Wednesday, March 26, 2008

Part II

Federal Trade Commission 16 CFR Part 37 Business Opportunity Rule; Proposed Rule

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FEDERAL TRADE COMMISSION The FTC is requesting that any comment to lengthy delays due to heightened filed in paper form be sent by courier or security precautions. 16 CFR Part 437 overnight service, if possible, because FOR FURTHER INFORMATION CONTACT: U.S. postal mail in the Washington area Monica Vaca (202) 326-2245, Division of RIN 3084-AB04 and at the Commission is subject to Marketing Practices, Room 286, Bureau delay due to heightened security Business Opportunity Rule of Consumer Protection, Federal Trade precautions. Moreover, because paper Commission, 600 Pennsylvania Avenue, AGENCY: Federal Trade Commission. mail in the Washington area and at the NW, Washington, DC 20580. ACTION: Revised Notice of Proposed Agency is subject to delay, please SUPPLEMENTARY INFORMATION: This Rulemaking. consider submitting your comments in Revised Notice of Proposed Rulemaking electronic form, as prescribed below. seeks comment on a revised proposed SUMMARY: The Federal Trade Comments filed in electronic form Business Opportunity Rule. In addition Commission (the ‘‘Commission’’ or should be submitted by using the to minor wording and punctuation ‘‘FTC’’) is publishing a revised Notice of following weblink: https:// changes to improve clarity, the revised Proposed Rulemaking to amend Part secure.commentworks.com/ftc- proposed rule modifies the initial 437, the trade regulation rule governing bizopRNPR/ (and following the proposal in six significant ways: sale of business opportunities that are instructions on the web-based form). To • It narrows the scope of the proposed not covered by the amended Franchise ensure that the Commission considers Rule to avoid broadly sweeping in Rule. The revised proposed Business an electronic comment, you must file it sellers of multi-level marketing Opportunity Rule (or ‘‘the Rule’’) is on the web-based form at the weblink opportunities, while retaining coverage based upon the comments received in https://secure.commentworks.com/ftc- of those business opportunities sellers response to an Advance Notice of bizopRNPR/. If this notice appears at historically covered by the FTC’s Proposed Rulemaking (‘‘ANPR’’), a http://www.regulations.gov, you may original Franchise Rule (and by the Notice of Proposed Rulemaking also file an electronic comment through FTC’s interim Business Opportunity (‘‘NPRM’’), and other information that website. The Commission will Rule), as well as coverage of sellers of discussed in this notice. The revised consider all comments that work-at-home schemes; proposed Business Opportunity Rule regulations.gov forwards to it. You may • It cures a potential overbreadth would require business opportunity also visit the FTC website at http:// problem that may have inadvertently sellers to furnish prospective purchasers www.ftc.gov/opa/index.shtml to read swept in companies using traditional with specific information that is the Revised Notice of Proposed product distribution arrangements; material to the consumer’s decision as Rulemaking and the news release • It eliminates the previously- to whether to purchase a business describing this proposed Rule. proposed requirement that a covered opportunity and which should help the The FTC Act and other laws the business opportunity seller disclose the purchaser identify fraudulent offerings. Commission administers permit the number of cancellation and refund The proposed rule also would prohibit collection of public comments to requests it received; other acts or practices that are unfair or consider and use in this proceeding as • It eliminates the requirement to deceptive within the meaning of Section appropriate. The Commission will disclose litigation history of certain 5 of the Federal Trade Commission Act consider all timely and responsive sales personnel (while retaining the (the ‘‘FTC Act’’). public comments that it receives, requirement to disclose litigation DATES: Written comments must be whether filed in paper or electronic history of the seller, its principals, received on or before May 27, 2008. form. Comments received will be officers, directors, and sales managers, Rebuttal comments must be received on available to the public on the FTC as well as any individual who occupies or before June 16, 2008. website, to the extent practicable, at a position or performs a function similar ADDRESS: Interested parties are invited http://www.ftc.gov. As a matter of to an officer, director, or sales manager); • to submit written comments. Comments discretion, the FTC makes every effort to It adds a requirement to include a should refer to ‘‘Business Opportunity remove home contact information for citation to the Rule in the title of the Rule, R511993’’ to facilitate the individuals from the public comments it required disclosure document; and • organization of comments. A comment receives before placing those comments It prohibits misrepresenting that the filed in paper form should include this on the FTC website. More information, government or any law forbids reference both in the text and on the including routine uses permitted by the providing prospects with a list of prior envelope, and should be mailed or Privacy Act, may be found in the FTC’s purchasers of a business opportunity. delivered, with two complete copies, to privacy policy, at http://www.ftc.gov/ The Commission invites interested the following address: Federal Trade ftc/privacy.htm. parties to submit data, views, and Commission/Office of the Secretary, Comments on any proposed filing, arguments on the proposed Business Room H-135 (Annex S), 600 recordkeeping, or disclosure Opportunity Rule and, specifically, on Pennsylvania Avenue, NW, Washington, requirements that are subject to the questions set forth in Section J of DC 20580. Comments containing paperwork burden review under the this notice. The comment period will confidential material, however, must be Paperwork Reduction Act should remain open until May 27, 2008. To the filed in paper form, must be clearly additionally be submitted to: Office of extent practicable, all comments will be labeled ‘‘Confidential,’’ and must Information and Regulatory Affairs, available on the public record and comply with Commission Rule 4.9(c).1 Office of Management and Budget, placed on the Commission’s website: Attention: Desk Officer for the Federal http://www.ftc.gov/os/ 1 The comment must be accompanied by an Trade Commission. Comments should publiccomments.htm. After the close of explicit request for confidential treatment, be submitted via facsimile to (202) 395- the comment period, the record will including the factual and legal basis for the request, 6974 because U.S. Postal Mail is subject remain open until June 16, 2008, for and must identify the specific portions of the comment to be withheld from the public record. rebuttal comments. If necessary, the The request will be granted or denied by the applicable law and the public interest. See Commission also will hold hearings Commission’s General Counsel, consistent with Commission Rule 4.9(c), 16 CFR 4.9(c). with cross-examination and post-

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hearing rebuttal submissions, as opportunity agreement but to ensure In 1997, the Commission published specified in Section 18(c) of the FTC that sellers disclose material an Advance Notice of Proposed Act, 15 U.S.C. 57a(c). Parties who information to prospective buyers. The Rulemaking (‘‘ANPR’’) in the Federal request a hearing must file a comment Franchise Rule was posited on the Register,5 seeking further comment on in response to this notice and a notion that a fully informed consumer several proposed Franchise Rule statement explaining why they believe a can determine whether a particular modifications, including the separation hearing is warranted, how they would offering is in his or her best interest. of disclosure requirements for sales of participate in a hearing, and a summary As part of the Commission’s overall business opportunities from those for of their expected testimony, on or before policy of periodic review of its trade sales of franchises. The Commission May 27, 2008. Note that because the regulation rules, in 1995 the also sought comment on the proper NPR has been revised, parties interested Commission commenced a regulatory scope of the term ‘‘business 6 in a hearing must resubmit their request review of the Franchise Rule.3 From the opportunity,’’ the types of business in comments to this Revised NPR. outset of that review proceeding, the opportunities that are known to engage 7 Parties testifying at a hearing may be predominant theme sounded by in deceptive or fraudulent conduct, subject to cross-examination. For cross- commenters and other participants was and the types of disclosures that are examination or rebuttal to be permitted, that the Rule, insofar as it concerned material to business opportunity 8 interested parties must also file a sales of business format franchises, purchasers. comment and request to cross-examine should be more closely harmonized After assessing the comments or rebut a witness, designating specific with state franchise regulations—i.e., received in response to the ANPR, the Commission decided to amend the facts in dispute and a summary of their the Uniform Franchise Offering Circular Franchise Rule to harmonize it better expected testimony, on or before June (‘‘UFOC’’) Guidelines. A corollary with the UFOC. Accordingly, the 16, 2008. In lieu of a hearing, the theme was that business opportunity Commission published a Franchise Rule Commission will also consider requests sales should be governed by a separate Notice of Proposed Rulemaking to hold one or more informal public regulation, in accordance with the (‘‘Franchise Rule NPR’’), soliciting workshop conferences to discuss the approach followed generally at the state issues raised in this notice and comment on proposed revisions to the level. 9 comments. Franchise Rule, and simultaneously Moreover, early in the review the announcing the intention to conduct a Section A. Background issue arose as to whether the Franchise separate rulemaking to address business The Commission is publishing this Rule’s extensive disclosure opportunity sales.10 Agreeing with the Revised Notice of Proposed Rulemaking requirements were well-suited to overwhelming view of the commenters pursuant to Section 18 of the FTC Act, business opportunity sales and whether who discussed this issue during the 15 U.S.C. 57a et seq., and Part 1, the Franchise Rule imposed Rule Review and in response to the Subpart B, of the Commission’s Rules of unnecessary compliance costs on both ANPR, the Commission found that Practice. 16 CFR 1.7, and 5 U.S.C. 551 business opportunity sellers and buyers. franchises and business opportunities et seq. This authority permits the To ensure that the required disclosures are distinct business arrangements that Commission to promulgate, modify, and protect prospective business require separate disclosure approaches. repeal trade regulation rules that define opportunity purchasers, while After addressing each of the required with specificity acts or practices that are minimizing overall compliance costs, stages of rulemaking under Section 18 of unfair or deceptive in or affecting the Commission solicited comment on the FTC Act, the Commission commerce within the meaning of whether any of the Rule’s disclosures announced adoption of an amended Section 5(a)(1) of the FTC Act. 15 U.S.C. should be eliminated as unnecessary in Franchise Rule on January 23, 2007, and 45(a)(1). the business opportunity context and published the amended rule and On December 21, 1978, the whether any additional material accompanying Statement of Basis and 4 11 Commission promulgated a trade disclosures should be required. Purpose on March 30, 2007. In that regulation rule entitled ‘‘Disclosure At the conclusion of the Rule Review, Federal Register notice, the Requirements and Prohibitions the Commission determined to retain Commission also separated the Concerning Franchising and Business the Franchise Rule with modifications Franchise Rule into two distinct CFR Opportunity Ventures’’ (the ‘‘Franchise designed to harmonize it better with parts—part 436 governing the sales of Rule’’) to address deceptive and unfair state franchise requirements. At the business format franchises, and a new practices in the sale of franchises and same time, the Commission determined part 437, governing the sales of non- business opportunity ventures.2 Based to seek additional comment on whether franchise business opportunities. Part upon the original rulemaking record, the to address the sale of business opportunities through a separate 5 ANPR, 62 FR 9115 (Feb. 28, 1997). References Commission found that franchise and to the ANPR comments are cited as: the name of business opportunity fraud was narrowly tailored new trade regulation the commenter, ANPR, comment number (e.g., widespread, causing serious economic rule. NASAA, ANPR 120). References to the ANPR harm to consumers. The Commission workshop conferences are cited as: name of 3 commenter, ANPR, date Tr (e.g., Bundy, ANPR, adopted the Franchise Rule to prevent Rule Review, 60 FR 17656 (Apr. 7, 1995). 6Nov97 Tr). A list of the ANPR commenters and the fraudulent practices in the sale of References to the Rule Review comments are cited abbreviations used to identify each is cited in the as: the name of the commenter, RR comment NPR. See 71 FR at 19093-19095. franchises and business opportunities number (e.g., NASAA, RR 43). References to the 6 62 FR at 9116-117 and 9121 (Question 12). through pre-sale disclosure of specified Rule Review workshop conferences are cited as: 7 items of material information. name of commenter, Sept95 Tr or March96 Tr, Id. at 9121 (Questions 8–10). The purpose of the Franchise Rule respectively (e.g., D’Imperio, Sept95 Tr, and 8 Id. at 9121 (Questions 15–16). 9 was not to regulate the substantive Ainsely, March96 Tr). A list of the Rule Review Franchise Rule NPR, 64 FR 57294 (Oct. 22, commenters and the abbreviations used to identify 1999). terms of a franchise or business each in this notice is cited in the Notice of Proposed 10 Id. at 57296. Rulemaking for the Business Opportunity Rule 11 Amended Franchise Rule Statement of Basis 2 Statement of Basis and Purpose (‘‘SBP’’), 43 FR (‘‘Business Opportunity Rule NPR’’). See 71 FR and Purpose (‘‘Amended Franchise Rule SBP’’) 72 59614 (Dec. 21, 1978) (Franchise Rule codified at 19054, 19092–93. FR 15444 (March 30, 2007) (Amended Franchise 16 CFR 436). 4 60 FR at 17658 (Question 14). Rule codified at 16 CFR 436).

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437 is identical to the original Franchise some 150 Franchise Rule cases against Franchise Rule violations. To attack Rule, with all of the definitional vending machine, rack display, and other forms of business opportunity elements and references regarding similar opportunities. Since 1995, the fraud—notably, work-at-home and business format franchising deleted.12 Commission has conducted more than pyramid schemes—the Commission Part 437 will continue to govern sales of 15 business opportunity sweeps,16 used Section 5 of the FTC Act, because non-franchise business opportunities, many with other federal and state law these schemes were not covered by the pending completion of the Business enforcement partners, to combat original Franchise Rule.22 Opportunity rulemaking proceedings persistent business opportunity frauds The NPR highlighted features of the advanced in a Notice of Proposed violating the Franchise Rule, such as original Franchise Rule that excluded Rulemaking published April 12, 2006.13 those involving the sale of vending from its coverage certain types of machines,17 rack displays,18 public Section B. The Notice of Proposed schemes, such as pyramid schemes and telephones,19 Internet kiosks,20 and 900- 23 Rulemaking work-at-home schemes. The number ventures,21 among others. The Commission noted that many of these Having determined to create a great majority of these cases alleged schemes fell outside the ambit of the separate rule for business opportunities, Franchise Rule because: (1) the in 2006 the Commission published in 16 E.g., Project Fal$e Hope$ (2006); Project Biz purchase price was less than $500, the the Federal Register a Notice of Opp Flop (2005); Project Busted Opportunity (2002); Project Telesweep (1995); Project Bizillion$ minimum payment necessary to trigger Proposed Rulemaking (‘‘NPR’’) on a coverage under the original Franchise 14 (1999); Operation Money Pit (1998); Project Vend Business Opportunity Rule, which Up Broke (1998); Project Trade Name Games (1997), Rule; (2) required payments were would amend what is now designated as and Operation Missed Fortune (1996). In addition primarily for inventory, which did not 16 CFR Part 437. The NPR explained the to joint law enforcement sweeps, Commission staff count toward the $500 monetary need for a Business Opportunity Rule has also targeted specific business opportunity ventures such as envelope stuffing (Operation threshold; (3) the scheme did not offer separate from the Franchise Rule, noting Pushing the Envelope 2003, medical billing location or account assistance; or (4) the particularly that business opportunities (Operation Dialing for Deception 2002, and Project scheme involved the sale of products to Housecall 1997); seminars (Operation Showtime and franchises are distinct business the business opportunity seller rather arrangements that pose very different 1998); Internet-related services (Net Opportunities 1998); vending (Project Yankee Trader 1997); and than to end-users, a further limitation regulatory challenges. For example, 900 numbers (Project Buylines 1996). on coverage under the original franchises typically are expensive and 17 E.g., FTC v. American Entm’t Distribs., Inc., No. Franchise Rule.24 involve complex contractual licensing 04-22431-CIV-Martinez (S.D. Fla. 2004); FTC v. To bring the wide array of fraudulent relationships, while business Pathway Merch., Inc., No. 01-CIV-8987 (S.D.N.Y. business opportunities within the scope opportunity sales are often less costly, 2001); U.S. v. Photo Vend Int’l, Inc., No. 98-6935- CIV-Ferguson (S.D. Fla. 1998); FTC v. Hi Tech Mint of the Rule, the NPR proposed an involving simple purchase agreements Sys., Inc., No. 98 CIV 5881 (JES) (S.D.N.Y. 1998); expansive definition of ‘‘business that pose less of a financial risk for FTC v. Claude A. Blanc, Jr., No. 2:92-CV-129-WCO opportunity.’’ In addition to those purchasers. (N.D. Ga. 1992). See also FTC News Release: FTC Yet, the Commission’s law Announces ‘‘Operation Vend Up Broke’’ (Sept. 3, business opportunities that had been 1998) (available at http://www.ftc.gov/opa/1998/09/ covered by the original Franchise Rule, enforcement experience in conducting vendup2.htm) (FTC and 10 states announce 40 numerous sweeps of the business the Initial Proposed Business enforcement actions against fraudulent vending Opportunity Rule (the ‘‘IPBOR’’) aimed opportunity industry demonstrates that business opportunities). fraud is not only prevalent but 18 E.g., U.S. v. Elite Designs, Inc., No. CA 05 058 to cover work-at-home schemes and 25 persistent, and many comments also (D.R.I. 2005); U.S. v. QX Int’l, No. 398-CV-0453-D pyramid schemes. sounded this theme.15 Just in the period (N.D. Tex. 1998); FTC v. Carousel of Toys, No. 97- To reach these schemes, the NPR 8587-CIV-Ungaro-Benages (S.D. Fla. 1997); FTC v. proposed a broad definition of since 1990, the Commission has brought Raymond Urso, No. 97-2680-CIV-Ungaro-Benages (S.D. Fla. 1997); FTC v. Infinity Multimedia, Inc., ‘‘business opportunity’’ that would have 12 The interim Business Opportunity Rule differs No. 96-6671-CIV-Gonzalez (S.D. Fla. 1996); FTC v. included commercial arrangements from the original Franchise Rule in three respects. O’Rourke, No. 93-6511-CIV-Ferguson (S.D. Fla. where the seller made ‘‘earnings claims’’ First, references to ‘‘franchisor’’ and ‘‘franchisee’’ in 1993). See also FTC News Release: Display Racks or offered ‘‘business assistance.’’26 The for Trade-Named Toys and Trinkets are the Latest the original Franchise Rule have been changed to Commission recognized that the most ‘‘business opportunity seller,’’ and ‘‘business in Business Opportunity Fraud Schemes (Aug. 5, opportunity purchaser,’’ respectively. Second, the 1997) (available at http://www.ftc.gov/opa/1997/08/ frequent allegation in its law original definition of ‘‘franchise’’ set out at 436(a)(2) tradenam.htm) (FTC and 8 states file 18 enforcement actions against business has been changed to ‘‘business opportunity,’’ and enforcement actions against sellers of bogus display opportunity frauds has been that the the first part of the original definition—the opportunities that use trademarks of well-known ‘‘franchise’’ elements—has been deleted; the companies). seller made false and unsubstantiated definition now focuses on the second part of the 19 E.g., FTC v. Advanced Pub. Commc’ns Corp., earnings claims. Therefore, the IPBOR original definition—the business opportunity No. 00-00515-CIV-Ungaro-Benages (S.D. Fla. 2000); incorporated the broad definition of elements. Third, part 437 sets forth a new FTC v. Ameritel Payphone Distribs., Inc., No. 00- ‘‘earnings claims’’ from the original exemption for franchises that comply with or are 0514-CIV-Gold (S.D. Fla. 2000); FTC v. ComTel 27 exempt from part 436. Amended Franchise Rule Commc’ns Global Network, Inc., No. 96-3134-CIV- Franchise Rule. SBP, 72 FR at 15444. Highsmith (S.D. Fla. 1996); FTC v. Intellipay, Inc., The IPBOR also defined a new term, 13 Business Opportunity Rule NPR, 71 FR 19054 No. H92 2325 (S.D. Tex. 1992). ‘‘business assistance,’’ in a broad (April 12, 2006). 20 E.g., FTC v. Bikini Vending Corp., No. CV-S-05- manner, using five illustrative examples 14 Id. 0439-LDG-RJJ (D. Nev. 2005); FTC v. Network 15 Service Depot, Inc., No. CV-S0-05-0440-LDG-LRL E.g., Baer, ANPR 25, at 5; Wieczorek, 21Aug97 22 Likewise, they are not covered under 16 CFR (D. Nev. 2005); U.S. v. Am. Merch. Tech., No. 05- Tr at 35; DSA, id.; Finnigan, id. at 90; Kestenbaum, Part 437. RR 14, at 3-4; Wieczorek, RR 23, at 2-3; Lewis, RR 20443-CIV-Huck (S.D. Fla. 2005); FTC v. Hart Mktg. 23 Two types of work-at-home schemes 40, Attachment at 3; CA BLS, RR 45, at 5-6; Enter. Ltd., Inc., No. 98-222-CIV-T-23 E (M.D. Fla. mentioned in the NPR were product assembly D’Imperio, Sept95 Tr at 130; Kezios, id. at 365, 631. 1998). See alsoFTC v. FutureNet, Inc., No. CV-98- schemes and envelope-stuffing schemes. 71 FR at But see MLMIA, at 7 & Exhibit A (comment 1113 GHK (BQRx) (C.D. Cal. 1998); FTC v. 19059–19060. submitted in response to the NPR and its attached TouchNet, Inc., No. C98-0176 (W.D. Wash. 1998). 24 declaration argue that fraud is not widespread in 21 E.g., FTC v. Bureau 2000 Int’l, Inc., No. 96- The limits on coverage of the original Franchise the business opportunity sector). The exhibit 1473-DT-(JR) (C.D. Cal. 1996); FTC v. Genesis One Rule and the effects of those limitations are attached to the MLMIA’s comment is belied by the Corp., No. CV-96-1516-MRP (MCX) (C.D. Cal. 1996); discussed in detail in the NPR. See 71 FR at 19055. Commission’s law enforcement experience, FTC v. Innovative Telemedia, Inc., No. 96-8140- 25 Id. at 19059. described above, as well as that of the Department CIV-Ferguson (S.D. Fla. 1996); FTC v. Ad-Com Int’l, 26 IPBOR, 437.1(d)(3). of Justice, described in its comment. DOJ, at 1. No. 96-1472 LGB (VAP) (C.D. Cal. 1996). 27 IPBOR, 437.1(h).

