Scholar urges lawmakers to hold multi-level marketing companies liable for misleading claims made by salespeople.
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Over 50 percent of Americans report being “inundated” online with posts advertising products from multi-level marketing (MLM) companies—a $40 billion industry that relies on person-to-person sales between contractors and their friends and family. Often, these posts make dramatic promises: rapid weight loss, financial freedom working part-time from home, or homeopathic cures for autism and COVID-19.
MLMs are subject to the same labeling and advertising laws as traditional retailers but rarely face consequences for the outlandish—and unlawful—claims made by their sales representatives, contends Alexandra J. Roberts of Northeastern University School of Law. In a forthcoming article, Roberts argues that enforcement authorities are not holding MLM companies accountable for misleading claims made by the individuals selling their products.
Roberts recommends that agencies, social media companies, and competitors use existing false advertising laws to “tamp down” the deceptive claims that Roberts contends are an intentional “feature, not a bug,” of MLM corporate strategy.
Instead of purchasing advertisements, MLMs contract with individuals to sell products and recruit downstream sellers for a commission. Because nearly all MLM sellers fail to earn a profit, however, they may be “desperate to say whatever they must in order to sell products.”
Roberts surveyed MLM sellers in the United States and reports that 40 percent of them are unaware of any laws that regulate their marketing claims. In reality, both the U.S. Federal Trade Commission (FTC) and U.S. Food and Drug Administration (FDA) regulate the advertising and labeling of MLM products.
Under the Federal Trade Commission Act and Lanham Act, the FTC prohibits companies from making false and misleading claims in advertisements. The FTC Act regulates product endorsements, which the FTC has interpreted to include influencers and MLM sellers, Roberts explains. The FTC has issued MLM-specific guidance that warns companies of their liability for deceptive statements made by sellers, “regardless of where the participant statements are made, including on social media and in small group recruiting meetings.”
The Lanham Act’s prohibitions apply only to commercial advertisements. Roberts argues that the Act covers MLM sellers’ statements about products, which are made to sell products, recruit distributors, and generate revenue. Some courts have held that speech to a single person or group, such as online direct messages, are not disseminated widely enough to count as advertising under the Lanham Act. In response, Roberts explains that MLM sellers strategically drive traffic from online posts to direct messages. The post and message jointly create an advertisement that, if misleading, falls under the Lanham Act and the FTC’s enforcement authority.
FDA only regulates prescription drug advertising, but it maintains authority over product labeling—a term courts read to include not only a product’s physical label but any accompanying text, such as a post’s caption or product’s description. In enforcement proceedings, FDA uses distributors’ online content as evidence of unlawful labeling.
FDA’s labeling authority covers wellness and personal care products, such as supplements and cosmetics, which make up nearly 50 percent of MLM sales in the United States. With prior notice to FDA, these products may include claims related to the structure or function of the body, such as that a product “supports immunity.”
Claims about a product’s nutritional value or health benefits, however, must follow FDA guidelines, and only FDA-approved prescription drugs may claim to prevent, treat, or cure a disease. Upwards of 90 percent of nutritional MLM companies have made disease-related statements that violate the Food, Drug, and Cosmetics Act, Roberts contends.
For example, a distributor for Isagenix posted on Facebook that the MLM’s health supplements kill cancer and autoimmune disease in blood cells. A distributor for YoungLiving hailed its essential oils as treatment for diabetes, lupus, and cancer. Roberts explains that FDA treats these statements as marketing misbranded foods or unapproved new drugs.
Beyond federal and state law, MLMs and their sellers are constrained by social media platforms’ terms of service. Roberts finds that many platforms prohibit misleading advertising, and some websites, such as TikTok, explicitly ban MLM-related content. Other social media platforms prohibit MLMs from making specific claims, such as advertising weight loss products to minors.
Despite TikTok’s reportedly millions of rejected advertisements, Roberts contends that platform policies are underenforced. Two TikTok accounts claiming to be official pages for Herbalife, a nutrition-focused MLM, post videos on TikTok that market its products. MLM sellers, such as this Monat distributor, post product testimonials and direct customers to another website to purchase products.
Roberts reports that 59 percent of MLM sellers are aware of legal restrictions on marketing, but three-fourths of MLM sellers admit that they nonetheless regularly make product efficacy, testimonial, and business opportunity claims. Direct sellers act as endorsers, agents, and employees of MLM companies, and Roberts urges the FTC and courts to trace liability back to the MLMs reaping profits from sellers’ misleading marketing.
The FTC’s acknowledgement that MLMs encourage sellers to make outlandish claims is not enough, Roberts contends. To compel MLM companies to supervise endorsers’ statements, the FTC should enforce its business guidance and threaten steep civil penalties against the companies. In addition, Roberts recommends that lawmakers expand FDA’s regulatory authority over dietary supplement claims to increase oversight and prevent misleading health and disease-related claims.
Roberts suggests that social media platforms should create advertising-specific takedown processes, and she adds that MLM companies can use online compliance software to monitor sellers’ content. Competitors may bring suit against MLMs under the Lanham Act for misleading claims, and Roberts urges traditional retailers to use litigation to “expose and enjoin MLMs’ deceptive practices.”
Roberts admits that advertising laws were not designed to address diffuse MLM content shared through lay salespeople, and future reform may be necessary to regulate multilevel marketing claims fully. Roberts concludes that, despite this limitation, the legal channels available to agencies, litigants, and social media platforms can begin to prevent MLMs from “preying on consumers’ desperation.”
