For nearly as long as direct selling has been in existence, our business model has been the subject of skepticism, and often by virtue of the fact that it’s one with which many aren’t familiar.
That uniqueness—that flexibility to operate one’s own business with an unparalleled degree of support from an established brand—is what inspires thousands to begin a direct selling business each year. As a company’s sales force grows, it becomes increasingly challenging to ensure that every distributor is complying with the terms of his or her independent contractor agreement and representing the products and the opportunity appropriately. With the advent of social media, it’s easier than ever for a false claim to go viral before a company is even aware of it. On the other hand, social media can make it easier for companies to detect problems before they become even larger.
“In the early days of her company, Mary Kay Ash said that one of the most challenging aspects of her job was that there was just one Mary Kay and 20,000 Mary Kay spokespeople.”
We can’t discount the fact that many new distributors don’t read the fine print and therefore have no idea when they’ve overstepped the boundaries. Others may be taught by their upline to present the business opportunity or products in a manner not endorsed by the companies they represent. And we certainly can’t ignore that continually new sales force members are coming into direct selling for the first time. Direct selling companies may take great care to explain compliance, but if they don’t revisit the topic on a regular basis, there are those who will inevitably fall through the cracks.
Whether due to these areas of vulnerability or the deep pockets of direct selling companies—or both—the reality is that direct sellers have been the target of class-action lawsuits.
Class Action Seal Has Been Broken
The most common missteps occur generally in two areas: earnings claims and product claims. “In my experience, we’re seeing more and more direct selling companies targeted by class-action lawsuits. The seal has been broken,” says Crayton Webb, owner and CEO of Sunwest Communications, a Dallas-based public relations firm.
In the early days of her company, Mary Kay Ash said that one of the most challenging aspects of her job was that there was just one Mary Kay and 20,000 Mary Kay spokespeople. In other words, it’s very difficult to ensure that every member of your volunteer army is marching to the same drummer. Companies try to monitor and manage this—and most do quite well—but it’s nearly impossible to catch every infraction.
TINA.org’s Amplification Impact
It may come as no surprise, then, that the direct selling business model has become the target of criticism from organizations like Truth in Advertising (TINA), which has frequently panned direct selling companies and distributors for making what it considers to be erroneous or otherwise inappropriate claims on websites and social media platforms.
“Many times we’ll hear from distributors who simply don’t understand the law. It would be a prudent course for MLM companies to find an effective way to educate their distributors.”
— Bonnie Patten, Executive Director, Tina.Org
In 2017, TINA organization conducted an inventory of Direct Selling Association member companies, looking for what it considered to be questionable income claims by either the companies or their distributors. In total, TINA amassed a database of 3,000 examples. The organization then wrote letters to each of the companies. Many responded—some with a pledge to investigate the claims and address any wrongdoing, others questioning the organization’s tactics of publicizing the alleged offenses before giving companies the opportunity to respond, and still others pointing to their previous resolution of the issues (in some cases, the posts were from individuals who were no longer in the company’s independent sales force).
TINA’s legal team generally uses “FTC law and their guidance on that law to make the determination” that violations have occurred, says Executive Director Bonnie Patten. She adds that because there’s no way to vet all of the tips TINA receives about direct sellers due to the volume of complaints they’ve received, the organization started a blog called “TINA’s List,” which shares the names of organizations consumers have asked TINA to investigate.
Distributors Not Understanding the Law
Patten believes direct sellers can provide legitimate business opportunities; however, companies and distributors need to have a better understanding of the law when it comes to making income and health claims. “Many times we’ll hear from distributors who simply don’t understand the law,” she says. “I really do think that it would be a prudent course for MLM companies to find an effective way to educate their distributors. Obviously, there will always be people who choose not to follow the law, but that’s different from not knowing the law.”
“We can’t afford to be complacent because class-action suits affect not only the reputation and bottom line of the defendant; they affect our industry at large.”
Spencer Reese of Reese, Poyfair, Richards PLLC, has been an attorney since 1992, focused solely on the direct selling field. He says there’s been an uptick in class-action suits over the years fueled not necessarily by bias as much as the vulnerabilities associated with the sales channel. “Back in the ’90s,” he says, “we saw a lot of suits filed against bigger companies all alleging pyramid schemes. Now we’ve expanded beyond pyramids to improperly paid sales tax, deceptive income claims and conduct. The claims tend to follow suit with what the FTC is doing.”
Most allegations, Reese says, are brought by “disgruntled former reps but the real driving force is law firms are trolling for class-action business. One law firm has filed five different class-action lawsuits. They file a cookie cutter complaint hoping to get a quick settlement, and they move on.”
