In this video, I explain what it means when our firm is retained by a network marketing client. The fact that I’m retained should never be viewed as an endorsement of the program. There’s a lot that goes one when I’m working with a client and I make it very clear that my name is never to be used in a promotional sense i.e. “We hired Kevin Thompson and he says we’re a great company.” I want you to have a better understanding of what it means when I’m retained by a client. Watch this video to understand more.
If you’ve been in business for very long, there’s a good chance you’ve received what I call an “eat s%@#” letter from a lawyer. These are commonly referred to as “cease and desist” letters and are designed to serve two functions:
- Intimidate the other side in an effort to get them to stop doing something; and,
- Put the other side on notice that if the bad behavior persists, they could get sued.
Cease and desist letters are commonly used by network marketing companies when distributors are raiding the downline. I’ve sent dozens of these letters to disgruntled distributors on behalf of companies, usually with a bit of discomfort while hoping the information I’m fed is accurate. This is my litmus test I explain to clients before sending a C&D: if they’re willing to spend the money to sue the other party if the letter is ignored, I’ll send it. Otherwise, I’m not interested in allowing a client to take a gamble with my credentials. I’m not a fan of sending hollow threats. When someone sees a C&D on Thompson Burton letterhead, it needs to be known that we follow up, otherwise C&Ds are meaningless.
Negative Online Commentary
Negative online commentary is the cost of doing business. If you’re doing anything meaningful, there’s going to be some skeptical people. And if you’re doing something shady, there’s going to be a lot of skeptical people, some of whom will choose to write an article about you or your business. It’s the nature of the internet. We all have the power to publish content at the push of a few keys. While I have several thoughts on how companies should deal with negative online articles, I’m going to focus instead on what they should NOT do: have their lawyers send Cease and Desist letters.
In all of my years seeing online publishers post negative commentary about companies here and there, I have never once seen an author actually heed the C&D (hey, that rhymes). Troy Dooly gets them. BusinessForHome gets them. And now we can add Oz over at BehindMLM to the list. Oz was recently sent a C&D regarding his review about “BidsForMyMeds.” And what was the result? The article was not pulled down. On the contrary, Oz dedicated another article to the business and made the poor lawyer famous. Unless a company is willing to defend itself publicly on a platform it does not control, it should always lead with a hand shake instead of a handgun. Be proactive instead of reactive. I have yet to see an instance where an online author posts blatant lies about a company or person. In that scenario, it might make sense to throw a punch. In nearly all cases, the authors are providing their opinions. As biased as those opinions might be, they’re still opinions and given broad protections under the First Amendment.
Scope of the First Amendment
When you’re thinking about calling your lawyer to send one of these nasty-grams to an online meanie, it’s important to understand the limits of First Amendment protections. Below, I’ve inserted some notes from one my talks a few years ago with respect to the First Amendment and blogging. Bottom line: save the Cease and Desist for those occasions when the damages are real, you’re justified and you’re fully prepared to go the distance. Otherwise, throw water on the fire instead of gasoline by reaching out human-to-human and engaging in a conversation. Keep your emotions under control.
If you’ve received a C&D, how did you handle it?
Beginning of my notes
A statement is defamatory if it “tends to injure the plaintiff’s reputation and expose the plaintiff to public hatred, contempt, ridicule, or degradation.” Phipps v. Clark Oil & Ref. Corp., 408 N.W.2d 569, 573 (Minn. 1987).
The defendant must have known or should have known that the communication was false. The statement must also have been a statement of fact.
Defamation Per se
Some statements are so defamatory that they are considered defamation per se; and the plaintiff need not prove that the statements harmed his reputation. The classic examples of defamation per se are allegations of serious sexual misconduct; allegations of serious criminal misbehavior; or allegations that a person is afflicted with a loathsome disease.
What Constitutes Injury to Reputation?
The plaintiff must establish proof of damage to reputation in order to recover any damages for mental anguish; see Gobin v. Globe Publishing Co., 232 Kan. 1, 649 P.2d 1239, 1244 (1982).
Some plaintiffs have such poor reputations to begin with, they are considered “libel- proof.” A plaintiff is “libel-proof” when his reputation has been irreparably stained by prior publications. At the point the challenged statements are published, then, plaintiff’s reputation is already so damaged that a plaintiff cannot recover more than nominal damages for subsequent defamatory statements. Marcone v. Penthouse Int’l Magazine for Men, 754 F.2d 1072, 1079 (3rd Cir. 1985).
Defenses to Defamation
Truth is an absolute defense.
If the communication is designed as a parody where a reasonable audience would not confuse it as factual, it is not actionable. Falwell v. Hustler Magazine. In Falwell, the Supreme Court held, “At the heart of the First Amendment is the recognition of the fundamental importance of the free flow of ideas and opinions on matters of public interest and concern. The freedom to speak one’s mind is not only an aspect of individual liberty – and thus a good unto itself – but also is essential to the common quest for truth and the vitality of society as a whole. We have therefore been particularly vigilant to ensure that individual expressions of ideas remain free from governmentally imposed sanctions.”
In the mid-80s, Hustler magazine printed a satirical advertisement talking about Jerry Falwell’s “first time” with liquor. The advertisement was a play on words that made it seem like Jerry was talking about his “first time” with his mother. Since the advertisement was clearly a parody and one where a reasonable audience would know that the statements were not factual, Jerry Falwell lost his lawsuit.
If the Plaintiff is considered a Public Official or Public Figure, they have to prove that the Defendant acted with malicious intent to harm the Plaintiff. It’s an extra element that makes it more difficult for public figures to file suit against their detractors.
What’s a Public Figure/Official
In general, Public Officials are individuals that hold public office while public figures are individuals that are in the forefront of particular issues.
Large, publicly traded companies are typically treated as “public figures” for purposes of First Amendment cases. If a citizen lashes out at Comcast and communicates false statements. Comcast would have the additional burden of proving that the individual acted with malicious intent to harm the company.
The First Amendment protects statements of opinion, as distinct from statements of fact, against claims of defamation. A statement is an opinion when:
(1) the statement is genuinely believed; and
(2) that there is a reasonable basis for that belief; and
(3) that the speaker is not aware of any undisclosed facts tending to undermine the accuracy of the statement.
Prefacing a sentence with “in my opinion” is not always the cure. Statements of opinions can be actionable when one of the above factors is absent.
– end notes –
This article was written by the former President of the DSA, Neil Offen. It was published in Direct Selling News magazine. The article was so well-written that I requested permission to republish on my site. In the article, Neil dispels of several myths about network marketing and he casts a strong vision on ways to improve its reputation. I’ll gladly share my site with anyone willing to LEAD the industry in a better direction. At a time when the industry is being attacked by people with a financial incentive to bring it all down, this content is important and it’s very worthy of your attention. +Kevin Thompson
By Neil H. Offen
It has been slightly over two years since I retired after 40 years with the Direct Selling Association (DSA), first as a staff attorney and lobbyist and eventually as President and CEO. In addition, I was there at the creation of the Direct Selling Education Foundation (DSEF) and the World Federation of Direct Selling Associations (WFDSA), serving as Vice Chairman and Secretary General, respectively, of those two organizations.
I have spent some 42 years in our industry—the reality is that it’s a method of distribution more than an industry per se—representing it, protecting it, promoting it and policing it. To say the least, I have seen much change, much adaptation, and much growth and innovation during that period. At the same time, I have seen the industry’s core values remain focused on empowering people one individual at a time, seen it being led by women and men of integrity and high moral character, and seen a continuing commitment to and passion for our distributors by corporate management.
