As the COVID-19 pandemic continues to wreak havoc in the medical and business community, direct sales companies face the added pressure of ensuring that their independent sales representatives are not seeking to boost sales by making unauthorized health claims related to the coronavirus.
Statements that imply or expressly claim that a product can treat or alleviate COVID-19 symptoms will almost certainly invite immediate regulatory scrutiny.
On April 7, the Direct Selling Association (DSA) and Direct Selling Self-Regulatory Council (DSSRC) issued a joint press release cautioning direct selling companies and their independent salesforces from making claims suggesting that products:
Treat or alleviate the symptoms of COVID-19;
Cure, treat or alleviate symptoms of COVID-19;
Boost or improve immune function that can prevent COVID-19; and/or
Eliminate or remove viruses.
The press release stated that DSSRC has already contacted several direct selling companies regarding COVID-19 claims. On April 10, the FTC issued an alert warning consumers about COVID-19 scams that “take advantage of anxieties related to the Coronavirus.”
The direct selling industry experienced a rough end to 2019. FTC regulatory enforcement actions were filed against two prominent companies and there were alarming public statements by FTC’s Andrew Smith suggesting that the FTC is applying a new definition of pyramid scheme in evaluating MLM compensation structures.
Heightened Scrutiny on Health Claims
With the FTC’s heightened scrutiny of the direct selling channel, direct sellers can ill afford the reputational damage (and certain adverse regulatory enforcement action) that would result if a company (or its independent salespeople) seeks to capitalize on the current pandemic by making unsubstantiated health claims. It is not hard to imagine how Mr. Smith and his FTC cohorts would prioritize and aggressively prosecute a direct selling company seeking to capitalize on the COVID-19 crisis by making improper health claims.
“Statements that imply or expressly claim that a product can treat or alleviate COVID-19 symptoms will almost certainly invite immediate regulatory scrutiny.”
– Brent Kugler, Partner Scheef & Stone, LLP
The Centers for Disease Control and Prevention and the Food and Drug Administration have both stated that there are no approved vaccines, drugs or investigational products currently available to treat or prevent COVID-19. Accordingly, improper health claims related to COVID-19 are certain to be highly prioritized by both the FTC, FDA and state regulatory agencies. No direct selling company possesses reliable scientific substantiation to support a claim that a product can treat or mitigate COVID-19 symptoms or prevent exposure to the virus.
Review Compliance with FTC Standards
The regulatory parameters for compliant product claims are well known. Companies must ensure that product claims comply with, among other things, the FTC Policy Statement Regarding Advertising Substantiation, the FTC Guide Concerning the Use of Endorsements and Testimonials in Advertising, the FTC’s revised Dot.com Disclosure Guide and applicable FDA regulations regarding reliable scientific substantiation for product efficacy claims. These standards apply to consumable products as well as cleaning materials and personal protective equipment such as masks and gloves.
Just as critically, companies must monitor the sales activities of their independent sales forces. In his statements to the DSA in October 2019, FTC’s Smith made it clear that the FTC intends to hold companies accountable for the claims and representations made by its independent sales representatives. With revenues declining, some companies may be inclined to “look the other way” rather than confront and deal with a distributor who is making illegal health claims to boost product sales. Companies must resist this temptation, both for their own survival and also to prevent massive damage to the image and reputation of the direct selling channel at this critical time.
Brent Kugler is a partner with Scheef & Stone in Dallas, Texas. Brent is a prominent attorney is a direct selling industry with extensive experience in representing direct sales, multilevel and network marketing companies in lawsuits, arbitrations regularities matter across the untied states.