MLM Legal Perspective: FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 2)

KT

This article was written by +Kevin Thompson in collaboration with our stellar summer associate, Jake Perry.

FTC Disclosure GuidelinesIn the last article, FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 1), we walked through the Federal Trade Commission’s recently published .com Disclosure Guidelines (fully included below). In this installment, we’re going to walk through five hypothetical examples of common marketing claims made in the MLM industry. The goal of this post is to provide you with practical, easy-to-understand tips on how to make proper claims.

The format is simple: I’m going to give you common fact patterns of how claims are made in the MLM industry. Then I’ll show you what most distributors would WANT to do as far as making disclosures. Then I’ll show what they SHOULD do, as per the .com Disclosure Guidelines. These guidelines apply whether the company is an MLM startup or a well-established company.

Ready? Go time!

EXAMPLE 1: CHECK WAVING

check

Fact Pattern:

Kyle is very excited about his involvement in a new cosmetics company, Wrinkles-B-Gone. After six months of hard work, he received his first check in the mail for $4,500. Overcome with excitement, Kyle gets an idea. He decides to post a picture on his Facebook profile showing off his check. Kyle figures it’ll be a great way to “flex his muscles” while demonstrating the power of his new company. It is clearly visible in the picture that the check is for $4,500. In his Facebook post, Kyle says, “Boom, playa! Check me out! Want to learn why this company is throwing money at me? Give me a call.”

Kyle does not include a disclosure of the average earnings for Wrinkles-B-Gone distributors. The average is $345 per month per distributor.

What Kyle wants to do:

Kyle, in no attempt to be deceitful, would want to provide a link to the company’s income disclosure in the caption. He figures, “Hey, they can click on the link and see all of the numbers at their leisure.”

What the FTC wants to see:

In the caption of the photograph: Results not typical. The average distributor earns $345 per month. Click the link for a full disclosure: www.wrinkles-b-gone.com/earningsdisclaimer

Lesson Learned:

Sadly, simply providing a hyperlink is not going to cut it anymore. This is contrary to what most distributors think. The FTC states that consumers may NOT understand that additional information is available through the hyperlink. Since a hyperlink is not a “clear and conspicuous” disclosure, it’s going to likely be considered insufficient. In the .com Disclosure Guidelines, the FTC states that hyperlinks are useful where a disclosure is lengthy; HOWEVER, links should not be used where the disclosure is “so integral to the claim being made that they cannot be separated without causing confusion.” Translated into English, full disclosures need to be used with income claims. Links, by themselves, are insufficient. Disclosures must be “clear and conspicuous.” According to the FTC, this means that they should be as close as possible to the claim in question, easy to see, properly labeled and consistent in style. There’s plenty of space available in a Facebook post, so giving a disclosure in the caption itself removes the need for customers to click to another page for the averages. If you allow your distributors to make income claims, it’s imperative that you educate them on the proper ways to make those claims. Provide them with a cut and paste disclosure and require that they use it.

EXAMPLE 2: Weight Loss Claim

Weight Loss Example -  | MLM attorneyGronk has been using “Slim-Me-Cave” for the past 30 days. Miraculously, Gronk lost 30 pounds in this short period of time. Incredibly happy with this weight loss product, Gronk decides to post a blog on the Internet. In the article, he writes, “I lose 30 pounds in 30 days with Slim-Me-Cave! It best weight loss product!!” The average customer of Slim-Me-Cave loses about 1 pound per week, so Gronk’s results are certainly above average.

What Gronk wants to do:

*Results Not Typical.

What the FTC wants to see:

Typical loss is 1 pound per week for Slim-Me-Cave customers. Results will vary depending on diet and exercise.

Lesson Learned:

Your disclosures must give a “reasonable customer” sufficient information to make a decision. “Results Not Typical” does not provide enough information. When making a testimonial about a product that’s “above average,” the average needs to be disclosed (as per the FTC guidelines). Back in the old days, “Results Not Typical” used to work. But now since everyone is a potential marketer, the FTC wants disclosures to be more specific. Does “Results Not Typical” mean a customer will lose only 20 pounds in 30 days? 15 pounds in 30 days? What results can the average customer expect? When possible, provide the averages.