I have also witnessed a spirit of service by our industry and its companies, their personnel and their representatives in the field in the various communities in which they operate. Given all of the good that our industry represents, it is disappointing to see the negative attacks on it. At this juncture in the road, the direct selling industry faces the question: Do we let our critics define us or do we take steps to make sure we better control our own reputation?
To explain what I mean, I will be focusing on four areas. One disclaimer that I need to make at the outset is that I am speaking for myself and only myself. I am not representing the DSA, the WFDSA or any other entity.
The four areas I will discuss are the industry’s attributes, the negative myths and canards leveled against it, the actions that can harm the reputation of the industry, and finally, what I see as possible solutions and courses of action that will continue to protect, promote and enhance the reputation of the direct selling industry. I use the terms sales persons, consultants, distributors and representatives interchangeably throughout the article.
Do we let our critics define us or do we take steps to make sure we better control our own reputation?
Direct Selling Attributes: What Are They?
All of us working in direct selling believe in its positive attributes. I’ve listed here those truths about the direct selling opportunity that I believe are most powerful:
- It empowers people. Its diversity is without bounds. It offers opportunities for people to set their own objectives, great or small, through full- or part-time efforts, for career opportunities or merely for supplemental income. It is an industry that directly ties reward to effort. It does not discriminate based on race, gender, national origin, religion, age, physical condition, educational background, political beliefs or financial resources;
- It provides unlimited flexibility for the individual to achieve her or his own goals and control the time spent in the business as well as how that time is spent;
- It drives micro-enterprise development wherever it operates—in a world seeking and needing such enterprises—and is a robust, grassroots source of business skills education, guidance and training;
- It motivates people through providing recognition, quality products and services, technical resources and an overall nurturing environment with ongoing symbiotic support;
- It provides opportunities with minimal capital investment or risk of loss;
- It provides consumers with outstanding product warranties and guarantees in each marketplace in which it operates;
- Its rules and standards, through company policies and through the independently administered direct selling associations’ codes of ethics, protect both salespeople and their consumers from abuse;
- It is a simple business, though not necessarily an easy one, and due to the independent contractor status of each salesperson, it allows great ease of entry and egress;
- It is global in nature and borderless in promotion of common core values and ethical standards;
- It is innovative, adaptive and technologically friendly;
- It has a strong public service and corporate social responsibility orientation at both the corporate management and the individual distributor levels;
- It offers social contacts in a world where more and more people are becoming isolated from one another;
- It is cause-oriented where its distributors believe in the product or service or opportunity and that they are helping to fill a valuable need of friends, family, neighbors and the public at large; and
- It is a source of social and economic stability and opportunity within all its markets
“Direct selling motivates people through providing recognition, quality products and services, technical resources and an overall nurturing environment with ongoing symbiotic support.”
Myths and Canards
Several untrue assertions regarding our industry permeate the Internet and mainstream news media. The following are some of the misstatements or outright lies often attributed to our business model.
Myth No. 1: All—or almost all—people who participate in direct selling lose money.
In my experience, the reality is that an overwhelming majority of people who join a direct selling company to sell products and build a business do profit from it. DSA research shows that over 80 percent of business-oriented recruits have very modest goals when joining a company and the vast majority, whether still with the firm or no longer in the industry, have their expectations met or exceeded. The distributors earning the highest level of income are the business builders who typically spend significant time on the business selling, recruiting, motivating and training distributors and consumers in their organizations. They generally constitute between 10 percent and 20 percent of the salesforce. There is nothing wrong or unethical about this model, and this is similar to most non-direct selling retail sales organizations.
In addition, the industry has implemented safeguards against financial loss. The biggest protection against financial loss for all participating in our business is the unconditional product money-back guarantees for consumers and, for sales people, our minimum 90 percent inventory buy-back. All DSAs require their member companies to offer buy-back protection to all their distributors. Membership in a DSA is an added protection from abuse for sales people, potential sales people and consumers.
“DSA research shows that over 80 percent of business-oriented recruits have very modest goals when joining a company and the vast majority … have their expectations met or exceeded.”
Myth No. 2: Self-consumption by sales persons is a problematic practice.
In fact, there is no binding precedent that establishes that a set amount of sales must be sold to persons outside the sales organization. The seminal FTC/Amway case in 1979 created a “70% rule,” but that rule only applied to the requirement that the distributors certify that they had sold at least 70 percent of their inventory in the prior month before they could be permitted to buy additional inventory. (Note: This case was long before the industry adopted the 90 percent inventory buy-back standard as part of the DSA Code of Ethics, which occurred in the mid-1990s.)
Our industry’s standard of the buy-back removes the possibility of inventory loading if the firm is bound by the buy-back and it is properly administered. A distributor who purchases a product to personally consume it is a “consumer,” and there is nothing inherently wrong with paying compensation on these product sales.
Myth No. 3: Multilevel direct sales firms will fail due to geometric progression and turnover rates.
This simply may seem logical mathematically, but only if you start with the assumption that everyone is purchasing products solely to qualify to earn large amounts of compensation by creating a network and earning compensation on similar downline purchases. It does not occur in the real world because the assumption is faulty. Most persons signing up as salespeople in our industry are either seeking to buy product at a discount or for supplemental income, putting in less than 11 hours per week, and not that much in every week.
The FTC tried to make the geometric progression argument to the Second Circuit Court of Appeals in the Ger-Ro-Mar Inc. vs. FTCcase back in 1975. Ger-Ro-Mar sold bras and lingerie. In the words of the Second Circuit Court of Appeals:
“We find no flaw in the mathematics or the extrapolation [presented by the FTC] and agree that the prospect of a quarter of a billion brassiere and girdle hawkers is not only impossible but frightening to contemplate, particularly since it is in excess of the present population of the Nation, only about half of whom hopefully are prospective lingerie consumers. However, we live in a real world and not fantasyland (emphasis added).”
As stated above, the reality is that a majority join a direct sales firm either after having been a customer or wishing to buy its products at a discounted price. Most sales people and most direct sales firms market low-ticket, consumable products, and my educated guess is that over 50 percent of such sales people are sales people in name only. They buy the firms’ products at a discounted price for personal consumption and do not sell products or recruit other distributors. This percentage of “discount buyers” may approach over 90 percent of the salesforce of some firms and account for over 90 percent of product sales.
As with any sales organization, the industry experiences a high rate of turnover in its salesforce, but people join and leave a salesforce for a variety of reasons. For example, if a woman was working only one month before Christmas to earn Christmas present money, she would contribute to the high turnover rate even though she might return year after year for decades during the Christmas season. In addition, based on data that I have seen over the years, many sales people sell for more than one direct sales firm during the year, either simultaneously or at different times. I believe that between 10 percent and 20 percent of the sales organization falls into this category, thereby overstating turnover rates.
One final point on the geometric progression canard: I believe that the turnover rate of retail store personnel and franchise employees is very high. Strange that we don’t hear more about that and the fact that some work in retail stores because they are given employee discounts as part of their compensation plan. According to recent data, retail store employee discounts are often extended to the employee’s family and even sometimes to friends.
“The percentage of “discount buyers” may approach over 90 percent of the salesforce of some firms and account for over 90 percent of product sales.”
