FTC Multi-Level (MLM) Marketing Compliance Guidance

The assessment of an MLM’s compensation structure is a fact-specific determination that the FTC makes after careful investigation.  The FTC, in accordance with established case law, focuses on how the structure as a whole operates in practice, including such factors as:

• marketing representations (e.g., statements that focus on or encourage recruitment rather than retail sales, and information provided to participants in training or events regarding recommended practices or how to make money);
• participant experiences (e.g., testimony from participants and information indicative of participant success or failure in the company—including amounts they purchased, sold, and earned, as well as the amount of additional expenses they incurred);
• the compensation plan (e.g., whether the plan requires participants to recruit additional participants to gain access to more lucrative rewards); and
• the incentives that the compensation structure creates for participants (e.g., incentives to focus on recruiting rather than product sales to real customers who don’t also participate in the MLM network, also referred to as non-participant end users, or incentives to make large or regular purchases in order to maintain eligibility for rewards).

The structure of illegal pyramid schemes may differ, and they may harm consumers in different ways.  For example, in Koscot, the Commission described two ways that an illegal pyramid scheme’s compensation structure could cause financial injury to consumers.

• First, the FTC observed that the right to earn lucrative recruitment rewards could overrun an MLM’s retailing opportunity by making recruitment an end unto itself, resulting in “insufficient sales for the insupportably large number of distributors whose recruitment the system encourages.” Koscot, 1975 WL 173318, at *59.
• Second, the FTC concluded that “recruitment with rewards unrelated to product sales” was “nothing more than an elaborate chain letter device,” worthy of “categorical condemnation” under Section 5 of the FTC Act for its “inevitably deceptive representation … that any individual can recoup his or her investment by means of inducing others to invest.” Id. at *59-60.

According to the FTC, MLMs operating as pyramid schemes harm participants in a number of ways, including by causing significant financial losses.

The FTC has observed in many instances, for example, that a substantial majority of pyramid scheme participants lose money and time because they cannot sell enough products or services or recruit enough new participants.  Such financial losses are inevitable, according to the agency, due to the structure of the pyramid scheme and are not caused by a lack of effort or skill among participants.

Additionally, the FTC believes that pyramid schemes are made up of participants who themselves have invested money into the scheme and who cannot recoup that money without recruiting new participants into their downline.  As a result, pyramid scheme participants have a financial incentive to make whatever claims will attract new recruits, even if those claims mislead potential new participants.

In addition, participants who successfully recruit their family or friends put their family or friends’ financial security at risk, the FTC states.  The consequence of being involved in a pyramid scheme can be so severe that some participants experience harm to their health, lose their housing, become estranged from friends and family, or declare bankruptcy.

As noted above, the FTC will conduct a fact-intensive analysis to determine if an MLM is operating as a pyramid scheme.

While each investigation is different, the FTC will look at, among other things, the behavior the MLM is incentivizing in participants, what income expectations it creates through its marketing, and how its participants are trained and compensated. \

The FTC may also look at data to evaluate, among other factors: (i) why individuals sign up to become participants, (ii) how participants can and, in reality, do make money under the MLM’s compensation plan, and (iii) who buys the products or services and why. These are examples only.

Neither is the correct legal standard, as per the FTC.  There is no percentage-based test to determine whether an MLM is a pyramid scheme.  A far more comprehensive analysis is required.

Under federal law, in a pyramid scheme, participants pay “money to the company in return for which they receive: (i) the right to sell a product; and (ii) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of product to ultimate users.” Koscot, 1975 WL 173318, at *59.

Under this standard, whether an MLM is a pyramid scheme depends on what the MLM’s compensation plan incentivizes as well as the rights the compensation plan offers to participants.  An MLM operates as a pyramid scheme where the “focus [is] in promoting the program rather than selling the products.” FTC v. BurnLounge, 753 F.3d 878, 883 (9th Cir. 2014); see also FTC v. Noland, No. CV-20-47-PHX-DWL, 2023 WL 3372517, at *42 (D. Ariz. May 11, 2023) (“Put another way, the second prong of Koscot is satisfied when “participants purchase the right to earn profits by recruiting other participants, who themselves are interested in recruitment fees rather than the sale of products.”).

In this inquiry, “courts look beyond a company’s policies and procedures and examine how the company operates in practice.” FTC v. Vemma Nutrition Co., No. 15-cv-01578, 2015 WL 11118111, at *10 (D. Ariz. Sept. 18, 2015), citing BurnLounge, 753 F.3d at 883.  For example, a court has found that an MLM was a pyramid scheme when its “focus was recruitment…. Recruiting was built into the compensation structure in that recruiting led to eligibility for cash rewards and more recruiting led to higher rewards.” BurnLounge, 753 F.3d at 884.