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of the types of assistance that would narrow the scope of the IPBOR, to involving the sale of business trigger coverage.28 Among these implement various safe-harbor opportunities.38 Therefore, in an examples, the IPBOR included ‘‘buy provisions, and/or to reduce the attempt to strike the proper balance, the back’’ assistance, which refers to a required disclosures. Thousands of Commission mitigated the compliance seller’s offer to buy back products that comments were form letters35 submitted burden by including in the IPBOR consumers have assembled at home.29 by participants in various MLM substantially simplified and streamlined Another example captured the tracking operations, including Quixtar, , disclosure requirements. of payments and commissions, a type of PartyLite, Xango, among others.36 The However, the streamlining did not assistance that pyramid schemes Commission also received fully achieve the Commission’s purpose. routinely offer.30 Additionally, the approximately 187 comments, primarily Two key problems emerged with the definition of ‘‘business assistance’’ from individual consumers or consumer IPBOR’s breadth of coverage. First, the expressly included assistance in the groups, in favor of the IPBOR.37 Only a IPBOR would have unintentionally form of training.31 handful of comments came in from non- swept in numerous commercial At the same time, the IPBOR excised MLM companies and industry groups, arrangements where there is little or no two features of the original Franchise expressing various concerns about evidence that fraud is occurring. Rule that limited the scope of its obligations that the IPBOR would Second, the IPBOR would have imposed coverage: the $500 minimum payment impose upon them. greater burdens on the MLM industry threshold, and the exemption for than other types of business opportunity purchases of inventory at bona fide Section C. Scope of the Proposed Rule sellers without sufficient countervailing wholesale prices. By eliminating the The revised proposed Business benefits to consumers. $500 minimum payment requirement, Opportunity Rule (‘‘RPBOR’’) is more 1. Traditional Product Distribution the IPBOR would have included within narrowly tailored than the IPBOR. The Arrangements and Others its scope the various types of fraudulent RPBOR expressly excludes from business opportunity sellers that have coverage training and/or educational Several commenters contended that evaded coverage under the disclosure organizations that, as the comments the IPBOR would have regulated a wide requirements of the Franchise Rule by showed, may have been inadvertently range of legitimate and traditional pricing their schemes below $500. covered. In addition, the revised product distribution arrangements that Envelope stuffing, product assembly, proposal does not attempt to cover are not associated with the types of medical billing schemes, and other MLMs. Instead, the Commission will fraud that business opportunity laws are schemes frequently are priced below the continue to use Section 5, a flexible and designed to remedy.39 As one monetary threshold of Franchise Rule effective weapon, against MLMs that commenter described it, the IPBOR coverage.32 Additionally, the IPBOR engage in unfair or deceptive practices. would have swept in traditional would have ensured coverage of In recognition of the prevalence of arrangements for distribution of ‘‘food pyramid schemes by eliminating the fraud in the sale of business and beverages, construction equipment, inventory exemption. opportunities, including work-at-home manufactured homes, electronic In response to the NPR, the and pyramid schemes, the Commission components, computer systems, medical Commission received more than 17,000 had designed the IPBOR with an supplies and equipment, automotive comments.33 The overwhelming expansive scope in order to reach parts, automotive tools and other tools, majority of these comments came from various fraudulent practices. While petroleum products, industrial the multilevel marketing34 (‘‘MLM’’) expanding the scope of the original chemicals, office supplies and industry, including industry Franchise Rule’s coverage of business equipment, and magazines.’’40 For representatives, companies, and opportunities, the IPBOR greatly example, one commenter, a footwear individual distributors. These reduced the compliance burden that the manufacturer, suggested that the IPBOR commenters urged the Commission to original Franchise Rule imposed on could be read to cover the commenter’s business opportunity sellers. The product distribution through retail 28 IPBOR, 437.1(c). Commission recognized that the stores simply because the retailer pays 29 IPBOR, 437.1(c)(1)(iii). extensive disclosures of the original for inventory and the manufacturer 30 IPBOR, 437.1(c)(1)(iv). Franchise Rule would entail provides sales training to its retail 31 IBPOR, 437.1(c)(v). disproportionate compliance costs for accounts.41 Thus, this aspect of the 32 See infra Section D.1.a.1.ii. comparatively low-cost transactions 33 References to the comments responding to the commenter’s operations would meet the Business Opportunity Rule NPR are cited by the definition of ‘‘business opportunity’’ in name of the commenter and the page number. 35 Some commenters provided information the IPBOR because: (1) the ‘‘payment’’ Individual commenters are identified by their first demonstrating that certain MLM companies and last names. Companies and organizations are solicited their distributors to submit letters in their 38 identified by abbreviated names. A list of proposed form or template to the FTC. See e.g., 71 FR at 10057. companies and organization that are cited herein James Kellogg (Quixtar); Smith (Arbonne); 39 E.g., IBA, at 1, 5; PMI, at 2; Timberland, at 1; and the abbreviations used to identify each is Anonymous (PartyLite). Sonnenschein, at 1-2 (stating that the rule would attached as Attachment A. 36 In addition, the Commission received form cover ‘‘manufacturers, suppliers and other 34 Multi-level marketing is one form of direct letters from participants in AdvoCare, Tastefully traditional distribution firms that have relied on the selling, and refers to a business model in which a Simple, Nature’s Sunshine, Arbonne, Lia Sophia, bona fide wholesale price exclusion to avoid company distributes products through a network of , Cookie Lee Jewelry, , Scent coverage’’ under the rule). The Cosmetic, Toiletry distributors who earn income from their own retail Station, Neways, Synergy Worldwide, Freelife, and Fragrance Association posits that the IPBOR sales of the product and from retail sales made by Essential Oils, and . In would cover the relationship between a the distributors’ direct and indirect recruits. addition, the Commission received thousands of manufacturer and an independent contractor who Because they earn a commission from the sales their letters that were individualized but followed a sells the product to beauty supply companies, recruits make, each member in the MLM network template that covered the same issues as the form salons, and others. CTFA, at 4. See also LHD&L at has an incentive to continue recruiting additional letters. 2 (noting that the IPBOR could cover the sales representatives into their ‘‘down lines.’’ See 37 Numerous letters came from individuals with relationship between a manufacturer and a regional Peter J. Vander Nat and William W. Keep, negative experience with various MLMs, including distributor of products). Marketing Fraud: An Approach to Differentiating Quixtar, 4Life, , Arbonne, Liberty League 40 IBA, at 5; Timberland, at 1 (noting that Multilevel Marketing from Pyramid Schemes, 21 J. International, Financial Freedom Society, Herbalife, numerous manufacturers structure their retail of Pub. Pol’y & Marketing (Spring 2002), (‘‘Vander Xango, Melaleuca, EcoQuest, Pre-Paid Legal, distribution in this manner). Nat and Keep’’) at 140. PartyLite, Shaklee, Vartec/Excel, and Vemma. 41 Timberland, at 1.

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prong of the definition did not exempt insufficient to curb pyramid fraud49 yet MLM companies commented that they voluntary purchases of inventory; and devastating to MLM companies and do not require distributors to purchase (2) providing retail staff with sales individual MLM distributors. Criticism any inventory in advance of selling it.54 training would satisfy the ‘‘business was not confined to industry comments. As one commenter put it, purchasing a assistance’’ prong of the definition.42 Two consumer groups also filed direct selling opportunity ‘‘is less Moreover, review of the comments comments asserting that, although complicated and carries less financial suggests that even if a company MLMs should be covered, the risk for a participant than purchasing a provides no ‘‘business assistance,’’ a disclosures the Commission proposed in flat-screen TV set.’’55 Commenters product distribution arrangement still the IPBOR would be inadequate to contended that the low-risk nature of easily could have fallen within the remedy deceptive earnings claims.50 On the distributorship is essential to scope of the IPBOR if the company balance, based upon this record and its facilitate ease of entry because the MLM made some representation about sales or law enforcement experience, the industry relies on part-time and profits sufficient to constitute an Commission does not believe it is seasonal distributors.56 Furthermore, ‘‘earnings claim.’’43 One trade practicable or sufficiently beneficial to these commenters argued that there is association notes, ‘‘[a]s a practical consumers to attempt to apply the no evidence that the MLM industry is matter, suppliers will find it difficult to proposals advanced in this rulemaking permeated with fraud.57 enter into a business relationship with against multi-level marketing The MLM industry commenters also a distributor or dealer without at least companies, particularly when sharply criticized each of the primary discussing possible sales volumes or considering the burdens upon industry. requirements of the IPBOR. They argued profit levels.’’44 The Commission, therefore, has that, balanced against the low risk of Other commenters argued that the determined that at this point, it will financial loss, it would be excessively IPBOR would have been broad enough continue to use Section 5 to challenge burdensome to mandate a seven-day to cover: bona fide educational unfair and deceptive acts or practices in waiting period and the various programs offered by colleges and the MLM industry. disclosure and recordkeeping universities;45 the sale of certain books obligations. The seven-day waiting by publishers or book stores;46 and even a. Industry comments period would require sellers to wait the relationship between newspapers MLM industry representatives, MLM seven days after presenting disclosure and independent carriers who distribute companies, and independent documents to the prospective purchaser the papers to homes and businesses.47 distributors for those companies before collecting any money or Because application of the IPBOR to submitted numerous comments. The obtaining an executed contract.58 The these types of arrangements was strongly stated theme common to all provision is designed to allow unintended, the Commission has these comments was that the low prospective purchasers the opportunity narrowed the proposed definition of the economic risks of participating in a to review required disclosures term ‘‘business opportunity,’’ to exclude typical MLM do not justify imposing thoroughly or to speak with an advisor. from coverage distribution arrangements burdensome regulations that would The proposed seven-day waiting period in which the only required payment is threaten to strangle the MLM industry. drew intense criticism from industry for reasonable amounts of inventory at These commenters pointed out that groups, and was characterized as bona fide wholesale prices. In addition, the fees top MLM companies charge ‘‘regulatory overkill’’ by the proposed definition of ‘‘business prospective distributors for the right to Financial Services, Inc.59 opportunity’’ has been substantially sell products are low—often less than MLM industry commenters argued narrowed as explained in Section D, $100.51 Furthermore, commenters that the waiting period would undercut infra. argued, the risk that consumers will lose the basic MLM business model, 2. The MLM Industry money through large purchases of characterized by minimal risk of inventory is low. The Direct Selling financial loss and maximum ease of The second problem with the breadth Association (‘‘DSA’’), a national trade entry. The DSA submitted a survey of the IPBOR’s coverage relates to the association of direct selling firms that showing that the level of interest in Commission’s attempt to reach pyramid claims to account for 95% of the becoming a direct salesperson drops at schemes with the Business Opportunity industry’s sales in the United States,52 least 33% and as much as 57% when a Rule. An overwhelming majority of asserts that its members offer a 90% waiting period is imposed.60 48 commenters argued that the IPBOR refund on resalable inventory and on Commenters opined that the waiting failed to differentiate between unlawful other start-up costs, as well.53 Certain pyramid schemes and legitimate 54 Primerica Rebuttal, at 6; Avon, at 4; Quixtar, at companies using an MLM business 49 DSA, at 21 (positing that compliance with the 5; Mary Kay, at 4. model. These commenters argued that new mandates would be ignored by fraudulent 55 Primerica Rebuttal, at 17. the requirements of the IPBOR pyramid schemes). 56 E.g., Mary Kay, at 4 (estimating that 80% of its simultaneously would have been 50 The Consumer Awareness Institute and sales force members are part-time); Avon, at 3 Alert each submitted comments (‘‘With its low cost / low risk design, many and rebuttal comments. Representatives take advantage of its ease of entry 42 IPBOR, 437.1(d)(2); IPBOR, 437.1(c)(v). 51 Shaklee, at 3 ($19.95); Avon, at 10 ($10 or $60); and exit to come and go as their needs / goals 43 IPBOR, 437.1(d)(3)(i). Quixtar, at 5 ($45); , at 2 ($90); Mary change.’’); CTFA, at 2. 44 IBA, at 4. See also PMI, at 3 n. 1. Kay, at 3 ($100). 57 E.g., SIA, at 5; Primerica, at 34; DSA, at 18–20. 45 Chadbourne, at 7 - 13 (illustrating the point 52 DSA, at 4. According to the DSA, 84% of direct 58 IPBOR, 437.2. with numerous course offering descriptions that selling firms use some form of multilevel 59 Primerica Rebuttal, at 16. See also MLM DRA, could arguably fall within the definition of compensation. DSA, at 9, 13 (defining direct selling at 5 (stating that ‘‘the majority of MLM distributors ‘‘business opportunity’’); Venable, at 3-5 (same). as ‘‘the sale of a consumer product or service, in are very small mom and pop businesses’’ and that 46 Venable, at 2 - 3. a face-to-face manner, away from a fixed retail ‘‘this burden would very likely ruin their 47 NAA, at 1-3. location’’). business.’’). United States Congressman Tom Cole 48 Of the more than 17,000 comments that the 53 DSA, at 24 n. 45 (describing the Code of Ethics also submitted a comment expressing the opinion Commission received, it is fair to estimate that well that members must follow). See also, e.g., Shaklee, that the seven-day waiting period is inappropriate over 95% came from members of the MLM industry at 6 (stating it has a 90% buy back requirement for for business opportunity sales costing less than expressing opposition to the IPBOR. As noted its products and start-up kit purchased within the $500. Cole, at 1. above, many of these were form letters. last two years); Quixtar at 3. 60 DSA, at 24.

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period would make entry into this opportunity promoter ‘‘simply because not for resale.75 Commenters argued that business much harder; moreover, some bigger companies with more sales those who use the distributorship in this commenters stated that the waiting representatives and more years of way do not expect to earn money, and period would significantly burden operation are likely to get involved in a so the earnings of these inactive recruiting because multiple visits would larger number of cases.’’68 Some distributors should not be counted.76 be necessary for each potential recruit.61 commenters pointed out that as Further, one commenter stated that a Industry commenters also contended publicly-traded companies, information disclosure of average earnings may that the various disclosure obligations of about their legal actions is already unfairly suggest that distributors the IPBOR are ill-suited to the MLM publicly available.69 achieve low earnings when, in fact, business model. For example, industry those earnings are substantial given the Similarly, according to these commenters assert that an MLM’s list of amount of time spent selling.77 62 commenters, the obligation to disclose distributors is proprietary information 70 Furthermore, many industry that is kept strictly confidential because refund requests and cancellations commenters argued that the IBPOR’s distributors necessarily compete with would penalize MLM industry members required earnings disclosure would be each other to recruit additional who deliberately structure their far too complicated because it would distributors into their ‘‘down lines.’’63 business model to facilitate ease of entry require a disclosure of the material The IPBOR would have required an by offering refunds. Because companies characteristics of purchasers who MLM distributor to provide to every with liberal refund policies are more earned the claimed income.78 As such, potential recruit a disclosure document likely to have refund requests than those some industry commenters expressed that includes a list of other distributors offering no refunds, disclosure of refund concern that the proposed earnings as references.64 As one commenter put requests could mislead consumers into disclosure would unnecessarily it, furnishing a list of distributors to thinking that the company offering complicate a simple and low-risk every individual who inquires about an liberal refunds is less reputable than the transaction.79 Furthermore, other 71 MLM distributorship, ‘‘would be like company offering no refunds. The rule commenters pointed out that it would requiring a salesman to introduce his would create a perverse incentive to be extremely burdensome for legitimate 72 customer to ten competing salesmen discontinue refund policies. businesses that attempted to comply,80 and then wait seven days before Some industry commenters but it would not be helpful to attempting to close a sale.’’65 The contended that the IPBOR’s earnings consumers in evaluating the Commission notes that another claim disclosure requirement73 would opportunity or in distinguishing characteristic of the MLM model may itself be misleading or incomplete. fraudulent claims.81 One commenter undermine the utility of the list of While some commenters stated they went further, stating that: ‘‘the required references that the IPBOR would have already make an earnings disclosure, disclosures do not address the crucial required MLMs to disclose. Specifically, they opposed the IPBOR’s provisions for distinction between pyramids and a previous purchaser on the reference a variety of reasons.74 For example, legitimate multi-level marketing—i.e., in list likely would stand to receive a some industry commenters argued that pyramids, compensation is based on financial benefit if a prospect who only the earnings of so-called ‘‘active’’ recruitment, rather than sales for contacts them were successfully distributors should be considered consumption.’’82 recruited by that previous purchaser. because many individuals use their Finally, echoing the concerns raised Under these circumstances, information distributorship as a ‘‘buyers club’’ and above, industry commenters uniformly from such a reference might not be the are only interested in purchasing goods asserted that the cost of compliance most reliable basis for the prospect’s at a wholesale price for their own use, with the IPBOR would be extremely purchasing decision. high, much higher than the Commission Other disclosure obligations of the 68 Quixtar, at 34. See also SPC, at 3 (stating that IPBOR, industry commenters it is a subsidiary of Time, Inc., and the litigation 75 E.g., Shaklee, at 3 (stating that 85% of contended, ‘‘will paint all direct selling disclosure of affiliate companies would encompass individuals who sign up with Shaklee do so as companies in a falsely negative light.’’66 all of Time Warner, which includes hundreds of ‘‘wholesale buyers’’ rather than distributors); Quixtar, at 8; Herbalife, at 2. For example, according to one companies). 69 Avon, at 10, 15; Pre-Paid Legal, at 14. 76 E.g., Quixtar, at 25 & n. 30; Primerica Rebuttal, commenter, the proposed obligation to 70 IPBOR, Section 437.3(a)(5). at 34. 67 disclose legal actions would cast 71 E.g., Pre-Paid Legal at 15-16; DSA, at 29 (stating 77 Avon, at 19. See also DSA, at 33 (questioning successful and long-established that because individuals enter and exit direct the relevance of earnings statistics to an individual companies in a worse light than a fly- selling each year to meet short term goals, the who enters as discount buyer or for short term by-night fraudulent business number of cancellation requests is likely to be supplemental income). artificially high and misleading). See also Quixtar, 78 The IPBOR would require disclosure of ‘‘any at 39 (asserting that because individuals join and characteristics of the purchasers who achieved at 61 DSA, at 25–26 (positing that three visits would leave for various personal reasons, information on least the represented level of earnings, such as their be required to sign up a prospective participant); cancellations would be ‘‘of little, if any, benefit’’); location, that may differ materially from the Shaklee, at 6 (stating that a waiting period would PANM, at 3 (stating that reporting cancellations and characteristics of the prospective purchasers being be ‘‘as though regulators had painted a big ‘X’ on refunds serves no purpose at all where the fee is offered the business opportunity.’’ IPBOR, the backs of direct selling companies, warning nominal). 437.4(a)(4)(vi). consumers ‘not to go there.’’’); Avon, at 14. 72 MLMIA, at 51-52, Pre-Paid Legal, at 16; 79 Avon, at 18; Quixtar, at 21 (stating that the goal 62 Shaklee, at 7 (‘‘a company’s distributor and Herbalife, at 10. See also Carico, at 1 (stating that should not be ‘‘to provide a maze of intricate customer lists are its most important and because dishonest companies would not honor an calculations and disclosures but to instead put confidential information which competitors must agreement to make refunds, the IPBOR would only across the simple point that most participants in the be kept from accessing.’’); DSA, at 30 (stating that have a negative effect on legitimate companies). business opportunity earn modest incomes’’). the list of sellers has been kept confidential even 73 IPBOR, 437.3(a) and 437.4. 80 E.g., DSA, at 33; HIG, at 3; Pre-Paid Legal, at from the IRS); Avon, at 16–17; 74 E.g., Quixtar, at 25-26 (proposing an earnings 10. Some commenters contend that it would be 63 Avon, at 16–17 (stating that direct selling disclosure that would include only ‘‘active’’ impossible to comply with this requirement. companies compete for same recruits); DSA, at 30– distributor earnings and would allow the company Shaklee, at 10; Xango, at 6; Vector, at 3. 31. to ‘‘infer a reasonable level of ‘retail’ profit’’); 81 E.g., DSA, at 33; Xango, at 6; Mary Kay, at 10; 64 IPBOR, 437.3(a)(6). Melaleuca, at 9-10 (stating that it publishes income Synergy, at 2. See also Xango, at 6 (‘‘[s]uch 65 Quixtar, at 31–32. statistics but opposing a federally mandated complicated compilations will only serve to 66 Pre-Paid Legal, at 8. disclosure); FreeLife, at 4 (preferring disclaimers to confuse prospective purchasers’’); Symmetry, at 2. 67 IPBOR, 437.3(a)(3). the IPBOR’s requirements). 82 Primerica, at 26.

