Not So Fast: FTC Letter Rebukes Direct Selling Self-Regulatory Council Guidance

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Historically, the Federal Trade Commission (FTC) has touted self-regulation as integral to consumer protection. This has included encouraging industries to work with the Better Business Bureau (BBB)...
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Historically, the Federal Trade Commission (FTC) has touted self-regulation as integral to consumer protection. This has included encouraging industries to work with the Better Business Bureau (BBB) in developing a self-regulatory body that can promote industry-wide policies and heightened compliance. However, late last month, the FTC criticized guidance promulgated by a self-regulatory body calling into question how much the current FTC values industry self-regulation.

In 2023, the BBB National Programs' Direct Selling Self-Regulatory Council (DSSRC), a self-regulatory agency for multilevel marketers (MLMs) and their members, released a guidance document on the use of Income Disclosure Statements (IDS). The purpose of IDS is to give prospective members information on the amount of income they can expect to earn in a business. Although these disclosures are not mandatory, if issued, they must comply with FTC regulations, as they are considered advertisements.

The IDS guidance was intended to improve transparency by avoiding misleading information when making earnings claims. For example, it advised using median instead of mean income. Although mean income is the average of total earners, this can be skewed by a small number of high earners, whereas median income is defined by equal numbers of earners above and below the median. The IDS Guide also recommended including the number of those who earned no income and the material expenses related to participating in the business.

Overall, the IDS guidance encouraged DSSRC members to issue IDSs with the relevant, material information in an easily digestible format that a prospect can use to make an informed decision on whether to join the business. However, on March 15, 2024, Lois Greisman, associate director of FTC's Division of Marketing Practices, penned a letter to the DSSRC disagreeing with the agency's recommendations and reiterating the FTC's stance on several of the issues presented in the IDS guidance. This criticism illuminates the FTC's approach to earnings claims generally.

The FTC's letter arises not out of what should be in an IDS, but instead clarifies how much certainty and substantiation is required to make certain claims. The letter expressed concern with the IDS guidance advising companies to report an income amount "even if they have only 'some indication' of participant expenses or 'an estimate of mandatory costs.'" The letter argues that this is not consistent with the law and does not satisfy the requirement that an advertiser have a "reasonable basis" for any claims that it makes.

The FTC's letter further focuses on the IDS guidance advisements as to a "typical participant." Specifically, the FTC's letter argues that the guidance fails to account for "typical participants" that make little to no money, or even lose money, and thus are unlikely to report this type of information. The FTC's letter further points out that earnings claims should accurately reflect all the expenses involved in participation, such as travel or training. According to the FTC's letter, all these factors contribute to what would "likely leave a net impression that is deceptive." As the FTC's letter states: "In our view, an MLM that wishes to follow the FTC Act should not rely on this Guidance."

That the FTC dealt with this issue through a public letter rather than conversations with the self-regulatory body on concerns the FTC had about the guidance is noteworthy. Whether and how the DSSRC revises its guidance remains to be seen. The FTC's letter, however, depicts how harshly the FTC views earnings claims and the level of substantiation the FTC insists on for any company making earnings claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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