FTC seeks comment on Deceptive or Unfair Earnings Claims
A typical component of an FTC lawsuit against an MLM company is deceptive or unfair earnings claims.
Last year the Supreme Court, in a decision that sided with payday loan scammers, limited the FTC’s ability to regulate MLM fraud.
Specifically, the FTC was barred from seeking “equitable monetary relief under section 13(b) of the FTC Act “.
For decades, injunctions obtained via Section 13(b), has seen the FTC recover ill-gotten gains from scammers and impose additional monetary penalties.
In light of the Supreme Court’s AMG decision leaving it unable to do so within the existing framework of the FTC Act, the regulator is exploring ways it can continue to effectively regulate fraud.
As part of those efforts, the FTC is seeking public comment on a proposed “Earnings Claims” rule.
Deceptive of unfair earnings claims is where an MLM company and/or promoters, make unfair/deceptive representations about income related to the MLM opportunity.
For MLM companies this is typically misrepresentations about potential income, relative to average earnings inside the company.
For promoters, typically top earners within the company make claims to lure new recruits in.
A particularly egregious form of deceptive income claims is rank marketing. This is when a “new” signup boasts about hitting a significant rank within a company, and the accompanying earnings, without disclosing they cut a deal with the company, and/or brought over a downline from another company.
This is obviously not a representation of typical earnings available to consumers who sign up, hence deception.
In their proposal, the FTC tenders creation of “a rule prohibiting the use of misleading earnings claims”.
The FTC states such a rule
would enhance deterrence and help the Commission move quickly to stop illegal conduct.
Such a rule also may further clarify for businesses what constitutes a deceptive earnings claim and what it means to have substantiation for an earnings claim.
In addition, a rule would enable the Commission to seek monetary relief for consumers harmed by deceptive earnings claims, as well as civil penalties against those who make the deceptive claims.
Basically we’d go back to the FTC steamrolling scammers in court, circumventing the Supreme Court’s Rule 13(b) roadblock.
The rule would be designed to deter the use of misleading earnings claims, inform market participants of their legal obligations by spelling out prohibitions plainly, and ensure the Commission can seek monetary relief for consumers deceived by misleading earnings claims.
There are existing rules through which deceptive of unfair earnings claims can be addressed (the Business Opportunity Rule, Telemarketing Sales Rule and Franchise Rule are cited), but the FTC claims
the scope of coverage of these rules is limited.
Numerous different types of enterprises that do not clearly fall under the scope of these existing rules continue to use misleading earnings claims to deceive consumers.
The financial consequences of this deception for consumers are significant.
The new Earnings Claims rule would apply to a range of offers. Relevant to BehindMLM’s coverage are multi-level marketing opportunities (MLM), chain referral schemes and “other investment opportunities”.
In seeking comment from the public regarding the proposed rule, the FTC asks
that commenters provide other information or evidence on the prevalence of these practices in these same contexts as well as any others.
Other issues the FTC is “exploring” are disclaimers, disclosures, source-data, substantiation behind claims and “lifestyle claims”.
Disclaimers pertains to information provided that is supposed to place information being provided into context.
As the FTC points out, for the most part they’re just used as a cover to provide deceptive information;
In the Commission’s experience, we have not seen probative evidence that disclaimers effectively cure atypical earnings claims.
One relevant example that comes to mind is “this is not financial advice”. It’s an absolutely meaningless disclaimer that will not hold up in court.
In Commission enforcement actions where defendants have argued that disclaimers or disclosures cured any deceptive earnings claims, courts have repeatedly found otherwise.
Disclosures pertains to companies being required to “give recipients specific earnings information.”
The Franchise and Business Opportunity Rules require companies that make earnings claims to furnish prospective members with a disclosure document that includes information about earnings. Should similar provisions be implemented in an earnings claim rule?
How would it effectively prevent or curb deception regarding earnings? If so, what information should such a disclosure include?
What would be the benefit to consumers and the burden to business of such a disclosure requirement?
I think, with respect to MLM, companies should absolutely be required to provide consumers with an earnings disclosure document.
By law, the document should be made available anywhere earnings information is brought up. This would include marketing, both by companies and promoters.
Source-data pertains to
the use of real or purported earnings data or statistics from an industry or professional field in the promotion of money-making opportunities.
In the Commission’s experience, some such uses are misleading.
These seemingly objective figures may create the impression that the depicted level of sales or earnings is typical in the industry or field, or for the opportunity being advertised, and by implication, that the prospective purchaser, employee, or other participant will achieve similar results.
Again, for MLM, I believe company-specific source-data is required. Broad industry-wide data and statistics are meaningless, primarily due to the scope of the MLM industry itself.
Substantiation behind claims pertains to records kept by a company to substantiate any claims made.
The Commission also seeks comment on whether and how a rule can most effectively provide clarity on the substantiation a company must possess before making an earnings claim, and whether those who make earnings claims should be required to keep records to demonstrate how they have substantiated the claims.
I think at a minimum 6 months of data should be required. That’s not ideal but it’s a compromise.
Long-term records should be kept to three years. Five years would be ideal but potentially unnecessarily burdensome, so again a compromise (there’s nothing stopping an individual tracking beyond three years with their own calculations and provided data).
As to the substantive data itself;
earnings claims that reflect gross income and omit material expenses are misleading.
Before making an earnings claim, a business must have a reasonable basis for the claim —that means both gross income and expenses incurred in generating that income.
I think six months to three years is a reasonable timeframe to track typical net income statistics.
