this strategy of, let's all travel together as a herd, and every now and then, the gazelle will get eaten. And that's just the way it goes. That case by case approach has annoyed the ftc, because they'll take down a gazelle. But the rest of the industry doesn't really pay a lot of attention. So, for example, burn lounge. Burn lounge gets sued. People say, well, burn lounge is a bad company. They had it coming, but we're different. They sue vemma. And the narrative is, well, it was kind of personal towards bk barako. They really didn't like that guy. He really made some people angry. So that's the narrative. The herbalife settlement hits different ball game. But even now, the herbalife settlement, at least prior to the speech, I think it's different going forward. But prior to the speech, the narrative is, well, it's punitive for herbalife. It's really, Herbalife is under attack by a short seller. They're being punished. They got caught doing some bad things. It's punitive doesn't really apply to the industry. Well, here comes edith ramirez at the dsa event, and she said, the herbalife case matters, and it is a good template for the rest of the industry moving forward. After her presentation, the tone was a bit somber. I think it really surprised a lot of people, because now people can't pretend to be dumb anymore and sort of try to guess, well, maybe the regulators are just mad at that one company. No, it's industry wide. There's no room for debate now. How companies pivot and change to more closely reflect those limitations in the herbalife order. And to what degree they go. That's the decision that every single company needs to have, right? How, how much of the herbalife order should they try to mimic, and how much can they disregard? Eve ramirez did say, this order is really designed to be a guide. It's not required. So if there's one thing specific to herbalife that's not in your company, it's not the end of the world. As long as the spirit of your program Reflects the objectives that the ftc is shooting for in the herbalife order. Hope that makes sense. So look to the substance. She outlined four principles to help determine if a network marketing company is legitimate. Where are they here? First, legitimate mlms focus on real customers. Second, legitimate MLMs must base sales that are profitable and verifiable. Third, mlm should not use threshold or volume quotas that are met by personal purchases. Distributors buying to qualify a monthly volume goal. Fourth, compensation paid must be tied to retail sales. So look, the macro perspective over this entire discussion, this entire speech, the issue of internal consumption. So really quick, if I can, in 30 seconds or less. Pyramiding is technically when rewards are unrelated to product sales to ultimate users. Again, rewards unrelated to product sales to ultimate users. That's the language from the courts. What is an ultimate user? The distributor buys for personal consumption. Are they an ultimate user? Courts have said yes. Which then led to more discussion, more debate, more litigation. Well, how much is too much? So can distributors contribute 99% of a company's revenue through personal purchases? And the answer is clearly no. What we don't have is we don't have a magic percentage, right? At what point is personal consumption too much? And so edith ramirez covered that. First of all, real customers she defines are people outside of the pay plan. So a company needs to heavily focus on generating sales to real customers. She clearly defines legitimate MLMs should be principally sold. Products should be principally sold to consumers who are not pursuing a business opportunity. That word principally, in my opinion, is very important, because in my opinion, it means more than 50%. So more than 50% of a company's revenue Needs to come via retail sale. Now, there's room for an argument where it should be 2/3. The Orbalife, the herbalife settlement. They are required to show that 2/3 of their volume moves to retail customers. But that's one of those areas where herbalife, maybe that's a punitive measure. And that part of the order is designed to reign in a company that they feel has committed fraud historically. Anyways, I'm getting into the analysis here. The bottom line is, companies, first of all, shouldn't have monthly volume quotas. I think that's a no brainer. When I proposed modifications to the dsa code of ethics two years ago, Number one, it was to properly code people, Distributors, customers, preferred customers. Not just lumping everybody in the database. That was one of the items addressed by edith ramirez. Number two, I said we need to get rid of monthly volume quotas. Because what happens is those monthly quotas Coincide with monthly consumption patterns, which leads people to just buy for themselves every single month, to self qualify. And if Retail sales are not happening in that kind of a company. The distributor consumption will dramatically outweigh the retail sales, Causing a problem. Chairwoman ramirez said, I'm not going to find it here. I found it. MLMs should not contrive ways to get their business opportunity participants to make purchases for reasons other than actual retail demand, Meaning having a requirement to buy product to qualify for commissions. That needs to go. So in the article I wrote, there's a lot of substance there, and companies have a hard decision to make. First of all, this isn't that surprising for a lot of people, because in an environment where, again, we're not able to police ourselves, an adult will step in and do it for us. Like it or not, it's here. The question companies have going forward is, how much, like the herbalife settlement, do they need to incorporate? How much of the herbalife settlement do they need to incorporate? And edith ramirez did say, the herbalife settlement is not a requirement. It's just a good guide to give you a sense of what a legitimate network marketing company looks like. And so you're going to see companies sort of do this assessment of how