NSA Settlements: Enormous Industry Impact

By Jeffrey A. Babener
 April, 1993

A three-year multi-state investigation of NSA resulted recently in settlements with ten states that will have major repercussions for the network marketing industry. Almost simultaneously with the ten-state settlement scheme, a nationwide class action suit was filed in U.S. Federal Court. The industry should expect to see major press ramifications arising from the claims during the next year or two that will probably rival the press's earlier experience with NuSkin. The thrust of the claims involve accusations of inventory loading, earnings misrepresentations, as well as secondary issues involving methods of selling the products themselves. Because of the sheer size of sales during the last few years by NSA, the potential for mandated refunds under the state settlements or federal class action could be staggering and may be in amounts that few network marketing companies could survive. The recent multi-state settlement sent a clear message to the network marketing industry to clean up its act, and some of the new found restrictions imposed upon NSA based upon prior activities, could become an inhibiting regulation for other network marketing companies as well. States involved in settlements include: Connecticut, Florida, Illinois, Kentucky, Michigan, Oregon, Pennsylvania, Tennessee, Texas and Vermont.

There are definitely lessons to be learned in the NSA experience. Some of the pertinent provisions of a state settlement indicate the sweeping nature of the matter:

1. NSA agreed to buy back at 75 percent of the wholesale price products from canceling participants which were purchased prior to January 1, 1993. A new buy-back policy was adopted for purchases after January 1, 1993 at the 90 percent level and, for new distributors in the future, a 100 percent refund policy will exist for 30 days after joining. Although the settlements address individuals who have product in their possession, a likely group who would object to not being protected by the settlements would be those who may claim to have lost significant amounts of money because they have long since discarded unwanted product or sold it at fire sale prices to salvage some return on their investment. The thrust of the claims involve accusations of inventory loading, earnings misrepresentations, as well as secondary issues involving methods of selling the products themselves.

2. In the future, NSA will be required to provide the information, updated on a quarterly basis, to a new recruit containing the following:

(A) For the relevant state: (i) the total number of NSA participants in that state; (ii) the total number and percent of all NSA participants who are at each level of the distribution system in that state; (iii) the total number and percent of participants who have achieved a specific claimed level of annual income; and (iv) the fact that additional information relevant to a local geographic market within a state may be obtained by telephoning a stated toll free number.

3. NSA was mandated to adopt a specific program to verify sales to the ultimate consumers, and to report monthly to the applicable state the results of its verification program as follows:

(A) NSA must adopt, implement, maintain and enforce in its distribution system, a policy and practice whereby NSA shall require verification of sales to ultimate consumers by participants of at least seventy percent (70%) of all NSA product sales on which it pays any commission, bonus or other compensation under its sales program.

(B) Each month, for a period of one year, NSA must select at random two percent (2%) of those participants in the state receiving commissions, bonuses or similar compensation, and shall require these participants to verify compliance with the 70% requirement. Thereafter, each third month for a period of one (1) year NSA must select at random one percent (1%) of those state participants receiving commissions, bonuses or similar compensation, and shall require these participants to verify compliance with the 70% requirement. NSA must personally contact customers of these participants to verify sales reported by the participants.

4. NSA must restrict dollar volume of purchases to be made by new dealers in their first month to $2,000.

5. A host of other practices were prohibited regarding the earnings opportunity, including projections of earnings potentials or displaying copies of checks, tax forms or other records specifying income from NSA. Any misleading or deceptive claims regarding earnings are also prohibited.

6. A variety of other prohibitions were agreed to including any scare tactics about water quality or representations of government approval of various water filter products.

Inventory loading is inappropriate behavior for all the wrong reasons to maximize compensation benefits under an MLM marketing plan.

Basements and garages full of unused product serve no useful purpose.

Although the NSA settlements only have legal effect as to NSA, the nature and scope of the settlements will influence enforcement policy and proposed legislation as to all network marketing companies. In actuality, the story probably has yet to unfold in that settlement is only applicable to participants in ten states, leaving participants in 40 more states to be reckoned with. In addition, the pending federal class action could supersede and be more onerous than the state settlements.

Whether true or false in the NSA situation, accusations of inventory loading represent the number one criticism by the press, regulators and courts of the network marketing industry. Inventory loading is inappropriate behavior for all the wrong reasons to maximize compensation benefits under an MLM marketing plan. Basements and garages full of unused product serve no useful purpose. Ultimately, programs which are based on inventory loading collapse and leave long trails of victims. In addition, failed instances of inventory loading leave a sour taste in the mouth of the public about the network marketing industry, make recruiting new distributors to other companies more difficult and result in overly burdensome and restrictive regulation and enforcement policies for the majority of companies in the network marketing industry because of the abuses of a few.

The fate of NSA after its settlements is not yet written. The unfolding story, however, is sure to spark debate and discussion in government, the press and the industry that will impact the future of every network marketing company and distributor.

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.

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