When is a MLM also a Franchise: Ask the FTC
provides an interesting update on what Mary Kay has been doing with respect to the new FTC Rule. Apparently, Mary Kay is complaining that "However, the FTC has cast its net so broadly that it could include Mary Kay and other legitimate direct selling companies. Unfortunately, the rule as it is currently proposed could impose requirements on legitimate direct selling companies that would be very burdensome. While we support the government's effort to protect consumers from business opportunity frauds such as envelope stuffing schemes, we want to ensure their efforts do not harm legitimate direct selling businesses, such as Mary Kay." Frankly, I have never really understood why in some cases Mary Kay isn't regulated as a franchise anyways. Let's look at the FTC definition of a franchise.
Pink Truth: Update Regarding FTC Proposed Rule-Making Activities
"Traditional Franchises": There are three definitional prerequisites to coverage of a business-format or product franchise (Parts 436.2(a)(1)(i) and (2)):
1. Trademark: The franchisor offers the right to distribute goods or services that bear the franchisor's trademark, service mark, trade name, advertising or other commercial symbol.
2. Significant Control or Assistance: The franchisor exercises significant control over, or offers significant assistance in, the franchisee's method of operation.
3. Required Payment: The franchisee is required to make any payment to the franchisor or an affiliate, or a commitment to make a payment, as a condition of obtaining the franchise or commencing operations. (NOTE: There is an exemption from coverage for required payments of less than $500 within six months of the commencement of the franchise (Part 436.2(a)(3)(iii)).
A Mary Kay distributor is selling trademarked products, but is Mary Kay exercising significant control or offering significant assistance to the distributor?
Well, I would argue that there is certainly the offer of significant assistance to the distributor. There are marketing plans, marketing meetings, and promotional plans put in place to assist the distributor.
The only element which might be tricky is the "required payment". For some consultants, who start up with a small inventory, they would not qualify. But what about those people who are pressured by their national sales director to load up on $2,000 or $3,000 worth of inventory to start?
Does this inventory loading qualify as a "a condition of commencing operations"? Is is a requirement? What if the Mary Kay consultant truly believes that she had no other choice but to load up and spend more than $500? Would that make it a requirement? I have never seen an answer to this question in the FTC's staff advisory opinions regarding the FTC Rule.
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