So You Received a Notice of Penalty Offenses, Now What?

    Clay Brewer is an associate attorney at Thompson Burton PLLC. His practice area focuses primarily on serving young, direct selling companies. He assists Kevin Thompson in providing exceptional legal support for companies ranging from early-stage startups to well-established entities.

    Roughly 1,100 entities received a Notice of Penalty Offenses from the Federal Trade Commission on October 26, 2021. It’s important to know that being a recipient does not mean you have previously or are currently violating the law. Candidly, it’s not all bad being on the list. The companies that did not make the cut are likely already out of business. The FTC is leaving very few stones left unturned.  The full list of companies is here.  Candidly, if you’re not on the list you’ve got other problems.

    The Notice makes it abundantly clear as to what the FTC’s focus is: unsubstantiated income possibilities and misleading testimonials.

    This article is meant to provide a bit of context as to what is happening and also provide some guidance for our readers going forward whether they have received a Notice this time around or not.

    What Does It Mean Now That You’ve Received A Notice?

    The FTC is reviving an old statute found in Section 5(m)(1)(b) of the Federal Trade Commission Act and Section 45(m)(1)(b) of the United States Code. This “Penalty Offense Authority” allows the FTC to put businesses on notice of “certain acts or practices” that the FTC has previously found to be unlawful in administrative proceedings. In summary, the FTC has put you, and the entire sector, on notice that all unsubstantiated income claims are false, misleading, and will no longer be tolerated.  NEWSFLASH: these sorts of claims were never allowed in the first place.  The FTC is simply trying a different approach to work their way into a courtroom.

    Once the FTC has put businesses on notice of violative behavior, it opens up the door for the FTC to sue those businesses in the future if their warnings are not followed because recipients are considered to have “actual knowledge” that certain acts or practices are unlawful. Litigation can result in serious penalties, up to $43,792 per violation. The positive out of all of this is that the FTC will have to still prove its claims against you in court, so there are available options you can implement in an attempt to steer clear of the FTC’s watchful eye. The FTC itself has stated, in the Notice at footnote 7, that “[A]lthough the Commission would have the burden of proof in a law enforcement action, the Commission notes than an advertiser possessing reliable empirical testing demonstrating that the net impression of its advertisement with such a disclaimer is non-deceptive will avoid the risk of the initiation of such an action in the first instance.” We agree that avoiding litigation is important and being targeted by disregarding these shots across the bow is ill-advised.

    We’ve discussed the foundation of this process in our article outlining the FTC Sharpening Its Regulatory Knives And Preparing For Battle. This is substantially new not only for the network marketing space, but also for the entire legal world. The Penalty Offense Authority has not been used in any significant fashion such as this since the 1980s.

    What To Do Now?

    The simplest option is to refrain from making income claims completely. In my experience, this is an untenable option. Ultimately, your leaders will have to answer this obvious question on every prospect’s mind: what’s in it for me?

    Practically, compliance needs to become standardized with training and enforcement.

    People are going to make income claims. This is a natural human inclination that cannot be 100% prevented. Even the FTC understands this basic fact. The issue is how you train and monitor the field and how you enforce your standards when violations are seen.

    We will continue to monitor this new era of FTC enforcement as more information comes to our attention, but we would strongly advise all clients, whether those who have received Notices or not, to implement the following steps within their current operations, at a minimum.

    (1) Provide adequate income disclosures upon the enrollment of a new participant. Such income disclosure should contain genuine average earnings of ALL participants who have registered within each year. These earnings cannot simply have a low and high value. The FTC is interested in the “net impression” of income claims, your use of template disclosures will not be enough to save you.

    (2) Upon enrollment, have ALL enrolling participants click a box, or acknowledge in some written manner, that this average earnings information was presented to them and that they agree that there is no guarantee of income, even with hard work, and that there are risks present in exploring all business opportunities.

    (3) Push out training via a newsletter to ALL participants or push out compliance and training information through any means you find most necessary to ensure that all participants are in reception of it. Most income claims are coming via social media whether on Facebook, Twitter, or otherwise. It is critical to (a) monitor the posts of your field and have participants monitor others.  We are considering implementing a sort of “whistleblower” program with some of our clients where distributors are rewarded for anonymously narcing on each other.  It’s not pleasant, but perhaps better than the alternative; and (b) provide a link that provides the average earnings and train distributors how and when to use it.  These are just simple suggestions, concepts that are easy to implement that we think goes far towards sanitizing any misleading claims made in the field.

    Conclusion

    The tectonic plates have certainly shifted.  This is a new strategy being employed by the FTC; thus, we’re all trying to figure this out in real-time.  In our view, companies will have to drastically re-think how they discuss the income opportunity with their distributors.  And if companies think they can simply pay lip service to compliance as they’ve done in the past, it would be such an insanely foolish outlook.

    As we mentioned, this is an evolving field that we will continue to monitor. If you have any questions, please do not hesitate to contact us. Again, these steps do not prevent you from selling your opportunity and promoting the benefits of your company and its products. Measures should be taken to, at a minimum, reduce your exposure in the event the FTC seizes on claims made by your distributors.

      Clay Brewer is an associate attorney at Thompson Burton PLLC. His practice area focuses primarily on serving young, direct selling companies. He assists Kevin Thompson in providing exceptional legal support for companies ranging from early-stage startups to well-established entities.