Direct Selling Law 101: How to Keep the Regulators Happy

direct selling law
Back to News November 20, 2019

Direct Selling Law 101: How to Keep the Regulators Happy

 
Everyone in our industry is thinking more and more about direct selling law these days. Recent actions by the FTC to crack down on certain direct sales practices have caused many companies to rethink various aspects of their promotional activities and compensation plans.

But there’s no need for MLM firms to panic. By following some simple, clear best practices, any direct sales company can steer clear of trouble without compromising the ability of its sales reps to attract and retain customers.

To help you navigate the current regulatory environment, we recently spoke with Steve Richards, a principal at Reese Poyfair Richards, PLLC. We at Thatcher have worked with Steve for years, often collaborating with him in industry groups to help firms understand direct selling law and fine-tune their business practices accordingly.

Here’s a summarized version of that interview.

 
Thatcher: Everyone is talking about the recent Advocare case with the FTC. What did you find most interesting about that decision?
 
Steve Richards (SR): After all the months of rumor, everyone is finally reading about what actually happened. The high-level story is that Advocare is transitioning from an MLM model to basically an affiliate program. From now on, their independent contractor distributors will only be compensated for their own sales, not for their downlines.

But one thing that really caught my eye in the stipulated Order between the FTC and Advocare, was that two husband-wife couples who were Advocare distributors were specifically named in the lawsuit, and were a significant reason that the FTC went after Advocare and Advocare was ordered to pay such a staggering fine. The FTC went after Advocare in large part due to what these couples, and presumably others, were doing and saying in promoting their independent Advocare businesses.

Why is this significant? These people weren’t employees—they were independent contractors, like most distributors. I think that we can all agree that the claims that they were making would have been problematic for Advocare if they had come directly from the company. But the FTC ultimately held Advocare responsible, almost as if the claims had come from the company itself.

This case is a significant example of what I call the “independent contractor fallacy” in direct selling law. Most firms know they can’t make certain claims about income potential, and can’t claim that their nutritional products will cure, treat, or prevent disease. When we tell them they need to prohibit their distributors from doing the same thing, they understand that, too. But when we tell them they need to police their distributors and watch for these kinds of promises, all too often they’re surprised.
 
Thatcher: Direct selling firms probably think, “We can’t control what our distributors say!”
 
SR: Exactly. But the Advocare case illustrates that what independent contractors say and do can be interpreted as violations of direct selling law by the firms themselves. This is the case even though they are independent contractors.
 
Thatcher: What are some of the ways that distributors typically run afoul of FTC regulations?
 
SR: One of the obvious ways would be a video on social media in which your top distributors are showing off checks they earned by participating in your opportunity. Now, these may be legitimate checks for money they actually did earn through your program—but if their results are not representative of what the average distributor could hope to attain, you could get flagged for an inappropriate income claim.

The same principle applies when a distributor gets up on stage at one of your events and talks about how much money they made last year. Again, they’re being honest down to the penny, but it could still be labeled a deceptive claim by the FTC or state regulators because this person is in the top tenth of a percent of all your sales reps and their results are not typical. That is, they do not represent the results that have been achieved by the typical or average distributor.

Not only can you not throw around large dollar figures without putting them in context, but you also can’t promise big money by inference or referential storyline. An example would be making a video where your top sales rep is discussing the opportunity while leaning against the hood of his Ferrari, and then at the end of the video he drives away from his beachside house.

This is called a lifestyle claim, and lifestyle claims can come in many forms. The Ferrari and beachside house is an obvious one, but it can also be something subtler, like having a distributor say, “Because of our direct selling business, my husband was able to quit his full-time job,” or “We were able to send our children to an exclusive private school.” These lifestyle claims are making an implied income claim, which can be seen as deceptive because, again, the average distributor isn’t achieving these results.
 
Thatcher: How can a direct selling firm avoid these many pitfalls?
 
SR: The first approach would be one that I’m sure no direct selling firm wants to take: don’t make any income claims at all. But that can severely hinder a firm’s ability to attract new distributors.

A more reasonable approach would be to examine your income claims—whether they’re explicit or in the form of a referential storyline—and ask yourself whether they represent the average results for all distributors. If they don’t, you need to make disclosures to alert your audience that these results are not typical.
 
Thatcher: Is it enough to add the footnote, “Results Not Typical”?
 
SR: That will not cut it with the FTC. Instead, firms need to make disclosure about the average earnings of ALL distributors within a certain time period.

