International Law

Direct Selling Association's Position Against Truth in Advertising

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Recently, I have been posting about whether Mary Kay distributors could be a franchisor, a topic which had a great following over as Sean Kelly's blog, Franchise Pick.

In 1997, Joseph N. Mariano, then counsel to the Direct Selling Association, laid out the DSA's opposition to being regulated by the FTC as a business opportunity franchise.

He stated that 

"In the direct selling industry, sellers enter into a contract with a direct selling company giving the seller the right to sell that company"s products or services. Over 99.8% of direct sellers are independent contractors.

Upon signing the distributor agreement. some direct selling companies require the seller to purchase a start-up kit, w,hile other companies make purchase of the kit an option.

These start-up kits typically contain some product samples, promotional literature, and training and sales aids. DSA member sales kit range in price from less than $100 to near $500.

It is not unusual for these sales kits to be sold at a not-for-profit basis by the company.

We wish to avoid any mistaken characterization of direct selling as analogous to "franchises" or "business opportunities" which require large cost outlays."

But this is why the amount of initial inventory is critical.

While many MLMs may allow an IBC to start with a minimal inventory, there is often pressure by the person who recruited the new IBC to start off with inventory that more than reasonably necessary.

Or, while inventory levels may be minimal, IBC's are auto-enrolled in monthly programs which require them to purchase several hundred of dollars "worth" of inventory.

My own legal work with Tupperware distributors makes me wonder how the MLM establishes the wholesale price, given the pennies they pay for the product. Without a reasonable wholesale price, or method to establish it, MLMs who auto ship may be skirting on the edge of the FTC's Franchise Rule.

Do you know anyone who was coerced into taking too much inventory?

Full post as published by Misleading Advertising Law on July 29, 2008 (boomark / email).