Lifestyle claims is the marketing tactic wherein a lifestyle, represented to be funded by participation in a company, is used to market the company’s MLM opportunity.
Comment, evidence, and information is therefore sought on (a) whether and what lifestyle claims are deceptive; (b) the benefits to businesses and consumers from receiving guidance on this topic; and (c) what evidence a company must have before making a lifestyle claim to substantiate it.
Two examples come to mind; the first is the “rags to riches” cliche. You’ll have someone banging on about living in a paper bag “but look at me now!”
Trouble is they only joined the company they’re marketing two weeks ago, and the lifestyle they’re representing (typically a house/car/travel/luxuries etc.), has nothing to do with said company.
The other is typically seen on social media. You’ll get someone flashing their lifestyle in between explicit pitches, implying that the former is a result of the latter.
In practice this can’t be stopped but if the FTC has a specific rule to squash anyone it goes after for this, as part of a wider MLM fraud case, that might go some way towards future deterrence.
To strengthen this deterrence, there should be an additional penalty levied at an MLM company when a promoter is found to have violated this rule.
E.g. MLM company A and promoter X is sued by the FTC for whatever. Promoter X is charged with making lifestyle claims (house/car posts on social media) that have nothing to do with company A.
If Promoter X is fined $y, company A should either also be fined $y or a percentage of it (it’s a company, make it 200%).
That kind of enforcement is far more effective then any self-regulation initiatives the industry itself comes up with.
Here’s where things get complicated… the FTC’s request for comment details twenty-eight relevant question issues.
That’s a lot to cover in one hit, even for someone like me who’s been covering the MLM industry for over a decade.
Further compounding accessibility to comment is repeated requests for supporting evidence. Here’s an example from the FTC’s first question issue;
If so, describe the relevant industry or business context and the basis for your position.
Provide any evidence, such as empirical data, consumer perception studies, or consumer complaints, that demonstrates the extent of such practices. Provide all evidence that supports your answer.
That’s one question, pertaining to “the use of false, unsubstantiated, or otherwise misleading earnings claims by entities or individuals”.
I can tell you now “false, unsubstantiated, or otherwise misleading earnings claims” are absolutely being used to promote MLM companies. Give me an MLM company name and enough time and I’ll find an example.
From a consumer standpoint is the FTC looking for comment on specific companies or the industry as a whole?
If I were to answer just the first question, my submission could easily run into thousands of words and dozens of examples. How broad am I supposed to go?
And then to do that twenty-seven times more? I’d have to shut BehindMLM down for six months and my submission would likely run into half a million to a million words.
The FTC’s comment form is limited to 5000 words and 20 attachments. That’s less than one attachment per question issue.
Just trying to explain the FTC seeking comment on a proposed Earnings Claims Rule in this article has come in at ~1960 words.
Granted I’m not your typical consumer but the FTC doesn’t provide any guidance on this. I think they could have done a better job rather than dumping 28 questions onto the public.
FTC staff has access to the same resources consumers do. How about soliciting less intensive replies from consumers and cross-checking that internally?
At time of publication the FTC has received 1047 comments from consumers and organizations – 200 of which were made in the last 3 days alone.
I’ve clicked through on about 15 to 20 and most are a few paragraphs from consumers, detailing personal experiences (mostly negative) with respect to MLM.
As far as the FTC’s twenty-eight issue questions go, these appear to be, at least in the small sample-size I looked at, ignored. Or at least not directly addressed. I’m not sure how helpful that is.
One comment I saw called on the FTC to not implement an Earning Claims Rule because, among other things;
MLM has operated nationally since the 50s and globally since the 80s. In all this time, FTC never enacted any “rule” affecting MLM
Though MLM has financially solicited virtually every US household, FTC has never conducted an investigation. To now include MLM in a sweeping Earnings Rule violates FTC’s regulatory precedent.
A third of that comment is used to promote its author.
Instead of giving consumers a 5000 box in which they can type anything in, perhaps present a form that has the questions the FTC wants addressed. Limit each text area to 2000 to 3000 words and cut down the number of questions presented.
I think that’d be far more productive and useful to FTC staff.
Anyway, if you want to throw in your 2 cents regarding an Earning Claims Rule, submissions can be made here. Comments are being accepted until May 10th.
The list of question issues provided by the FTC can be seen here (scroll down). Comments approved for publication can be seen here.
I’m OK with these being discussed in the comments below but please remove any personally identifying information (company/organization information is fine).
I’d like to see more requirements put on affiliate recruiters as well. Some ideas:
– A 1099, or a Schedule C even better, must be available to the new prospect if the recruiter has been in at least one tax year.
– A disclosure of how many downline, and how many non-affiliate customers the recruiter has.
– Disclosure of how much commission they will make off the new prospect’s initial order.
– A verbal communication by the recruiter, and a bold written notice on the prospect’s affiliate agreement of all requirements, so prospect knows their rights to this information.
My only consideration with individual reporting is the admin work behind it. I imagine it’d be pretty burdensome for the FTC to have to police retail/recruitment ratios at an individual level.
Those disclosures to prospects sound good, although I’m not sure they’d work in the current social media marketing climate.
Strengthening the emphasis on retail sales through laws/rules would make it easier overall to streamline court cases against MLM pyramid schemes. I’d be all for avoiding the grey area cases we have going at the moment for years (Nerium/SBH come to mind).
I mean nothing stops someone from mounting a defense but it shouldn’t be a “if they win then pyramid schemes are legal” scenario.