FTC Advertising Regulations for MLM and Small Business

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Another AHBBO Article
Not Just 6 Lines, 65 Characters

If you've placed advertising in an ezine, you've no doubt been
advised by the publisher of his or her advertising guidelines.
Typically these guidelines go something like this: "Six lines,
65 characters per line plus URL/email.  No adult, hate,race." 

Unfortunately, the publisher's guidelines typically don't go on
to require that the ad conform with the U.S. Federal Trade
Commission ("FTC") guidelines for advertising on the Internet. 
As a result, many of the classified ads you see in ezines, on
classified ad sites and wherever else such ads appear are,
simply put, unlawful.

In this article, we'll take a look at what the law requires in
this area as amplified by the FTC's published guidelines on
the subject.  And if you're not located in the U.S., don't
think they don't apply to you.  The laws on deceptive and
misleading advertising are very similar from country to country
so this discussion probably applies to you too.  Even if
your country's laws are different, if your ad is going to
readers in the U.S. that may be enough to catch you
anyway.


GENERAL PRINCIPLES

The basic legal principles that apply to advertising generally
apply equally to advertising on the Internet.  There are three:

1.  advertising must be truthful and not misleading;

2.  advertisers must have substantiation for their claims; and

3.  advertisements must not be unfair.


TRUTH IN ADVERTISING

In its policy statement on deception
(http://www.ftc.gov/bcp/policystmt/ad-decept.htm)
the FTC notes that there are three elements that underlie all
deception cases:

1.  there is a representation, omission or practice that is likely
to mislead the consumer.  For example, "false oral or written
representations, misleading price claims, sales of hazardous or
systematically defective products or services, without adequate
disclosures, failure to disclose information regarding pyramid
sales, use of bait and switch techniques, failure to perform
promised services, and failure to meet warranty obligations";

2.  the perspective of a consumer acting reasonably in the
circumstances or, if the representation or practice is directed
to a particular group, the perspective of that group acting
reasonably; and

3. the representation, omission or practice must be a "material"
one. This means it must be likely to affect the consumer's
conduct or decision with regard to the product or service.

In short, therefore, the Commission will find deception if "there
is a representation, omission or practice that is likely to
mislead the consumer acting reasonably in the circumstances,
to the consumer's detriment".

=> Role of Disclosures and Disclaimers

The FTC places particular emphasis on disclosures and
disclaimers when considering whether an advertisement is
truthful and not misleading.  Now, obviously, in your ezine ad
you don't have room to go into all the ins and outs of your
product or service.  But that's OK because the ad is not
really your sales pitch, it's what you use to try and generate
a click through to your sales pitch. 

That's not to say that anything goes in your classified ad
and that it's only your sales letter that you need to be careful
with.  Try using a headline like "MAKE $60,000 IN 60 DAYS"
when the product you're promoting sells for $20 a pop and you
yourself are lucky to make one sale a week and see how
far that gets you with the FTC. 

But most "reasonable" consumers recognize puffery when they
see it and will not be deceived into believing a product or service
referred to in an ad with a headline like "CHANGE YOUR LIFE
TODAY!" is, in fact, a magic wand.

But when it comes to your salesletter or website, watch out. 
This is where you need to be very careful about your
representations, and include appropriate disclaimers and
disclosures where necessary.  Here's the FTC's guidelines for
effective disclosures:

"Disclosures that are required to prevent an ad from being
misleading ... must be clear and conspicuous.  In evaluating
whether disclosures are likely to be clear and conspicuous
in online ads, advertisers should consider the placement
of the disclosure in an ad and its proximity to the relevant
claim.  Additional considerations include the prominence
of the disclosure, whether items in other parts of the ad
distract attention from the disclosure; whether the ad is so
lengthy that the disclosure needs to be repeated; whether
disclosures in audio messages are presented in an adequate
volume and cadence and visual disclosures appear for a
sufficient duration; and, whether the language of the disclosure
is understandable to the intended audience."


=> Content of Disclosures and Disclaimers

Advertisers are required to identify all express and implied
claims that the ad conveys to consumers and, when doing
so, focus on the overall impression of the ad and not just
individual phrases or statements.

If those claims are likely to be misleading to the "reasonable"
consumer, then the advertiser must disclose qualifying
information to remove any possibility of deception.  Such
qualifying information must be disclosed clearly and
conspicuously in a place where the reader of the claim will see
either the qualification itself or a prominent link to it.

Note also that a disclosure only qualifies or limits a claim to
prevent it creating a misleading impression.  It CANNOT cure
a false claim.  If the disclosure contradicts the claim, the claim
itself must be modified for it is deceptive.

For a full copy of the FTC's "Dot Com Disclosures" guidelines,
visit
http://www.ftc.gov/bcp/conline/pubs/buspubs/dotcom/index.html.


SUBSTANTIATION OF CLAIMS

If you claim that by purchasing your new viral marketing
product, the consumer can generate $50,000 in 60 days in
additional revenues, you'd better have a reasonable basis
for doing so.  In other words, when you get an informal access
letter from the FTC asking for substantiation (or, if you fail
to respond, a formal civil investigative demand), be prepared
to produce documents and records that provide support for
your claim that your consumer's revenues will increase
$50,000 in 60 days as a direct result of purchasing and
using your product.

If you could not provide, if asked to do so, substantiation for
a claim you intend to make in your online ad, it is misleading
to include it.