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estimated.83 The costs of complying Primerica projected an economic loss of individual MLM participants in favor of would arise, first, from the burden of $1 billion for Primerica alone over the a Business Opportunity Rule that would developing, providing, and keeping next ten years if the [IPBOR were] cover MLMs.97 Consumer advocates records of the proposed disclosures, and promulgated.’’90 The cost of impaired contend that the MLM industry is second, from the impaired ability to recruiting, some commenters argued, comprised primarily of pyramid scheme recruit. With regard to the first point, would be borne by the millions of operators masquerading as legitimate industry commenters contended that the individual MLM distributors who companies.98 While commenters lauded burden of making the proposed would find their home businesses the Commission’s efforts to impose a disclosures would fall adversely affected.91 Indeed, the MLM business opportunity rule that would disproportionately on established, Distributors Rights Association (‘‘DRA’’) cover MLM firms, they argued that the legitimate businesses.84 For example, warned that the IPBOR would put rule’s earnings disclosure requirements the single page disclosure would be ‘‘millions out of business,’’ and were insufficient to expose a fraudulent simple for a new—possibly fraudulent— concluded with a plea to ‘‘come up with MLM company as a pyramid scheme.99 company that has no litigation history a new rule that will protect without CAI expressly recommended a different and fewer than 10 references.85 For damaging the little guy in America disclosure for MLM companies than for long-established MLMs, however, the trying to make a living.’’92 Numerous all other forms of business costs would be quite high: having polled letters submitted by individual MLM opportunities.100 its members on this issue, the DSA participants echo this theme, as well.93 According to these consumer groups, states that the median total compliance virtually all MLMs are pyramid schemes b. Consumer group comments cost for a small firm would be that enrich those at the top through the approximately $130,000 annually, and The Commission received comments endless recruitment of new more than $567,000 annually for a large from two consumer groups, the participants.101 These commenters firm.86 DSA further estimates that Consumer Awareness Institute (‘‘CAI’’) contended that the purported sale of because about 5 million people are and Pyramid Scheme Alert (‘‘PSA’’),94 a products to end users (i.e., typical recruited into direct selling each year, few other consumer advocates,95 customers) is just a mirage, because the the paperwork burden would include individuals who regret becoming MLM sales force seldom engages in distributing over 750 million pages of involved in MLMs,96 and other retail selling.102 disclosure documents annually.87 Further, according to these Furthermore, according to the DSA, the 90 Primerica Rebuttal, at 11 (emphasis in original). commenters, MLMs deceptively market IPBOR’s requirement to retain 91 MLM DRA, at 2, 5 (estimating that there are distributorships as a low-risk between 13 million and 15 million MLM opportunity with high earnings documents for three years would require distributors in the United States); Babener, at 3 (the 2.25 billion pieces of paper to be IPBOR would cripple ‘‘the livelihoods of 14 million potential. In fact, the cost of generated and warehoused.88 Americans that look to direct selling to help participating in an MLM can be quite Second, and apart from the direct cost support their families’’). high, including not only the registration 92 DRA, at 2, 7. The DRA demands that the fees, but also the cost of product of complying, industry commenters Commission drop the IPBOR in its entirety. DRA, contend that the IPBOR’s requirements at 2. purchases, training and seminars, and would impose high costs because it 93 E.g., Tina Bailey, at 1 (‘‘This bill would kill my other features purported to enhance a would significantly impair the ability to business and I would loose (sic) my ability to be recruit’s performance in an MLM.103 recruit.89 According to Primerica, a stay at home mom with an income.’’); Eric Gang, The typical earnings, by contrast, are at 1 (‘‘If adopted, the Rule would destroy my small extremely small and cannot be ‘‘[b]ased on a conservative estimate that business that I have worked so hard to develop.’’); the Proposed Rule would reduce Anne Trevaskis, at 1 (‘‘As a person with a disability, Primerica’s recruiting by 25 percent, unable to go out to work, if [the IPBOR] is adopted, Wess; Kelly Boucher, Rebuttal; Carol Franklin, I will be prevented, continuing as an independent Rebuttal. distributor’’); Marian Warshauer, at 1 (‘‘Please don’t 97 E.g., Barbara Avery (‘‘Direct selling or mlm 83 Mary Kay, at 9 (estimating that the record penalize and ruin and honest earning opportunity CAN be a good program if done with honesty and keeping requirement would cost ‘‘between $300,000 for tens of thousands of people with legitimate integrity- enacting laws to protect the consumer and $500,000 per year in additional expenses, companies); Noelle Marino, at 1 (‘‘I’m very would be a welcome change!!’’); Kristine Keesler (‘‘I software and training’’). concerned about [the IPBOR], because I believe it think this new legislation would be very beneficial. 84 Primerica, at 15–16. will jeopardize my business.’’). If I had seven days to consider my decision and 10 85 Id. 94 CAI and PSA each submitted comments with references I would not have jumped into the ... 86 DSA, at 21-22 (stating that 26 firms responded numerous reports attached. Citations to their business so quickly.’’). to its July 2006 survey on compliance costs). See comments will specifically note the submitting 98 CAI, at 2 (‘‘I can certify that MLM (sic) are not also Shaklee, at 9 (estimating that the cost of entity and the name of the report. direct selling programs, but chain selling compliance would likely exceed $100 million for 95 See Eric Scheibeler (author of Merchants of programs’’); CAI Rebuttal of DSA Comments, at 3 the industry); MLMIA, at 12 (estimating that cost of Deception, a book ostensibly warning the public (‘‘The Direct Selling Association (DSA), recently compliance for each MLM distributor would be about Quixtar); Bruce Craig (former Assistant taken over by chain sellers now promotes chain between $25,000 to $45,000 for the first year and Attorney General for the State of Wisconsin); selling (pyramid marketing) - even more than $10,000 to $20,000 per year thereafter). Douglas Brooks (law practitioner who has legitimate direct selling’’). See also Brooks, at 2 (‘‘In 87 Id. at 21 (reporting that respondents estimate represented class actions against MLM companies). my opinion, most MLM firms operate in a deceptive or fraudulent manner’’). disclosing 15 pages of documents under the 96 E.g., Katy Li (‘‘If I had been given basic 99 IPBOR). See also Vector, at 3 (estimating that the statistics about the company I never would have CAI, at 3; PSA, at 2. See also Douglas Brooks, proposed disclosure would require Vector to joined’’); Marshelle Hinojosa (‘‘Please pass the at 3 (stating that disclosures will not prevent provide over 100 million pieces of paper annually BUSINESS OPPORTUNITY LAW and stop these consumer injury caused by pyramid schemes). to potential recruits). pyramid schemes!’’); Valerie Andersen (‘‘Words 100 CAI, at 6. 88 Id. at 21. See also Melaleuca, at 5 - 6 cannot express the humiliation, financial loss and 101 CAI, at 2 (‘‘out of hundreds of MLM programs (estimating that Melaleuca would need to store 1.8 lost respect and trust from friends and family we have evaluated, no more than a (sic) three of million disclosure documents over a rolling three- members ... whom [sic] were persuaded by me them could qualify as legitimate retail-based year period). because they trusted me ... to join the MLM ...’’); programs.’’). See also PSA, at 1. 89 ‘‘If a new application, disclosure document and J Padgett (describing his wife’s involvement in an 102 PSA, The Myth of Income Opportunity in seven-day waiting period were required for a MLM); Robin Smith (stating that she would not Multi-Level Marketing, at 4. Member to become a Distributor, the number of have joined an MLM if she had known the 103 PSA, The Myth of Income Opportunity in Members who choose to build a small home-based background of the principals); David McHenry Multi-Level Marketing, at 4 (pointing to / business would dramatically decline.’’ Shaklee, at (‘‘Make these MLMs legally responsible for their Quixtar’s sale of books, tapes and seminar 6 (stating that recruitment dropped when Shaklee claims with documentation that is accurate from the registrations to new recruits); Douglas Brooks, at 4, introduced two applications instead of one). beginning.’’); James Kenny; Charles Wagner; Brian 5; Scott Johnson, at 1.

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considered anything but a net loss when MLM; typically, the initial registration See Credit Practices Rule, 49 FR 7740, business expenses are considered.104 In fee is nominal, and is just the beginning 7742 (Mar. 1, 1984).118 fact, these commenters contended, more of the total investment.111 PSA also The discussion below addresses, first, than 99% of individuals who participate argued that the earnings disclosures that the question of whether there are in MLMs lose money.105 some MLMs make are deceptive because widespread unfair or deceptive acts or These consumer groups they fail to include the money practices that cause consumer harm. recommended implementing a number participants pay out to the MLM.112 In Second, the discussion reviews the of changes to the disclosure addition, according to PSA, MLMs various proposals for reducing requirements in the IPBOR. To begin routinely include only the income of consumer harm and the adequacy of with, the IPBOR would have required ‘‘active’’ participants in their averages, case-by-case law enforcement under business opportunity sellers to state and thus conceal ongoing and mounting sections 5 and 13(b) of the FTC Act to whether they make any earnings claim, losses of new investors.113 address existing problems. To and if they do, to have written Regarding the other provisions of the summarize, while there is a significant substantiation for the claim.106 PSA IPBOR, CAI supported the requirement concern that some pyramid schemes argued that MLMs are presented to of disclosing refund history, but noted masquerade as legitimate MLMs, consumers as income opportunities, and that it is not particularly useful in the assessing the incidence of such therefore, should not be allowed the MLM context, inasmuch as ‘‘[i]t is practices is difficult. In any event, option of asserting that they make no extremely rare for MLM victims to commenters broadly concur that the 107 earnings claim. With regard to the recognize the fraud in an MLM program IPBOR would not help consumers make earnings disclosure itself, they without intensive de-programming by a an informed decision about the risks of recommended two changes to the knowledgeable consumer advocate.’’114 joining a particular MLM. Further, the IPBOR. First, they recommended that CAI also recommended that the ten comments do not provide sufficient the earnings disclosure state the average referrals to prior purchasers should information about how to tailor the retail-based income that participants proposed rule so that disclosures assist 108 include at least five ex-participants in achieve. They argued that, by the business,115 and that there should be in the purchase decision in a manner focusing on dollars earned from retail a three-day waiting period that includes that is likely to reduce consumer harm. sales, the disclosure document would a recommendation to search the internet Moreover, it is appears that the burden highlight the key feature that for information about the company.116 of complying with the IBPOR would be distinguishes a legitimate company from costly to legitimate companies using the a pyramid scheme—the sale of products 3. Analysis MLM business model without the to end users.109 Section 18(d)(2)(B) of the FTC Act, 15 promise of sufficient offsetting benefits Second, these commenters asserted U.S.C. 57a(d)(2)(B), states that ‘‘[a] to prospective purchasers of MLM that the earnings disclosure should state distributorships. not only the revenue paid to substantive amendment to, or repeal of, participants, but also should reveal the a rule promulgated under subsection a. Prevalence of deceptive practices payments by participants for products (a)(1)(B) shall be prescribed, and subject causing significant consumer harm to judicial review, in the same manner and services.110 CAI argued that product In considering whether to impose an purchases—necessary to advance in the as a rule prescribed under such subsection.’’ The standard for amending industry-wide rule covering MLMs, the MLM hierarchy—are often a major threshold inquiry is identifying the element of the overall investment in an or repealing a section 18 rule is identical to that for promulgating a trade unfair or deceptive practices at issue. If regulation rule pursuant to section 18. such practices exist, the Commission 104 PSA, The Myth of Income Opportunity in evaluates whether such practices are Multi-Level Marketing, at 3 (stating that 99% of all When deciding whether to amend a sales representatives in the sample of companies rule, the Commission engages in a prevalent and cause significant analyzed earned less than $14 per week, a figure consumer harm. While these are that does not count any business expenses, such as multi-step inquiry. Initially, the Commission requires evidence that an separate areas of consideration, these inventory purchases). inquiries overlap and are discussed 105 existing act or practice is legally unfair PSA, at 2; CAI, The 5 Red Flags, at 15-16. One together to avoid unnecessary commenter, noting that some MLMs require no or deceptive. The Commission then advance purchases of inventory, strongly disagreed requires affirmative answers, based redundancy. with this conclusion: ‘‘The facts in the record There are two related but distinct upon the preponderance of reliable provide no basis for deducting assumed ‘costs’ from allegations of deceptive practices the available income estimates and jump to the evidence, to the following four regarding MLM companies. The debate conclusion that participants actually lose money . questions: about the legitimacy of MLM companies ... It is simply not possible that agents are required 117 to pay more money to Primerica than they receive (1) Is the act or practice prevalent? typically centers on whether an MLM in commissions, because there is no requirement (2) Does a significant harm exist? operates as a pyramid. By their very that they buy anything from Primerica.’’ Primerica (3) Would the rule provisions under nature, pyramid schemes are deceptive Rebuttal at 6 (emphasis in original). consideration reduce that harm? and 106 437.3(a)(2) & 437.4(a)(2). and violate the FTC Act. Equally 107 PSA at 2. Several individuals filed form (4) Will the benefits of the rule exceed serious, however, is the question of comments, with small variations, making this point its costs? whether an MLM is engaged in making as well. E.g., Jean Smith; Douglas Konkol; Harold false earnings claims. These allegations Ducre; Rachel Quill; N Gursahani; Petteri Haipola; 111 Bradford Chase; Curtis Marburger; Joel Rolfe; CAI, Red Flags, at 10. are clearly related in that any claim that Marshall Massengill; Marcus Batte. See also CAI, at 112 PSA, at 2. the average participant in a pyramid 6 (asserting that if MLMs present themselves as 113 PSA, The Myth of Income Opportunity in Multi-Level Marketing, at 3. offering an ‘‘income opportunity,’’ they should have 118See also 15 U.S.C. Section 57a(d)(1)(A)—(C) 114 to disclose earnings). CAI, Red Flags at 11; CAI, at 7. (requiring in the Statement of Basis and Purpose 108 PSA, at 2. 115 CAI, at 7. accompanying the rule a statement as to prevalence, 109 PSA, at 2. CAI, Red Flags at 5 (acknowledging 116 CAI, at 6. the manner in which the acts or practices are unfair that an MLM may be legitimate if it allows a person 117See 15 U.S.C. Section 57a(b)(3) (stating that or deceptive, and the economic effect of the rule); to earn a significant income from retailing products prevalence may be established if information Federal Trade Commission Organization, to end users). available to the Commission indicates a widespread Procedures and Rules of Practice, 16 CFR 1.14(a) 110 CAI, at 7; PSA, at 2. pattern of unfair or deceptive acts or practices). (i)–(iv).

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scheme will make money is necessarily sellers say that direct selling meets or month; to subscribe to a phone line so false. But even if an MLM is not exceeds their expectations as a good they could recruit others; and to attend operating as a pyramid scheme, it way to supplement their income.125 trainings and seminars at a cost of $300 violates the FTC Act if it makes false Given the overwhelming number of to $1,000. earnings projections to consumers. comments from consumers who operate Equinox had ostensibly implemented The comments received about the as MLM distributors and from safeguards to show it was not a pyramid legitimacy of MLMs, discussed above, organizations representing such scheme. For example, Equinox demonstrate sharply divergent points of distributors, the Commission does not purported to link compensation to retail view. The record in this proceeding to dispute the proposition that MLM sales, including requiring distributors to date is largely comprised of thousands companies can operate legitimately. produce receipts showing retail of letters from consumers who operate Sharply diverging from the comments purchases. However, the evidence as MLM distributors.119 Many of these of industry advocates are those of revealed that such policies were not commenters extolled the benefits of the consumer advocates who argued that by enforced.128 Like other members of the products they sell and overwhelmingly and large, MLMs victimize consumers DSA, Equinox purported to offer urged the Commission not to impose a by claiming to provide an opportunity refunds on inventory purchases. Yet, the rule that would hamper their ability to to earn money that cannot realistically net loss to consumers who participated run their small businesses.120 be achieved. The Commission’s law in Equinox was more than $330 Organizations representing distributors enforcement experience shows that million.129 Indeed, pyramid schemes also voiced strong opposition to the some MLMs have violated the law by masquerading as legitimate MLMs can IPBOR.121 In addition, the National making false earnings representations implement numerous purported Association of Consumer Agency and have operated as pyramid schemes. safeguards to appear legitimate.130 Administrators (‘‘NACAA’’), after In the last ten years, the Commission Apart from operating as illegal canvassing its members nationwide, has sued fourteen pyramid schemes that pyramids, MLMs also could be engaged stated that they ‘‘reported there was no purported to be legitimate MLM in making false earnings appreciable number of complaints filed businesses selling products to end- representations. In the Commission’s against direct sellers that are member users.126FTC v. Equinox International law enforcement experience, all of its companies of the Direct Selling Corp. provides a prime example of how pyramid cases131 against purportedly Association.’’122 One comment a pyramid scheme could masquerade as legitimate MLMs alleged that the presented a survey finding that an a legitimate MLM. Equinox purported to defendant made false earnings ‘‘average’’ distributor earns $418 per offer distributorships to sell products, representations. Notably, at least one month,123 and DSA presented another including water filters, vitamins, other case the Commission brought survey124 finding that 85% of direct nutritional supplements, and skin care against an MLM company alleged false products.127 However, the company earnings representations.132 119 In response to the NPR, the Commission emphasized to new distributors that the Nevertheless, MLM industry advocates received comments from approximately 16,700 real way to make money was through individual MLM distributors. While several thousands of these were form letters, thousands recruiting additional distributors, not 128See also FTC v. Trek Alliance, Inc., CV-02- more included individual recitations of positive through product sales. The company 9270 (C.D. Cal. 2002); http://www.ftc.gov/opa/2003/ personal experiences with the MLM extracted money from its recruits by 08/trek.shtm. distributorships. encouraging them to enter the MLM at 129 Documented proof of claim forms received 120E.g., Tom Hadley, at 1 (pastor stating that he the ‘‘manager’’ level, which required a from consumer-victims of Equinox reveal that the uses the income he receives from his XanGo net loss to consumers was at least $330 million. The distributorship to pay his childrens’ college purchase of $5,000 worth of products; to defendants settled FTC charges by paying cash, expenses); Gary Minor, at 1 (distributor of Young rent desk space for $300 to $500 per corporate and individual assets in the amount of Living Essential Oils states he believes the product nearly $50 million, which comprised virtually all the assets of the defendants. As part of the is exceptional and he makes money from selling 125 PSA argued to the contrary, pointing to its settlement, the individual defendant, William product); Kelly Radke, at 1 (Tastefully Simple study of seven companies which ostensibly shows distributor stating that direct selling is a way for that 99% of MLM distributors earn no profit from Gouldd was barred permanently from engaging in moms to stay home with their kids, pay off bills, company rebates, and further stating that it is any multi-level marketing operations. See http:// and even save for vacations and retirement). practically impossible for distributors to earn www.ftc.gov/opa/2000/04/equinox.shtm. 121 The Commission received comment from the money through product sales. PSA, The Myth at 24, 130 In Webster v. Omnitrition Int’l, Inc., World Association of Persons with disAbilities, 29 (reviewing pay-outs that seven MLM companies distributors sued Omnitrition, an MLM company, Inc., the MLM Distributor Rights Association, and made to distributors between 1998 and 2004). But alleging that it was a pyramid scheme. The Ninth the Professional Association for Network Marketing, see Primerica Rebuttal, at 5 (characterizing the data Circuit reviewed the safeguards that the MLM expressing opposition to the IPBOR. as ‘‘both unrepresentative and unreliable.’’). purportedly used to ensure retail sales. Webster v. 122 NACAA, at 1 (stating that ‘‘NACAA currently 126 FTC v. BurnLounge, No. 2:07-cv-03654-GW- Omnitrition Int’l, Inc., 79 F.3d 776 (9th Cir. 1998). represents more than 160 government agencies and FMO (C.D. Cal. 2007); FTC v. Mall Ventures, Inc., These included requiring no payment to become a 50 corporate consumer offices in the United States No. CV 04-0463 FMA (PLAx) (C.D. Cal. 2004); FTC distributor; imposing no quota of products that and abroad.’’). The Chamber of Commerce of the v. NexGen3000.com, No. 03-120 TUC WDB (D. Ariz. distributors were required to buy from the MLM; United States of America also filed a comment 2003); FTC v. Trek Alliance, Inc. , No. CV-02-9270 imposing an affirmative obligation that distributors stating that in ‘‘coordination with key industry (C.D. Cal. 2002); FTC v. Streamline Int’l, Inc., 01- certify that 70% of products they ordered have been leaders,’’ it has concluded that the IPBOR would 6885-CIV-Ferguson (S.D. Fla. 2001); FTC v. resold and that they have made sales to at least 10 ‘‘impose a tremendous burden on legitimate Bigsmart.com, No. CIV 01- 0466 PHX ROS (D. Ariz. retail customers in the past month; and affording a businesses with little benefit to consumers.’’ CC 2001); FTC v. Netforce Seminars, Inc., No. 00 2260 90% refund on resaleable inventory if the USA, at 1. Although it does not expressly mention PHX FJM (D. Ariz. 2000); FTC v. 2Xtreme distributor resigns from the company. Id. at 780. In the DSA, the Commission believes that the CC USA Performance Int’l, LLC, No. Civ. JFM 99CV 3679 (D. spite of these safeguards, the Ninth Circuit is referring to the direct selling industry. Similarly, Md. 1999); FTC v. Equinox Int’l, Corp., No. CV-S- concluded that summary judgment in favor of the National Black Chamber of Commerce filed a 99-0969-JBR-RLH (D. Nev. 1999); FTC v. Five Star Omnitrition was inappropriate because ‘‘the comment urging the Commission to tailor the Auto Club, Inc., No. CIV-99-1693 McMahon (S.D. structure of the scheme suggests that Omnitrition’s IPBOR more narrowly because of the impact on N.Y. 1999); FTC v. FutureNet, Inc., No. CV-98-1113 focus was in promoting the program rather than direct selling companies. NBCC at 1-2. GHK (C.D. Cal.1998); FTC v. JewelWay, No. 97-383 selling the products.’’ Id. at 782. The Court further 123 MLMIA, Appendix A at 13 (Coughlan and TUC JMR (D. Ariz. 1997); FTC v. World Class noted that Omnitrition failed to show that it Grayson, Network Marketing Organizations: Network, Inc., No. SACV-97-162-AHS (Eex) (C.D. enforced its 70% resale rule or its buy-back rule on Compensation Plans, Retail Network Growth, and Cal. 1997); FTC v. Mentor Network, Inc., No. SACV distributors. Id. at 784. Profitability, 15 International Journal of Research in 96-1104 LHM (Eex) (C.D. Cal. 1996). 131See supra note 126. Marketing 401 (1998)). 127 See http://www.ftc.gov/opa/1999/08/ 132In re Nu Skin Int’l Inc., Docket C-3489, 117 124 DSA Rebuttal, at 3. equinox1.shtm. F.T.C. 316, 324 (1994).

