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Panel Discussion on International Regulation
John P. Venardos, Senior Vice President, Herbalife International India
Pvt. Ltd.
Mark-e-Dir: Bringing Market to Consumers
Wednesday, 17th April, 2013
New Delhi
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WFDSA Draft Definition of Direct Selling
•“Direct selling“ is a business model that offers opportunities to individuals acting as
independent entrepreneurs to market and/or sell products/services away from a fixed
retail establishment through one-to-one selling away from a fixed location. For
example, by in-home product demonstrations or online.
•Direct sellers may be called distributors, representatives, consultants or various
other titles. They participate and derive financial benefit in various ways, including
purchasing products and services for personal use, referring customers to the
company or reselling products themselves directly or through sales organizations to
which they provide training and leadership. All compensation is paid for product
sales, none for recruiting.
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Canadian Direct Selling Regulations
• Compensation representations: No person who operates or participates in a MLM
plan shall make any compensation representations to a prospective participant
unless representations constitute or include fair, reasonable and timely disclosure
of info within the knowledge of the person making the representations relating to:
(a) compensation actually received by typical participants in the plan; or
(b) compensation likely to be received by typical participants relating to:
• the nature of the product, including its price and availability;
• the nature of the relevant market for the product;
• the nature of the plan and similar plans; and
• if the person operating the plan is a corporation, partnership, sole
proprietorship or other form of business organization.
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Canadian Direct Selling Regulations
• Competition Act: Regulates structure of MLM plans, prohibits pyramid selling
• MLM plan definition: A plan where participants receive compensation for supplying
product to another participant in the plan who receives compensation for the sale of
that product or another product to other participants in the plan
• Act requires disclosures MLM plans must make regarding products, compensation
typically paid under the plan, the market for the products, and other information
• Act prohibits payment of compensation for recruiting, prohibits purchase of product in
a commercially unreasonable amount, and requires implementation of a commercially
reasonably buy-back policy
• 55. (1): For the purposes of this section and section 55.1, “multi-level marketing plan”
means a plan for the supply of a product whereby a participant in the plan receives
compensation for the supply of the product to another participant in the plan who, in
turn, receives compensation for the supply of the same or another product to other
participants in the plan
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Canadian Direct Selling Regulations
• Due diligence defense:
• A person accused of an offence under subsection (2.1) shall not be convicted
if the accused establishes that he/she took reasonable precautions and
exercised due diligence to ensure:
• (a) that no representations relating to compensation under the plan were
made by participants in the plan or by representatives of the accused; or
• (b) that any representations relating to compensation in the plan made by
participants or by representatives of the accused constituted or included fair,
reasonable and timely disclosure of info referred to in that subsection.
• 55.1 (1) “Scheme of pyramid selling” means a MLM plan whereby a participant in
the plan gives consideration for the right to receive compensation by reason of the
recruitment of another participant who gives consideration for the same right; and
a participant in the plan gives consideration, as a condition of participating in the
plan, for a specified amount of product, other than a specified amount of the
product that is bought at the seller’s cost price for the purpose only of facilitating
sales
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Canadian Direct Selling Regulations
• Other aspects of illegal pyramid schemes:
• Do not have a buy-back guarantee that is exercisable on reasonable
commercial terms or a right to return the product in saleable condition on
reasonable commercial terms, or
• Participant is not informed of the existence of a guarantee or right of return and
the manner in which it can be exercised
• Penalties:
• No person shall establish, operate, advertise or promote a scheme of pyramid
selling.
• On conviction on indictment, such person subject to a fine in the discretion of the
court or to imprisonment for a term not exceeding five years or to both; or
• On summary conviction, to a fine not exceeding $200,000 or to imprisonment for
a term not exceeding one year, or to both
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Mexico Direct Selling Regulations
• NOM 035 SCFI-2003 regulation defines commercial practices, and information
criteria for home sale systems:
• Consumer;
• Independent authorized distributor;
• Direct sales system; and
• Catalogue sales
• “Direct sales activity” defined as a sales system out of a commercial facility in
which the product or service to the consumer is conducted by an independent
authorized distributor, usually through a demonstration or explanation. In this case,
the authorized independent distributor or supplier representative can take the
order, arrange delivery of the product or service and receive the correspondent
payment or payments.
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Mexico Direct Selling Regulations
• “Independent authorized distributor” is defined as a physical or moral person who
has a commercial contract with a supplier, and who promotes , distribute and sells
goods or services in the consumer’s home
• The company does not have a legal labor (employment) relation with distributors
since they are independent distributors with a commercial contract
•
Customers are protected by the Consumers Protection Regulation and its bureau
•
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South American Direct Selling Regulations
• In general, there is no formal regulation for Direct Selling
• Local DSAs adopt the WFDSA guidelines for establishing Code of Ethics
• Ecuador includes a direct selling definition in its draft Consumers Law:
“Direct Sales. - Is marketing outside a trade of goods and services directly to
consumers through personalized demonstration of a product or equipment, or
presentation of a catalog and products by a dealer or independent consultant to
personally, registered in the seller.”
• Argentina legislator wants to “regulate” direct selling, classifying independent
distributors as employees
• Costa Rica’s Social Security agency is trying to classify independent distributors
as employees of the company
•
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United States Direct Selling Regulations
• Members of the US Direct Selling Association adhere to a strict Code of Ethics
administered by an independent Code Administer to ensure self-regulation
• Direct selling firms distribute products and/or services to customers through or with
the assistance of independent salespersons who demonstrate and explain those
products to the consumer, usually in the home or work place
• FTC has regulatory authority over many U.S. business activities, including direct
selling; that authority has been used to set anti-pyramid standards and has been
instrumental in determining the business standards used by legitimate MLM firms
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United States Direct Selling Regulations
• Koscot Interplanetary Inc., 86 F.T.C. 11106 (1975), found that pyramid schemes
are inherently deceptive and in contravention of §5 of the FTC Act, 15 U.S.C.
§45. See also, In re Ger-Ro-Mar, Inc., 84 F.T.C. 95 (1974) rev’d 518 F.2d 33 (2d
Cir. 1974), Holiday Magic Inc., 84 F.T.C. 748 (1974).
• FTC’s decisions in Koscot provided a broad definition of unlawful pyramid
schemes; the Commission’s basic test was that a pyramid rewards recruiting alone
“unrelated to the sale of product to ultimate users” through headhunting fees and
inventory loading. Violations of the Koscot standard must be determined using an
analysis of whether or not sales of product to ultimate users are taking place and
driving the compensation mechanism, and in light of what features exist in the plan
to prevent the evils of a pyramid scheme.
• In 2013, FTC staff said there is nothing inherently wrong with internal
consumption; FTC said there should be more “transparency” re: who is buying
product (whether distributors for their own use primarily/exclusively or other
consumers)
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Thank You For Your Time
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