FTC Knocks Down MLM Pyramid Scheme

Advertising Law

The Federal Trade Commission reached a $150 million deal with multilevel marketing (MLM) defendants that also includes a ban from the business.

In the agency’s Texas federal court complaint, it accused AdvoCare International, L.P., its former chief executive officer and four other top promoters of operating an illegal pyramid scheme. The defendants marketed a business opportunity to distribute health and wellness products (such as the Spark energy drink) through a network of hundreds of thousands of participants.

“To convince consumers to pursue AdvoCare’s business opportunity, Defendants claim that AdvoCare offers the average person a financial solution that will enable them to earn unlimited income, attain financial freedom and eliminate the constraint of traditional employment,” according to the complaint. “In reality, the overwhelming majority of [participants] never earn compensation from the company.”

AdvoCare charged consumers $59 to become a “distributor,” or participant, and then pushed them to recruit new distributors to create a downline instead of selling products, the FTC said. In order to earn bonuses or incentives, distributors had to become “advisors,” which typically required them to spend between $1,200 and $2,400 purchasing AdvoCare products and to recruit even more participants.

The defendants encouraged distributors to make “exaggerated claims” about the amount of money consumers could make (hundreds of thousands or even millions of dollars per year) in order to recruit others, to create “emotional narratives” that began with distributor struggles prior to their AdvoCare affiliation and ended with their financial success after joining, and to instill fear in consumers that they would regret not participating, according to the FTC.

But these claims were false, the agency alleged. In 2016, 72.3 percent of distributors did not earn any compensation from AdvoCare, while 18 percent earned between $250 and one cent. Annual earnings distributions for 2012 through 2015 were nearly identical.

To settle the charges, the company and CEO agreed to a permanent ban from the MLM industry as well as to the $150 million payment.

They are also required to notify all AdvoCare distributors about the FTC’s lawsuit and settlement, informing them that they will no longer earn compensation based on distributor purchases in their downline, that they may get some of their money back from the FTC if they had significant losses pursuing their AdvoCare business, and that they are entitled to a 100 percent refund on unused products if they decide to discontinue their participation.

Two of the promoters reached a separate deal that similarly includes a ban on MLM marketing as well as a $4 million payment (most of which was suspended based on an inability to pay). Litigation continues against the other two promoters.

To read the complaint and stipulated orders in FTC v. AdvoCare International, click here.

Why it matters: The FTC is keeping a close eye on multilevel marketing. It instituted other enforcement actions and issued guidance last year. MLM marketers should pay close attention to this guidance.