In this episode, hosts Brad and Michael, and partner Jay Reyero, break down the unique compliance challenges of membership programs in aesthetics. They discuss how state laws, gift card regulations, and medical board rules impact these programs — especially when expanding across state lines. Learn how to avoid common pitfalls and structure a profitable and compliant membership program.
Listen to the full episode using the player below, or by visiting one of the links below. Contact ByrdAdatto if you have any questions or would like to learn more.
Transcript
*The below transcript has been edited for readability.
Intro: Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to another episode of Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd.
Michael: Thanks, Brad. As a business and health care law firm, we meet a lot of interesting people and learned their amazing stories. This season’s theme is Compliance Fundamentals. We’re taking real client stories and scrubbing their names to learn all about navigating compliance and the obstacles they face in the business of health care.
Brad: Yes. And Michael as we’re closing up the season, we’ve talked about compliance a lot. So for those who’ve never heard, what does it mean?
Michael: Yeah, compliance is a broad word to capture all the state and federal laws that govern the practice of medicine or other health care practices. As we’ve talked about, health care is one of the most heavily regulated industries in the [00:01:00] United States. And so if you are being compliant, Brad, it means you’re running your practice consistent with these various laws.
Brad: Awesome. And as we’ve said before, compliance is not stagnant. For those watching us on TV land, you’ll notice already that for the third and final time this season, we welcome back our partner and series regular Jay Reyero.
Jay: Hey Guys. Love being here. And I was thinking about today’s story and the topic that we’re going to get into in a little bit, and I started going down this memory road. And do either of you guys remember the Columbia House Record Club way back in the day?
Michael: Yeah, I think actually several seasons ago, we talked a little bit about it on one of our episodes, but I have a vivid memory all the Columbia record model to increasing my music collection.
Brad: So I’m always the oldest person here, but I’m looking at Kennedy, have you ever heard of this? And she’s shaking her head. So the Utes have not heard of that, which is probably a good thing.
Michael: Okay. Well, let’s talk about it. [00:02:00] So for those in our audience who are not old enough to remember this, I’m using “Club,” or if you didn’t hear us talk about it in the past, I think Brad, you should give them a little bit of description of what is the Columbia House Record Club and what was it all about?
Brad: I love the Club, as you said, the “Columbia House Record Club” was the unique marketing strategy, give customers free albums, is what they call the, which is really were CDs or tapes, mail it to their home and then promise that the customer would purchase another set of CDs or tapes at the full club price, plus obviously the shipping. So Michael, were you ever a member? I think you know the answer.
Michael: Well, first of all I think we have a vocabulary word for the day based on our younger audience. A CD is called a compact disc. It’s an object that used to deliver music back in the day. And then a tape is a cassette tape that’s even older than the CD [00:03:00] that was kind of after the album.
Brad: The albums are back in style again.
Michael: Yes.
Brad: Excuse me, vinyls back in style.
Michael: Yeah. You just got to have a fancy name around it. But yes, I was a member of the Club Bride. You would get my memory is like 16 free CDs, and then they would ship you one every month of their choice. And you had a really small window to either return it or you would get charged for it. but yes, I did do it. How about you, Jay?
Jay: Yeah, I mean, this was back in the heyday too of my youth. And it may have been the BMG alternative, the same business model. But yeah, I immediately got that thing and wanted to pay whatever it was, a dollar for the however many CDs at the time, and automatically go through it, pick out all the CDs I want, completely forget about the rest of the conditions that I was going to have to deal with. That was kick the can down the road later. But what about you, Brad? Were you ever part of this club?
Brad: I did not participate in that [00:04:00] club. I had many friends who got sucked down that rabbit hole. They did eventually have a movie version of that, and I did get kind of maybe stuck in that one for a little bit.
Jay: Yeah. And I think about the scheme and just, I mean, how shady it was with targeted clearly to young kids who weren’t even old enough to enter into contract ands sticking their parents with the bill at the end of the day fine print that you never read. But I think I heard and read that it changed at different points, setting up processes that essentially were geared to make you fail or not succeed, make it really hard for you to remember and get out of it. And then I even remember reading some after the fact, about how some of the CDs were created and generated in such ways that the music itself, the quality of it was different than if you had just gone to a retail side of things and bought it.
Michael: I was the ideal audience because I’m tone deaf. I actually would get it and I would get excited when I saw the 16 free and I knew there was rules. [00:05:00] I just figured I’m going to conquer them this time because I did it more than once, by the way. And I did really ramp up my music collection and oftentimes got a lot of CDs that I never listened to, because I forgot to return them on time.
