Law Articles
2022-11-10
MLM
Common False Advertising by Multi-level Distributers - Case Studies of False Advertising by MLM Distributers in the U.S. (Part 2)
【Charlotte Wu, Partner Lawyer, Zhong Yin Law Firm】
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
A good advertising strategy can boost sales and distribution and help build a company's brand, and advertising is an important part of the multilevel marketing business model. The MLM business places a great deal of emphasis on the promotional ability of the distributor, and especially in an environment where internet users are rapidly increasing, distributors can use online advertising to stimulate market activity. Therefore, in order to make the company's brand and goods or services more attractive to consumers, many distributors often advertise and use a large number of subjective terms such as "complete" and "best," or link to terms such as "first," "champion," "most," and "largest," but in fact there are no sales figures or objective data such as surveys and other objective data to prove that they are exaggerated to impress consumers. These exaggerated statements may cause the MLM business and the distributors themselves to bear the legal responsibility of advertising misrepresentation. Through this article, the author will analyze the common misrepresentation of advertisements in practice, and introduce the misrepresentation of advertisements in practice in the U.S. MLM business or distributors, as a reference.
Common false advertising in practice among MLM distributors.
To attract consumers, false advertisements employ different strategies mainly based on the price, quality, and purpose of the product, such as bait and switch, forced marketing, deceptive or ambiguous contracts, artificially inflating prices, and failure to disclose facts. Compared to the general business model, the multi-level marketing business relies on the distributor's interpersonal network to promote their products. Therefore, false advertisements mostly occur during the distributor's marketing behavior, and the Internet makes it quicker and more convenient for distributors to promote or advertise their business, so most of their behavioral patterns are through online advertisements.
Taiwan's current liability for false advertisement of distributors is governed by the Multi-Level Marketing Act and the Fair Trade Act:
1. The MLM Act is more specific about the behavioral patterns of false advertising, including:
(1) Article 11 of the Multi-Level Marketing Management Act states that when recruiting distributors, distributors should indicate that they are engaged in the practice of multi-level marketing and should not do so by recruiting employees or under any other guise.
(2) Article 12 of the Multi-Level Marketing Act states that when a distributor promotes, sells goods or services or introduces others to participate in a successful case study, the distributor must not make false statements or misleading statements regarding the period of time, benefits gained, and development history of the case study.
2. Section 21 of the Fair Trade Act. This section mainly regulates that a distributor shall not make false or misleading representations or statements in merchandise or advertisements, or by other means of making them known to the public, regarding "matters relating to merchandise that are sufficient to influence a trading decision". In addition, the advertising media is also jointly and severally liable with the advertiser for damages, if it knowingly or intelligently disseminates or publishes advertisements that are likely to be misleading. The endorser of a testimonial advertisement is also jointly and severally liable with the advertiser for damages if the endorser knew or could have known that the advertiser's recommendation posed a risk of being misleading. However, if the endorser of a testimonial advertisement is not a well-known public figure, professional or organization, the endorser shall be jointly and severally liable with the advertiser for consequential damages only to the range within ten times the advertiser's remuneration.
The so-called multi-level marketing refers to the marketing method in which the distributor introduces others to participate in order to obtain financial benefits and establish multi-level organizations to promote and sell goods or services. The commercial basis of marketing is the attractiveness of the marketing system and goods or services to the public, and people may invest in the business or purchase goods or services because they believe in the characteristics of the system or the effectiveness of the goods or services. Therefore, the author believes that in practice, when engaging in MLM marketing, distributors often make false claims, exaggerate, mislead people or fail to disclose false advertisements about the MLM system and goods or services in order to attract or persuade others to lure consumers, for example, false advertisements for recruitment are actually recruiting downlines or overstating the effectiveness of the goods or the high income. In the past, there was a case in which a distributor was penalized by the Fair Trade Commission for failing to provide relevant documents to substantiate its advertisement.
