Next Up – Earnings Claims:  Notice of Penalty Offenses Sent to 1,100 Direct Selling Companies and Others in the Gig Economy

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In its third recent Penalty Offense Authority notice, the FTC today notified more than 1,100 companies offering “money-making opportunities” that it intends to pursue civil penalties of up to $43,792 per violation for misrepresentations related to potential earnings and related characteristics about the opportunity.  Recipients of the notice include virtually every major direct selling company and others in the gig economy such as Amazon, DoorDash, Lyft, and Uber.

That makes more than 1,800 companies that have been put on notice of penalty offenses in the past month.  It also crosses another alleged deceptive practice off the list laid out in the October 2020 paper authored by current Bureau Director Sam Levine and former FTC Commissioner Rohit Chopra, entitled The Case for Resurrecting the FTC Act’s Penalty Offense Authority.  Next up?  Well, if the Chopra/Levine paper points the way (and it appears to), we should expect future notices that focus on allegedly unfair and deceptive data harvesting and targeted marketing.

In addition to the eight categories of misrepresentations in today’s notice ranging from the amount of earnings possible to the amount of training provided, the sample cover letter published online also includes a section on endorsements and testimonials.  This means that each company receiving today’s notice also will receive the notice published last week on endorsements and testimonials, which over 700 companies also received (with some minimal overlap in that list).

From the FTC’s perspective, why not?  Throwing in the notice on endorsements and testimonials along with today’s “money-making opportunities” notice opens up the companies on today’s list to threats of civil penalties both for misrepresentations related to the business opportunity and endorsements.

But as we’ve discussed in prior posts, the FTC’s legal authority to use the Penalty Offense Authority to circumvent notice and comment rulemaking and open up civil penalties in this way is far from certain.

It will be interesting to see how today’s action will fit with the FTC’s stated intention to review its longstanding Business Opportunity Rule, which it announced in June 2021.  With today’s notice, one might wonder why the Commission thinks revisions to the BOR are even necessary, assuming that the rulemaking focuses on earnings representations.  Perhaps the FTC is simply double-bagging, to ensure that civil penalties are available according to one theory or another. Or is it possible that the FTC regards the notices as mission accomplished for earnings rules and will push BOR in an entirely unexpected direction?

Today’s “money-making opportunity” notice (a previously unused and still undefined term) identifies eight categories of claims that the FTC intends to pursue civil penalties for:

  • Misrepresentations concerning the profits or earnings that may be anticipated by a participant in a money-making opportunity, including six sub-categories of earnings claims that generally mirror injunctive relief in prior FTC settlements with direct sellers and others offering business opportunities;
  • Misrepresentations that sales of a money-making opportunity will be made to only a limited number of prospective participants (including, for example, that sales will be made to only a limited number of prospective participants in a geographic region), when sales will be made to any person who is willing and able to pay;
  • Misrepresentations that prospective participants will be screened or evaluated for suitability to use or benefit from the money-making opportunity;
  • Misrepresentations that participants do not need experience in order to earn income;
  • Misrepresentations that a prospective participant must act immediately to purchase or to be considered for a money-making opportunity;
  • Misrepresentations that purchasing a money-making opportunity is risk-free or involves little risk;
  • Misrepresentations about the position being offered to prospective participants in a money-making opportunity, such as by failing to disclose that it is a sales position when such is the case; and
  • Misrepresentations about the amount or type of training that will be given to participants in a money-making opportunity.

We noted in our last post that the first two rounds of notices made little effort to describe the conduct that past FTC cases had found deceptive.  Notably, today’s notice provides more detail than either of the previous recent notices by including short summaries of 12 litigated administrative decisions dating from 1941 to 1980 as support for its findings and the ability to rely on the Penalty Offense Authority.  The letter also includes a number of references to federal court cases, notwithstanding that federal cases cannot serve as the predicate for a Penalty Offense Authority action. And the letter also emphasizes that “disclaimers are not always effective and are not a defense if the net impression is still misleading” and that companies can be held liable for deceptive earnings claims made by independent salespeople, although it’s not clear what findings from prior cases the FTC would rely upon to attack disclaimers.

Questions abound and are likely to be tested in litigation if the FTC makes good on its promise to use the Penalty Offense Authority as threatened in these notices and recipients of notices push back.  For now, companies offering “money-making opportunities” should have another look to ensure income and lifestyle claims and compliance programs align with best practices. CIDs are undoubtedly in the offing.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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