Federal Legal Framework
It is well established that commercial advertising can be regulated by the federal government. For direct sellers, at least two types of advertising fall into the category of commercial speech: earnings claims and testimonials. While there is no federal statute specifically controlling earnings information which may be given by direct sellers, the Federal Trade Commission (FTC) has general statutory authority to regulate both forms of advertising if the truthfulness of the earnings claim or the legality of the activity being advertised is called into question.
The FTC investigates advertising practices that it learns of from many different sources, including letters from consumers or businesses, Congressional inquiries, and advice from consumer protection advocates. When the FTC takes action against false or deceptive advertising, it is most often under section 5 of the FTC Act (15 U.S.C. § 45), which prohibits any “unfair methods of competition…and unfair or deceptive acts or practices in or affecting commerce.”
The FTC is authorized to issue a complaint when it has “reason to believe” that a violation of the law has occurred. In addition, the FTC is authorized to seek a judicial remedy whenever the FTC has “reason to believe” that any party “is violating, or is about to violate” a provision of the body of law enforced by the FTC. Under this authority, the FTC may ask a U.S. District Court to enjoin the allegedly unlawful conduct, pending the completion of an FTC administrative proceeding to determine whether the conduct is in fact unlawful. In addition, the FTC may seek a permanent injunction.
The FTC does not have to prove actual deception to establish that advertising is unfair and misleading. A claim that has the capacity to deceive is sufficient. Further, the FTC may rely on its own common sense and administrative experience to assess whether the overall impression made by the advertising is unfair, deceptive, or misleading. An advertisement may be misleading or deceptive even though the statements made are literally true because of what is implied under the circumstances. Advertising may also be unfair and deceptive if it omits information material to the consumer’s assessment of and reliance on the representations made. This legal standard provides the backdrop over which the FTC regulates earnings claims.
In order to establish a case regarding earnings misrepresentations, the FTC must demonstrate that a company or individual made “a material representation, omission, or practice that is likely to mislead consumers acting reasonably under the circumstances.” Generally, potential misrepresentations likely to mislead consumers acting reasonably under the circumstances are examined in their entirety through the eyes of the reasonable consumer and without emphasizing any particular word or phrase.
Omissions or failures to disclose important information are legally deceptive if they have a tendency or capacity to deceive. A claim is considered material if it involves information that is likely to affect a consumer’s choice of, or conduct with respect to, a product (including a service or earning opportunity).
For direct sellers, misrepresentations regarding the profit potential of an earning opportunity are material misrepresentations in violation of the FTC Act. There are only a few specific decisions involving direct selling companies. The legal standard as articulated in those decisions is that statements about potential earnings should be:
- Clear and conspicuous;
- Reasonably objective under the circumstances; and
- Provided to prospective recruits at the time they are solicited to join a direct seller.
If, for example, generalized statements about potential earnings exceed the earnings normally received by current members of a company’s sales force, and no context is provided for those statements, the statements likely are misleading and would, thus, violate the FTC Act. Moreover, statements attributed to named individuals, including income testimonials and implied lifestyle claims, should also be accurate and should be presented in a way that is not misleading. If such statements have the capacity and tendency to lead members of the public to believe that a substantial number of participants will regularly earn similar amounts, then they are likely misleading and deceptive and would violate the FTC Act.