The Direct Selling Association’s recent Code Responsibility teleconference featured a presentation on deceptive representations in earnings claims by FTC attorney Janice Kopec.
An earnings claim is a statement made by a company or its representative about the income an individual can earn from a business opportunity. The FTC requires any earning claims be presented in writing; any claims not supported by written documents are illegal. According to Ms. Kopec, the Earning Claims Statement must include:
- The name of the person making the claim and the date
- The specifics of the claim
- The start and end date those earnings were achieved
- The number and percentage of your buyers who got at least that result
- Any information about the buyers who got those results that might vary from prospective buyers – for example, where they’re located
- A statement that prospective buyers can get written proof for your earnings claims if they ask for it
Kopec talked about how the FTC examines earnings claims to determine whether they comply with the rule. Aside from the basic criteria – whether a claim is material, whether the proper disclosure statements are provided, etc. - the FTC looks at how the typical consumer will perceive the claims.
A federal judge has sentence Kevin Trudeau to 10 years in prison after his November conviction by a jury for criminal contempt of court by violating a 2004 stipulated order to pay a $37.6 million fine for misrepresenting in infomercials the content of his book, “The Weight Loss Cure They Don’t Want You to Know About.”
Federal prosecutors in a filing had asked that Trudeau be sentenced to at least 10 years in prison for repeatedly defying court orders to pay the fine, claiming to lack assets while allegedly living a lavish lifestyle. According to prosecutors, between 2010 and 2013, Trudeau spent at least $12 million on such things as first-class airfare, a single pair of cufflinks costing $12,000 and two residences that together cost more than $15,000 per month.
In his sentencing of Trudeau, U.S. District Judge Ronald Guzman agreed, saying, “He has treated federal court orders as if they were mere suggestions,” adding that, at most, Trudeau considered them “impediments to be sidestepped, outmaneuvered or just ignored.”
The FTC has won a $2.2 million judgment against Wellness Support Network, Inc. as the U.S. District Court for the Northern District of California found that WSN’s marketing of dietary supplements to treat and prevent diabetes violated Section 5 of the FTC Act. The FTC said that any money recovered will be used to reimburse consumers.
The court also prohibited WSN and its two principals from claiming that their supplements would treat and prevent diabetes without rigorous proof to support the claims, as well as from making other deceptive claims.
One of the first Federal Trade Commission actions brought under the updated Business Opportunity Rule has led to a settlement that permanently bans the operators of Smart Tools LLC, Kristin Hegg and Curtis Dawn, from deceptive sales practices. The settlement order imposes a $7.4 million judgment that will be suspended when $234,847 has been paid. The full judgment will be due immediately if they are found to have misrepresented their financial condition.
The FTC charged Smart Tools LLC, Hegg and Dawn, with deceptively selling a work-at-home business opportunity that promised buyers earnings up to $38,943 per year as “Government Insurance Refund Processors.” As processors, the buyers of the program would find people eligible for refunds of their mortgage loan insurance premiums and charge a fee for telling them how to get the refunds.
U.S. Marshals in Norcross GA, acting at the request of the FDA, seized $2 million in dietary supplements from Hi-Tech Pharmaceuticals, Inc. According to the FDA, the products contained 1, 3-Dimethylamylamine HCl (DMAA) or its chemical equivalent.
Kevin Trudeau, who in 2010 was ordered by a federal judge to pay more than $37 million for violating a 2004 stipulated order by misrepresenting in infomercials the content of his book, “The Weight Loss Cure They Don’t Want You to Know About,” was found guilty of criminal contempt for violating that order. The jury took less than an hour to reach its verdict, which was read in a Chicago courtroom Nov. 12.
Prosecutors argued Trudeau knowingly violated the order when he used infomercials to tout the book’s plan that would “cure” obesity without requiring a special diet or needing to exercise, even though the book called for limiting calories to 500 a day and required walking an hour a day.
The defense argued that there was no violation, since the statements made in the infomercials were presented as opinions, and thus were protected speech under the First Amendment. In addition, because nothing was said in the infomercials that did not appear in the book, the defense maintained that a Trudeau was not misrepresenting the content of the book.
The Food and Drug Administration has filed a complaint seeking a permanent injunction against James G. Cole, Inc., its president, James G. Cole, and its general manager, Julie D. Graves, to stop the company’s distribution of unapproved drugs and adulterated dietary supplements in violation of the Federal Food, Drug, and Cosmetic Act.
The complaint was filed by the U.S. Department of Justice in the U.S. District Court for the District of Oregon, Portland Division.
The FTC has filed a complaint against the marketers of the HCG Platinum dietary supplements, charging them with deceptive advertising for claiming that using the product will result in substantial weight loss.
The complaint filed in the U.S. District Court for the District of Arizona, names two corporate defendants, HCG Platinum, LLC and Right Way Nutrition, LLC, company president Kevin Wright, and seven relief defendants the FTC says received money from sales of the HGC products.
The federal district court for the District of Arizona, at the Federal Trade Commission’s request, has frozen the assets of the defendants’ against whom the FTC has alleged falsely promised consumers in the U.S. and Canada that they could make money by referring merchants in their area to a non-existent money-lending service.
The court also appointed a receiver for the operation, which allegedly collected more than $6 million from consumers, as the FTC seeks to shut down the operation permanently and return money to consumers.
Every network marketing company, whether MLM, party plan or hybrid, is fine-tuning their marketing strategy trying to crack the magic nut that is social media. Whether it’s posting a polished Facebook Fan Page or an ad hoc tweet, everyone is getting into the act. But it’s independent distributors who are leading the charge; they have adapted it as their favored communication medium to broadcast their message.
Social media is indeed a communications phenomenon, and there’s simply no stopping it. Unquestionably it can quickly create the much desired “buzz” that every company desires. But direct sellers MUST understand that they are responsible for all the social chatter that goes on. The FTC has made it clear in its testimonials and endorsements guidelines that it will hold a business responsible for statements and representations made by anyone with a “material connection” to a company. Guess what – your distributors definitely have a material connection to your company, and you are responsible for what they are saying!
In January the FTC is filed a lawsuit against Fortune HiTech Marketing (FHTM) alleging that it is a pyramid scheme and that it engaged in false and deceptive practices. As evidence against FHTM, the FTC presented statements and presentations that FHTM’s independent distributors posted on social networks. Among the posts cited by the FTC are:
- A tweet wherein an FHTM distributor allegedly states: “bring ur friends & learn how 2 make $100K a YR.”
- Photos of a check presentation ceremony;
- Distributor photo’s of their commission checks;
- A top-level FHTM distributor claimed on Twitter that he made more than $5 million through FHTM.
It’s very clear that the FTC is monitoring and gathering evidence from social media outlets, and direct sellers MUST take this message to heart. Understand that social media is indeed a communications phenomenon, but you must not let it go unchecked. Your company is responsible for the statements that your sales force posts, so be clear with your field about the rules they must follow. But that’s not enough. In addition, as part of your regular compliance efforts it’s critical that also actively monitor social media posts made by your sales force and take proper measures when improper posts are discovered. After all, the FTC is watching …