Federal Trade Commission Doorway SignAs we wait to see how the Supreme Court will rule on the FTC’s redress authority and whether the FTC will potentially be controlled by Republicans or Democrats for at least the next four years, it is worth noting that Commissioner Chopra and one of his attorney advisors has written an interesting draft paper advocating for increased use of the FTC’s penalty authority under Section 5(m)(1)(B). And what is that exactly, you ask? Well, to the authors, that is part of the problem, as they argue that the FTC has improperly neglected an important tool in its law enforcement toolbox. The paper itself is lengthy (40+ pages) and goes into far more detail than we can do justice to in a blog post, but below are some highlights.

While the Commission typically only obtains civil penalties against parties that violate their own existing consent orders, Section 5(m) allows the Commission to seek civil penalties against a party who engages in conduct it knows to have been determined unlawful in an adjudicated Commission order (in other words, not a consent order and not necessarily an order against that company.) Section 5(m) was last used in 2009 with respect to allegedly misleading claims that textile products were made from bamboo, when in reality they were made from a type of rayon, sourced from bamboo. The Commission sent letters to numerous retailers notifying them of a prior Commission order relating to this finding, effectively putting them on “notice” under Section 5(m). Thus, with the stroke of a pen or the mailing of an envelope, the Commission was able to make an entire industry subject to civil penalties. Several years later, that effort bore fruit as the Commission obtained civil penalties from several retailers that allegedly engaged in such misrepresentations.

Apart from the fact that Section 5(m) permits civil penalties against first-time violators (and is not at risk of being struck down by the Supreme Court), what other advantages do the authors see for Section 5(m) over consumer redress? The authors point to several. First, consumer redress by definition is capped at however many dollars the wrongdoer received from consumers. The authors argue that in at least some cases, this may not serve as a sufficient deterrent. For example, a consumer may have incurred collateral medical costs or may have taken out a loan or given up other opportunities to pursue a multilevel marketing opportunity.

Second, often in cases where the alleged misconduct involves “established corporate actors,” the good or service at issue may have provided at least some real benefit to consumers, making it potentially more difficult for the Commission to obtain consumer redress as the parties argue over the ratio of benefit to harm. As a result, the authors argue, the Commission far too often declines to seek redress in such cases. The authors further argue that such “no-money settlements against established corporate actors seriously impair the Commission’s credibility.”

The authors then illustrate five areas of misconduct that they believe are prime candidates for application of Section 5(m). As noted above, application of Section 5(m) does require the existence of a litigated Commission order, though there is no limitation on how old the order can be. The order, though, must “relate” to the act or practice in question, which can raise the question as to how close the nexus must be. In the matter involving textiles labeled as bamboo, the allegation was that because the proper legal name for the material was “rayon,” it was misleading to refer to the textile simply as “bamboo” (“rayon made from bamboo” would have been acceptable.) The FTC’s Section 5(m) letters included a synopsis of FTC litigated decisions which found more generally that it was a violation of Section 5 to fail to use proper fiber names in labeling and advertising textile products but did not specifically include any litigated cases involving the use of bamboo to describe a fiber. While that may relate closely enough to the alleged violation, how close the fit needs to be may well become an issue were the FTC to more aggressively utilize this remedy.

But we digress. The five areas the authors identify as ripe for Section 5(m) are:

  • For-profit college fraud.
  • False earnings claims targeting workers (for example, multilevel marketing).
  • Online disinformation (for example, fake reviews and use of influencers without disclosures).
  • Deceptive data harvesting.
  • Illegal targeted marketing (for example, use of credit reports for targeted marketing).

Finally, the authors close by urging the Commission to keep Section 5(m) in mind as it writes and courts adopt new orders to cover other types of conduct.

We urge you all to give the paper a read or at least a good skim. It is no doubt an interesting time at the FTC.