In April 2023, the Federal Trade Commission announced a number of consumer protection actions and inquiries involving an important U.S. Supreme Court Ruling regarding the ability of defendants in FTC and SEC actions to raise constitutional claims regarding Administrative Law Judge proceedings in federal court, notices of penalty offenses and warnings relating to unsubstantiated product claims, a broad-sweeping proposed rule making it easier for consumers to “click to cancel” recurring subscriptions and memberships, and social media and video streaming platforms’ methods for screening for misleading advertisements.

The FTC also announced its first action under the Opioid Addiction Recovery Fraud Prevention Act, agency attempts to block the alleged facilitation of credit card laundering for tech support scammers, a joint lawsuit with the Florida Attorney General against chargeback mitigation business, crackdowns on illegal telemarketing operations, and a growing interest in the technical side of pixel tracking.

Supreme Court Ruling Hobbles FTC ALJ Proceedings

On April 14, 2023, the U.S. Supreme Court afforded defendants the ability to directly challenge the structural constitutionality and existence of the Federal Trade Commission (and other federal agencies, including the Securities and Exchange Commission) in federal court without having to first slog their way through pre-enforcement administrative proceedings that many believe deprive defendants of due process. Axon Enterprise, Inc. v. FTC (consolidated with SEC v. Cochran).

At issue in Axon was whether defendants in an agency’s administrative enforcement action are permitted to challenge its structure or processes in a federal district court or must first endure the agency’s administrative proceeding, which may be costly and time consuming. By ruling in the affirmative, the Supreme Court has once again brought into question the scope and legitimacy of the agencies’ respective enforcement authority.

The FTC administrative adjudication process, in part, consists of the FTC’s commissioners voting to initiate complaints. Then, FTC staff investigates and prosecutes those complaints before the agency’s Administrative Law Judge. The commissioners themselves then assess (and virtually always affirm) the complaints that they voted to initiate. That is an enormous amount of discretion bestowed upon the prosecutor, judge and jury. Defendants are only permitted to appeal in federal court once all three steps are completed.

The unanimous opinion was written by Justice Elena Kagan.

Axon sued the FTC in 2020 in federal court in Arizona following an investigation by the agency into its 2018 acquisition of a rival body-camera provider. The company said the agency acts as "prosecutor, judge and jury" in violation of the U.S. Constitution's Fifth Amendment guarantees of due process and equal protection under the law, and that its administrative law judges are unlawfully insulated from the president's power to control executive branch officers under the Constitution's Article II. In 2021, the Ninth U.S. Circuit Court of Appeals threw out Axon's case, ruling that under the FTC Act the company must raise its claims in the administrative proceeding first.

Since that time, the FTC has urged Congress to provide it with expanded 13(b) authority. The agency has also aggressively sought to utilize rulemaking authority to create new legal regulations that provide for statutory civil penalties, including, but not limited to, proposed rulemakings relating to the Negative Option Rule, a Non-Compete Rule, the Use of Reviews and Endorsements, expansion of the Telemarketing Sales Rule, Earnings claims, Dot Com Disclosures, and the Business Opportunity Rule.

The March 31, 2023, Commission vote to approve the substantiation notice and authorize the distribution of both notices was 3-1, with then-Commissioner Christine S. Wilson voting no and issuing a separate statement on her final day as a Commissioner.

Commissioner Rebecca Kelly Slaughter issued a statement, joined by Chair Lina M. Khan and Commissioner Alvaro Bedoya. The primary staffers in this matter were Michael Ostheimer and Christine DeLorme in the FTC’s Bureau of Consumer Protection.

The Axon decision may trigger additional FTC penalty offense notice and rulemaking efforts, agency referral of matters to the U.S. Department of Justice - Consumer Protection Branch for civil prosecution, and further efforts by the FTC seeking Congressional intervention.

Digital marketers that interested in learning more about the practical ramifications of the Axon decision, including potential motions to stay judicial enforcement proceedings and attacks on the DOJ’s authority to act on the FTC’s behalf, should consult with an experienced FTC CID attorney.

See the full article discussing this important judicial decision.

More FTC Notices of Penalty Offenses: Health Product Claim Substantiation Warnings

The FTC continues its aggressive use of penalty offense notices in an effort to secure monetary redress.

Most recently, the agency sent notices to almost 700 companies regarding the substantiation of product claims. The notices warned recipients that they must avoid deceiving consumers with advertisements that make product claims that cannot be substantiated with reliable evidence or face hefty monetary civil penalties. Health and safety claims must be substantiated with “competent and reliable scientific evidence.”