Brad: Where are those CDs now?
Michael: Yeah, no idea.
Brad: The fastest thing is that the business model is so easy to get in, they kind of set themselves up for some criminally minded individuals to kind of take advantage of them. I don’t know if you’ve heard the name Joseph Parvin or David Russo before, their story?
Michael: Well, I had a buddy in college named David Russo, so I’m hoping it’s not the same. David, based on what you just talked about, criminal activities.
Brad: Well, if your college buddy – well, first off, I don’t know what he did in college either. If your college buddy is from New Jersey, it could be him, because both Joseph and David are from New Jersey and no judgment whether or not they were connected guys or something like that.
Michael: My David was from San Antonio, so we should.
Brad: Not him. So for those who know this fun story, from [00:06:00] 1993 to 1998, Joseph received 26,559 CDs via 2,417 fake accounts. He was charged and criminally and admitted bill Columbia House for estimated $425,000. That’s in 1998 terms, so I’m sure this closer to like a million now. And David Russo, not your friend, was charged criminally and amid to receiving 22,260 Record Club CDs, and he had 1,630 aliases in 12 addresses in seven different towns.
Jay: Man. Yeah, I don’t think at that point I was ever thinking about crime or think CDs and the Hootie and Blowfish album was worth that. But I remember my first and only time as a member, I’d look at the offer, I’d figure it all out, and then I would try to figure out, okay, what’s the cheapest way for me to fulfill my obligations and get out? And after that first time, I started getting smart enough to realize that I was going to [00:07:00] end up with about a thousand Poka CDs that I was never going to listen to, and I don’t know if I won that game or if they ended up winning.
Michael: Well, I would say I did in fact get Hootie and the Blowfish as one of my free CDs whenever I signed up the second time I tried it. I never mastered it. I failed every time. I got a little less bad each time at losing money. But they made you like – you had to go through the process of returning CDs for like a year before they’d even let you out of it.. And so yeah, they ended up winning guest.
Brad: Congrats, Michael at getting less bad at it.
Michael: Well, let’s move on. And Jay, I’m not sure how Columbia House and our New Jersey boys if they’re going to be connected to today’s story of Compliance Fundamentals, let’s get started.
Jay: Yeah. Well, they’re not connected to our story, but our compliance fundamental, we’re going to dive deep into membership, so hence the Club. [00:08:00] So with our client today, it’s going to be a multi-state weight loss and aesthetic center and let’s call it Music City Wellness.
Brad: Nice. I like the name. I mean, it actually sounds like a kind of place you would actually go to.
Jay: Yes, yes. And I didn’t Google, so it may exist.
Brad: And no affiliation real if is Music City Wellness.
Jay: And so yeah, Music City Wellness wanted to start offering a membership program for their patients when it came to weight loss. And really at the time they felt like this was going to help create a connection to their patients. They also wanted to make sure that it would not only be beneficial financially to the patient, but more importantly, it was going to help their patients stay diligent on this very regimen treatment protocol and weight loss.
Brad: Yeah. And for those not familiar, but one of the number one reasons a medical practice would still like to have this membership program is develop this steady revenue stream. But as you pointed out, there are additional benefits, a sense of loyalty, communities surrounding these patients. And [00:09:00] obviously to your point, it does encourage repeat business and hopefully enhances that patient’s retention.
Michael: Yeah, absolutely. And for the audience members who are not familiar; the membership programs that you’ll see kind of in these settings are a monthly typical membership. It might be more periodic, an annual membership, and you become a member of that club, of that med spa or whatever they call it, and you get benefits for that. And the benefits are all over the map. It can range from discounts and other offerings like that to actual medical treatments. And I know we’ll have some questions and conversation along the way. And kind of to add on to what Brad said as to why people would do; it also for the meds spas that have a vision to build and sell, a recurring [00:10:00] revenue model really adds value to a business.
Jay: Yep. And so, Music City Wellness had all this going around in their heads, and what they wanted to do was start this program in their flagship headquarter location in Maryland. And so, we began talking to them about some of the details of what they envision their program looking like, what they had in mind, because our next step was to start developing the membership agreement that would contain the actual terms and conditions for their patients to sign up on.
Michael: So talk about some of the details that they would need to work through from a business perspective.
