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

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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.

As you well know, the FTC lost a good deal of its ability to get monetary relief in the AMG decision earlier this year; this is a vehicle that may be used to fill the gap to a degree. But with the big caveat that it only allows for civil penalties, not redress for consumers. Depending on the circumstances, however, civil penalties – which are calculated per violation – could actually exceed reasonable consumer redress. In the past decade, the authority has only been used in a few settled cases that challenged companies that allegedly mislabeled textiles as being made from bamboo. The more recent cases from 2013 and 2015 settled generally in the six-figure range.

Let’s talk a little bit about what is in the latest round of Notices. For starters, the focus is on misrepresentations that are made regarding profits or earnings that consumers can anticipate through participating in a moneymaking opportunity. And there are a series of more granular misrepresentations that are part of the Notice, including misrepresentations regarding:

  • The opportunity being given to only a limited number of participants.
  • Participants being screened for suitability.
  • Experience not being needed to earn income.
  • The need to act quickly to be considered for the opportunity.
  • The risk-free nature of the opportunity.
  • The nature of the position being offered (such as failing to disclose that it is a sales position).
  • The type of training that will be provided.

And much like the prior Notices, the FTC administrative cases cited go decades back into FTC history, from the 1950s to the 1980s. But one interesting twist here is worth noting: Although the statutory authority only applies to litigated administrative actions, this letter does include an interesting string-cite of more recent federal court decisions that have “confirmed” some of the determinations set forth in the Notice.

Now, before the AMG decision, Section 13(b) would have been a pretty straightforward way to seek money from companies that made deceptive earnings claims. But times have changed, and although consumer redress is still possible if the commission litigates administratively and eventually shows dishonest or fraudulent conduct, or if it alleges certain rule violations, these Notices are a potential path forward for future monetary recovery of the penalty variety.

To be clear, the existence of these Notices and the legal authority that allows for potential penalties does not mean that any eventual law enforcement in this area will succeed. There are defenses that may and will likely be raised by any companies alleged to have violated the provisions of these Notices – or the other Notices. But it is a notable warning shot from a unanimous commission (which is also pretty noteworthy of late), and it will be interesting to see whether these Notices lead to law enforcement actions and what impact they have on market behavior regardless.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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