One of the biggest debates in the MLM industry concerns the sale of products to distributors and whether or not sales to a company’s own distributors should be considered a legitimate retail sale. We’ve discussed the matter at length in regards to Herbalife. Our stance: Since Herbalife has no systems in place to record retail sales (a violation of a California Court Order) and given that management has continually changed its story regarding personal consumption, we conclude that Herbalife is indeed operating as an illegal pyramid scheme.
We’ve presented our opinion on Herbalife, but let’s turn instead to one Kevin Thompson, aka “The MLM Attorney” and founding member of Thompson Burton PLLC. Thompson is a well known and trusted resource in the MLM industry. Watch some of his video presentations and it doesn’t take long to realize that Thompson is a slick, confident and knowledgeable attorney.
The bio on his website goes so far as to proclaim Thompson as “one of the top 25 most influential people in direct sales”. Herb Greenberg even turned to Thompson to get a voice for the MLM industry during his expose of Herbalife and other MLM companies.
We should also note that Mr. Thompson is also a “vendor” member of the DSA and serves on the DSA’s Ethics Committee and Government Relations Board. In case you need a reminder, the Direct Selling Association (DSA) is the trade group for direct selling firms- most of which utilize a Multi-Level-Marketing (MLM) compensation scheme.
From the DSA website:
The Association’s mission is “To protect, serve and promote the effectiveness of member companies and the independent business people they represent. To ensure that the marketing by member companies of products and/or the direct sales opportunity is conducted with the highest level of business ethics and service to consumers.”
Self Deception, Burn Lounge and The DSA
Last April, Thompson wrote a blog post which was fueled in part following the FTC’s decision to shut down BurnLounge (which was convicted of running an illegal pyramid scheme). Thompson, who makes a living by representing new MLM entrants, offered suggestions for how the industry could improve its tarnished reputation. In what might be viewed by some as an audition for legal counsel at Herbalife, Thompson discussed many issues regarding the state of the MLM industry.
…Right now in the MLM industry, we’re heading in the wrong direction, in my opinion. I’m just calling it like I see it….
So what’s the problem?
We need clearer standards. The MLM industry is cloaked in a veil of ambiguous law where there’s an ocean of gray separating legitimate companies from pyramid schemes. I was prompted to write this article based on the industry’s response to the BurnLounge Final Order(click here for a summary of the BurnLounge decision). Since BurnLounge’s fate was officially sealed when the final order hit last month (pending an appeal), people are now figuratively saying “yeah, I always knew those guys were really stupid. After all, their product could not really stand on its own in the marketplace.” (See comment above about self deception). And now, people are rightfully unnerved by some verbiage in the BurnLounge order.
It’s noted that the BurnLounge decision really threw the MLM industry for a loop. The court decision provided evidence that the FTC was putting down its foot in regards to sales to company distributors. From the BurnLounge Final Order (note the highlighted section):
“Prohibited Marketing Scheme” means a pyramid sales scheme, Ponzi
scheme, chain marketing scheme, or other marketing plan or program
in which participants pay money or valuable consideration in return
for which they obtain the right to receive rewards for recruiting other
participants into the program, and those rewards are unrelated to the
sale of products or services to ultimate users. For purposes of this definition, “sale of products or services to ultimate users” does not include sales to other participants or recruits or to the participants’ own accounts.
The Direct Selling Association has filed an appeal of the BurnLounge decision. This is an important event. It shows that the DSA realizes this decision could have crippling effects on the entire MLM industry. If a company can’t count sales to its distributors as a retail sale, what percentage of MLM companies would be running a legitimate operation?
More from Thompson:
So how do we respond? How do we improve?