Most direct sales firms publish some kind of income disclosure statement that shares the numbers on what their sales reps actually earn. This statement has to be both conspicuous and contemporaneous. In other words, it needs to be easy to find on your website or in your marketing materials, and it has to be provided at the same time you’re making an income claim. That’s the contemporaneous part. The disclosure must also be conspicuous. In other words, it cannot be hidden in fine print or in an audio or video presentation read at a speed that is incomprehensible to most people.

So the bottom line is that you can feel free to say something like, “We offer not only great products but also an income opportunity and we’d love to have you join us!” without providing proof. But if you’re going to get more specific with your income promises, you’ll need to back it up.
 
Thatcher: How would you sum up the FTC’s current mindset towards MLMs and direct selling law?
 
SR: That’s a huge topic that I would love to discuss with you in more detail. But for purposes of what we’ve been talking about today, companies need to be aware that the FTC wants to see them promoting products, not income opportunities. Yes, you can still promote the income opportunity and even make income claims, but you have to make sure that the claims are reasonable and are accompanied by all the appropriate disclosures.

Be careful in those disclosures. Many companies play fast and loose with their income data. They may report that at the lowest level of distributor, the average income is, say, $25 per month, and at the second tier it’s $100 per month. They continue this way up the ladder. But they’ve actually stripped out all the people who are earning $0 per month. They try to get away with this by saying that the income figures represent all “active distributors,” and that nobody who earned $0 is an “active” distributor. This is deceptive, because if someone is still signed up as a distributor, they may very well be actively trying to sell products but not closing any deals. Or they may have been enticed to join because of over-the-top income claims and found that success in this business takes a lot of hard work, perseverance, and even some luck. If they haven’t experienced immediate success, they may give up. Nonetheless, these people are still distributors and excluding them from the calculation of average earnings is deceptive.
 
Thatcher: We’ve mainly focused on income claims here, but what about nutritional claims? Is the FTC cracking down on those, too?
 
SR: I don’t think anything has changed there, so I’ll recap some direct selling law best practices that I’ve seen work well in the industry. If your firm is selling nutritional products, you need to make sure your claims aren’t crossing the line into disease or drug claims. These types of claims can only be made for products that have gone through the FDA’s drug approval process. Since dietary supplements by definition are not drugs, claims that they may be useful in the treatment or prevention of diseases cannot be made for them.

So, for example, your video can’t feature a customer saying, “I took this pill and my eczema cleared right up!” That’s a drug claim. You’re saying your product cured a disease. And yes, if one of your distributors makes a claim like this, you can be held liable.

What you can make are structure/function claims. These are claims in which you say your product helped support a structure or function of the human body. For example, it’s OK to say that vitamin C supports the immune system, or that calcium supports bone health. Keep in mind, however, that you still need to have competent and reliable scientific evidence to substantiate a structure/function claim.

You and your distributors can also feel free to make more benign claims about your nutritional products. You can say your product helped soothe an upset stomach, or helped someone sleep more soundly. In these cases, you’re obviously not claiming that your product cured a disease.
 
Thatcher: What’s the biggest takeaway for direct sales firms in light of the Advocare decision?
 
SR: Companies not only have to be careful about how they describe their products and make income claims, but they also have to police the way their distributors are making these claims. If you can’t demonstrate that you have a reliable process for monitoring distributor activities, you could be found in violation of direct selling law. It’s no longer enough to sit back and wait until you are made aware of the violations your distributors are committing—you should be seeking out these violations and addressing them immediately.

 

How Technology Can Help You Comply with Direct Selling Law

Thank you to Steve Richards for taking the time to speak with us and share his expertise with our audience.

By now, you may be wondering how technology can help you monitor the promotional activities of your sales reps and encourage them to make realistic promises. There’s no silver-bullet solution that can prevent every violation of direct selling law. But Thatcher’s Prowess platform provides features that can help.

Within Prowess, every distributor can create a website that they can personalize with their own photos, profile, tagline, and testimonial. By setting controls within the platform, you can ensure that someone at your corporate office approves the content of every distributor website before it is published.

In addition, Prowess enables you to maintain and provide access to a content library from which your distributors can draw as they’re preparing promotional materials. This library should contain media, text, and coaching logic that you’ve carefully examined to make sure it is free of deceptive practices.

If you have specific questions about direct selling law, we highly recommend you reach out to Steve Richards at Reese Poyfair Richards, PLLC. Thanks for reading!

7 Must-Have Capabilities
for Direct Selling Software Download the White Paper
Holler Box