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.
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.
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:
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.
1 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.”)..