Response to FTC Press Release About Fortune Hi Tech Marketing
Kevin Thompson, an MLM attorney, breaks down the FTC's permanent injunction against Fortune High Tech Marketing. The order flags three red flags: unsubstantiated income claims, recruitment-driven marketing over product sales, and pay plans that relied on new recruits rather than real customers. Thompson reads the order's language and compares it to past cases like BurnLounge.
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Hi, everyone out there. Kevin Thompson here, MLM attorney and managing partner at Thompson Burton. I apologize for my casual appearance here. I just hopped out of the shower. It's late, but there's some breaking news and it's important that we get this information out there. The FTC has just announced that there's a final order in its case against Fortune High Tech Marketing. So there is what's called a stipulated order for a permanent injunction is the formal term. Stipulated order means it's an order that was agreed upon by both parties, it was negotiated, and the permanent injunction means it's final. There's a final injunction in place. There's no surprises to the injunction. Fortune High Tech agrees not to operate as an mlm, which is a shocker. And they've got to pay back a lot of cash or what's left of their cash. So a couple of points to take away from this deal. Number one, the FTC is finally talking to us, which is encouraging. There was a press release that was issued and they're sort of spiking the ball and it represents finality to this case. And in this release they actually somewhat explain what they found offensive about the Fortune High Tech case. They don't talk much about these issues, especially in plain English. So I think this press release is incredibly valuable. I've included it in full on my blog post. You should read it. And if you read that release, there's really two issues that stick out. One issue that I'm going to throw in there that are important takeaways. Number one, earnings claims. Income claims really got Fortune High Tech in a significant amount of trouble. It got the attention of the ofTC and the FTC in the press release, they referenced some outlandish earnings claims made by distributors. And they also go so far as to say that just because some of your reps experience significant success, it doesn't matter. There needs to be proper substantiation. You need to have a culture that is responsible when it comes to income claims. That's number one and that is within every organization's control to take compliance seriously. Number two, the emphasis. This is really important here. And this is where it's not so much science or bright line rule that separates pyramid schemes from network marketing companies. This is the subtle nuance. It's very subjective. And the second thing was the emphasis of the marketing pitch. The emphasis the FTC is stating here was on recruitment. You make money in this business by recruiting 10 people and you help them recruit 10 people and they all buy for themselves. And we Teach everybody how to recruit. That's bad. So the emphasis of the marketing program needs to be about product value. They imply that there was very little discussion about the Fortune high Tech products. That's a pretty clear takeaway for network marketing companies in the industry that sell something valuable. If you don't sell anything valuable, your field will have no choice but to talk about recruitment and you're in a lot of trouble. So there's a caveat there. The third thing that I'm throwing in there that wasn't really referenced in the press release, although it's there behind the scenes. The third thing is that the majority of Fortune's pay plan was driven by volume from new participants. I'm going to repeat that. The majority of the plan was driven by volume from new participants. In other words, front loading. That was heavily emphasized in Peter van der Najt's declaration. He's the FTC's economist. He's the expert they used in this case. And the main argument was that a significant portion of this plan is driven by these starter packs. And so in order to keep the plan going, you have to constantly shovel coal in the furnace to keep the engine moving. And so once recruitment stops, the plant is underfunded and all hell breaks loose. So that was the third thing and the third takeaway that we've learned from the experience. Read their release. So they are talking to us. That's reassuring. Now, what does this mean for the future of the industry? There's no sense in me speculating or projecting. This order against Fortune high Tech is identical to their orders that have been issued against other pyramid schemes. Literally identical. Burn Lounge, you can cut and paste the verbiage. It's the same thing. Of course the facts are different. The facts are different and the amount of money is different. But as far as how they define what a pyramid scheme is, it's identical. This is where it gets troubling. It's like a rerun of a bad movie. I had a lot of concern when I saw this in Burn Lounge. The verbiage is in this case in this order, where it says that, well, let me read it to you. Let me find it on my computer. Multi level marketing program means blah, blah, blah. Prohibited marketing program means any marketing program or plan in which a participant pays money to get the right to receive rewards in return for recruiting other participants which are unrelated to the sales of products. So let me translate that in English. Payment of money to participate in a program where you can receive rewards unrelated to product sales. It then goes on to say, and this is where it gets. This is where the heartburn kicks in. For the purpose of this definition, Sale of products to ultimate users does not include sales to other participants or recruits in the downline. So, in other words, commissions driven by internal consumption. When your distributors and the downline buy and use product, the resulting commissions is not allowed. That's a prohibited marketing program, as per this definition. Now, as I've made clear in the back, when the burn lounge order hit about a year ago, these things, these orders, they're clear to say, for purposes of this order, the following definitions apply. So these definitions are limited to this particular case. The DSA, back in 2004, sent the FTC a letter, and they said, look, how should we interpret these orders that are coming out, which were similarly written to what we've got here? And the ftc said that these orders are not meant to represent the general state of the law. They find the bad actors. They throw the kitchen sink at them, in other words. So, hopefully, I'm probably confusing you. But the bottom line is, there are no surprises in this order. It's just like orders from the past. And we're starting to learn more, which is why I'm encouraged. We're learning more about what the ftc finds offensive. And because of that, we can mature and get more intelligent. With respect to how we operate in america, how these companies operate in america. So that's good. The gray is shrinking. There's still a lot of gray, right? I mean, how much revenue from customers do we need to see to prove that a company is not a pyramid scheme? We don't know yet. Right? That represents the gray. But this press release and other releases Published by the ftc recently, to me, it represents an attempt from them. To participate in the discussion. To throw some information out there. So I've got some thoughts on where we're going as an industry. Everybody's wondering, how will this impact herbalife? Herbalife is going to be fine. With respect to the subpoena they've received from the ftc. That's a separate issue. Anyways, read the release. Hope you found my thoughts helpful. And you take care.
