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Staying Competitive and Compliant

Podcast episode 1

Article by: Kenny Rawlins
Spencer Reese
March 31, 2017

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Full Transcript

You’re listening to the premier episode of the MLM.com Podcast. I’m your host Kenny Rawlins. What is the MLM.com podcast? Well, for the better part of the last 20 years, MLM.com has focused on bringing industry leaders relevant information on issues facing our industry. This podcast is the latest extension of that goal. Each episode of the MLM.com podcast, we’ll bring on a different guest to discuss topics relevant to the industry.

In this episode, I discuss regulatory issues with Spencer Reese, from Reese, Poyfair, and Richards. Spencer is an attorney with over 20 years’ experience in the direct selling industry. You can learn more about Spencer at the mlmlaw.com. With the recent Herbalife settlement and the actions against Vemma and their settlement, regulatory issues have been a hot topic of conversation in the industry. The first issue we tackle is how a direct selling company should handle field training. As many of you are aware, the FTC’s settlement with Herbalife calls for very strict training requirements for distributors. However, I’ve heard some express concern that such training could jeopardize the independent contractor status of distributors. This has been one of the issues raised in cases against Uber and others. I wanted to get Spencer’s take on how concerned direct sales companies should be. We’re going to join mine and Spencer’s conversation in progress.

Kenny: If people only react to the FTC, which is certainly what’s getting the most buzz, it sounds like you can get yourself in trouble in other ways.

Spencer: And that’s exactly right. And so what it comes down to is you have to balance the risks. Which is the riskier situation? Not providing training? In which case you risk running afoul of the FTC’s objectives and desires and how they want the industry of direct sellers to manage themselves. Or do you provide the training to satisfy the FTC, and then run the risk of jeopardizing the independent contractor relationship by creating an employment relationship. And I have opinions on that. I frankly think that it’s better—it’s less risky—to create and have training. Not only does that satisfy the FTC’s concerns, but frankly it can make reps that much better and more effective at what they do. And if the training is good, then you can certainly add not only compliance training, but sales training, and—hey, that’s a good thing. Because my opinion is our sales people are taught very well how to recruit, they’re not taught how to sell. So that’s something that needs to be fixed.

Kenny: And I do think… you look at some of the things that have almost gone viral. Last year there was the Today show that did some undercover reporting, where they—basically, I think it was a Vemma distributor who talked only about the opportunity. And to that point, we need people who better understand how to sell the product, and how to talk about the fact that the product is the heart of the good companies. And I do think that there are some extraordinary companies within the direct selling space that provide great products. There are products that I like to use, that come from companies that are in our space, but we get so fixated on talking about the business opportunities sometimes, that I think that that training is extremely valuable.

Spencer: Yeah. Without question. Without question. Not only would it satisfy the FTC if it’s done correctly, but it would make our sales force more effective sales people. So that outweighs the risk of the downside on the independent contractor questor. You must understand that an independent contractor/employment analysis is a multifaceted analysis. There’s a number of pieces… there’s a number of considerations that go into the mix. And whether or not training is required, is just one of the factors that are subject to analysis. It’s one factor that’s considered. You can have, say, half a dozen factors weigh in favor or employment, you can have ten factors weigh in favor of independent contractors. There’s no one… Well, seldom is there just one factor that’s considered. The overall concern is, does the principal—that is the company—reserve the right to control how the individual worker conducts their business. That’s the overarching consideration. But how do you figure that out? Well, you consider all these other different factors, of which one of the factors is the employee/independent contractor required to take employer/principal training.

Kenny: That actually eases my mind a little bit—hearing the way that you’ve talked about it. That it isn’t—like you say—it’s not just one factor, it’s a factor in multiple things. And I do think that training can go a long way, and especially with the technology that we have today, and some of the ways that the home offices can reach out and really help these representatives get off on the right foot. It doesn’t serve anybody’s interests to have people get involved in an opportunity who didn’t know what they were getting involved in, and end up disenfranchised with the whole model. So I agree with you, there.

Spencer: We’re on the same sheet there, Kenny.

Kenny: One of the things that I wanted to get your takeaway from, having known you for all these years, I’ve heard you preach a lot on these things that now are finally getting some of the attention they needed. I’m curious what you think are the number-one takeaways from the past, really, two years where we’ve seen increased regulation.