The kind of evidence needed for substantiation depends on
the claim.  A claim such as "9 out of 10 women lost an
average of 10 pounds in two seeks while taking ABC-
Metabolizer" will require competent and reliable *scientific*
evidence.  Letters from satisfied customers do NOT
constitute adequate substantiation for this purpose.


FAIRNESS IN ADVERTISING

According to the FTC's policy statement on unfairness, to
justify a finding of unfairness, the injury to the consumer
must satisfy three tests:

1.  it must be substantial;

2.  it must not be outweighed by any countervailing benefits
to consumers or competition; and

3.  it must be an injury that the consumer him or herself
could not reasonably have avoided.


=> Substantial

"Substantial" means more than trivial or merely speculative.
As the FTC notes, "In most cases a substantial injury involves
monetary harm, as when sellers coerce consumers into
purchasing unwanted goods or services".

On the other hand, "emotional impact or other more subjective
types of harm ... will not ordinarily make a practice unfair."
So, the mere fact that an ad is sexist, for example, and as a
result offends some members of the community, will not, without
more, render the advertisement "unfair" for the FTC's purposes.


=> Countervailing Benefits to Consumers or Competition

It is possible for an injury to be outweighed by higher interests.
An example the FTC cites is a case in point: "A seller's failure
to present complex technical data on his product may lessen a
consumer's ability to choose, ... but may also reduce the
initial price he must pay for the article.  The Commission is aware
of these tradeoffs and will not find that a practice unfairly
injures consumers unless it is injurious in its net effects."


=> Injury the Consumer Could Not Reasonably Have Avoided

There is a fine line between freedom of choice and regulatory
intervention.  Consumers are expected to survey the market
and the available alternatives and to make an informed
purchase decision.  The Commission will generally only get
involved where certain sales techniques operate to interfere
with the consumer's ability to effectively make his or her own
decisions. 

FTC examples of these types of sales techniques include
exercising undue influence over highly susceptible classes of
purchasers such as promoting fraudulent "cures" to seriously
ill cancer patients or dismantling a home appliance for
"inspection" and refusing to reassemble it until the consumer
signs a service contract.

For a full copy of the FTC's policy statement on unfairness,
see http://www.ftc.gov/bcp/policystmt/ad-unfair.htm .


OTHER ISSUES

=> Refunds

Refunds must be made to dissatisfied customers if you promised
to make them.

=> Franchises and Business Opportunity Rule

If you are selling a franchise or a business opportunity, you must
give consumers a detailed disclosure document at least 10 days
before the consumer pays any money or commits to a purchase.

=> Multi-Level Marketing

MLMs should pay commissions for the retail sale of goods or
services, NOT for recruiting new distributors (pyramid schemes).

=> Free Products

If a product is advertised for free if another product is purchased,
the consumer must pay nothing for the one item and no more than
the regular price for the other.  Such ads should describe all the
terms and conditions of the free offer clearly and prominently.

=> Jewelry

The FTC has a Jewelry Guide about how to make accurate and
truthful claims about jewelry you offer for sale.

=> Mail and Telephone Orders

Under the Mail or Telephone Order Merchandise Rule, you
must have a reasonable basis for stating or implying that a
product will be shipped within a certain period of time.
If not, you are implying that you can ship within 30 days and
you must have a reasonable basis for such implication.

There are various other rules that may impact on your business
including 900 numbers, telemarketing, testimonials and
endorsements, warranties and guarantees and the like.

For more information on these and other topics, see the FTC's
publication "Advertising and Marketing on the Internet: Rules of
the Road" at
http://www.ftc.gov/bcp/conline/pubs/buspubs/ruleroad.htm .


PENALTIES

The penalties imposed by the FTC against companies or
individuals (via state mirroring legislation) that run a false
or deceptive ad depend on the nature of the violation.

Here are the possibilities:

=>      Cease and Desist Orders

These are legally binding orders that require the company
to stop running the offending ad or engaging in the deceptive
practice, to have substantiation for claims in future ads, to
report periodically to the FTC about such substantiation and
to pay a fine of $11,000 per day if the company violates the
law in the future.

=>      Civil penalties, consumer redress and other monetary
        remedies.

=>      Corrective advertising, disclosures and other informational
        remedies.

=>      Bans and bonds.


One effect of the prevalence of spam on the Internet that I have
not heard mentioned before is that it desensitizes us to
outrageous advertising claims.  We EXPECT to see claims such
as "make $60,000 in 60 days" even though we have conditioned
ourselves to ignore them. 

The danger, though, is the fact that we ARE so desensitized that
it's almost second nature to "reach" when writing our own ads.  It's
easy to gild the lily, to make our opportunity, product or service
sound a bit bigger and better than it really is.  That's the nature of
advertising after all. 

But on the Internet, we have to be more careful than the offline
advertiser.  Only on the Internet it seems, has hype been elevated
to such an art form, so much so that we begin to think that we
must do the same if our ad is to be noticed. 

The challenge for us all, then, is to write winning ads that draw the
attention of the reader while at the same time refraining from making
claims that the reasonable reader may be misled by and by being
fully prepared and able to substantiate any claims made.

By following these, in essence common sense, principles, we will
go a long way to ensuring that OUR advertising practices don't
attract the attention of the wrong people!


More About How to Market, Promote and Sell Your New Business

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