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argue that a government regulation is be sufficiently effective to remedy these Modern pyramid schemes display not needed to protect individuals taking practices. endless ingenuity in finding ways to low financial risks, such as the great disguise payment of participation fees to b. Whether the IPBOR or other proposals many MLM distributors who participate would reduce consumer harm appear as if they are for the sale of goods on a part-time or seasonal basis. or services. The source of the income However, while MLM commenters After careful consideration, the typically is not easy to discern from a contended that the cost of joining is Commission believes that the consumer facial examination of a company’s typically very small, they often referred harm flowing from deceptive practices compensation structure and the only to the minimum required fees, and in the MLM industry can more safeguards it purportedly has in place. did not mention all costs necessary to effectively be addressed at this time Economic analysis of the MLM business qualify for higher levels of through targeted law enforcement under model suggests a continuum with compensation.133 Such costs are Section 5. Commenters on all sides clearly legitimate MLMs at one end and problematic to the extent that MLM generally agree that the IPBOR’s clearly fraudulent pyramid schemes at firms market their distributorships with required disclosures would not help the other. With some basic company lifestyle representations134 that do not consumers identify a fraudulent information, a company residing at one correlate to the small part-time income scheme. As discussed below, a simple pole or the other can be identified. earnings disclosure is unlikely to enable that active MLM distributors primarily Nevertheless, in the middle is a 135 consumers to determine whether an earn. substantial gray area where MLM company is operating lawfully. On the basis of its law enforcement differentiating the two is much more experience and the rulemaking record, Further, at this time, the record difficult because the source of income is the Commission concludes that some indicates that the proposed alternatives both sales of products or services and MLMs engage in unfair or deceptive acts that various commenters suggested participation fees.138 Indeed, the or practices. These practices include would not effectively counter deceptive question of whether a purportedly operation of pyramid schemes and false practices and would not enable legitimate MLM is, in reality, only a or unsubstantiated earnings claims. It is consumers to avoid a fraud. beyond a doubt that where they occur, As commenters noted, an earnings pyramid scheme in masquerade is a these practices cause significant disclosure, such as the one proposed in highly fact-intensive inquiry. That being consumer harm. The Equinox case alone the IPBOR, will not help prospective the case, the issue is a particularly illustrates that the harm to consumers purchasers determine whether an difficult one to address via industry- resulting from such practices is offering is a pyramid or is a legitimate wide rulemaking, as opposed to case-by- enormous—not just in the aggregate, but MLM because it does not reveal the case enforcement. individually. source of the income.136 The main Commenters have advanced three The further question as to whether difference between a pyramid scheme main alternatives to the specific such deceptive practices are prevalent, and a legitimate MLM is that the elements of the IPBOR: (1) granting a however, is elusive. It is difficult to legitimate company actually derives its safe-harbor to companies that gauge the incidence of such practices income primarily from the retail sale of implement certain safeguards; (2) among MLMs. As noted in more detail products to end users, while the requiring detailed earnings information; below, determining whether a company pyramid scheme supplies income to and (3) defining what constitutes a operates as a pyramid requires a fact- participants at the top of the pyramid pyramid scheme. As explained in more specific inquiry that depends on primarily through fees that new detail below, at this time, the evaluating a number of factors. Even if participants pay for the right to Commission is not persuaded that any deceptive practices were established as participate in the venture.137 In a of these proposals would likely lead to prevalent in the MLM industry, pyramid scheme, a participant can reap a rule that would not unfairly burden however, the Commission has rewards only by obtaining a portion of legitimate companies while rooting out determined at this time that neither the the fees paid by those who join the pernicious frauds dressed in the garb of IPBOR nor the alternative proposals that scheme later. People who join later, in legitimacy. commenters advanced appear likely to turn, pay their fees in the hope of profiting from payments of those who i. MLM comments advocating a safe 133 In Webster v. Omnitrition, the Ninth Circuit enter the scheme after they do. In this harbor to exempt legitimate companies observed that while there was no cost to becoming way, a pyramid scheme simply transfers would not adequately distinguish a distributor in the MLM company, the cost of between pyramids and legitimate qualifying for higher compensation was monies from losers to winners. For each ‘‘substantial.’’ 79 F.3d at 782. person who substantially profits from companies 134 the scheme, there must be many more Depending upon the particular MLM industry commenters suggest representations, touting grandiose lifestyles may be losing all, or a portion, of their limitations on the rule so that it would considered an earnings claim—rather than mere investment to fund those winnings. puffery—that must be substantiated. The Absent sufficient sales of goods and exclude firms that require very low Commission has long held that an earnings claim registration fees;139 firms that offer includes statements from which a prospective services, the profits in such a system 140 purchaser could reasonably infer ‘‘a specific level refunds on inventory purchases; hinge on nothing more than recruitment 141 or range of income,’’ such as ‘‘earn enough money of new fee-paying participants into the firms that are publicly-traded; firms to buy a new Porsche.’’ See Franchise Rule Final that have been in business for a Interpretive Guides, 44 FR 49965, 49982 (Aug. 24, system. 1979). As the Commission’s cases 138 135E.g., MLMIA, Appendix A at 13 (presenting a demonstrate, the sale of goods and Vander Nat and Keep, at 149. survey finding that earnings for an average services alone does not necessarily 139 Avon, at 10 (advocating that the Commission impose a monetary threshold for required payments distributor are $418 per month); DSA at 15 (‘‘A render a multi-level system legitimate. direct seller’s median annual gross income from and that the rule not apply to transactions below direct selling is about $2,400 per year.’’); Avon, at that threshold); Pre-Paid Legal, at 1 (advocating a 19 (‘‘those selling on a part-time basis may show 136See PSA, at 2; CAI, Red Flags at 5; Primerica monetary threshold of $250). low earnings, which, in fact, may be quite at 26. 140 Quixtar, at 5; Melaleuca, at 7. substantial given the amount of time they spend 137See Staff Advisory Opinion—Pyramid Scheme 141 Pre-Paid Legal, at 1; Avon, at 10; Herbalife, selling .’’). Analysis, January 14, 2004. at 16.

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significant number of years;142 or firms schedules that offer greater proposal to deduct a distributor’s costs, that are members of a self-regulatory compensation for greater sales volume. in particular, is ‘‘administratively body, such as the DSA.143 However, Moreover, because there likely is an impossible’’ because it ‘‘require(s) none of these factors is determinative of earnings disparity between new MLM information that companies do not whether a company is, in fact, a recruits and distributors who have well- routinely possess and cannot easily pyramid scheme or otherwise engaged established down-lines, an additional obtain.’’149 For example, business- in deceptive conduct. Furthermore, the issue arises as to whether a disclosure related expenses could include effort to craft a workable rule using of participants’ median income rather independent costs that an MLM could these criteria could undermine law than average income is most not track, such as costs for computers, enforcement efforts if pyramid schemes appropriate. In pyramids, a disclosure of office equipment, leasing office space masquerading as MLMs were able to average income would suggest that all and other facilities.150 In addition, many manipulate their corporate structure—as participants have the ability to make the commenters point out that MLM Equinox did—to meet safe harbor claimed earnings, when in reality, the participants use their membership to provisions while continuing, in fact, to earnings figure is skewed to reflect the purchase products at a discount for their operate illegally. lavish profits reaped by those at the top own personal consumption.151 of the pyramid. New recruits to the Deducting ‘‘costs’’ that members pay to ii. Imposing the earnings disclosures pyramid scheme would not have any the MLM would be too broad insofar as that consumer groups suggest on MLMs possibility of reaping such profits. it would include inventory that is fraught with problems and complexity Median income, by contrast, would distributors choose to purchase for Consumer advocates advanced a eliminate the outliers, thus providing a themselves.152 requirement to disclose the retail-based more realistic picture of what the In view of these difficulties, the earnings of active and inactive majority of participants earn in a Commission at this time believes it is participants, deducting the costs pyramid. Whether that is the most more cost-effective to challenge distributors paid.144 There are several appropriate measuring stick for a deceptive MLM practices through problems with this approach. Given the legitimate MLM company where targeted law enforcement under Section complexities of each MLM’s earnings are based on retail sales is 5.153 compensation schedule, developing a unclear. iii. Crafting a definition of ‘‘pyramid standard, useful, understandable, and Second, it may be difficult to scheme’’ would be counter-productive straightforward earnings disclosure that determine retail income. While an MLM would serve industry-wide is elusive. firm may provide distributors with Some commenters advocated crafting Further complicating the problem are products, the MLM may not be able to a definition of ‘‘pyramid scheme’’ that the practical considerations of whether verify the extent to which a distributor would avoid the problems of MLMs could, using an industry-wide has resold the product at retail, is overbreadth in the IPBOR by excluding format, gather reliable information on warehousing the product, or bought the legitimate MLMs from coverage while retail earnings. product for his or her own personal keeping pyramid schemes covered.154 More broadly, a number of issues consumption. Even where an MLM has There are two practical difficulties with would make it difficult to craft an policies in place purportedly to ensure this approach. First, as noted above, industry-wide rule on a proper earnings that a portion of its distributors’ income there is no bright-line, universal test for disclosure, as proposed above. A comes from retail sales—as opposed to the particular quantity of retail sales meaningful earnings claim disclosure inventory loading—the company may that in every case would suffice to fund likely would require different still lack accurate figures on the true the payment of commissions for every disclosures for different levels of amount of its distributors’ retail MLM company. While economic participation in the company. For income.147 For example, such policies analysis can reveal if an individual example, how should such a disclosure could go unenforced, or even if they company clearly is operating treat inactive participants who have were ostensibly enforced, could be legitimately or if it clearly is a pyramid joined merely to purchase product for circumvented by distributors, who may scheme, it is difficult to draw an their own use as opposed to active have an incentive to ‘‘certify’’ their sales appropriate line in the gray area.155 participants in the earnings figure? How in order to qualify for higher level of would one identify participants who are commissions.148 Indeed, the potential 149 Primerica Rebuttal, at 34. inactive because they only wanted to collusion between MLM companies and 150 Primerica Rebuttal, at 35. obtain access to the product at distributors to fake the true level of 151See supra, note 75. wholesale prices rather than those who retail sales would undermine the utility 152 Primerica Rebuttal, at 6 (‘‘Moreover, these are inactive because they concluded that commenters allege losses based in part on counting of an earnings disclosure based on retail as costs what the record makes plain is a benefit the business was not suitable for income. for many participants—the ability to purchase for them?145 How long after a participant’s The deduction of costs also is personal consumption products they like at a last sale should he or she be considered problematic. Primerica argued that the significant discount.’’). ‘‘inactive’’?146 MLM companies often 153 Regardless of whether it is covered by the proposed rule, if a business makes earnings claims, 147Webster v. Omnitrition International, Inc., 79 have complicated compensation including through the use of testimonials, such F.3d 776, 783 (9th Cir. 1996) (stating that Omnitrition produced no evidence that it enforced claims must be truthful and must be substantiated, 142 Primerica, at 41. its rule ostensibly requiring its distributors to sell under Section 5 of the FTC Act. 143 DSA, at 42. at wholesale or at retail 70% of the products they 154E.g., Craig, at 7-8 (former Assistant Attorney 144 PSA, at 2; CAI, at 7. bought). General with the State of Wisconsin); Primerica, at 145 The issue of inactive participants who are 148 In the Omnitrition case, the Ninth Circuit 38. only interested in obtaining product at wholesale commented on the requirement that distributors 155See VanderNat and Keep, Marketing Fraud: An prices appears to be unique to MLMs. As far as the certify their sale of the product, stating: ‘‘There is Approach to Differentiating Multilevel Marketing Commission is aware, this complication does not no evidence that this ‘certification’ requirement from Pyramid Schemes, 21 J. of Pub. Pol’y & arise in other forms of business opportunities. In actually serves to deter inventory loading.’’ 79 F.3d Marketing, at 149. See also Primerica Rebuttal, at the MLM context, the record does not reveal the at 783. Similarly, in the Commission case against 35 (‘‘As the extensive analysis contained in extent to which individuals join MLMs to buy Equinox, it was alleged that the MLM looked away [consumer group] comments demonstrates, products at wholesale. when distributors wrote their own receipts to fake identifying a pyramid scheme (or, at least, one that 146E.g., Primerica Rebuttal at 34-35. retail sales to consumers. attempts to disguise itself as a legitimate business

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Second, any definition of ‘‘pyramid the opportunity in order to recruit and the Commission’s reasons for scheme’’ would provide bad actors with additional distributors into their ‘‘down adopting or not adopting them. As noted a road map for restructuring their lines.’’ Thus, they might not provide a below, the Commission continues to businesses to skirt the definition, at very reliable assessment of participating solicit commentary on all aspects of the least facially, and thereby providing in the opportunity offered. Similarly, to RPBOR. the extent individuals join MLMs only them with a safe harbor that could 1. Proposed Section 437.1: Definitions undercut law enforcement efforts. to purchase products at wholesale, the The benefit of using Section 5 to waiting period would be an unnecessary As with the IPBOR, the RPBOR begins prosecute pyramid schemes is that it is obstacle. And, as noted above, the with a ‘‘definitions’’ section. With the a flexible instrument that allows the earnings claim disclosure requirement exception of the terms discussed Commission to pursue bad actors no would itself be incomplete and possibly specifically below, the definitions in the matter how they choose to manipulate misleading because it would be unlikely RPBOR are the same as in the IPBOR. As their corporate structure. At this time, to capture and accurately portray the noted, the Commission proposes to and on the basis of evidence in the actual source of compensation. narrow the scope of the proposed rule by redefining the term ‘‘business record, the Commission declines to d. Conclusion define ‘‘pyramid scheme’’ through opportunity.’’ The RPBOR eliminates rulemaking but will continue to use The deceptive practices of some the previously defined term ‘‘business Section 5 to attack such schemes. companies using the MLM business assistance’’ and adds a new term, model, which operate as pyramids or ‘‘required payment.’’ In addition, the c. Benefits and Burdens of the IPBOR disseminate false earnings claims, RPBOR slightly modifies the definition As set forth above in greater detail, remain a troubling consumer hazard. On of ‘‘designated person’’ and of MLM industry commenters contend that the question of whether such practices ‘‘providing locations.’’ are prevalent, however, it is difficult to the burdens of making the IPBOR’s a. Proposed Section 437.1(c): ‘‘Business gauge the incidence of such practices disclosures would be devastating. Some opportunity’’ of these concerns are overblown and among MLMs. Even if the troubling The definition of ‘‘business clearly misunderstand the intent of the practices were established to be opportunity’’ establishes the parameters IPBOR, which would not require prevalent, the Commission is not of the Rule’s coverage. In the RPBOR, individual MLM distributors to disclose persuaded at this time that the proposed the Commission proposes a tailored their personal litigation histories, for remedies would significantly redress definition of ‘‘business opportunity’’ example, to prospective purchasers.156 consumer harm in a cost-effective manner. The Commission believes that that will reach those business However, numerous commenters made opportunities that have, in the valid points about the direct cost of the burdens that would be imposed upon legitimate business operations Commission’s law enforcement complying and the indirect cost of loss experience, persistently caused recruitment. As one commenter noted, would not appear to be justified by possible benefits to consumers. To substantial consumer injury. These with a dwindled sales force, there include business opportunities would be a consequent drop in the sale fashion a proper approach to combat fraud in the MLM industry, the promoting vending machine, rack- of product, and the cost to one MLM, display, work-at-home, medical billing, Primerica, would be $1 billion over ten Commission will continue to examine the MLM industry and individual and 900-number schemes, among years.157 Even if this figure grossly companies, particularly the degree to others. overestimates the cost to individual which product sales fund the The three definitional elements of the MLM companies, millions of MLM compensation that distributors earn. At term ‘‘business opportunity’’ in the distributors, according to distributors this time, however, the Commission RPBOR are: (1) a solicitation to enter and groups representing MLM believes that the proposed rule is too into a new business; (2) a ‘‘required distributors, would individually bear blunt of an instrument to cure fraud in payment’’ made to the seller; and (3) a the cost of lost recruitment and would the MLM industry. The Commission has representation that the seller will find their home businesses adversely determined that it will use the provide assistance in the form of affected. flexibility inherent in Section 5 of the securing locations, securing accounts, or Commenters also argued that the FTC Act to address particular frauds in buying back goods produced by the burdens are unjustified because the the MLM industry. business. The RPBOR incorporates and disclosure requirements are ill-suited to builds on the definition of ‘‘business the MLM industry and would fail to Section D. The Proposed Rule opportunity’’ used in the original help consumers identify a risky To limit the proposed rule’s scope, as Franchise Rule and the interim Business opportunity. For example, the discussed above, the Commission now Opportunity Rule158 to cover these requirement that business opportunity proposes a significantly revised Section particular types of schemes.159 sellers disclose a list of prior purchasers 437.1, redefining ‘‘business The changes to the IPBOR’s definition would be costly for covered companies opportunity.’’ In addition, the of ‘‘business opportunity’’ are three- but would not help consumers analyze Commission proposes three changes to fold. First, the RPBOR definition the possibility of loss because every Section 437.3, which prescribes the includes a prong limiting coverage to prior purchaser has an incentive to sell content of the basic disclosure opportunities for which ‘‘the document. Finally, the Commission also opportunity) entails an in-depth examination of the proposes minor changes to Section 158 As noted previously, the interim Business compensation structure and the actual manner in Opportunity Rule, found at 16 CFR 437, is the which compensation flows within an 437.5, which addresses deceptive claims portion of the original Franchise Rule that applied organization.’’). and practices in connection with to business opportunities. It will remain effective 156E.g., Mary Kay, at 8, 9; MLMIA, at 9-10 business opportunity sales. Each of until the current rulemaking proceedings conclude. (estimating that there are 10 million business these proposals is discussed in detail 159See Primerica, at 39 (suggesting that the opportunity sellers in the marketplace, and further Commission should ‘‘[r]etain the existing definition stating: ‘‘The Proposed Rule may actually cause a below. In addition, this section from the Franchise Rule that covers business recession in the United States if fully enforced.’’). discusses commenters’ opportunities and expand [it] based on 157 Primerica, at 3, 4; Primerica Rebuttal, at 11. recommendations for specific changes demonstrated problems.’’); DSA, at 39-40.

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prospective purchaser makes a required the Franchise Rule.163 The point of Many pernicious frauds, including payment’’ for the purchase of the excluding payments for inventory was typical work-at-home schemes, have business opportunity. This change will to exclude ‘‘agency relationships in fallen outside the ambit of the original exclude from the definition business which independent agents, Franchise Rule’s disclosure obligations relationships in which the only required compensated by commission, sell goods because it covered only a franchise or payment is for inventory at bona fide or services (e.g., insurance business opportunity costing at least wholesale prices. Second, the RPBOR salespersons).’’164 Indeed, as numerous $500.169 These frauds have often definition eliminates two types of commenters point out, manufacturers, targeted vulnerable populations, such as ‘‘business assistance’’ that formerly suppliers, and other traditional the disabled, elderly, and immigrant would have triggered the Rule’s distribution firms ‘‘have relied solely on populations.170 Some commenters strictures and disclosure obligations, the bona fide wholesale price exclusion asserted that a monetary threshold namely tracking payments and to avoid coverage as a franchise.’’165 simply provides scam operators a means providing training. Third, the RPBOR no The IPBOR had eliminated this to circumvent the Rule, noting that longer links the definition of ‘‘business concept in an attempt to bring pyramid business opportunities sometimes opportunity’’ to the making of an schemes that engaged in ‘‘inventory charge $495 to skirt the original earnings claim. Each of these changes is loading’’ within the ambit of the Rule. Franchise Rule’s disclosure discussed in detail below. As discussed above, however, the requirements. For example, NCL stated Commission has determined that that the: 1. Required payment challenging such practices in targeted $500 minimum investment... i. Inventory exemption law enforcement actions under Section leaves many consumers without the 5 of the FTC Act is a more cost-effective disclosures and other protections that The RPBOR definition reaches only approach than attempting to address they need. Nearly one-third of the those opportunities where the pyramid schemes as proposed in the consumers who reported to the NFIC prospective purchaser of a business IPBOR. last year that they had lost money to opportunity makes a required payment fraudulent or deceptive business ii. Monetary threshold to the seller. Proposed section 437.1(o) opportunities paid less than specifies that a ‘‘required payment’’ Only business opportunities costing $500.... Whatever minimum includes ‘‘all consideration that the the purchaser at least $500 are covered amount might be set, fraudulent purchaser must pay to the seller or an by the interim Business Opportunity operators will price their services affiliate, either by contract or practical Rule. The RPBOR, however, would below it, and consumers will be necessity, as a condition of obtaining or eliminate any monetary threshold for victimized.171 commencing operation of the business the required payment. Many Based upon this record and its law opportunity. Such payment may be commenters, including MLM industry enforcement experience, the made directly or indirectly through a members as well as non-MLM product Commission concludes that the scope of third party. A required payment does distributers, urged the Commission to not include payments for the purchase establish a minimum threshold.166 A 169See e.g., FTC v. Med. Billers Network, Inc., No. of reasonable amounts of inventory at common theme in many comments 05 CIV 2014 (RJH) (S.D.N.Y. 2005) ($200-295 fee); bona fide wholesale prices for resale or submitted by the MLM industry is that FTC v. Sun Ray Trading, No. Civ. 05-20402-CIV- Seitz/Bandstra (S.D. Fla. 2005) ($160 fee); FTC v. lease.’’ mandatory disclosures are not necessary Wholesale Marketing Group, LLC, No. 05 CV 6485 The exclusion from the definition of or appropriate for small investments.167 (N.D. Ill. 2005) ($65 to $175 registration fees); FTC inventory purchases at bona fide On the other hand, some commenters, v. Vinyard Enterprises, Inc., No. 03-23291-CIV- wholesale prices of ‘‘required payment’’ such as the National Consumers League ALTONAGA (S.D. Fla. 2003) ($139 fee); FTC v. Leading Edge Processing, Inc., 6:02-CV-681-ORL-19 effectuates the Commission’s (‘‘NCL’’) strongly support the proposal DAB (M.D. Fla. 2002) ($150 fee); FTC v. Healthcare determination that traditional product to drop the financial threshold to zero, Claims Network, Inc., No. 2:02-CV-4569 MMM distribution arrangements should not be as a means of closing gaps that would (AMWx) (C.D. Cal. 2002) ($485 fee); FTC v. covered by the Business Opportunity allow perpetrators of fraud room to Stuffingforcash.com, Corp., No. 92 C 5022 (N.D. Ill. 2002) ($45 fee); FTC v. Kamaco Int’l, No. CV 02- 160 168 Rule. Accordingly, the definition of avoid making disclosures. 04566 LGB (RNBx) (C.D. Cal. 2002) ($42 fee); FTC ‘‘required payment’’ is substantially v. Medicor LLC, No. CV01-1896 (CBM) (C.D. Cal. similar to that employed in the recently 163See Franchise Rule Final Interpretive Guides, 2001) ($375 fee); FTC v. SkyBiz.com, No. 01-CV- amended Franchise Rule,161 but also 44 FR at 49967 (‘‘the Commission will not construe 0396-EA (X) (N.D. Okla. 2001) ($125 fee); FTC v. as ‘required payments’ any payments made by a Para-Link Int’l, No. 8:00-CV-2114-T-27E (M.D. Fla. incorporates language from the IPBOR person at a bona fide wholesale price for reasonable 2000) ($395 to $495 fee). that reaches situations where a payment amounts of merchandise to be used for resale. The 170E.g., FTC v. Juan Matos, No. 06-161429 CIV- is made either directly to the seller or Commission will construe ‘reasonable amounts’ to Altonaga (S.D. Fla. 2006) ($110 fee); FTC v. USS indirectly through a third party.162 mean amounts not in excess of those which a Elder Enterprises, Inc., No. SACV-04-1039 AHS reasonable businessman normally would purchase (Anx) (C.D. Cal. 2004) ($50 to $180 fees); FTC v. The inventory exemption was by way of a starting inventory or supply or to Castle Publishing, Inc., No. AO3CA 905SS (W.D. originally set forth by the Commission maintain a going inventory or supply.’’). Tex. 2003) ($59 to $149 fees); FTC v. Esteban in its 1979 Final Interpretative Guide to 164Id. at 49967-68. Barrios Vega, No. H-04-1478 (S.D. Tex. 2003) ($79 165 Sonnenschein, at 1-2. See also NAA, at 1-3; to $149 fees). Timberland, at 1 (noting that numerous 171 NCL, ANPR 35, at 11. See also SBA Advocacy, 160See supra C.1. manufacturers structure their retail distribution in ANPR 36, at 6 (‘‘[T]hreshold should be lowered to 161See 16 CFR 436.1(s). this manner); CTFA, at 4. $100 in order to curtail the number of unsavory 162 As noted in the NPR, this provision is 166E.g., DSA, at 37; Avon, at 10; Pre-Paid Legal, companies that are beyond the reach of the FTC designed to close a potential loophole that would at 1; Sonnenschein, at 5; Herbalife, at 15; IBOAI, at because they sell their scandalous ‘business subvert the proposed rule’s anti-fraud protections. 4-5; IBA, at 9. opportunities’ for $495.’’); M. Garceau, 20Nov97 Tr Without such a provision, fraudulent business 167E.g., Xango, at 4; Avon, at 12; Herbalife, at 3; at 53 (‘‘[I]t should be one dollar’’); D’Imperio, opportunity sellers could circumvent the Rule by Shure, at 1-2; Symmetry, at 1. Sept95 Tr at 130 (‘‘I don’t care if it’s $10, fraud is requiring payment to a third party with which the 168 NCL, at 1, 2 (‘‘[F]or many work-at-home fraud.’’); Purvin, id. at 280 (‘‘[C]ompanies use that seller has a formal or informal business victims, even losses of less than $100 can have threshold to avoid regulation and consequently relationship. While this concept appeared in the significant impacts. Some mention living on fixed have their entry fee be under $500, which seems to IPBOR’s definition of ‘‘business opportunity,’’ it is disability or retirement incomes, others are me forces the amount of money that a prospective now incorporated into the definition of ‘‘required desperately trying to supplement their wages in purchaser can lose within a very acceptable payment.’’ order to make ends meet.’’). See also ASTA, at 2. norm.’’).