Spencer: Sure. We’ve given that a lot of consideration. And really, we look at the Vemma and Herbalife settlement orders, and a lot of people think they’re just as different as night and day. But they’re not. Just like Commissioner Ramirez’s remarks at the DSA, there are common themes that run through the Herbalife and Vemma consent orders, and those common themes can be traced back—some of them, anyway—to 1996 and the Omnitrition case. And they also came out in the FTC’s 2004 advisory opinion to DSA. And so we have to ask ourselves, “What are those common themes?” Because we’ve seen the FTC exercise them in the last two years, in Vemma andd Herbalife and Burnlounge. But the handwriting’s been on the wall for many, many years. So those common themes… the first two aren’t going to surprise nobody. Income and lifestyle claims, we’ve got to get those under control. That’s only been an issue for 75 years now, so there’s no big shock there. The next one you and I just spoke about, and that is training. The FTC is very much in favor, and then requires… and I am going to include within the umbrella of training, compliance monitoring and enforcement.

Kenny: Yeah, absolutely.

Spencer: So again, those two are not surprising in the least. They’ve been around forever. The second two common themes, or principles, that we see underlying all the recent FTC activity. One is—and I classify that as they are against and trying to prohibit inventory loading. Now, a lot of people say “inventory loading? What are you talking about? We don’t require people to buy lots of merchandise or load them up with inventory.” That’s not what inventory loading is anymore. See, that’s the problem. People misunderstand what inventory loading is. Everybody is in the old-school mindset of inventory loading occurring when companies foist large amounts of merchandise on people. Well, that’s what it used to be. Not anymore. This comes back from the Omnitrition case back in 1996. Inventory loading now—there’s two definitions. The old-school definition still applies, but the new school definition—and that’s the one that the FTC is really harping on now—the new school definition is that inventory loading occurs when distributors or reps make minimum purchases necessary to qualify for recruitment-based bonuses without reselling the merchandise. That’s the definition that came out of the Omnitrition case in 1996. But what that mean? And this is exactly what we saw reflected in the 2004 advisory opinion. It’s not a question of quantity of merchandise, it’s the question of, “Why are reps buying?” What is the motive for purchase? If the motive for purchase is to qualify for compensation, and they don’t subsequently resell the merchandise, then that’s inventory loading. Well, how does that impact us now? Well, this is exactly where the FTC is, this is the exact issue that they’re focusing on. And that is, the compensation plans are designed so that people have to do a minimum PV quota every month—100, 200 PV to active, whatever the case may be. Those purchases—because the reps are making those purchases primarily to qualify for compensation, rather than primarily based on market demand for the products, they are therefore inventory loading. Unless, they resell the merchandise, which, of course, nobody does. Or very few people do.

Kenny: I appreciate the way you’ve explained that because that’s by far one of the best definitions that I’ve heard or explanations of it. And it’s interesting to view the Herbalife settlement in that light because you see them trying to regulate how you define that, right? In the sense that—especially coming from my background in thinking about how you would program a compensation plan… No matter how much somebody buys, you can’t commission on it until you’ve received verification that it’s been resold, up to a certain amount of product which is considered an appropriate amount for personal use. So you look at that and you say, “Yeah, anybody who’s trying to buy their qualification at the end of the month, and now has that tool taken away from them, because if it’s over X amount of PV, you can’t commission on it until you receive verification that it’s been resold,” which is a fascinating direction. And I know there are mixed emotions about that direction, but it is fascinating. And like you said, so many people look at inventory loading strictly as the old joke of, “Send me the dimensions of your garage, and I’ll send you the product,” which is no longer the case.

Spencer: Yeah, and it’s interesting. Because, well, in Herbalife, understand Herbalife was a legacy or an old school comp plan. To access all of the primary bonuses under the plan, people would come in at the Supervisor level which was a 2100 PV purchase. So that was old-school inventory loading, and so we saw that that was addressed in their consent order. But they also had an ongoing maintenance requirement, and that’s the new definition of inventory loading. So we see both of those reflected in that Herbalife settlement. We don’t necessarily… we only see the new school version addressed in the Vemma settlement because they didn’t have a big front-end purchase like Herbalife did in their comp plan. Even so, even just any plan… how common is it to have a 100 or 200 PV quota per month to be active?

