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New FTC Earnings Claims and Income Claims Regulations: Avoid Trouble with Effective FTC Compliance Strategies
Are You a Marketer, Advertiser or Agency?
If you're you a marketer, advertiser or agency looking to make FTC earnings claims for money-making opportunities, but are uncertain about the new FTC regulations? If so, you're in the right place!
In this comprehensive checklist, I'll walk you through everything you need to know about understanding and complying with the new FTC regulations for making earnings claims.
With the recent FTC guidelines, it's essential that money-making opportunity marketers understand not only the old strategies that won't work anymore (and may get you into big trouble with the FTC), but also new strategies for navigating new FTC regulations. Failure to do so can result in huge fines for deceptive earnings claims and even having your business shut down.
Understand FTC Earnings Claims and FTC Income Claims for FTC Compliance
Ad claims are specific claims an advertiser makes regarding the advertiser's product or service. Ad claims are not opinions. Instead, they are factual statements that can be either express or implied, and provable true or false.
Earnings claims are a specific type (subset) of ad claims. The FTC defines earnings claims as “any oral, written, or visual representation to a prospective purchaser that conveys, expressly or by implication, a specific level or range of actual or potential sales, or gross or net income or profits.”
The FTC states that earnings claims may include:
- “Any chart, table, or mathematical calculation that demonstrates possible results based on a combination of variables; and
- Any statements from which a prospective purchaser can reasonably infer that he or she will:
- Earn a minimum level of income (e.g., ‘enough to buy a Porsche'),
- ‘Earn a six-figure income,' or
- ‘Earn your investment back within one year.'”
Earnings claims may either be first-party or third-party claims. Each is regulated by the same rules regarding deceptive earnings claims.
- First-party example: “Sign up and make $10K your first month in the program.”
- Third-party example (Success Story Testimonial): “I made $10K my first month.”
Having a clear understanding of what earnings claims are is an essential step for avoiding enforcement actions for deceptive earnings claims by the FTC and state regulators.
Understand Deceptive Earnings Claims
The FTC defines earnings claims as “... any oral, written, or visual representation to a prospective purchaser that conveys, expressly or by implication, a specific level or range of actual or potential sales, or gross or net income or profits.”
- Example: “Sign up and make $10K your first month.”
So, what's a deceptive earnings claim? The FTC states, “The Commission will find an act or practice deceptive if there is a misrepresentation, omission, or other practice, that misleads the consumer acting reasonably in the circumstances, to the consumer's detriment.”
There is also a “standard” known as the “materially misleading standard” that may be used to determine deception. Deception is indicated if a statement or omission that is material to a consumer's decision to act (in response to a CTA) is likely to mislead a consumer acting reasonably.
Understanding deceptive earnings claims is an essential step for crafting earnings claims that avoid enforcement actions by the FTC and state regulators.
Understand Why the FTC is Cracking Down on Deceptive FTC Earnings Claims and Income Claims
The FTC has ramped up its enforcement efforts against deceptive and unsubstantiated earnings claims to protect consumers from being deceived. The rise of deceptive and unsubstantiated earnings claims has resulted in consumer losses escalating to record levels.
Recent examples of FTC enforcement actions and related consumer losses from deceptive or unsubstantiated earnings claims, as reported by the FTC, include:
- FTC v. Wealth Press (1-11-23): Trade Recommendations in Financial Markets – Consumer losses unknown, but settlement required payment of $1.7 Million;
- FTC v. Lurn (3-2-23): eCommerce Coaching Programs – $65 Million;
- FTC v. DK Automation (11-16-22): Amazon Business Packages - $52 Million;
- FTC v. Raging Bull (2-4-21): Stock Market Trading Strategies - $137 Million; and
- FTC v. Nudge & Response Marketing Group (11-5-19): Real Estate Investment Training - $400 Million.
As indicated in the video below, the FTC crackdown on earnings claims demonstrates how the FTC is using its new framework to enforce new regulations for deceptive earnings claims.
For Starters, Avoid “Red Flag” FTC Earnings Claims
It's important to not say these things, but there are more strategic and even more important tasks described below.
“Red Flag” earnings claims involve claims of extraordinary financial results.
Examples of “Red Flag” FTC earnings claims from recent enforcement actions include:
- FTC v. DK Automation:
- “We'll help you build your Autopilot [Amazon] Business!”
- “Average monthly revenue $165,015.”
- FTC v. Lurn: “Singal personally uses a simple 1-page website to generate over $13,700 per day.”
Additional examples with financial benefits in terms of specific dollar or percentage amounts include:
- “I made $10,000 my first month in the program,”
- “My sales exploded by 120% after I enrolled,” and
- “My gross income went from averaging $10K per month to over $27K.”
“Red flag” earnings claims may also include lifestyle claims such as:
- Lavish lifestyles featuring expensive automobiles, vacation homes, or yachts, and
- Work-related lifestyles featuring making money on “autopilot” or enjoying the “Internet Lifestyle” (the so-called ‘Four Hour Workweek').
Avoiding Red Flag earnings claims is essential for FTC compliance for two basic reasons:
- They attract a lot of attention, including the FTC and state regulators.
- Under the FTC's new regulations, they are difficult, if not impossible, to substantiate as being typical results.
Substantiate Your FTC Earnings Claims Under the New Regulations
Substantiating FTC earnings claims requires a working knowledge of "Net Impression."
"Net Impression" is legal jargon that refers to the message (or takeaway) that a reasonable consumer derives or infers from an ad claim.
