FTC "resurrects" Penalty Offense Authority for unlawful endorsements and testimonials

Hogan Lovells

The Federal Trade Commission (FTC) has notified businesses that it is “resurrecting” its Penalty Offense Authority, an enforcement tool that had not been used by the agency since the 1980s. The Penalty Offense Authority, established under the FTC Act, allows the agency to seek civil penalties for practices that violate the FTC Act if such practices have been found unfair or deceptive under a prior administrative order and the party knew that the conduct was unfair or deceptive. The FTC’s most recent notice is intended to put more than 700 companies on notice regarding the endorsement and testimonial practices that the FTC considers to be unfair or deceptive.

An Alternate Civil Penalty Approach Under Section 5

The FTC’s move to revive this enforcement tool appears to be motivated, at least in part, by the Supreme Court’s April 2021 decision in AMG Capital Management, LLC v. FTC, which limited the agency’s authority under Section 13(b) of the FTC Act to seek monetary relief for unfair or deceptive conduct. The action also is consistent with the more aggressive enforcement posture signaled by FTC Chair Lina Khan and reflected in an article written by former FTC Commissioner Rohit Chopra and newly appointed director of the FTC’s consumer protection bureau, Samuel Levine. That article made the case for the FTC to “resurrect” it’s rarely used Penalty Offense Authority,1  which Chopra and Levine argued could “be used to systematically eradicate unfair or deceptive practices through administrative adjudication and market participant notification.”2

The Penalty Offense Authority under Section 5(m)(1)(B) of the FTC Act permits the agency to seek civil penalties if: (1) the agency previously determined that a practice is unfair or deceptive and has issued a cease and desist order; and (2) the agency proves that the company has “actual knowledge that such act or practice is unfair or deceptive and is unlawful.” 3 The civil penalties can be significant—in excess of $40,000 per violation, which may be assessed on a per consumer basis.

The notices that the FTC sent earlier this month describe certain acts or practices that the FTC has found through administrative orders violated the FTC Act and lay the groundwork for the agency to exercise its Penalty Offense Authority. 

Unlawful Practices Relating to the Use of Endorsements and Testimonials

The FTC issued two Notices of Penalty Offenses within a week of each other in October 2021.4 In the second, issued on October 13, the FTC sent notice to more than 700 companies across a variety of industries regarding the use of fake or misleading endorsements or testimonials.  The FTC pointed to “the rise of social media” as well as “fake online reviews and other deceptive endorsements … [in] the online world” as the impetus for this notice. The notice follows a September 2021 FTC resolution that designated deceptive and manipulative conduct on the internet a priority enforcement area.5  It informs recipients about several advertising practices that the FTC has previously determined in administrative orders to be unlawful under Section 5 of the FTC Act:

  • Falsely claiming, expressly or by implication, that a third party has endorsed a product or its performance;
  • Misrepresenting that an endorsement represents the experience, views, or opinions of an actual user or purported users of the product;
  • Misrepresenting an endorser as an actual user, a current user, or a recent user of a product or service;
  • Continued use of an endorsement without good reason to believe that the endorser continues to subscribe to the views presented in the endorsement;
  • Use of testimonials to make unsubstantiated or otherwise deceptive performance claims, even if such testimonials are genuine;
  • Failure to disclose a connection between an endorser and the seller of an advertised product or service, if such a connection might materially affect the weight or credibility of the endorsement and if the connection would not be reasonably expected by consumers; and
  • Misrepresenting that the experiences described by endorsers of a product or service represents the typical or ordinary experience of users of the product or service.

Notice and Penalty Offense Authority Going Forward

The FTC stated that the notices were not an assertion of wrongdoing by any of the recipients, nor an indication that an investigation is underway, imminent, or contemplated.6 All companies, not just the recipients, should review their existing advertising practices against those highlighted in the FTC letters and assess compliance programs and processes. This is especially true for companies relying on online endorsements and testimonials.

References 

See Rohit Chopra and Samuel A.A. Levine, The Case for Resurrecting the FTC Act’s Penalty Offense Authority, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3721256&download=yes.

2 Id. at 9.

3 15 USC § 45(m)(1)(B)

4 Federal Trade Commission, Notice of Penalty Offenses Concerning Deceptive or Unfair Conduct in the Education Marketplace (6 Oct. 2021), https://www.ftc.gov/system/files/attachments/penalty-offenses-concerning-education/final-notice-education.pdf; Federal Trade Commission, Notice of Penalty Offenses Concerning Deceptive or Unfair Conduct around Endorsements and Testimonials (13 Oct. 2021), https://www.ftc.gov/system/files/attachments/penalty-offenses-concerning-endorsements/notice-penalty_offenses-endorsements.pdf.

5 See Federal Trade Commission press release, FTC Streamlines Consumer Protection and Competition Investigation in Eight Key Enforcement Areas to Enable Higher Caseload (14 Sep. 2021), https://www.ftc.gov/news-events/press-releases/2021/09/ftc-streamlines-investigations-in-eight-enforcement-areas.

6 See Notice of Penalty Offenses, Federal Trade Commission, https://www.ftc.gov/enforcement/penalty-offenses (“That a company is sent a Notice does not indicate that the Commission has reason to believe it is breaking the law. Rather, these Notices serve to “ensure that companies understand the law” and “that they are deterred from breaking it.”)..

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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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