Law Articles
2022-01-17
MLM
Foreign Regulation News: U.S. Officials Issue Notice of Strict Penalties for False Marketing and Advertising Income Inaccuracies
【Charlotte Wu, Partner Lawyer, Zhong Yin Law Firm】
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
In order to prevent the spread of the new coronavirus and the aggravation of the pandemic, governments in various countries have announced the raising of the alert and the implementation of relevant isolation measures. The ecology of industries, consumption habits, and work patterns have all changed as a result. Some industries have withdrawn from the market due to the pandemic, and remote work has become an alternative for employees to provide labor. As the need or anxiety for extra income or to offset the financial impact of unemployment grows, the multilevel marketing industry, with its focus on community development, is one of the best choices. Many unscrupulous entrepreneurs see a need in the marketplace and use slogans such as "fast," "easy," and "no experience" to attract people to join the industry, only to realize too late that the outcome is not as rosy as they had envisioned at the time. In order to eliminate this mess, on October 26, 2021, the Federal Trade Commission issued a "Penalty Offenses Concerning Money-Making Opportunities" notice[1] to a number of Multi-Level Marketing (MLM) companies. The Commission issued a "Penalty Offenses Concerning Money-Making Opportunities[1]" (hereinafter referred to as the "Notice") to a number of multi-level marketing (MLM) companies and warned them not to violate the law, or else they could be subject to a civil penalty of up to $43,792 for each violation. This article will use the Notice to briefly summarize the evolution of the U.S. regulatory attitude toward multilevel marketing (MLM) and reflect on the development of Taiwan's industry, in the hope of throwing a sprat to catch a herring and contributing to the industry's improvement.
Summary of the Notice
In the Notice, it is considered an unfair or deceptive trade practice to make false, misleading, or deceptive representations about expected earnings or profits to participants in a money-making program or opportunity. Before making a claim of potential gain or profit, the advertisement or claim provider should have sufficient evidence of the truth of the claim and the experience it describes should be achievable by the average participant. If the claim is not representative, e.g. a high level of income for a small number of senior members, there is a high likelihood that the claim will be considered misleading. If the overall impression of the claim is misleading, the Notice also serves as a reminder that the disclaimer is not ipso facto valid at this point. Traders should also ensure that any independent salesperson should also avoid such deceptive income claims. "The Notice also sets out examples of claims that may be considered illegal, a selection of which is set out below:
- Attracting people to participate in a program that sells a particular product at a fixed high profit will be considered a misleading statement of income;
- Prohibits the use of direct or implied statements that a participant has the opportunity or hope of earning a substantial profit unless that substantial profit is a common experience shared by a large number of participants in a particular community, geographic area, and the time required to realize that income should be clearly demonstrated;
- Where a high guaranteed income is advertised to job seekers to attract participation, but the person accepting the position does not receive the guaranteed income because of terms or restrictions not disclosed at the outset, the competent authority will recognize the claim as deceptive;
- It is prohibited to use information inequality to claim average potential income, which can mislead participants' decisions;
- Claims that exceed the average amount that users of the product would normally earn are prohibited and can mislead participants into making a decision to participate or not;
- Lying about an opportunity being limited to attract potential participants to a money-making opportunity is prohibited;
- Prohibit lying about the fact that potential participants will be screened or evaluated for suitability;
- It is prohibited to lie that a potential participant does not need any experience to make a profit;
- Prohibit the false claim that a potential participant should act immediately in order to purchase or participate in the earning opportunity;
- It is prohibited to lie that the money-making opportunity involves little or no risk;
In addition, regarding the use of endorsers and testimonials as a form of promoting products or services, the Notice states that it is possible to violate the law by falsely claiming that an endorser or testimonial is an actual or current user, or by using an endorser to falsely claim or exaggerate the performance of a product. In summary, according to the Notice, the main criteria to be considered unlawful is to give potential participants misinformation for evaluation by exaggerating the benefits of the opportunity to earn money, which would constitute an unfair and deceptive trade practice.
The "Notice" shows that U.S. trade authorities have taken a more proactive stance toward related fraudulent trade practices.
In April 2021, the Federal Supreme Court held in AMG Capital Management, Inc. v. Federal Trade Commission that Section 13(b) of the FTC Act does not directly authorize the FTC, as a matter of course, to ask the court to award monetary relief, such as restitution or return of money to the consumer[2]. To protect the interests of the consumer public, the FTC has turned to Section 5 of the FTC Act, which functions as the Penalty Offense Authority (POA), and which empowers the FTC to impose civil penalties for violations of the FTC Act, provided that the FTC proves that the industry had knowledge that the conduct was a violation of the FTC Act. FTC Act, and the FTC must have previously issued an administrative order determining that the specific conduct was unfair or deceptive [3].
In October of this year, the Federal Trade Commission issued a series of similar notices to various industries in order to appropriately utilize its punitive enforcement powers, including notices to for-profit academic institutions[4] prohibiting the recruitment of students through misleading claims, notices[5]. The notices are also issued to advertisers, retailers, prohibiting them from issue deceptive advertisements and endorsements that would mislead the public about the effectiveness of a product. As outlined herein, notices of unfair or deceptive practices to multiple businesses offering opportunities to make money, including multi-level marketing and odd-jobbing businesses.
The multilevel marketing industry has always been exempt from the Business Opportunity Rule[6][7]. Although the Notice does not directly modify the application of the Business Opportunity Rule, the content of the Notice is similar to that of the Business Opportunity Rule in that it is directed at income claims that are not untrue or exaggerated. By publishing the Notice, the FTC will be able to demonstrate that the company receiving the Notice was aware of the substantial risk of violation of the law by the particular conduct, and will be able to take action against future violations of the law by the relevant industry. Nonetheless, the Notice represents the U.S. Federal Trade Commission has become more proactive in regulating the multi-level marketing industry.
