Time to Reexamine DSA’s Code of Ethics: Suggestions From MLM Attorney, Kevin Thompson
September 26, 2014
By Nicole Dunkley
It's old news now. Avon left the DSA. In their announcement, they stated the DSA's Code of Ethics needed revision. Specifically, Cheryl Heinonen at Avon said,
We believe the association’s agenda in the U.S. is overly focused on the issues of a few specific brands rather than industry-wide challenges. . . We believe that the U.S. DSA Code of Ethics requires updating to better reflect the current state of the industry in the U.S.
In a separate article in the Washington Post, Heinonen gave a quote that shed a little light on what she meant. She said,
I think it's problematic when you sell inventory — bulk product — that the person who is acquiring it can't use themselves and sometimes may not know how to sell, Heinonen said. She added that the language in the trade association's code of ethics on this point and other aspects of consumer protection need to be firmer.
The problem: inventory loading. And I'll drill down a little deeper because inventory loading, when it exists, is a symptom of a larger problem: lack of product value. In other words, when there's a lack of legitimate demand for product, companies incentivize participants to load up on items they might not want or need in an effort to qualify for bonuses.
The cure for this problem has historically been the 12-month refund policy. If you boil down the DSA's Code of Ethics, the most valuable requirement is the 12-month refund policy. According to Avon, this is not enough. And I agree.
The DSA has invited people to propose changes to the Code. Here's a start. Call it The KT Optimus-Prime Plan (everything is better when you use Transformer names).
(1) Proper Customer Coding
I suggest that companies be required to offer an option for Customers to receive product discounts without joining. The technology exists. The most basic of startup companies in the industry can pull this off. The Preferred Customer concept has been around for at least 5 years, possibly longer. Today, it's a great source of confusion when we, as an industry, say We're not able to deduce the amount of customer activity because many people join to save money on product. While it's a true statement, we're in a position to clear this ambiguity and offer clean data. The alternative is nebulous and unprovable (short of paying for surveys, which has been done by Herbalife). Understand, it's not illegal to operate without a preferred customer option. The absence of a customer option is not conclusive proof of fraud; thus, it's not legally required. But, in my opinion, the DSA should not want to swim with average, they should strive to be above-average. Currently, the 12-month refund requirement is good, but by itself, it's not good enough. There's a cancer that has developed where companies, using the DSA's Code, are looking good without actually being good.
Requiring that companies clearly track their buyer motivations / offering a clear path for customers will help eliminate all doubt regarding the motivations driving volume consumption. There's no need to mandate the AMOUNT that needs to come via customers, just to have the ability to clearly track the data.
Also, along these same lines, when it comes to direct sales i.e. belly to belly sales, there needs to be a requirement that companies accumulate receipts from their sales leaders. The excuse that we're not able to track the retail activity in the field needs to end. In the past, the excuse was reasonable. Going forward, it makes little sense.
The downside (or upside, depending on how you view it): regulators, via a subpoena, will be able to clearly see the amount of customer activity.
An argument against this concept: When people join to save money on product, they might turn out to be productive distributors later. In my opinion, the likelihood of these participants producing significant volume is slim; thus, the upside is not worth the alternative.
(2) Zero Personal Volume Requirements
This should be easier than the #1 idea above. It's common for companies to require personal volume each month for participants to earn commissions i.e. move $100 worth of product to remain qualified for bonuses. While companies are smart enough to construct this in a way where it's technically not required for people to buy the product (because they can qualify by SELLING too), in most cases, participants get on autoship and self-qualify. This is not illegal; however, the concept has been abused. It leads people to buy things they might not otherwise want or need in order to remain qualified for bonuses.
This sort of rule would be consistent with the current state of the law. In BurnLounge, the court cited the fact that participants were required to purchase products in order to qualify for commissions. This fact was used to prove that the participants were buying products primarily to qualify for money instead of the value. While companies today can argue that participants are technically not required to buy, BurnLounge also teaches us that courts and regulators will look at how companies operate in practice. If the vast majority of participants qualify via an autoship, it matters not what's on paper. It'll be used as proof to show that the opportunity is driving consumption, not the products. Yes, it might be more difficult for companies to get participants to buy products. But if participants do not WANT to buy product, why force them? The DSA, in my opinion, should create space here.