Jay: Yeah. So a lot of the questions start revolving around essentially how is this going to work? How do you explain this in legal terms or in simple terms, but using legal language to patients? So the things you have to start thinking about, what is the fee that they’re paying? What is it paying for? If I give you a dollar, I give you $99, whatever the number is, what am I getting out of that? Are these prepaid services or are these discounts to [00:11:00] other services? Which means I’m going to have to come out of pocket? What happens if I want out? What happens if I want to cancel? Is it easy in easy out? Is there some strings attached? Is there a lock in period? What happens if I just don’t take advantage of what the benefits are? Do I get a refund or are there no refunds? Is it use it or lose it? And then kind of finally, because we’re in health care and we always have to think about this how does this align with the practice of medicine and the need for compliance when it comes from a standard of care perspective, just making sure that we add in that extra layer of if we’re going to surround this and involve some type of medical services, how is that going to work so that we don’t disrupt the continuity of care or the standard of care.
Brad: All very valid points, Jay. And then internally the practice, just start thinking about ways of looking at their actual data to help build out some of that program. So like, what’s the lifetime value of that patient inside the program? Do they need to offer different levels of membership? Are [00:12:00] the members utilizing and familiar with all the benefits and how do they make sure that the members renew their membership?
Michael: Yeah. A common mistake that we’ll see is a business or practice like this will borrow the membership program that they see on the street or that their friend gives them. And going back to where Jay, you were taking us on how you led them through this conversation. The business setup is critical, both in terms of setting up for success, going on to what Brad and you were saying, and in protecting the practice through a membership agreement. That’s taking all these business concepts and pulling it into a legal contract. And so going back to some of the things y’all are saying, if the only goal, for example, is to create a community and stickiness to the patient base, then the program may be built around discounts and benefits that make them feel a part of something. [00:13:00] And they don’t going back to your words, Jay, easy and easy out, they don’t typically carry as much risk when someone cancels. On the other hand, we’ve seen some practices, their strategy is we’re noticing that patients are not following through on their treatment plan. They get their first treatment and then they drop off. And so what if we built this into a membership, spread the cost out monthly, and they would be more engaged and likely to stick to it. Well, now you’re actually offering medical treatments as a part of the membership, and again, more complexity in protecting the practice and setting it up for success.
Jay: Yeah. And so, I mean, as you can see, all of these are great points and, and part of the necessary conversation. So it wasn’t a, we had a 30 minute call and we knocked out an agreement and sent it to them. We had to work over this over a period of time and working through the details, ad so we did. We worked through all these details and we developed a really good membership [00:14:00] agreement that contained all these terms that they wanted sufficiently described it, but in a legally binding way from a membership agreement.
Michael: Jay, you’re making me feel really good. We got this really nice story. You’re, you’re just dropping knowledge and yet usually when you’re here, there’s like, you’re going to tell us about some sort of problem that went wrong along the way. So what happened?
Jay: Yeah. Now you expect a twist every time I show up. Well, so they implemented the program and it was a rousing success. Patients loved it. Location signed up ton of members in the first year, and they easily saw the results on the bottom line in Maryland. It was a great success.
Brad: I don’t think Jay’s mic’s working because he didn’t hear what Michael just said about. This sounds like a compliant story. But Jay, we’re still waiting for the twist.
Jay: All right. Well, so this came during a call with Music City Wellness on a totally unrelated matter, [00:15:00] a after the fact. We were on the phone talking about just kind of the weight loss regulatory environment in general and all the different changes and things that have been going on. And specifically, we were talking about out in California and just in passing they mentioned, “Hey, how successful our membership program is working out in California.”
Michael: Well, you used the word California, and that’s the twist. I’m kind of relieved because I’m sitting here thinking, well, you guided them through this entire process. I hope the twist isn’t that you screwed up.
Brad: Yeah. And we all know that California is super restrictive state.
Jay: Yeah. Completely caught us off guard too. And we’d never looked at California. We never had a conversation about California. We didn’t even have notes on California regulatory landscape when it came to membership agreements, because everything we did was set it up in Maryland. And their thought was, well, if we have it in Maryland, why can’t it be done in California the same way they?
Michael: Aren’t as jaded as we are when we hear regulatory in [00:16:00] California in the same sentence. Well, so how did you handle the conversation?
Jay: Well, the common talk track is, we’ve always talked about on the podcast and we talk about on a daily basis, is first reminding them, Hey, every state’s different. And so, anytime you want to copy and expand to a new state, there’s some level of due diligence that we have to do. We have to look at the state’s rules and we have to figure out, one, can we do this? Two, if not, then what? And then three, if so, are there any changes that we need to make? And so we had that conversation.
Brad: This twist does remind me of somebody who’s suffering from a bad case of compliance drift. So what did you find with these going through the three rules?
Jay: Well, it’s California, so what do you think we found? I’ll give you one guess.
