ftc-logoProposed Federal Trade Commission Business Opportunity rules directed at multilevel marketing companies could have a devastating impact on dietary supplement and functional food companies that rely on multilevel marketing to distribute their products.  To read the FTC release on the new rules, and for a link to the Federal Register notice, click here.

The new rules would require MLM companies to disclose information to potential sales reps such as what a typical rep earns and whether and how long it takes for average reps to make back their initial investment.  These disclosures could have a devastating impact on the ability of MLM companies to attract and retain new sales representatives.

MLM companies typically tout potential earnings to prospective reps with claims about the huge profits sales reps can earn in the MLM system.  The new FTC rules would also require these companies to disclose more sobering statistics such as the amount an average sales representative makes, or the short time sales reps remain in the system before quitting.  The new rules would also require disclosure of lawsuits against MLM companies for deceptive trade practices.  In recent years, these lawsuits have proliferated.

In an interesting twist, The New York Times reported today that a number of short sellers have been shorting the stock of MLM companies, including supplement companies Herbalife and Mannatech, in anticipation that the new FTC regulations will take effect and have a devastating financial impact on these companies’ earnings and stock price.

More resources on multilevel marketing:

The Multi-Level Marketing International Association (MLMIA)

Legal Principals of Multi-Level Marketing from Grimes & Reese

About 

Joel B. Rothman represents clients in intellectual property infringement litigation involving patents, trademarks, copyrights, trade secrets, defamation, trade libel, unfair competition, unfair and deceptive trade practices, and commercial matters. Joel’s litigation practice also includes significant focus on electronic discovery issues such as e-discovery management and motion practice relating to e-discovery.

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