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the RPBOR should be broad enough to do not include: tracking or paying The RPBOR would exclude from its reach business opportunities that our commissions or other compensation for scope those commercial arrangements anti-fraud law enforcement history and recruitment or sales; or generalized where the only assistance the seller consumer complaints show are a training or advising. provides is tracking payments. By so widespread and persistent problem. To The RPBOR retains the scope of the doing, the Commission takes MLM make the Rule sufficiently broad to original Franchise Rule (as currently set companies out of the ambit of the Rule. reach persistent frauds, such as work-at- forth in the interim Business Likewise, the RPBOR would exclude home schemes and envelope stuffing Opportunity Rule), in that it includes those sellers that offer assistance only schemes, the RPBOR eliminates the location and account assistance in the in: ‘‘Advising or training, or purporting monetary threshold. Expansion of the definition of ‘‘business opportunity.’’ to advise or train, the purchaser in the Rule’s coverage to reach these particular Indeed, the Commission’s enforcement promotion, operation, or management of types of fraud is balanced by experience shows that the offer of a new business, or providing, or significantly streamlined disclosure location assistance is the hallmark of purporting to provide, the purchaser obligations, which result in drastically fraudulent vending machine and rack with operational, managerial, technical, reduced compliance costs. At the same display route opportunities,173 while or financial guidance in the operation of time, the RPBOR’s more limited account assistance is typical of medical a new business.’’178 While the definition of the types of business billing schemes.174 Commission’s law enforcement assistance that trigger coverage of the Similarly, the RPBOR retains the experience shows that the promise of Rule, see infra, D.1.a.2., will avoid example of ‘‘buy back’’ assistance in the such assistance is a feature of many blanket coverage of commercial proposed definition of ‘‘business fraudulent business opportunity arrangements for the purchase of a opportunity’’ because it is a ventures, such as vending opportunities, business venture costing less than $500. characteristic feature of work-at-home rack display schemes, and medical schemes promoting product assembly billing work-at-home schemes,179 these 2. Limiting the type of business and envelope stuffing schemes.175 The schemes are captured adequately within assistance that would trigger coverage of term, however, would be broadened the scope of the RPBOR. Defining the Rule slightly to make explicit that any ‘‘business assistance’’ to include such ‘‘Business assistance’’ was a key payments or promise of payments for advising or training would incorporate definitional element of the term home-based envelope stuffing schemes such a broad array of traditional ‘‘business opportunity’’ in the IPBOR, come within the parameters of the Rule. activities in legitimate commercial and remains so in the RPBOR, but with As such, the definition of ‘‘business relationships that the costs would certain modifications intended to opportunity’’ is modified expressly to outweigh the benefits that would be correct the IPBOR’s overbreadth. The include: ‘‘providing payment for such generated as a result of including these IPBOR defined the term ‘‘business services as, for example, stuffing opportunity,’’ in relevant part, as ‘‘a envelopes from the purchaser’s 178See IPBOR, 437.1(c)(5). Similarly, the RPBOR commercial arrangement in which... home.’’176 This is necessary because also eliminates the term ‘‘training’’ from the the seller... either makes an earnings hucksters who offer envelope stuffing IPBOR’s definition of the term ‘‘providing locations, outlets, accounts, or customers.’’ See IPBOR, claim or represents that the seller or one opportunities commonly represent them 437.1(n). In the RPBOR, ‘‘providing locations’’ or more designated persons will provide as employment or quasi-employment remains a form of business assistance that would the purchaser with business opportunities in which they will trigger the coverage of the rule. See RPBOR, assistance.’’172 In turn, the IPBOR compensate participants according to 437.1(c)(3)(ii) and 437.1(l). This change avoids the the number of envelopes they stuff.177 possibility that the use of the term ‘‘training’’ in the defined ‘‘business assistance’’ as ‘‘the definition of ‘‘providing locations,’’ at Section offer of material advice, information, or 437.1(l), could be interpreted as a ‘‘catch-all’’ support to a prospective purchaser in 173E.g., FTC v. Am. Entm’t Distribs., No. 04- inadvertently sweeping into the ambit of the rule connection with the establishment or 22431-CIV-Huck (S.D. Fla. 2004); FTC v. Advanced such businesses as manufacturers that provide sales Pub. Commc’ns Corp., No. 00-00515-CIV-Ungaro- training or educational institutions. However, the operation of a new business,’’ and Benages (S.D. Fla. 2000); FTC v. Ameritel Payphone elimination of the word ‘‘training’’ from the included five illustrative examples of Distribs., Inc., No. 00-0514-CIV-Gold (S.D. Fla. definition of ‘‘providing locations’’ does nothing to the kinds of activities considered to be 2000); FTC v. Mktg. and Vending Concepts, No. 00- erode the long-standing interpretation of ‘‘location ‘‘business assistance’’: securing 1131 (S.D.N.Y. 2000). assistance’’ in the original Franchise Rule to reach, 174E.g., FTC v. Mediworks, Inc., No. 00-01079 potentially, circumstances where a seller ‘‘instructs locations; securing accounts; buying (C.D. Cal. 2000); FTC v. Home Professions, Inc., No. investors on how to find their own profitable back goods produced by the business; 00-111 (C.D. Cal. 2000); FTC v. Data Med. Capital, locations.’’ Staff Advisory Opinion 95-10, Bus. tracking or paying commissions or other Inc., No. SACV-99-1266 (C.D. Cal. 1999). See Franchise Guide (CC) ¶ 6475 (1995) (noting that compensation for recruitment or sales; alsoFTC v. AMP Publ’n, Inc., No. SACV-00-112- assistance must be more than nominal). The AHS-ANx (C.D. Cal. 2000). Commission solicits comment on whether the and training or advising for the 175E.g., FTC v. Misty Stafford, No. 3: CV 05-0215 revision to Section 437.1(l) cures potential over- business. (M.D. Pa. 2005); FTC v. USS Elder Enter. Inc., No. breadth without sacrificing the full extent of The RPBOR streamlines and narrows SACV-04-1039 AHS (ANx) (C.D. Cal. 2004); FTC v. coverage of the original rule, as described in Staff the scope of the definition of ‘‘business , No. C 93-4038 VRW (N.D. Cal. Advisory Opinion 95-10. opportunity’’ by, among other things, 1994). 179E.g., FTC v. Inspired Ventures, Inc., No. 02- 176 RPBOR, Section 437.1(c)(3)(iii). 21760-CIV-Jordan (S.D. Fla. 2002); FTC v. Inv. Dev. incorporating the concept of 177E.g., FTC v. Group C Marketing, Inc., No. CV- Inc., No. 89-0642 (E.D. La. 1989); FTC v. Home ‘‘assistance’’ into the ‘‘business 06-06019 (C.D. Cal. 2006) (defendants represented Professions, Inc., No. 00-111 (C.D. Cal. 2000); FTC opportunity’’ definition itself, rather they would pay $7 for every envelope consumers v. Star Publ’g Group, Inc., No. 00-023 (D. Wyo. than cross referencing a separate stuffed); FTC v. Gregory Bryant, No. 3:04-CV-897-J- 2000); FTC v. Hi Tech Mint Sys., Inc., No. 98 CIV 32MMH (M.D. Fla. 2004) (defendants represented 5881 (JES) (S.D.N.Y. 1998); FTC v. Fresh-O-Matic ‘‘business assistance’’ definition. Also, they would pay $4 for every envelope consumers Corp., No. 96-CV-315-CAS (E.D. Mo. 1996); FTC v. to cure the overbreadth of the IPBOR, stuffed and mailed); FTC v. America’s Shopping Joseph Hayes, No. 4:96CV06126SNL (E.D. Mo. activities specified as fulfilling the Network, Inc., No. 02-80540-CIV-Hurley (S.D. Fla. 1996). See Illinois Act, 815 ILCS at § 602/5-5.15 ‘‘assistance’’ prong of the ‘‘business 2002) (promising to pay $635 per week for (The seller offers a marketing plan, defined as processing mail); FTC v. Darrell Richmond, No. ‘‘advice or training... includ[ing], but not limited opportunity’’ definition of the RPBOR 3:02-3972-22 (D.S.C. 2002) (offering to pay $2 per to... training, regarding the promotion, operation envelope stuffed); FTC v. Financial Resources or management of the business opportunity; or 172 IPBOR, § 437.1(d), 71 FR 19054 at 19087 (Apr. Unlimited, No. 03-C-8864 (N.D. Ill. 2003) (offering operational, managerial, technical, or financial 12, 2006). (Emphasis supplied.) to pay $10 per envelope). guidelines or assistance.’’).

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types of business assistance. For experience shows are associated with locations, outlets, accounts, or example, it could introduce the business opportunity fraud. Indeed, the customers. unintended and unappealing specter of definition of earnings claims is long- The RPBOR would alter the definition regulating certain educational standing, as it is taken from the of ‘‘providing locations, outlets, offerings.180 It also could include description of earnings claim in the accounts, or customers,’’ slightly by manufacturers who provide product and original Franchise Rule, and adding the phrases ‘‘providing a list of sales training to third-party retailers.181 incorporates examples taken from the locator companies’’ and ‘‘offering to Therefore, the RPBOR excludes UFOC Guidelines as well as the furnish a list of locations.’’ In its ‘‘advising or training’’ as a form of Interpretive Guides to the Franchise comment, the United States Department assistance that would trigger application Rule.184 of Justice, Office of Consumer Litigation of the Rule. The Commission does not believe that (‘‘DOJ’’), which has a long history of this change undermines the utility of cooperating with the Commission to 3. Earnings claims the RPBOR in addressing fraud in enforce the Franchise Rule,185 pointed One major revision to the IPBOR is connection with earnings claims. It out that many fraudulent business that the making of an earnings claim no simply unlinks the definition of opportunities simply provide lists of longer is sufficient to bring a ‘‘business opportunity’’ from the making locators or locations. DOJ noted that commercial arrangement within the of an earnings claim. while the definition included in the IPBOR could be read to include such definition of ‘‘business opportunity.’’ b. Proposed Section 437.1(d): scenarios, it would be useful to make This revision addresses the concerns ‘‘Designated person’’ that numerous commenters articulated, the rule cover such practices explicitly. namely, that because the definition of The RPBOR makes a minor Indeed, DOJ’s concerns resonate with ‘‘earnings claim’’ is very broad, the modification to the IPBOR’s definition the Commission’s law enforcement IPBOR’s definition of business of ‘‘designated person.’’ The IPBOR’s experience, and the Commission agrees opportunity would transform common definition ended with an example of the that the rule text should explicitly commercial transactions into ‘‘business type of person who could be considered address this specific practice. Further, opportunities.’’182 a ‘‘designated person,’’ which included, the definition is also modified to The Commission considered but does without limitation, ‘‘any person who incorporate the term ‘‘lead generator’’ not believe that narrowing the definition finds or purports to find locations for into the third clause, thus adding of ‘‘earnings claims’’ effectively equipment.’’ The RPBOR eliminates this symmetry to the definition, which refers addresses concerns with over breadth. concluding language because the to ‘‘lead generators’’ in all other clauses. Moreover, narrowing the definition of definition of ‘‘business opportunity’’ Thus, the third clause in Section ‘‘earnings claims’’ could weaken lists the types of assistance a 437.1(l) now includes: ‘‘providing a list protections on the most salient feature ‘‘designated person’’ might render or of locator or lead generator companies.’’ of the sales presentation by allowing purport to render. To avoid any Finally, the words ‘‘or training’’ are sellers to avoid disclosing the numbers possibility of confusion by including deleted from the last clause of Section of people who, for example, earned one example but not all three in the 437.1(l) to avoid the possibility that it enough money to ‘‘buy a Porsche,’’ or definition of ‘‘designated person,’’ the could be interpreted as a ‘‘catch-all’’ earned the top level of compensation on Commission deletes the example. A capturing any business offering to an earnings matrix.183 Earnings claims ‘‘designated person’’ is defined in the provide training. The revision leaves lie at the heart of business opportunity RPBOR as ‘‘any person, other than the intact the phrase ‘‘or otherwise assisting fraud, and are typically the enticement seller, whose goods or services the seller the prospective purchaser in obtaining that persuades consumers to invest their suggests, recommends, or requires that his or her own locations, outlets, the purchaser use in establishing or money. The disclosure obligations in accounts, or customers.’’ To determine operating a new business.’’ the RPBOR, as in the Franchise Rule, are whether a seller provides the requisite designed to help a consumer identify c. Proposed Section 437.1(l): ‘‘Providing assistance in providing locations, and evaluate an earnings claim, if one locations’’ outlets, accounts or customers, the is made, or to arouse suspicion if an Commission will continue to apply its Section 437.1(l) of the RPBOR differs longstanding analysis, which considers earnings claim is made orally but is in some respects from the analogous disclaimed in writing. If the RPBOR the kinds of assistance the seller offers provision in the IBPOR. It would define and the significance of that assistance to were to create opportunity for a ‘‘providing locations, outlets, accounts, the prospective purchaser (e.g. whether potential loophole on this critically or customers’’ as: the assistance is likely to induce important issue, certainly unscrupulous furnishing the prospective purchaser business opportunity sellers would be reliance on the part of the prospective with existing or potential locations, 186 very quick to exploit it, to the great outlets, accounts, or customers; purchaser). detriment of consumers. requiring, recommending, or 2. Proposed Section 437.3: The Basic Therefore, the Commission believes a suggesting one or more locators or Disclosure Document better approach is to tailor the lead generating companies; providing Proposed Section 437.3 specifies the substantive scope of the Rule rather a list of locator or lead generating than to narrow or restrict the definition items of material information that must companies; collecting a fee on behalf be included in the basic disclosure of ‘‘earnings claims.’’ The RPBOR is of one or more locators or lead intended to cover all variations of document. As explained in the NPR, the generating companies; offering to seller of the business opportunity is the earnings representations that the furnish a list of locations; or Commission’s law enforcement otherwise assisting the prospective 185 As it points out in its comment, between 1995 purchaser in obtaining his or her own and July of 2006, DOJ filed 61 lawsuits alleging 180See supra note 45. Franchise Rule violations by 145 defendants. DOJ, 181 See Timberland, at 1. 184See UFOC Guidelines, Item 19; Staff Advisory at 1 n. 1. 182E.g., IBA, at 4; PMI, at 2; MMS, at 2; Venable, Opinion, Handy Hardware Centers, Bus. Franchise 186See Staff Advisory Opinion 95-10, Bus. at 1-2. Guide (CCH) ¶ 6426 (1980); Interpretive Guides, 44 Franchise Guide (CC) ¶ 6475 (1995). See also supra 183See RPBOR, 437.1(f). FR at 49982. note 178.

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party responsible for providing the basic that such act is unfair or deceptive and in consumers receiving meaningful disclosure document to prospective is prohibited by such rule.’’189 information, and could unfairly tarnish purchasers, and the seller must present According to DOJ, its experience is that the image of a seller who has been sued the required information in ‘‘a single individuals who market business but has not been found liable.194 written document in the form and using opportunities sometimes claim that they Second, some commenters argued that the language set forth in Appendix A to simply copied their disclosure state laws conflict with the requirement part 437.’’ The Commission has retained documents from a previous employer, in the IPBOR that sellers report the an expert to assess the basic disclosure suggesting that they did not know their litigation histories of their sales document as proposed, with the disclosure documents were in violation employees.195 objective of achieving a format and of any rule. Including a short reference With respect to the first point, the content that communicates the material to the rule would ‘‘eliminate[ ] any Commission disagrees that the information to consumers. The significant question as to whether the disclosure of prior legal actions does not Commission welcomes comments on all defendant had actual or implied impart meaningful information to aspects of the RPBOR; commentary on knowledge as required by the consumers. This and other proposed the proposed form, however, would be statute.’’190 material disclosures on the form are most useful if accompanied by The Commission agrees with DOJ. As quantitative or qualitative studies on the numerous commenters have noted, law intended to help consumers understand effectiveness of the form, with specific enforcement is critical to eliminating and assess the risks of their prospective suggestions for potential improvement. malfeasance from the marketplace.191 investment. The Commission believes The RPBOR makes three DOJ’s suggested minor modification to that information about litigation history modifications187 to the IBPOR with the form promises to advance the in the areas of ‘‘misrepresentation, respect to the information that must be government’s ability to enforce the law fraud, securities law violations, or presented on this document: (1) a through the use of civil penalties. unfair or deceptive practices,’’ is citation to the Rule would be added to Therefore, the title of the proposed form material to assessing that risk. Indeed, the title of the form; (2) the disclosure on Appendix A has been modified to discovering that a seller has a history of of legal actions pertaining to a seller’s add the language ‘‘Required by Federal violating laws and regulations is sales representatives would be deleted Trade Commission, 16 C.F.R. Part 437.’’ perhaps the best indication that a from the form; and (3) the disclosure of particular business opportunity is a b. Proposed Section 437.3(a)(3): Legal the number of cancellations and refund high-risk investment. In the Actions requests would be deleted from the Commission’s law enforcement form. These changes are discussed Proposed Section 437.3(a)(3) would experience, business opportunity below. address fraud in the sale of business promoters have failed to disclose such opportunities by requiring the material information to prospective a. Proposed Section 437.3(a): Form of disclosure of material information about purchasers, to the detriment of those the basic disclosure document certain prior legal actions192 involving purchasers.196 Regarding the concern The form and language of the basic the company, its directors, and certain that businesses will be unfairly disclosure document is set forth in sales employees. This requirement is tarnished, nothing in the RPBOR Appendix A to the RPBOR. While the based on analogous provisions of the prevents the seller from speaking with Commission received a plethora of original Franchise Rule.193 Commenters the consumer to explain the nature or commentary on the substantive raised two distinct issues regarding the outcome of any legal action disclosed on disclosures to be included in the basic disclosure of prior legal actions. First, the form.197 disclosure document, it received hardly some commenters, primarily members any commentary on the language used of the MLM industry, argued that this 194E.g., Melaleuca, at 6; Quixtar, at 35; , at in the proposed form. The Commission disclosure obligation would not result 2; Babener, at 2. received a persuasive comment by DOJ, 195 Venable, at 11; Chadbourne, at 20; Shaklee, at 10, 12. 189 advising the Commission to add to the 15 U.S.C. § 45(m)(1)(A). 196E.g., FTC v. Success Vending Group, Inc., No. title a citation to the legal authority 190 DOJ at 2. CV-S-05-0160-RCJ-PAL (D. Nev. 2005) (failure to requiring the seller to provide the basic 191E.g., Haynesboone, at 5 (urging the disclose guilty plea for mail fraud and previous disclosure document. The Commission Commission to focus more resources on injunction); FTC v. Netfran Development Corp., No. has decided to adopt this suggestion. enforcement); DRA, at 2. 1:05-cv-22223-UU (S.D. Fla. 2005) (failure to 192 The Commission notes that the definition of disclose FTC injunction against principal); FTC v. As discussed above, DOJ has ‘‘actions’’ in the RPBOR is different from that American Entm’t Distribs., Inc., No. 04-22431-Civ- substantial expertise in enforcing the employed in the amended Franchise Rule. The Martinez (S.D. Fla. 2004) (failure to disclose prior Franchise Rule, and has the authority to reason for that and other differences is that the two FTC injunction); United States v. We The People seek civil penalties for violations of rules were crafted to achieve different objectives Forms and Serv. Centers USA, Inc., No. CV 04 and to govern different types of business 10075 GHK FMOx (C.D. Cal. 2004) (failure to trade regulation rules issued pursuant to transactions. To provide one example, a major disclose prior lawsuits); FTC v. Joseph Hayes, No. 188 the FTC Act. To obtain civil penalties objective of the amended Franchise Rule was to Civ. 4:96CV02162SNL (E.D. Mo 1996) (failure to for infractions of an FTC rule, however, harmonize it with various state law requirements disclose prior state fines and injunctive actions); the government must prove ‘‘actual and, thus, maximize uniformity of laws at the FTC v. WhiteHead, Ltd, Bus. Franchise Guide (CCH) federal and state level governing business-format ¶ 10062 (D. Conn. 1992) (failure to disclose fraud knowledge or knowledge fairly implied franchises. That objective is not present in the effort action); FTC v. Inv. Dev. Inc., Bus Franchise Guide on the basis of objective circumstances to amend the interim Business Opportunity Rule. (CCH) ¶ 9326 (E.D. La. 1989) (failure to disclose Therefore, there should be no negative inferences insurance fraud convictions). 187 Additionally, the ‘‘earnings’’ section of the drawn from the inclusion in or exclusion from the 197 As noted above, some members of the MLM disclosure document is modified slightly to include RPBOR of any particular terms used in the amended industry voiced concern about making extensive a disclosure of earnings claims the seller ‘‘has stated Franchise Rule. litigation disclosures because they are affiliated or implied.’’ The use of the past tense makes clear 193 The Commission stated in the original with numerous other companies. In the context of to a seller completing the form that it must identify Franchise Rule’s SBP that litigation history is such an MLM, it could be impractical for a earnings claims made over the course of marketing material because it bears on the ‘‘integrity and consumer to ask about every legal action listed on the business opportunity to the consumer, and not financial standing of the [seller].’’ 43 FR at 59649. the disclosure form, and thus, the form itself may just those claims made at the moment of providing A disclosure of litigation history is also be unduly prejudicial to the MLM. Given the the disclosure document. incorporated into the interim Business Opportunity RPBOR as now tailored, such concerns are unlikely 188 15 U.S.C. § 56(a)(1); § 45(m)(1)(A) . Rule. 16 CFR 437.1(a)(4). Continued