EXAMPLE 3: YouTube Income Claim

youtube_logo_635

Fact Pattern:

Stephanie is giving a video testimonial on YouTube about the benefits of her network-marketing company’s pay plan. She states that “In this business, when I recruited just 20 people, I was making over $2,000 per week!” In that particular program, the average distributor earns $235 per month.

What Stephanie wants to do:

Stephanie would probably not want to provide an income disclosure at all. I’m just being candid. Rarely in videos prepared by distributors do you see any kinds of income disclosures.

What the FTC wants to see:

The FTC states that the manner you communicate your claim should also be the manner you communicate your disclosure. Therefore, a YouTube video should contain a disclaimer in both video and audio formats. Where should the disclaimer be? Sadly, there’s no clear answer. But if we look at the FTC’s definition of “Clear and Conspicuous,” I think the safest bet is a text disclosure displayed simultaneously to the claim in question in addition to a more detailed audio and video formatted disclosure at the end of the testimonial. Or Stephanie could provide a “visual cue” during the video to communicate to the viewer that disclosures can be found at the end of the video.

Without question, it’s now required (in my opinion) that distributors end their videos with a properly formatted video segment. At the end of the testimonial video, a separate video disclosure should be included to illustrate the average incomes. The video file should include an image of the company’s income disclaimer (usually in spreadsheet format). While the image is on the screen, there should be audio narration regarding the average earnings. If a company is going to permit distributors to use YouTube to promote their businesses, the company should provide this kind of file freely on its website AND educate distributors on how to use it.

While it sounds complicated, it’s not difficult for companies to provide this sort of video file. However, if the company is unwilling to properly arm the distributors with sufficient tools to make good claims, they should restrict distributors from using YouTube (which is not realistic AT ALL).

There are several questions this kind of hypo raises:

Should companies require leaders to insert a clear and conspicuous textual disclosure to appear on the screen when the claim is being made?

It depends. In a perfect world, yes, it’s a good idea to provide the disclosure during the claim. But in reality, most reps lack the technical skill to do this right. This is what we know: disclosures should be as close as possible to the claim being made. Is it sufficient to provide a video file containing a full disclosure at the end of the video? In my opinion, the answer is yes. But in the abundance of caution, it would be better if there were a text disclosure provided during the video in addition to a video file being used at the end.

Is it a good idea to even allow reps to make these sorts of claims to begin with?

Are you able to produce a quality disclosure for your distributors to use? Do you trust your distributors to “color within the lines” and end their videos with a video? Do you have a solid compliance department to catch and correct the distributors that do this poorly? If the answer to those questions is “yes,” then you’ve got a shot. If, on the other hand, you answered “no” to any of those questions, it might not be worth the risk.

Lesson Learned:

If you are going to allow reps to make videos that contain income claims, be careful! When it comes to videos, it’s difficult to walk the tight rope. When it comes to income claims in videos, there’s not much margin for error. With this in mind, I would advise companies to require tight compliance. At a minimum, companies should provide distributors with a professionally produced video file that all distributors can include at the conclusion of their videos. If you know leaders are going to make claims in YouTube videos, or any other video platform, it’s wise to properly arm them with adequate disclosures. A video file will give the needed audio disclosure as well as additional visual disclosure to the income claim in question.

EXAMPLE 4: YouTube Product Claim

Product Claim Example | MLM attorneyFact Pattern:

“Sports Minded” is a company that sells organic products that improve mental focus during physical activity. Adam is a distributor for Sports Minded and he decides to do a self published a YouTube video to give a testimonial about how he can now focus for 8 hours straight while playing golf without additional supplements. However, studies performed by Sports Minded indicate users can experience an average of 4 hours of improved focus. Adam is being honest regarding his experience with the product. He’s like Mr. Miyagi for 8 hour straight! Since it’s a true statement about his personal experience, is he required to provide substantiation and disclose the average results?