Actions That Can Harm the Reputation of the Industry
The reputation of our industry can be negatively impacted by a number of factors including the following:
1. Misconduct by a Member of a Salesforce
As sales people in any industry, most participants in direct selling conduct business in an ethical and consumer- and recruit-friendly manner. It is unfortunate but true that the reputation of the industry is negatively impacted if a participant inappropriately markets products or the income opportunity in a misleading way. Given the millions of participants in the direct selling industry, even the acts of a small percentage of participants can create significant reputational harm. Examples of acts that can damage the industry’s reputation include:
- Exaggerated earnings claims made to prospective recruits;
- Exaggerated or false product claims;
- High-pressure recruiting and sales tactics; and
- Excessive non-corporate training/motivational expenses.
2. Business Practices
It is also important that companies properly evaluate business initiatives and compensation incentives before they are implemented to make sure they do not motivate or incentivize problematic behavior. For example, I believe that compensating the salesforce for sign-up fees—which is one strong indicator of a possible pyramid scheme—as well as sales kits and aids, samples, and training fees and materials can create an incentive that increases the cost of the investment to join the business and the associated potential risk of loss to a new participant.
“It is important that companies properly evaluate business initiatives and compensation incentives before they are implemented to make sure they do not motivate or incentivize problematic behavior.”
3. Enforcement of Distributor Policies and Codes of Ethics
If a company fails to diligently monitor the activities of its salesforce and enforce its ethical standards, regulations and policies, it will ultimately contribute to inappropriate actions that damage not only the reputation of the company but also the industry. A large number of participants join our industry each month, which makes it an imperative that companies adequately train the salesforce on marketing claims, legal requirements and the industry’s code of ethics. Companies cannot be passive in this effort.
Having touched upon some of the attributes, myths and problematic practices, let me now turn to a view of the future that maximizes our positive attributes and potentially helps quash some of the negative stereotypes and myths that presently afflict us. Here are my high-level recommendations for the industry that I believe will further strengthen the industry and its reputation.
1. Continue to Enhance Consumer Protective Measures
I believe our industry has done a remarkable job developing consumer and distributor protective policies and codes of ethics. The industry standard of a 12-month return policy plays a critical role in protecting distributors from inventory loading risks. Unconditional 100 percent consumer product money-back guarantees should continue to be encouraged.
The DSA Code of Ethics establishes a baseline of important ethical practices for companies to follow. It is important that we continue to evaluate whether there are additional measures that can be adopted to further enhance the protection of consumers and distributors. The following are areas where I think additional protections may be beneficial to consumers, distributors and the industry:
Compensation Summary: I believe the industry should adopt and implement an industry-wide standard of transparency and disclosure regarding various relevant aspects of compensation earned by its salesforce members. Many of our companies already make such disclosures, which provide prospective recruits with protection from misleading claims that could be made by a participant in the salesforce. No one can criticize us if we provide full disclosure of earnings. Presenting prospective recruits with detailed distributor earnings data during the recruiting process as well as on our websites and in our literature will eliminate most of the risk of the salesforce exaggerating the opportunities we are offering.
It is important that such disclosure be complete and provide sufficient information to furnish a fair overview of the earnings potential. Creating an industry standard will assist other companies and provide a norm they can follow. Once in place, all companies taking this transparency approach would be free from any charges of financially misleading members and prospective members of the salesforce.
Minimizing Risk of Loss: A critical component of the industry’s code of ethics is its 12-month inventory return policy, which was adopted to reduce the risk of loss for new participants. Salespeople utilizing the return policies should be able to do so easily and expeditiously. The industry also needs to remain diligent in monitoring and evaluating trends and developments in business practices and activities of direct sellers to identify additional measures that should be adopted to ensure the industry always has comprehensive measures to protect consumers and distributors.
For example, I recommend that it should be made more clear that the current buy-back policy includes other purchases by new participants in the business such as sales aids, training costs and starter kits. I believe that DSAs should promulgate code provisions to codify some of the best practices in the industry, including restricting payments on certain types of compensation.
“I believe the industry should adopt and implement an industry-wide standard of transparency and disclosure regarding various relevant aspects of compensation earned by its salesforce members.”
2. Educate Our Constituencies
- Members in the DSAs should take the opportunity to participate in industry research and surveys done by outside third-party firms retained by DSAs so that the industry will have accurate and credible data for use with the press, governmental entities, academia and other constituencies.
- Member companies can further increase their focus on educating their salesforce and customers regarding compliance policies and codes of ethics. Having a salesforce that is knowledgeable about the code of ethics—and their responsibilities under such code—is important to the long-term success of our industry. Member companies should have the necessary compliance staff and provide the training to accomplish this. I believe the head of this function should report to the CEO or general counsel. Companies should also have a whistle-blower system in place.
- Member companies should work to further improve their customer relations departments with a philosophy of total consumer and distributor satisfaction and excellent service. This is not just good business, it’s also smart business.
- There should be ongoing and significant public education efforts portraying the industry as it truly is, through public relations efforts based on solid data and useful information, public service activities, promotion of quality research, excellent use of social media channels and targeted projects to educate key influencers in society (e.g., legislators, regulators, the financial press, the “style” and general news media, academia, think tanks and consumer protection organizations). We have an opportunity to tell “our story,” much more effectively. This will require substantially increased financial commitments by the companies to those efforts.
- Annually, the WFDSA global “best practices” exchanges will ensure our industry is operating in all our markets on a consistent basis, at the highest ethical levels, and with the most effective ways to protect our corporate interests through taking the high road in building and sustaining our reputation, image and brand. Strengthening DSAs across the globe strengthens our industry. All industry firms should belong to the national DSA in the countries in which they operate.
Now is not the time to relax in our efforts to be a consumer-friendly, consumer-protective industry. This is critical to our long-term success and the success of the people who rely on this industry for income opportunities and life-enhancing products. We must constantly evaluate our business trends and practices and be willing to take additional steps to protect our industry and its participants.
Having worked in 50 countries throughout my career, I have seen that the DSAs that are most successful are those with the support of the majority of companies in the country. I believe strong DSAs are critical to success, and I can’t emphasize enough that all industry companies should be members of the association in the countries in which they do business to most effectively do the job necessary on behalf of the industry.
“Now is not the time to relax in our efforts to be a consumer-friendly, consumer-protective industry”
Our business model not only works, but it is also a good thing for free enterprise, society and individual freedom. Its success is built on maintaining existing and establishing new personal relationships based on truth and trust. We and our sales people want happy customers and satisfied recruits. We and our sales people want to be good corporate citizens and contribute to society. In other words, we and our sales people want to do well while doing good.
The original article is published on the Direct Selling News website. Direct Selling News is the trade magazine serving direct selling and network marketing executives since 2004. Subscriptions are available in the App Store and Google Play Store via this link: http://directsellingnews.com/index.php/dsn/app
If you’re reading this via email, click here to view the video.
The purpose of this article is to explore the current “deal making” culture in the MLM industry. Quite frankly, it’s getting pretty stupid.
