DIRECT SELLING, MULTI-LEVEL MARKETING AND CONSUMER LAWS

The world without consumer is unrealistic. A consumer is not only a prominent sponsor to the industrialists, but also the very mainstay of the financial structure of society. The widely accepted belief is that the economic conditions of a country are broadly driven by its industries and companies. But, from another perspective, all the industries and companies function for serving the consumers. The business models are developed around the needs of consumers, the products or services are developed keeping in mind the necessities of consumers, and even the marketing strategies are fixated based on the consumers’ behaviors and sentiments. It is the consumers who define the pace and direction of the economy of a nation.

Now, in developing a business, companies generally opt for any of the two dissimilar channels for the distribution of their products and services to consumers. The first one is the conventional channel which is more widely accepted, and comprises of a supply chain starting from the manufacturer to the third party carrying and moving agents to redistribution stockist, wholesaler, distributor, retailer, and finally to the Consumer. Here, the marketing strategy involves some traditional advertisements and promotions through various media channels like televisions, radio, internet, etc., as well as through print media. Now, this model is broadly believed and practiced in India.

The second one is a Direct Selling model, which is also popularly known as MLM [Multi Level Marketing], in which the manufacturers dispense the product and service directly to the consumers via distribution centers across the country. This model involves most of the stakeholders as a traditional business model, but with certain modifications. Here, a great similarity is witnessed between the distributor, retailer and advertisers. The most significant part of a direct selling business is its marketing strategies.

Direct selling firms aim at building up a team of human advertisers, who promote the brand not over any media, but by face to face promotion.

This again entails the concept of chain-marketing to certain extent. The associates of such a company approaches potential consumers, and apart from promoting the products of the company, they also rope in the consumers to further market the products in return of some commission. This marketing model can be quite efficient, albeit profitable, but certain questions are raised regarding the ethics and standard of marketing by the company associates. There are various allegations of the associates being extremely rude and pushy, and in India, many people hold an untrue presumption of such companies being a Ponzi or pyramid scheme or chit fund.

The present article is aimed at a comprehensive insight into the nuances of the direct selling industry, and how the consumer and advertising laws in India apply to it.

EVOLUTION OF MULTI-LEVEL MARKETING [MLM]

The origin of MLM can be traced in America in early 1800s, when on one occasion, various travelling salespersons were found creating their own trained sales organizations and forming a sales team to sell some syrup of a particular brand in restaurant and other beverage junctions. Then again, the adversities of Great Depression provoked the former vice president (sales) of Fuller Bush Company, Mr. Frank and Catherine Brien to lead Stanley Home Products. They proposed daily used household products. Some of the sellers from their company started providing demonstrations to clubs and organizations rather than individuals. This gave birth to the so-called “PARTY PLANS”. In a party plan, a seller invites friends, families and other contacts to their house and provides demonstrations.

In 1934, Rehnborg started selling vitamins supplement under California Vitamin Corporation, five years later he altered the name to Nutrilite Products Company, Inc. In 1945 Mytinger & Casselberry who were the exclusive distributor for Nutrilite products in America formulated the first MLM compensation plan. The offer of 35% discount to the distributor on Nutrilite products was given according to the plan so that he could sell the product on MRP with a profit margin of 35%. It was a quota based system in which the one who sells higher volume will be entitled to get higher profit share. Thus the concept of MLM gradually became prevalent in the market.

DIRECT SELLING & MULTI-LEVEL MARKETING

A direct selling organization dispenses and provides its products and services to the consumers without involvement of the contribution of mediators involved in the traditional chain of sale. The model eliminates the intermediaries, it permits the producers to distribute a particular amount to the agents who are independent according to their sales volume.

Direct selling is of two kinds -

Single Level Marketing [SLM]
Multi-Level Marketing [MLM]

BASIC PLAN OF DIRECT SELLING & MULTI-LEVEL MARKETING

The Consumer Protection Act 2019, under Section 2 sub-section 13, provides that:

"direct selling" means marketing, distribution and sale of goods or provision of services through a network of sellers, other than through a permanent retail location.