Kenny: Yeah.

Spencer: It’s practically universal.

Kenny: Yeah. Yeah.

Spencer: The FTC’s position is that if that is how your plan is structured, then you are inventory loading because from their perspective, reps are purchasing the products every month primarily to qualify for compensation, rather than because they’re acting as bonafide ultimate users or end consumers. They assume that the motive is financial. And frankly—between you and me—I think in most cases they’re correct.

Kenny: Right. And by making it required… now it becomes very difficult to argue that it’s a market demand when you’ve required it from a compensation level. So do you think—

Spencer: And you have to understand there’s required in fact and required in practice. We have comp plans that, “You must personally purchase 200 PV every month.” That’s a minority. I don’t see a lot of that; I do see some of it. But the other is, you can qualify… You have to generate at least 200 PV. You can do that either through personal purchases or through retail. Now, the percentage of people that actually sell 200 PV to retail customers, or generate 200 PV in retail customer orders, is extremely small. Less than a percent, normally. So the tacit understanding, and the requirement in practice, if not in fact, is that they personally purchase their 200 PV. So even if it’s not required on paper, it’s required in practice.

Kenny: Yeah. And so what would your recommendation be or what do you think we’ll see the industry go to? No personal volume requirements?

Spencer: One of two things. Either no PV quota, or a PV quota that is tied to retail customer purchases. And that’s the… I said that there were four common themes or principles that we see. We touched on three of them. Inventory loading is one, the income and lifestyle claims is another, and training, enforcement, and compliance is the other. The fourth one is retail sales. Again, “Gee, what a surprise?” And the FTC really wants to see sales to customers who are outside of the distribution network.

Kenny: And I was waiting for you to get to that one, because that is the one that kind of stands out for me the most. And this won’t be a surprise to anybody in the industry, but I think… It’s been obvious to me that, for as long as I’ve been in the industry which is my entire life, people have really treated the distributor signup fee as a Costco membership fee. Which is whether I’m a consumer, or a small business person, it doesn’t matter—I’m paying to get the wholesale price. And that is clearly the practice that I think most needs to be removed. Because you look at everything that’s come out of whether it’s the Vemma case, the Herbalife settlement, or like you say, even that recent release by…

Spencer: BurnLounge case?

Kenny: Well, I was even talking about just that the four lessons kind of from the Herbalife and Vemma, but yes, certainly BurnLounge as well. It’s that they want real consumers; they want companies to be able to prove that real customers have purchased the product.

Spencer: Without doubt.

Kenny: And I look at that as kind of a fascinating challenge, and try to think, “Okay, we’re certainly in a better position than we’ve ever been to do that from an IT perspective.” But it is a mindset shift, that it’s going to be interesting to watch the industry grapple with. Especially when you’ve got people who have been at this longer, and are more ingrained in the ways that they work.

Spencer: Well, it’s interesting. And you know what? Honestly, Kenny, it comes back to… I’m going to tie this back to income and lifestyle claims. As I said before we got on this call, the FTC is regulating not by what the law is, but by what they want the law to be. And the law is, from the BurnLounge case, that is that a distributor can actually make purchases. And those purchases are valid bonafide purchases, and are commissionable if the motive for purchase is primarily based on market demand rather than financial incentives. The FTC does not want to have to conduct that kind of detailed analysis to determine what a purchaser’s motive is. They just want to look at a comp plan and say, “Okay, because it financially rewards people for their purchase by making them active, we want to have to the assumption that they are making that purchase for financial reasons.” And what evidence backs them up in that? Well, why do people get on board in the first place? They’re onboarded—or they get interested—because they’re lured and baited with income and lifestyle claims. So it all comes back to lifestyle and income claims. At the root of the problem, at the root of the issue, that it is the biggest problem that we have, and it has been for 75 years. And if it weren’t for the income and lifestyle claims, and the way that they have gotten out of control… Because they’re so pervasive and that’s how essentially the products are marketed—how we get customers I should say—they’re induced to buy the products because they think it’s going to get them ahead and give them the opportunity to make untold riches, or walk the beaches of the world or whatever the case may be, drive their Ferraris… that adds compelling evidence to the motive for purchase and supports the FTC’s position there—that they are not bonafide customers because their primary motives for purchasing is based on financial incentives and motives which are, again, evidenced by the fact that they join, and they make the purchases, not because they make the best deals and they’re discount buyers, but because they’re lured into the business with income claims.