Raiding in Secret
Another word for “raiding” is “stealing.” But I’m not taking it that far. “Raiding” typically occurs when a leader strikes a special deal with a new company, violates his contract with his or her existing company, solicits the downline for the next new thing, conveniently fails to disclose the existence of the special deal, generates a decent commission for a year or two, possibly gets sued, seeks out another deal, wash, rinse, repeat. This is what I call “raiding in secret.” It’s a dirty / uncomfortable secret we deal with in the industry. It’s one that rarely gets discussed outside of the inner-circle because both parties instinctively know that it’s wrong. In the scenario of the private deal, there exists an understanding between the company and the recipient that there’s going to be a contract violation somewhere between the networker and their existing (or previous) MLM. This contract violation can even be factored into the contract negotiations i.e. “if you get sued, we’ll cover the legal fees.” I have always known about this side of the industry. There are companies out there like to cut deals and then turn around and sue their own distributors when they leave for other deals. It’s naive for me to think that these sorts of deals will end. After all, there is the occasional special deal that’s legitimate i.e. the networker waits for his or her old contract provisions to expire, starts from scratch and leverages his or her skill to build a large downline FAST. But…that’s rare.
I’ve written about this process in the past in two separate articles. The first is titled Master Distributors: good or bad? In the article, I talk in general about these deals and discuss the importance of disclosing the existence of these deals. In the second article, titled Revised FTC Endorsement Guidelines: Part 1 (Master Distributors),” I talk about the new disclosure requirements published by the FTC when it comes to these sorts of deals. Bottom line: disclosure is key.
Raiding in Plain Sight
Epic has recently announced, very publicly, that they’ve got $100,000,000 available for “experienced networkers.” The payment terms are published in a separate PDF, found below. Basically, if leaders can keep up with various performance metrics, they can earn additional income. While it caps out at $20,000 per month, Epic leaves room for some negotiation:
Are these still not big enough for your dreams and what you know you are capable of? Contact us for details on Epic Performance Programs beyond our $20,000 program.
How is this raiding in plain sight?
Watch the video above, titled Epic Puts $100,000,000 on the table for deals. In my opinion, there’s more to this than “paying for performance.” When you offer networkers $20,000+ per month in addition to commissions in exchange for 120,000 group volume points in six months….you know it’s quite likely (I’m putting it mildly) that the networker is transitioning distributors from another downline. And when that happens, it’s likely the distributor has some contractual restrictions for that kind of activity i.e. non-solicitation, non-compete, etc. There’s a better way to go about building a business. Plus, this sort of activity will invite mass litigation from the industry in general as leaders start migrating towards Epic (if that ever occurs). The claim will likely be “tortious interference,” which occurs when one company encourages people under contract with another company to violate the agreement.
Is this good for the industry?
In my opinion, it’s not. Companies invest years (sometimes decades), thousands of hours and millions of dollars building up their brands and goodwill with its leaders. If all of that effort can be taken by way of a confidential agreement with one of its top leaders, it’s bad for our profession. And what about the distributors in the downline? They’re the people that trust the leader to make good decisions. If they’re not in the know on the special deal, they’re really not in a good position to make an informed decision. They get lost in the shuffle. They get used. Is it in their best interest to uproot their organizations and follow the leader? In most cases, the answer is no.
Disclosure: I’m a conservative, free-market man. I believe in the power of the markets. However, in order for markets to work, information needs to be freely exchanged. In the case of these special deals, the public is never made aware of the deals; hence, the public / distributors are at a significant disadvantage. The market is manipulated.
There are no shortcuts to success. When I competed in the decathlon in college, I was met each year with one or two athletes that talked big. They were motivated for a month, bragging about their inevitable success. Within months, they quit. Success is a grind over time. It’s a long, arduous process. Through week after week, year after year of work, the power of compounding takes over. When I see a company trying to skirt around the work, I just shake my head… If you’re not willing to grind it out, you’re not developing the muscles necessary to win. Cutting these sorts of deals to take advantage of the investments made by other companies…it’s dishonorable.
What do you think? We’ve never had a company publish these sorts of deals before. Is it good or the industry? Bad?
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I’m incredibly excited to announce the location of the next DS Edge conference: my city, Nashville, Tennessee! It’s the home of country music and for two days in September, its neighbor (Franklin, TN) will be the home of direct selling.
Come to Tennessee to learn how to start and grow your party plan or network marketing company at the Direct Selling Edge Conference on Thursday and Friday, September 26 and 27, 2013.
This two-day educational conference is the best for new and young direct selling companies because the quality of the content presented is excellent. It is pure education.
Students Deserve Vacations
After two full days of learning, as a student you’ll deserve a vacation, too.
We’ve got plans to take you an optional excursion to visit some of the most famous honky tonks in downtown Nashville after the first day of the conference. Stay the weekend if you’d like to enjoy all that Franklin and Nashville have to offer. In your free time, you can visit the Grand Ole Opry, the Country Music Hall of Fame, The Parthenon, and RCA Studio B in Nashville, but don’t miss the historic sites of Franklin, too.
What will you learn at this conference?
- how direct selling is different from other business models
- the differences and similarities between network marketing and party plan companies
- what recent Federal Trade Commission decisions means for you
- best practices and step-by-step instructions for creating an ethical and effective presence in the social media landscape
- the legal limits for raising capital and the legal rights inherent with stock ownership
- the differences between different types of compensation plans and how to assess which plan type is best for you
- the ABC’s of successful recruiting
- how to teach others how to sell
- the key behaviors we need to movivate in, and the building blocks of, compensation plans
- the science behind compensation plan design
- how Founder Programs work and why have one
- how to select the right MLM software
- why you need to have a distributor compliance system for your network marketing or party plan company
- all about sales tax, 1099′s, unclaimed property reporting, and state income taxes
- why one merchant account is not enough
- simple methods to keep your MLM or party plan company safe from federal and state regulators
- how the options of pilot programs, soft launches and hard launches can be used to ignite your growth
- common mistakes of startup companies
- 20 secrets of successful companies
Our 8 speakers will educate you in 16 sessions, plus there are 4 round table discussions that you will fill you with even more knowledge to give you the edge you need to be successful.
At the end of each day, from 5 until 7 pm, you’ll have the opportunity to meet with conference speakers for 20 minute appointments at no additional cost! Add the four hours up and you’re easily walking away with over $1,000 worth of consultation.
Where is the conference?
The Direct Selling Edge Conference will be held in Franklin, Tennessee (just 20 miles from Nashville) at the Drury Plaza Hotel Franklin on Thursday and Friday, September 26 and 27, 2013.
Built in 2012, the new 338-room hotel offers a daily free hot breakfast, free soda and popcorn, free food at 5:30pm, free local and long distance calls, free parking, and a microwave and refrigerator in every room.
We’ve negotiated excellent rates for you. Only $119.95 per night.
Where Do You Register?
Registration is fast and easy. For tickets, go to http://www.directsellingedge.com.
For lodging, go to https://wwws.druryhotels.com/Reservations.aspx?groupno=2181246
Questions? Call Jay or Victoria at Sylvina Consulting or email [email protected].
What is the Direct Selling Edge Experience?
Here is what you’ll get…
Our agenda is loaded with information specifically chosen to advance your business.
Reserve Your Seat
At $199 for your ticket and only $100 for each of your companions, this educational conference is a great value. Contact me to obtain a promo code to obtain a discount. Ignorance is more expensive than education. Information is the only asset separating you from your competitors. We guarantee you’ll get the edge you need. If you’re not satisfied with the program, we’re offering a 100% refund, no questions asked.
It’s easy to get to Nashville and the Direct Selling Edge Conference. Conference tickets are available now.