The claim substantiation penalty offense notices are the fourth round, following prior notices covering education practices, endorsements and money-making opportunities.

“The requirement for advertisers to have adequate support for their advertising claims at the time they’re made is a bedrock principle of FTC law,” said FTC lawyer Sam Levine, Director of the FTC’s Bureau of Consumer Protection. “The prospect of steep civil penalties will help ensure that advertisers don’t play fast and loose with the truth.”

The FTC is now using its penalty offense authority to remind advertisers of the legal requirement to have a reasonable basis to support objective product claims and to deter them from making deceptive claims in the future. Notices of penalty offenses allow the agency to seek civil penalties -- up to $50,120 per violation -- against a company that engages in conduct that it knows has been found unlawful in a previous FTC administrative order, other than a consent order.

The most recent slew of notices of penalty offenses were directed to marketers of OTC drugs, homeopathic products, dietary supplements and functional foods. The agency has placed them on notice that they could incur significant civil penalties if they fail to adequately substantiate their product claims in ways that run counter to the litigated decisions of prior FTC administrative cases.

The notices outline specific unlawful acts and practices, including:

• Express and implied product claims made without reasonable evidence
• Health of safety claims made without possession of appropriate scientific evidence (or evaluation by a qualified professional in the field)
• Express and implied misrepresentations of the type or quality of substantiation utilized to support claims
• Express and implied representations that products can treat, cure, prevent or mitigate a serious disease without at least one random, well-controlled, double-blinded, qualified human clinical trial that yields significant results
• Representations that express and implied claims have been clinically or scientifically proven reasonable evidence establishing acceptance within the applicable scientific community

Although the initial distribution of the notice is limited to those making or likely to make health claims, the notice is not limited to health claims and applies to any marketer making claims about the efficacy or performance of its products. Clearly, the FTC is seeking to impose a more rigid advertising claim substantiation standard and related disclosure requirements.

The letter to the recipients also provides them with a copy of a previously approved notice of penalty offenses regarding the use of endorsement and testimonials. That notice addresses 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.

Finally, the letters suggested that the recipients consult FTC staff’s recently issued “Health Products Compliance Guidance.” The Guidance dramatically overhauled the 1998 dietary supplement guidance and departed from the FTC’s prior, flexible interpretation of the “competent and reliable scientific evidence” threshold.

Importantly, the recent penalty offense notices are not limited to health claims. Rather, the substantiation principles apply to all product claims.

FTC Proposes Rule Making it Easier for Consumers To “Click To Cancel” Recurring Subscriptions and Memberships

As the author previously blogged about here, the Federal Trade Commission recently announced a proposed a “click to cancel” provision requiring sellers to make it as simple for consumers to cancel their enrollment as it was to enroll. For example, if a consumer can sign-up online, cancellation much be able to be effectuated on the same website, in the same number of steps.

That is just one of several significant updates FTC attorneys are proposing to its rules regarding subscriptions and recurring payments.

The FTC is also proposing:

• Expanded Scope: The proposed “Rule Concerning Recurring Subscriptions and Other Negative Option Plans” would cover all forms of negative option marketing, whether via internet, phone, through print materials, and in-person transactions. Any persons “selling, offering, promoting, charging for, or otherwise marketing a negative option feature” would be subject to the new Rule.
• Additional Consent Requirements: The proposed rule requires marketers to obtain independent consent for the negative option feature and precludes the inclusion of additional information that could interfere a consumer’s ability to provide consent. It sets forth requirements about how consent must be obtained. Marketers would be required to obtain consent for the whole transaction and maintain proof for three years.
• Additional Disclosure Requirements: The proposed rule requires marketers to disclose “any material terms related to the underlying good or service that is necessary to prevent deception,” regardless of whether it relates to the negative option feature, including (i) that consumers’ payment will be recurring; (ii) the deadline for consumers to stop charges, (iii) the amount or range of costs that may be incurred; (iv) the date the charge will be submitted for payment; and (v) information about how to cancel. The proposed rule also sets forth instructions about how to make disclosures.
• New requirements before making additional offers: The proposed rule would allow marketers to pitch additional offers or modifications when a consumer tries to cancel their enrollment. However, before making such pitches, sellers must first ask consumers whether they want to hear them. In other words, a seller must take “no” for an answer and upon hearing “no” must immediately implement the cancellation process.

• New requirements regarding reminders and confirmations: The proposed rule would require sellers to provide an annual reminder to consumers enrolled in negative option programs involving anything other than physical goods, before they are automatically renewed. The reminders must identify the product or service, the frequency and amount of charges and how to cancel.