Kenny: Having gone through the data of a lot of these different companies, you can look and you can say, “Okay, long after people would realize that they’re not making this kind of money, they continue to buy the product.” And so there’s a case to be made on the other side of it. But to your point, the FTC looks at the lowest common denominator, right? And I do think that’s where there’s a big opportunity within the way comp plans are structured to stop drawing so much attention to that.

Spencer: Yeah. And Kenny, I think one thing that’s really important to recognize is that, yes, within direct selling, we have said forever that, “Okay, maybe they’re lured into the business and buying the product initially because of the income representation, but the longer they continue to purchase down the stream from their enrollment without making any money, the money likely it is, and the stronger the evidence that they’re buying as bonafide consumers.” From the FTC’s perspective, they don’t care. It’s, “Why did they buy initially? What got them interested?” And it is the income claims which proved to be deceptive because the income opportunities are not nearly what they’re represented to be. Very, very few people make money.

Kenny: Absolutely.

Spencer: Paltry. And the number of people that spend more on products than they ever earn back is considerably weighted and heavier on the side of people spending more than they make.

Kenny: Absolutely. And like you said, I think if really pushed, you can make that case. But so often, companies don’t get the opportunity to make that case, especially when you get into the whole ex parte TRO and things like that, which is mind-numbingly aggravating.

Spencer: Yes, it’s a complete denigration of due process. It completely ignores due process.

Kenny: But most people’s goal is to not try to make that fight. And I think that there is that opportunity there to change the things that we’re focusing on a little bit, and not have to fundamentally shift too much. But like you said, either make the PV requirements directly tied to customer purchases. And one of the things that I’ve long said is that I would have a metric out there that really focuses on non-distributor purchases—truly customer purchases—

Spencer: Absolutely.

Kenny: …And the people who are repurchasing that are customers. And that’s data that companies should have available to them, and they should make it prominent to their field and say, “This is the metrics that we really care about.” And I think that would go a long way.

Spencer: Absolutely. And this is a technology issue too. So I’ll throw it out there, because I know you’ll appreciate it. But for so long, companies have said, “Well, we sell all this merchandise to our reps, but once they get in their hands, we can’t track it. We don’t know what they do with it.” Herbalife said that forever. You know what? Bullshit [chuckles]. You can if you want to. It’s just that the technology has not been implemented within direct selling. It’s certainly available though. I mean, all you do is put a barcode on each product, and you put a barcode scanner app on your reps’ cell phones, and you scan each barcode when they sell a product. If you want to track who’s retailing, you do it that way. The technology is easily, readily available. Just get an app on your smartphone—and everybody’s got a smartphone—but nobody uses it. We haven’t adopted that technology in direct selling yet because… And I think it would be—by the way—just for InfoTrax’s purposes, I think that would be crazy effective in the party plan world.

Kenny: And that’s something that really has perked my ears up, and piqued my interest over the past couple years. Because part of the problem is getting people… What a company is focused on is obviously where the dollars go, and where the focus is. And I completely agree that there is so much potential there for the technology to make things very transparent and to keep yourself off the FTC’s radar, and to really know what’s happening with your product. And that would go such a long way.

Spencer: The problem is—let’s be real—in the case of a company that has a big front-end purchase, even if they had the technology, they pretty much know that their reps are not selling it. They’re giving it away, or they’re garage-loading it or whatever they’re doing with it. They’re just not selling it. They’re not trained to sell. So guess what? We get back to that whole training component again. Here we go again. Amazing the way things come full circle, isn’t it? We’re coming back to income claims, lifestyle claims, and training.

Kenny: And I totally agree with you. One of the things that kind of—to me—indicates that we’re starting to move somewhat in the right way is we’ve got a lot of clients that are having smaller and smaller average upfront purchases. To me that indicates that people are being more realistic about what can be resold and what’s used for personal consumption. So in that sense, I think we’re moving in the right way. But absolutely, the next big step is to say, “Okay. Let’s make it so that you can carry a little bit of inventory and let the company know when you’ve resold it.”