Similarly, another court held that an MLM was a pyramid scheme because, among other things, it “drove [] sales by pushing recruitment, taking advantage of the momentum from recruitment to sell large up-front product packs, urging large monthly purchases to stay on the path to financial freedom, and encouraging one’s recruits to do the same (i.e., to ‘duplicate’).” Noland, 2023 WL 3372517, at *43.

Courts will look at the structure of the organization, both on paper and in practice, to see whether recruitment, rather than selling products, is the focus of the business opportunity. See BurnLounge, 753 F.3d at 884-7.  Under Koscot, rewards need not be completely unrelated to retail sales. Id. at 886; see also Koscot, 1975 WL 173318, at *59 (“Indeed, even where rewards are based upon sales to consumers, a scheme which represents to all comers that they can recoup their investments by virtue of the product sales of their recruits must end up disappointing those at the bottom who can find no recruits capable of making retail sales.”) (emphasis in original).

Also, while purchases by participants do not per se result in a pyramid scheme, “evidence that distributors purchase and consume product for the purpose of qualifying for recruitment incentives is evidence of a pyramid scheme.” Vemma, 2015 WL 11118111, at *3.  Where recruiting is necessary to earn significant rewards and the system is set up to motivate participants to earn rewards, rewards are for recruiting. BurnLounge, 753 F.3d at 887 (collecting cases).

No.

According to the FTC, an MLM can sell real, even high-quality, products or services and still be a pyramid scheme.  Similarly, having some or even many product or service sales to retail customers does not necessarily mean an MLM is not a pyramid scheme.

Not having a real product or retail customers can accentuate the harm caused by a pyramid scheme, but an MLM can be a pyramid scheme and harm consumers even if it has real products or many actual retail customers.

No.

According to the FTC, there is no safe harbor under the FTC Act for such a compensation plan.  “To determine whether an MLM business is a pyramid, a court must look at [both] how the MLM business operates in practice” and the incentives “built into the compensation structure.” BurnLounge, 753 F.3d at 884. An MLM can be a pyramid scheme even if it offers rewards based on retailing. See id. at 885 (Koscot “does not require that the rewards be completely unrelated to the sale of products”).

The relevant test under Koscot is whether the compensation structure, as a whole, gives participants the right to rewards for activity that is unrelated to the sale of the product or service to ultimate users, even if rewards are paid out in connection with reported retail sales. See Koscot, 1975 WL 173318, at *59 (“Indeed, even where rewards are based upon sales to consumers, a scheme which represents indiscriminately to all comers that they can recoup their investments by virtue of the product sales of their recruits must end up disappointing those at the bottom who can find no recruits capable of making retail sales.”).

In addition, many compensation plans reward participants for purchases made by participants in their downline.  Products or services that are purchased and consumed by participants to satisfy their own genuine personal demand do not themselves indicate a problematic MLM compensation structure.  However, the FTC’s law enforcement experience has shown that many participants make purchases — and recruit or pressure other participants to buy products or services — for reasons unrelated to their own actual demand or their customers’ genuine retail demand.

Such reasons include to obtain rewards or a particular rank under an MLM’s compensation plan, to help their upline maintain eligibility for particular rewards or get new rewards, or due to pressure from their upline or the MLM.

For example, in its prior investigations, Commission staff has observed MLMs where upline participants were often paid rewards for product purchases made by downline participants without regard for whether the product involved was consumed, retailed profitably, retailed at a loss, given away, or discarded.  FTC staff has seen MLMs that permit participants to meet mandatory targets to qualify for particular compensation via participant purchases alone.

Additionally, FTC staff has seen MLM participants who are encouraged to purchase products in order to qualify for more compensation or help their upline qualify for particular compensation.  FTC staff has even seen MLMs in which participants made purchases in the names of fake customers, purportedly to satisfy sales requirements, and MLMs that either encourage or turn a blind eye to such practices.

An MLM that operates in any of these ways may run afoul of Koscot, especially when the MLM also requires or incentivizes participants to make recurring product purchases—for example, by premising rank advancement or reward eligibility on such purchases.  Note that such purchasing incentives still may exist even when the compensation structure permits rank advancement or reward eligibility through other means, such as retail sales.

This issue, like all issues concerning the evaluation of an MLM’s compensation structure, is fact-specific.  However, when evaluating whether an MLM’s payment of compensation for participant purchases is, under Koscot, a reward that is unrelated to the sale of the product to ultimate users, the FTC is likely to consider several factors, including:

