Revised FTC Endorsement Guidelines: Part 1 (Master Distributors)

Endorsements and Testimonials GuidelinesAs I was reviewing the revised FTC endorsement guidelines, I ran across several provisions that would impact the direct sales industry. When people read the word “impact,” I think they naturally assume it’s a negative thing. Undoubtedly, the revised FTC guidelines calls for more disclosures from network marketing companies. In a multi part series, I’m going to hash out the provisions that network marketing companies need to pay special attention to.

I recently wrote an article about “Master Distributors” and explained the pros and cons of cutting special deals with top networkers. In the end, I see nothing wrong with businesses cutting favorable deals with top performers. HOWEVER, I think it’s important for companies that cut these deals to disclose the relationship to the public. There’s a provision in the guidelines that’s directly on point:

§ 255.5 Disclosure of material connections

When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed. . . . Additional guidance, including guidance concerning endorsements made through other media, is provided by the examples below.
. . .
Example 4: An ad for an anti-snoring product features a physician who says that he has seen dozens of products come on the market over the years and, in his opinion, this is the best ever. Consumers would expect the physician to be reasonably compensated for his appearance in the ad. Consumers are unlikely, however, to expect that the physician receives a percentage of gross product sales or that he owns part of the company, and either of these facts would likely materially affect the credibility that consumers attach to the endorsement. Accordingly, the advertisement should clearly and conspicuously disclose such a connection between the company and the physician.
End Quote

Analysis

With master distributors, assuming a special deal has been cut, there’s certainly a material connection that would not be expected by the audience. In this case, as stated by the guidelines, the connection would need to be disclosed because absent a disclosure, regulators will perceive the endorsement as deceptive or misleading. In example 4 above, the endorsing physician was earning a cut of gross sales of the product. In that context, the guidelines clearly state that his relationship with the company should have been disclosed.

Let’s play around with the characters in the example 4 hypothetical. Instead of an anti-snoring product, let’s say it’s a water filtration system sold via network marketing. And instead of a physician, let’s say she’ a distributor. We’ll call her Susan. Additionally, as with the physician in the above example, let’s say Susan is receiving a percentage on the gross revenue of her downline volume. Since Susan is getting a special deal that’s not available to the public (again, there’s nothing wrong with this), let’s call her a master distributor.

Now that the scene is set, let’s play around with some facts. Susan is at a convention talking about the incredible benefits of the walter filters and about how they zap salmonella and chlorine. She also talks about the incredible financial opportunity referencing the unique binary/two-up/matrix/unilevel hybridization, patent pending, copyrighted pay plan. Since Susan is the recipient of a lucrative deal (percentage on gross revenue), it could be perceived as a fact that would “materially affect the credibility that consumers attach to the endorsement.” If consumers knew about Susan’s deal, they would be in a better position to weigh in on the veracity of the endorsement being made. Consumers might think to themselves “Of course this is the opportunity of a lifetime…for her!” Or, if Susan and the company handle it well, Susan can build trust with her organization from a position of full disclosure whereby her endorsement would still merit attention.

When companies and distributors do not disclose these deals, it’s my opinion that’s it’s an abuse of goodwill accrued by the distributor. Clearly, their opinion means something or else they’d be unable to draw over the hundreds and thousands of new participants. People trust their leaders and that measure of trust has value for companies looking to beef up their sales. If new participants were aware of a special deal, they would at least be operating with all of the facts. And in most cases, the participants would still follow their leader.

What do you think about this FTC provision? Do you think companies should disclose their deals with master distributors?