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With respect to the second issue against false representations about the eliminates section 437.3(a)(5) of the concerning the disclosure of legal success of prior purchasers. This is a IPBOR, which would have required actions pertaining to sales employees, misrepresentation the Commission has disclosure of the seller’s refund IPBOR, 437.3(a)(3)(D), the Commission observed in many of its law enforcement history.203 believes it would be appropriate to actions against fraudulent business d. Proposed Section 437.3(a)(6): opportunity sellers.200 In the NPR, the exclude these employees from the References disclosure requirement. Some Commission specifically sought commenters suggested that this comment on the proposed disclosure of After analyzing commentary to provision would be inconsistent with the seller’s refund history, particularly Section 437.3(a)(6) of the RPBOR, the state employment laws, but they did not on the likely effect this disclosure might Commission leaves intact the IPBOR’s cite to specific statutes in which a have on the willingness of sellers to language requiring the disclosure of a conflict would necessarily arise.198 The offer refunds.201 Based upon the limited number of prior purchasers as IPBOR’s requirement to disclose the arguments articulated in the comments references.204 The Commission believes litigation history of sales employees was to the NPR, the Commission no longer that the disclosure of prior purchasers is intended to enable a prospective believes this second disclosure is useful, very important to prevent fraud because purchaser to evaluate the and revises 437.3(a)(4) accordingly. it enables prospects to evaluate the representations made by a sales person. Some commenters persuasively seller’s claims based on information The Commission now believes that the argued that requiring disclosure of a from an independent source with burden of collecting litigation histories seller’s refund history would have the relevant experience. The Commission for every sales person is not outweighed perverse effect of discouraging had solicited comment and suggestions by the corresponding benefit to legitimate businesses from offering on balancing the need to enable prospective purchasers. In the refunds.202 Commenters argued that prospective purchasers to verify sellers’ 205 Commission’s law enforcement legitimate businesses often have liberal claims with privacy concerns. In experience, sales representatives often refund policies so they can provide a addition to seeking comment on work from sales scripts that someone low-risk opportunity. If they were possible alternatives, the Commission with supervisory authority has required to track and disclose the sought comment on whether the Rule developed. A problem emerges when number of purchasers who took should permit purchasers the companies conceal the litigation history advantage of the refund policy, opportunity to opt-out of the disclosure 206 of the person with supervisory authority however, the disclosure of such of their contact information. by claiming that individual is just a information might create a misleading The MLM industry articulated sales person. The Commission believes impression of general dissatisfaction. It concerns peculiar to its business model, that it is sufficient to require business might cause prospective purchasers to but these provisions would no longer opportunity sellers to disclose the misinterpret risk, and therefore eschew apply to MLM companies inasmuch as litigation histories of their principals, a safe opportunity. these companies, and their The Commission is persuaded that the officers, directors, and sales managers, representatives, are excluded from the disclosure of refund history could be as well as any individual who occupies ambit of the RPBOR. unduly prejudicial to business The MLM comments also suggested, ‘‘a position or performs a function opportunities that offer and liberally more broadly, that the reference similar to an officer, director, or sales provide refunds to prior purchasers. disclosure requirement raised privacy manager of the seller.’’ In this way, the Indeed, a prospective purchaser might and security concerns.207 The RPBOR is sufficient to enable compare the refund requests of a Commission believes that the very prospective purchasers to ferret out fraudulent seller with no refund policy limited proposed reference disclosure situations where recidivists, ostensibly against a legitimate seller with a liberal does not raise security concerns because employed as sales personnel, in fact refund policy and inappropriately the required disclosures include no function as de facto officers or directors. conclude that the legitimate seller offers sensitive personal information Therefore, in the RPBOR, the a riskier business venture. Thus, the whatsoever, no social security numbers, Commission deletes paragraph (D) from disclosure would not reliably remedy birth dates, or financial account section 437.3(a)(3) of the IPBOR. deception on this issue. Furthermore, numbers. The disclosure requirement of c. Proposed Section 437.3(a)(4): the most important piece of information nothing more than name, city, state, and Cancellation or refund history for consumers is not how many telephone number—covers less individuals sought refunds, but what are Section 437.3(a)(4) of the IPBOR information than may be commonly the particular requirements of the available in public telephone books. would have required a seller both to refund or cancellation policy. This state on the basic disclosure document On the topic of privacy concerns, the information is not likely to create Commission received a few comments whether it has a cancellation or refund perverse results or mistaken policy, and to disclose the number of in support of allowing individual impressions. Therefore, Section business opportunity purchasers to opt purchasers who had asked to cancel or 437.3(a)(4) of the RPBOR requires who had sought a refund in the two disclosure of the refund policy, but 203 199 This change reverts back to the requirements previous years. This second of the original Franchise Rule which did not require disclosure was included as a remedy 200E.g., FTC v. National Vending Consultants, a business to tally the number of refund or Inc.,CV-S-05-0160-RCJ (PAL) (D. Nev. 2005); FTC v. cancellation requests but did require disclosure of to be raised in the context of typical business Fidelity ATM, Inc., No. 06-CIV-81101 (S.D. Fla. refund policies. See 16 CFR 437.1(a)(7) (interim opportunity schemes. 2006). Business Opportunity Rule). 198 Venable, at 11; Chadbourne, at 20; Shaklee, at 201 71 FR at 19070. 204 The requirement to disclose prior purchasers 10, 12. A California statute forbids employers from 202See supra note 72. The comments on this issue was in original Franchise Rule, and is now in the inquiring into histories of arrests that did not result came from members of the MLM industry. While interim Business Opportunity Rule. See 16 CFR in convictions. Cal. Lab. Code Ann. § 432.7(a) the RPBOR has been pared back to exclude MLMs, 437.1(a)(16)(iii). (Deering 2007). It is not clear how this would the Commission is persuaded that their 205 NPR, 71 FR at 19071. conflict with the RPBOR, which would not require commentary on this issue can be applied to 206Id. disclosure of arrest records. business opportunities that remain within the scope 207E.g., Quixtar, at 33; Babener, at 2; Pre-Paid 199 IPBOR, 437.3(a)(5). of the Rule. Legal, Rebuttal, at 8; DRA, at 6.

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out of having their contact information may differ materially from the all those who purchased the business disclosed.208 DOJ, however, urged the characteristics of the prospective opportunity before the ending date Commission to reject any opt-out: ‘‘The purchasers being offered the business when the represented earnings were Rule should not permit such an opt-out. opportunity.’’ Here, commenters— achieved, not just individuals who It would be an easy matter for primarily from the MLM industry— purchased the business opportunity telemarketers to talk consumers into argued that it would be extremely costly during the stated time period. Thus, opting out, describing to them what a to undertake an analysis of the various under the RPBOR’s section hassle it becomes for those who do not characteristics that successful 437.4(a)(4)(v), the seller must disclose: 211 opt-out because of all the demand that purchasers had in common. MLM ‘‘The number and percentage of all arises for their time and attention.’’209 companies peculiar concerns are no persons who purchased the business The Commission agrees with DOJ that it longer relevant inasmuch as they are opportunity prior to the ending date in is critical to provide prospective excluded from the scope of the RPBOR. purchasers with a true list of prior The Commission has decided to retain (iv) above who achieved at least the purchasers. By investing in a business this provision in the RPBOR because the stated level of earnings.’’ opportunity, these purchasers are information disclosed is material; it is 4. Proposed Section 437.5: Other entering the world of commerce and intended to enable the prospect to Prohibited Practices embarking upon the establishment of a determine whether the claimed earnings business. Businesses generally hold of prior purchasers are typical in the In addition to mandating disclosures themselves out as offering goods and prospect’s market. Furthermore, the to prospective purchasers, the IPBOR services to the public.210 Therefore, the business opportunity seller is in the best would have prohibited sellers from Commission believes that the value to position to know what set of engaging in a number of deceptive prospects of information about prior characteristics, such as location in practices. The RPBOR retains these purchasers outweighs any potential densely-populated areas, tend to make prohibitions, and would add: (1) a detriment to prior purchasers of the their purchasers successful. The substantive prohibition to section disclosure of their contact information. amended Franchise Rule imposes an 437.5(e), and (2) clarifying language to analogous obligation,212 and indeed, the The RPBOR leaves intact section section 437.5(r). Each of these changes RPBOR’s earnings disclosure obligation 437.3(a)(6). is discussed immediately below. is similar to what the interim Business 3. Proposed Section 437.4: The Earnings Opportunity Rule already requires.213 Claim Document a. Proposed Section 437.5(e): The Commission continues to seek Misrepresenting the Law Apart from the comments submitted comment on this topic, particularly on by the MLM industry, the Commission the question of the burdens upon The IPBOR would have prohibited received little comment on the business against the benefit to sellers from ‘‘[m]isrepresenting that any provisions in the proposed earnings prospective purchasers.214 governmental entity, law, or regulation claim document. The one aspect of On its own initiative, the Commission prohibits a seller from furnishing these provisions that drew the most has decided to modify slightly another earnings information to a prospective scrutiny from commenters was section provision of the IPBOR, section purchaser.’’ The RPBOR would add a 437.4(a)(vi), which requires sellers who 437.4(a)(4)(v). Section 437.4(a)(4)(iv) second numbered clause, further make earnings claims to disclose ‘‘any requires sellers who make earnings prohibiting misrepresentations that any characteristics of the purchasers who claims to disclose the ‘‘beginning and governmental entity, law or regulation achieved at least the represented level of ending dates when the represented prohibits a seller from ‘‘disclosing to earnings, such as their location, that earnings were achieved,’’ and section prospective purchasers the identity of 437.4(a)(4)(v) of the IPBOR further other purchasers of the business 208E.g., Scarlet Leverton (affiliated with Lia required disclosure of the ‘‘number and Sophia); Kay Gidley (affiliated with Universa Life percentage of all purchasers during the opportunity.’’ DOJ suggests the above Sciences); Joseph McGarry (affiliated with Quixtar). stated time period who achieved at least modification because, in its law These comments express generalized privacy enforcement experience, it has concerns. the stated level of earnings.’’ The 209 DOJ, at 3. revision clarifies a potential ambiguity: encountered ‘‘numerous fraudulent 210 Notably, federal law often focuses on privacy the purchasers who must be counted are business opportunity sellers who deflect concerns affecting individuals, not businesses. For consumer requests for current example, Congress specifically focused on the need 211E.g., MLMIA, at 41 (‘‘No one can hope to distributors by falsely claiming that the to respect ‘‘the consumer’s right to privacy,’’ in substantiate accurately an earnings claim in a way enacting the Fair Credit Reporting Act (‘‘FCRA’’). 15 law forbids disclosing their identity, that would take into account and disclose every U.S.C. 1681(a)(4). The FCRA requires various factor material to each person’s earnings and to which of course, is exactly the opposite protections for consumer information, including of the truth.’’215 The Commission agrees provisions addressing identity theft, but there is no contrast that with the characteristics of each comparable statute that protects business prospective purchaser without the expert advice of that such a prohibition is appropriate, information. Similarly, Congress enacted the a person trained in marketing and economics at the and will help consumers understand graduate level who in addition has experience in Graham-Leach-Bliley Act to protect personal that if the seller supplies no references, financial information of individual consumers but making these kinds of assessments.... Legal and excluded from the ambit of the law the protection marketing consultants are expensive.’’). it is because none exists or because the of information pertaining to businesses. Graham- 212 16 CFR 436.5(s)(3)(ii)(A). seller chooses not to make such Leach-Bliley Act, 15 U.S.C. 6809 (9) (defining 213 The interim Business Opportunity Rule information available, which would ‘‘consumer’’ to include individuals who obtain requires earnings claims be presented with a financial products or services for personal, family statement of the material bases and assumptions contravene the RPBOR. Furthermore, or household purposes). See also Privacy of upon which the claim is made. 16 CFR 437.1(b)(3); the prohibition on making false Consumer Financial Information, 16 CFR 313.1(b) 437.1(c)(3). statements imposes no costs on (expressly stating that it ‘‘does not apply to 214 As noted earlier, even without the RPBOR, legitimate companies, and as such, information about companies or about individuals any seller who makes an earnings claim must be who obtain financial products or services for truthful in that assertion and must substantiate the serves simply to confer a significant business, commercial, or agricultural purposes.’’); claim. If a seller makes an earnings claim that is benefit to consumers. Standards for Safeguarding Customer Information, only relevant to a narrow subset of purchasers and 16 CFR 314.2(b) (defining ‘‘customer’’ by reference the seller fails to disclose that fact, the claim would to Part 313). violate Section 5 of the FTC Act. 215 DOJ, at 2.

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b. Proposed Section 437.5(r): Failure to The Commission agrees with DOJ that sophisticated businesses that do not Disclose Payment of References state disclosures should not be bundled need its burdens or protections.222 Having narrowed the scope of the The RPBOR is intended to prohibit in to the same document with the proposed Rule considerably, the sellers from failing to disclose payments proposed federal disclosure, and Commission believes it has tailored the to individuals identified as references or therefore, the RPBOR retains Section Rule’s application to cover only those personal relationships with such 437.5(c) of the IPBOR. One important business opportunities where fraud is individuals. However, the language of goal of revising and tailoring the most likely to occur. In the the second clause of this paragraph in disclosure requirements of the Commission’s law enforcement the IPBOR does not state that what must Franchise Rule for business opportunity experience, these business opportunities be disclosed is the relationship between promoters is to simplify and streamline can cost tens of thousands of dollars, the seller and the reference.216 the disclosures into a single page and seldom, if ever, involve seasoned Therefore, the RPBOR adds clarifying document. Allowing business opportunity promoters to mix federal purchasers with sufficient expertise to language to the opening clause of negotiate the terms of the transaction. section 437.5(r), so that it prohibits a and state disclosures into one document would be an invitation to sellers to There is an insufficient basis at this time failure to disclose, ‘‘with respect to any to conclude that further exemptions are person identified as a purchaser or present lengthy and confusing information to prospective purchasers. necessary to avoid covering transactions operator of a business opportunity between sophisticated business people. offered by the seller,’’ any consideration Such a result would be contrary to the Commission’s goal of providing a However, the Commission continues to paid, any personal relationship, or other solicit comment on whether the unrelated business relationship. simple, clear, and concise disclosure document. proposed modifications to the scope of c. Proposed Section 437.5(c): the Rule adequately capture the Extraneous Materials 5. Proposed Section 437.7: Exemptions marketplace in which fraud is prevalent or whether it is needlessly over- Like the IPBOR, the RPBOR’s Section Section 437.7 of the IPBOR identifies inclusive. 437.5(c) would prohibit the inclusion of entities that would be exempt from any additional information in a complying with the Business Section E Rulemaking Procedures disclosure document that is not Opportunity Rule. The exemption Pursuant to 16 CFR 1.20, the explicitly required or permitted by the applies to business opportunities that Commission will use the following Rule. The point of the prohibition is to constitute franchises, and it was rulemaking procedures. These preserve the clarity, coherence, designed to eliminate the possibility procedures are a modified version of the readability, and utility of the disclosures that a business would face duplicative rulemaking procedures specified in by ensuring that the seller does not compliance burdens under the Business Section 1.13 of the Commission’s Rules clutter the disclosure document. The Opportunity Rule and the amended of Practice. Commission sought comment on Franchise Rule. However, it was also First, the Commission is publishing whether it is appropriate to prohibit designed to ensure that certain this Revised Notice of Proposed sellers from including in their franchises exempt from the Rulemaking. The comment period will disclosure documents additional requirements of the Franchise Rule be open until May 27, 2008, followed by disclosures required by state business —namely, those falling under the a rebuttal period until June 16, 2008. opportunity laws. minimum payment exemption or the Interested parties are invited to submit DOJ urged the Commission to exclude oral agreement exemption220—would be written comments. Written comments state disclosures from the proposed covered by the Business Opportunity must be received on or before May 27, form. In DOJ’s experience, ‘‘[p]urveyors Rule. To add precision and clarity to 2008. Rebuttal comments must be of fraudulent business opportunities this provision, the RPBOR revises received on or before June 16, 2008. All will seek every opportunity to water Section 437.7 to adopt the language of comments should be filed as prescribed down this document with extraneous the amended Franchise Rule describing in the ADDRESSES section above. information to hide any negative the relevant exemptions and to add Second, pursuant to Section 18(c) of information it may contain.’’217 specific citations to the relevant the Federal Trade Commission Act, 15 The original Franchise Rule permitted provisions of Part 436. U.S.C. 57a(c), the Commission will hold the inclusion of state mandated Many commenters argued for hearings with cross-examination and disclosures in the federal disclosure additional changes to the IPBOR, rebuttal submissions only if an document, where the state disclosures including changing the definition of interested party requests a hearing by provided equal or greater protection to ‘‘new business,’’ exempting purchasers the close of the comment period. In prospective purchasers.218 However, the of sufficient net worth, excluding view of the substantial revisions to the original Franchise Rule required a very transactions above a monetary NPR, the Commission has held in lengthy disclosure, which included abeyance the hearing requests submitted threshold, such as $50,000.221 These more than 20 categories of information. in response to the NPR. Individuals who commenters essentially argued that the Any additional state disclosures that continue to be interested in a hearing Rule’s application should encompass afforded greater protections to should, therefore, renew and resubmit only those transactions involving the prospective purchasers were generally their requests in comments responding vulnerable or unsophisticated minor additions that could be easily to this Revised NPR. Parties interested purchasers that they posited the Rule accommodated.219 in a hearing must submit within the seeks to protect, and that exemptions comment period the following: (1) a should be written into the Rule for 216 This omission was noted in DOJ’s comment, comment in response to this notice; (2) at 2. a statement how they would participate 217 DOJ, at 3. disclosures that Florida required affording greater in a hearing; and (3) a summary of their 218 Original Franchise Rule, 16 CFR 436.1(a)(21). protection than the Franchise Rule). 219See Informal Staff Advisory Opinion, Bus. 220 Amended Franchise Rule, 16 CFR 436.8(a)(1) expected testimony. Parties wishing to Franchise Guide (CCH), Paragraph 6410 (April 15, & (a)(7). 1980) (noting that there were only three additional 221 Sonnenschein, at 2, 5,6; Snell, at 2, 4. 222Id.