• Whether features of the MLM’s compensation structure incentivize or encourage participants to purchase product for reasons other than satisfying their own personal demand or genuine retail demand in the marketplace.  Examples include:
  • MLMs that require participants to meet monthly or quarterly purchase quotas to maintain their eligibility for a particular compensation rank or bonus and allow participant purchases to count toward meeting those quotas.  In the Commission’s experience, these MLMs are likely incentivizing inventory loading.  Other examples of this practice include training participants to meet their sales quotas by purchasing products themselves, regardless of personal demand.  But even in the absence of such explicit instruction, the incentive to purchase products to meet the sales quota may exist.  A participant having difficulty finding customers sufficient to meet their quota during a slow month has a strong incentive to buy products to meet their quota and stay eligible for particular kinds or amounts of compensation;
  • MLMs that require or encourage potential recruits to sign up as retail or “preferred” customers for some period of time before becoming participants.  Purchases made during that time may be incentivized by the compensation plan and may not be indicative of true retail demand;
  • MLM compensation plans that encourage duplication, or recruiting one participant who is encouraged to make a large initial purchase, who then recruits another participant who is encouraged to make the same large initial purchase, and so on.  In the Commission’s experience, at least some participants are told to make the large initial purchase to build their business or to qualify for certain types of compensation and are not motivated by true retail demand;
• Whether participants are ever encouraged by the company or other participants to purchase products for reasons other than true retail demand or to falsely attest that personal purchases represent sales to family members, friends, or other purported end users; and
• Whether particular purchases by participants were made for reasons other than to satisfy personal or retail demand.

The persuasiveness of this information in any particular case will depend on its reliability.

The FTC’s case against BurnLounge provides an example.  BurnLounge argued that its participants bought product packages consisting of sales websites and music-related merchandise because they wanted to use the merchandise.  However, when a court ordered BurnLounge to untie its product packages from the business opportunity, monthly sales of these packages plummeted by almost 98 percent. BurnLounge, 753 F.3d at 885.

This demonstrated that most packages had been bought in pursuit of the opportunity to earn income rather than due to genuine personal demand.  At most, such demand was responsible for only a small minority of package sales, and the court found BurnLounge used an unfair or deceptive compensation structure.

Similarly, in AdvoCare, the FTC alleged that participants had to meet minimum purchase requirements each pay period to earn income, qualify for bonuses, and maintain their compensation level.  Even in typically slower retail sales months, such as January — coming right after the holidays — the business still required participants to meet the same purchase thresholds each pay period or lose their compensation level and bonus eligibility.

The FTC alleged that because of AdvoCare’s compensation plan its participants made purchases in furtherance of the business opportunity rather than to satisfy genuine personal or retail demand.

These are examples only.  As noted above, the FTC will conduct a fact-intensive analysis to determine if an MLM is operating as a pyramid scheme.

According to the Federal Trade Commission, “inventory loading” refers to product or service purchases made so that a participant in the MLM can qualify for compensation (including payments, rewards, promotions, and discounts), receive increased compensation, or otherwise advance in the marketing program, rather than to satisfy genuine personal or retail demand.  For example, participants may buy product to meet certain “volume” thresholds or to satisfy requests from their uplines.

Participants may or may not understand at the time of purchase that their product or service purchases amount to inventory loading.  They may be responding to various arguments MLMs and other participants use to motivate purchasing, such as: it is not risky to purchase extra because the product is easy to sell, participants need to look like avid users of the product in order to be successful salespeople, and product purchases represent an investment that will lead to a future return.  Whatever the argument, participants can find themselves with financial losses when forced or encouraged to buy product or services that they neither want for personal use nor can sell for profit.

“Buyback provisions,” which allow participants to return unsold product to the MLM for a refund, can benefit participants, but do not shield an unlawful pyramid scheme from law enforcement.

As a general matter, money-back guarantees and refunds are not defenses for violations of the FTC Act.  Specifically, a refund policy is not a defense for marketing an unlawful MLM compensation structure or for making deceptive income or lifestyle claims, as consumers may still be harmed even with a refund policy.

Even where a buyback provision is offered, policies surrounding its implementation may dissuade or prevent dissatisfied participants from seeking a refund.  For example, participants may be unaware of their right to a refund; the refund process may be too complicated or difficult to navigate; upline recruiters may pressure recruits to not seek refunds because doing so may hurt the upline’s status or compensation; the refund policy may be limited based on factors such as age or condition of the product; or obtaining a refund may require quitting the opportunity entirely.

Also, if the conditions and incentives related to obtaining a refund under a buyback program are not apparent to participants (as FTC staff has seen in certain instances), the buyback provision may increase consumer harm.  For example, consumers may be misled into believing that the buyback program makes the opportunity “risk-free” and purchase more products – increasing their overall losses.

In addition, buyback provisions do not protect against harm from various other — potentially quite substantial — business expenses, such as travel for conferences, tools or services, and training.  They also do not compensate a participant for all the time spent pursuing the income opportunity, according to the Commission.

No, there is no such requirement according to the FTC.

However, as discussed above, to comply with the FTC Act, an MLM’s compensation structure must pay compensation for sales to ultimate users, among other requirements.  Thus, receipts documenting actual sales to real customers who do not participate in the MLM network would provide relevant — but not dispositive — evidence concerning an MLM’s legality.