The Ministry of Consumer Affairs defines direct selling as:

“Direct Selling” means marketing, distribution and sale of goods or providing of services as a part of network of Direct Selling other than under a pyramid scheme[1]

“Network of Direct Selling” means a network of direct sellers at different levels of distribution, who may recruit or introduce or sponsor further levels of direct sellers, who they then support. “Network of direct selling” shall mean any system of distribution or marketing adopted by a direct selling entity to undertake direct selling business and shall include the multi-level marketing method of distribution.[2]

In a Direct Selling company, the producers / manufacturers offer their products and services to their members at a price which is lower than the printed MRP of the product. This offered price is known as distributor price or member price. The retail profit from MRP and member price usually differs from 10-20%. Each direct selling company has their own criteria for calculating the sales volume and commission. For example, the company may decide that on the sale of product worth of Rs. 1000 by a member, the volume produced will be of 700 points. It means that Rs. 100 = 70 points, which will be allotted to the seller. The companies generally offer money back on these points or sales volume made in a month. The amount of cash back is directly proportionate to the sales volume. On attaining a particular cumulative sales volume, a member intensifies his cash back scale.

“Remuneration System” means the system followed by the direct selling entity to compensate the direct seller which illustrates the mode of sharing of incentives, profits and commission, including financial and non-financial benefits, paid by the direct selling entity to the direct sellers, on a monthly or periodic or yearly basis or both, as the case may be.[3]

PREDATORY SELLING STRATEGIES AND RIGHTS OF CONSUMERS

While in a traditional mode of advertising and marketing, the companies aim at attracting customers with the elegance of their products alone, in direct selling the situation can get a bit different. Due to the distributorship plans offered by such companies, the direct sellers tend to focus on spreading their networks, thereby glorifying the benefits of the compensation schemes rather than the quality of the products. As a result, for genuine buyers who are not interested in the company commission plans but on the products alone, do not get proper information regarding the products they purchase. Moreover, the direct sellers often allegedly tend to make false representations of the products to be sold, in order to grow their network and earn greater commissions by initiating more sales.

Now the question that arises is, whether such forcible or pushy selling tactics allegedly involved in direct selling, invokes the rights of the consumers against unfair trade practices or restrictive trade practices or unscrupulous exploitation under the Consumer Protection Act 2019. To understand the rights of the consumers in this regard, some definitions are imperative to be referred–

Restrictive Trade Practices: The Consumer Protection Act 2019 gives a definition of this expression under Section 2 sub-section 41. Discussing it simply, restrictive trade practices are some unethical practices used by companies which tend to impose some undue conditions, costs or restrictions upon the consumers for manipulating the price or delivery of products or services. When the seller retains some goods, in order to deliver it to the consumer at a later time, when the price increases, is a restrictive trade practice. Similarly, any practice which requires a consumer to buy, hire or avail of any goods as a condition precedent for buying, hiring or availing of other goods or service is also included within such restrictive practices.

Unfair Trade Practice: There is an expansive definition of Unfair Trade Practices given by the Consumer Protection Act 2019. Section 2 (47) of the Act says that,

Unfair trade practices means a trade practice which, for the purpose of promoting the sale, use or supply of any goods, adopts any unfair method or unfair or deceptive practice.

Some of such unfair practices include –

Making any statement that
- Gives a false representation that the goods are of a particular standard, quality, quantity, etc.;
- Falsely represents that the goods have some sponsorship, approval, performance, uses, benefits, which, in reality, those goods do not have;
- Makes a false or misleading representation concerning the need for, or usefulness of any such goods;
- Makes any false or misleading warranty, guarantee or promise for replacement or repair of such goods;
Offering spurious goods for sale [“spurious goods" means such goods which are falsely claimed to be genuine];
After selling the goods, refusing to take back or withdraw defective goods and to refund the payment received from the consumers;
Disclosing the personal information of the consumers to any third party illegally; and many others.

