FTC Member’s Opposition to Anti-Pyramid Scheme Bill Shows Bias Against Industry

It’s extremely rare to have a sitting Federal Trade Commission member comment on pending legislation. That’s why in August when Commissioner Terrell McSweeny published an op-ed attacking current legislative proposals to statutorily outlaw pyramid schemes, it caused the ears of many attorneys to perk up.

McSweeny wrote at great length about the harm that deceptive direct selling companies can cause if there “is no product or service to sell” or if they “promise” high salaries. She then concluded that pending legislation should be abandoned because it would “entirely stop the FTC from shutting down these kinds of scams.” This is simply false.

Nobody questions the importance of ferreting out pyramid schemes that sell the right to recruit people but have no product or service to offer, or of stopping direct selling companies that make false earnings promises. What was strange about McSweeny’s op-ed is that she did not explain how, or why, pending legislation would harm the FTC. Indeed, she didn’t describe the pending legislation at all.

Contrary to her conclusion, the bill currently pending before the House may be the strongest anti-pyramid and pro-consumer legislation that have been before Congress in a generation.

Take, for example, H.R. 3409, a bipartisan bill introduced by Reps. Marsha Blackburn (R-Tenn.) and Marc Veasey (D-Texas). H.R. 3409 does not place a single restriction on the FTC’s authority – it would instead add two powerful tools to the FTC’s toolkit.

First, the bill would amend the FTC Act Section 5A(a) to make it unlawful for a person to operate a pyramid scheme. Why is that important? It surprises most people, but there is currently no federal statute that prohibits pyramid schemes. Today’s prosecutors are forced to argue that pyramid schemes indirectly violate some other federal law – like the FTC Act’s prohibition on deception or the Security and Exchange Act’s prohibition against selling unlicensed securities.

The bill would cut to the chase by making a pyramid scheme – as that term is defined by over 20 state laws, by federal courts and by the FTC in its complaints – illegal right out of the gate. Such a provision is long overdue.

Second, the bill would amend the FTC Act Section 5A(b) to require that all direct selling companies guarantee that they will repurchase any unused inventory from someone who joins the company but later decides that it’s not for them. This would prevent the harm described by McSweeny where some members of direct selling programs lose “thousands of dollars in fees and unwanted products.”

It’s hard to understand how these simple, pro-consumer and pro-business changes could result in the parade of horribles described by McSweeny. Outlawing pyramid schemes does not “cripple the FTC’s enforcement efforts,” as she says. Requiring that consumers be compensated for unused merchandise does not “stop the FTC from getting money out of scammers’ hands.”

McSweeny’s arguments are fallacious and have no substance. They represent a clear bias against an entire industry – the direct selling industry represented by companies such as Avon, Amway, Mary Kay, NuSkin, Shaklee and many other reputable companies. Instead, H.R. 3409 gives the FTC more tools, more options and more legal weapons to go after bad actors – not less.

McSweeny’s op-ed conveys a knee-jerk reaction to any bill supported by the business community. Ironically, her assumption that “the industry” must always be wrong has made her the unlikely champion of those companies that want to resist, at all cost, the passage of anti-pyramid legislation.

For example, while the majority of the direct selling industry supports H.R. 3409 as a needed step to weed out bad apples, opponents of the bill include companies that have paid millions to the FTC for alleged unfair and deceptive practices, or that have hundreds of consumer complaints alleging their failure to buy-back unused products – conduct that H.R. 3409 would expressly prohibit. In her rush to condemn an industry-backed bill, McSweeny has found herself side by side with the minority of the industry that fears its passage the most.

David Zetoony is a partner with Bryan Cave LLP and is the leader of the firm’s consumer protection practice.

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