The FTC and Advertising

by Jeffrey A. Babener
MLM Legal Attorney
©2011

Every business must communicate the worth of its product to the buying public, and a multilevel marketing business is no exception. The nature of multilevel marketing is such that rarely will there be a need for a comprehensive multi-media ad campaign. Most advertising is by face-to-face communication between sellers and potential customers. However, sales kits usually contain brochures and other promotional materials, labels contain representations, and these are subject to regulation the same as is the million dollar Madison Avenue barrage.

The most important, but not the only regulator of advertising is the Federal Trade Commission. The FTC has the power to order a business to cease and desist using an advertisement found to be deceptive, and violation of an FTC order can result in penalties of up to $5,000.00 a day.

The FTC regulates advertising under Section 5(A), which declares that deceptive acts are unlawful. Practices that have been found to be deceptive include false representations, misleading price claims, sales of hazardous or defective products without warnings, bait and switch, failure to disclose information regarding pyramid sales and failing to live up to warranties.

A marketer should review not only promotional material for possible deception, but also the sales force's entire course of conduct, from initial contact to sale, as the FTC evaluates an entire sales transaction or course of conduct of a seller when searching for deceptive practices. In a case involving Encyclopedia Britannica Inc., the FTC found that Britannica was engaged in deceptive practices by misrepresenting the nature or purpose of the initial contact with customers by stating that the representatives were conducting research surveys, when in fact the purpose was door-to-door solicitation. In addition, Britannica was engaged in a deceptive practice in its recruitment of door-to-door salespersons through "blind" recruiting ads falsely promising management positions.

If a claim in promotional materials is directed to a particular group of consumers, the FTC will determine the effect of the claim on a reasonable number of that group. For example, if a claim is contained in an advertisement directed toward terminally ill consumers, more far-fetched claims as to cures etc., may be "reasonable" because these consumers are desperate and susceptible. Similarly, outlandish claims regarding weight loss without dieting are evaluated from the perspective of how they affect obese consumers, and as stated by the FTC:

"To these corpulent consumers the promises of weight loss without dieting are the sirens all, and advertising that heralds unrestrained consumption while muting the inevitable need for temperance, if not abstinence, simply does not pass muster."

The FTC will evaluate the entire product, transaction or course of dealing in deciding whether reasonable consumers are likely to be misled by misrepresentations. A misrepresentation in an ad headline may or may not be corrected by qualifying information in the text of the ad, as a reasonable consumer may read only the headline and not the text. Therefore, if a disclaimer is used, it should be prominently displayed. Nor are money-back guarantees a defense in a case of deceptive advertising.

The final factor in evaluating and deciding whether a deceptive practice has occurred is that the act or practice must be "material." A material misrepresentation is one that is likely to affect a consumer's choice regarding a product or service. Express claims are presumed to be material. Information that the seller omits when the seller knows that the consumer needs the information to make a decision is presumed to be material. Other claims the FTC generally considers material include claims dealing with health, safety, efficiency, cost, durability, quality, warranties or the purpose of the product.

A direct selling company would be wise to review all advertising and promotional materials for claims that it is able to support and to be sure that the message will pass the watchful eyes of the Federal Trade Commission. Be sure and check with your company before running any advertising on your own.

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About the Author:

Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad. His firm has focus on startup and emerging MLM companies. He has been adviser to such companies as Avon, Nikken, Discover Toys, NuSkin, Excel, Fuller Brush, Cell Tech, Kaire, Sunrider, Melaleuca, etc. He is editor of the industry resource internet site www.mlmlegal.com.  He is a frequent lecturer and has been interviewed on the industry, and published, in many publications. Babener & Associates, 121 SW Morrison, Suite 1020 Portland, OR 97204, www.mlmlegal.com.

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