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cross-examine witnesses must also file a interim Business Opportunity Rule (and to make an earnings claim is optional. request by the close of the 20-day formerly covered by the original While the disclosures of references and rebuttal period, designating specific Franchise Rule, as explained above), as earnings claims retain, for the most part, facts in dispute and a summary of their well as certain others not covered by the the interim Business Opportunity Rule expected testimony. If requested to do interim Business Opportunity Rule, requirements, the required disclosure of so, the Commission may hold one or including work-at-home programs. The lawsuits is reduced from the interim more informal public workshop proposed Rule would require business Business Opportunity Rule. conferences in lieu of hearings. After the opportunity sellers to disclose specified As noted above, the interim Business close of the comment period, the information and to maintain certain Opportunity Rule requires an extensive Commission will publish a notice in the records relating to business opportunity list of suits that must be disclosed Federal Register stating whether sales transactions. including those involving allegations of hearings (or a public workshop The currently approved estimates for fraud, unfair or deceptive business conference in lieu of hearings) will be disclosure and recordkeeping burden practices, embezzlement, fraudulent held and, if so, the time and place of the under the interim Business Opportunity conversion, misappropriation of hearings and instructions for those Rule, Part 437, includes 16,750 hours property, and restraint of trade. wishing to present testimony or engage for business opportunity sellers. That Business opportunity sellers also must in cross-examination of witnesses. estimate was based on an estimated disclose suits filed against them Finally, after the conclusion of the 2,500 non-exempt business opportunity involving the business opportunity rebuttal period, and any hearings or sellers.224 As discussed below, the relationship. 16 CFR at 437.1(a)(4). In additional public workshop proposed Rule would reduce the burden contrast, the proposed Rule’s lawsuit conferences, Commission staff will issue on business opportunity sellers by disclosure requirements are limited to a Report on the Business Opportunity streamlining disclosure requirements to suits for misrepresentation, fraud, or Rule (‘‘Staff Report’’). The Commission minimize compliance costs.225 unfair or deceptive business practices will announce in the Federal Register The proposed Rule is designed to only. the availability of the Staff Report and streamline and reduce substantially the 2. Incorporation of existing materials will accept comment on the Staff Report quantity of information business for a period of 75 days. opportunity sellers would be required to The RPBOR also reduces collection disclose. The proposals would impact and dissemination costs by permitting Section F Communications to such sellers differently, depending upon sellers to reference in their disclosure Commissioners and Commissioner whether they are currently covered by documents materials already in the Advisors by Outside Parties the interim Business Opportunity Rule. possession of the seller. For example, a Pursuant to Commission Rule The Commission staff estimates that seller need not repeat its refund policy 1.18(c)(1), the Commission has there are approximately 3,050 business in the text of the disclosure document, determined that communications with opportunity sellers, comprised of some but may attach its contract or brochures, respect to the merits of this proceeding 2,500 vending machine, rack display, or other materials that already provide from any outside party to any and related opportunity sellers, and 550 the necessary details. Commissioner or Commissioner advisor work-at-home opportunity sellers. 3. Use of electronic dissemination of shall be subject to the following For the 2,500 vending machine, rack information treatment. Written communications and display, and related opportunity sellers summaries or transcripts of oral presently covered by the interim The RPBOR defines the term communications shall be placed on the Business Opportunity Rule, the ‘‘written’’ to include electronic media. rulemaking record if the communication proposed Rule would reduce the Accordingly, all business opportunities is received before the end of the number of disclosures from 20 covered by the RPBOR are permitted to comment period. They shall be placed categories of information to four use the Internet and other electronic on the public record if the mandatory disclosures pertaining to media to furnish disclosure documents. communication is received later. Unless earnings claims, lawsuits, refund policy, Allowing this distribution method could the outside party making an oral and references. For the 550 business greatly reduce sellers’ compliance costs communication is a member of opportunity sellers presently exempted over the long run, especially costs Congress, such oral communications are from the interim Business Opportunity associated with printing and permitted only if advance notice is Rule, the disclosures, as noted below, distributing disclosure documents. As a published in the Weekly Calendar and are streamlined to minimize compliance result of this proposal, the Commission Notice of ‘‘Sunshine’’ Meetings.223 costs. expects sellers’ compliance costs will decrease substantially over time. Section G Paperwork Reduction Act 1. Reduced Mandatory Disclosures 4. Use of computerized data collection The Commission is submitting this The RPBOR contains four mandatory technology proposed Rule and a Supporting disclosures pertaining to earnings Statement for Information Collection claims, lawsuits, refund policy, and Finally, because of advances in Provisions to the Office of Management references. With respect to earnings computerized data collection and Budget (‘‘OMB’’) for review under claims, business opportunity sellers technology, the Commission anticipates the Paperwork Reduction Act (‘‘PRA’’), must disclose whether or not they make that the costs of collecting information 44 U.S.C. 3501-3521. In this notice, the earnings claims. However, the decision and recordkeeping requirements Commission proposes to amend a trade imposed by the RPBOR will be minimal. regulation rule governing business 224 71 FR at 19,081; 70 FR 51,818, 51,819 (August For example, a seller can easily opportunity sales. The proposed Rule 31, 2005). maintain a spreadsheet of its would cover those business 225 If the Commission ultimately amends the purchasers, which can be sorted by interim Business Opportunity Rule, FTC staff will location. This would enable a seller to opportunities currently covered by the seek all necessary PRA clearances and/or adjustments. The amended Franchise Rule and comply easily with the proposed 223See 15 U.S.C. 57a(i)(2)(A); 45 FR 50814 (1980); interim Business Opportunity Rule have OMB reference disclosure requirement (at 45 FR 78626 (1980). clearance through October 31, 2008. least 10 prior purchasers in the last

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three years who are located nearest the 1. Evaluate whether the proposed this Document constitutes a Notice of prospective purchaser, or, if there are collection of information is necessary Proposed Rulemaking, the Commission not 10 prior purchasers, then all prior for the proper performance of the has set forth in Section I below, in purchasers). In the alternative, the functions of the Commission, including connection with its Initial Regulatory RPBOR permits a seller to maintain a whether the information will have a Flexibility Analysis (‘‘IRFA’’) under the national list of purchasers. practical utility; Regulatory Flexibility Act, and has As a result of these proposals, the 2. Evaluate the accuracy of the discussed elsewhere in this Document: Commission estimates that the 3,050 Commission’s estimate of the burden of (1) the need for and objectives of the business opportunity sellers will require the collection of information, including proposed Rule (see IRFA ¶ 2); (2) a between three hours and five hours each the validity of the methodology and description of reasonable alternatives to develop a Rule-compliant disclosure assumptions used; that would accomplish the Rule’s stated document.226 On the lower end, the staff 3. Enhance the quality, usefulness, objectives consistent with applicable estimates that for existing businesses and clarity of the information to be law (see IRFA ¶ 6); and a preliminary that have not been covered by the collected; and analysis of the benefits and adverse 4. Minimize the burden of collection interim Business Opportunity Rule but effects of those alternatives (see id.). The of information on those who are to will be covered by the RPBOR, such as Commission has determined that the respond, including through the use of work-at-home schemes, the time proposed amendments to the Business appropriate automated electronic, required for making a new disclosure Opportunity Rule will not have such an mechanical, or other technological document is approximately 5 hours. By annual effect on the national economy, collection techniques, or other forms of contrast, businesses that have been on the cost or prices of goods or services information technology, for example, covered by the interim Business sold through business opportunities, or permitting electronic submission of Opportunity Rule will already have a on covered businesses or consumers. As responses. disclosure document which will just noted in the Paperwork Reduction Act Comments on any proposed filing, need updating to meet the requirements discussion above, the Commission staff recordkeeping, or disclosure of the RPBOR. The staff estimates that estimates each business affected by the requirements that are subject to these 2,500 businesses will likely need Rule will likely incur only minimal paperwork burden review under the only 3 hours to perform the necessary compliance costs. Specifically, Paperwork Reduction Act should updating to the disclosure document. approximately 3,050 businesses will additionally be submitted to: Office of Therefore, the hours required to develop spend not more than $1,750 (7 hours x Information and Regulatory Affairs, a disclosure document in the first year $250 each) to comply with the proposed Office of Management and Budget, would be approximately 10,250 ((550 x Rule and not more than $1000 (4 hours Attention: Desk Officer for the Federal 5 hours) + (2,500 x 3 hours)). In x $250 each) to update the four required Trade Commission. Comments should addition, staff estimates these entities disclosures on an annual basis. These be submitted via facsimile to (202) 395- will require between one and two hours figures reflect a change in the estimated 6974 because U.S. Postal Mail is subject to file and store records per year, for a number of affected businesses, since the to lengthy delays due to heightened estimate now excludes MLM total of 6,100 hours (3,050 x 2 hours). security precautions. companies. As explained above, the Staff assumes that in many instances an OMB will act on this request for RPBOR no longer sweeps in MLM attorney likely would prepare or update review of the collection of information companies or their networks of the disclosure document, at an contained in these proposed regulations distributors. To ensure that the estimated hourly rate of $250. The between 30 and 60 days after Commission has considered all relevant Commission estimates that the total publication of this document in the facts, however, it requests additional number of hours initially to comply Federal Register. Therefore, a comment comment on these issues. with the Rule would be approximately to OMB is best assured of having its full 16,350 (10,250 disclosure-related hours effect if OMB receives the comment Section I Regulatory Flexibility Act + 6,100 recordkeeping hours), at a total within 30 days of publication. This does The Regulatory Flexibility Act cost of $4,087,500 (16,350 x $250). not affect the deadline for the public to (‘‘RFA’’), 5 U.S.C. 601—612, requires an FTC staff expects that the annual comment to the FTC on the proposed agency to provide an IRFA with a burden will diminish after the first year regulation. proposed rule and a Final Regulatory to two hours to prepare disclosures and Flexibility Analysis (‘‘FRFA’’) with the between one and two hours of Section H Regulatory Analysis final rule, if any, unless the agency recordkeeping, resulting in Section 22 of the FTC Act, 15 U.S.C. certifies that the rule will not have a approximately 12,200 hours per year 57b, requires the Commission to issue a significant economic impact on a (3,050 x 4 hours) or fewer, for a total preliminary regulatory analysis when substantial number of small entities. See cost of $3,050,000 (12,200 hours x publishing a Notice of Proposed 5 U.S.C. 603—605. The FTC does not $250). To the extent that disclosure or Rulemaking, but requires the expect that the RPBOR will have a recordkeeping obligations are performed Commission to prepare such an analysis significant economic impact on a by clerical staff, the labor costs initially for a rule amendment proceeding only substantial number of small entities. and thereafter would be significantly if it: The abbreviated disclosure and less. (1) estimates that the amendment will recordkeeping requirements of the The Commission invites comments have an annual effect on the national RPBOR are the minimum necessary to that will enable it to: economy of $100,000,000 or more; (2) give consumers the information they estimates that the amendment will need to protect themselves and permit 226 While commenters from the MLM industry cause a substantial change in the cost or effective enforcement of the rule. argue that the costs of complying would be price of certain categories of goods or Companies previously covered by the significantly higher, see supra Section C.2.a., their services; or (3) otherwise determines original Franchise Rule and now estimates are based on assumptions that would not apply to more narrow field of the business that the amendment will have a covered by the interim Business opportunities that are within the scope of the significant effect upon covered entities Opportunity Rule, will experience a proposed Rule. or upon consumers. To the extent that reduction in their compliance burden,

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while companies not previously covered 3. Description of and, Where Feasible, Opportunity Rule and formerly covered will have minimal new disclosure Estimate of the Number of Small by the original Franchise Rule. Section obligations. As such, the economic Entities to Which the Proposed Rule 437.2 of the proposed Rule would impact of the RPBOR will be minimal. Will Apply require ‘‘sellers’’ of covered business In any event, the burdens imposed on The RPBOR primarily applies to opportunities to provide potential small businesses are likely to be ‘‘sellers’’ of business opportunities, purchasers with a one-page disclosure relatively small, and in the document, as specified by Section 437.3 including vending, rack display, Commission’s enforcement experience, and Appendix A, at least seven calendar medical billing, and work-at-home (e.g., insignificant in comparison to their days before they sign a contract or pay craft assembly, envelope stuffing) gross sales and profits. any money toward a purchase. If a seller opportunities. The Commission believes This document serves as notice to the elects to make an earnings claim, that many of these sellers fall into the Small Business Administration of the Section 437.4 would require that written category of small entities. Determining agency’s certification of no effect. substantiation for the claim be provided the precise number of small entities Nonetheless, the Commission has to the purchaser in a separate ‘‘earnings affected by the RPBOR, however, is determined that it is appropriate to claim statement’’ document. However, difficult due to the wide range of publish an IRFA in order to inquire into the proposed Rule would not require the impact of the proposed Rule on businesses engaged in business sellers to make an earnings claim, and small entities. Therefore, the opportunity sales. The staff estimates thus any compliance costs incurred in Commission has prepared the following that there are approximately 3,050 connection with such claims are strictly analysis, based on the IRFA set forth in business opportunity sellers, including optional. the Commission’s earlier notice of some 2,500 vending machine, rack Section 437.6 of the RPBOR proposed rulemaking, after a review of display, and related opportunity sellers prescribes recordkeeping requirements the public comments submitted in and 550 work-at-home opportunity necessary for effective enforcement of response to that notice and additional sellers. The previous IRFA estimated a the Rule. Specifically, sellers of a information and analysis by total of 3,200 business opportunity covered business opportunity, and their Commission staff. sellers, including 150 multilevel principals, must retain for at least three companies, which are no longer covered years the following types of documents: 1. Description of the Reasons that by the proposed rule. Most established (1) each materially different version of Action by the Agency Is Being and some start-up business all documents required by the Rule; (2) Considered opportunities would likely be each purchaser’s disclosure receipt; (3) The Commission’s law enforcement considered small businesses according each executed written contract with a experience provides ample evidence to the applicable SBA size standards.227 purchaser; and (4) all substantiation that fraud is pervasive in the sale of The FTC staff estimates that as many as upon which the seller relies for each many business opportunities marketed 70% of business opportunities, as earnings claim made. The RPBOR to consumers. Yet, the Commission defined by the Rule, are small requires that these records be made believes that the current requirements of businesses. The Commission invites available for inspection by the the interim Business Opportunity Rule comments and information on this Commission, but does not otherwise are more extensive than necessary to issue. require production of the records. The protect prospective purchasers of 4. Projected Reporting, Recordkeeping Commission is seeking clearance from business opportunities from deception. and Other Compliance Requirements, the Office of Management and Budget The pre-sale disclosures provided by the Including an Estimate of the Classes of (‘‘OMB’’) for these requirements, and RPBOR will give consumers the Small Entities that Will Be Subject to the the Commission’s Supporting Statement information they need to protect Requirement and the Type of submitted as part of that process will be themselves from fraudulent sales Professional Skills Necessary for made available on the public record of claims, while minimizing the Preparation of the Report or Record this rulemaking. compliance costs and burdens on As discussed in section H above, FTC sellers. The RPBOR imposes disclosure and staff estimates that the total number of recordkeeping requirements, within the hours initially to comply with the Rule 2. Succinct Statement of the Objectives meaning of the Paperwork Reduction would be 16,350, at a total cost of of, and Legal Basis for, the Proposed Act, on the ‘‘sellers’’ of business $4,087,500 (16,350 x $250), or less. FTC Rule opportunities and their principals. staff expects that the annual burden of The objective of the RPBOR is to These requirements are fewer in number complying with the rule will diminish provide consumers considering the and lesser in extent than requirements after the first year, however, to purchase of a business opportunity with currently applicable to such entities approximately 12,200 hours, at a total material information they need to now covered by the interim Business cost of $3,050,000 (12,200 hours x investigate the offering thoroughly so $250). To the extent that disclosure or they can protect themselves from 227 Since October 2000, SBA size standards have recordkeeping obligations are performed fraudulent claims, while minimizing the been based on the North American Industry Classification System (‘‘NAICS’’), in place of the by clerical staff, the total labor costs compliance burdens on sellers. The Standard Industrial Classification (‘‘SIC’’) system. would be substantially less. The change legal basis for the proposed Rule is In general, a company in a non-manufacturing in these estimates from the previous Section 18 of the FTC Act, 15 U.S.C. industry is a small business if its average annual IRFA reflect that the total estimated 57a, which authorizes the Commission receipts are $6.5 million or less. See http:// www.sba.gov/size/indexguide.html. Thus, the size number of sellers no longer includes to promulgate, modify, and repeal trade standard for vending machine operators is $6.5 multilevel companies. regulation rules that define with million in annual receipts (NAICS 454210), and the specificity acts or practices in or same size standard applies to other direct selling 5. Other Duplicative, Overlapping, or affecting commerce that are unfair or establishments (NAICS 454390), marketing Conflicting Federal Rules consulting services (NAICS 541613), other deceptive within the meaning of Section management consulting services (NAICS 541618) There are no other federal statutes, (5)(a)(1) of the FTC Act, 15 U.S.C. and other business support services (NAICS rules, or policies that would conflict 45(a)(1). 561499). with the RPBOR, which would amend

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the Commission’s interim Business that the RPBOR will not have a requests comment on whether there are Opportunity Rule, 16 CFR Part 437.1. significant economic impact upon small any persons or classes of persons The Commission notes, however, that businesses. covered by the RPBOR that it should it is aware that 22 states have statutes The RPBOR would require business consider exempting from the Rule’s specifically governing the sale of opportunity sellers to provide only four application pursuant to Section 18(g). business opportunities. The affirmative disclosures in a one-page However, the Commission notes that the Commission therefore seeks comment disclosure document. This is a RPBOR’s purpose of protecting and information about any state statutes significant reduction from the 20 consumers against fraud could be or rules that may conflict with the disclosures now required by the undermined by the granting of a broad proposed requirements, as well as any Commission’s interim Business exemption to small entities. other state, local, or industry rules or Opportunity Rule, with which many policies that require covered entities to business opportunity sellers are now 7. Questions for Comment to Assist implement practices that conflict or obligated to comply. The RPBOR limits Regulatory Flexibility Analysis comport with the requirements of the required disclosures to information a. Please provide information or RPBOR. about the sellers’ litigation history, comment on the number and type of refund policy, prior purchaser small entities affected by the RPBOR. 6. Description of Any Significant references, and a statement about Include in your comment the number of Alternatives to the Proposed Rule That whether the seller makes an earnings small entities that will be required to Would Accomplish the Stated claim. Because the RPBOR does not comply with the RPBOR’s disclosure Objectives of Applicable Statutes and require sellers to make information and recordkeeping requirements. That Minimize Any Significant about potential earnings available to b. Please provide comment on any or Economic Impact of the Proposed Rule potential purchasers, such earnings all of the provisions in the RPBOR with on Small Entities, Including Alternatives claims are entirely optional. Thus, if regard to: (a) the impact of the Considered, Such as: (1) Establishment sellers make no earnings claims provision(s) (including benefits and of Differing Compliance or Reporting whatsoever, they can avoid the RPBOR’s costs to implement and comply with the Requirements or Timetables That Take requirement that any person making an RPBOR or any of its provisions), if any; Into Account the Resources Available to earnings claim provide a potential and (b) what alternatives, if any, the Small Entities; (2) Clarification, purchaser with an earnings claim Commission should consider, as well as Consolidation, or Simplification of representation in writing that provides the costs and benefits of those Compliance and Reporting substantiation for the claim. alternatives, paying specific attention to Requirements Under the Rule for Such Thus, the Commission does not the effect of the RPBOR on small entities Small Entities; and (3) Any Exemption believe that the RPBOR will impose a in light of the above analysis. In From Coverage of the Rule, or Any Part significant economic impact on a particular, please provide the above Thereof, for Such Small Entities substantial number of small businesses. information with regard to the The RPBOR’s disclosure and Nonetheless, the Commission disclosure and recordkeeping provisions recordkeeping requirements are specifically requests comment on the of the RPBOR set forth in sections 437.2, designed to impose the minimum question whether the RPBOR imposes a 437.3, 437.4, and 437.6, and describe burden on all affected business significant impact upon a substantial any ways in which the RPBOR could be opportunity sellers, regardless of size. In number of small entities, and what modified to reduce any costs or burdens formulating the RPBOR, the modifications to the rule the for small entities consistent with the Commission has taken a number of Commission could make to minimize RPBOR’s purpose, and costs to significant steps to minimize the the burden on small entities. Moreover, implement and comply with provisions burdens it would impose on large and the Commission requests comment on of the RPBOR, including expenditures small businesses. These include: (1) the general question whether new of time and money for: any employee limiting the required pre-sale disclosure technology or changes in technology can training; attorney, computer to a one-page document, with check be used to reduce the burdens mandated programmer or other professional time; boxes provided to simplify disclosure by the Act. preparing relevant materials (e.g., responses; (2) allowing the disclosure to In some situations, the Commission disclosure documents); and refer to information in other existing has considered adopting a delayed recordkeeping. documents to avoid needless effective date for small entities subject c. Please describe ways in which the duplication; (3) permitting the to a new regulation in order to provide RPBOR could be modified to reduce any disclosure document itself to be them with additional time to come into costs or burdens on small entities, furnished in electronic form to compliance. In this case, however, in including whether and how minimize printing and distribution light of the RPBOR’s flexible standard technological developments could costs; and (4) employing specific and modest compliance costs, the further reduce the costs of prohibitions in place of affirmative Commission believes that small entities implementing and complying with the disclosures whenever possible. should feasibly be able to come into RPBOR for small entities. Moreover, because the majority of compliance with the RPBOR by the d. Please provide any information sellers covered by the RPBOR are proposed effective date, six months quantifying the economic costs and already required to comply with the following publication of the final Rule. benefits of the RPBOR on the entities Commission’s interim Business Nonetheless, the Commission invites covered, including small entities. Opportunity Rule and the business comment on whether small businesses e. Please identify any relevant federal, opportunity laws in 22 states, FTC staff might need additional time to come into state, or local rules that may duplicate, anticipates that the RPBOR will compliance and, if so, why. overlap or conflict with the RPBOR. drastically reduce their current In addition, the Commission has the compliance costs, while imposing authority to exempt any persons or Section J Request for Comments exceedingly modest ongoing compliance classes of persons from the Rule’s The Commission invites members of costs on all covered sellers. application pursuant to Section 18(g) of the public to comment on any issues or Consequently, the Commission believes the FTC Act. The Commission therefore concerns they believe are relevant or

