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FTC Exempts MLM from Business Opportunity Rule:
DSA Speaks Out

Jeffrey Babener, Babener and Associates

© 2008

In April 2006, the FTC released a sweeping proposed change in its FTC Business Opportunity Rule. The proposal was immediately and strongly criticized by representatives of and experts in the MLM, Direct Sales, Direct Selling, Network Marketing and Party Plan industry. The process to a completed Rule was expected to last 18 months to 3 years. The DSA (Direct Selling Association) has assumed the primary role in organizing the industry response to the FTC Proposed Business Opportunity Rule. It has issued the below public announcement press release and, among many interested industry parties, is the "filer" of record of comments to the FTC on the FTC Proposed Business Opportunity Rule, representing the position of hundreds of its members, including such major companies as Avon, Tupperware, Shaklee, Alticor (Quixtar), Primerica, PrePaid Legal, Mary Kay, Herbalife, Pampered Chef, Creative Memories, etc. Ongoing public statements by the DSA are to be found at its website at www.dsa.org. For extensive analysis, text of the actual FTC Proposed Business Opportunity Rule and ongoing updates, please visit www.mlmlegal.com.

During the following two year period, the FTC received more than 17,000 comments on its proposed rule, the majority of which were from companies, representatives and distributors in the MLM industry.  The vast majority of comments raised serious concerns regarding the onerous and burdensome nature of the proposed rules, as well as extending the scope of the rule to the MLM/Direct Selling industry.  In addition, scores of members of Congress weighed in with concerns about the impact on a well-established industry that involved millions of home-based businesses.

On March 18, 2008, the FTC responded favorably to constructive criticism, and announced that it was seeking to modify the Proposed Business Opportunity Rule to exempt MLM companies. (As part of its explanation of MLM exemption, the FTC cited comments from the editor of www.mlmlegal.com, Babener & Associates.)  The FTC issued a Revised Proposed Business Opportunity Rule for comment.  The revised draft, announced with the intent of exempting MLM companies, is still flawed in that its wording may still inadvertently create applicability to many leading MLM companies because proposed "definitions" section 437.1(c)(3)(ii) may mistakenly include MLM/Direct Selling companies that assist in customer gathering on the web, in print, institutional or co-op advertising campaigns or other customer lead generation programs.  However, the proposed rule represents a good faith start to narrow the scope of the Proposed FTC Business Opportunity Rule and invite comments from the public to assist in this process.  At the very least, the FTC was unequivocal in its stated intent to exempt the MLM industry, noting in its public statement:

On balance, based on this record and its law enforcement experience, the Commission does not believe it is practicable or sufficiently beneficial to consumers to attempt to apply the proposals advanced in this rulemaking against multi-level marketing companies, particularly when considering the burdens upon industry. The Commission, therefore, has determined that at this point, it will continue to use Section 5 to challenge unfair and deceptive acts or practices in the MLM Industry.

DSA Position Statement on FTC Proposed Business Opportunity Rule Exemption for Direct Sellers and MLM Companies

 Among leading spokespersons for the Direct Selling industry, the Washington, D.C.-based Direct Selling Association (DSA), is clearly at the forefront on the challenges posed by the FTC Proposed Business Opportunity Rule. The trade association and its various subcommittees and member companies coordinated a multifaceted campaign to address the tremendous hardship that would fall upon an industry with approximately 15 million earners in the U.S. alone. Below is the actual text of the position statement issued by the DSA on the FTC’s announcement to exempt MLM/Direct Selling Companies in its FTC Revised Proposed Business Opportunity Rule.

DSA Public Position Statement:

FTC Revised Proposed Business Opportunity Rule Narrows Scope to Exclude Direct Sellers

The Federal Trade Commission (FTC) today issued a revised Notice of Proposed Rulemaking regarding the proposed Business Opportunity Rule (Rule) originally promulgated nearly two years ago. The revised proposed Business Opportunity Rule significantly narrows the scope of the original proposal, a change that was strongly recommended by DSA to avoid broadly sweeping legitimate multilevel marketing companies into an “unintended” burdensome regulatory scheme. Most importantly, the FTC has made clear its intent in revising the initial Rule is to exempt legitimate direct selling companies, such as those that are members of the DSA, from the revised Rule. The FTC concluded that the revisions to the initial proposal were necessary to “avoid broadly sweeping in sellers of multilevel marketing opportunities.”