What Adam wants to do:

Adam would likely try to provide a disclosure via a hyperlink in the video description, in text at the end of the video or in a brief audio message at the end of the video.

What the FTC wants to see:

They want a “clear and conspicuous” disclosure that contains the average results. Just like with the income claim example above, the disclosure needs to be in both audio and visual format.

It would be ideal if the distributor had the skill to inject the disclaimer immediately after making the claim i.e. “I know that the company says the average person experiences 4 hours of increased focus, but that was NOT the case for me!” In order for this to happen consistently in the field, the company needs to take compliance education very seriously.

Lesson Learned:

As you can see with all of these disclosures, it’s a lot more art than science. We previously mentioned that the manner you communicate your claim should also be the manner you communicate your disclosure. Technically, the FTC wants to see the disclaimer in both audio and visual formats (even for videos produced by the field). With that being said, it’s unrealistic to expect sales people to get this right when they’re making product testimonials. And I think the FTC understands this (I’m at least hoping they do). With product testimonials, I think a text disclaimer inserted into the video would be a sufficient disclosure. But this approach would NOT be sufficient for income claims. Because money clouds judgment, the FTC is much more strict in that category (and they should be).

EXAMPLE 5: Tumblr Blog

Tumblr - MLM exampleFact Pattern:

Mary publishes an article on Tumblr about “N-ERGY SAVER,” a utility service MLM where customers can save money on their electric bills throughout the year. Mary, a representative, claims that she saved $50 per month by signing up with the company. While Mary’s claim is 100% true, the company’s data shows that the average homeowner saves $15 per month on their electric bill.

What Mary wants to do:

She wants to tell her story! She wants to say “I saved $50 a month with this service and so can you!” Since it’s a true story, Mary sees nothing wrong with her sharing her personal experience.

What the FTC is looking for:

The FTC wants to see a disclosure in close proximity to her claim. So if she has written text about her savings with N-ERGY, she needs to include a disclaimer in the same font and format as the text that triggered the claim. The disclaimer can say “The average homeowner saves between $10 and $20 per month, depending on their energy consumption patterns.”

BONUS EXAMPLE!

bonus

Fact Pattern:

Same as Example #2, except suppose Gronk wants to make the same claim via Twitter.

What Gronk wants to do:

I saved 30 LBS w/ Slim-Me-Cave in 30 days! bit.ly/f56/productinfo [linking to the product page that includes the average results]

What the FTC wants to see:

Twitter allows for 140 characters per tweet. If there’s sufficient space for a disclosure, it’s ok to use to twitter. Otherwise, it should be avoided. With Gronk, providing a link is insufficient. But the FTC provides a little hope in this category: as long as the average results are provided in the tweet, twitter can be used. The FTC provides an example of a permissible weight loss claim below:

Untitled

Should Twitter be allowed for income claims?

No! There’s just not enough real estate to provide an adequate income disclosure. As I mentioned above, providing a hyperlink by itself is insufficient.

Lesson Learned:

Twitter is tricky. If the distributors are properly trained, they can use twitter for good product testimonials. But with respect to income claims, Twitter should not be allowed AT ALL.

Conclusion

It’s going to be tough for network marketing companies to walk this tight rope. On the one hand, they want to give their distributors the freedom and flexibility to aggressively market the products and pay plan. On the other hand, they need to “pump the brakes” to ensure that the distributors are doing things right. In my opinion, the real challenge is going to be with online video. While it’s very easy for anyone to create a video with a webcam, it’s very difficult for people to insert proper disclaimers during and/or after the video. In the future, proper education in the field is going to be absolutely crucial. Companies that commit to field education are going to be the ones that pass the scrutiny. Companies that take their hands off the wheel and expect leaders to get this stuff right are walking on thin ice. The FTC’s expectations are out there. Ignorance is no longer an excuse.

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