National Dynamics Corporation

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IN THE MATTER OF NATIONAL DYNAMICS CORPORATION, ET AL.

OPINION AN MODIFIED ORDER, IN REGARD TO ALLEGED VIOLATION OF THE FEDERAL TRADE COMMISSION ACT Docket 880. Decl 'Jion Feb. , 197,'* Modifid Orr June . 1975 Order further modifying order issued Mar. 4. 1975 40 F.R. 19459, (p. 390 herein), ag-d.inst a New York City seller of battery additive, VX-u, and other products by eliminating certin "loopholes" in the earlier order, while setting forth in some detail and with greater clarity a wide variety of options available to S".. 2F_ c.4H.

NATIONAL UYNAMIC CUKPUKATIUN lum 1052 Opinion respondents for making truthful claims concerning the earnings of their distributors, Appeamnces For the Commission: Jeffrey TUTeck and Miclwl C. McCarey. or the respondents; Solonwn H. Frind, N. OPINION OF THE COMMISSION BY DIXON Corn:missioner:

Complaint counsel have fied a "Petition for Reconsideration" of tbe Commission s order in this matter issued on Mar. 4, 1975. Respondents have replied in opposition. In order to obtain more time within which to consider the petition for reconsideration, the Commssion, by order dated May 27, 1975, stayed the effective date of its Mar. 4 order, and thereby, the time within which respondents might appeal it. The order of Mar. 4 modifed an earlier cease and desist order of the Commission, pursuant to remand from the United States Cour of Appeals for the Second Circuit, which had instructed that the original order be changed.

Having reviewed the arguents made by complaint counsel in their petition for reconsideration, and respondents' arguments in opposition and after conducting our own review of the order previously entered we have determined that it must be moded in order to accomplish the puroses intended by the Commssion whel) it issued its opinion and order of Mar. 4. The order as revised is designed to eliminate certain loopholes" in the earlier order to which complaint counel have properly objected, while settng forth in some detail and with greater clarty a wide variety of options available to respondents for making truthful claims concerning the earings of their distributors, consistent with the mandate of the Cour of Appeals.

The Commission s original order in this matter, of which the Court of Appeals disapproved, limited respondents essentially to representations of average earng-so The Cour of Appeals remaded with the instructions that respondents should not be limited to average earings. The Cour suggested that the Commission consider permitting ranges of earngs to be represented, and implied, by its reference to an earlier assurnce of volunta compliance, that truthful testimonials should also be allowed, though cautionig that respondents must not be allowed to make deceptive use of the unusual earnings of a few. In fashioning our modified order, we have proceeded on the theory that respondents should be allowed to make a wide variety of simple truthful, nondeceptive statements concerning the earnings of their distributors. At the same time, they must be prevented from bandying $ % ( % $ 10,,4 FEDERAL TRADE COMMISSION DECISIONS Opinion H5 F.T.

about high carnings achieved by a minority of purchasers with no indication of the unrepresentativeness of such earngs. If respondents lack .evidence that the high reported earngs of a few distributors are ' fact representative of the earnn of large numbers of other distributors, then it is clearly deceptive for them to portray the minority results reported to them without a clear indication of their unreprcsentativeness. The appended order cmbodies a general prohibition on representations of past earnings, followed by a detailed enumeration of various broad sorts of earings claims, in addition to average earnings claims which respondents may make: (1) Average or median earnings. The order makes clear that any true statement of average or median earnings achievcd by distributors durng any particular stated past time period is permissiblc. For example;

1. Last year our distributors earned an average of $ 2. In 1971 our distributors earned an average of$ 3, For all of 1973 our distributors earned an average of pcr month. 4. In May, 1973, our distributors earned an average of$_ The requiremcnt that respondents provide some indication of the time period upon which a statement of earngs is based is implicit in the requirement that they not misrepresent past earngs, a probibition sanctioned by the Cour of Appeals. Failure to disclose that represented achievements are in fact several years old is clearly misleading, since the assumption of readers is likely to be that they are based on recent information.

(2) StatemJ!nt of non-average, rwn-rrwdwn earnings achieved by substantialwurnber of purchasers. Respondents may wish to advertise that some number of their purchasers have eared some stated figure or more when the stated figue excecds the average. The order would permt all representations of this sort, provided that a substantial number of purchasers have in fact eared the stated figue or more and provided that a clear and conspicuous disclosure is made of the perccntage of the total number of distributors constituted by those who, according to respondents' representations, have achieved or excecded the stated amount. The percentage disclosure is necessar in order to avoid the mislcading implications of statements such as Hundreds of our distributors have earned or more1J when the hundreds constitute only a tiny fraction of all purchasers. Examples of the numerous earngs claims permitted by this section would bc the following:

1. Last year at least 5H5 of ollr distributors of all our distributors) earned orrnore.

2. In 1972 of our distributors earned $_ or more. R In all of 19n, hundreds of our distributors C- % of all distributors) ean1fd an average of or more per month. ( %$ $ NATIUNAL UY NAMIC:: COIU' UKE\TIUN lUbb 1052 Opinion 4. In May, 1973, at least 600 of our distributors of the total)eamed or more.