There is no single method for creating and retaining such documentation.  Different MLMs use a variety of approaches to show that their product or service is sold to retail customers, including collecting retail sales receipts created by participants; having retail customers buy product directly from the company, rather than from a participant’s inventory; and having product users sign up with the company as customers who are not participating in the business opportunity.

The most credible documentation is obtained through direct methods and used to verify that retail sales are made to real customers, says the FTC.  Documentation obtained through indirect methods—like participant attestations or checkboxes—is less likely to be persuasive, with unsupported assertions being even less persuasive.

Having retail customers or even many retail customers is not a safe harbor.  As noted above, the issue of whether an MLM operates as a pyramid scheme is fact-specific, and one key question is what an MLM compensation plan incentivizes. See Response to Question No. 5 above for more details.

Deceptive Earnings and Product Claims

13.  How should an MLM approach representations about income and earnings to current and prospective participants?

An MLM’s or its participant’s representations related to the business opportunity, including earnings claims, violate Section 5 of the FTC Act if they are material to consumers and false, misleading or unsubstantiated.  This is true wherever the representations are made, including on social media, in live presentations, in one-on-one conversations, or in any other medium.

Whether representations are deceptive is a fact-specific inquiry, but here are some guiding principles about earnings claims:

• Any earnings claim should reflect what the typical person to whom the representation is directed is likely to achieve in income, profit, or appreciation.
• Claims about earnings should take into account both what participants earn and what they spend.   Most MLM participants incur numerous expenses, such as costs for product purchases, travel for conferences, tools or services, and training.  These expenses must be subtracted from any revenue earned to determine whether the participant has made a profit or lost money.  It is deceptive to promote what MLMs may pay participants without also disclosing the typical expenses participants may incur and the typical amount of those expenses.
  • For example, should expenses nullify income for many participants, a claim that participants are likely to earn any money would likely leave a net impression that is deceptive.
• An MLM or participant making claims about MLM income must have a reasonable basis for the claims disseminated to current or prospective participants about the business opportunity at the time it makes the claims.  A “reasonable basis” means reliable, empirical evidence that supports the claim, not subjective beliefs or personal anecdotes.  It is deceptive to make claims without appropriate supporting evidence.
• No aspect of an earnings claim should be misleading.  For example, claims about making money while working only a limited number of hours are deceptive if they do not represent what participants generally experience in terms of money earned or time worked.
• Truthful testimonials from MLM participants who earn large amounts of money or career-level income likely will be interpreted as representing that their experience is representative of what others should expect to receive.  Given the reality of MLM participant experiences, such a testimonial is atypical and not representative of what most MLM participants will achieve.  Presenting atypical earnings to consumers considering an income opportunity is likely to generate a deceptive impression.  At a minimum, avoiding deception requires a clear, prominent, and unavoidable presentation of the typical participant’s revenue and expenses—all of which must be substantiated.
  • A “results not typical,” “results are not guaranteed,” or similar disclosure is not enough.
  • Moreover, to be clear and conspicuous, the disclosure must be prominent, worded in a way consumers understand, placed where consumers are likely to look, immediately next to the claim it disclaims, and not easily missed. These principles apply also to disclosures in all multimedia ads, including claims in video and audio ads.
  • In addition, disclosures that include information inconsistent with or contradictory to what is otherwise said in an advertisement are not effective.  Disclosures need to be both understandable and unambiguous to be effective.
  • Disclosures that are an integral part of a claim or inseparable from it should not be communicated through a hyperlink or mouse-over.  Many consumers may not click on hyperlinks or read information in mouse-overs or that is available after clicking a hyperlink.  They might immediately close the mouse-over, move to the next page in pursuit of completing their intended tasks, or not associate information available in a hyperlink window with a claim or product they haven’t encountered yet.  Instead, disclosures should be unavoidable.  They should be placed immediately next to the claim and be sufficiently prominent so that the claim and the disclosure are read at the same time, without referring the consumer somewhere else to obtain this important information.
  • Disclosures are not always effective in correcting a misleading message conveyed by advertising claims and are not a defense if the net impression is misleading.
  • More information about these concepts is available in the FTC business guidance .com Disclosures: How to Make Effective Disclosures in Digital Advertising and in the blog post Full Disclosure.
• MLMs can be held liable when their participants, employees, and other agents violate the FTC Act. (See Questions 27 and 28, below.)  In addition, MLMs violate the FTC Act if they provide the means and instrumentalities for individuals or entities to make a false or unsubstantiated representation, such as by providing them with a false statement or information for use in their marketing.

MLMs should have access to reliable and substantiated information about expenses. But, if an MLM or MLM participant does not have access to data showing what participants typically spend pursuing the business opportunity (e.g., product or service purchases, website fees, party costs, and training or conference expenses), they should refrain from making any earnings claims.