much risk can they tolerate. Because if you match the herbalife order, you're fine. It's a hard business to operate, but you'll have no problems. What part of the order can they deviate from? Like I said earlier, herbalife order says two thirds needs to be retail. I think it's probably going to be more like 50% so that. That, you know, maybe in the ftc's formal guidelines, they'll say that. So I developed an acrostic in my article, and it's remodel. And for every element that you have, the better off you are. And companies have to pick and choose which element they can live without. Now, remodel. The r stands for no required inventory purchases. The e is for earnings misrepresentations. Needs to stop. Edith ramirez specifically said claims of replacing career level income, it needs to stop. Claims of lavish lifestyle needs to stop. And forget lavish, Just claims of modest income needs to stop. She basically said, you can talk about supplemental income. That's it. That was interesting. The m stands for monitoring. They're going to require that you monitor the field to catch infractions, as opposed to just responding to what's put at you. You need to actively go out and look for people. The o stands for over 50%. Companies would be well advised to drum up as much retail sales as possible to where it's more than 50% of the revenue. The d Is for depth. To earn depth in the plan, Companies should have rank advancement Just based on personal retail sales requirements. That's an herbalife requirement. Doesn't mean everybody has to do it. But if you did it, it would look good. The other e is for education. Companies have to train people to abide by the policies. They have to be proactive to teach people the kinds of claims they can make. A lot of startups, unfortunately, they don't have the resources for this particular piece. And so they need to improve. And lastly, the last one is label. Companies need to properly label people. Participants, customers, preferred customers. You don't want people joining your business to get a product discount. Create a path for them to enjoy the discount. A preferred customer without joining or without entering the genealogy in your database, what happens is that inflates the denominator and increases the victims in your business, the people that lose money Even though they're not building a business, doesn't matter. Regulators are going more towards a bright line analysis. You want people coded as preferred customers. So remodel companies have a lot to think about. The chairwoman said some things that's a little inconsistent with the law. And they've done this before, you know, in burn lounge, they said, hey, commissions generated via internal consumption. Completely inappropriate. Even though in 2002, they said internal consumption is fine. Now in the burnlunge case, the judge pushed back and says, no, it's okay. Internal consumption is fine so long as it's driven Via legitimate market demand. As long as people are buying for the right reasons. In her speech, this whole 2/3 approach and customers have to be outside the plan. Those are things that can be litigated. If a company can survive that kind of litigation. Keep in mind, when the ftc, when they litigate, It's a sucker punch. It's an ex parte tro. They freeze all your money to get a receiver in there to gut your entire business operation. And from there, you have to defend yourself. But if a company can defend itself in that kind of environment, there's some room for argument, but who would survive? So I think you're going to see a lot of companies Make a pivot towards this herbalife settlement and do some things to really drum up their retail sales. I don't think you'll see a lot of companies Pretend like they are beyond reproach and that these ftc enforcement actions Are really unique situations against individual companies. I think now we will see companies More receptive To the idea of modifying their business. Because the reality is the ftc Expects this herbalife order to be an industry wide thing, not just an herbalife thing. And that was a really big question. It was the main reason I flew to D.C. because I figured she would say something significant about the industry. And she did. Again, there's room for argument, but who wants to argue with the government? So I learned something new. There's the law and there's attitude. And right now, the ftc has an attitude that is a little bit different than the law. It's a little bit more restrictive than what the law currently allows, in my opinion. But companies would be ill advised to disregard ramirez's presentation. She's going to be giving formal guidance in the future. In my opinion. There's not much need to wait. Because we know what it's going to look like. This is big, but it's not the end of the world. Customers are actually good for business. So, you know, companies that focus on customers generally do well. A lot of people, when you pitch them on the opportunity, they don't join. If a small fraction of those people bought as customers, that would dramatically tip the scale in favor of legality. So this is a lot of content. It's a long video, longer than I anticipated. But there's a lot of material here. So process it. Read the article. If you learn something, share it. And also, if you're in the field, you should expect more from your company. You should put pressure on them to do better, to clearly communicate how they're going to operate moving forward. In light of these recent developments. If you're a company, maybe it's time you get a fresh set of eyes on your program. You get a new perspective. You hire us. Of course I'm pitching myself for selfish reasons. Or. Or you hire one of my competitors. You hire spencer reese. You hire jeffrey babner. You hire anybody. You hire somebody from the outside who's worked with countless companies that can spot problems in your business that you might not be able to see. The kinds of problems that led Edith ramirez to uncork one, two days ago. So, with that being said, have a good day.