Legislature(2001 - 2002)
02/25/2002 03:20 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 393-SALES OF BUSINESS OPPORTUNITIES CHAIR MURKOWSKI announced the next order of business, HOUSE BILL NO. 393, "An Act relating to unfair and deceptive trade practices and to the sale of business opportunities; amending Rules 4 and 73, Alaska Rules of Civil Procedure; and providing for an effective date." Number 127 REPRESENTATIVE GARY STEVENS, Alaska State Legislature, testified as the sponsor of HB 393. He explained that HB 393 addresses business opportunities, commonly referred to as "biz opps," which are work-at-home schemes. Unfortunately, some people believe these [schemes], and thus are ripped off. This is a consumer-protection issue that would be best prevented. Representative Stevens referred to a Red Book Magazine article entitled "So you want to work at home?" This article reviews the scams related to work-at-home schemes, he noted. REPRESENTATIVE STEVENS explained that HB 393 creates a new, comprehensive statute that regulates the sale of business opportunities - prepackaged small business deals that target Alaska. About half of the states are attempting to regulate these business opportunities. [HB 393] requires that these businesses register with the state, which these business won't want to do [otherwise] because it allows the state to know who and where the business is. This legislation also requires that the business disclose information to the buyers, and an escrow account must be used in order to assure delivery of the products. Furthermore, it requires a 30-day right of cancellation for the buyer. With these measures, violators will be subject to civil and criminal penalties. Representative Stevens related his belief that a legitimate business won't object to these requirements. Number 198 CHAIR MURKOWSKI asked whether specific incidents in Alaska had precipitated HB 393. REPRESENTATIVE STEVENS replied yes and deferred to the Department of Law for examples. He mentioned that there are exemptions for businesses such as Amway or Avon. Furthermore, this legislation won't impact those legitimate businesses. REPRESENTATIVE CRAWFORD asked what this $75,000 surety bond would cost the individual or company. REPRESENTATIVE STEVENS deferred to the Department of Law. Number 210 JULIA COSTER, Assistant Attorney General, Fair Business Practices Section, Civil Division (Anchorage), Department of Law, testified via teleconference. She began by providing the committee with examples of complaints. She then explained that HB 393 is a comprehensive regulatory scheme that requires the following: the seller of the business opportunity must register with the state through the Department of Law, which is similar to the statute relating to telemarketers and charitable organizations; must disclose certain information through the registration form; and must provide to the potential provider - ten days in advance of the contract closure - a disclosure statement that includes all the terms and conditions of the contract. MS. COSTER continued explaining HB 393. It requires that the seller post a bond in the amount of $75,000. It also requires a 30-day right of cancellation of the contract. If the seller requires more than 20 percent down, then the seller has to establish an escrow account; thus anything over the 20 percent is placed in the escrow account until the buyer provides notice that he/she has received the products. MS. COSTER concluded by announcing [the department's] strong support of HB 393, which it views as discouraging fraudulent sellers from trying to do business in the state while also providing an important enforcement tool. Number 312 CHAIR MURKOWSKI noted that the committee packet includes a letter [an e-mail from John Hesse dated February 13, 2002] from the Direct Selling Association (DSA). She asked Ms. Coster to address that. MS. COSTER related her understanding that DSA supports HB 393. However, HB 393 says that businesses costing less than $200 to purchase are exempt from this legislation. The suggestion of DSA is to increase that exemption to $500, which is the limit in many states; she mentioned the FTC [Federal Trade Commission] franchise rule. Ms. Coster urged the committee to maintain the $200 limit, however. MS. COSTER explained that many states with a $200 limit were contacted regarding the $200-versus-$500 limit; those states recommended maintaining the $200 limit because without it, the state wouldn't have the necessary enforcement authority to go after those businesses under $500 - quite a few businesses. Many states have experienced that businesses are priced just below $500, in order to avoid the $500 limit. Ms. Coster again urged the committee to maintain the $200 limit. MS. COSTER also pointed out that DSA represents direct sellers, as opposed to direct business opportunities. She specified that DSA represents businesses such as Amway and Mary Kay cosmetics, which wouldn't need to be concerned with the requirements of this legislation due to the exemption under Section 5. Number 361 CHAIR MURKOWSKI asked what is done now in regard to enforcement. MS. COSTER answered that currently the Consumer Protection Act prohibits unfair and deceptive trade practices. If a business has represented that it would provide goods or services, but hasn't done so - and if there is a pattern of that - then it would be considered an unfair deceptive trade practice. However, many are "fly-by-night" operations. It is more difficult to obtain refunds after the fact than to stop these businesses from selling their product in the state in the first place. If they fail to register, when their advertisement is in the newspaper [the department] can tell the business to cease and desist, and can obtain an injunction to stop the business from advertising. Without the registration requirements [in HB 393], however, the [department] has to wait until the business engages in a conduct in which [the product] hasn't been provided. Going in after the fact is not effective. Number 382 CHAIR MURKOWSKI asked to whom this applies. If there were an advertisement in USA Today, for example, the business wouldn't fall under the requirements for the offer. However, since an Alaskan could purchase the newspaper and see the advertisement and could have the product shipped to Alaska, then that business would fall under HB 393. MS. COSTER replied in the affirmative. She pointed out that proposed AS 45.66.070(3) [page 4, lines 23-24] says it applies to a buyer domiciled in Alaska [if] the business opportunity is or will be operated in Alaska. Ms. Coster clarified that [subsection (3) also] says the buyer has to be domiciled in Alaska. Number 402 CHAIR MURKOWSKI turned to the fiscal note, which seems to anticipate ten to twelve business opportunities registering with the state. She asked who these will be. MS. COSTER expressed interest in finding out who these will be as well. She noted that there are legitimate business opportunities, which will probably register. She reported that most states have found there are far more business opportunities out there than do register. Most states have ten to twenty business opportunities that register a year. The fact that there are business opportunities operating without registering provides [the department] the ability to pursue them through enforcement. Number 416 CHAIR MURKOWSKI expressed concern with the exemption for Amway, Mary Kay, and Avon, which she understood Ms. Coster to indicate would fall under AS 45.66.220(5). However, Chair Murkowski related her belief that the purpose of Amway is to resell the product. MS. COSTER related her understanding that many of the Direct Selling Association's businesses such as Amway work so that there isn't a large upfront investment by the person who does the selling, which is different from many business opportunities. Direct sellers generally require the purchase of a demonstration kit with samples for sales demonstration. Furthermore, the seller of Amway [products] generally purchases the product inventory at wholesale and resells it for a retail price. Therefore, Amway is exempt as it relates to AS 45.66.220(5). MS. COSTER remarked that no business, whether a direct seller or not, is allowed to make misrepresentations in regard to earnings, the type of products being sold, and so forth. Those sorts of things would be covered under the Consumer Protection Act. This legislation also includes prohibitions relating to misrepresentations regarding earnings. CHAIR MURKOWSKI discussed an Avon advertisement in the paper that guaranteed a certain amount of earnings. She asked if Avon would not [fall under this] by guaranteeing a certain amount of earnings. MS. COSTER said she hesitated to make any comments since she hadn't seen the advertisement. Number 464 CHAIR MURKOWSKI directed attention to page 8 regarding the cancellation of the contract. She said she understood that section to essentially allow a buyer to cancel the contract at any time for the reasons outlined in the section, one of which is if any untrue, misleading, incomplete, or deceptive statements are made. She asked whether [cancellation] relates to the sale of the business opportunity or the product itself. MS. COSTER answered that it would be difficult to distinguish between the two. She said she didn't know that it was restricted in any way. Number 490 REPRESENTATIVE HALCRO referred to page 9, lines 1-6, regarding notice of cancellation. He asked if the buyer is entitled to all payments once notice of cancellation is given. MS. COSTER answered that it would be a complete refund of all monies. Number 500 REPRESENTATIVE MEYER inquired as to how many states have a law such as HB 393. He also asked about Internet advertisements. MS. COSTER replied that 22-23 states have such a law. Internet advertisements would be treated like any other advertisement. If the advertisement makes claims that can't be substantiated, it would constitute an unfair deceptive trade practice under state and federal law. However, there could be a question in regard to jurisdiction; thus she indicated that a purchase would probably have to be made in order to establish jurisdiction. REPRESENTATIVE MEYER turned to the fiscal note and related his understanding that this [would be] a class C felony. He asked if it costs less to prepare for a class A misdemeanor versus a class C felony. In that case, he asked, wouldn't it be better to pursue these violations as a class A misdemeanor? MS. COSTER explained that the fiscal note is in regard to the cost to the department regarding the civil enforcement aspect. This legislation makes a violation of the statute a violation of the Consumer Protection Act, which provides some civil enforcement. There are also some costs associated with the requirements for registration forms and their processing. In regard to the criminal aspect, she