Some scholars believe that multi-level marketing companies should recognize that all income claims may be deemed deceptive due to accuracy concerns. Companies should assist direct sellers in understanding this point, not only through contractual arrangements and the establishment of relevant codes of conduct but also by providing appropriate regulatory education to direct sellers. This is to prevent companies from facing legal risks due to direct sellers making unauthorized or false income claims. Additionally, companies should compile income disclosure statements to avoid falling into related legal risks[8].
Taiwan's relevant regulations, the pandemic, technological development, and how to reconstruct the multi-level marketing industry.
Taiwan's Multi-Level Marketing Act also has provisions against the above behaviors, for example, a distributor's source of income should be based on the promotion and sale of goods or services at a reasonable market price, and should not rely on the referral of others to participate as the main source of income [9]; distributors should not promote, sell goods or services or refer others to participate in a way that is deceptive or misleading [10]. In addition, when an MLM business or distributor promotes or sells products or services or introduces others to join a MLM organization by a successful case, it must not be false or misleading when demonstrating the facts of the case study, such as the period of time during which the case study was conducted, the benefits gained, or the history of the case[11]. Distributors or MLM businesses should pay attention to the relevant laws and regulations when promoting their businesses to avoid being fined or subjected to other necessary corrective measures by the competent authorities, or worse, being held criminally liable.
In Taiwan, due to the pandemic, there are many people who are facing the pressure of being unemployed or working from home, and they may easily show interest in starting their own business, investing, and sales advertisements that can easily earn high profits, and there are also distributors who attract members to join through deceptive marketing systems. All of these behaviors may be in violation of the Multi-Level Marketing Act, and distributors must be cautious about it. In addition, in the market, there are cases in which the actual products of daily life, such as beauty care and cosmetics, are still reported as entities, but the business model of "shopping mall" and "e-commerce alliance" is still used as the main business model in the promotion and recruitment, and attention should be paid to whether this has violated the boundaries of the relevant laws and regulations.
It is still unknown whether the United States' attitude towards industry rectification will also affect Taiwan's authorities in strengthening regulations. In addition, the diversification of social media and communication software has blurred the boundaries of advertising, and the MLM industry, distributors, and regulators are bound to have different responses to this new landscape. In addition to self-regulation by the MLM industry through proper education of distributors and deepening of dispute resolution mechanisms, it may be possible to bring order to MLM promotional activities by the authorities by appropriately specifying the obligations and responsibilities of distributors. If the industry and the competent authorities can work together to create a favorable industry environment and reputation, we can avoid a small number of unscrupulous business owners from lowering the reputation of the industry in the society as a whole.
If you have any comments or are interested in learning more about the above, please feel free to contact us.
Charlotte J.H. Wu
charlotte.wu@zhongyinlawyer.com.tw
tel +886 2 2377 1858 ext 8888
[1] The full text of the notice can be referenced at: Federal Trade Commission, 2021, Re: Penalty Offenses Concerning Money-Making Opportunities, https://www.ftc.gov/system/files/attachments/penalty-offenses-concerning-money-making-opportunities/cover-letter-mmo.pdf. (Last visited Dec. 9, 2021)
[2] AMG Capital Management, LLC v. FTC, 593 U.S. (2021)
[3] William Hurd, Whitney Shephar, 2021, Seller Beware: FTC Issues Notices of Penalty Offenses in Effort to Combat “Explosion” of Deceptive Endorsements and Advertising, https://www.jdsupra.com/legalnews/seller-beware-ftc-issues-notices-of-1114574/. (last visited Dec 9, 2021)
[4] Federal Trade Commission, 2021, Penalty Offenses Concerning Education, https://www.ftc.gov/enforcement/penalty-offenses/education. (last visited Dec 9, 2021)
[5] Federal Trade Commission, 2021, Penalty Offenses Concerning Endorsements, https://www.ftc.gov/enforcement/penalty-offenses/endorsements. (last visited Dec 9, 2021)
[6] The Business Opportunity Rule requires operators to provide potential customers with specific information to help them evaluate business opportunities, thereby ensuring that potential customers have the information they need to assess the risks of purchasing or participating in work-at-home or other business opportunities. For details, see https://www.ftc.gov/enforcement/rules/rulemaking-regulatory-reform-proceedings/business-opportunity-rule. (last visited Dec 9, 2021)
[7] Federal Trade Commission, 2018, Business Guidance Concerning Multi-Level Marketing, https://www.ftc.gov/tips-advice/business-center/guidance/business-guidance-concerning-multi-level-marketing. MLMs might not be able to get away with their shady promises much longer, 2021. Vox news, https://www.vox.com/the-goods/22732586/ftc-mlm-rohit-chopra-business-opportunity-rule. (last visited Dec 9, 2021)
[8] Kevin Grimes, 2021, Lessons in Missing the Point – The MLM Industry is Now Expressly Targeted by the FTC For Deceptive Income and Product Claims, https://thompsonburton.com/mlmattorney/2021/08/03/lessons-in-missing-the-point-the-mlm-industry-is-now-expressly-targeted-by-the-ftc-for-deceptive-income-and-product-claims/ (last visited Dec. 9, 2021)
[9] Article 18 of the Multi-Level Marketing Management Act.
[10] Article 15 of the Multi-Level Marketing Management Act.
[11] Article 12 of the Multi-Level Marketing Management Act.