The FTC’s analysis for the revision of the initial Rule recognized DSA’s arguments that the breadth of coverage of the initial Rule would have encompassed legitimate direct selling companies where there is little or no evidence of fraud. Moreover, DSA argued, and the FTC agreed, that the requirements in the initial proposal would have imposed significant burdens on multilevel marketing companies without sufficient countervailing benefits to consumers.

In concluding that a revised Rule was necessary to limit the impact on multilevel marketing companies, the FTC stated “the burdens (of the initial Rule) that would be imposed upon legitimate business operations would not appear to be justified by possible benefits to consumers…the Commission believes that the proposed Rule is too blunt of an instrument to cure fraud in the MLM industry.”

Accordingly, the FTC also concluded that it will continue to use the flexibility inherent in Section 5 of the FTC Act to address individual fraud cases in the MLM industry.

The FTC has requested comments to the proposed revised Rule by May 27, 2008, and rebuttal comments by June 16, 2008. The FTC might hold hearings, or in lieu thereof, workshops, to discuss the issues raised in its Revised Notice of Rulemaking and the comments it receives from the public.

DSA will continue to monitor developments and work with both member companies and the FTC as the process continues. Details of any additional developments will forthcoming.

End of DSA Statement

 

On any given day you can catch Jeffrey Babener, editor of www.mlmlegal.com, lecturing on Network Marketing at the University of Texas or the University of Illinois, addressing thousands of distributors in Los Angeles, Bangkok, Tokyo and Russia, or writing a new book on Network Marketing, an article for Entrepreneur Magazine or a chapter for a University textbook. Over two decades he has served as marketing and legal advisor to some of the world's largest direct selling companies, the likes of Avon, Nikken, Shaklee, Tupperware, Prepaid Legal, Longaberger, Melaleuca, Discovery Toys, Usana, Amazon Herb, NuSkin, Cell Tech, Sunrider…. and he has provided counsel to the most successful telecom network marketing companies...Excel, ACN, World Connect, ITI, Acceris, AOL Select and Network 2000. An active spokesperson for the industry, he has assisted in new legislation and served on the Lawyer's Council, Government Relations Committee and Internet Task Force of the Direct Selling Association (DSA) as well as serving as General Counsel for the Multilevel Marketing International Association. He is an MLM attorney supplier member of the DSA and has served as legal counsel and MLM consultant on MLM law issues for many DSA companies. He is author of multiple books, including, Network Marketing: What You Should Know, Network Marketer's Guide To Success, Tax Guide for MLM/Direct Sellers, Starting and Running the Successful MLM Company, The MLM Corporate Handbook and Window of Opportunity. He is author of countless articles on network marketing, many of which can be found at www.mlmlegal.com where he is the editor. You will see his articles and interviews in such publications as Money, Atlantic Monthly, Success, Entrepreneur, Business Startups, Home Office Computing, Inc., Money Makers Monthly, etc. He has been chairman of numerous industry conference series, including, Starting and Running the Successful MLM Company, The MLM Entrepreneur Series and The MLM Masters series. He has served as the close advisor to scores of MLM Companies and their distributors, comprising millions of distributors and billions of dollars in sales. Mr. Babener is a graduate of the University of Southern California Law School, where he served as editor of the USC Law Review. After an appointment to be an advisor law clerk to a U.S. Federal Judge, he went on to become a member of the California and Oregon State Bar, where he has also served as chairman of the Oregon State Bar Committee on Judicial Administration. He has exclusively practiced in the area of direct selling for over 20 years. A Regulatory Update for MLM,Direct Selling, Network Marketing, Direct Sales, Party Plan Independent Distributors and Companies

Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

www.mlmlegal.com

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