“Some businesses too often trick consumers into paying for subscriptions they no longer want or didn’t sign up for in the first place,” said FTC lawyer and Chair Lina M. Khan. “The proposed rule would require that companies make it as easy to cancel a subscription as it is to sign up for one. The proposal would save consumers time and money, and businesses that continued to use subscription tricks and traps would be subject to stiff penalties.”

The notice of proposed rulemaking is part of the FTC’s ongoing review of its 1973 Negative Option Rule, which the agency uses to combat unfair or deceptive practices related to subscriptions, memberships and other recurring-payment programs.

Caveat, the new rules pertaining to what the FTC refers to as “Negative Option Programs” would be applicable to “negative optioning” marketing in all media, including telephone, online, print and in-person transactions. They would effectively require all marketers engaged in automatic renewals to revisit renewal and cancellation compliance protocols.

These programs are widespread in the digital advertising marketplace and can provide substantial benefits to both consumers and businesses. However, without first engaging in preventive compliance legal work with qualified FTC practice counsel they can become dangerous when marketers fail to make adequate disclosures, bill consumers without their consent, or make cancellation either difficult or impossible—such as by requiring customers to cancel in person or keeping them stuck on hold waiting to talk to customer service.

The FTC vote approving publication of the notice of proposed rulemaking was 3-1, with Commissioner Christine S. Wilson voting no. Chair Khan issued a separate statement, in which she was joined by Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya.

Commissioner Wilson issued a dissenting statement wherein she notes that the updated rules would cover services “wholly unrelated to the negative option feature” and expand the FTC’s reach beyond the automatic renewal space. In effect, it would enable the FTC to regulate marketers using negative option programs for misrepresentations (e.g., about the features, efficacy or characteristic of a product/service) that are not related to the automatic renewal feature, and obtain civil penalties for almost any misrepresentation.

Noteworthy and something that should not get lost here is that the proposed rule prohibits negative option sellers from “misrepresenting, expressly or by implication, any material fact related to the transaction, such as the Negative Option Feature, or any material fact related to the underlying good or service.” Commissioner Wilson characterized the proposed rule as an “end-run around the Supreme Court’s decision in AMG” in her dissent.

The expanded authority to seek redress and civil penalties for misrepresentations is arguably the most dramatic and controversial aspect of the proposed rule.

The FTC has developed a fact sheet summarizing the proposed changes to the Negative Option Rule. Digital marketers should also bear in mind applicable state legal regulations, and their potential applicability to negative option, automatic renewals, subscriptions, free trial conversions and continuity offers.

FTC Issues Orders to Social Media and Video Streaming Platforms Seeking Information on How They Screen for Misleading Ads and Counterfeit Products

The FTC also recently announced that it issued orders to social media and video streaming companies seeking information about how the platforms scrutinize and restrict paid commercial advertising that is deceptive or exposes consumers to fraudulent health-care products, financial scams, counterfeit and fake goods, or other fraud. The orders were sent using the FTC’s 6(b) authority, which authorizes the Commission to conduct wide-ranging studies that do not have a specific law enforcement purpose.

The amount of money consumers have reported losing to fraud that originated on social media platforms has skyrocketed since 2017. In 2022 alone, consumers reported losing more than $1.2 billion to fraud that started on social media, more than any other contact method, according to FTC data.

The orders, which the companies are required to comply with by law, were sent to: Meta Platforms, Inc.; Instagram, LLC; YouTube, LLC; TikTok, Inc.; Snap, Inc.; Twitter, Inc.; Pinterest, Inc.; and Twitch Interactive, Inc.

“Social media has been a gold mine for scammers who tout sham products and other scams that have cost consumers enormously in recent years,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “This study will help the FTC ensure that social media and video streaming companies are doing everything they can to keep scammers and deceptive ads off their platforms.”

The orders are intended go collect information about the companies’ standards and policies related to paid commercial ads and their processes for screening and monitoring for compliance with those standards and policies, including through human review and the use of automated systems. The orders also require the companies to report their ad revenue, the number of ad views, and other performance metrics, including for ads involving categories of products and services more prone to deception such as those intended to treat, prevent, or cure substance use disorders and tout income opportunities.

According to the FTC, the orders will help the Commission better understand how prevalent deceptive advertising is on social media and video streaming platforms, the consumers who may be harmed by that advertising, and the effectiveness of the platforms’ oversight of advertisers, including whether the companies treat English-language and Spanish-language ads differently. The study also may shed light on how the platforms create ads, including any use of generative artificial intelligence, and track, and classify ads, as well as the ad formats offered to advertisers, including shoppable ads, which allow consumers to purchase products or services directly through the ad, and virtual reality and other extended reality ads.