Now that the meaning of such unfair and restrictive trade practices is clear, the question remains as to what the consumers can do about it. To answer that, the Consumer Protection Act 2019 says that all consumers have certain rights under the law, like:

the right to be informed about the quality, quantity, potency, purity, standard and price of goods, products or services, as the case may be, so as to protect the consumer against unfair trade practices;
the right to be heard and to be assured that consumer's interests will receive due consideration at appropriate fora;
the right to seek redressal against unfair trade practice or restrictive trade practices or unscrupulous exploitation of consumers; etc.

Therefore, if the consumers believe that they have been subjected to any such restrictive or unfair trade practices by any direct seller, the consumer laws provide adequate redressals, and they can move the appropriate forum against the company or the seller.

RIGHTS OF CONSUMERS AGAINST LOW-QUALITY PRODUCTS

Every consumer has the right to get full and correct information regarding the quality, approvals, purity, standard, etc. of the product he is buying. But, misrepresenting and selling poor quality products to the customers is not a very rare business tactics these days, which can happen either in a traditional company or a direct selling company alike. So, what does a consumer do when he buys a product inferior in quality, and the seller refuses to replace/repair it? The consumer protection laws comes to the rescue.

The Consumer Protection Act 2019 provides that any consumer may make any complaint to seek relief for any goods bought by him, which suffers from one or more defects.

The Act defines a defect as: “any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard which is required to be maintained by or under any law for the time being in force or under any contract, express or implied”.

That means, where the seller has represented and promised that the product is of a certain quality or standard, but later it appears that the product is actually of an inferior quality, the consumer has the option of taking legal recourse under consumer laws.

The law further imposes a liability on the seller and manufactures for any harm caused to the consumers for any defect in the product. Section 2 sub-section 34 defines "product liability" as the responsibility of a product manufacturer or product seller, of any product or service, to compensate for any harm caused to a consumer by such defective product manufactured or sold or by deficiency in services relating thereto;

An aggrieved consumer may file a complaint before the District Commission or State Commission or National Commission for claiming compensation for any harm caused to him owing to such defective product.

FALSE REPRESENTATIONS AND MISLEADING ADVERTISEMENTS OF PRODUCTS

While marketing the products, in direct selling or otherwise, the sellers sometimes speak too highly of the quality and standard of the products that they sale. This might become very attractive for the buyers at the at time, but later can turn out to be false. The consumer laws have now evolved to a great extent to ensure that the companies, including the direct selling companies, do not dupe consumers by any misleading advertisements or false promises and representations.

Consumer Protection Act 2019

With regard to misleading advertisements, the Consumer Protection Act 2019 defines the expression as:

"misleading advertisement" in relation to any product or service, means an advertisement, which—

(i) falsely describes such product or service; or

(ii) gives a false guarantee to, or is likely to mislead the consumers as to the nature, substance, quantity or quality of such product or service; or

(iii) conveys an express or implied representation which, if made by the manufacturer or seller or service provider thereof, would constitute an unfair trade practice; or

(iv) deliberately conceals important information;

The consumer protection laws have now provided for a speedy and effective solution to curb such misleading advertisements and unfair trade practices by sellers and manufacturers, by establishing the Central Consumer Protection Authority. Consumers can file a complaint before this Central Authority in any case of misleading advertisement by any company or seller.

Advertising and Standards Council of India (ASCI)

Apart from the Consumer Laws, the advertisement of products and services in India are greatly regulated by the Advertising Standards Council of India (ASCI). This Council, a self-regulatory body, has laid out a comprehensive guidelines to be followed by all the companies in India, including Direct Selling Companies, with regard to advertisement of their products. The ASCI provides that an advertisement should:

have a Truthful and Honest Representation;
be non-offensive to the public;
not relate to any harmful product or services;
be fair in competition.

The ASCI has also recognized that nowadays promotion of products readily involve the use of Awards, Accolades and Rankings that the company has received. In direct selling business, the sellers often allegedly press upon the awards that their company has received, the goodwill of the seniors (called up-line), and the rankings of the company. But such portray of awards and accolades may be lead the consumers to believe that the brand is a superior one as compared to others.

