It is more important than ever for direct selling companies to have a robust and functional compliance program in today’s regulatory environment. The direct selling industry is under constant scrutiny by the Federal Trade Commission (FTC) and State Attorneys General, and recent changes at the FTC suggest that this level of scrutiny is likely to intensify. While no advertiser—no matter how well-intentioned or vigilant—is likely to get it right 100 percent of the time when it comes to avoiding misleading or deceptive advertising claims, a well-designed, implemented, and enforced compliance program can help prevent infractions from occurring in the first place, and help the company detect infractions that do occur, swiftly correct the mistakes, and take steps to ensure they do not happen again. Moreover, in the unfortunate event that a regulatory investigation or enforcement action does occur, the existence of a strong compliance program can go a long way toward mitigating the remedies that a regulator may seek. On the other hand, a company that lacks a robust compliance program—or has a compliance program in name only, not actively implemented or enforced—presents a greater risk of repeated and uncorrected violations and is a far more tempting target for regulatory enforcement actions.
What does a robust compliance program look like? We often like to analogize an effective compliance program to a three-legged stool. One leg, of course, is a thorough understanding of what is required to make sure all product, earnings, and lifestyle claims are truthful and accurate, not misleading. And because direct selling companies are responsible for the claims they make and for the product and earnings claims made by their salesforce members, they must invest significant time and resources toward training their members to ensure they understand what claims they can and cannot make. Moreover, that training should be mandatory and updated periodically to account for changes in the law or regulatory environment.
The second leg of the compliance program is having a system in place to monitor and audit the claims being made by salesforce members about the product benefits and business opportunities to ensure claims are truthful, accurate, and properly substantiated—and that unsupported claims are quickly removed.
The third and essential leg to any compliance program is developing appropriate enforcement mechanisms and ensuring that those mechanisms are applied fairly and consistently to deter future violations. Having a compliance program that looks great on paper but is ignored might be worse than having no compliance program.
Feeling overwhelmed? A great place to learn more about the legal requirements and best practices for an effective compliance program is the compliance training and certification program that DSA offers at least twice a year. Attendees are provided with the necessary tools to succeed in developing an effective compliance program, including hearing from outside counsel, industry experts, and respected peers about the legal requirements for making and substantiating product, earnings, and lifestyle claims, as well as best practices for compliance training, monitoring, auditing, and enforcement. In addition, attendees who pass the online evaluation after the program will receive a certification, good for two years, showing they have successfully completed the training.
Here are a few detailed highlights for each of the three legs to get you started with your compliance program.
Ensuring Claims Are Truthful, Accurate, and Not Misleading
It’s great that consumers seem to love your products and write glowing reviews. Still, direct selling companies must have objective support for the claims they and their salesforce members are making, something we lawyers like to call a “reasonable basis.” What constitutes a reasonable basis varies depending upon the nature of the claim. However, higher-risk claims such as those involving health or safety usually require what is known as “competent and reliable scientific evidence,” which in turn often means you should have at least one, if not two, well-conducted human clinical studies that support the claim. In some cases, it may be possible to rely on third-party studies, but that depends on the claims being made and requires that the third-party studies have been conducted on a substantially similar product containing the same ingredients, in the same quantities, and using the same method of delivery. In addition, companies cannot cherry-pick the studies they choose to rely on—that is, there should not be a significant number of other studies that suggest the claim is unsupported. In addition, the substantiation must match the claim. For example, a claim that a product relieves pain instantly requires testing showing that the product effectively relieves pain and that the relief occurs immediately.
It’s also important to note that you must substantiate not only the express claims being made but also claims that may be implied by the overall context of the advertising or even the images that are used. This is referred to as the “net impression” of the advertising. For example, even if the ad does not directly state that a dietary supplement will cause substantial weight loss, if the ad features before and after photos of an individual and the individual appears to have lost a substantial amount of weight, a substantial weight loss claim is implied. There is, however, one important but narrow exception to the duty to substantiate claims—something called “puffery.” A “puff” is a claim that is subjective and not the sort of claim that can be objectively proven or for which consumers would expect substantiation. For example, claiming that a product is the “ultimate” skin-care treatment is likely to be considered puffery because the word ultimate is vague. As a practical matter, however, most product, earnings and lifestyle claims are not considered puffery.
There are substantial resources available to help you better understand how to make many common claims in a truthful and non-misleading manner. For example, there are “red flag” weight-loss claims that should be avoided, such as that you can lose weight without diet and exercise or that you can lose a substantial amount of weight rapidly. Dietary supplements can claim to support the structure or function of some aspect of the body, such as “supports healthy joints,” but they can’t claim to “treat, prevent, or cure” any disease such as arthritis. Similarly, cosmetics can claim to alter the appearance of the skin but can’t claim to alter the skin’s structure or function. Deviating from this guidance might mean that you are making unapproved drug claims. Testimonials from satisfied customers can be an effective marketing tool, but they must be truthful, and they must represent the typical results customers will get from the use of your product. If the testimonial results are not representative or typical of the actual consumer experience, it is no longer sufficient to state “results may vary.” Instead, you must disclose what the typical results are, and you must be able to substantiate those results. There is also guidance regarding so-called “green claims,” including avoiding unqualified claims that suggest your product is “earth friendly.” Additional guidance warns against unqualified claims that your product is “Made in USA,” stating that such claims should only be made if “all or virtually all” of your manufacturing costs are of domestic origin.