One option is to seek peace. To try to convince ourselves that the owners were simply reckless. The better option would be to seek improvement by having an honest conversation about the problem. While we easily roll BurnLounge under the bus and reference their junk products as the main reason for their demise, we should at least acknowledge, industry-wide, the major importance of accruing revenue from external customers. When proving the marketability of a product, the only metric that really matters is revenue from customers…
Instead…We’re trying to “get tough on crime” by passing legislation that would effectively legitimize a model very much like BurnLounge. Instead of shrinking the gray and increasing the standards in the industry, we’re falling back to old tricks, talking about resurrecting old bills to “clarify” the ambiguity in the industry. We all know the FTC and regulators want to see external sales. So why are we even discussing old bills that obliterate all external sales obligations?…
In his post Thompson also proposes a “required retail sales rule” to help clear up some of the grey areas regarding retail sales and internal consumption. Thompson would like to mandate that distributors make a sale each month to a non-participant in a program.
Thompson also proposed a bill for Tennessee Lawmakers back in 2010. Some of the points that we’d like to point out (with special attention on the highlighted section):
1. “Customer” means a consumer of products or services of a company that does not occupy a position in the company’s line of sponsorship and does not possess the opportunity to earn commissions or other consideration with the company through any later action or conduct. (COMMENT: I to this wording from one of Gerald Nehra’s articles “MLM Legality Test 2005” available at http:www.mlmatty.com/legal.php.
4. “Endless Chain” means any scheme or plan for the disposal or distribution of property or services whereby a participant pays a valuable consideration for the chance to receive compensation for introducing one (1) or more additional persons into participation in the same scheme or plan or for the chance to receive compensation when the person introduced by the participant introduces a new participant. Any multilevel distribution company that requires its distributors to purchase a requisite amount of product each month as a condition precedent for financial gains, without any requirement for customer sales, shall be presumed to be operating an endless chain.
8. “Pyramid scheme” means a business enterprise characterized by the payment of money by participants in return for which they receive the right to sell products and recruit participants and the right to receive rewards without any condition precedent of customer sales. The mere act of having a customer requirement does not serve as an absolute defense in the event there’s a pattern of conduct demonstrating a lack of enforcement.
SECTION 17: Any person who knowingly violates this part, or any rule or regulation promulgated under this part, commits a Class E felony. Notwithstanding any other law to the contrary, any person who is convicted of a violation of this part shall be fined not less than ten thousand dollars ($10,000) or imprisoned for not less than one (1) year or both fined and imprisoned.
Kevin Thompson is a well-known, influential and respected MLM attorney. He is a recommended vendor of the DSA and a member of the DSA’s Ethics Committee and Government Relations Board. Thompson has acknowledged that sales to consumers who are not also distributors are essential to avoid being a pyramid scheme. Consequently, based on Mr. Thompson’s comments and his proposed legislation, Herbalife is operating a pyramid scheme.
Again, to reiterate Mr. Thompson’s point:
Any multilevel distribution company that requires its distributors to purchase a requisite amount of product each month as a condition precedent for financial gains, without any requirement for customer sales, shall be presumed to be operating an endless chain.
Herbalife’s Lack of Clarity Is Legendary
Herbalife has no system to track retail sales and has admitted in its regulatory filings that it sells 100% of its products exclusively to distributor members of its MLM salesforce.
Notwithstanding the above facts, Herbalife’s President Des Walsh insisted on a conference call that 70% of sales are [retail sales] made to consumers who are not also distributors. Herbalife CEO Michael Johnson, on the other hand, has proclaimed that 90% of its distributors purchase for internal personal consumption. This of course, isn’t based on first-hand company information, yet from a hired market research firm (See our report on Lieberman Research).
Herbalife’s position is in direct conflict with FTC case law, including the BurnLounge decision in July 2012, where the court ruled that sales to distributors WERE NOT SALES TO RETAIL CUSTOMERS/END USERS. Undaunted by the law, Herbalife seems ready to standby by its absurd position that—if it can’t prove it has retail sales, it will argue that the personal consumption of its distributors is good enough.
We invite Mr. Thompson to respond to our post, and we welcome the discussion. We ask you Mr. Thompson, based on your comments and based on your proposed legislation, how is it that Herbalife or almost all other MLM’s for that matter would not be classifed as an ‘endless chain’?
Kevin Thompson is to be applauded for being the voice of reason in the battle that is currently raging in the Herbalife vs. Shorts battle. Kevin has the legal prowess to properly identify the issues (necessity of retail sales) and the veracity to fight for his position.