“Some of the awards and rankings are likely to mislead the consumer by communicating that the product or service is a recognised one, and raise its esteem in the mind of the consumer as evaluated by experts or by a large body of experts, whereas this actually may not be the case.”[4]

For this reasons, ASCI has developed a set of guidelines to be followed by every company, advertiser and seller while promoting or marketing its products. The ASCI has developed its Consumers’ Complaints Council (CCC) for regulating all such unethical advertising standards by companies. The CCC shall act against any company practising such advertising strategies on any of the following type of complaints:

Complaints from General Public / Consumers;
Complaints from Non-Public, such as Government Regulators, Consumer Groups, Industry Groups;
Intra Industry Complaints
Suo Moto Complaints;

Thus, for any misleading advertisement of products or services by any direct seller, the aggrieved consumers can either move the concerned Consumer Commission under the Consumer Protection Act 2019, or may file a complaint with the Advertising and Standard Council of India (ASCI)

Government Guidelines On Direct Selling - Duties And Obligations Of Direct Sellers

Although Direct Selling companies have significant similarities with all other forms of companies and differ mainly with respect to their business model, there is no separate legislation guiding their functions. Direct Selling companies are surely subject to the Company Act 2013 and their associated rules and regulations, but there has always been a void in terms of Government’s directions over their functioning. This was until 2016, when the Government of India through its Ministry of Consumer Affairs, Food and Public Distribution, brought about a set of model framework of guidelines for regulating the Direct Selling businesses in India.[5] This model framework has been adopted by various states and notified as the Direct Selling Guidelines for those states.

The Guidelines provide for a number of duties and obligations on the part of a direct seller, in respect to the promotion, advertisement and sale of the products. Some of the duties of a direct seller are:

A Direct Seller shall always carry their Identity Card while meeting any prospect / consumer;
The Seller shall, at the very outset of such meeting, give proper explanation and true and correct representation and information to the consumer / prospect about themselves, their company (direct selling entity), their nature of goods sold, and the purpose of solicitation. The Seller shall also explain clearly about the goods and services, prices, credit terms, terms of payment, return policies, terms of guarantee, after-sales service;
A direct seller shall not use any misleading, deceptive and / or unfair trade practices, or any misleading, false, deceptive, and / or unfair recruiting practices. He shall not misrepresent actual or potential sales or earnings and advantages of Direct Selling to any consumer / prospect;
He shall not make any factual representation to a prospect that cannot be verified or make any promise that cannot be fulfilled. He should not present any advantages of Direct Selling to any prospective direct seller in a false and / or a deceptive manner; etc.
There shall be a cooling-off period or buy-back guarantee of 30 days set out by every direct selling entity within which the consumer may return the products purchased by them and get return of money paid. The direct sellers at the very beginning shall inform such period to the consumer.

The guidelines provide for a number of other duties as well. The Guidelines require that every Direct Selling entity shall constitute a Grievance Redressal Committee for dealing with consumer grievances. It further lays down that the direct selling businesses will be guided by the Consumer Protection Act. Therefore, if any consumer is of the opinion that any direct seller or direct selling company has committed a breach of any such obligations / duties, they may have a recourse under the Consumer Protection Laws.

Apart from these Government laid guidelines, the Indian Direct Selling Association (IDSA), a self-regulatory body dealing with direct selling businesses, have also laid down several measures and duties in similar terms. Among other duties, the IDSA Code of ethics provide that the direct sellers shall provide the consumers with a reasonable buy-back period permitting the consumer to return for or refund any goods already delivered. In case of any direct seller or direct selling entity breaches any such duties or obligations, the IDSA’s Code Administrators can be contacted for resolving the issue.

GRIEVANCE REDRESSAL AND CONSUMER COMPLAINTS PROCEDURE

In spite of the absence of any specific legislation relating to the direct selling business, the Indian legal system provides for enough ammunition to tackle any kind of grievance of a consumer arising out of a direct selling transaction. The Central Government issued Model Framework for Guidelines on Direct Selling, which has been adopted, with minor to no modifications, by various States as the Direct Selling Guidelines, The Consumer Protection Act, and the Code of Ethics of the Indian Direct Selling Association have created a combined structure for keeping the direct selling industry in check and giving redressal to aggrieved consumers.

