FTC Launches Coast-to-Coast ‘Biz-Op’ Rule Blitz4 Dec, 2012 By: William I. Rothbard
From Vermont to California and Oregon to Florida, the Federal Trade Commission (FTC) has wasted no time enforcing its beefed up Business Opportunity (“Biz-Op”) Rule. Last month, it filed its first six cases across the country (three are the author’s) to enforce the rule, which took effect last March. Some of the companies had been operating for years without a peep from the FTC, even though they’re charged with violating not only the Biz-Op Rule but also the FTC’s basic statute against “unfair and deceptive” practices.
If they’ve been on the wrong side of the FTC all this time, then why weren’t they sued earlier? One guess is that, individually, they weren’t important enough enforcement priorities before. But now, the new Biz-Op Rule gives the FTC a powerful weapon to wield against an entire marketing sector – “work-at-home” programs – it sees as populated with hucksters seeking to grab the “last dollar” from financially-distressed “Great Recession” consumers.
Once confined to the realm of vending machine businesses and the like, and limited to biz-ops costing $500 or more, the Rule now covers “work-at-home” offers carrying no purchase minimum. It requires detailed written disclosure, in a prescribed form, of several items of information, including the basis of earnings claims – the sine qua non of biz-op offers. The seller must disclose, at least seven days prior to sale: a) who it is; b) whether it’s making an earnings claim; c) whether it, its affiliates, or key personnel have been involved in any legal actions; d) whether it has a cancellation or refund policy; and e) a list of purchasers within the past three years. If the seller makes earnings claims, has been sued, or has a cancellation/refund policy, it must provide supplementary information substantiating the claims, identifying the suits, and stating the key cancellation/refund terms. The disclosure document must be provided even if the seller is not making earnings claims.
A seven-day disclosure requirement of this type will kill many biz-ops, including ones that offer legitimate opportunities to struggling consumers. It is particularly nonsensical for work-at-home offers that initially may cost nothing (except shipping and handling) or only a modest amount. Consumers considering a tryout or purchase of an income opportunity with minimal financial risk don’t need such overprotection, and small businesses shouldn’t face extinction to provide it.
There may be hope, though. Biz-Op Rule defendants need to read the Rule carefully to see if it even applies to them. Its definition of “business opportunity” doesn’t apply to just any work-at-home program but only to those based on a solicitation to “enter into a new business” that involves a “required payment” and in which the seller offers to “provide outlets, accounts or customers, including … Internet outlets, accounts or customers, for the purchaser’s goods or services.” It does not include providing “advertising and general advice about business development and training….”
Parsing this definition, Biz-Op Rule targets, in constructing their defense, need to ask themselves: 1) Do my customers actually become their “own bosses,” selling their own goods or services to their own customers, or are they just “finders” for my products? 2) Do I actually “provide outlets, accounts or customers” to my customers, or concrete assistance in obtaining them, or am I really just offering advertising and general business help? 3) Are my customers really making a purchase “payment” if my offer is initially free with at most only shipping and handling fees and a chance to cancel?
If you’re a work-at-home opportunity seller and the answer to any of these or other coverage questions is no, the heavy-handed new Biz-Op Rule may not apply to you. If so, then the next challenge may be getting the FTC or a judge to agree.
William I. Rothbard is a former FTC attorney and practices in Los Angeles, specializing in advertising and marketing law. He can be reached at (310) 453-8713, Rothbard@FTCAdLaw.com, and www.ftcadlaw.com.