Network marketing opportunities and income claims go hand in hand. It’s just a fact. Ours is an industry that provides financial opportunity, which naturally leads prospects to ask the very basic question: “what’s in it for me?”
It’s human nature. Regulators know this better than anyone. This leaves companies and distributors in a tricky position. Does the business prohibit ALL talks of income, thereby limiting the excitement of those involved and their desire to share the products and opportunity with others?
Or on the opposite end of the spectrum, should a company just “let it go” and allow the field to say and do whatever it wants (i.e., the don’t see, don’t ask, don’t tell posture)?
The answer lies somewhere in the middle with a more targeted, training-intensive approach.
In Part One of this series, we explored the FTC’s historical perspective on how it evaluates and enforces income claims. The long story short is this: the presence of income claims comes with the need for adequate disclaimers and disclosures.
To conclude our look at income claims, this article will propose how companies and distributors should position income claims and the type of training necessary to educate the field on what they can and cannot say.
Guidance from the DSSRC
Seeing that income/earnings claims represents one of the greatest challenges faced by network marketing companies, the Direct Selling Self-Regulatory Council (DSSRC) put out an informative document that provides guidance on the subject.
The DSSRC expounds upon key principles surrounding claims through the use of educational examples of social media posts.
Some particularly noteworthy principles the DSSRC touches upon includes the following:
- Earnings claims should always factor in and mention distributor costs associated with operating a business (e.g., registration fees, travel, mandatory attendance at company events).
- The FTC holds companies responsible for what its distributors say, especially with respect to social media posts. “A direct selling company is responsible for the earnings claims made by its salesforce members.“
- Words/phrases like “quit your job,” “replacement income,” “career-level income,” and “unlimited income” are examples of problematic (and in some cases outright prohibited) lifestyle claims that are likely misleading to the average consumer.
After reading all this, you may be thinking — what the heck can distributors say about compensation?
The answer is a lot so long as income/earnings messages are done correctly. If I had to pinpoint the single biggest thing companies and their sales force fail to do in generally discussing compensation it’s this: A failure to convey generally expected results.
Examples
Let’s look at some examples to better understand what this all means.
Example A – a Facebook Post:
Since I joined BestMLM in the fall of last year, I’ve earned $2,400/month.
What’s wrong with this?
Well, for starters there is no reference to the average annual income typical of BestMLM distributors. A modified version of the post would include an asterisk after the quote and the following phrase displayed clearly at the bottom of the post, “In 2020, the typical annual income earned by a BestMLM Distributor is $435.
Please click the link to review our full income disclosure document.” Without that disclaimer featuring the average income, the social media post is atypical of what a BestMLM distributor can expect to earn and therefore misleading in the eyes of the DSSRC and regulators.
Secondly, both the DSSRC and the FTC may question whether the earnings amount ($2,400) includes the appropriate context, like incorporating in costs associated with running a BestMLM business.
Let’s say, for hypothetical purposes, that the BestMLM opportunity requires $99 in back-office fees every month and the purchase of $200 of inventory for resale per month.
This would mean the BestMLM Distributor should incorporate the $300 costs into her original statement, which would reduce her claimed earnings of $2,400/month down to $2,100/month.
Example B — an Instagram post:
Thankful BestMLM rewarded all my hard work with a much-needed trip to paradise!
This lifestyle claim is deficient. The key question here is how common it is for a BestMLM distributor to get this sort of incentive trip.
The correct thing to do would be for this poster to include at the bottom a disclaimer highlighting either the average income or the number of BestMLM distributors who typically earn this sort of trip.
The disclosure provided in the example above would suffice (“In 2020, the typical annual income earned by a BestMLM Distributor is $435. Please click the link to review our full income disclosure document.”) [i.e. Income Disclosure | Amway United States]
Or the following: “Of BestMLM’s 45,000 salesforce members, about 2,200 outstanding Distributors achieve this sort of incentive trip this year.”
Without a disclaimer adding in some important context, the impression for those who view the post would be that the incentive trip is something to be expected.
Example C — a testimonial video from a top-earner in BestMLM:
In 2019, I earned $1.2 million working as a BestMLM Distributor. Safe to say, this was the best decision of my life.
Let’s say this claim is completely truthful and that this top-earner did in fact earn $1.2 million as a BestMLM Distributor. That is, the company can substantiate the accuracy of the proposed earnings. So what’s the problem?
Well, the FTC has taken issue with even truthful testimonials from a small minority of people if the presentation fails to include the amount earned/lost by most participants — or the average generally expected results.
Nevertheless, this claim in my opinion is STILL problematic even WITH a disclosure of average earnings.
In a recent speech given to the DSA by FTC Commissioner Noah Joshua Phillips, he spoke of the risky nature by which companies tout extraordinary earnings not reflective of what the typical participant achieves.
He stated, “In fact, after a consumer sees a claim about atypical earnings, it will likely be difficult to correct that consumer’s impression with a disclaimer so that you leave him or her with a truthful net impression.”
This is another way of saying that a disclaimer is likely not an adequate remedy to any impression that BestMLM Distributors can or will earn a million dollars in a year.
Therefore, touting career-earnings by top network marketers is a risky proposition for companies in the current regulatory environment that’s probably best avoided.
Good Compliance Starts with Good Training
Companies cannot expect distributors to inherently know what they can and cannot say about income. A strong compliance culture starts with necessary training.
MLMs must expend time and resources on providing back-office tools to its salesforce members. These tools may take the form of company newsletters covering topics on income disclosures or social media posts discussing money.
Teaching distributors where the Income Disclosure Statement is located and how to affix it to testimonials, social media posts, and other messages.
Training needs to be part of the company’s culture. It’s not a one-and-done thing, the education never stops.
Once the right training is in place, companies must then monitor the field. People will inevitable make mistakes. Perfection isn’t the standard, accountability is.
Compliance Departments should document when disciplinary measures occur and the actions taken to correct the inappropriate behavior. If regulators start asking questions, a buttoned-up compliance program full of effective protocols that are actually enforced can go a long way.
Have any questions about income claims or what you or your company can do to more effectively enforce its compliance program? Contact us.
Michael Kissinger and
Sydney Ritenbach
Phone 415-678-9965
Email: mjkkissinger@yahoo.com
Article by: Thomas Ritter an associate attorney at Thompson Burton PLLC. See: Distributor Resources Archives – The MLM Attorney (thompsonburton.com) His practice area focuses primarily on cybersecurity law, which includes an assortment of data protection and privacy-related matters, and a wide-variety of business transactions. He assists diverse businesses from well-established companies to early stage start-ups.
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