MLM Misrepresentation Cases Under U.S. Laws
Any person, partnership or corporation that disseminates or causes to be disseminated, by any means, any untrue advertisement that induces or may induce, directly or indirectly, the purchase of food, drugs, devices, services, or cosmetics, or that affects its industry, or that engages in unfair or deceptive acts or practices, may be in violation of advertising liability under the U.S. Code[1], and therefore, distributors may face legal liability for any untrue advertisements made at times while engaged in the act of distributing their products. Therefore, MLM distributors may be subject to liability for any untrue advertisements made during the course of their MLM activities.
The U.S. Federal Trade Commission (FTC), in an effort to protect consumers from fraud and false advertising related to the COVID 19 outbreak, issued warning letters to 16 multi-level marketing companies in April 2020 based on claims made by representatives of these MLMs on social media that the merchandise they were selling cured or prevented the coronavirus, such as, " Experts in the field recommend that regular doses of vitamin C can help prevent coronavirus, and that immediate and widespread use of high doses of vitamin C can significantly slow or completely stop coronavirus"; or claiming that their distributors have made significant profits by investing in their businesses after losing income due to the outbreak, e.g., "I can tell you that there are thousands of people out of work right now, and they're all looking for ways to make money! This is a great program because you can teach someone how to make $1,730 in 10 days", the FTC warned the MLM companies that their untrue or misleading advertisements could be a violation of the law. The FTC has even joined with the FDA to issue warning letters to MLM companies suspected of selling unauthorized goods and requesting that the advertising be discontinued if it is without sufficient and reliable scientific support. [2]
In the past, multi-level marketing businesses in the United States have been prosecuted by the FTC for false advertising. In one case, a multi-level marketing business was accused of illegally operating a multi-level marketing scheme, deceiving consumers into believing that they can earn a substantial income as "distributors" of their merchandise, claiming that anyone could achieve unlimited income, attain financial freedom, and quit their jobs. They required distributors to exaggerate that they could earn up to hundreds of thousands or millions of dollars annually, but in reality, most distributors did not make money and even lost money. Ultimately, the multi-level marketing business was banned from engaging in multi-level marketing and was required to pay $150 million, which would be refunded to consumers through the FTC[3]. In fact, many MLMs were sued in this case, and one MLM was even banned for life and ordered to liquidate its real estate holdings to return millions of dollars. In addition, there have been allegations of false advertising by U.S. MLM businesses that claimed to enhance brain health and prevent, reduce, or treat the risk of concussions or chronic traumatic encephalopathy, as well as Alzheimer's disease and Parkinson's disease, which is still being litigated [4]. In response to inaccurate advertisements, U.S. authorities often require "strong and reliable evidence" to support the sale of goods or related benefits, such as MLM companies or distributors who fail to provide sufficient evidence may be considered a violation of the relevant laws and regulations and be sued for damages, or even banned from engaging in marketing activities for life.
Conclusion
In the wake of the global epidemic, the Internet has become the basis for people's social connections, and we have become accustomed to, and even changed, to living at home, going to work or school, and many online marketing activities have also become a norm. The important feature of MLM is that it is an interpersonal organization without the need for intermediary channels and fixed sales venues, which is a life opportunity for people who live at home. Many MLM businesses have begun to use the Internet to recruit, gather, and educate distributors, and to connect with social technologies to adjust their business models. However, MLM distributors are usually independent, and the size of their organization and the amount of financial benefits they receive are usually determined by their own skills, so marketing and promotion strategies are very important to distributors. The author's purpose in writing this article is to make distributors aware of the legal risks involved and to avoid them, because once advertising inaccuracies are exposed, not only will the distributor and his or her marketing company face legal liabilities, but also the public's trust in the company and its goods or services will be weakened, thus damaging its brand image, and in some cases, the company will need to undergo a brand reset in order to get rid of negative associations that consumers have with the company's previous brand. In severe cases, companies may need to undergo a brand reset to rid consumers of negative associations with their previous brand.