The FTC requires advertisers to substantiate (support) Net Impression with what is known as a “reasonable basis” before the ad claim is disseminated.
The clincher is that the FTC believes earnings claims are “typicality” claims, meaning that reasonable consumers generally infer an ad claim to mean that the advertised results are “typical.”
So, if your testimonialist states: “I made $10,000 my first month,” then reasonable consumers take away the message that they should be able to also achieve the advertised results.
Bottom line: given that ad claims are “typicality” claims, the FTC requires that you:
- Substantiate that most consumers can achieve your advertised result, or
- Provide a disclosure of “generally expected results.”
In my experience working with clients, satisfying this requirement is initially challenging, but readily doable when we view earnings from a different perspective for compliance.
Say Goodbye to Your Current Disclaimer Strategy
If your disclaimer contradicts the net impression of your messaging, it won't work (it will be totally ineffective).
“Your results may vary” by itself won't work.
“We don't know what's typical because we don't track customer results” won't work.
If you're thinking the FTC is now eliminating all of the prior strategies of (i) promising consumers they will make specific amounts of money, and (ii) then using a disclaimer to eliminate your responsibility to demonstrate and/or disclose typical results, you're right.
The Most Important Thing: Understand and Navigate The New FTC Earnings Claim Framework
The FTC doesn't refer to a “framework.” But if you carefully review the recent FTC Enforcement actions, including the actions against DK Automation and Lurn, clearly there is a framework.
I explain the new FTC Framework in the video below.
Avoid Personal Liability for Deceptive Earnings Claims and FTC Income Claims
In simple terms, “personal liability” means the FTC can satisfy a claim against your company out of your personal assets, including:
- Your bank accounts;
- Investment accounts; and
- Your real estate holdings.
Generally speaking, entities such as a corporation or LLC will shield you from personal liability involving routine civil lawsuits. It's very difficult for civil litigants to “pierce” these entities to get to your personal assets.
Not so with the FTC.
The FTC has extraordinary powers that easily enable the FTC to “pierce” your entity to satisfy FTC enforcement action judgments or settlements with your personal assets. The FTC's extraordinary powers also extend to personal bankruptcy laws. You can't discharge your personal liability to the FTC by declaring bankruptcy.
In FTC v. DK Automation, the FTC named two execs of the entity defendants as individual defendants resulting in joint and several liability for these individuals.
The FTC's basis for its claim against the two DK Automation execs was merely the allegation that they “… alone or in concert with others, formulated, directed, controlled, had the authority to control, or participated in that acts of [DK Automation], including the acts and practices set forth in this Complaint.”
Given the risk of personal liability, even if you operate as a corporation or LLC, engagement with the new FTC Framework is essential.
Why the New FTC Earnings Claims Regulations Can Help You Grow Your Business
While the new FTC regulations may seem stringent, they can actually help you compete more effectively. By adhering to the new FTC guidelines, you can build trust with consumers, differentiate your business from less scrupulous competitors, and avoid costly legal issues.
Transparent and truthful earnings claims can enhance your reputation and attract loyal customers who will be eager to give you enthusiastic testimonials and referrals, ultimately giving you a competitive edge in the market.
Conclusion: Key Takeaways and Recommended Resources for FTC Compliance
Key takeaways from this checklist on FTC earnings claims include:
- Understanding what constitutes an earnings claim and a deceptive earnings claim as well and why the FTC is cracking down on deceptive earnings claims, particularly “red flag” earnings claims;
- What is required for substantiation of earnings claims and why old disclaimer strategies not only will fail to work for you, but also why they will get you into big trouble with the FTC, including potential personal liability; and
- Why new strategies are required for engaging with the FTC's new Earnings Claim Framework, and why engagement with the Framework can help you grow your business.
Update, July 31, 2024: FTC Earnings Claims Expanded to Include Savings Claims Targeting Consumers
On July 31, 2024, the FTC announced its $10 million settlement with NRRM, LLC d/b/a Carshield involving alleged deceptive savings claims based on vehicle service contracts.
Carshield's advertising included consumer testimonials pomising specific savings form vehicle service contracts, including:
- "I've been a Carshield customer for close to seven years, had thee veicles covered, and they saved me close to $9,000."
- "If I didn't have Carshield, I would have been out-of-pocket $7,000."
- Another consumer testimonialist was depicted as having "saved $8,000."
The FTC alleged in its compliant that (i) the testimonials were "false and misleading", and (ii) that numerous testimonialists "did not save the amount claimed.
Update, October 25, 2024: FTC Earnings Claims Expanded to Include Hourly Wage Claims for Gig Economy Workers
On October 2, 2024, the FTC announced its proposed settlement with Lyft, Inc. in the amount of $2.1 million for allegedly makng deceptive earings claims: (i) about how much money drivers could make per hour, and (ii) how much drivers could earn in Lyft's guaraneeed bonus program if they completed a specific number of rides in a specified time.
In the proposed settlement, Lyft will be prohibited from making any earnings claims unless Lyft has the required evidence to support the claims. In addition, Lyft will be prohibited from making any claims about tips if they are included in a stated hourly amount.
The enforcement action against Lyft is part of the FTC's ongoing efforts to protect workers in the gig economy.
Additional Resources
Download Earnings Claim Strategies Guide
FTC Press Release: Announcing Proposed Earnings Claim Rule 2-17-22
FTC Advance Notice of Proposed Rulemaking: Earnings Claims 3-11-22