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appropriate to the Commission’s assisting the prospective purchaser in consider? Would these options enable consideration of the RPBOR. The obtaining his or her own locations, the seller to select only those prior Commission requests that factual data outlets, accounts, or customers.’’ Does purchasers who are successful or who upon which the comments are based be this language adequately cover all of the otherwise would give a favorable report submitted with the comments. In business opportunity arrangements that on the seller? What would be the costs addition to the issues raised above, the should be within the scope of the rule? and benefits of each alternative? Commission will continue to accept Why or why not? Will the inclusion of 6. Proposed Sections 437.4(a)(4)(v) public comment on the specific ‘‘otherwise assisting’’ in the definition and 437.4(b)(3)(ii) would require questions identified in the Notice of cause traditional product distribution business opportunity sellers who make Proposed Rulemaking.228 arrangements, educational institutions, Furthermore, the Commission solicits or how-to books to be subject to the earnings claims to disclose ‘‘the number comment on the following specific proposed Rule? Will it result in the and percentage of all persons who questions. inclusion of multi-level marketing purchased the business opportunity In response to each of the following relationships that would otherwise not prior to the ending date [of the period questions, please provide: (1) detailed be covered? Why or why not? How when the represented earnings were comment, including data, statistics, could the language be refined to achieve achieved] who achieved at least the consumer complaint information, and the proper scope? stated level of earnings. Does this other evidence, regarding the issues 3. The one-page disclosure document requirement create difficulties for a addressed in the question; (2) comment set forth in Appendix A is intended to business opportunity seller who is as to whether the proposal does or does provide prospective purchasers with attempting to inform consumers not provide an adequate solution to the material information with which to accurately of their likely experience if problems it is intended to address; and make an informed investment decision. they purchase the business opportunity (3) suggestions for additional changes The Commission has retained an expert being offered? Is such a disclosure going that might better maximize consumer to evaluate the proposed form to ensure to be useful to consumers who are protections or minimize the burden on that it appropriately conveys to the considering the purchase of the business business opportunity sellers. consumer information that is material to opportunity? Why or why not? Are there 1. Proposed section 437.1(c) limits the the transaction. Can the overall alternative approaches—for example, scope of coverage to sellers who offer to presentation of the information in the limiting the set of purchasers to be provide location assistance, account one-page disclosure document be included in the percentage calculation— assistance, or buy-back assistance. Do improved to make it more useful and that would limit the difficulties? How the enumerated categories of assistance understandable? Are there specific would any such proposals affect the that are necessary to trigger coverage of sections that can be improved by usefulness of the resulting information the rule adequately cover the field of simplifying the presentation to make it to prospective purchasers? business opportunity promoters who are easier for prospective purchasers to most likely to engage in fraud? Why or 7. Proposed section 437.4(a)(4)(vi) understand? How could the would require sellers who make why not? What alternatives, if any, presentation be improved? What would earnings claims to disclose ‘‘any should the Commission consider? What be the costs and benefits of each characteristics of the purchasers who would be the costs and benefits of each alternative? Please submit quantitative achieved at least the represented level of alternative? The RPBOR covers all or qualitative analysis to support earnings, such as their location, that business arrangements currently specific recommendations. covered by the interim Business 4. Proposed section 437.3(a)(3) would may differ materially from the Opportunity Rule, as well as certain require sellers to furnish certain characteristics of the prospective others currently not covered, such as litigation information. Specifically, the purchasers being offered the business work-at-home offerings (e.g., envelope seller would disclose information about opportunity.’’ Does this provision stuffing or craft assembly schemes), and itself, as well as any affiliates and prior adequately capture the relevant earnings offerings costing less than $500. Are businesses, any of the seller’s officers, information that should be disclosed? there other types of offerings not directors, and sales managers, but not of Why? What alternative language, if any, covered by the interim Business sales employees. Does this provision should the Commission consider? What Opportunity Rule that inadvertently adequately capture the types of would be the costs and benefits of each may be covered under the RPBOR? In individuals whose litigation should be alternative? particular, are the limitations to the disclosed? Why or why not? What 8. Proposed section 437.7 identifies RPBOR’s coverage sufficient to keep the alternative language, if any, should the two categories of franchises that are rule from covering traditional Commission consider? What would be exempt from the requirements of the distributor relationships? Why or why the costs and benefits of each RPBOR. Is the exemption overly broad not? Are there industries where there alternative? or overly narrow? Why? What are significant numbers of people who 5. Proposed section 437.3(a)(6) would alternative language, if any, should the work at home and are paid on a piece- enable a seller to furnish prospective Commission consider? work basis? Would firms that employ purchasers with a national list of prior such workers become subject to the purchasers. Is this a viable option? Why List of Subjects in 16 CFR Part 437 provisions of the RPBOR? Why or why or why not? Under what circumstances Reporting and recordkeeping not? What alternatives should the should the Rule permit a seller to post requirements, Trade practices. Commission consider to avoid covering a national list of purchasers on its arrangements that should not be covered website? What protections should be Section K Text of Proposed Rule by the RPBOR? put in place to limit access to the list? 2. The definition of ‘‘providing What protections might be sufficient to For the reasons set forth in the locations, outlets, accounts, or prevent those who merely want to sell preamble, the Federal Trade customers’’ includes ‘‘otherwise fraudulent business opportunities from Commission proposes to amend 16 accessing such a list? What other C.F.R. chapter I by adding part 437 to 228 71 FR at 19083 - 87. options, if any, should the Commission read as follows:

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PART 437—BUSINESS OPPORTUNITY conspicuous, accurate, concise, and obtaining his or her own locations, RULE legible. outlets, accounts, or customers. (f) Earnings claim means any oral, (m) Purchaser means a person who Sec. written, or visual representation to a buys a business opportunity. 437.1 Definitions. prospective purchaser that conveys, (n) Quarterly means as of January 1, 437.2 The obligation to furnish written April 1, July 1, and October 1. documents. expressly or by implication, a specific 437.3 Disclosure document. level or range of actual or potential (o) Required payment means all 437.4 Earnings claims. sales, or gross or net income or profits. consideration that the purchaser must 437.5 Other prohibited practices. Earnings claims include, but are not pay to the seller or an affiliate, either by 437.6 Record retention. limited to: contract or by practical necessity, as a 437.7 Franchise exemption. (1) Any chart, table, or mathematical condition of obtaining or commencing 437.8 Outstanding orders; preemption. calculation that demonstrates possible operation of the business opportunity. 437.9 Severability. results based upon a combination of Such payment may be made directly or Appendix A to Part 437: Business variables; and indirectly through a third-party. A Opportunity Disclosure Document (2) Any statements from which a required payment does not include Authority: 15 U.S.C. 41–58. prospective purchaser can reasonably payments for the purchase of reasonable infer that he or she will earn a minimum amounts of inventory at bona fide § 437.1 Definitions. level of income (e.g., ‘‘earn enough to wholesale prices for resale or lease. The following definitions shall apply buy a Porsche,’’ ‘‘earn a six-figure (p) Seller means a person who offers throughout this part: income,’’ or ‘‘earn your investment back for sale or sells a business opportunity. (a) Action means a criminal within one year’’). (q) Written or in writing means any information, indictment, or proceeding; (g) Exclusive territory means a document or information in printed a civil complaint, cross claim, specified geographic or other actual or form or in any form capable of being counterclaim, or third-party complaint implied marketing area in which the downloaded, printed, or otherwise in a judicial action or proceeding; seller promises not to locate additional preserved in tangible form and read. It arbitration; or any governmental purchasers or offer the same or similar includes: type-set, word processed, or administrative proceeding, including, goods or services as the purchaser handwritten documents; information on but not limited to, an action to obtain through alternative channels of computer disk or CD-ROM; information or issue a cease and desist order, and an distribution. sent via email; or information posted on assurance of voluntary compliance. (h) General media means any the Internet. It does not include mere (b) Affiliate means an entity instrumentality through which a person oral statements. controlled by, controlling, or under may communicate with the public, common control with a business § 437.2 The obligation to furnish written including, but not limited to, television, documents. opportunity seller. radio, print, Internet, billboard, website, (c) Business opportunity means: In connection with the offer for sale, and commercial bulk email. (1) A commercial arrangement in sale, or promotion of a business which the seller solicits a prospective (i) New business means a business in opportunity, it is a violation of this Rule purchaser to enter into a new business; which the prospective purchaser is not and an unfair or deceptive act or and currently engaged, or a new line or type practice in violation of Section 5 of the (2) The prospective purchaser makes of business. Federal Trade Commission Act (‘‘FTC a required payment; and (j) Person means an individual, group, Act’’) for any seller to fail to furnish a (3) The seller, expressly or by association, limited or general prospective purchaser with the material implication, orally or in writing, partnership, corporation, or any other information required by §§ 437.3(a) and represents that the seller or one or more entity. 437.4(a) of this part in writing at least designated persons will: (k) Prior business means: seven calendar days before the earlier of (i) Provide locations for the use or (1) A business from which the seller the time that the prospective purchaser: operation of equipment, displays, acquired, directly or indirectly, the (a) Signs any contract in connection vending machines, or similar devices, major portion of the business’ assets, or with the business opportunity sale; or on premises neither owned nor leased (2) Any business previously owned or (b) Makes a payment or provides other by the purchaser; or operated by the seller, in whole or in consideration to the seller, directly or (ii) Provide outlets, accounts, or part, by any of the seller’s officers, indirectly through a third party. customers, including, but not limited to, directors, sales managers, or by any Internet outlets, accounts, or customers, other individual who occupies a § 437.3 Disclosure document. for the purchaser’s goods or services; or position or performs a function similar In connection with the offer for sale, (iii) Buy back any or all of the goods to that of an officer, director, or sales sale, or promotion of a business or services that the purchaser makes, manager of the seller. opportunity, it is a violation of this Rule produces, fabricates, grows, breeds, (l) Providing locations, outlets, and an unfair or deceptive act or modifies, or provides, including but not accounts, or customers means practice in violation of Section 5 of the limited to providing payment for such furnishing the prospective purchaser FTC Act, for any seller to: services as, for example, stuffing with existing or potential locations, (a) Fail to disclose to a prospective envelopes from the purchaser’s home. outlets, accounts, or customers; purchaser the following material (d) Designated person means any requiring, recommending, or suggesting information in a single written person, other than the seller, whose one or more locators or lead generating document in the form and using the goods or services the seller suggests, companies; providing a list of locator or language set forth in Appendix A to this recommends, or requires that the lead generating companies; collecting a part: purchaser use in establishing or fee on behalf of one or more locators or (1) Identifying information. State the operating a new business. lead generating companies; offering to name, business address, and telephone (e) Disclose or state means to give furnish a list of locations; or otherwise number of the seller, the name of the information in writing that is clear and assisting the prospective purchaser in salesperson offering the opportunity,

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and the date when the disclosure seller, your contact information can be will be made available to the document is furnished to the disclosed in the future to other buyers.’’ prospective purchaser upon request. prospective purchaser. (6) Receipt. Attach a duplicate copy of (b) Make any earnings claim in the (2) Earnings claims. If the seller makes the disclosure page to be signed and general media, unless the seller: an earnings claim, check the ‘‘yes’’ box dated by the purchaser. The seller may (1) Has a reasonable basis for its claim and attach the earnings statement inform the prospective purchaser how at the time the claim is made; required by § 437.4. If not, check the to return the signed receipt (for (2) Has in its possession written ‘‘no’’ box. example, by sending to a street address, material that substantiates its claim at (3) Legal actions. email address, or facsimile telephone the time the claim is made; (i) If any of the following persons has number). (3) States in immediate conjunction been the subject of any civil or criminal (b) Fail to update the disclosures with the claim: action for misrepresentation, fraud, required by paragraph (a) of this section (i) The beginning and ending dates securities law violations, or unfair or at least quarterly to reflect any changes when the represented earnings were deceptive practices within the 10 years in the required information, including, achieved; and immediately preceding the date that the but not limited to, any changes in the (ii) The number and percentage of all business opportunity is offered, check seller’s refund or cancellation policy, or persons who purchased the business the ‘‘yes’’ box: the list of references; provided, however, opportunity prior to the ending date in (A) The seller; that until a seller has 10 purchasers, the paragraph (b)(3)(i) of this section who (B) Any affiliate or prior business of list of references must be updated achieved at least the stated level of the seller; or monthly. earnings. (c) Disseminate industry financial, (C) Any of the seller’s officers, § 437.4 Earnings claims. earnings, or performance information directors, sales managers, or any unless the seller has written individual who occupies a position or In connection with the offer for sale, substantiation demonstrating that the performs a function similar to an officer, sale, or promotion of a business information reflects the typical or director, or sales manager of the seller. opportunity, it is a violation of this Rule and an unfair or deceptive act or ordinary financial, earnings, or (ii) If the ‘‘yes’’ box is checked, practice in violation of Section 5 of the performance experience of purchasers of disclose all such actions in an FTC Act, for the seller to: the business opportunity being offered attachment to the disclosure document. (a) Make any earnings claim to a for sale. State the full caption of each action prospective purchaser, unless the seller: (d) Fail to notify any prospective (names of the principal parties, case (1) Has a reasonable basis for its claim purchaser in writing of any material number, full name of court, and filing at the time the claim is made; changes affecting the relevance or date). (2) Has in its possession written reliability of the information contained (iii) If there are no actions to disclose, materials that substantiate its claim at in an earnings claim statement before check the ‘‘no’’ box. the time the claim is made; the prospective purchaser signs any (4) Cancellation or refund policy. If (3) Makes the written substantiation contract or makes a payment or provides the seller offers a refund or the right to available upon request to the other consideration to the seller, cancel the purchase, check the ‘‘yes’’ prospective purchaser and to the directly or indirectly, through a third box. If so, state the terms of the refund Commission; and party. or cancellation policy in an attachment (4) Furnishes to the prospective to the disclosure document. If no refund purchaser an earnings claim statement. § 437.5 Other prohibited practices. or cancellation is offered, check the The earnings claim statement shall be a In connection with the offer for sale, ‘‘no’’ box. single written document and shall state sale, or promotion of a business (5) References. the following information: opportunity, it is a violation of this part (i) State the name, city and state, and (i) The title ‘‘EARNINGS CLAIM and an unfair or deceptive act or telephone number of all purchasers who STATEMENT REQUIRED BY LAW’’ in practice in violation of Section 5 of the purchased the business opportunity capital, bold type letters; FTC Act for any seller, directly or within the last three years. If more than (ii) The name of the person making indirectly through a third party, to: 10 purchasers purchased the business the earnings claim and the date of the (a) Disclaim, or require a prospective opportunity within the last three years, earnings claim; purchaser to waive reliance on, any the seller may limit the disclosure by (iii) The earnings claim; statement made in any document or stating the name, city and state, and (iv) The beginning and ending dates attachment that is required or permitted telephone number of at least the 10 when the represented earnings were to be disclosed under this Rule; purchasers within the past three years achieved; (b) Make any claim or representation, who are located nearest to the (v) The number and percentage of all orally, visually, or in writing, that is prospective purchaser’s location. persons who purchased the business inconsistent with or contradicts the Alternatively, a seller may furnish a opportunity prior to the ending date in information required to be disclosed by prospective buyer with a list disclosing paragraph (a)(4)(iv) of this section who §§ 437.3 (basic disclosure document) all purchasers nationwide within the achieved at least the stated level of and 437.4 (earnings claims document) of last three years. If choosing this option, earnings; this Rule; insert the words ‘‘See Attached List’’ (vi) Any characteristics of the (c) Include in any disclosure without removing the list headings or purchasers who achieved at least the document or earnings claim statement the numbers 1 through 10, and attach a represented level of earnings, such as any materials or information other than list of the references to the disclosure their location, that may differ materially what is explicitly required or permitted document. from the characteristics of the by this Rule. For the sole purpose of (ii) Clearly and conspicuously, and in prospective purchasers being offered the enhancing the prospective purchaser’s immediate conjunction with the list of business opportunity; and ability to maneuver through an references, state the following: ‘‘If you (vii) A statement that written electronic version of a disclosure buy a business opportunity from the substantiation for the earnings claim document or earnings statement, the

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seller may include scroll bars and (p) Misrepresent that any person, constitutes a ‘‘franchise,’’ as defined in internal links. All other features (e.g., trademark or service mark holder, or the Franchise Rule, 16 CFR Part 436, multimedia tools such as audio, video, governmental entity, directly or provided however, that the provisions of animation, or pop-up screens) are indirectly benefits from, sponsors, this Rule shall apply to any such prohibited; participates in, endorses, approves, franchise if it is exempted from the (d) Misrepresent the amount of sales, authorizes, or is otherwise associated provisions of Part 436 because, either or gross or net income or profits a with the sale of the business (a) Under § 436.8(a)(1), the total of the prospective purchaser may earn or that opportunity or the goods or services required payments or commitments to prior purchasers have earned; sold through the business opportunity; (e) Misrepresent that any (q) Misrepresent that any person: make a required payment, to the governmental entity, law, or regulation (1) Has purchased a business franchisor or an affiliate that are made prohibits a seller from: opportunity from the seller or has any time from before to within six (1) furnishing earnings information to operated a business opportunity of the months after commencing operation of a prospective purchaser; or type offered by the seller; or the franchisee’s business is less than (2) disclosing to prospective (2) Can provide an independent or $500, or purchasers the identity of other reliable report about the business (b) Under § 436.8(a)(7), there is no purchasers of the business opportunity; opportunity or the experiences of any written document describing any (f) Fail to make available to current or former purchaser. prospective purchasers, and to the material term or aspect of the (r) Fail to disclose, with respect to any Commission upon request, written relationship or arrangement. person identified as a purchaser or substantiation for the seller’s earnings operator of a business opportunity § 437.8 Outstanding orders; preemption. claims; (g) Misrepresent how or when offered by the seller: (a) If an outstanding FTC or court commissions, bonuses, incentives, (1) Any consideration promised or order applies to a person, but imposes premiums, or other payments from the paid to such person. Consideration requirements that are inconsistent with seller to the purchaser will be calculated includes, but is not limited to, any any provision of this regulation, the payment, forgiveness of debt, or or distributed; person may petition the Commission to provision of equipment, services, or (h) Misrepresent the cost, or the amend the order. In particular, business discounts to the person or to a third performance, efficacy, nature, or central opportunities required by FTC or court party on the person’s behalf; or characteristics of the business order to follow the Franchise Rule, 16 (2) Any personal relationship or any opportunity or the goods or services CFR Part 436, may petition the past or present business relationship offered to a prospective purchaser; Commission to amend the order so that (i) Misrepresent any material aspect of other than as the purchaser or operator of the business opportunity being the business opportunity may follow the any assistance offered to a prospective provisions of this part. purchaser; offered by the seller. (j) Misrepresent the likelihood that a (b) The FTC does not intend to § 437.6 Record retention. seller, locator, or lead generator will preempt the business opportunity sales find locations, outlets, accounts, or To prevent the unfair and deceptive practices laws of any state or local customers for the purchaser; acts or practices specified in this Rule, government, except to the extent of any (k) Misrepresent any term or business opportunity sellers and their conflict with this part. A law is not in condition of the seller’s refund or principals must prepare, retain, and conflict with this Rule if it affords cancellation policies; make available for inspection by prospective purchasers equal or greater (l) Fail to provide a refund or Commission officials copies of the protection, such as registration of cancellation when the purchaser has following documents for a period of disclosure documents or more extensive satisfied the terms and conditions three years: disclosures. All such disclosures, disclosed pursuant to §437.3(a)(4); (a) Each materially different version of however, must be made in a separate (m) Misrepresent a business all documents required by this Rule; state disclosure document. opportunity as an employment (b) Each purchaser’s disclosure opportunity; receipt; § 437.9 Severability. (n) Misrepresent the terms of any (c) Each executed written contract territorial exclusivity or territorial with a purchaser; and The provisions of this part are protection offered to a prospective (d) All substantiation upon which the separate and severable from one purchaser; seller relies for each earnings claim from another. If any provision is stayed or (o) Assign to any purchaser a the time each such claim is made. determined to be invalid, it is the purported exclusive territory that, in Commission’s intention that the fact, encompasses the same or § 437.7 Franchise exemption. remaining provisions shall continue in overlapping areas already assigned to The provisions of this Rule shall not effect. another purchaser; apply to any business opportunity that BILLING CODE 6750–01–S

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BILLING CODE 6750–01–C

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By direction of the Commission. Home Interiors & Gifts Inc. (‘‘HIG’’) Plumbing Manufacturers Institute Independent Bakers Association (‘‘PMI’’) Donald S. Clark (‘‘IBA’’) Professional Association for Network Secretary International Business Owners Ass’n Marketing (‘‘PANM’’) Attachment A Int’l, (‘‘IBOAI’’) Pyramid Scheme Alert (‘‘PSA’’) Larkin Hoffman Daly & Lindgren Ltd. Cited NPR Commenters (‘‘LHD&L’’) Quixtar, Inc. (‘‘Quixtar’’) Shaklee Corporation (‘‘Shaklee’’) Avon Products, Inc. (‘‘Avon’’) Maclay Murray and Spens LLP American Society of Travel Agents, (‘‘MMS’’) Snell & Wilmer (‘‘Snell’’) Inc. (‘‘ASTA’’) Mary Kay, Inc. (‘‘Mary Kay’’) Sonnenschein Nath & Rosenthal LLP Amsoil, Inc (‘‘Amsoil’’) Melaleuca, Inc. (‘‘Melaleuca’’) (‘‘Sonnenschein’’) Babener and Associates (‘‘Babener’’) MLM Distributor Rights Ass’n (MLM Southern Progress Corporation Carico International (‘‘Carico’’) DRA) (‘‘SPC’’) Multilevel Marketing International Chadbourne & Parke LLP, Success In Action (‘‘SIA’’) Association (‘‘MLMIA’’) (‘‘Chadbourne’’) National Association of Consumer Shure Pets (‘‘Shure’’) Chamber of Commerce of the United Agency Administrators (‘‘NACAA’’) Symmetry Corporation (‘‘Symmetry’’) States of America (‘‘CC USA’’) National Black Chamber of Commerce Synergy Worldwide (‘‘Synergy’’) Consumer Awareness Institute (‘‘NBCC’’) The Timberland Co. (‘‘Timberland’’) (‘‘CAI’’) National Consumers League (‘‘NCL’’) United States Department of Justice, The Cosmetic, Toiletry and Fragrance Newspaper Association of America Office of Consumer Litigation (‘‘DOJ’’) Association (‘‘CTFA’’) (‘‘NAA’’) Venable LLP (‘‘Venable’’) Direct Selling Association (‘‘DSA’’) Pampered Chef, Ltd. (‘‘Pampered World Association of Persons with Freelife International (‘‘Freelife’’) Chef’’) Venable, LLP (‘‘Venable’’) Pre-Paid Legal Services, Inc. (‘‘Pre- disAbilities, Inc. (‘‘WAPAI’’) Haynes & Boone, LLP Paid Legal’’) Xango, LLC (‘‘Xango’’) (‘‘Haynesboone’’) Herbalife International Primerica Financial Services, Inc., [FR Doc. E8–6059 Filed 3–25–08: 8:45 am] of America (‘‘Herbalife’’) (‘‘Primerica’’) BILLING CODE 6750–01–S

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