(3) Income Disclosure Statements
The DSA should require its member companies to publish average earnings. We know that EVERYONE makes income claims in the industry. When recruiting, the question always comes up: What's in for me? The pay plan has to be explained, which means that income will be referenced. It's not illegal to make income claims. It is, however, misleading to make income claims WITHOUT ADEQUATE DISCLOSURE. With this in mind, why allow companies admittance without a solid income disclosure document?
(4) Undisclosed Financial Arrangements
It's common in the industry for a company to offer additional compensation to leaders in exchange for them leaving another company. While the agreements never explicitly say We're paying you to leave Organization X and raid your old downline, they might as well. This sort of behavior has spun out of control, causing companies to rip into each other and there needs to be a clear signal at the highest levels that this will not be tolerated.
First, the FTC's Testimonial and Endorsement Guidelines strongly suggests that these sorts of undisclosed deals are fraudulent. I wrote an article on the subject in June of 2010 here.
Second, these sorts of deals are not illegal. It's only a problem when there's no disclosure. If the DSA were to require that these deals be disclosed, it might actually curb the activity.
Third, these sorts of deals are bad for the industry because, candidly, they rarely make economic sense. The leader leaves, boasts about the greatness of the new company, takes very few people with him or her and subsequently crashes. This leaves hyperbolic activity in the industry where companies are trying to out-hype each other.
Fourth, the DSA's Code Administrator, when put onto the case, can easily deduce if a deal has been struck and whether the deal was publicly disclosed.
(5) Compliance Training
Rule 11 in the Code of Ethics states: Member companies shall provide adequate training to enable independent salespeople to operate ethically. But what does this mean? If companies are going to be allowed to sell starter packs ranging in price between $500 and $2,000, there needs to be solid training to ensure that the inventory moves properly. Compliance training can be delivered a number of ways: videos, email blasts, etc. If a new distributor was promised easy money, the time to cure this false expectation is at the beginning of their tenure. This is where the company can explain its refund policy, explain that success takes work and also reference its income disclosure statement. And, if the company were confident, it would be a great opportunity to suggest that if the distributor wants easy money, they should quit now and get a refund.
(6) Sales Aides
The Code needs to improve in this category by clearly prohibiting the practice of paying commissions on sales aides. First, it's clearly pyramiding. Sales aides are not commissionable because there's no market for the products beyond the network itself i.e. there's no opportunity for customer sales, i.e x 2 the resulting rewards are unrelated to product sales to 'ultimate users,' i.e. x 3 it's pyramiding. The Code tries to create space from this practice by saying, This Code provision is not intended to endorse marketing plans that provide financial benefits to independent salespeople for the sale of company-produced promotional materials, sales aids or kits (tools). The Code needs to revisit this issue and address it head-on.
If the company, or its leaders in the field, sell tools and pay commissions on those tools, they need to adjust or get out. Tool sales are highly profitable, leading sellers to focus primarily on recruiting new participants to expand the market for those tools (because there's no market outside the network itself; thus, recruiting is the only way to maximize profitability). It leads to a twisted culture in the field, one that depends on hype and hyperbole. The DSA needs to create space here.
It's time to have an honest discussion about the future of the industry. Candidly, it's BEEN time for several years. But, it sometimes takes a good crisis to mobilize support for change. Avon's departure is a good catalyst for this sort of discussion. I'm not a fan of closed door meetings. Transparency is key. And transparency, at times, makes people uncomfortable. If you know me by now, you know that I'm not one to kiss the hand and play political games. In other words, I'm not trying to be liked by everyone.
Leadership at the DSA needs to understand that building a consensus on any of these issues is going to be impossible. In order to tighten the screws, it's going to frustrate some member companies. It needs to prepare itself for a little internal-controversy.
Candidly, the DSA avoiding some of these issues has also frustrated members, leading to Avon's departure. Avon was not a fluke. While this subject matter is unpopular, it's very important for the health of the industry. I think the best ideas come by way of open discussion. And I'm not afraid to lead it.
Do you agree with any of the KT Optimus-Prime Plan items referenced above? Disagree?
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