The Potential Cost of Misleading Income Claims
Nov 4, 2021 by Peter Marinello, Vice President, Direct Selling Self-Regulatory Council, BBB National Programs
The Federal Trade Commission (FTC) recently put direct sellers, and other companies offering money-making opportunities, on notice: false promises about earnings potential and other aspects of a company’s business opportunity could subject the company to civil penalties of up to $43,792 per violation.
To curb the proliferation of deceptive money-making claims, the FTC invoked a rarely used provision of the FTC Act, Section 5(m)(1)(B), which allows the FTC, under certain circumstances, to seek civil penalties against parties who engage in conduct that they have actual knowledge is unfair or deceptive. In its recent Notice of Penalty Offenses, the FTC listed eight claims related to money-making opportunities that it has determined are deceptive. It served this Notice on over 1,100 companies, including direct sellers, franchises, business opportunities, and gig economy businesses.
Under this Notice, if the FTC can establish that a company knew its money-making claims violated the FTC Act, then the company’s message of alluring wealth and riches could boomerang and result in significant financial consequences to the company making the claim.
Direct selling companies and others in the gig economy were not the first group of advertisers to receive Notices of Penalty Offenses from the FTC. Recently, the FTC targeted two other segments of the advertising industry: over 700 companies received notices regarding fake reviews and misleading endorsements, and 70 for-profit higher educational organizations received notices regarding false promises made about graduates’ job and earnings prospects.
The FTC served the penalty offense notice about reviews and endorsement claims on the companies on which it also served the notice about false money-making claims. This is not surprising, given that claims about earnings are frequently made through endorsements and testimonials.
While the FTC’s approach of issuing Notices of Penalty Offenses regarding deceptive earnings claims may be new, the FTC’s concern about false and misleading money-making claims is not.
Earnings Claims Guidance
Since its inception in 2019, the Direct Selling Self-Regulatory Council (DSSRC), part of BBB National Programs, has been cautioning direct selling companies about the need to be truthful, accurate, and non-misleading when communicating earnings claims. In the summer of 2020, DSSRC published its Guidance on Earnings Claim for the Direct Selling Industry, which reinforces fundamental tenets regarding the dissemination of earnings claims by direct selling companies and their independent salesforce members and provides mock examples to illustrate those principles. In light of the FTC’s Notice of Penalty Offenses on deceptive earnings claims, it is worth emphasizing two of those tenets, regarding claim interpretation and claim support.
Earnings Claim Interpretation
An earnings claim may be made expressly or implied through what is said, depicted, or left unsaid. The DSSRC Guidance provides examples of representations that are considered earnings claims:
- A level or range of actual or potential earnings that may be earned by salesforce members;
- A level or range of gross or net income or profits, including representations that suggest that the ability to make lifestyle purchases – such as homes, vehicles, vacations, etc. – are related to income earned from direct selling;
- Any statement, representation, or hypothetical scenario from which a current or prospective salesforce member could reasonably infer that he/she will earn a certain level or range of income;
- Any chart, table, or mathematical calculation demonstrating possible income, actual or potential sales, or gross or net profits based upon a combination of variables;
- Marketing materials or advertising describing or promising potential income amounts or demonstrating extraordinary or lavish lifestyles of salesforce members enabled by their participation in direct selling;
- Suggestions that salesforce members may earn or have earned company-sponsored incentives, including those lifestyle purchases such as homes, vehicles, vacations, or other rewards.
Like the FTC, DSSRC evaluates claims based upon the context in which the claim appears and the potential net impression of such claim to the audience. This means that sellers cannot focus on just the literal words in their ads or posts but must also consider what may be implied. For example, descriptions or images of opulent mansions, private helicopters, private jets, yachts, exotic automobiles, or any substantially similar descriptions or images convey that participation in a direct selling business is likely to result in the ability of the participants to live a lavish or extravagant lifestyle. The Guidance makes clear that such claims are prohibited lifestyle claims.
Similarly, the Guidance states that companies should not use certain terms commonly used when making representations of potential earnings including phrases such as “financial freedom,” “full-time income,” “replacement income,” “residual income,” and “career-level income.”
Earnings Claim Support
In addition to claim interpretation, DSSRC’s Guidance addresses the support companies must have for the earnings claims they make. Section 13 of the FTC’s 2018 Business Guidance Concerning Multi-Level Marketing states that a company must have a reasonable basis for the claims it disseminates to current or prospective participants about its business opportunity and that if direct selling participants generally do not achieve the income claimed or the lifestyle depicted in marketed materials from a direct selling company, these representations likely would be false or misleading.
DSSRC’s Guidance similarly notes that:
- Earnings claims disseminated by salesforce members should be supported by substantiation demonstrating that the earnings communicated in the claim are accurate as to the individuals depicted in the claim. Such claims should also be otherwise truthful and non-misleading.
- With respect to any earnings claim, if the direct selling company does not have substantiation that the experience of the individual depicted is representative of what the audience will generally expect to achieve, the advertisement (e.g., social media post) should clearly and conspicuously disclose the generally expected results in the depicted circumstance. The direct selling company also must possess adequate substantiation for the representation of the generally expected results.
- Disclosures that are necessary to prevent deception pertaining to atypical earnings claims should be clear, conspicuous, and in close proximity to the triggering representation.
DSSRC Is Here to Help
DSSRC has been encouraged by the direct selling industry’s response to the Guidance and its commitment to the ongoing training and monitoring of its salesforce members to ensure that earnings claims are truthful, accurate, and not misleading. DSSRC is committed to continue providing guidance to companies as they contemplate how they communicate claims about the direct selling business opportunity. The Direct Selling Association (DSA) provides similar guidance to its members in its Code of Ethics, to which all DSA members are required to adhere.
Though the industry is making progress, there is still room for improvement, particularly in ensuring salesforce member compliance. Regardless of whether a company received a Notice of Penalty Offense from the FTC, the time is ripe for anyone making earnings claims to ensure their claims are compliant. DSSRC stands ready to assist direct sellers in this effort by providing advice on compliance with our Guidance.
All DSSRC case decisions are posted publicly on the BBB National Programs website.