Three key strategies to make sure your statement stands up to scrutiny.
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This year’s Multilevel Marketing: The Consumer Protection Challenge Conference just wrapped up, and much of the conference was, yet again, laser-focused on income claims and direct sellers’ attempts to craft defensible income disclosure statements (IDS) to justify such claims. And late last year, the Federal Trade Commission (FTC) issued its Staff Report on Multi-Level Marketing Income Disclosure Statements, pointing to five primary areas of concern identified after assessing the IDS of 70 different direct sellers.
That Staff Report came only after the FTC sent letters to over 1,000 companies, including virtually every major direct seller, warning that misrepresentations or deceptive claims in their IDS could trigger stiff civil penalties. Suffice to say, the FTC, other regulatory bodies and anti-MLM supporters are preparing for a fight against the direct sales channel, and at least one piece of ammunition they intend to use is an ill-crafted IDS.
For most direct sales companies, the IDS is the company’s most prominent—and public—presentation of its earnings opportunity. So, ensuring that your IDS reliably and accurately reflects the actual experience of a typical distributor, as borne out in your company’s business intelligence data, should be a top priority for every direct seller.
Here we’ve outlined several strategies we’ve used to help our clients create an IDS that effectively captures the earnings opportunities available to typical distributors while guarding against misleading representations.
1 / The Importance of a Preferred-Customer Program
Typically, direct sellers have some distributors that signed up only to receive a discount on the company’s products. These distributors have no interest in selling the company’s products and building a business. They are merely end-user consumers, and they will earn little to no money from the company. Such distributors deflate the average earnings across all distributors.
To address this, some direct sellers report in their IDS only the earnings of those distributors who are interested in the business opportunity. There are many different and defensible methodologies that can be used to identify such business-building distributors. But no matter how defensible the methodology, excluding any subset of distributors is likely to result in FTC (or other agency) allegations that the IDS artificially inflates earnings by including only a subset of the company’s distributors.
Instead, direct selling companies should consider a “preferred customer” program that allows distributors to accurately classify themselves from the beginning as interested only in consuming the company’s products. Preferred customers are generally more than one-off retail customers—they typically want to make regular product purchases at a discount.
A robust preferred customer program that provides appropriate incentives for individuals to self-classify upon registration gives companies a principled and defensible way to exclude from their IDS persons who have no desire to participate in the compensation plan. A preferred customer program also makes it easier to quantify genuine demand for the company’s products, as customers in this category cannot participate in the compensation plan and are therefore purchasing solely for personal consumption.
Direct selling companies should ensure that their preferred customer programs adequately incentivize distributors to appropriately classify themselves upon registration. For instance, if the only meaningful difference between preferred customers and distributors is the opportunity to participate in the compensation program, a rational individual will choose to become a distributor, even if they do not intend to build a business.
For a preferred customer program to be effective, it is important for a company to provide adequate incentives. This can be accomplished by lowering the enrollment and renewal fees for preferred customers; by offering larger discounts to preferred customers; and/or by sending preferred customers periodic gifts or product samples that are not available to distributors. Making product auto-shipments available exclusively to preferred customers is another great incentive that many companies offer.
2 / The Importance of Disclosing Identifiable Costs
An effective and defensible IDS will disclose business expenses incurred by the typical distributor to ensure that the IDS does not paint an overly rosy picture of distributor earnings. For instance, the IDS should include statements regarding sign-up costs, distributor website costs, renewal costs and various other expenses that most distributors incur. The IDS should also prominently disclose that, as independent contractors, distributors may choose to incur various other business expenses that are not reimbursable by the company, which reduce distributors’ net earnings.
3 / Earnings Calculations Should Accurately Capture the Typical Distributor
Calculating a typical distributor’s earnings is not easy. Many companies disclose only the total amount of compensation paid at each level over the course of the year, which probably does not capture a typical distributor’s earnings. It is only slightly better to divide the total compensation paid out to all distributors at a given rank by the total number of distributors within the rank. Because the amount distributors earn within a given rank almost always varies greatly and many distributors change ranks within any given year, simply calculating the mean rarely captures how much a typical distributor at a given rank is likely to earn.
There are various strategies companies can implement to ensure that the methodology used to calculate IDS earnings reflects a typical distributor’s experience. For example, rather than using the mean to report distributor earnings, other measures that better reflect the “central tendency” of the earnings across a group, such as the median (the value separating the earnings of the higher half from the lower half) may more accurately show typicality. Direct sellers should also include robust disclosures in their IDS, to explain, for example, how earnings figures were calculated, and the percentage of distributors who attain each of the various ranks.
Ultimately, crunching your business intelligence data to capture the earnings of a typical distributor is an art, and expert guidance is recommended. We, the attorneys drafting this article, routinely team up with an expert economic consultant at Edgeworth Economics, Branko Jovanovic, PhD, to help our direct selling clients develop an IDS that is carefully crafted to present an accurate and truthful reflection of the typical distributor’s experience. We are here to help you navigate the minefield the FTC and others are creating in an effort to obtain penalties against direct sellers that are not currently using best practices for their IDS.
Winston & Strawn partners Katrina Eash and John Sanders lead Winston’s direct selling practice focused on representing multi-level marketing and direct sales organizations in a wide range of disputes and consulting matters. Winston currently represents dozens of direct selling clients in various matters, including advising several clients in Federal Trade Commission investigations and compliance, defending multiple clients in California class action, independent contractor misclassification litigations and arbitrations and ongoing compliance consulting.
From the July/August 2025 issue of Direct Selling News magazine.