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With the recent buzz of Federal Trade Commission v. Fortune Hi-Tech Marketing, Inc. slowly coming to a close, I wanted to write an article to reiterate the importance of proper income claims. Statements regarding a network marketing company’s income opportunity go to the heart of the Federal Trade Commission’s (“FTC”) mission to extinguish deceptive, unfair, or unsubstantiated claims made by a company and its distributors. And let’s be honest here, it’s not the distributors’ fault. The majority of income claims made by a distributor are more likely than not truthful statements, but the FTC is not JUST concerned with the truth. Promises of riches and an opportunity to live the American Dream can cloud even the most reasonable person’s judgment. With this in mind, the FTC wants to ensure that all potential distributors make a fully informed decision before choosing to join an MLM program.
In this article, we discuss the legality of income claims made by MLMs and their distributors while using the recent Fortune Hi-Tech (“FHTM”) case as a framework. In Part 2 of this series, we’ll use what we learn in this article to help develop solutions that meet the FTC’s requirements.
What Was All the Fuss About?
Among other reasons in its case against FHTM, the FTC alleged that FHTM’s distributors misrepresented the income opportunity. Specifically, the FTC argued that FHTM violated Section 5(a) of the FTC Act which prohibits “unfair or deceptive acts or practices in or affecting commerce” by misrepresenting or omitting material facts in its income claims. In my opinion, the FTC’s argument about FHTM operating as a pyramid was weak. There’s not much to be learned there. But there’s a lot that can be learned by analyzing its argument regarding improper income claims. The FTC based its allegations off of recorded video and audio presentations, pictures on social media networks, and Twitter posts uploaded by various distributors. These facts underscore the importance of properly educating distributors on how to make clean product and MLM income claims online.
Examples cited by the FTC include the following:
Recorded Video Presentations
- The FTC alleged one distributor claimed in a recorded video presentation on her Vimeo website dedicated to her FHTM business that “four months into the business [with FHTM]… I had actually quadrupled what I have ever made as a Registered Nurse.”
- The FTC alleged a distributor claimed on her Vimeo site that distributors who reach the National or Executive Sales Manager levels “are making thirty-, forty-, sixty-, seventy-thousand a month.”
- The FTC alleged distributors frequently made lifestyle claims, such as highlighting extended family vacations to exotic locations, driving nice cars, and purchasing large homes with luxurious amenities.
Recorded Audio Presentations
- The FTC alleged a recorded conference call posted on distributor’s team website stated that another distributor earned over $50,000 in his sixth month with the company alone and that he “earned millions and millions beyond that” in subsequent years.
- Regarding another conference call, the FTC alleged a distributor posted on his team’s website that another distributor was earning “over $100,000 a month” after three years with the company.
- The FTC alleged a distributor posted on her Twitter account about a recruiting meeting, encouraging people to “Bring ur friends & learn how 2 make $100k aYR.”
- The FTC alleged that at a national convention, 30 top earners were called to the stage to be presented with a mock check for $64 million to represent the amount of money they earned with the company. Several distributors later shared a photo of the presentation on social networking sites.
Sound familiar? No matter how long you have been involved in the network marketing industry, chances are you’ve heard claims similar to the examples above on a regular basis. I’m not trying to point any fingers at distributors. The statements referenced above could potentially all be true. The key is whether those distributors shared legally sufficient income disclosures to the prospects immediately after making the claims. When it comes to these income disclosures, the FTC preferences are confusing and they require a lot from all marketers. In most cases, distributors are simply unaware of how to promote their opportunities appropriately. That’s just the nature of the beast, and it all ties back to compliance training. It’s important to understand the FTC’s top priority is ensuring income claims are adequate. With that being said, the best place to start when learning how to play a game is studying the rules.
The Rules of the Game
The FTC used the following legal argument to make its case against FHTM:
Any income claim that is considered to be deceptive needs a disclosure. The FTC considers an income claim deceptive where information that would affect a reasonable consumer’s judgment is misrepresented or omitted. There is a presumption that all information regarding earning potentials affect consumer’s judgment, even when you do not guarantee they will make any money. Out of those claims, it is also presumed to be reasonable for consumers to rely on statements you expressly make, regardless of whether you tell them making “big money” is a sure thing or not. In other words, all income claims that are atypical need adequate disclosures.
The FTC says that any income claim made is regarded as what consumers will “general[ly achieve . . . .” In other words, what you represent as potential money to a prospect is what a reasonable prospect will expect to earn. IF YOU LACK SUBSTANTIATION (aka, you have no proof) that the majority of your distributors earn the amount represented by a few high earners, you must give a clear and conspicuous disclosure indicating exactly the percentage of distributors who earn at least the amount you represented. And you must also disclose the average earnings. If you’re a distributor that’s working with a particular company, if they do not provide adequate income disclosures, DO NOT MAKE INCOME CLAIMS. The pressure is on them to provide the data.
If you are the motivated (or self-burdening) type, I’d like to challenge you with a little homework project. Look at the examples cited by the FTC against FHTM above and determine what type of disclosure is necessary using the rules we discussed in this article. In our next installment, we’ll discuss our own solutions and ideas for the proper ways to make income claims.
 See FTC v. Bay Area Bus Council, Inc., 423 F.3d 627, 635 (7th Cir. 2005); FTC v. World Media Brokers, 415 F.3d 758, 763 (7th Cir. 2005); Kraft, Inc. v. FTC, 970 F.2d 311, 322 (7th Cir. 1992), cert. denied, 507 U.S. 909 (1993); FTC v. QT, Inc., 448 F. Supp. 2d 908, 957 (N.D. Ill. 2006).
 FTC v. Febre, No. 94 C 3625, 1996 WL 396117, at *2 (N.D. Ill. July 3, 1996) (conditional earnings claims would be understood to represent typical or average earnings and are therefore deceptive).
 See World Travel Vacation Brokers, 861 F.2d 1020, 1029 (7th Cir. 1988).
 FTC v. Five Star Auto Club, Inc., 97 F. Supp. 2d 502, 528 (S.D.N.Y. 2000).
 16 C.F.R. § 255.2(b) (Guides Concerning the Use of Endorsements and Testimonials in Advertising); see also In re Cliffdale Assoc., Inc., 103 F.T.C 110, 173 (1984), 1984 WL 565319 (F.T.C.), at *16 (testimonials presumed to represent typical experiences).
 In re Nat’l Dynamics, 85 F.T.C. 1052 (1975).
In the last article, FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 1), we walked through the Federal Trade Commission’s recently published .com Disclosure Guidelines (fully included below). In this installment, we’re going to walk through five hypothetical examples of common marketing claims made in the MLM industry. The goal of this post is to provide you with practical, easy-to-understand tips on how to make proper claims.
The format is simple: I’m going to give you common fact patterns of how claims are made in the MLM industry. Then I’ll show you what most distributors would WANT to do as far as making disclosures. Then I’ll show what they SHOULD do, as per the .com Disclosure Guidelines. These guidelines apply whether the company is an MLM startup or a well-established company.
Ready? Go time!
UPDATE: This article has been updated after further research. The .com Disclosure Guidelines are over 50 pages and it never mentions income claims. The analysis below is based on my interpretation of their guidelines.
EXAMPLE 1: CHECK WAVING
Kyle is very excited about his involvement in a new cosmetics company, Wrinkles-B-Gone. After six months of hard work, he received his first check in the mail for $4,500. Overcome with excitement, Kyle gets an idea. He decides to post a picture on his Facebook profile showing off his check. Kyle figures it’ll be a great way to “flex his muscles” while demonstrating the power of his new company. It is clearly visible in the picture that the check is for $4,500. In his Facebook post, Kyle says, “Boom, playa! Check me out! Want to learn why this company is throwing money at me? Give me a call.”