deferred to someone from the criminal section. REPRESENTATIVE MEYER said he would hold the question for the bill's hearing in the House Judiciary Standing Committee. Number 542 CHAIR MURKOWSKI returned to the notice of cancellation and pointed out that the cancellation is effective - if it's done by mail - when deposited in the mail. However, page 9, subsection (e), requires that the seller refund the buyer within 15 days of the notice of cancellation. She expressed concern with regard to the timing. MS. COSTER replied that a buyer who receives a refund a few days late probably won't be too upset. She explained that basically [subsection (e)] establishes a timing mechanism so that the buyer and the department have some parameters. Usually, a grace period would be allowed. CHAIR MURKOWSKI restated Representative Crawford's earlier question regarding the cost of a surety bond in the amount of $75,000. MS. COSTER answered that on average, it would cost approximately $20 for every thousand dollars of bond being posted. Therefore, a $75,000 bond for a person with good credit would probably cost about $1,500. Number 570 JOHN W. HESSE, II, Senior Attorney and Director, Government Relations, Direct Selling Association (DSA), testified via teleconference. Mr. Hesse informed the committee that the direct selling industry is a global industry that generates more than $83 billion in worldwide sales. Sales totaled $25.57 billion in the United States last year. He estimated that there are approximately 30,000 salespeople in Alaska; on average, each will generate about $2,000 in sales. Therefore, the market in Alaska probably amounts to about $18 million. MR. HESSE explained that the association's issue with HB 393 is a technical legal issue. The association has supported regulation of business opportunities for 20-30 years. TAPE 02-24, SIDE B Number 001 MR. HESSE agreed that 23 other states regulate business opportunities. However, 27 states don't regulate business opportunities, and [those states] primarily rely on the leadership of the FTC. Mr. Hesse emphasized his belief that there can be clear distinctions made between business opportunities and direct selling businesses. These statutes provide a mechanism to make that distinction. However, the $200 threshold is problematic. MR. HESSE informed the committee that the association has experienced confusion with the threshold. Therefore, the association supports a higher threshold because the North American Association of Securities Administrators (NAASA) Model Act of 1984 and the Commissioners on Uniform State Law contained a $500 threshold, which is a larger figure when indexed backwards for inflation. Most states with a lower threshold will say that it should be higher [when reviewing the figures in terms of 2002 dollars]. MR. HESSE echoed Ms. Coster's testimony that comparatively it costs little money to join a direct selling business, and thus that distinction can be drawn. He informed the committee that the association's sellers are mostly women - 73 percent in 2001 - who have other, significant family responsibilities. Mr. Hesse said, "Our goal really is to make sure that there are not barriers erected that limit the opportunities that ... are available to these folks through direct selling." MR. HESSE specified that the association would like the threshold to be raised to $500. The association also wants that threshold to be moved to the definition of a business opportunity, because it's much more difficult to change the definition section rather than the exemption section of statute. In conclusion, Mr. Hesse reiterated that 27 other states don't regulate this area, and of the 23 states that do, only 3 have a threshold as low as $200. Although preferring that the threshold be changed to $500, the association is willing to work with the department to develop a number between $200 and $500; however, Mr. Hesse conveyed his understanding that the department has been unwilling to engage in such a discussion. Number 061 CHAIR MURKOWSKI surmised that the association's preference is that Alaska not adopt legislation to regulate these business opportunities, and that the FTC can perform the oversight. However, she'd understood the department to say it is difficult to get the operators of these scam businesses. Therefore, she asked how beneficial it would be to rely on the federal regulations. MR. HESSE answered that the association is neutral regarding whether Alaska should adopt statutes to regulate business opportunities. He expressed the need to contact the 27 states that don't regulate business opportunities and ask why they don't. The question is not really whether Alaska regulates business opportunities, but rather how it is done, because [direct sellers] don't want to be included with some of the "fly-by-night" operations. Therefore, the association would be supportive of Alaska's regulating this area. Number 105 PAM LaBOLLE, President, Alaska State Chamber of Commerce, testified in support of HB 393, which provides protection from fraudulent schemes. Ms. LaBolle expressed concern with regard to the threshold at which business opportunities have to register. She related her understanding that the fee for registration would be around $150; however, she'd misunderstood that the bond would cost $50 rather than $1,500. Therefore, she questioned why would anyone spend $200 for a business opportunity. She suggested a higher threshold would be more