October 20, 2021
More than 700 companies received a notice this month from the Federal Trade Commission regarding the use of endorsements and testimonials.
The notice of penalty offenses warned recipients they could be subject to nearly $44,000 in civil penalties per violation if they engage in certain deceptive or unfair practices, such as falsely claiming a third party’s endorsement or failing to reveal an unexpected material connection with an endorser.
“The notice could apply not only to a company’s own ads but also to its use of influencers, fake reviews and reviews by customers with connections to the company,” explained Seena Gressin, an FTC attorney, in a recent blog.
FTC singled out top marketers—not because they necessarily have breached its rules.
“Fake reviews and other forms of deceptive endorsements cheat consumers and undercut honest businesses,” Samuel Levine, director of FTC’s Bureau of Consumer Protection, said in an Oct. 13 news release. “Advertisers will pay a price if they engage in these deceptive practices.”
FTC commissioners recently voted 5 to 0 to authorize the notice and its distribution before Rohit Chopra left the agency. The former FTC commissioner is now the head of the Consumer Financial Protection Bureau.
In part, the notice was perceived as an effort by FTC to obtain money damages under the Federal Trade Commission Act—notwithstanding an adverse court ruling earlier this year. The U.S. Supreme Court held in AMG Capital Management LLV v. Federal Trade Commission that the agency can no longer rely on Section 13(b) of the FTC Act to obtain monetary relief.
FTC’s recent notices are reliant on what lawyers described as a rarely used provision of the FTC Act: Section 5(b). Per this section, the agency can obtain civil penalties if:
FTC determines a practice is deceptive or unfair;
The agency issues a final cease and desist order (other than a consent order); and
Any corporation, person or partnership engages in the above activities and had “actual knowledge” that such an act is unfair or deceptive and unlawful.
The notices describe practices the agency has determined are deceptive or unfair in prior administrative cases, according to FTC’s news release. The notices reference several administrative decisions from as early as 1941 and as recently as 1984—when advertising relied principally on radio, television and print mediums and well before the internet age.
“What kinds of advertising crosses the line?” Gressin asked in her blog. “Among other things, companies that use endorsements:
Can’t misrepresent that an endorser is an actual, current or recent user of a product
Can’t misrepresent that endorsers’ experiences represent people’s typical experiences
Can’t use an endorsement without good reason to believe the endorser still holds the views expressed
Can’t use an endorsement to make deceptive claims about how a product performs, and
Can’t fail to disclose an unexpected relationship between the endorser and the advertiser, like a business or family relationship, a payment, or a gift of a free product.”
Several firms on the massive list—essentially a who’s who in American business—market food and/or nutritional supplements, including Amway Corp., Bayer Corp., General Nutrition Corp., Hershey Co., Nestlé USA Inc. and Reckitt Benckiser LLC.
“FTC staff is not singling out your company or suggesting that you have engaged in deceptive or unfair conduct,” FTC stated in a sample cover letter sent to the companies. “We are widely distributing similar letters and the notice to large companies, top advertisers, leading retailers, top consumer product companies and major advertising agencies.”
FTC, however, could seek civil penalties from companies on the list, rather than “a slap on the wrist,” if the agency subsequently finds they have engaged in the unlawful activities described in the notices, warned Katie Bond, a partner with the law firm Lathrop GPM.
Former law professor Lina Khan, who was sworn in as FTC chair in June, has made it known “she intends to be an aggressive enforcer,” Bond said in an interview.
In a memo outlining her priorities and sent in September to FTC staff and the commissioners, Khan said her agency must be "forward-looking in anticipating problems and taking swift action."
"On both the competition and the consumer protection sides, this means being especially attentive to next-generation technologies, innovations and nascent industries across sectors," she stated. "Timely intervention—be it checking anticompetitive conduct that would lead markets to tip, or targeting unfair practices before they become widely adopted—can help us tackle problems at their inception, both limiting harms and saving resources over the long term."
Attorney Ivan Wasserman suggested the recently distributed notices reflect FTC’s message that it’s going to continue to enforce the law and seek money damages in spite of the Supreme Court’s decision in AMG and that it remains concerned about how easy it is to commit fraud online via endorsements and testimonials.
But to date, FTC hasn’t “dropped a big hammer solely on improper use of influencers either not disclosing material connections or making claims that are not substantiated,” noted Wasserman, a partner with Amin Talati Wasserman LLP.
He questioned whether the agency would focus its limited resources on an influencer who sends out a tweet or two and fails to disclose a statement was sponsored, rather than focusing on unsubstantiated and pervasive claims that products treat diseases.
Wasserman, however, suggested FTC may start taking more aggressive action against repeat offenders culpable for deceptive endorsements and testimonials. But whether FTC will be able to obtain large civil penalties in court based on its recent notice and subsequent deceptive acts is an open question.
“It remains to be seen whether such a blanket ‘notice of penalty violation’ will survive what will surely be multiple, inevitable court challenges,” attorneys with Kelley, Drye & Warren LLP wrote in a recent blog.
Editor's note: This article first was published by Natural Products Insider, the sister website to Food & Beverage Insider.
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