Kyle does not include a disclosure of the average earnings for Wrinkles-B-Gone distributors. The average is $345 per month per distributor.
What Kyle wants to do:
Kyle, in no attempt to be deceitful, would want to provide a naked link to the company’s income disclosure in the caption. He figures, “Hey, they can click on the link and see all of the numbers at their leisure.”
What the FTC wants to see:
In the caption of the photograph: Please click this link to see our average earnings: www.wrinkles-b-gone.com/earningsdisclaimer
The FTC allows marketers to provide a link to a disclosure IF the disclosure is not integral to the claim being made. “Integral” as defined by meridian is “essential or fundamental.” Is an income disclosure integral to an income claim? Sadly, the FTC does not give us any examples that involve income claims. But they did specify that issues related to health or higher costs would certainly require disclosure near the claim itself (not via a hyperlink). In an example in the guidelines, there was a refrigerator that was unable to maintain a cold enough temperature to prevent bacteria growth. In that example, a disclosure by the ad itself is required. Is the risk associated with an earnings claim on par with food borne illnesses? I doubt it (but I’m open for a discussion).
The FTC further states that disclosures made via hyperlinks are permissible when the data is too complex to disclose next to the ad itself. With income disclosures, the data can be very complex. Plus, the average earnings changes each month; thus, making it nearly impossible to get the entire field to properly disclose the averages immediately after their claims. It’s only practical, in my opinion, to get the field to provide a link to a full earnings disclosure. Keep in mind, providing the link by itself is insufficient. The link must be clearly labeled to adequately inform consumers. Inserting “Please click this link to see our average earnings” sends a clear signal.
If you allow your distributors to make income claims, it’s imperative that you educate them on the proper ways to make those claims. Also, it’s a good idea to display the income disclosure form at some point during the enrollment process. This will help “clean up” in the event your leader fails to provide a disclosure.
EXAMPLE 2: Weight Loss Claim
Gronk has been using “Slim-Me-Cave” for the past 30 days. Miraculously, Gronk lost 30 pounds in this short period of time. Incredibly happy with this weight loss product, Gronk decides to post a blog on the Internet. In the article, he writes, “I lose 30 pounds in 30 days with Slim-Me-Cave! It best weight loss product!!” The average customer of Slim-Me-Cave loses about 1 pound per week, so Gronk’s results are certainly above average.
What Gronk wants to do:
*Results Not Typical.
What the FTC wants to see:
Typical loss is 1 pound per week for Slim-Me-Cave customers. Results will vary depending on diet and exercise.
Your disclosures must give a “reasonable customer” sufficient information to make a decision. “Results Not Typical” does not provide enough information. When making a testimonial about a product that’s “above average,” the average needs to be disclosed (as per the FTC guidelines). Back in the old days, “Results Not Typical” used to work. But now since everyone is a potential marketer, the FTC wants disclosures to be more specific. Does “Results Not Typical” mean a customer will lose only 20 pounds in 30 days? 15 pounds in 30 days? What results can the average customer expect? When possible, provide the averages.
EXAMPLE 3: YouTube Income Claim
Stephanie is giving a video testimonial on YouTube about the benefits of her network-marketing company’s pay plan. She states that “In this business, when I recruited just 20 people, I was making over $2,000 per week!” In that particular program, the average distributor earns $235 per month.
What Stephanie wants to do:
Stephanie would probably not want to provide an income disclosure at all. I’m just being candid. Rarely in videos prepared by distributors do you see any kinds of income disclosures.
What the FTC wants to see:
The FTC states that the manner you communicate your claim should also be the manner you communicate your disclosure. Therefore, a YouTube video should contain a disclaimer in both video and audio formats. Where should the disclaimer be? Sadly, there’s no clear answer. But if we look at the FTC’s definition of “Clear and Conspicuous,” I think the safest bet is a text disclosure displayed simultaneously to the claim in question in addition to a more detailed audio and video formatted disclosure at the end of the testimonial. Or Stephanie could provide a “visual cue” during the video to communicate to the viewer that disclosures can be found at the end of the video.
Without question, it’s now required (in my opinion) that distributors end their videos with a properly formatted video segment. At the end of the testimonial video, a separate video disclosure should be included to illustrate the average incomes. The video file should include an image of the company’s income disclaimer (usually in spreadsheet format). While the image is on the screen, there should be audio narration regarding the average earnings. If a company is going to permit distributors to use YouTube to promote their businesses, the company should provide this kind of file freely on its website AND educate distributors on how to use it.
While it sounds complicated, it’s not difficult for companies to provide this sort of video file. However, if the company is unwilling to properly arm the distributors with sufficient tools to make good claims, they should restrict distributors from using YouTube (which is not realistic AT ALL).
There are several questions this kind of hypo raises:
Should companies require leaders to insert a clear and conspicuous textual disclosure to appear on the screen when the claim is being made?
It depends. In a perfect world, yes, it’s a good idea to provide the disclosure during the claim. But in reality, most reps lack the technical skill to do this right. This is what we know: disclosures should be as close as possible to the claim being made. Is it sufficient to provide a video file containing a full disclosure at the end of the video? In my opinion, the answer is yes. But in the abundance of caution, it would be better if there were a text disclosure provided during the video in addition to a video file being used at the end.
Is it a good idea to even allow reps to make these sorts of claims to begin with?
Are you able to produce a quality disclosure for your distributors to use? Do you trust your distributors to “color within the lines” and end their videos with a video? Do you have a solid compliance department to catch and correct the distributors that do this poorly? If the answer to those questions is “yes,” then you’ve got a shot. If, on the other hand, you answered “no” to any of those questions, it might not be worth the risk.
If you are going to allow reps to make videos that contain income claims, be careful! When it comes to videos, it’s difficult to walk the tight rope. When it comes to income claims in videos, there’s not much margin for error. With this in mind, I would advise companies to require tight compliance. At a minimum, companies should provide distributors with a professionally produced video file that all distributors can include at the conclusion of their videos. If you know leaders are going to make claims in YouTube videos, or any other video platform, it’s wise to properly arm them with adequate disclosures. A video file will give the needed audio disclosure as well as additional visual disclosure to the income claim in question.
EXAMPLE 4: YouTube Product Claim
“Sports Minded” is a company that sells organic products that improve mental focus during physical activity. Adam is a distributor for Sports Minded and he decides to do a self published a YouTube video to give a testimonial about how he can now focus for 8 hours straight while playing golf without additional supplements. However, studies performed by Sports Minded indicate users can experience an average of 4 hours of improved focus. Adam is being honest regarding his experience with the product. He’s like Mr. Miyagi for 8 hour straight! Since it’s a true statement about his personal experience, is he required to provide substantiation and disclose the average results?
What Adam wants to do:
Adam would likely try to provide a disclosure via a hyperlink in the video description, in text at the end of the video or in a brief audio message at the end of the video.
What the FTC wants to see:
They want a “clear and conspicuous” disclosure that contains the average results. Just like with the income claim example above, the disclosure needs to be in both audio and visual format.
It would be ideal if the distributor had the skill to inject the disclaimer immediately after making the claim i.e. “I know that the company says the average person experiences 4 hours of increased focus, but that was NOT the case for me!” In order for this to happen consistently in the field, the company needs to take compliance education very seriously.