Spencer: Well, that’s right, if we’re going to say that we’re to say that we’re a resale model. And that comes back. We have to ask—I’m going to get to a philosophical level here, Kenny—we have to ask ourselves, “What are we selling?” and, “Who are we?” And this is a point that Laurie Bush really drove home. We were out in Dallas last week for the Momentum Factor seminar, and this is something that I’ve been harping on for a long time. And we’ve said it in this conversation—both of us. We say “the industry.” Well, wait a minute. Back up. An industry is representative of a specific product or something. We are talking about direct selling which, by the way, is also a misnomer. But what are we? We are a multilevel—Well, that’s a compensation structure. Network marketing is the method of sales we use. So we say ”industry,” what are we talking about? The only commonality we have throughout what’s been referred to as the industry is the fact that we all have multilevel compensation structures. Well, that means we’re selling a compensation structure and income opportunity. That’s not an industry. We are a distribution system that is comprised of numerous industries: supplements, diet, health and nutrition, cosmetics, skin care, travel—You name all the products and services that we sell, there are buckets of them. But those are all different industries using the same distribution channel and compensation structures. So it’s a misnomer to say, or to try to classify ourselves as an industry because the only commonality we have is the same compensation structure. That means, we sell—the industry is selling—income opportunities, which is not what we should be about. So that’s a bit philosophical, but I think it’s very important. We have to identify who we are, and what we’re doing, and what we’re selling. We cannot call ourselves an industry to describe direct selling and multilevel marketing. Because it’s not an industry, it’s… well, the compensations format is the commonality running between companies in very, very disparate industries.

Kenny: I appreciate you bringing that up, because is more philosophical and a bit abstract, but it is one of the questions that I think people have to grapple with. And you actually see that a little bit within even what we call the industry because like you say we’re actually almost like a subindustry, or this loosely knit group of people because of the sales method. But then, you get the people who it’s much more likely to be friendly company-to-company if you’re not direct competitors, and you say, “Well, if you’re in the same industry you are competitors.” And it’s like, “Well, no. You’re really not.” If you’re selling beauty products versus kitchenware, that’s not a direct competitor relationship, right? Beauty products to beauty products—those are the people that are competing so to speak. So I agree with what you’re saying that we definitely do need to… I’d like the association of different network marketing companies to utilize best practice and things like that, but I think you’re right that we need to stop driving so much of the conversation based on the one thing that ties us together which is the compensation plan.

Spencer: Exactly. I think you’re spot-on there. But again, it’s a philosophical question, but really it’s a philosophical question that underpins the whole regulatory atmosphere that we’re dealing with right now, because we have been accused of or guilty of going down the path, for so many years, of selling income opportunities—that’s really what’s being marketed. We sell that under the guise of offering products and services. But really what are people buying into? The income opportunity. So that is an industry. Now, a lot of us just use the term, “the industry” because it’s a handy acronym to cover all of network marketing. But you know what? We need to come to grips with that, to admit, “No, that’s not right.”

Kenny: I agree with you. I promised that we wouldn’t take too much of your time, but I really appreciate you taking the time to hop on here and discuss some of these things with us. I guess I would just say, is there anything—kind of some final thoughts that you have, anything that we haven’t talked about that you think needs to be said in light of the regulatory environment?

Spencer: Well, I guess… Frankly, it’s my opinion that we’re going to see… If we don’t see changes on two fronts, we’re not going to have a direct selling channel ten or fifteen years into the future. We’ve got to make some dramatic changes. One of them, one of the two things that we need to change is on the regulatory front. We need to clean ourselves up. We can’t be sitting here, wringing our hands, saying, “Oh poor us. What victims we are,” without taking a good, hard look in the mirror and saying, “How much of this have we brought on ourselves?” And obviously, that’s heavily regulatory-oriented. But the second thing we have to be extremely vigilant of—because I think this is really the clear and present danger—and that is the threat from outside business forces. The Amazons of the world are feeding us our lunch. Our customer service systems and delivery systems—It takes two, three weeks to get products when Amazon is going to deliver anything we want overnight, free of shipping charges? Come on, folks! Let’s wake up. We got to get more aggressive and creative, and we’ve got to face those challenges. So regulatory is a serious issue, and the business concerns are very serious. And I don’t see direct selling responding adequately to the Amazons of the world. A perfect example: I bought some stuff from a direct seller for Christmas gifts. My niece is a distributor for them, and I placed the order through her website. And I wanted to send the gifts directly to the recipients and put them on my credit card, well they didn’t have a ship-to address separate from the credit card address. Ultimately, I just put the ship-to address in as the credit card address, hoping that it would get there. Well, okay, it did. It got there, but there was not an opportunity in the shipping process for me to put a gift card in there, so the recipient knew who it was from. And they just show up, and there’s no gift wrapping of course, and it’s just all of those things. And the order process was so confusing and confounded. Whereas on Amazon, you go, you buy something, it’s really simple, it’s streamlined, anybody can use it. We have to be able to do that kind of thing, and face all those kinds of business challenges, and we’re just not doing it.