Some MLMs and MLM participants may present the MLM as a way for participants to get rich or lead a wealthy lifestyle.  They may convey such representations through words or through images such as houses, automobiles, and luxury vacations.  These are implied earnings claims, and such claims are deceptive if participants generally do not achieve such results.

An MLM or its participants may also claim that participants, while not necessarily becoming wealthy, can achieve career-level income, replace earnings from a job, pay off debt, or provide a means to supplement their income.  They may represent through words or images that participants can, for example, earn thousands of dollars a month, quit their jobs, “fire their bosses,” or become stay-at-home parents.  They also may suggest that the income from the MLM has funded, for example, paying for gas, grocery bills, or activities for their children.

It is deceptive and unlawful to make such claims if participants generally do not achieve such results or if the MLM lacks objective data to know whether participants generally achieve these results.

A hypothetical earnings scenario — such as, “if you recruit 30 people who each sell $1,000 of product each month, you will earn $1,500 a month” — may imply that the assumptions made (e.g., the number of people recruited, the amount sold by each recruit) are consistent with the actual experiences of typical participants.  If the assumptions are not so because most participants do not achieve them, the earnings scenario likely would be false or misleading to consumers, violating the FTC Act.

MLMs and their participants must have a reasonable basis for earnings claims at the time the claims are made.  Personal beliefs or anecdotal observations are not sufficient.

So, before making express or implied claims that people “working hard” or “trying hard” are likely to make a certain amount of money, that people working “part-time” will earn some money, but not as much, that people who don’t make money aren’t really “trying” to pursue the business opportunity, or other similar claims, answer some questions:

• What does “working hard” or “trying hard” mean?  Have you explained up front to prospective participants what they need to do to “work hard” or “try hard” — do they need to work 30 hours a week, spend $2,000 a month, or recruit 4 people each month?
• Do you have a reasonable basis for your claim that unsuccessful participants are unsuccessful because they do not work or try as hard as those who are successful, or that working more hours generally leads to a higher level of income?
• Do you have evidence that shows that a typical participant who is “working hard,” or who works a certain number of hours, earns a certain amount of money?

If the answer to any of these questions is “I don’t know” or “no” or “I only have anecdotal evidence,” you probably do not have a reasonable basis or substantiation to make a claim that participants in your MLM who try hard make money, that MLM participants who lost money did not work hard enough, or similar claims.

If participants generally do not achieve such results, these representations likely would be false or misleading to current or prospective participants.

The MLM and its participants must have a reasonable basis for any claims they make based on their personal experience, including lifestyle claims, before they make those claims.  According to the FTC, a “reasonable basis” means reliable, empirical evidence demonstrating that the typical person in the group they’re making the representation to is likely to realize — in income, profit, or appreciation — an amount equal to or greater than that conveyed by the earnings or lifestyle claim.

If the MLM or participant does not have a reasonable basis to know what the typical person in the group is likely to achieve in earnings, they should not make any earnings claims, including lifestyle claims.  If the MLM or participant does have a reasonable basis to know what the typical person in the group is likely to achieve in earnings, then the MLM or participant has to consider if the earnings they want to promote are typical or atypical.

If they are typical, the earnings claim is likely acceptable.  If they are atypical, then discussion of those atypical earnings must be accompanied, at a minimum, by a clear, prominent, and unavoidable presentation of the typical participant’s revenue and expenses.  The MLM or participant always must ensure the claim is not deceptive.

What does “modest or supplemental income” mean?

If you do not know the typical amount people actually make (after expenses), you should not make any earnings claim.  Even if an MLM does know this figure, before making any claim of “modest or supplemental income,” it should establish what that phrase means to reasonable consumers.  It must then look to whether the MLM has a reasonable basis to know that its participants generally earn at least this amount, after taking into account typical expenses.  If not, it should not make such a claim.

Because people continually search for the best buy and usually view offers of “free” merchandise or services as special bargains, all such offers must be made with care. While any inquiry under the FTC Act is fact-specific, here are some general principles to keep in mind.

First, MLMs and their participants should not suggest that a trip or car will be offered for “free” if the person will have to pay for the item.  The word “free” suggests that the person will pay nothing.  Thus, it is reasonable for someone to view a “free vacation” offer as providing for free all material costs of the vacation (like airfare, hotel, and a rental car).  If that is not true, the MLM and its participants should either refrain from using the word “free” or from misstating what is “free.” (For example, if only a free hotel room is being provided, the offer should specify that: “Free hotel room stay for X nights.”)

Second, MLMs and their participants should not make misleading statements about what is being given away.  Take, for example, a “free car” promotion. A reasonable consumer likely would not believe getting a “free car” means: (i) they get only a limited or discrete “free” payment for a car lease; (ii) the “free” payment will stop abruptly if the participant stops being eligible; or (iii) the participant has to continue paying for the car lease after the “free” payment stops.

