This week, the FTC issued a letter to the Direct Selling Self-Regulatory Council (DSSRC), informing the self-regulatory body that certain guidance DSSRC had previously issued about Income Disclosure Statements ("IDS") was either "not fully consistent with federal law" or "fails to address key concepts of FTC law."
DSSRC, a self regulatory body administered by BBB National Programs, was created in January 2019 to "address earnings claims and product claims communicate by direct selling companies and their salesforce members to ensure a high level of accuracy and adequate substantiation of those claims."
In the fall of last year, DSSRC released a guidance document, "Guidance on Income Disclosure Statements for the Direct Selling Industry" that was intended to provide guidance related to IDS claims "based on the tenets of advertising law that have been articulated by the FTC"'s .com Disclosures Guide, the 2024 FTC Business Guidance Concerning Multi-Level Marketing, the FTC Guides Concerning Use of Endorsements and Testimonials in Advertising, DSSRC's Guidance on Earnings Claims for the Direct Selling Industry, and Section A(8) of the DSA Code of Ethics."
The FTC's response highlighted a few key criticisms of the guidance:
- Inadequate Substantiation: The FTC highlighted that the DSSRC guidance allowed earnings claims based on insufficient evidence, such as estimates, which do not comply with FTC standards (stating, "as far as we know, no court or other authority has ever concluded that a reasonable basis exists from 'some indication' or an 'estimate.')
- Misrepresentation of Typical Earnings: The FTC noted that the guidance "encourages MLMs to say in the IDS that most participants make 'modest or supplemental income'" but noted that the guidance failed to adequately represent the fact that that significant amounts of participants "lose money or make nothing"
- Lack of Expense Transparency: The FTC noted that the guidance did not sufficiently take into account whether whether the claim that participants make a "modest or supplemental income" was gross or net (i.e., whether it accounts for costs and expenses associated). Because, according to the FTC, a participant's costs could "completely offset the typical participant's income or leave that participant at a net loss" the FTC flagged that expenses would need to be taken into consideration for such claims.
In sum, the FTC highlighted that "while it is theoretically possible to make truthful, non-deceptive claims about substantial earnings, doing so requires at a minimum a clear, prominent, and unavoidable presentation of the typical participant's revenue minus expenses—all of which must be substantiated." As such, the FTC was concerned that the DSSRC's guidance would "encourage deceptive conduct and facilitate deceptive earnings claims and result in consumer harm" and recommended that if companies wish to follow the FTC Act they should not rely on the DSSRC's guidance.
This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.