Taking a Break from the FTC Drama

The latest Federal Trade Commission (FTC or Commission) public meeting was notable for what did not happen – there were no 3-2 votes taken over the strong objections of the Republican commissioners. With former Commissioner Rohit Chopra’s departure to head the CFPB, for at least the next few weeks – or, more likely, months – we are in 2-2 territory at the agency. Until, of course, the Senate acts on the nomination of Alvaro Bedoya, the founding director of the Center on Privacy & Technology at Georgetown Law. (Note: His hearing was held earlier this week.) So let’s dive into a relatively tame Commission meeting.

For a dramatic change of pace, the Commission’s latest public meeting featured the consumer comment section upfront, and we heard from 15 different consumers raising issues ranging from supply chain challenges to a request for a study on franchise issues to surveillance marketing concerns. Chair Lina Khan kicked off this discussion by indicating that the FTC is making sure that the comments are heard and being integrated into the work that the agency is doing on the consumer protection and competition sides. That makes sense to me – but I continue to wonder how the agency will accomplish this, given the breadth and diversity and importance of issues being raised though this public comment section of the Commission meetings. (As an aside, the FTC’s press office director does such a good job at enforcing the two-minute speaking time limit that I may start a petition to have her assume responsibility for the Academy Award time limits.)

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Much Ado About Penalties

So we have been writing quite a lot about the recent deluge of FTC Notice of Penalty Offense letters. And as we have told you, at their core, the letters are a vehicle that would potentially allow the agency to seek significant civil penalties against companies with actual knowledge that their actions violate the principles described in the letters. My colleagues recently wrote a great blog discussing some of the limitations of this authority and raising questions about the legal underpinnings of aspects of this authority.

But there are other ways the FTC can seek to impose penalties. One way is through a company violating its own administrative order. Another is through Congress expressly giving the FTC penalty authority, and we have seen that in specific areas such as telemarketing and children’s privacy. But there is language afoot in current budget legislation that would dramatically change the landscape and allow the FTC to broadly seek civil penalties for initial violations of the FTC Act’s prohibitions on unfair or deceptive acts or practices. This would be a significant game changer if it becomes law. Longtime FTC watchers may recall that back in 2010, there was a somewhat similar move afoot to give the FTC this type of broad fining authority. It never happened.

After 23 years of living in D.C., I have learned to never predict what Congress will or will not do, but we will be watching this provision to see if it disappears or actually becomes law. For now, we aren’t running around screaming that the sky is falling, but this would be a very big deal if it actually happened. We will keep you posted on this and other FTC developments.

Less to the FTC’s Notice of Penalty Offenses Than Meets the Eye?

The FTC’s Notice of Penalty Offenses concerning endorsements and testimonials is barely a week old and it’s likely already had its intended effect. Hundreds, if not more, of consumer products companies are taking a second or third look at their practices when it comes to endorsements and testimonials and are beefing up their training and guidance materials. We blogged about the basics concerning the FTC’s notice when it first came out, but it is perhaps time to take a closer look at the extent to which the FTC has a legal basis to assert the right to civil penalties. Please, however, do not take our analysis of the FTC’s legal authority as an invitation to go back to not caring about how your company uses endorsements and testimonials; no one likely wants to find themselves in the position of having to argue to a court about whether the FTC’s notice is legally sufficient. However, given that this is a tool the FTC has begun using extensively and promises to utilize even more in the future (just today, the FTC announced an additional round of letters), we thought it worth a closer look at the legal underpinnings of the FTC’s actions.