Finally, when MLMs or their participants advertise any “free” items, the advertisement should contain all the information about the offer that is likely to affect a consumer’s purchasing decision.  In other words, it is not appropriate to tell potential participants that they can get a “free” car without also telling them — in a clear and conspicuous manner — what they need to do to be eligible to get that car.

In addition, as discussed above in response to Question 13, it is not appropriate to communicate conditions on “free” offers in a hyperlink.  Instead, the information should be placed immediately next to the claim, be written in a way that is understandable to an ordinary consumer, and be sufficiently prominent so that the claim and the disclosure are read at the same time, without referring the consumer somewhere else to get this important information.

MLMs and their participants should be candid and upfront with potential recruits about the type of opportunity being offered and the name of the company offering the opportunity.  The Commission has said it is “manifestly unfair and deceptive to cause persons to invest time, energy and money and go through an appointment and interview before learning such basic and threshold information as the nature of the position being offered.” Encyclopaedia Britannica, Inc., et al., 87 F.T.C. 421, 487-88, 531 (1976); see also FTC v. Think Achievement Corp., 144 F. Supp. 2d 993, 1011-12 (N.D. Ind. 2000).

Possibly – it depends on the opportunity that the MLM is offering.

As stated in the Business Opportunity Rule’s Statement of Basis and Purpose, the Commission crafted the current Rule to avoid broadly sweeping in MLMs.  It did so by tailoring the definition of business opportunity to exclude certain types of business assistance common to MLMs. 76 Fed. Reg. 76816, 76824 (Dec. 8, 2011).

It is important to note, however, that MLMs are not exempt from the Rule if they otherwise fit the definition of a business opportunity. Id. at 76824 n.91.  As with any other business entity, the determination whether an MLM is a business opportunity to which the Rule applies would be made on a case-by-case basis.

23.  Does the FTC Act require MLMs to give an Income Disclosure Statement to potential participants?

If the MLM is a “Business Opportunity,” as that term is defined under the Business Opportunity Rule, 16 C.F.R. § 437.1, then it must comply with the requirements of that rule, including by giving prospective purchasers a Business Opportunity Disclosure Document.  If an MLM subject to the Business Opportunity Rule or its participants make earnings claims to potential participants, then the MLM or its participants must give potential participants an earnings claim statement that contains the information required by Section 437.4(a) of the Business Opportunity Rule before signing up the participants.

According to the FTC, if an MLM is not a “Business Opportunity,” it may not be required to give any information about earnings to potential participants, but any earnings information it does give must be truthful, substantiated, and non-misleading.

If an MLM does not have evidence of the typical earnings of its participants (including any costs that its typical participants incur), it should refrain from making any earnings claims and ensure its participants do the same.

Like all earnings claims made by MLMs, an Income Disclosure Statement (IDS) should contain truthful, substantiated, and non-misleading information about the earnings participants can generally expect, considering both their income and typical expenses.

According to the FTC, most MLM participants earn little to no money, and, for any MLM for which that is true, the IDS should clearly and conspicuously reflect that.

It is misleading for an MLM to exclude from its IDS information about participants who lost money or earned no money, or who failed to qualify for bonuses or commissions.  It also is misleading for an MLM to discuss only the earnings of “active” participants, while excluding participants who the MLM considers “inactive” because they didn’t get any compensation or qualify for a certain type of compensation during a particular time period.

In the FTC’s enforcement experience, many MLM participants that MLMs might consider “inactive” try hard to succeed at the business, but fail to earn any money from the MLM or to qualify for certain types of compensation.  Omitting the earnings and losses of such participants paints a misleading picture of what participants can generally expect to earn.  Participants should not be omitted from earnings statistics unless the MLM has evidence that they have affirmatively opted out of the income-earning opportunity, not merely failed to qualify for it or not merely exercised any inventory buy-back program.

Other considerations to keep in mind when drafting an IDS include:

• The IDS should not misrepresent participant earnings, including by annualizing or projecting income that was not actually earned by a participant in the time period the IDS covers.  For example, in its complaint in AdvoCare, the FTC alleged that AdvoCare misrepresented participants’ “annual average income.” According to the complaint, when calculating a participant’s annual income, if a participant worked one year — 24 pay periods — but only earned one paycheck for $100, AdvoCare multiplied the single $100 check by 24 pay periods to calculate the participant’s “annual average income” as $2,400.  The FTC alleged that AdvoCare’s IDS therefore was deceptive in its portrayal of participant income.
• The IDS should cover a reasonable and appropriate time period.
• The IDS should clearly and prominently explain what data is contained in the document.  For example, MLMs should steer clear of using terms such as “income” and “earnings” to describe the IDS, if the document does not describe “net income” (or total income following payment of expenses), excludes certain types of income, or only summarizes prominently the earnings of a limited subgroup of participants.
• The IDS should not state that a percentage of participants earned $0 if those participants actually spent more pursuing the business opportunity than they received from the MLM in compensation (i.e., if any participants actually lost money, that should be reflected on an MLM’s IDS).
• An IDS that highlights the earnings of the small percentage of MLM participants who make significant income is deceptive where many participants in a particular MLM make significantly less money, lose money, or make nothing.
• The IDS should not state or imply that working hard or working for a certain period of time will lead to someone earning a particular amount of income or achieving a particular rank, unless that result is in fact typical for everyone who works that amount or that period of time.  For example, an MLM should not say or imply that it takes four years for someone to reach a particular rank, unless that result is typical for everyone who works four years.
• Finally, all material information in the IDS should be clear and conspicuous. Information should not be buried in legalese, small text, or long paragraphs. Additional considerations include: the prominence of the material information in the IDS, whether it is unavoidable, whether other parts of the IDS distract attention from the material information, whether the information is repeated at different places, whether the material information appears for a sufficient duration, and whether the language of the information is understandable to the intended audience.

