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April 01, 2014

New Perspectives

What Does the FTC Inquiry Really Mean? A Direct Selling News Point of View

by DSN Staff

Click here to order the April 2014 issue in which this article appeared or click here to download it to your mobile device.

When Herbalife announced March 12 that it was facing an FTC inquiry, the company said it welcomed the news given the tremendous amount of misinformation in the marketplace.

“We are confident that Herbalife is in compliance with all applicable laws and regulations,” the company said. “Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors, and positively impacted the lives and health of its consumers for over 34 years.”   

The past two years of relentless attacks on the Herbalife business model by one hedge fund manager in particular, as well as others known to have very negative opinions about the direct selling business model, have captured the attention of an entire industry and the wider public. 

The direct selling industry has been down this road before, and challenges are to be expected when utilizing any non-traditional model for distribution of goods and services. Traditional brick-and mortar-retail is being confronted by e-commerce to the extent that many predict an end in sight, or at least a drastic redesign of the concept of attracting people to a physical shopping environment.

So what can be expected from the recently announced FTC investigation of Herbalife, and what are the real issues? The role of personal consumption will certainly be explored, as well as the vulnerability for personal loss. The FTC addressed the basic issues surrounding personal consumption back in 1979 [In the Matter of Amway, 93 F.T.C. 618 (1979)]. As to the question of personal loss by distributors, reputable direct selling companies have, for many years, offered a buy-back provision in their code of ethics, and the Direct Selling Association insists that its members have such a policy. Leading direct selling companies have these policies and stand by them, thus protecting the consumer.

The recent investigation concerns Herbalife, but it also has ramifications for direct selling in general, network marketing, party plan, personal selling, and social selling or social commerce. This is about every business model that uses any form of compensation that allows independent contractors to become micro-entrepreneurs who benefit, in various ways, from enrollment and the enrollment of others who purchase and/or sell products and services.

An old argument—in fact, an argument that was won by our industry—has become a fresh one, and once again a major company has come under examination. It behooves our industry to pay attention, stand together, be united in speaking out about our good points, and collectively examine ourselves on behalf of the millions of distributors and consumers that we serve.