As we previously wrote, Section 45(m)(1)(B) of the FTC Act permits the FTC to notify companies that certain acts or practices have been found in administrative decisions, other than consent orders, to be deceptive or unfair and, having put those companies on notice, it permits the FTC to impose civil penalties should the companies engage in the same acts or practices. A key question regarding the FTC’s authority in this regard is how close the fit has to be between the act or practice found unlawful in the administrative proceeding and the subsequent act or practice engaged in by the party that has been put on notice. For example, suppose the FTC prevailed in an administrative proceeding with regard to a deceptive weight-loss health claim; could it then send a letter to hundreds of companies notifying them of the decision’s finding that making health claims without adequate substantiation is deceptive and putting the companies on notice that they are liable for civil penalties if they too make health claims without adequate substantiation? How close must the facts of the decided case match the facts in the subsequent matter? Does the answer to that question depend on how much factual context informs the legal conclusion? Given that the premise of Section 45(m)(1)(B) is actual notice that the act or practice is deceptive or unfair, presumably broad characterizations of an act or practice as unlawful in a situation where facts are important (e.g., what connections are material) are too broad. In the above hypothetical, companies still will not have actual notice as to whether the substantiation they may have for a specific type of health claim other than weight-loss claims is or is not reasonable.

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The Latest FTC Policy Statement Sets Its Sights on Negative Option Marketing

Policy statements are neither rules nor notices of penalty offenses, but when the FTC issues a policy statement discussing an area that has been the subject of a lot of enforcement activity, it warrants serious attention, particularly when the press release discusses ramping up enforcement on “illegal dark patterns that trick or trap consumers.” That’s some pretty strong language.

The latest FTC missive arrives with a 3-1 vote featuring a Commissioner Wilson dissent and a Commissioner Phillips concurring statement. More about the statements later, but for now let’s talk about the important content in the Enforcement Policy Statement Regarding Negative Option Marketing (Policy Statement). Whether you call them subscription services or negative options, the fact is that a number of different FTC laws and regulations, including the Restore Online Shoppers’ Confidence Act (ROSCA), the Telemarketing Sales Rule (TSR) and Section 5 of the FTC Act, are part of this regulatory ecosystem. But at its core, the Policy Statement focuses on three fundamental issues that are central to overall FTC negative option enforcement, namely, how disclosures are provided, how consent is obtained and the cancellation process. The provisions of the Policy Statement are not a total surprise because they codify many of the requirements that the FTC has imposed in Consent Orders arising from ROSCA cases. Now, however, all marketers are on notice as to what the FTC expects marketers to do to avoid ROSCA violations, and those requirements far exceed what the statute actually says.

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A Synopsis by Any Other Name Is Still an Important Thing To Consider

Whether you are old-school and call them Synopses or you use the new, more in-your-face term Notices of Penalty Offenses, the fact is that this tool has dramatically and quickly increased in significance under Chair Lina Khan’s Federal Trade Commission (FTC), and this warrants attention. Round one focused on 70 for-profit colleges; round two went broader, with over 700 letters sent out regarding endorsements and testimonials. And now for round three, the FTC has focused on moneymaking opportunities and earnings claims, with 1,100 recipients receiving letters, including companies involved in multilevel marketing and coaching services, franchises, and large and small gig-app companies. And as an added bonus, the 1,100 recipients in the latest round also received a copy of the Notice regarding endorsements and testimonials.

If you haven’t been paying attention, these Notices are a vehicle that may allow the FTC to seek civil penalties against companies that violate the terms of a Notice. It is an older authority, dating back to the 1970s, that fell into disfavor after a significant 8th Circuit U.S. Court of Appeals loss in the late 1980s and after the commission started to use Section 13(b) to obtain monetary relief in federal court. But this authority has resurfaced, much like Jason Voorhees 10 minutes before the end of a “Friday the 13th” movie. In short, the Notice sets forth specified practices from prior litigated commission adjudications that – the commission alleges – have been found to be deceptive or unfair and can allow for civil penalties against companies with “actual knowledge” that these practices have been deemed deceptive or unfair. It is a somewhat unusual authority, but it can definitely be the real deal if there is a close enough fit between the case law cited and the current conduct.

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Allow Me To Introduce Myself

I’m a longtime consumer protection practitioner but a new blogger in a new role. Now, I am well aware that there are many talented folks out there writing about these issues, but I will try my best to make these entries worthwhile, concise and valuable reads, with maybe just a touch of snark. And after this one, I promise to make them far less about me and far more about what’s going on at the Federal Trade Commission (FTC), and occasionally other consumer protection and privacy enforcement agencies.