Often, direct selling companies and their salesforce members make express or implied claims about how much money current members have earned or how much a consumer can expect to earn as a new member. Such claims are subject to rigorous scrutiny and must be carefully substantiated. In general, such claims must be supported with accurate records documenting the typical earnings of salesforce members. If the advertising represents atypical earnings results, then there must be a clear and conspicuous disclosure indicating what the typical earnings are, and the claim must likewise be supported by accurate records. Earnings claims may also include lifestyle claims in which the advertising expressly or impliedly represents salesforce members living a lavish lifestyle or quitting their jobs, such as by having pictures of salesforce members with expensive automobiles or other luxury items such as boats. While not expressly required by the FTC or the DSA Code of Ethics, it is a best practice for direct selling companies making earnings or lifestyle claims to maintain an Income Disclosure Statement that includes typical earnings for members and other information that would be important to prospective members.
Training and Monitoring
Direct selling companies are responsible for the claims made by their salesforce members. Every direct selling company should have written policies and procedures in place that detail how salesforce members can purchase and resell products, what they can and cannot say about the company’s products, and how to talk about the business opportunity and earnings potential. While all salesforce members should be required to acknowledge and agree to these written policies and procedures, that is not enough. There should be mandatory training for all distributors on key legal and regulatory issues, and that training should be updated and refreshed periodically as necessary.
Direct selling companies must also have a reasonable monitoring program designed to routinely and regularly monitor claims made by their salesforce members to ensure they are complying with the company’s policies and procedures. There are various software tools available that can help companies, particularly those with large salesforces, efficiently monitor claims being made in the marketplace, including social media. While regulators understand that it is impossible for any company to monitor every ad being placed by its distributors, the key is to develop a program that demonstrates that the company is using best efforts to actively monitor its salesforce members and take appropriate remedial action. And, as noted above, it is better to have a program that the company can comply with than one that looks good on paper but is too ambitious.
Enforcement and Remediation
Uncovering claims that are potentially misleading is only the beginning. If a company discovers claims that are not fully substantiated, it should immediately require that the material containing the problematic claims be modified or withdrawn. Companies should also provide supplemental training to the individual responsible to ensure they understand why the claim was potentially misleading and how it might be rectified. Finally, while we all deserve a second chance, we may not deserve a third or fourth. There should be well-defined consequences for violations of company policies regarding product, service, or earnings claims, and these policies must be enforced. This could include termination if the violations are flagrant and ongoing. While no one wants to cross swords with particularly successful salesforce members, companies should not look the other way if one of them engages in misleading advertising.
In short, a great compliance program can’t guarantee that your company or its salesforce members won’t disseminate potentially misleading advertising or run afoul of regulatory authorities, but it can provide substantial protection against such eventualities and, if violations do occur, ensure any ill effects are mild.
What People Are Saying about the DSCP-CP
The Direct Selling Compliance Professional–Certification Program (DSCP–CP) is designed to sharpen understanding of key concepts related to a direct selling company’s compliance program. For more information on the program, go to www.dsa.org.
"Comprehensive. Enlightening. Current. The speakers and organizers were highly knowledgeable on not only the compliance essentials, but also on upcoming legislation, trends, and other news that will affect the direct selling industry in the near future. Working in marketing, I gained actionable insights from the program materials and from the live questions that were raised by other participants. What I learned will help me reframe my design and promotional work in the future—whether that be social content or training materials for our sales field organization. I would recommend the certification program for any company looking for a better understanding of key compliance concepts or as a refresher course to better understand the latest best practices.”
—Lauren Howes, Director of Marketing, WineShop At Home
"I found this program to be very worthwhile as part of my continuous efforts to stay up to speed on all applicable guidelines and best practices in direct selling. The presenters were very knowledgeable, and the discussions were on point. I would definitely recommend the program to any legal or compliance professional in the industry.”
—Michael LaClare, Associate General Counsel, Isagenix International
"DSA’s compliance certification program is a must for any company committed to establishing a world-class compliance program, period. It provides the most comprehensive overview I have ever seen in my eighteen-plus years in compliance of the crucial topics for each organization to get right for protecting your company and the industry. USANA has already begun filling gaps in the department and developing future strategies based on the content directly from the program. The course handbook alone is invaluable and one of my most-used resources when we are facing questions or challenges. I can’t say enough about the value-add of the program in that it is solution focused, providing practical takeaways for a company of any size.”
—Dan Whitney, Vice President of Ethics and Market Expansion, USANA Health Sciences
"The compliance certification program was a great resource for our entire compliance team to learn from a variety of industry leaders. Even though our team has a wide range of knowledge and experience (ranging from three months to more than ten years), each of us came away with a wonderful bank of new information as well as reinforcement of what we already knew. It also gave us a push to go back as a team and assess our current policies and processes to see if there were any areas in which we could make improvements or reinforce what we were currently doing. We all look forward to attending the next certification program.”
—Jean Keltner, Paralegal and Compliance Team Leader, Medifast
"As a professional in regulatory compliance for twenty-five years, I would recommend the certification program to anyone looking to add to their credentials and expand their knowledge on the central aspects we all deal with in the direct sales space—specifically, income and product claims. With a constantly evolving legal environment, companies need to stay abreast of changes, and this program is specifically geared to accomplish that goal. Having taken the course, I found it informative, dynamic, and resourceful for setting compliance (and sales/marketing) teams up for success. Whether a seasoned professional or a novice, you will find the program’s offered subject matter organized, dynamic, and relevant."
—Andrea Wyland, Senior Director of Compliance, Color Street
"The compliance certification program is exactly what I would expect from a training: rich content and in-depth materials by industry experts. I highly recommend this program for every direct selling professional, including those outside of compliance, as the training provides foundational learnings applicable to many aspects of our business.”
—Jacintha Parker, Senior Director of Compliance, Arbonne