As you can see with all of these disclosures, it’s a lot more art than science. We previously mentioned that the manner you communicate your claim should also be the manner you communicate your disclosure. Technically, the FTC wants to see the disclaimer in both audio and visual formats (even for videos produced by the field). With that being said, it’s unrealistic to expect sales people to get this right when they’re making product testimonials. And I think the FTC understands this (I’m at least hoping they do). With product testimonials, I think a text disclaimer inserted into the video would be a sufficient disclosure. But this approach would NOT be sufficient for income claims. Because money clouds judgment, the FTC is much more strict in that category (and they should be).
EXAMPLE 5: Tumblr Blog
Mary publishes an article on Tumblr about “N-ERGY SAVER,” a utility service MLM where customers can save money on their electric bills throughout the year. Mary, a representative, claims that she saved $50 per month by signing up with the company. While Mary’s claim is 100% true, the company’s data shows that the average homeowner saves $15 per month on their electric bill.
What Mary wants to do:
She wants to tell her story! She wants to say “I saved $50 a month with this service and so can you!” Since it’s a true story, Mary sees nothing wrong with her sharing her personal experience.
What the FTC is looking for:
The FTC wants to see a disclosure in close proximity to her claim. So if she has written text about her savings with N-ERGY, she needs to include a disclaimer in the same font and format as the text that triggered the claim. The disclaimer can say “The average homeowner saves between $10 and $20 per month, depending on their energy consumption patterns.”
Same as Example #2, except suppose Gronk wants to make the same claim via Twitter.
What Gronk wants to do:
I saved 30 LBS w/ Slim-Me-Cave in 30 days! bit.ly/f56/productinfo [linking to the product page that includes the average results]
What the FTC wants to see:
Twitter allows for 140 characters per tweet. If there’s sufficient space for a disclosure, it’s ok to use to twitter. Otherwise, it should be avoided. With Gronk, providing a link is insufficient. But the FTC provides a little hope in this category: as long as the average results are provided in the tweet, twitter can be used. The FTC provides an example of a permissible weight loss claim below:
Should Twitter be allowed for income claims?
No! There’s just not enough real estate to provide an adequate income disclosure. As I mentioned above, providing a hyperlink by itself is insufficient.
Twitter is tricky. If the distributors are properly trained, they can use twitter for good product testimonials. But with respect to income claims, Twitter should not be allowed AT ALL.
It’s going to be tough for network marketing companies to walk this tight rope. On the one hand, they want to give their distributors the freedom and flexibility to aggressively market the products and pay plan. On the other hand, they need to “pump the brakes” to ensure that the distributors are doing things right. In my opinion, the real challenge is going to be with online video. While it’s very easy for anyone to create a video with a webcam, it’s very difficult for people to insert proper disclaimers during and/or after the video. In the future, proper education in the field is going to be absolutely crucial. Companies that commit to field education are going to be the ones that pass the scrutiny. Companies that take their hands off the wheel and expect leaders to get this stuff right are walking on thin ice. The FTC’s expectations are out there. Ignorance is no longer an excuse.
This article was written in collaboration with our stellar summer associate, Jake Perry.
The world we live in today is changing at a rapid pace. Technological developments have revolutionized the way we communicate and live. We can now complete our Christmas shopping lists from the comfort of our recliners. But while these technological advancements bring great convenience, they also create serious problems for marketers. Bottom line: technology is growing faster than the law can keep up. It was easy to regulate marketers back in 2000 when the original guidelines were written. Few people had the ability to publish…anything. But today, it’s a different ballgame. We all have the means of production in the palm of our hands with our mobile devices. With communication tools such as YouTube.com, Facebook, Twitter and WordPress, it’s been really difficult for network marketing companies to create clear policies for their salespeople. Luckily, the Federal Trade Commission clarified much of the confusion. The FTC has recently published the .com Disclosure Guidelines (fully included below). Essentially, the guidelines provide a “how to” guide for giving adequate disclosures in online advertisements. This is a good thing. The FTC has recognized that this area of the law is fuzzy, blurry, and every other synonym for “unclear” you can find in Merriam-Webster.
These guidelines are extremely helpful and a step in the right direction for our industry. But….the document is over 50 pages long. This is why I have decided to boil them down in a way that makes sense for you all. The purpose of this series is to give you specific instructions on how to stay within the boundaries of these guidelines. While the guidelines never referenced any MLMs, I’ll be providing examples using fact patterns that are common to our industry.
Before we get into those fact patterns, it’s important to understand the basics of these guidelines. There are several key themes to keep in mind when providing “adequate disclosure.”
1) Required disclosures must be “clear and conspicuous.”
A clear and conspicuous disclosure is:
i. One that is within close proximity to the relevant claim in question.
ii. One that is not hidden in a bunch of senseless words.
iii. One that is prominent and easy to spot i.e. clearly visible.
iv. One that is in plain language that your target audience will understand.
v. One that is not accompanied by other distractions in the advertisement.
In other words, do not bury the disclosure in the fine print. It needs to be seen. Period. Keep in mind, the manner you communicate the relevant claim should also be the manner you communicate your disclosure. Therefore, a YouTube video should contain a disclaimer in both video and audio formats.
2) Do not partake in “unfair or deceptive acts or practices.”
While this should go without being said, it’s important to remember that “honesty” is always the best policy. Never try to hide the ball or position your product or service in a way that’s inconsistent with reality. Transparency with customers is actually good for business long term.
If the claim is untrue, there is no amount of disclosure or substantiation that can “sanitize” the statement. For example, an advertisement states that an individual lost 100 pounds taking a new weight loss supplement when in reality she only lost 75 pounds. In this scenario, no disclosure or amount of substantiation can qualify or limit the claim being made because the claim is blatantly false. Therefore, in this scenario, the claim itself must be modified, i.e. individual X lost 75 pounds using the dietary supplement.
3) Claims must have “substantiation,” regardless if they originate from the company or the field.
Substantiation refers to evidence that backs up your claim. The FTC states in the guidelines that before distributing an ad, advertisers must have “appropriate support for all express and implied objective claims that the ad conveys to reasonable consumers.” In other words, if a company or its sales people make aggressive marketing claims, those claims need to be backed up with reliable data. Research studies, expert opinions, and other types of data must be used to support any type of claim you make.
With MLM companies, distributors are also required to provide substantiation when promoting a product or service. As made clear in the Endorsements and Testimonials Guidelines published in 2011, the company can be held responsible for any false or misleading claims made by its distributors. Therefore, it’s vitally important to ensure the field is educated on ways to properly market the products and services. It’s crucial that the field understands when and how to provide substantiations and income disclosures. This is where compliance training becomes a key factor. If you care about the longevity of your business, you’ll make the investment to make sure your reps are adequately trained.
4) Would your disclosure give a “reasonable customer” notice of the information?
A reasonable customer is a hypothetical person who contains the necessary intelligence, judgment, attention, knowledge, and experience required to function in our society. For example, where a disclaimer is located at the bottom of a website in 30 lines of small text titled “LEGAL TERMS AND CONDITIONS,” a reasonable person would never expect to find a disclosure about the product they are buying buried there. A reasonable person would expect to find the disclosure somewhere within close proximity of the statement in question. When you’re creating promotional materials, use common sense when figuring out the location and form of your disclosures.
5) Research and follow-up on the effectiveness of your disclosure.