In days past, you might have been able to get some good insights and helpful information from listening to career FTC staff speak at conferences, trade associations and other public events. But those days of frequent, insightful FTC staff on the speaking circuit have been on hold for many months now. Making blogs like this perhaps even more useful than days gone by. I am still a bit perplexed as to why the massive merger-filing surge prevented consumer protection staff from speaking, but I digress.

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CARU’s Revised Guidelines Are Not Kid-ding Around

By: Amy Mudge, Mike Ingram and Carolina Alonso

The Children’s Advertising Review Unit (CARU) recently held their “Kidvertising” workshop to discuss the revised CARU Advertising Guidelines, which are set to take effect on January 1, 2022. The workshop tackled several issues important to child advertising including diversity and inclusion, influencers, and in-app and in-game advertising. Throughout the workshop, CARU continued to emphasize that children can often struggle to determine what is and what is not an advertisement. It was for many the first opportunity to hear the perspectives of the relatively new CARU director, Mamie Kresses, as well as the CARU staff, Jim Davis and Debra Policarpo.

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FTC Puts 700+ Companies on Notice to Expect to Pay Penalties for Any Endorsement Violations

By: Linda Goldstein, Amy Mudge, Randy Shaheen, Jack Ferry and Matt Renick

The Federal Trade Commission (FTC or Commission) announced on Oct. 13 a widespread enforcement action against deceptive endorsement practices. The Commission sent a Notice of Penalty Offenses to more than 700 companies, notifying them that conduct related to fake or misleading endorsements and reviews could subject them to significant civil penalties. Deceptive reviews and endorsements have been a focus of recent FTC cases and guidance, but these letters reflect its largest action to date and serve as a warning to industry that the Commission intends to actively enforce this area of the law.

The FTC notes in the press release and template letter that its Endorsement Guides and recent enforcement actions in this space best illustrate violations of the law. It cites the following examples of misleading conduct:

Falsely claiming an endorsement by a third party; misrepresenting whether an endorser is an actual, current, or recent user; using an endorsement to make deceptive performance claims; failing to disclose an unexpected material connection with an endorser; and misrepresenting that the experience of endorsers represents consumers’ typical or ordinary experience.

When the FTC refers to an “endorser,” it defines that term as anyone with a material connection to the company. Typically, this means a person who is paid, but it could also mean a person who is sent a free product or receives some other form of compensation. Companies should review their marketing materials to make sure that their endorsers are not making any deceptive claims. If you cannot make a claim in your own advertising, then you cannot pay or otherwise compensate someone to make it for you. This includes third-party endorsers who are incorporated into traditional advertising such as a commercial, as well as influencers who are compensated to post about a product or service on social media.

It’s also important to note that the FTC specifically mentions reviews, which can be a kind of endorsement if there is a material connection between the reviewer and the company. The FTC has previously taken enforcement action against fake reviews. This affects more than companies fraudulently posting fake reviews, however, because if a company compensates a reviewer, for example, by offering a small gift to everyone who posts a review, technically, it must disclose that material connection.

As a reminder, the FTC usually enforces this type of conduct through Section 5 of the FTC Act, which broadly prohibits deceptive practices in advertising. The FTC’s ability to obtain equitable relief under Section 5 was stymied by a recent Supreme Court ruling, as explained in our previous blog post on the subject. Here, the Commission is working around that limitation by sending notice letters of conduct that has been found unlawful in previous FTC administrative orders. This gives companies the actual knowledge required to create liability under 15 U.S.C. § 45(m)(1)(B) that an act or practice is unlawful. The civil penalty is up to $43,973 per violation.

Notably, the FTC expressly states both in the list of companies receiving a letter and in the sample letter template that “FTC staff is not singling out your company or suggesting that you have engaged in deceptive or unfair conduct.” Instead, the Commission sent these letters to the largest companies in different areas. This gives it the ability to take action against these companies under 15 U.S.C. § 45(m)(1)(B) and also notifies the marketplace at large that these practices will not be tolerated.

Whether or not they received a letter, companies should be reviewing how they treat endorsements and reviews. We advise clients on these issues every day. If you have any questions about best practices in these areas, please reach out.

