In October 2019, the Federal Trade Commission (FTC) announced a case against one of the well-known direct sales companies, its former CEO, as well as two of its top promoters. The FTC alleged that defendants operated an illegal pyramid scheme, made income misrepresentations and provided the means and instrumentalities for its distributors to do the same.
- a $150 million fine for CEO
- a $4 million fine for distributors
- a direct selling business ban for three plaintiffs
The COVID-19 pandemic has aggravated the number of unsubstantiated claims.
In April and June 2020, the FTC sent warning letters to 16 direct selling companies to address and demand the removal of claims that they or their distributors were making to tap into consumers’ fears during the pandemic.
The warning letters highlighted problematic language and cautioned companies that such activity on social media is unlawful under the FTC Act.
Acts and practices subject to FTC investigations:
- illegal pyramid schemes
- deceptive earning claims
- unsubstantiated product claims
Lesson learned: When a company acts illegally, defendants – including senior management, promoters, and distributors – may be named personally, face bans, and be required to turn over money they have taken from consumers.
Why do misleading claims appear on social media?
Distributors want to sell and recruit more by any means. Authenticity on social media is an effective way to cut through all the endless content “noise” and have meaningful interactions with consumers. But sometimes it can go too far.
The direct selling model’s huge advantage is a massive salesforce optimized to become social media sellers generating income for themselves and ultimately increasing corporate sales. What’s more, social selling’s impact has grown during Covid times, attracting more and more newcomers to social media. Consequently, there’s a greater possibility of non-compliant posts.
Lack of guidelines, documentation, proper training. When corporations don’t have social media guidelines in place to secure their reputations, they’re walking on a minefield – and they may end up in federal court. It’s not that distributors intentionally harm their companies, it’s just circumstances.
Top-performing distributors want to be empowered by HQ. They’re ready to obey and follow the rules, but those rules must be clear and known by the teams.
No effective tools. The best way to protect your company against legal risks is to correct questionable posts before they’re published. Implementing third-party solutions which can filter keywords, ban them from use, or warn authors about their ambiguity is usually a part of a pre-posting compliance strategy.
It’s more effective to track distributors in the initial stage of content production than it is to monitor social media afterward. However, there are tools for post-posting compliance and network monitoring like Momentum Factor.
Steps to zero distributor violations
Social media compliance means following the rules when using social media to engage with the public. The “rules” are a mix of industry regulations, federal and state laws, and company guidelines. If that seems too complicated at first sight, remember that the foundation of your compliance is explaining to your distributors the main principle of consumer protection: telling the truth.
Establish clear rules of conduct. Claims – by direct selling companies and their distributors – must be non-misleading and substantiated.
Use compliance tracking software. Use compliance tracking software. The FTC has cautioned direct selling companies that they are obliged to instruct their distributors and monitor them so they do not make misrepresentations. Intelligent software can filter keywords at the pre-approval stage and track networks for illegal content to minimize future manual searches.
Don’t tolerate non-compliant claims. Unsubstantiated product claims are a serious challenge for the industry. On the one hand, companies want excited distributors. On the other hand, if these excited distributors exaggerate, it can get the company into serious trouble. Proof of efficacy is vital.
More on How to Make Distributors Authentic Yet Compliant on Social Media watch the webinar with Kellye Drye lawyer John Villafranco.
Direct selling has had a record year. Despite all the challenges 2020 presented, according to DSA, approximately 80% of direct selling companies grew their revenue compared to 2019.
The FTC keeps on cracking down on direct selling companies participating in fraudulent activities: work-from-home scams, pyramid schemes, and companies that make promises about income opportunities which in actuality cost consumers more than they earn.
How to avoid warnings and cases in the future?
First, recognize the importance of social media compliance. Second, ensure that all claims made are accurate and have proof of efficacy. Third, educate distributors about best practices for product and earnings claims.
Book a demo to learn how PromoRepublic can secure and amplify your brand on social.