Keep your eye on these trends.

These trends are definitely ones to watch for networkers. How they go will influence the lives of millions of network marketing distributors.

Trend Tracking 1998

By Jeffrey A. Babener

January, 1998

 

"Tomorrow is promised to no one."
Clint Eastwood, film Absolute Power

Legal issues that affect network marketers and their businesses do not stand still. Here are ten emerging legal trends worth watching:

1. Open-minded lawmakers.

Increasingly, network marketing is coming into its own in terms of recognition by legislators and regulators. Perhaps, this trends is a direct result of the fact that most new jobs in America are created by small business and network marketing is certainly a part of the small business and home business trends. With increasing frequency, legislators or regulators appear in panel discussions at industry-sponsored meetings. In addition, many are increasingly open to the concerns of network marketers and small business. This is opening the door to favorable legislation.

2. Model Legislation.

In keeping with the trend of legislators to listen to the direct selling industry, at least three states have adopted model legislation which is both good for consumers and good for the industry. Those states are Oklahoma, Texas and Louisiana. In each of those states, state legislatures working with industry representatives have created legislation which recognized the importance of personal use as an end goal for products marketed by network marketing companies. The question of "personal use" has been a thorny issue between the industry and many regulatory agencies over the years. In return, the industry sponsored provisions in legislation in each of the states mandating a one-year buyback policy for returned product, which effectively addresses the issue of overaggressive "inventory loading" by some unethical distributors and companies. Such model legislation is on the agenda for several more states in the coming year.

3. Home Office Deductions.

Home-based businesses and network marketing businesses are about to receive relief from an adverse Supreme Court ruling that denied home office tax deductions, unless customers were in fact seen in the home. This approach failed to recognize the growing phenomenon of home-based business and the way many individuals conduct their small business in the home. New federal legislation will place into effect in 1999 new rules to deduct home office costs. Under the new rules, the home office must be used exclusively and regularly for administrative tasks as the main business place for the small business. This approach is very livable for home-based businesses.

4. The Dietary Supplement Act.

The network marketing industry has always had a rocky road with the FDA. At times, it appeared that the FDA wished to stamp out the dietary supplement industry. In 1994, Congress overwhelmingly passed the Dietary Supplement Act, which opened the doors to retail health food stores, catalog sellers and network marketing companies to disseminate published information on dietary supplements to educate the public, as well as to make claims under certain conditions where verification of the claims could be established. In an era where the public is increasingly looking to alternative and natural health measures to assist, from a preventative health standpoint, the dietary supplement continues to broaden the ability of the dietary supplement industry to bring products and education to the American public.

5. Industry Self-regulation.

The direct selling industry realized long ago that it must undertake self-regulation if it was not to end up under the thumb of overzealous regulatory agencies. As a result, members of the leading trade association for the direct selling industry, the DSA, adopted requirements for their members to offer one-year buyback policies on inventory to terminating distributors, as well as extensive rules prohibiting misrepresentation of earnings possibilities in business opportunities. The adoption of these rules was widely heralded by regulatory agencies and serving the industry and consuming public very well. One state after another appears to be adopting the industry standards.

6. Success in International Markets.

For many of the leading direct selling companies, international markets represent the majority of their sales. Expansion into Asian and European markets have been tremendously successful for many of such companies. Both their activity and their success have promoted legislative agencies in other countries to adopt consumer protection legislation regulating such companies, but much of the legislation has had the input of the industry involved in adopting legislation. The fact that companies are having successes and are being well-received by the consuming public in other countries has contributed to a more understanding legislative treatment in both the United States and abroad.

7. Positive Press.

Although, ordinarily, it might not be thought that the activity of the press had any legal precedent, in fact, the coverage by the press greatly influences the attitudes of both legislative and regulatory agencies. The fact is that in recent years the tide has turned and the once critical press has turned into becoming positive, although always skeptical, of the network marketing industry. Positive articles on the industry appear in leading business journals, as well as leading daily newspapers. Such articles have their favorable impact both on the selling of products by companies, the attitudes of consumers, as well as approaches taken by legislative and regulatory agencies.

8. Some Difficult States.

Not every state has jumped on the bandwagon. In fact, two states, Florida and North Carolina, remain quite critical and skeptical of the network marketing industry. Regulatory agencies in those states have forced consent decrees upon companies that forced them to operate in ways that are not required throughout the rest of the United States. For instance, in those states, recent consent decrees have required company distributors to demonstrate that at least 70 percent of their sales revenue comes from sales to nonparticipants in the network marketing company. Although such a goal may be laudatory, forcing companies to operate this way is at odds with the fact that in many of the nation's leading direct selling companies, personal use by its distributor base is an important element of the company's success. Industry leaders are hopeful that those states will come more in line with other states as well as intentions of model legislation adopted in such states as Texas, Oklahoma and Louisiana which recognize the legitimacy of personal use by distributors.

9. The FTC Worries the Industry.

After a favorable decision in 1979 in litigation between Amway and the FTC, the Federal Trade Commission stayed away from the examination of the structure of network marketing companies, i.e. were they pyramids or not, and dwelled more on claims made for products or earnings. Recent cases brought by the Federal Trade Commission suggest that the Commission is again questioning the very structure of direct selling companies. Some of the recent cases were brought without notice to the companies, freezing assets of the companies and forcing companies to enter into extremely onerous changes to their marketing program under circumstances in which the companies had a gun to their heads. As with a few of the states, the FTC's insistence that the majority of sales be outside the network, may make the industry very nervous in the future and hopefully will cause ongoing dialog between leading industry representatives and the FTC to move the FTC's approach more in line with model legislation that has been adopted in several states.

10. Internet Sweeps.

Until the advent of the Internet and frequent use of Websites, investigations of MLM companies and distributors were sporadic and disorganized at the very least. Virtually every network marketing company has a Website and many distributors also advertise on the Internet, as well as promote opportunities in various usenet or news group forums. Both the FTC and states agencies are using this new technology to both monitor the offering of business opportunities and take action against those with whom they disagree. There are pluses and minuses to the Internet sweeps of federal and state agencies. First, it is good that true scams will be ferreted out. The minus, however, is that overzealous agencies who do not understand the industry are given the opportunity to identify and take unnecessary action against many companies that are actually trying to "do the right thing." For many companies, the sweeping of the Internet may have a chilling effect on the honest explanation of the opportunity.

So, keep your eye on these trends. These trends are definitely ones to watch for networkers. How they go will influence the lives of millions of network marketing distributors.

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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