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While the FTC settlement with Legacy Learning may seem unrelated to the direct selling indusry, the case actually is extremely relevant to MLM and direct selling companies.
Although you don’t typically see paid reviewers compensated for posting positive comments about direct selling companies’ products, it is common in the direct selling industry for companies to use testimonials to promote the sale of their products and services.
Oftentimes, those testimonials come from their distributors. Just as the Legacy “affiliates” benefited financially from their reviews, MLM distributors have a direct financial interest in the sale of the products.
As the Legacy Learning case clearly illustrates, whenever a direct selling company does this, it is extremely important that the company disclose the relationship between the company and the person providing the testimonial if that person is a distributor for the company. This can be accomplished by adding the title ‘Independent Company X Distributor’ to the identification of the person giving the testimonial.
Legacy Learning to Pay FTC $250,000 to Settle Charges Stemming from Compensated Reviews and Endorsements
The FTC’s enforcement of its rule against the use of deceptive or misleading endorsements or reviews has resulted in a $250,000 settlement agreement with Legacy Learning Systems Inc. and its owner, Lester Gabriel Smith, marketer of a series of guitar-lesson DVDs.
According to the FTC’s complaint, Legacy Learning advertised using an online affiliate program, through which it recruited “Review Ad” affiliates to promote its courses through endorsements in articles, blog posts and other online editorial material. According to the FTC, these endorsements generated more than $5 million in sales of Legacy’s courses.
The FTC charged Legacy and Smith with deceptive advertising because they represented these online endorsements as the views of ordinary consumers or “independent” reviewers, without clearly disclosing that the affiliates were paid for every sale they generated .
Under the proposed administrative settlement, Legacy Learning and Smith will pay $250,000. In addition, they have to monitor and submit monthly reports about their top 50 revenue-generating affiliate marketers, and make sure that they are disclosing that they earn commissions for sales and are not misrepresenting themselves as independent users or ordinary consumers.
Legacy Learning and Smith also must monitor a random sampling of another 50 of their affiliate marketers, and submit monthly reports to the FTC about the same criteria.
The FDA has stepped up its campaign against tainted and otherwise dangerous dietary supplements that so far has identified 300 fraudulent products.
These products, typically promoted as “safe” supplements for weight loss, sexual enhancement and bodybuilding, are deceptively labeled or contain hidden or deceptively labeled ingredients that can cause a variety of serious conditions, including stroke, liver injury, kidney failure, heart palpitations and death.
The illegal ingredients include the active ingredients in FDA-approved drugs, sometimes prescription drugs, or other compounds, such as synthetic steroids, that do not qualify as dietary supplement ingredients.
While dietary supplements typically do not require FDA approval, the marketing companies are responsible for ensuring both the safety of their products and that their marketing claims are true. And while it is easier for a product to come to market than for the FDA to take it off the market, the situation with tainted products is serious and commonplace enough for the FDA to step up enforcement activities.
The FDA started this enhanced program in December 2010. In addition to consumer alerts and press announcements about these products to warn consumers, the FDA issues warning letters, seizes products and conducts criminal prosecutions.
In December, for example, a woman pleaded guilty to an 18-count indictment charging her with the illegal importation and distribution of more than four million diet pills that contained a controlled substance, unapproved drugs and a possible cancer-causing agent.
The FTC and its law enforcment partners announced more than 90 enforcement actions against alleged business opportunity scams that promise guaranteed jobs and “be your own boss” opportunities.
Operation Broken Promises includes three new FTC cases and developments in seven other matters, as well as criminal actions by the Department of Justice, the U.S. Postal Inspection Service and various state law enforcement agencies in Alaska, California, Indiana, Kansas, Maryland, Montana, New Jersey, North Carolina, Oregon, Washington, and the District of Columbia.
The new FTC actions announced are:
Ivy Capital Inc. and 29 co-defendants allegedly have taken more than $40 million from people who paid Ivy Capital to help them develop their own Internet businesses, with the promise of earning up to $10,000 per month. Consumers paid up to $20,000 for a business coaching program and related products and services but, accroding to the complaint, got very little in return.
National Sales Group, Anthony J. Newton, Jeremy S. Cooley, and I Life Marketing LLC, also doing business as Executive Sales Network and Certified Sales Jobs, allegedly made false claims to consumers about employment opportunities. According to the FTC’s complaint, they advertised nonexistent sales jobs with good pay and benefits on CareerBuilder.com and other online job sites, and their telemarketers falsely told consumers the company recruited for Fortune 1000 employers and had a unique ability to get them interviewed and hired. The FTC alleged that the defendants charged fees they said covered background checks and other services, and often overcharged, taking $97 from consumers who had agreed to pay $29 or $38.
Business Recovery Services LLC and Brian Hessler allegedly telemarketed products and services they falsely claimed would help consumers recover money they had lost to business opportunity and work-at-home operations. According to the FTC complaint, they sold hundreds of variations of do-it-yourself kits tailored to particular schemes and priced up to $499. The FTC alleged that they violated the Telemarketing Sales Rule by misrepresenting the nature and effectiveness of their services, and accepting advance payments from consumers for recovering money lost in previous telemarketing transactions without waiting seven business days for the consumers to receive the recovered money, as required by the Rule.