WHAT IS YOUR COMPANY’S RISK PROFILE? By C. Brent Kugler, Partner, Scheef & Stone, LLP
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irect selling companies operating in the United States face a constantly evolving legal and regulatory landscape. Business practices and methods that were once viewed as acceptable or compliant may now invite significant legal or regulatory risk to a company and its stakeholders. Companies should, therefore, regularly evaluate their business practices to ensure that their risk profile has not increased due to business activities that are now deemed noncompliant or illegal. Commit to Policing Improper Earnings Claims Improper earnings claims are typically what will put a company on the radar of the Federal Trade Commission. Recently, the FTC launched a new rulemaking initiative to address deceptive earnings claims. Companies that do not have issues with improper earnings claims are much less likely to attract FTC scrutiny. Therefore, ensuring that your company is not publishing improper earnings claims is a logical place to start. In its complaint filed against AdvoCare, the FTC listed numerous examples of improper earnings claims made at AdvoCaresponsored events and on company-created social media posts and webinars. Companies should ensure that their marketing personnel are properly trained on what is and is not a permissible earnings claim. Just as importantly, companies must publish accurate data reflecting the earnings of all program participants. An income claim is considered deceptive if information is not disclosed showing what potential participants can typically expect to earn. A company’s Income Disclosure Statement (IDS) is a critical document. The FTC’s issue with AdvoCare’s Income Disclosure Statement was that it only reported earnings data for active distributors. Advocare defined active distributors as participants who earned income in the previous year. The FTC alleged that AdvoCare’s IDS was deceptive because less than 30 percent of all AdvoCare distributors earned income. By only disclosing the earnings data for active distributors on its IDS, the FTC alleged that the IDS was misleading because it failed to include earnings data for more than 70 percent of AdvoCare distributors. Done properly, the IDS can be an important insurance policy for
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MLM companies. A full and transparent disclosure of all participant earnings will significantly reduce a company’s exposure to regulatory scrutiny. On the other hand, an incomplete or misleading IDS can provide evidence the FTC relies on in concluding that a company has made deceptive earnings representations in violation of Section 5 of the FTC Act. The biggest challenge a company faces in reducing exposure for improper earnings claims is in policing claims made by members of its sales force. The FTC has unequivocally stated that it intends to hold MLM companies responsible for improper earnings claims made by their distributors. Companies must do much more than simply have policies in place that prohibit distributors from making improper earnings claims and occasionally enforce those policies. In today’s regulatory climate, companies must implement a training program that educates distributors on what is and is not a permissible earnings claim. Companies must also commit to terminating distributors at any level or rank who persist in making improper earnings claims. Companies must also actively monitor distributor social media posts and compel the removal of social media posts that contain improper earnings claims. Take a Fresh Look at Your Company’s Compensation Plan In the current regulatory climate, the FTC has prioritized scrutiny of MLM compensation plans. This heightened attention means that all MLM companies should review their compensation plans to avoid getting caught in the FTC’s crosshairs. Here are a few things to consider when evaluating your company’s compensation plan: • The compensation plan should reflect that commissions and advancement awards are based primarily on verifiable retail sales volume, not participant purchases. • Regardless of a compensation plan’s terminology, an emphasis on recruiting over selling products is