Slaughterhouse-Five: Myth-Busting with the Commissioner at NAD 2021

By Randal Shaheen and Matthew Renick

To kick off the final day of the National Advertising Division’s (NAD) 2021 virtual conference last week, FTC Commissioner Rebecca Slaughter gave a keynote address laying out her views on consumer privacy and the digital data economy writ large. Specifically, Commissioner Slaughter sought to bust five myths about privacy and data collection, and offered her perspective on where we ought to go in light of renewed congressional and regulatory scrutiny of data collection practices. More generally, Commissioner Slaughter hopes we stop thinking about these issues as “privacy” issues and instead start thinking about them in the context of “data abuses.” Here’s a summary of what the Commissioner had to say.

Myth #1: “Privacy” is the only concern for consumers in digital markets.

This first myth goes to the core of Commissioner Slaughter’s remarks: by thinking about these issues as ones of consumer privacy alone, rather than as data abuses, regulators and legislators may be excluding from their gaze other critical issues that exist in digital markets. Some examples the Commissioner offered include harms to civil rights and equal opportunity, the vast spread of misinformation, and increasing labor exploitation. Commissioner Slaughter acknowledged that although these issues “all stem from the same indiscriminate data collection,” these are broader than simply “privacy” issues and are worth investigating as prohibited unfair practices. Broadly speaking, the Commissioner would prefer to target problematic business practices rather than focus more narrowly on consumer knowledge and consent to companies’ data practices.

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NDI Letter Shows CBD’s Position Unchanged at FDA

The 2018 Farm Bill legalized hemp-derived cannabidiol (CBD) at the federal level, but in the nearly three years since then, little has changed from the perspective of the U.S. Food & Drug Administration (FDA). From the start, FDA’s regulatory position has been complicated by CBD’s previous approval as the active ingredient in the prescription drug Epidiolex. Subject to limited exceptions, the active ingredient in a drug cannot be added to food or dietary supplements. This restriction makes sense in the abstract – if a doctor has to prescribe something, it shouldn’t be available over the counter as a dietary supplement – but it has created a hurdle for CBD that many in the industry view as unfair. Ingredients that are commonly added to food or dietary supplements prior to becoming a drug are exempt from this prohibition, but because cannabis has been prohibited as a controlled substance, CBD never had an opportunity to be lawfully marketed in food and dietary supplements. Now that CBD is already approved as the active ingredient in a drug, it’s proving much more difficult for FDA to work around this restriction. Consequently, FDA prohibits adding CBD to a food or dietary supplement, but for practical purposes, it has only taken enforcement action against companies making drug claims in connection to the substance.

The latest development reveals that FDA’s position is unchanged. In August 2021, the agency released a letter to CBD company Charlotte’s Web stating that it will not approve the company’s application to market its Full Spectrum Hemp Extract product as a dietary supplement. This letter was in response to Charlotte’s Web’s submission under the New Dietary Ingredients (NDI) Notification process, by which a company notifies FDA that it wishes to market a dietary supplement with “new dietary ingredients.” Significantly, the process includes the agency’s review of information submitted by the manufacturer showing that the ingredient is reasonably expected to be safe. While FDA rejected the application on the grounds of CBD’s inclusion as the active ingredient in a drug, it also examined the evidence provided. FDA ultimately concluded that it still has concerns about the safety of the product, including that the studies did not address liver and reproductive toxicity. Charlotte’s Web issued a letter disputing FDA’s rationale and pointing to evidence on this issue, but it’s notable that the process even reached this point. Prior to this letter from FDA, and a similar one to Irwin Naturals released recently, the FDA considered NDI notifications solely on the basis of CBD’s presence in Epidiolex and did not evaluate safety information. Since CBD has been legalized, much of the conversation has centered around whether there is any testing showing its safety or benefits. The fact that manufacturers are starting to have that discussion with FDA shows how the industry is growing and developing the substantiation it will need for advertising claims. This may not alone overcome the prohibition on a drug ingredient in dietary supplements, but it is a strong sign for the industry and will be important going forward.

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