The Financial Toll
Are direct sellers particularly vulnerable to class-action suits? “Let’s not kid ourselves. Do we have some exposure? Of course we do,” Reese continues. “There are some bad apples among us, and one bad apple spoils the lot.”
Claims brought in civil cases tend to be disjointed but are often effective at leaning on pressure points. It’s expensive to defend one of these cases. Being accused of being a pyramid can be devastating so the pressure to settle is tremendous. A company that wants to fight it can do so for years, but it takes a financial toll like no other.
“We can’t just expect the legal department to clean up the mess. it’s not possible to ensure that members of the field are talking about products and the opportunity the right way.”
— Crayton Webb, owner and CEO, Sunwest Communications
So is there any way that a company can effectively police the online landscape and prevent these sorts of claims from gaining traction? A risk mitigation service can be an effective solution, says Reese. Other companies prefer to monitor social media manually – in other words, “hire a lot of people to sit and troll the web all day. I don’t recommend this; it’s an expensive way to do it.”
Getting distributors to read and comprehend the terms of their independent contractor agreements is difficult. Reese says he’s been looking for a way to encourage more distributors to do just that for the last 25 years. One possible solution, he adds, is one taken by some of his own clients, who require that representatives take compliance training modules before they can advance in rank, “but there’s no panacea.”
Filling the Messaging Vacuum
One of the wisest strategies may be one of inoculation, says Webb, who recommends that direct selling companies be “proactive in providing materials that tell your story, as well as the rules of the road for what you can and can’t share with your team members and customers. You have to plan for the worst and anticipate what’s coming. The most important thing that a direct selling company can do is to fill the vacuum of messaging in what’s permissible and what’s not with the field. In the absence of good material from corporate, the sales force may create things on their own.”
Reese advises that companies have a strong class action waiver in their independent contractor agreements. That waiver requires representatives to agree that if they ever have a dispute with your company, they’ll resolve it individually instead of through class action. “ The company will need to give up something to get that kind of protection,” he adds. “You may expose yourself to small claims cases, but you’ll stay clear of class actions, which are really devastating cases.” He cautions that the law is constantly changing around class action waivers, so companies have to keep up.
The direct selling business model is by no means alone in its vulnerability to class-action suits, though its areas of exposure may differ.If you look at any consumer brand of note, all of them are bound to face legal challenges. “It’s the cost of doing business, which is unfortunate and scary,” Webb says. “The smart direct selling companies are looking at this as a multi-departmental strategy. The sales department has to keep the field motivated, the lawyers have to keep them compliant, and the communications team has to come up with the right messaging. We can’t just expect the legal department to clean up the mess. We can’t expect compliance to handle all of it. We’re talking about hundreds of thousands of sellers. Without a proactive communications strategy, it’s not possible to ensure that members of the field are talking about products and the opportunity the right way.”
As direct selling companies, we must understand that there are individuals and organizations, fueled by varied motivations, who are ready to amplify our missteps at any opportunity. The most effective strategy for preventing class-action suits is for all of us to take ownership of this issue and step up our educational outreach and monitoring efforts. We can’t afford to be complacent because class-action suits affect not only the reputation and bottom line of the defendant; they affect our industry at large.
Preparation Equals Prevention
Lawsuits are inevitable, but there are some actions you can take to strengthen your company’s position should you be hit with a class action lawsuit. Here’s a quick summary from our legal experts:
|Proactive, integrated communications strategy—Sales, marketing, compliance have to work together to ensure the field are talking about products and opportunity the right way. It’s not just the legal team’s job to clean up the mess.|
|Hire a risk mitigation service—A risk mitigation firm can help you in evaluating your current risk as well as help you plan and develop options and actions to enhance opportunities in reducing potential threats that could lead to a class action.|
|Social media monitoring team—Hiring a lot of people to sit and troll the web all day can be expensive, but it may be worth it in the long run. Make sure they are trained on what to look for and how to report it to their team leader.|
|Compliance training modules—Before your distributors can advance in rank, provide them with a short and sweet training module that reminds them of rules of what you can and can’t do in regard to promoting products and the opportunity.|
|Provide materials to inoculate your distributors—Be proactive in providing materials that tell your story, as well as the rules of the road for what you can and can’t share with your team members and customers.|
|Have a strong class action waiver in your independent contractor agreements—That waiver requires representatives to agree that if they ever have a dispute with your company, they’ll resolve it individually instead of through class action.|
|Keep up on class action laws—It would be wise to have your legal team be on the lookout for any changes in class action law to be better assess your preparedness.|