Michael: I’m guessing that it’s different than Maryland.
Brad: Michael’s good.
Jay: Yes, a gold star there. We discovered that their membership structure needed to work very different in California than they would in Maryland. And the way the program was [00:17:00] set up in Maryland, actually, if it was done the same way in California, it’s going to cause some significant issues that we need to take care of.
Michael: How so?
Jay: Yeah, so the primary issue was the fact that in California, the membership program would be triggering California’s gift card laws, and their gift card laws are very consumer friendly.
Brad: I don’t know if my earphones are working, but he just said that gift cards, and I thought we were talking about membership programs, not gift cards, Jay. Explain how we just got here.
Jay: Yeah. Essentially when a patient was paying their monthly membership fee under the gift card law definitions and rules in California, it was going to be treated as basically a series of gift card purchases. And so the benefits covered by each monthly purchase can never expire under California rules. California gift cards balances never expire. So this meant significantly long-term liability issues that Music City Wellness was going to face in [[00:18:00] California.
Michael: This is the type of issue I was alluding to earlier. When you start to pull medical treatments into the benefits of a membership program, there’s a whole body of law like this that you have to navigate, and med spas create risk inadvertently when they create a concept of a credit bank or some other form of credit to track their payments against future services that can actually play negatively against these laws, the gift card laws and other laws.
Brad: This reminds me, well, first off, the fact that it can never expire, I don’t know if you remember the movie “Sandlot” when the kids were like forever. Like, this is what I’m going through my head as I’ve been hearing this story that yeah, you have to keep these forever. So, what did we do to help Music City Wellness?
Jay: Yeah. So, we immediately started examining the nuances in California law to figure out how would it applied to the Maryland program, what would we need to change and why? And we identified all these issues. And then we just began developing [00:19:00] the strategy for developing their program, both in Maryland and in California accordingly.
Michael: I wish I could do an instant poll to ask the audience if they’ve ever seen or heard of the Sandlot. I mean, you’re speaking to me, eighties movies. Yes, all the time.
Brad: Well, what you’re saying here is that we should shift immediately into movie talks. I like it.
Jay: For the record, I did not bring it in this time.
Michael: All right. Okay, let’s get a break and come back on the other side. Talk more about compliance issues that go into when you’re offering memberships.
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Brad: Well, welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd, and series regular, Jay Rojero, who’s still here. And for those who don’t know this season, our theme is Compliance Fundamentals.
Michael: Today we’re talking about membership agreements in a wellness and aesthetic business, Music City Wellness. And the quick recap is that Jay very definitely, like he always does help them set up a beautifully compliant membership program in Maryland. And then later found out that this was being rinsed and repeated in California, didn’t even know they had locations in California. And so where we left off was starting to talk about the way the laws can trip you up and why it is state by state, and why it’s not just state by state, but each designed program can be different [00:21:00] just with little changes than another program down the street.
Jay: Yeah. So going back to where we started, one of the things is really important for membership agreements is, the first place we always start is with the gift card laws. There’s actually a federal gift card law, but we typically go straight to the state level because the general rule is, the more consumer friendly statute is going to apply, and so you tend to find that being in the states. We want to go to the states to figure out what are their gift card laws rules, because the way that they’re written, they’re very broad and they can signal how can a membership agreement, even though it’s not a gift card, how could it be considered construed or trigger those gift card laws? And so, the first place we always start is the gift card laws, federal and state. And then that kind of gives us our playing field as to, okay, how do we then develop the program to comply with whatever those rules are, because we don’t want to trip up those laws if they’re pretty stringent, as we found out in California.
Brad: Yeah, and those are great points, Jay. And it’s critical really to focus on a [00:22:00] state level first, because these laws often actually provide greater consumer protection than actually the federal regulations. Additionally, when evaluating and comparing these rules with federal laws, it does help at least establish a solid framework, a as to how you can guide a compliant membership programs or policies to adjust as needed.
Michael: Okay, Jay, touch on the strategies that come into play given this.
Jay: Yeah, so what we’ve found is, generally speaking, when the program is related or for sufficiently identified goods or services, the more likely it’s going to trip up on these gift card laws because when it triggers those rules, now we’re talking about issues with expiration and refunds and all the things that a typical membership program’s going to have to deal with. The more you have softer benefits like priorities, scheduling or discounts on services, those type of things, the easier it becomes to navigate and create [00:23:00] a program that’s going to be more manageable for the practice and not trip up some of the issues that come with gift card laws.
