FTC Staff Report on MLM Income Disclosure: Many Observations Lead to Many Questions

Yesterday, the Federal Trade Commission released a report documenting a review of 70 publicly available income statements from a wide range of multi-level marketing (MLM) and direct selling companies, which highlighted:“common formats or methods that may influence the messages conveyed to consumers.” This report, which clearly reflects the views of“the authors and does not necessarily reflect the views of the Commission or any individual Commissioner,” according to updated Multi-Level Marketing Business Guidelines issued by the FTC staff earlier this year (discussed here ), staff letters to the Direct Selling Association (DSA) and the Direct Selling Self-Regulatory Council (DSSRC) (discussed here ), and the FTC’s prior March 2022 notice of proposed issuance of profit claims rulemaking (discussed here ).

The report reiterates many of the criticisms raised by staff over the years regarding income declarations. For example, staff findings include the following:““most” income statements:

Income data do not include participants who earned little or no income and often do not clearly explain this exclusion;
Expenses incurred by participants are not included in the settlements because they are not clearly disclosed;
Particular emphasis is placed on high amounts received by a relatively small number of participants;
The limited income that most participants receive is not disclosed clearly or prominently, if at all;
The presentation of income data is misleading or ambiguous.

The report does not provide clear guidance on how the staff believes such income statements should be developed and prepared, nor does it explicitly state that any of the practices described in the report are inherently deceptive. And while many of the principles in the report will not be new to the industry, there are important nuances.

ON segmentation for inactive distributors or distributors not receiving paymentsThe report notes that “(a) majority of the income statements reviewed did not present the distribution of income across all participants but instead presented a distribution that excluded certain groups of participants,” and only 16% explicitly included all participants in some way. The report does not, at least explicitly, question the exclusion of certain populations, as long as the exclusion criteria and justification are clearly stated. For example, the report notes that only four income statements included exclusion criteria“in plain language, as visible or nearly so visible as the dollar amounts.” Significantly, the report does not define““plain language” in general or in the specific context of income declarations.
Similarly, on expensesthe report found that none of the 70 information statements reviewed included expenses and“most convey the expense omissions in a less prominent way than displaying the dollar amounts that MLMs pay participants, such as in small print or dense blocks of text.” The staff report echoes staff guidance on MLMs, suggesting that income claims may be inherently misleading when““The disclosure of income shows that the vast majority of participants earned less in a given year than their (annual) membership fees.”
About the use tables and headingsThe report criticizes approaches that emphasize the high incomes of a small number of participants, including by breaking down income information by rank and devoting a disproportionate amount of visual space to higher ranks consisting of fewer people. The report does not explain the perceived benefits to consumers of a more detailed breakdown of consumers who do not earn significant incomes.
About the use average and median incomesThe report expresses Staff’s view that the median is often the preferred approach because “while the average can be a useful summary of data that has a relatively small degree of internal variability, it can be misleading when the data is largely consistent but has a small number of outliers.” Staff has raised this point before but did not do so in his MLM Guidance.

The report also criticized the way income data was presented and cited one information statement from““unexplained discrepancy” in which the table lists“both the average monthly salary and the average annual salary — but the annual salary is not 12 times the monthly salary, and the table does not explain how the MLM calculated this amount.” However, this“The “discrepancy” seems to be resolved by understanding that not all participants earned income every month of the year. Indeed, the report elsewhere questions extrapolating monthly earnings to annual earnings, because such calculations may incorrectly assume that every distributor earns income every month.

The report further questions the allegedly vague terminology without definitions or qualifications. The report claims that terms such as “income” or“earnings” can mean different things in different contexts, leading to confusion among consumers about what the numbers represent. Similarly, the report is critical of how MLMs use the term““active” in limiting the participant data set for earnings disclosure purposes without a clear explanation and includes as Appendix C a list of the various definitions encountered for““active” participants.

Finally, the report criticizes the use of general qualifying claims that purport to modify the basis of income claims without clear justification or support, such as:“qualities necessary to earn money, such as hard work, conscientiousness or leadership.” The report said that such statements“could be important to consumers considering this option,” but he seems to question the basis for such claims, even though many of them are common sense.

While the report does not have the force of law, it does offer important insight into how current staff interpret the law and may attempt to enforce it. However, staff statements such as this one have never been received Chevron respect and Garvey The ruling said staff interpretations such as this should command respect but not reverence.

At the same time, Staff gave this document the form““Report” instead“Guidance” for good reason. In most cases, Staff provides a series of observations (albeit often value-laden) on the approaches taken by different companies, without offering guidance on the preferred methodology for developing such statements. And while Staff questions many aspects of current earnings statements, it does not address some of the most difficult ones, such as:

How should companies differentiate between those who join to actively pursue direct selling opportunities and those who join primarily as discount buyers or passively seek out opportunities? The report seems to suggest that some distinction is defensible, provided it is clearly and concisely explained.
What expenses should companies consider if they are trying to deduct net profits to get net profits rather than gross profits? Presumably, employees would agree that certain indirect costs (e.g., gas for driving to meetings, lunch with other gas stations) should not be deducted—just as they are not deducted from profits in traditional employment opportunities.
Should companies try to estimate retail profit for income statements even if they can’t track that profit directly? The report notes that 14 of 70 income statements explicitly state that they exclude retail income, and most provide no guidance one way or the other. Of course, excluding the additional income category would result in a more conservative income estimate than including it.

These are difficult questions that require careful analysis and consideration. While the staff may not have provided clear guidance, it expects companies to take a thoughtful and rational approach when preparing and distributing income statements.

(See source.)