In addition, the Commission seeks information on how these platforms help consumers distinguish advertising and other commercial messages from other types of content, including disclosure tools for endorsers and influencers.

The orders seek information for the calendar years 2019 through 2023, which allows for the Commission to study relevant business conduct since the start of the COVID-19 pandemic.

Medical Clinic and its Owners Sued for Alleged False and Unsubstantiated Claims Regarding the Treatment and Cure of Addiction and Other Diseases

The FTC pursued its first action under the Opioid Addiction Recovery Fraud Prevention Act, suing a doctor and a set of companies she controls that operate as a medical clinic, for allegedly making a wide range of false or unsupported claims for addiction treatment services, cancer treatment services, and the treatment of other serious conditions.

The Department of Justice filed the case on the FTC’s behalf. The proposed order settling the Commission’s complaint bars the doctor and her clinic from making such purportedly unsupported claims and requires her to pay a $100,000 civil penalty.

FTC Acts To Block Payment Processor’s Alleged Facilitation of Credit Card Laundering for Tech Support Scammers

According to a recent announcement, the FTC has acted to stop a multinational payment processing company, along with its CEO and chief strategy officer, from allegedly serving as a facilitator for tech support scammers through credit card laundering.

The defendants have agreed to court orders that prohibit them from any further payment laundering and require them to closely monitor other high-risk clients for illegal activity. The complaint and orders were filed by the U.S. Department of Justice on behalf of the FTC.

The FTC’s complaint against the company, its CEO, and its chief strategy officer charges that the defendants were at the center of several offshore tech support scams, processing tens of millions of dollars in charges and giving the scammers access to the U.S. credit card network.

FTC, Florida Attorney General File Lawsuit Alleging Thwarting Consumers Trying to Reverse Disputed Credit Card Charges

The FTC and the State of Florida have filed suit against a chargeback mitigation business for purportedly unfairly thwarting consumers that were trying to dispute credit card charges through the chargeback process. According to the complaint, the company sent screenshots on behalf of their clients to credit card companies that supposedly show that consumers had agreed to the disputed charges—often recurring monthly subscription charges.

The complaint alleges that, in many instances, these screenshots have not actually been from the website where consumers made the disputed purchases and that the company ignored clear warning signs the website screenshots were misleading.

Operators of Alleged Telemarketing Scam Face Lifetime Ban from Extended Automobile Warranty Industry

As a result of an FTC lawsuit, the operators of an alleged telemarketing scam that purportedly called hundreds of thousands of consumers nationwide and allegedly scammed them out of more than $6 million for expensive “extended automobile warranties,” will face a lifetime ban from the extended automobile warranty industry and from all outbound telemarketing.

According to the FTC, the defendants falsely claimed to be affiliated with vehicle makers and deceptively claimed to offer “bumper to bumper” protection. The defendants, along with their owners, have agreed to the terms of the orders.

FTC Office of Technology Interested in Technical Side of Pixel Tracking

The FTC’s Office of Technology recently published a blog post highlighting the enforcement actions against GoodRx and BetterHelp, two digital healthcare platforms, for allegedly sharing user health data with third parties for advertising.

This was purportedly done through third-party tracking pixels, which enable platforms to amass, analyze, and infer information about user activity. The blog post aims to highlight key practices and trends in online ad tracking – and questions of interest across competitive dynamics, consumer harms, and business practices across data processing, use, monetization, retention, and management.

FTC Focusing on Illegal Robocalls Originating from Overseas

According to the FTC, U.S. consumers are bombarded by millions of unwanted, illegal robocalls each month, both to their landlines and cell phones. The agency’s data show that a significant proportion, if not the majority, of illegal robocalls originate from overseas.

To stop these illegal overseas calls, the FTC has implemented Project Point of No Entry, targeting “point of entry” or “gateway” Voice over Internet Protocol service providers and warning they must work to keep illegal robocalls out of the country.

Through Project PoNE, the FTC is: (i) identifying point of entry VoIP service providers that are routing or transmitting illegal call traffic; (ii) demanding they stop doing so and warning their conduct may violate the Telemarketing Sales Rule; and then (iii) monitoring them to pursue recalcitrant providers, including by opening law enforcement investigations and filing lawsuits when appropriate.

The FTC can seek civil penalties and court injunctions to stop TSR violations. It can also seek money to refund to consumers who were defrauded via illegal telemarketing calls. The FTC coordinates directly with the agency’s federal and state partners, which support the program and pursue their own actions to fight illegal telemarketing robocalls.