(8) State'Ynents of earnings ranges. As complaint counsel have pointed out in their petition for reconsideration, statements of ranges may be deceptive if the earings ranges are too large. A consumer presented will1 a statement that thousanas of distributors have eared from to is likely to assume that the average lies somewhere near the middle of the range, and that substantial numbers of people have achieved results in the top of the range. As complaint counsel point out in their petition for reconsideration, stipulated records in this case show for a particular year that over 99 percent of respondents distributors earned under $10 000, while a few earned in excess of $25 000. Common sense, moreover, would suggest that in most business opportunity situations one would find a few exceptional individuals performing well above average, rather than an even distribution of earnings results from bottom to top. Thus, the use of an unduly large range which encompasses the exceptional earngs of a few will result in deception, with the extent of deception increasing as the range does. Complaint counsel's solution to this problem is to require that respondents state figures for each quarile of any earnings range they choose to employ. This solution, however, would not be fai in instances where respondents properly employed narow ranges in an effort to present an accurate portrayal of their purchasers' earngs, nor would it entirely suffice in instances where respondents chose ranges so large that even quartiles thereof might be unduly broad. We think it is clear that in suggesting that the Commission fashion its order to permt the use of earnings ranges, the Court of Appeals anticipated that respondents would make use of reasonably descriptive ranges. In dealing with this problem in the past the Commssion has at times adopted the approacb of mandating particular ranges within which disclosures must be made. In an effort to allow respondents' maximum flexibility consistent with the nondeceptive use of earngs ranges, we believe the most appropriate solution in this case is to set an outer limit on the size of permssible ranges- The order as revised wil limit the size of permssible ranges to $4, for representations of yearly earngs and proportional amounts for other time periods. Stipulated evidence in this case, indicated that for a recent year over 99 percent of respondents' distributors earned $10 or less. Thus, if respondents wish to use earnings rdnges to give consumers an accurate picture of the earings achieved by their distributors, it appears they will be able to cover the earnings of over , S,." U"i"er ol C'f.dil Aaep/ollre Corp., dol, H2 F. C. 570, 670 (197:,), revn "d as t.o another i, suh nom 1fer1,, v. denll Tmde Cm""""" ,,(),'j F2rt 321 (9th C;r I!J74) $ ( % ( $ $ 1056 EDERAL TRAm; COMMISSION DECISIONS Opinion R5 F.

99 percent of their distributors by use of at most three ranges. Even allowing for some measure of infation and improvement in the , pcrfm:mance of respondents' distributors, it would appear that at most four or five $4 00 ranges will, for the foresceable future, be adequate to permt a description of the earngs of all but a tiny, unreprcsentative handful of purchasers.' Larger ranges, in light of these considerations, could too easily be used to deceive. In the event that circumstances should change in the future and respondents can demonstrate that the order "-" drafted would prevent them from describing the earngs of the vast majority of their distributors by means of a small number of ranges, they may petition the Commission to modify its order.

In addition, the order as revised requires that in stating any range respondents must indicate the percentage of their distributors who have achieved results within the range. As noted with respect to statements of non-average earings above, this requirement necessar to avoid the misleading implications of such statements as Hundreds of our distributors have earcd from to when in fact the hundreds may constitute only a small fraction of the total. In the event, however, that respondents choose to employ ranges beginning with $0 and proceeding continuously upward, they need only indicate the number or percentage of distributors within each r.mge. Under such circumstances a consumer can readily determine the signcance of large absolute numbers in the higher ranges. As in the case of other provisions, the one respecting earngs ranges requires that they must apply to "any stated period of time." Once again, this phrase is intended to require that respondents indicate the year in which stated results were compiled, as well as whether the results are yearly results, monthly averages, the results of one month only, or whatever. We think this is clearly implied in any requirement that respondents not misreprcsent earings. Puuant to subsection (8) of the order, following are examples of the many sorts of representations which respondents would be able to make: 1. In 1973 (number) of our distributors %) of all our distributors) earned from $6- 00.

2. In April, 1972 % of our distributors earned from $350-700. 3. In the first 9 months of 1973 (number) of our distributors of the total) earned from $400-'750 each month.

