Regulators warn enforcement is a ‘top priority’ at a recent industry conference
By: David Rauf
“I caution you to stay on the straight and narrow because now, more than ever, this is a top enforcement priority for me, and I hope, the agency.”
—Noah Phillips, Commissioner, Federal Trade Commission
A commissioner with the Federal Trade Commission (FTC) voiced a tough message for the direct selling community at a recent online event, saying the regulatory agency will remain aggressive in its approach to policing the channel.
Commissioner Noah Phillips, speaking at the Direct Selling Association’s (DSA’s) Legal & Regulatory Summit, says the FTC was quite active in the last year in bringing cases against direct selling companies and leveled a firm warning: “Sellers beware: We’ve been aggressive in the cases we’ve been pursuing, the remedies we’re seeking, and our willingness to go to court.”
While Phillips says “MLM done correctly can benefit distributors and consumers,” he cautions that an overemphasis on recruiting can “easily turn a multilevel-marketing company into a pyramid scheme.”
In the last year, the FTC has brought several cases against direct sellers over alleged illegal pyramid schemes and deceptive earnings claims. During his opening remarks, Phillips highlighted the 2019 case against AdvoCare, which forced the company to exit its MLM structure, as well as pending cases against Neora and Success By Health to demonstrate the agency’s readiness to drop the hammer.
“The FTC is fully engaged in this area and is determined to protect hard-working consumers from losing money to illegal pyramid schemes or other business opportunities that make deceptive earnings claims,” says Phillips. “I caution you to stay on the straight and narrow because now, more than ever, this is a top enforcement priority for me, and I hope, the agency.”
Phillips, a President Trump appointee, also highlighted a series of warning letters sent to direct sellers during the COVID-19 pandemic over allegations of false in-come and earnings claims. As of April, the FTC had sent letters to nearly 20 direct selling companies telling them to stop making claims about products and business opportunities associated with the coronavirus.
FTC officials have touted the effort as the fastest and most efficient way to clamp down on misrepresentations during the ongoing public health crisis. Since last spring, when the coronavirus first started spreading throughout the country, the FTC has sent more than 300 letters to companies and individuals in varying industries insisting they stop making pandemic-related marketing claims.
The warning letters have largely been welcomed by the direct selling channel. Industry experts have said the FTC’s typical approach to addressing similar issues in the past would have been to file a law-suit or seek to shut down a company. Instead, direct sellers have been allowed to fix problems before the agency accelerates its inquiry.
“The FTC has made clear there is an increased sensitivity and increased potential for consumer harm if mis-representations made are related to the ongoing pandemic. These include not only product claims, but earnings claims as well,” says Brian Bennett, vice president of government affairs and policy at DSA.
Bennett goes on to say that COVID-19 claims of any kind should bring a laser-focused effort from companies to remove them. “Since the beginning of the pandemic, DSA has called for heightened measures around these claims. The BBB National Programs and Direct Selling Self-Regulatory Council (DSSRC) have also urged caution. The DSSRC has been active in contacting companies and removing problematic claims regarding COVID-19. The warning letters indicate that if the FTC sees these claims in the marketplace, it will be a problem. They should be removed immediately.”
John Sanders, a partner at Winston & Strawn who specializes in direct selling litigation, represents several direct sellers that received FTC letters in April. He says, “Our hope is to send a signal to the FTC that No. 1, companies want to do the right thing, and No. 2, there’s a whole lot of conduct out there that’s impossible to police all the time, but if brought to their attention, companies will take action.”
Sanders says the regulatory agency has turned to issuing letters be-cause “right now the FTC is drinking from a fire hydrant trying to police a rapidly changing environment with COVID-19. They’re doing all they can.”
Increased FTC Activity
Sanders says the FTC has been far more active in the past 18 months to two years, and the reason remains unclear.
“The direct selling industry finds itself facing more scrutiny than it has in the past from the FTC,” he says. “It’s really fascinating. All industry watchers thought that under the Trump administration it would fare better than it did under the Obama administration, and I don’t think that has turned out to be true.”
One of the big issues currently being discussed in direct selling circles is exactly how companies can market their business opportunities during the economic crisis without running into trouble with the FTC over an earnings claim.
Phillips touched on the issue in his opening remarks during the summit, saying that in order for earnings claims highlighting wealth or full-time income to be considered truthful under the FTC Act, they also must disclose “what the typical participant can expect to earn after expenses—generally very little.”
“This means that claims about the potential to achieve a wealthy lifestyle, career-level income, or significant income are false or misleading if business opportunity participants generally do not achieve such results,” he says. “By generally, I do not mean the average or mean of what participants in a specific company earn—I mean what the typical distributor earns, which should factor in expenses rather than reflect gross income.
“And the law says that even truthful testimonials from participants who do manage to earn significant income, or more, will likely be misleading unless the advertising also makes clear the amount earned or lost by most participants.”
Sanders says that recent statements such as these from the FTC make it more difficult for his clients to know how to properly promote their business opportunity.
“The FTC has said even if you are out there making truthful income claims, those truthful claims can be deceiving and deceptive because it’s not a typical experience,” he says. “That is one of the things I deal with a lot on a daily basis with my clients—where they are just dumbfounded because people who have had success can’t talk about their success.”
Direct sellers have also grappled with the scope of the FTC’s authority to define an illegal pyramid scheme absent legislation or rulemaking on the issue.
The FTC, in recent years, has is-sued guidance, and agency officials have given speeches to direct selling groups outlining parameters for what constitutes a pyramid scheme. However, there has been no official action to define the term, and direct sellers contend the FTC has continued to change those parameters.
The FTC has made clear that the standard for finding a company is a pyramid scheme can be determined by overemphasis on recruitment and sales not tied to genuine consumer demand. However, de-fining these standards remains un-clear—the FTC has said they take a case-by-case approach.
“DSA continues working with the FTC to ensure clarity on what constitutes lawful compensation structures and continues advocating that personal use of products by participants in the business is not problematic unto itself,” Bennett says.
It appears the FTC is strongly maintaining the stance it has taken since the AdvoCare settlement agreement: Emphasize customers outside the compensation plan and refrain from any and all lifestyle, health or income claims.
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