The procedure for enforcement of the Codes and Guidelines may be described as below.

Central and State Guidelines on Direct Selling:

Under the Central and the State Guidelines, all Direct Selling entities are required to have a Grievance Redressal Committee in place for addressing consumer grievances. The Direct Selling entities in a state shall be under the supervision of the Ministry of Consumer Affairs of the Central Government and of the State Government. The step-wise procedure for setting up any grievance by any consumer, in case any direct seller or direct selling entity violates / commits breach of any of the State Guidelines, is as follows -

Every Direct Selling Entity shall have a Grievance Redressal Committee in place, comprising of at least 3 members.
All direct selling entity shall maintain a well-laid-out website, wherein a space for registering consumer complaints should be clearly marked, so that consumers can file any complaint through the website. All complaints received over phone, email, website, post and walk-in should have a complaint number for tracing and tracking the complaint and record time taken for redressal. All consumer complaints so received shall be addressed within 45 days.
Complaints may be made by any member of the General Public against a direct seller or any member of the direct selling entity;
In case a direct selling entity or a direct seller does not comply with any of the guidelines, the aggrieved consumer may also file a complaint with the Nodal Officer. For the State of West Bengal, the nodal officer for dealing with direct selling industry shall be the Joint Secretary, Special Secretary or Additional Secretary to the Department of Consumer Affairs of the State.
On receiving any complaint of violation of the guidelines by any direct seller or direct selling company, the nodal officer may inspect, search or require any person to provide, as may be required, and shall thereafter submit an inquiry report to the SDM. The SDM shall then pass any order as he deem necessary. If any person is aggrieved by any order of the SDM, appeal can be preferred before the District Magistrate or Municipal Commissioner within 15 days of such order.

The Guidelines also state that all direct selling companies and the direct sellers shall be guided by the provisions of the Consumer Protection Act. Hence, any consumer aggrieved with any direct seller or direct selling company may also approach the Consumer Commissions for relief.

IDSA Code of Ethics:

The Indian Direct Selling Association (IDSA) has its own Code of Ethics, which its member companies should follow for carrying out a direct selling business in the Country. The Code lays down certain guidelines, rules and obligations on part of the direct selling companies, which are in line with the Central and State Guidelines for Direct Selling. In case any direct seller or direct selling entity violates any provision of this Code, any aggrieved consumer may proceed in the following ways to get redressal -

The IDSA maintains that all its member companies should strictly adhere to the provisions of the Code. In case of any violation of any provision by the company or direct seller, the company itself shall make every effort to satisfy the complainant.
IDSA states that first, the consumers shall make a compliant in writing to the direct selling company by giving all relevant details like - date and details of the incident, parties involved, the particular code or provision which has been violated, and what relief the consumer expects, etc.
The IDSA Code provides that all of its member direct selling entities shall have a Code Compliance Officer / Customer Service Officer.
Thereafter, if the consumer is not satisfied with the action of the company, he can take the matter up with the IDSA designated Code Administrator and the Secretary General of IDSA, but making a written complaint giving all the relevant details.
The IDSA Code Administrator has her offices at West Mumbai, while the Co-Code Administrator has his offices in New Delhi. The Administrators can be contracted via email or phone as well.

Consumer Protection Act 2019

The Consumer Protection Act 2019 provides for a three-fold mechanism in order to ensure efficient and smooth enforcement of consumers’ rights and to prohibit unethical business tactics by companies and organisations.

CONSUMER PROTECTION COUNCIL - The advisory role is given to the Consumer Protection Council at Central, State and District Level. They are tasked with providing advice and suggestions with regard to the promotion and protection of Consumers’ rights.

CENTRAL CONSUMER PROTECTION AUTHORITY - Then there are the Central Consumer Protection Authority. This Central Authority has the prime function of protecting, promoting and enforcing the rights of consumers and class of consumers, preventing unfair trade practises, and ensuring that no misleading or false advertisement is made in relation to any goods or services. Such Authority has also been given an Investigation Wing to be headed by a Director-General, which shall carry on all such investigations and inquiries as may be relevant to ensure proper functioning of the Authority.