4. In 1972, our distributors achieved the following earnings: $0-4 000 (number or percentage) $4- $8- , Respondf'llts can, of cours, encompass thf' O'arninw; of an tho", at the top with a reprf'sel1tation in the form or more," p..rmiUpd by the order. or by USt, of testimonials '!lfro. 1052 Opinion $12 000 and up (4) Earnings testi7Ywnials. Complaint counsel are correct, we believe in pointing out that even though a consumer may be apprised that an earings testimonial represents a "better than average" result, the consumer is stil likely to assume that testimonial results represent an achievement that is within the realm of reasonable possibility for herself or himself. Thus, if a truthful testimonial represents a performance that has been achieved by only one or a handful of purchasers out of thousands, it is likely to convey a misleading impression even in the presence of a disclosure that it is a "better than average" result. For this reason, we believe it necessary to alter the treatment given to this problem in our order of March 4. One possible solution would be simply to prohibit the use of testimonials which describe a performance which has not been matched or exceeded by a representative fraction of respondents' purchasers. An alternative would be to require a disclosure which adequately apprises the consumer of the full extent of the disparty between the testimonial performance and the performance of others. Under the cirClItances of this case we believe an appropriate resolution is to permt all truthful testimonials, provided the following disclosures are made: 1. A statement of the average amount of time per day, week or month spent by the purchaser to achieve the stated performce; 2. The year or year during which, and the geogrphica area in which the results were achieved;

8. If the results achieved by the purchaser have been accomplished or exceeded by fewer than 10 percent of its distributors, either of the following disclosures, in conspicuous boldface type: (a) a statement of the average or median achieved by all distributors; (b) the following statement in boldface type: IMPORTANT NO- TICE: THE RESULTS DESCRIBED ABOVE ARE SUBSTAN- TIALLY Y IN EXCESS OF THE AVERAGE RESULTS ACHIEVED BY ALL OUR DISTRIBUTORS. OUR RECORDS SHOW THAT ONLY % OF OUR DISTRIBUTORS HAVE EQUALLED OR EXCEEDED THE PERFORMACE DESCRIBl' D ABOVE DURING THE INDICATED TIME PERIOD.

4. If respondents have records to indicate that the results achieved by a purchaser have been matched or exceeded by more than 10 percent of its distributors, either of the following disclosures: (a) a statement of the average or median achieved by al distributors; (b) a statement of the percentage of respondents' distributors who 1058 FEDERAL TRAIJ~: COMMISSION DECISIONS Opinion 85 F.

have equalled or exceeded the performance indicated during the indicated time period.

If the results achieved by the purchaser are in fact those of only an unrepresentative fraction (we have chosen 10 percent for tbe sake of clarity and precision) of total purchasers, tben we believe it is imperative that consumers be placed on notice in the strongest tent of the unrepresentativeness of the stated performance. A disclosure of average earnings should be sufficient to notify viewers of the full extent of the disparity. If respondents do not wish to compile average figures, then they must make a disclosure which wars in the strongest possible terms of the unrepresentativeness of the purchaser. The alternative disclosure provided would not require any additional recordkeeping on respondents' par, since it requires oriy a disclosure of the fraction of purchasers wbo, according to whatever records respondents have chosen to keep, have equalled or exceeded testimonial performance.

On the other hand, if, in fact, the testimonial performance has been equalled or exceeded by a signcant fraction of all purchasers then a simple indication that it exceeds the average should be sufficient to convey an accurate impression This can be accomplished by an actual statement of the average, or a statement of the actual fraction of purchasers who, to respondents' knowledge, have equaled or exceeded the represented performance. EXarples of the numerous simple concise, nondeceptive testimonials which would be permtted by this order are as follows:

1. In 1973, Mary Roe earned sellng VX-6 battery additive in the New York Metropolitan area, spending an average of hours per week on the job. The average earnings for all our purchasers during the same period were $ 2. In 1972, John Doe earned $_ sellng VX-- battery adIliiye in the Philadelphia Metropolitan area, spending an average of hours per week on the job. 15% of all our distributors did as well as or better than.John that year. Paragraph 2 of the order has been modified to require matenance of substantiation for claims made puruant to paragraph 1. We have not republished paragraphs 8 through 6 of the origial order because those pargrphs have previously become final.