Brad: Yeah. And based on what we’ve looked at, it appears that membership programs that are tied to “identifiable goods or services” are more likely to trigger gift card compliance rules, which leads to managing these expiration dates and refund policies. As such, as you’re focusing on software benefits such as priority access or service discounts can generally result in greater flexibility and simplicity in the management of these membership programs. So Jay, I know when it comes to money owed, this can even trigger some unique state laws that most people are not familiar with.
Jay: Yeah. You’re talking about the state, a sheet laws, and essentially what it boils down to is if you’re holding money that belongs to someone else, the state’s prescribed some timeframe or some process by which you have to turn it over to the state if it’s unclaimed. And so depending on the expiration, depending on how being kind of tracked, [00:24:00] it can sometimes trip up on those and you can actually find that practices will have a certain level of obligation to turn money over to the state because it’s being unclaimed by the patients.
Michael: And is this a sales thing? And wait, there’s more. So kind of that same concept, the unused monies, the medical board regulates for unused medical care. And so, you have some medical boards that may take a stronger position if they consider that membership program to be for prepaid medical services. And so, like the gift cards, you can face issues if unused this time it might be in the form of unprofessional conduct type investigation by the board for failing to return unused medical services – payments for medical service.
Brad: I’m going to try to unpack what y’all both said to make sure the audience is keeping up. So first off, Jay, good point so far. Understand these laws are different in how [00:25:00] states will handle the unredeemed gift card balance can really significantly impact the actual business practice itself. It’s essential for the practice to really stay informed, especially regarding expiration dates and the conditions in which the practice must report these unused funds. Additionally, I don’t mean to give Michael a compliment, but he made a really good point too with the medical boards, which is, again, from their perspective, they’re going to be looking at membership payments as prepaid being medical services, which adds another layer of a complexity to it. So if these payments are treated similar to gift to gift cards, the business may face heightened scrutiny, particularly regarding refunds for unused medical services/ Outside of the gift card laws, unfortunately, but wait, there’s more. What else should they be looking at, Jay?
Jay: A couple of other technical things, auto-renewing contracts; some consumer protection statutes could have stricter requirements on what you have to do to allow for that, whether it’s notices or whatnot. And then reoccurring payments – there’s a federal based [00:26:00] rule relating to reoccurring payments. Definitely want to check out the state rules to see if there’s anything that’s a little bit more strict as far as notice and timeline requirements.
Michael: All right, Jay, talk about how you approach it when you have states with all these different rules at play.
Jay: Yeah. So whether you’re doing all 50 states or just a few, generally you try to find the most restrictive rules and you comply with those. If you’re going to be complying with the most consumer friendly, strict rules, you’re going to be fine in most of the other states.
Brad: So let’s not forget though, going back to where we started this, this is a health care treatment or this is a medical practice.
Jay: Yeah. And so outside of the legal issues, you still have to go back and remember, the terms and conditions have to address this fact, that the program involves medical services, meaning everything we’ve talked about in the past, good faith exams and clearances, and being a good candidate, to continuity of care and medical board, ethical rules that Michael and you, you both have alluded to, advertising that you both – it’s all [00:27:00] of these things with the health care layer on top, you can’t lose sight of that. This isn’t like joining the Columbia House Club record. We have to deal with very real medical type compliance issues as well.
Brad: Yeah, absolutely correct as usual, Jay. And to me, it sounds like setting up one of these programs is like trying to assemble IKEA furniture maybe after you had a few vodka sodas and then you start reading the instructions, you realize it’s actually in a different language, so it doesn’t sound so smooth and easy. But Michael, what are your final thoughts?
Michael: It may feel like the audience that we’re trying to tell them not to do this, and that’s not the case at all. Many, many med spas have successful and compliant membership programs. If you’re interested in setting up a membership program, it’s important to first anchor yourself in why you’re doing it? What are you trying to accomplish? So the business stuff that Jay led with. And then once you have this information, you can go forward with setting it [00:28:00] up in a compliant manner and navigating any of these laws that might be triggered by the way your business setup is going to be set up.
Brad: Yeah, this is a great perspective, which is, this is not a rinse and repeat situation. Well, Michael and Jay, we did it. We made it through another season and we’ll never talk about compliance ever again on this podcast.
Michael: Yeah. Brad, that might be a little bit of a strong statement.
Jay: Too strong.
Michael: Yeah. This season about compliance fundamentals is over.
Brad: Oh yeah. Yeah, I guess we still bring compliance back in. Well, audience member, guess what, next Wednesday, we got something real special for you. We are back with a fan favorite live episode from Las Vegas where it had a kind of an Australian flavor to it. Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com.
Outro: [00:29:00] ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.