The FTC states that the ultimate test to determine the adequacy of a disclosure is whether the information intended to be disclosed is actually conveyed to consumers. While this is not a requirement made by the FTC in making an adequate disclosure, be forewarned that you will run the risk of having your disclosure declared inadequate. The FTC recommends conducting controlled side-by-side research experiments to determine where the average consumer does and does not look on a computer screen to test the effectiveness of your disclosures. The FTC also recommends assessing the effectiveness of a disclosure via hyperlink by monitoring the link’s click-through rate and make adjustments accordingly. If you know of an analytics geek that’s good with tech, it’s time to pay him or her. That data is going to be very important.
6) If you cannot follow the FTC guidelines in your advertisement, do not make the claim in question.
Where it is not possible to follow the FTC’s guidelines in giving adequate disclosure to customers, the claim in question should NOT be disseminated. This further reiterates point #1 and #4. A disclosure is not adequate simply because it is the best you can do under the circumstances. The disclaimer must actually convey the qualifying or limiting information to the ultimate consumer.
A perfect example of when it is not possible to ensure compliance with the FTC’s guidelines is when a distributor makes an income claim via Twitter. The character count allowed per “tweet” is simply not high enough to ensure that adequate disclosure is given to the consumer. As an example, a proper disclaimer could take up half of the tweet: “the average person can expect to earn between $300 and $500 per month.” While it’s true that a hyperlink may be included within a tweet, a reasonable consumer will not likely realize that “bit.ly/f56” leads to a disclosure of the statement made. Therefore, it is best to completely avoid making income claims on Twitter altogether.
Be careful. With companies that exercise tight control over their marketing efforts, complying with these standards will be easy. But for network marketing companies that rely on the creativity of a volunteer army, it’s going to be incredibly to walk this tight rope. Compliance training is going to be incredibly important to ensure sales leaders really understand how to do things right. Proper behavior in the field is not going to happen by sending out a single newsletter once a quarter or referencing the “C” word (compliance) at an annual convention. It’s going to take commitment. In Part 2 of this series, I’ll provide you with specific instruction on ways to do this right. I’ll be sure to use fact patterns that are common in the MLM industry.
If you’re reading this via email, please click here to review the full .com Disclosure Guidelines.
Guest post by +Cole Dowsley, Thompson Burton litigator. This is controversial subject in the network marketing profession. When independent distributors join a network marketing program, should they be “stuck” by way of a noncompete? Short Answer: legally, noncompetes are enforceable (in most cases, not all). When two adults sign a contract, it’s hard to get provisions thrown out. But, in my opinion,….the market might soon demand that companies remove these restrictions. Cue, Cedrick Harris. Harris, one of ViSalus’s top leaders, publicly (and respectfully) resigned from the company. His main gripe: the lack of flexibility to work other programs. As distributors get more educated in this area of the law, they’re going to start demanding that companies remove the restrictions. And when that happens, the restrictions will disappear. — Kevin Thompson
Most people think of non-compete agreements as a contract between an employer and an employee. However, this is not the only relationship where covenants not to compete may be valid. There are a number of other relationships in which courts have enforced non-compete agreements, including non-compete agreements between a business and an independent contractor and non-compete agreements between a buyer and seller of a business. Covenants not to compete may be included in or ancillary to a variety of business contracts, such as MLM distributor agreements and joint marketing agreements.
One of the most common questions is whether a business can require a “1099” independent contractor to execute a non-compete, and if so, whether the agreement is enforceable as to the independent contractor.
As noted in my recent blog post regarding the general enforceability of non-compete agreements, the law governing non-compete agreements is state specific. In Tennessee, the Court of Appeals has determined that covenants not to compete may be applicable to the independent contractor relationship.Baker v. Hooper, 1998 WL 608285 (Tenn. Ct. App. 1998). Courts in other states have reached the same conclusion. In the independent contractor context, non-compete agreements will generally be treated in the same fashion as employer/employee agreements. The U.S. District Court for the Middle District of Tennessee explained the law, as follows:
Although these provisions [with independent contractors] arise outside the employment context, and are entered into between companies with relatively more bargaining power than the average employee, they are still restraints on trade, and the Court concludes that Tennessee courts, if called upon to consider these provisions, would view them in essentially the same light it views non-competes in the employment context.
As such, the provisions are enforceable under Tennessee law only if they are reasonable under the circumstances. Tennessee courts have instructed that the factors to be considered in assessing reasonableness include whether the covenant not to compete seeks to protect a legitimate business interest, the economic hardship imposed on the restricted party, and whether such a covenant would be inimical to the public interest.
For a general discussion of the factors courts in Tennessee consider when determining the reasonableness of non-compete agreements, see my recent article on the subject. In the independent contractor setting, courts will likely place an emphasis on whether there is a legitimate protectable business interest under the circumstances of the case. The cases in Tennessee emphasize that there is no legitimate interest in protection from competition, only from unfair competition. In making this determination, a business must show the presence of special facts above and beyond ordinary competition that would give the independent contractor an unfair advantage when competing with the business. Such facts might include whether the independent contractor had access to confidential or proprietary information, such as business secrets, confidential pricing information and confidential customer lists. Unfortunately, there is no simple rule to easily determine whether or not an independent contractor non-compete agreement is reasonable and enforceable; it is a highly fact-driven analysis and the determination will depend on the unique circumstances of each case.
Do you have questions or concerns regarding a non-compete agreement? Contact the Business Litigation & Dispute Resolution Attorneys at Thompson Burton PLLC, who are regularly called upon to prepare, review, negotiate, and litigate non-compete agreements on behalf of businesses and individuals.
See below for the FTC’s latest effort to protect people across the country.
Begin Press Release
The FTC has been commissioned to address the growing belief that shorter men can actually compete at a high level in professional boxing. In fact, after conducting surveys over a period of four years, speaking with numerous experts (none of whom have actually boxed), the FTC has ultimately concluded that the empowering message of the Rocky franchise to be misleading for prospective boxers throughout the country. This report is intended to provide guidance for coaches and trainers going forward when they’re soliciting involvement from young fighters.
As per our newly published guidelines, trainers and coaches are required to obtain separate signatures on a disclosure document from prospective fighters before they begin training. The disclosure document addresses numerous myths associated with the Rocky character as well any false expectations held by prospective fighters. The disclosure document must contain a “purpose statement,” which is included below. The purpose statement must be included in red, 16 pt san serif font, center justified, all caps bold. The purpose statement must also be read aloud in English, Spanish, Mandarin and Russian.
THERE ARE BETTER WAYS OF EARNING A LIVING. WE, THE COACHES AND TRAINERS, STRONGLY ENCOURAGE YOU TO GET REAL JOBS. BUT IF YOU DECIDE TO PROCEED WITH A DREAM OF MAKING IT AS A BOXER, THIS IS A REQUIRED DISCLOSURE BY THE FEDERAL GOVERNMENT
The disclosure must state:
The average annualized income for all active Boxers during this period (before expenses) was $8.37. The average boxer can expect to suffer much and earn little.
Regarding the Rocky franchise: Rocky Balboa is a fictional character. Statistically, a 5’8″ Italian man over the age of 30 has zero shot of winning a heavyweight boxing title. Chasing chickens has not been scientifically proven to make you faster. There has never been a man that could really piss lightning or crap thunder. Pounding frozen meat has not been validated as an effective way to improve hand strength. After our medical advisory board reviewed the original Rocky film, they concluded that Rocky Balboa would have suffered 27 concussions at the hands of Apollo Creed before the final bell.
There are no guarantees of income as a fighter. Boxers that fail are condemned socially, labeled “wishful thinkers.”