appropriate. MS. LaBOLLE expressed confusion with regard to the surety bond and pondered whether the registration and the surety bond would be a one-time fee under which there could be several business opportunities. She related her understanding that 2 states have the $200 threshold, 7 states have a threshold between $250 and $300, and 14 states have a threshold higher than $300. Ms. LaBolle said there is no desire to place a chilling effect on any legitimate business opportunities. She added that the standard should be higher than what it will cost in the regulatory effort. Number 163 DOUG LETCH, Staff to Representative Gary Stevens, Alaska State Legislature, came forward to answer questions on behalf of Representative Stevens, sponsor. He related his belief that the $250 threshold may be a more acceptable amount for those in the business community. He related that Representative Stevens is comfortable with a $250 threshold. He noted that two states with a $250 threshold had started at the $500 threshold but reduced it. CHAIR MURKOWSKI highlighted the dilemma: there are small, legitimate operators such as Amway [distributors] who won't go the extra mile to obtain a surety bond and thus will be operating in violation. However, these aren't the offenders [HB 393] intends to address. Chair Murkowski voiced her desire that HB 393 not have a chilling effect on the legitimate operators. MR. LETCH offered his belief that the exemption in HB 393 covers legitimate businesses such as Amway, Avon, and Mary Kay. CHAIR MURKOWSKI asked why there [would be concern] over the amount of the threshold if the exemption covers them. The exemption on page 12, line 28, refers to sales-demonstration equipment and has nothing to do with a dollar amount. MS. COSTER pointed out that a number of exemptions are listed; one refers to business opportunities for which the buyer pays less than $200. Such transactions won't be covered by HB 393. Another exemption, under Section 3, paragraph (5), refers to the sale of a product not for resale. This exemption sets no price limit, but serves an entirely different purpose. Part of this exemption refers to product inventory that is sold to the buyer at a wholesale price. She related that this exemption addresses direct [sellers] such as Amway in that Amway [distributors] purchase products at wholesale and sell them at retail. Number 240 CHAIR MURKOWSKI asked, then, why Mr. Hesse wants a higher threshold, when typically [those businesses would] be exempt under Section 3, paragraph (5). MR. HESSE explained that basically [DSA] doesn't want to meet the legal definition of a business opportunity. Therefore, the association desires that a business opportunity be defined with a dollar threshold so that the majority of the membership doesn't meet the definition. CHAIR MURKOWSKI related her understanding that the desire is to further define business opportunity in order to not include those with an initial fee in excess of $500. However, she asked, why would it be necessary to change it in the exemption section? MR. HESSE answered that if the threshold were increased, then it could be deleted from the exemption section. Mr. Hesse specified that the association wishes to have a very precise definition of business opportunity that excludes his members. Number 275 REPRESENTATIVE HAYES surmised, then, that the definition from DSA [included in the letter dated February 21, 2002, from Alticor Inc.] would have to be incorporated into HB 393 in order to satisfy this issue. CHAIR MURKOWSKI agreed, specifying her understanding that DSA wants the definition of a business opportunity to include a higher threshold. Number 285 MR. LETCH related his understanding that DSA wouldn't represent a business opportunity necessarily, because those selling Amway, for instance, wouldn't purchase inventory until sales have been made. He asked if that was correct. MR. HESSE clarified that it has to do with the amount the [buyer] purchases. There are members of the sales force who purchase significant amounts of inventory for resale. Therefore, the question becomes whether the aforementioned can be defined as a business opportunity. The desire is to ensure that those purchasing low-cost consumables have enough room to make their inventory purchases without falling under the definition of a business opportunity. Number 312 CHAIR MURKOWSKI asked Ms. Coster where the problems are occurring. Are people being scammed for lesser items or more expensive items? MS. COSTER replied that the problems span from $35 to $469 to tens of thousands of dollars. Many cases fall under the $500 level, which is why there is the desire to keep the threshold as low as possible. Number 333 MR. HESSE remarked that the question is in regard to the level of dollar protection that should be afforded the consumer in terms of the consumers' risk of loss versus the cost to operate a legitimate business. Based on DSA's experience, the $200 threshold is too low. Number 359 CHAIR MURKOWSKI stated that she isn't entirely satisfied with the definition of a business opportunity, and therefore she expressed the need to meet with the sponsor and the Department of Law in order to put to rest the concerns of these legitimate smaller operators. She remarked that she didn't want to discourage the relatively small, legitimate operators. CHAIR MURKOWSKI announced that HB 393 would be held over.
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