The procedure to be followed in filing of complaints with the Central Consumer Protection Authority, and its redressal by such Authority shall be as below:

Any person or consumer or class of consumer may make a Complaint relating to violation of consumer rights or unfair trade practices or false or misleading advertisements which are prejudicial to the interests of consumers as a class, to the Central Authority directly, or to a Commissioner of a regional office, or to the District Collector.
The Complaint may be forwarded to the Authority, Commissioner, or District Collector, either in writing or by electronic means.
On receiving the Complaint, the Central Authority may cause a preliminary enquiry to find out if there is a prima facie case of violation of consumers’ rights or unfair trade practices or any unfair or misleading trade practices.
On the basis of such enquiry, if the Central Authority is satisfied that there is a prima facie case for proceeding, it shall cause investigation to be made either by the Investigating Wing or by the District Collector.
The District Collector may, on receiving any such complaint either directly from the complainant or from the Central Authority, inquire into or investigate into it on matters relating to violation of consumers’ rights or unfair trade practices or misleading advertisements within his jurisdiction, and shall thereafter send a report to the Central Authority.
On the basis of such report, received either from the Investigating Wing or District Collector, the Central Authority may either refer the matter to any concerned Regulator, or may order recall of the goods or withdrawal of the services, reimbursement of prices of the goods to the purchasers, discontinuance of practices which are unfair and prejudicial to consumers’ interests.
The Authority may also impose penalty upon such seller, manufacturer, advertiser or trader who are involved in such unfair trade practices or misleading advertisements.

CONSUMER DISPUTE REDRESSAL COMMISSION - The Consumer Dispute Redressal Commissions are the ultimate forums for redressal of any kind of consumer disputes. Such Commissions are established in District, State and National levels.

The District Consumer Dispute Redressal Commission [DCDRC], known as District Commission, deals with complaints relating to costs and compensation less than One Crore Rupees.
The State Consumer Dispute Redressal Commission [SCDRC], known as State Commission, deals with grievances relating to costs and compensation higher than One Crore Rupees but does not exceed Ten Crore Rupees.
The National Consumer Dispute Redressal Commission [NCDRC], known as State Commission, deals with complaints relating to costs and compensation higher than Ten Crore Rupees.

The Procedure for filing of Consumer Complaints has been dealt with in another Article. A Complaint may be filed by both physical and electronic means. Every such complaint shall be accompanied by the prescribed fees.

CONCLUSION

In India, the Direct Selling industry is not very well regulated due to the lack of expansive legislations. However, with the enactment of the Consumer Protection Act 2019, as well as the Central Government and State Government guidelines being in place, the situation is up for a change. Such supervisory legislation in this industry is of extreme importance, because the Direct Selling industry is alleged to be one of the most misconceived one. With the huge spread of the direct selling business in India, the possibility of the ethics being diminished, is great. However, now that the Consumer Protection Laws are well in place, the consumers of these companies are in for some relief.

References: [1] Clause 1 sub-clause 6 of ‘Advisory to State Governments / Union Territories: Model Framework for Guidelines on Direct Selling’ issued by Ministry of Consumer Affairs, Government of India. [2] Clause 1 sub-clause 5 of ‘Advisory to State Governments / Union Territories: Model Framework for Guidelines on Direct Selling’ issued by Ministry of Consumer Affairs, Government of India. [3] Clause 1 sub-clause 13 of ‘Advisory to State Governments / Union Territories: Model Framework for Guidelines on Direct Selling’ issued by Ministry of Consumer Affairs, Government of India. [4] ASCI Code for Self Regulation in Advertising Content [5] https://consumeraffairs.nic.in/sites/default/files/file-uploads/direct-selling/Direct%20Selling%20Guidelines%20Final%20_0.pdf

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Lawfield Associates is a nascent firm of lawyers, and is based at Kolkata, India. The firm regularly files and defends consumer complaints before the District, State and National Consumer Dispute Redressal Commissions. The services of the firm include advising and assisting clients, drafting Complaints/applications for complainants or written objection, drafting evidences and conducting the full trial of the cases.