By Ioana Gorecki, Guest Contributor
There is a perception that the regulatory landscape for direct sellers and multi-level marketers (MLMs) has become increasingly fraught. With numerous federal and state actions targeting the industry—as well as recently proposed Federal Trade Commission (FTC) rules on earnings claims and increasingly complex labor and employment implications—some companies are questioning whether the MLM model is worth the risk.
Transitioning to an affiliate or network marketing model might seem like a safer alternative, but it’s important to understand that affiliate marketing comes with its own regulatory requirements and pitfalls. Recent scrutiny from the FTC, state enforcers and self-regulatory bodies like the National Advertising Division (NAD) underscores the need for diligence in this space.
Why Are Some Companies Transitioning from MLM to Affiliate Marketing?
The MLM model has faced heightened criticism and regulatory enforcement for years. The FTC, in particular, has made it increasingly clear that it views MLM compensation structures as inherently problematic due to their complexity and tendency to incentivize recruitment.
The fact that the recently announced proposed earnings claim rules are limited to MLM companies specifically (and not direct selling companies more generally) is telling. It’s too early to know how the FTC under Chairman Andrew Ferguson will approach MLMs, but in light of recent actions some MLM companies have determined that transitioning to affiliate marketing represents a shift toward a simpler and less legally risky model.
Affiliate marketing differs from an MLM compensation structure in key ways. Most importantly, affiliate marketing typically avoids the layered recruitment structure that is central to MLM operations. Affiliates typically receive compensation based on each sale they make, not based on sales made by others they recruit.
This simpler structure reduces some of the risks associated with the MLM framework, particularly relating to the potential that a regulator would argue that a compensation structure incentivizes recruitment over sales and/or that a company lacks adequate support for earnings claims. However, the affiliate model is not free from regulatory oversight and presents its own challenges.
To ensure compliance and mitigate risk, businesses transitioning to affiliate marketing must adopt proactive and robust strategies. Below are eight key principles to help you navigate compliance when working with affiliates to promote your products or services.
1. You Are Responsible for Affiliates’ Claims
As a company, you are potentially liable for the claims your affiliates make about your products or marketing opportunity. This includes health and product efficacy claims. The FTC holds companies accountable for misleading or unsubstantiated claims, even if those claims are made by affiliates.
To mitigate risks, provide affiliates with clear, detailed guidance on what they can and cannot say. For example, you may want to create a list of approved health and performance claims for your products and explicitly instruct affiliates not to make any claims outside that list. You should also educate affiliates on compliance through regular training sessions and updated documentation. Educating affiliates on compliance is your first line of defense. A well-informed affiliate base reduces the likelihood of regulatory violations and protects your brand’s reputation.
2. Affiliate Testimonials Must Be Truthful
Affiliates’ testimonials must be truthful and based on their actual experience. While affiliates can use approved product claims to speak generally about your products or services, any personal testimonials must accurately reflect their own use or experiences with the product. Educate affiliates about the risks of making false or exaggerated claims, which can lead to legal repercussions for both the affiliate and your company.
3. Disclose the Relationship
Under the FTC’s Endorsement Guides, affiliates are considered “endorsers,” meaning that consumers are likely to believe that any statements they make about your products or services reflect their own opinions or beliefs. Because affiliates receive payment in exchange for endorsing and selling products, the FTC considers this a “material connection” that most consumers would not expect (in the absence of disclosures) and that may affect how consumers evaluate the endorsement. As a result, the affiliate relationship must be disclosed on each and every affiliate post. Provide affiliates with simple disclosure statements to use in posts, websites, and other content, and train them to use the disclosures every time. Explain that transparency builds trust and protects both the company and the affiliate from legal liability.
4. Don’t Bury Disclosures
Disclosures must be prominent, unavoidable, and in close proximity to triggering claims. They should not be hidden in hyperlinks, at the bottom of a page, or within terms and conditions. Teach affiliates to place disclosures in a visible location, such as immediately before or after an affiliate link or prominently within a social media post. For short-form content, such as X or Instagram posts, disclosures must be concise yet prominent and should not be obscured in hashtags or at the end of a post, where readers would need to click “more” to see them.
5. Use Simple, Plain Language
The language of disclosures should be straightforward and easy to understand. The FTC suggests the following as one option: “I get commissions for purchases made through this post.” For short-form content, adding “Paid Link” immediately next to an affiliate link should also be sufficient to disclose the material connection. Avoid overly legalistic or complex phrasing, as well as vague phrasing such as “affiliate link” or “buy now.” Providing affiliates with ready-to-use disclosure templates simplifies compliance.
6. Monitor Affiliate Activity and Address Non-Compliance
Creating guidance materials and training affiliates is not enough. Establish robust processes for monitoring affiliate content to ensure compliance. Regularly review affiliate posts, especially those that generate significant traffic or sales. You may be able to use software tools to automate monitoring of affiliate content for unapproved claims or missing disclosures.
If you identify non-compliant posts, act promptly. Provide corrective guidance and, if necessary, suspend or terminate relationships with affiliates who repeatedly violate your compliance policies. While it’s impossible to catch every non-compliant post, demonstrating reasonable efforts to monitor and correct non-compliance can serve as a mitigating factor in regulatory actions.
7. Consider Pre-Approval for Affiliate Posts
If monitoring proves too challenging, consider requiring affiliates to submit posts for pre-approval. Pre-approval ensures that content aligns with your brand’s compliance standards before it reaches the public.
Alternatively, provide a shared database of pre-approved, vetted posts that affiliates can use without additional oversight. These vetted materials can include product descriptions and claims that comply with regulatory requirements, as well as disclosure statements tailored for different platforms and post types. While pre-approval reduces the risk of non-compliance, it’s still important to ensure that pre-written content is accurate, especially when it communicates or implies personal use or experiences by affiliates. Misleading content, even if pre-approved, can still expose your company to legal and reputational risks.
8. Plan Ahead
Last, but certainly not least, develop a well-thought-out plan for effectuating the transition from MLM to an affiliate model. Think through and develop strategies for addressing all the ways in which a switch could impact distributors. Major changes in compensation structure could have major effects on distributor income and may open up the company to potential litigation. Make sure to take into account and plan for all foreseeable contingencies.
Final Thoughts
Affiliate marketing can be a viable and less risky alternative to MLM, but it’s not a free pass from regulatory scrutiny. By making a plan, implementing strong compliance measures, training your affiliates, and maintaining transparency, you can protect your business while fostering trust with consumers and regulators. The key is to remain proactive and stay informed about evolving regulations and best practices in affiliate marketing.
Ioana Gorecki is Special Counsel, Advertising and Marketing at Kelley Drye & Warren LLP.