As modifed, we believe the order entered herein wil permt respondents to make a viually limitless variety of simple, truthful nondeceptive, statements concerning the eargs of their distributors while at the same time preventing them from passing off the earnings of unrepresentative samples with no disclosure of their unepresentativeness. If respondents have evidence that impressive fractions of their distributors have earned goodly sums of money, they should be pleased to disclose the facts. On the other hand, if they lack evidence that more than a small fraction of distributors have eared given 1052 Order amounts, it would be a disservce to consumers to permit the representation of such amounts in advertisements without information to place them in perspective. While absolute clarty and precision in an area of such complexity as that of earings claims is certainly impossible, we believe the approach adopted herein is in accord with the, mand te of the Court of Appeals on remand and sufficient to eliminate thc shortcomings of the Commission s order of Mar. 4, 1975. Because the Commission has modifed its earlier order, respondents wil, by law, have the full statutory time period within which to appeal the new order. Their request for a 80-day period within which to appeal following our disposition of the motion to reconsider is, therefore, moot. ORDER GRANTING IN PART PETI1 ON FOR RECONSIm'RATION MODIFYING ORDER TO CEASE AND DESIST Complaint counsel have fied a "Petition for Rcconsideration" of the Commission s order in this matter issued on Mar. 4, 1975. Respondents have replied in opposition, The Commssion has determined upon review of the matter that paragraphs 1 and 2 of its order of Mar. 4 1975, must be modified, for reasons indicated in the accompanying opinion. Therefore It is ordered That respondents National Dynamics Corpration, a corpration, and its officers, and Ellott Meyer, individually and a." an officer of said corporation, and respondents' agents, rcpresentatives and employees, directly or through any corporate or other device, in connection with the advertising, offering fof sale, sale, or distribution of the battery additive VX- , or of any other products, in commerce, as do commerce" is defined in the Federal Trde Commission Act, forthwith cease and desist from:

1.(a) Representing, directly or by implication, that persons purchasing respondents' products can or wil derive any stated amount of sales profits, or earnings therefrom;

(b) Misrepresenting in any manner the past, present, or future sales products, or profits or earnings from the resale of respondents' representing, directly or by implication, the past or present sales profits or earings of purchasers of respondents' products except that any or all of the following representations shal not be prohibited: (1) A true statement of the average or median sales, profits, or earngs actually achieved by al purchasers of respondents' products durng any stated time period.

(2) A true statement of any particular amount of sales, profits, or earngs actually achieved or exceeded by a substatial number of purchasers of respondents' products durng any stated time period provided that it is accompanied by a clear and conspicuous disclosure (if Order 85 F.

printed, in typesize at least equal to that of the statement of sales profis, or earnings) of the percentage of the total number of purchasers who have achieved such results. (8).-An accurate representation of any range or ranges of sales profits, or earnings actually achieved by purchasers of respondents products for any stated period of time. Ranges describing yearly results shall not exceed $4 000 (e. $0-4 00; $2 000- 00; $4,00- (0). Ranges describing monthly results shall not exceed $350(e. , $0-850; $850-700) and ranges describing results for any other time period shall not exceed an amount constituting the same percentage of $4,00 as the time period constitutes of one year. A representation of any range or ranges of sales, profits, or earngs achieved by purchasers of respondents' products must include a clear and conspicuous statement (if printed, in typesize at least equal to that of the statement of the range) of the percentage which purchasers achieving results within the range constitute of the entire number of respondents' purchasers; l'rovided, Iwwever That if the ranges employed begin with $0 and proceed continuously upward, a statement of the number of purchasers within each range may be included in lieu of the percentage. (4) Truthful testimonials reg-drding the sales, profits, or earnings achieved by a purchaser of respondents' products, provided that any such testimonial includes or is accompanied by the following clear and conspicuous disclosures (if printed, iri boldface type at least equal in size to that of any sales, profits, or earngs figure stated in the testimonial):

(i) An accurate statement of the average amount of time per day, week, or month required by the purchaser to achieve the stated results; (li) An accurate statement of the year or year durng which, and the georgraphical area(s) in which, the stated results were achieved; (ii) If the results achieved by the purchaser providing the testimonial have not been achieved by at le"",t 10 percent of all purchasers of respondents' products during the time period covered by the testimonial, a statement of the average or median sales (or profits or earngs, whichever is included in the testimonial) of all purch"",ers of respondents' products during the time period covered by the testimonial, or the following statement: IMPORTANT NOTICE: THE RESULTS DESCRIBED ABOVE ARE SUBSTANTIALLY IN EXCESS OF THE AVERAGE RESULTS ACHIEVf D BY ALL OUR DISTRIBUTORS. OUR RECORDS SHOW THAT ONLY % OF OUR DISTRIBUTORS HAVE EQUALLED OR EXCEEDED THE PERFORMACE DESCRIBED ABOVE DURING THE INDICA TED TIME PERIOD; and (iv) If the results achieved by the purchaser provi(ling the