As we have noted in earlier posts, in the wake of the Supreme Court’s holding that Section 13(b) of the FTC Act does not allow for monetary restitution, the Federal Trade Commission has been attempting to creatively utilize other provisions of the Act in order to obtain money from the companies and individuals it prosecutes. One threat it seems the FTC is now making good on is the use of the FTC’s long dormant Penalty Offense Authority, found in Section 5(m)(1)(B) of the Act.
That provision, which has rarely been used, authorizes the Commission to seek civil penalties against other parties where (1) a final cease and desist order has been entered against a party in an administrative proceeding under Section 5(b) of the FTC Act, (2) there is a Commission determination that a specific practice is unfair or deceptive, as part of that order, and (3) a party with actual knowledge that the practice is unfair or deceptive has engaged in that practice after the order became final. Civil penalties can add up quickly – potentially nearly $44,000 per violation.
Earlier today, the FTC sent warning letters to more than 700 companies recommending that recipients review their practices related to endorsements and reviews to ensure that those practices comply with the law. The warning letters are explicitly meant to serve as a predicate for what could be a sweep of civil penalty investigations of advertisers. In the Commission’s announcement of the warning letters, it emphasized that, in the Commission’s view, the blanket warning letter to over 700 companies in nearly every industrial sector “puts those businesses on notice that deceptive practices in the future could result in penalties of up to $43,792 per violation.”
The warning letters outline a broad array of purportedly deceptive practices the FTC has determined to be unfair or deceptive in prior administrative cases, including:
- claiming – directly or by implication – that a third party has endorsed a product or its performance when that’s not the case (this includes fake reviews);
- misrepresenting that an endorsement reflects the experience, views, or opinions of users or purported users;
- misrepresenting an endorser as an actual, current, or recent user of a product;
- continuing to advertise an endorsement unless the advertiser has good reason to believe the endorser continues to subscribe to the views presented in the endorsement;
- using testimonials to make unsubstantiated or otherwise deceptive performance claims – even if the testimonial is genuine;
- failing to disclose a connection between an endorser and seller of a product if that connection might materially affect the weight or credibility of the endorsement or review and if consumers wouldn’t reasonably expect that connection; and
- misrepresenting – explicitly or implicitly – that the experience of an endorser represents the typical or ordinary experience of users of the product.
The warning letter informs its more than 700 corporate recipients that “FTC staff is not singling out your company or suggesting that you have engaged in deceptive or unfair conduct.” Instead, staff is “widely distributing similar letters and the notice to large companies, top advertisers, leading retailers, top consumer product companies, and major advertising agencies.” It remains to be seen whether such a blanket “notice of penalty violation” will survive what will surely be multiple, inevitable court challenges.
These types of letters are usually precursors to investigations. The FTC recently passed resolutions giving staff wide latitude in issuing Civil Investigative Demands, so now may be a good time to review your practices. Be sure to read our other posts on endorsements, reviews, and influencers for tips on how to comply with the law.