Kenny: I think that’s a great point. Because that’s one of the things that I constantly bring up is “Hey, guys. How does the Amazon do this?” Or, “How does Zappos do this?” And for so long, we were such an isolated method of buying products. But now, everybody buys online, and it’s been that way for a decade now. Everybody’s buying stuff online—who goes to the storefront for anything but perishable groceries it seems like? And even Amazon’s trying to get into that business. But, yeah, to that point, it’s, “Where is the next wave of innovation to keep us up-to-date and relevant within the change of landscape of how commerce is done?”

Spencer: Yeah. Amazon is going to go to drone delivery [chuckles]. You go to the DSA event, and they say, “Oh, one of the strengths of direct selling is customer service.” Well, pfsst. No. No, it really isn’t. We’ve been passed by long ago.

Kenny: Yeah, you can’t rest on your laurels, and I do think that is one of the things that it would be interesting to see over the next couple of years, how we as a group of network marketing companies respond.

Spencer: Yeah. I think we’ve got two major challenges in front of us, and I think that we do have strengths. Let’s not lose sight of the personal relationship—Amazon is never going to have a personal relationship with its customers. It can have a great customer service department, but with so many things going online, and people being sent friends on Facebook and social media, those real personal relationships, they don’t exist online. But people are very hungry for those. And so that’s a strength that we have, and I don’t think we’re in jeopardy of losing that. But we have to capitalize on it, that’s the issue.

Kenny: Yeah. The one thing I would add to that is, I generally go on Amazon to buy something that I know exists, so the ability to use that personal relationship to introduce people to new products and the education that can go through that peer-to-peer type thing. Absolutely. And I’m glad that you brought that up because there are real strengths to this industry. And I mentioned that I’ve been in the industry my entire life, and I’ve chosen to stay with it, because I think that there are strengths. And you’re right, we don’t want those to get swept under the rug. But if we want to continue to capitalize on those strengths, we’ve also got to make sure to guard against our weaknesses in areas that, perhaps, jeopardize what we’re trying to accomplish.

Spencer: Exactly. Anyway, we’ve got the immediate thing in front of us from regulatory pressures, and, honestly, that’s my wheelhouse. But from the business side, the competitive pressures from other sales channels are huge, and we’re not doing a good job of responding to that. So those are the two things where I think we can end this conversation. But identify our strengths and capitalize on those, let’s work on it. And fix our weaknesses.

Kenny: Exactly. Exactly. Well, Spencer, I thank you. You will always have the distinguished honor of being the first guest on the new podcast venture, and I appreciate it.

Spencer: You’re a rock star, Kenny. Thanks so much.

Kenny: And that’s it for our premier episode of the MLM.com podcast. Thank you for listening, and I look forward to you taking this journey with us. You can support us by rating us on iTunes, or reaching out to us through mlm.com. We would love to hear your feedback and the issues you would like addressed. Also, a special thanks to Spencer for his time and expertise. Thanks also to the mlm.com staff, especially Jana Bangerter and Adam Holdaway for their production support. I’m Kenny Rawlins, and I look forward to you joining us next time.

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Kenny Rawlins

Kenny Rawlins has been fortunate enough to have been around the network marketing industry his entire life and has experienced its power...

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Spencer Reese

 Mr. Reese is a partner in the law firm of Grimes & Reese. He is a member of the Utah, Idaho, Colorado and Missouri Bars, and is an active...

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