Under certain circumstances, yes.

For example, the FTC has determined in litigated administrative decisions in which final cease and desist orders were issued that it is an unfair or deceptive practice to make deceptive representations concerning the profits or earnings that may be anticipated by a participant in a money-making opportunity.

Under 15 U.S.C. § 45(m)(1)(B), engaging in this conduct could subject a company to civil penalties of more than $50,000 per violation.  The amount is adjusted annually for inflation. (For more information, see the FTC’s Notice of Penalty Offenses Concerning Money-Making Opportunities and the Notice of Penalty Offenses Concerning Deceptive or Unfair Conduct around Endorsements and Testimonials.)

Pursuant to the Business Opportunity Rule, 16 C.F.R. Part 437, the FTC may also seek civil penalties from MLMs that qualify as a business opportunity under the Rule for making deceptive earnings claims.

Any claims MLMs or their participants make about their products must be truthful, not misleading, and substantiated at the time the claim was made.  In addition, it is unlawful under the FTC Act, 15 U.S.C. § 41 et seq., to make health claims for a product or service unless, at the time the claims are made, you possess competent and reliable scientific evidence substantiating the claims.

Under 15 U.S.C. § 45(m)(1)(B), making deceptive product claims could subject a company to civil penalties of more than $50,000 per violation.

Although the determination of whether representations are deceptive is a fact-specific inquiry, below are some guiding principles:

• Advertisers must make sure that whatever they say expressly in an ad is accurate.  Often, however, an ad conveys other claims beyond those expressly stated.  Under FTC law, an advertiser is equally responsible for the accuracy of claims implied by the ad.  Advertisers’ implied and express claims must comply with the law.
• Advertisers must consider whether what they say or convey in an ad is accurate, considering the overall impression created by the text, images and graphics in the ad.
• An ad can also be deceptive because of what it fails to say.  Advertisers must disclose information if it is material in light of representations made or suggested by the ad, or material considering how consumers would customarily use the product.  For example, advertisers should disclose any significant limitations on an advertised health benefit.
• Similarly, advertising that makes either an express or implied safety representation should include information about any significant safety risks.  Even absent affirmative safety representations, advertisers may need to inform consumers of significant safety concerns related to the customary use of a product.  For example, take an energy drink that contains an ingredient that, when consumed daily over an extended period, can result in a significant increase in blood pressure.  Even absent any representation about the product’s safety, the marketer should disclose this potentially serious risk. If an ad would be misleading without certain qualifying information, that information must be disclosed clearly and conspicuously so that it is actually noticed and understood by consumers.
• To ensure that disclosures are effective, marketers should use clear, unambiguous language, avoid small type, place any qualifying information close to the claim being qualified, and avoid making statements or using elements that could undercut, distract from, or contradict the disclosure.
• In addition to conveying product claims clearly and accurately, advertisers must ensure there is adequate support for their claims.  Under FTC law, before disseminating an ad, advertisers must have a reasonable basis for all express and implied product claims.  What constitutes a reasonable basis depends on the net impression consumers take away from an ad, which in turn will depend on the specific language used, how the claims are presented in the context of the entire ad, and how consumers interpret any disclosures or qualifying statements.
• An endorsement, including a testimonial, must reflect the honest opinion of the endorser and can’t be used to make a claim that the product’s marketer could not legally make.  Testimonials will generally be interpreted to represent results that are typical of what consumers can expect to achieve.  If the results of an endorser are not typical, the ad must clearly and conspicuously convey what the expected results are, based on competent and reliable scientific evidence.
• MLMs can be held liable when their participants, employees, and other agents violate the FTC Act. (See responses to Questions 27 and 28, below.)  In addition, MLMs violate the FTC Act if they provide the means and instrumentalities for another to make a false or unsubstantiated representation, such as by providing another with a false statement or information for use in their marketing.

