Following the U.S. Supreme Court's decision in AMG Capital Management, LLC v. FTC, the Federal Trade Commission's (FTC) new leadership is testing a different, more aggressive and creative tactic regarding civil penalties to obtain money from companies. In October 2021, the FTC resuscitated a rarely used statutory authority: Section 5(m)(1)(B) of the FTC Act (45 U.S.C. § 45(m)(1)(B)), better known as the Penalty Offense Authority. This Section permits the FTC to pursue civil penalties in federal district court where it: 1) proves that a defendant knew that its conduct was violative of the FTC Act and 2) where the FTC previously issued an administrative order (not a consent order) that determined that the specific conduct at issue was unfair or deceptive.
To establish that a company "knew" that its advertising conduct was deceptive or unfair, the FTC may send a company a Notice of Penalty Offenses (commonly known as a "Section 205 Synopsis") delineating conduct that the FTC previously found to be unfair or deceptive. Thus, if a company has received a notice and thereafter engages in the practices described in the Notice, the FTC is authorized to pursue civil penalties of up to $43,792 per violation in federal district court. The Notices of Penalty Offenses sent to more than 700 companies in mid-October clearly state in bold that:
Receipt of this Notice puts your company on notice that engaging in conduct described therein could subject the company to civil penalties of up to $43,792 per violation. See 15 U.S.C. § 45(m)(1)(B).
The Notices also recommend that recipients review their endorsement, testimonial and advertising review practices to ensure compliance and, thus, forewarn of potential increased FTC enforcement activity in this realm. In the FTC's view, each recipient of the Notice now has the requisite knowledge that the delineated conduct could lead to penalties of up to $43,792 per violation. In describing certain acts or practices that the FTC has previously found unfair or deceptive in administrative proceedings, the FTC is attempting to provide the framework for its exercise of Penalty Offenses. This will give the FTC greater leverage during investigations into the alleged use of false endorsements and testimonials, as the FTC will be in a stronger position to threaten litigation if a company is unwilling to meet demands made by the FTC during investigation negotiations.
Examples of Deceptive Advertising
In the Notices, the FTC lays out certain types of advertising that it views as deceptive:
- falsely claiming an endorsement by a third party
- misrepresenting that an endorser is an actual user, current user or recent user
- continuing to use an endorsement without good reason to believe that the endorser continues to subscribe to the views presented
- misrepresenting that an endorsement represents the experience, views or opinions of users or purported users
- using an endorsement to make deceptive performance claims
- failing to disclose an unexpected material connection with an endorser
- misrepresenting that the experience of endorsers represents consumers' typical or ordinary experience
The Notice goes on to state that positive consumer reviews are a type of endorsement that the FTC may find unlawful when they are fake or when a company fails to adequately disclose a material connection. Thus, in addition to endorsements used in traditional advertising mediums (i.e., television, online) the Notice applies to endorsements and claims made in posts by social media influencers. Consequently, if an endorser or influencer states a claim about a product, it is the FTC's expectation that the speaker actually used the product, that the claims are accurate and that consumers can expect the same from the product (i.e. the results are typical). And, when a company provides any sort of consideration for the review, the company should disclose that the endorser or influencer received something in return.
What Companies Should Know if They Received a Notice
The FTC has made it clear: ignorance is not an excuse. The FTC's decision to send the Notices signals that companies will not have a second chance to comply following a warning of unfair and deceptive conduct. All companies – not just those that received the notice – should review their current endorsement, testimonial and advertising review policies, procedures and practices to ensure compliance with the FTC's expectations.
The policies should impose an internal, independent compliance review protocol for all advertising and endorsement content utilized, and companies would do well to document the process for maintaining substantiation for claims made. Companies should also have in place monitoring and remediation mechanisms for claims made in advertising content posted by third-party affiliates and business partners such as social media influencers. Finally, companies should also ensure to carefully investigate and respond to consumer complaints alleging that claims made by the company did not align with the consumer's experience with the service or product, as those complaints can be a harbinger of regulatory scrutiny.
Companies should review the FTC's multiple resources to ensure compliance pertaining to endorsement, testimonials and advertising review.
It is essential that all companies that engage in social media marketing or online advertising have a robust and compliant social media policy that incorporates all of the FTC's guidance on testimonials and endorsements. Such a policy is not discretionary – it's mandatory.