Income and/or earnings claims have been a recurring topic of conversation on this blog for the last seven years. Time and time again we’ve addressed the regulatory risk of income claims that go unmonitored. Why? Because income claims represent one of the most consistent challenges faced by every single company in the direct selling industry. For regulators looking to take action against a network marketing company, income claims are the gift that keeps on giving. If you have doubts, just remember that the FTC has included charges over inappropriate income or earnings claims in EVERY SINGLE ONE of its actions against an MLM.
In Part One of this 2-part series, I want to take a look at the historical evolution of how the FTC interprets and polices income/earnings (including lavish lifestyle) claims.
In Part Two, I’ll discuss practical guidance for what the field can/cannot say about income claims and explain how leaders can properly discuss earning potential.
Historical Perspective with a Recent Shift
Since the turn of the century, the FTC has repeatedly levied charges against companies that promote false, misleading, or unsubstantiated representations around income or earnings claims. For the longest time, the FTC took issue with income claims made without proper disclosures. As the Internet proliferated and social media became a bigger and bigger avenue by which companies and their sales force marketed sales opportunities, the FTC expounded upon its definition of an income claim to include “lifestyle claims,” or claims that involved statements, pictures or other general references to large homes, vehicles, vacations, and an overall lavish lifestyle.
The FTC has always attributed inappropriate income claims to the company, as the ultimate responsibility lies with corporate. In various actions against MLMs, the FTC has pointed to misleading income statements made in all different types of communication channels. Corporate events, sales trainings, conference calls & podcasts, social media posts, hashtags, you name it. If the company or an executive made an embarrassing claim, odds are FTC can find some evidence of it. However, the FTC in the last few years has even targeted statements by specific top-ranking distributors to support lawsuits against those specific individuals. In its enforcement action against Advocare, for example, the FTC cited deceptive income claims made by two husband and wife teams (the McDaniels and the Hardmans) (Complaint here) as a basis for seeking monetary relief against the couples.
The FTC of late has even taken issue with more ambiguous references to income, like “modest income” or “supplemental income.” As recently as May of 2020, Lois Greisman, Director of Marketing Practices at the FTC, said that seemingly innocuous statements about “modest income” or “supplemental income” were misleading without disclosing that the average participant fails to earn meaningful income. To put it mildly, the mood seems to be shifting at the FTC, necessitating a more aggressive position for sharing income disclosure statements.
Whenever a discussion on money or earning opportunities occurs in any capacity, the Company and those in the field must provide proper disclaimers. What does a disclaimer entail? Plainly speaking, a short explanation of how much money a participant can expect to earn/lose. Legally speaking, for an income claim to be truthful a company must show that earning any specific amount of money is the generally expected or achievable result (i.e., a reasonable basis for the claim).
Ideally, a company would have enough statistical data readily available to provide more than just a short disclaimer. In fact, a factual and data-driven disclaimer is known as an Income Disclosure Statement, or “IDS”. An IDS provides a statistical breakdown of how much money a company’s distributors at ALL the different ranks actually make and/or lose.
But Why Use Income Disclaimers
Traditionally, the thinking around income or lifestyle claims was that any statements were fine so long as accompanied by an adequate disclaimer and/or income disclosure. While not entirely wrong, the FTC offers a subtle not so fast. In Business Guidance published in 2018, the FTC offered up some fresh new principles around earnings claims. A few were particularly eye-opening:
- Even some truthful claims may be out of bounds. Even a truthful income claim from a million-dollar earner could nonetheless be misleading in the eyes of the FTC if there isn’t a clear disclaimer of how much money is made/lost by MOST participants.
- The FTC really doesn’t like the general ‘get rich’ soundbites or pictures. The often notoriously used “quit your job,” “earn enough to stay home,” “wouldn’t it be nice to live stress-free” or “career level income” phrases are false or misleading if the AVERAGE participant doesn’t achieve such results. The same goes for lifestyle claims featuring luxury cars, yachts and vacations.
The bottom line is any income or lifestyle statement must be backed up with hard evidence, and then even still must adequately tell the whole picture about the average earning experience of all distributors.
Income claims are easy ammunition for regulators against offending MLMs and their distributors. With the definition and enforcement of inappropriate income claims continuing to expand, companies must employ hyper-vigilance in compliance efforts and sales training. It’s not rocket science to put together a legally sufficient income disclosure document. At Thompson Burton, we give clients a toolkit of sorts to help clients prepare their own.
In Part Two of this series, we discuss specific strategies for companies to use to stay on the right side of this issue. The field needs to be educated as to when they need to share the income disclosure statement. Out of an abundance of caution, they need to be encouraged to over-share instead of under-share. More on that later.