More guidance about product claims, including health and weight loss claims, is available on the FTC’s website:

• FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising
• Health Products Compliance Guidance
• Advertising FAQs: A Guide for Small Businesses
• Gut Check: A Reference Guide for Media on Spotting False Weight Loss Claims
• Voluntary Guidelines for Providers of Weight Loss Products or Services

Companies and individuals are liable for the FTC Act violations of their agents. See, e.g., Goodman v. FTC, 244 F.2d 584, 592-593 (9th Cir. 1957); FTC v. IAB Mktg. Assocs., LP, 746 F.3d 1228, 1233 (11th Cir. 2014); FTC v. Medical Billers Network, Inc., 543 F. Supp. 2d 283, 319-20 (S.D.N.Y. 2008); FTC v. Stefanchik, No. 04-cv-1852, 2007 WL 1058579, at *6 (W.D. Wash. Apr. 3, 2007); FTC v. Skybiz.com, Inc., No. 01-cv-396, 2001 WL 1673645, at *9 (N.D. Okla. Aug. 31, 2001), aff’d, 57 F. App’x 374 (10th Cir. 2003); FTC v. Five-Star Auto Club, Inc., 97 F. Supp. 2d 502, 527 (S.D.N.Y. 2000).  The liability exists even if the company has unsuccessfully attempted to prevent such misrepresentations, see Five-Star Auto, 97 F. Supp. 2d at 527, or if the agent made the deceptive claim in violation of direct instructions from the company, see FTC v. U.S. Oil and Gas Corp., No. 83-cv-1702, 1987 U.S. Dist. LEXIS 16137, *48 (S.D. Fla. July 10, 1987).

Many MLMs choose to structure their business so that participants are the primary point of contact with the public, and those participants speak to the public with the actual or apparent authority of the MLM.  As such, the MLM is responsible for ensuring that its participants do not make deceptive or unfair statements, including deceptive claims about what participants can earn or unsubstantiated claims regarding the characteristics of its products.  This is true regardless of where the participant statements are made, including on social media and in small group recruiting meetings.

Additionally, an MLM may be liable for the deceptive earning claims of its participants if the MLM directly participates in the illegal practice or provides the means and instrumentalities for the deceptive claims.

MLM participants typically act as the agents of the MLM.  As noted above, federal courts and the FTC have ruled that corporations are liable for the Section 5 Act violations of their agents.  There is no safe harbor or exception to this principle under existing law.

MLMs should be proactive and ensure their agents do not violate the FTC Act.  This may include: providing training to agents about what conduct violates the FTC Act; monitoring agents for law violations and then imposing meaningful discipline on agents who commit illegal acts; requiring agents to obtain approval before making income or product claims; requiring agents to provide the MLM with copies of all of their advertisements, including transcripts of private online chats or videoconferencing calls; and, requiring agents to give the MLM access to all social media platforms or groups where they discuss their business (for example, private social media groups).

Further, MLMs should ensure that such compliance measures are effective in practice. Caselaw holds that MLMs are liable for the conduct of their agents, so the onus is on the MLM to ensure that their participants comply with the law.

The FTC enforces a variety of laws and regulations relating to advertising, marketing, sales, billing, privacy, data security, franchises, and business opportunities, among other topics.  These apply or may apply to MLMs, depending on an individual MLM’s circumstances.

The FTC may seek monetary remedies from MLMs that engage in fraudulent and dishonest conduct and for any rule violation and relevant statutory violations that MLMs may engage in, such as Telemarketing Sales Rule, 16 C.F.R. part 310, the Restore Online Shoppers’ Confidence Act, 15 U.S.C. §§ 8401-8405, and the Consumer Review Fairness Act, 15 U.S.C. § 45b.

Helpful information for businesses interested in these topics is available at the FTC’s Business Center.

Orders obtained through settlements of FTC law enforcement actions are not binding on the entire multi-level marketing industry.  Such orders, however, can be useful to MLMs that are not bound by them.  Industry members may choose voluntarily to follow the provisions in these orders or to consider the provisions in developing their own practices and procedures.  All industry members have an obligation to follow the law, and the provisions in FTC orders may provide guidance and insights to help them do so.

FTC administrative actions that are litigated may result in a final Commission decision and cease and desist order.  If MLMs engage in activity that the Commission determined in a prior litigated administrative order to be an unfair or deceptive practice, the FTC can seek civil penalties from those MLMs in federal court. (See, for example, the FTC’s Notice of Penalty Offenses Concerning Money-Making Opportunities and the Notice of Penalty Offenses Concerning Deceptive or Unfair Conduct around Endorsements and Testimonials. A list of a selection of Notices of Penalty Offenses issued by the FTC is available HERE.)

Belonging to a self-regulatory organization does not shield MLMs engaged in unfair or deceptive practices from FTC law enforcement action.  The FTC can and will bring law enforcement action against companies that follow, or claim to follow, self-regulatory guidelines, but nonetheless violate the FTC Act.