FTC Revives Penalty Offense Authority to Issue Notices Concerning Endorsements and Money-Making Opportunities

In October 2021, the FTC sent three different Notices of Penalty Offenses¹ to almost 2,000 companies, cautioning them against engaging in deceptive and unfair practices in the educational marketplace; endorsements, testimonials and customer reviews; and money-making ventures. In each case, potential civil monetary penalties up to $43,792 are on the line. In doing so, the FTC has brushed off a rarely used tool to combat what it views as an “explosion” of deceptive endorsements online and on social media and a proliferation of money-making opportunities capitalizing on the COVID-19 pandemic. Although the FTC has enforced these same consumer protection laws for decades, these recent Notices expand on the FTC’s efforts during the Biden Administration to enhance its powers and likely portend even more active enforcement in the consumer protection space.

Background

Until recently, the FTC long relied on Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), to seek a variety of remedies in consumer protection cases, including monetary relief, restitution, and disgorgement. In particular, Section 13(b) authorizes the FTC to seek a “permanent injunction” in federal court when it has reason to believe that an individual or company “is violating, or is about to violate” the FTC Act. For decades, the FTC used this provision to seek, or threaten to seek, monetary relief, disgorgement and restitution in consumer protection enforcement actions, including those related to false or deceptive advertising.

In April, however, the Supreme Court unanimously held that Section 13(b) does not empower the FTC to seek monetary relief. As we previously reported, in AMG Capital Management, LLC v. Federal Trade Commission, the Supreme Court reversed a $1.27 billion restitution and disgorgement order against a payday loan company and held that Section 13(b)’s “permanent injunction” language “does not authorize the Commission directly to obtain court-ordered monetary relief.”

Since then, the FTC has turned to its other sources of enforcement authority to fill the gap left by the Supreme Court. Section 5 of the FTC Act, 15 U.S.C. § 45, declares unlawful “unfair or deceptive acts or practices in or affecting commerce,” but does not provide for civil penalties for a first-time violation unless there is a violation of a rule, consent order, administrative order or other standard. As foreshadowed by a 2020 paper² co-authored by then Commissioner Rohit Chopra and current Director of the Bureau of Consumer Protection Samuel Levine, the FTC is now utilizing an infrequently used provision of Section 5, known as the Penalty Offense Authority, as a method of obtaining authority to seek penalties.

The Penalty Offense Authority allows the FTC to seek civil penalties if (1) the FTC can prove that the company or individual knew the conduct was unfair or deceptive under the FTC Act, and (2) the FTC has already issued a written decision that such conduct is unfair or deceptive.³ To trigger this authority, the FTC can send a Notice of Penalty Offenses — which then establishes the requisite knowledge element, namely that the recipient knew the conduct was unlawful. The Notice does not extend to conduct that was resolved by consent decree or other settlement.

Recent FTC Notices of Penalty Offenses

The FTC first issued a Notice of Penalty Offenses to more than 70 for-profit colleges and institutions concerning unfair and deceptive conduct in the educational marketplace in early October 2021.⁴ The Notice warns companies not to engage in a variety of conduct that has been ruled unfair or deceptive, such as: misrepresenting the demand for graduates of a specific institution; misrepresenting the employment prospects of or types of jobs available to an institute’s graduates; misrepresenting the amount of money graduates can earn; misrepresenting the necessary qualifications to obtain employment in a certain field; or misrepresenting an institution’s facilities or abilities to assist graduates in finding employment.

On October 13, 2021, the FTC issued another Notice of Penalty Offenses to more than 700 companies to deter deceptive advertising, endorsements, and testimonials. The Notice was sent to a broad array of companies,⁵ including advertisers, retailers, consumer product companies and numerous household companies. The Notice outlines a variety of practices that the FTC has previously determined are unfair or deceptive and unlawful in litigated administrative proceedings. This includes: falsely claiming endorsements from third parties; misrepresenting whether an endorsement is from an actual, current or recent user of a product; continuing to use an endorsement without reason to believe the endorser still has the same views; misrepresenting that an endorsement represents the experience of users; using an endorsement to make deceptive performance claims; failing to disclose an unexpected material connection with an endorser; or misrepresenting an endorser’s experience as typical or ordinary. Ironically, the administrative decisions on which the Notice is based date from 1941 through 1984, representing a body of law that has existed and been enforced long before online and social media advertising were as “explosive” as the FTC contends.

Finally, on October 26, 2021, the FTC issued a Notice of Penalty Offenses to more than 1,100 businesses offering money-making ventures (such as multi-level marketing companies or business and investment coaches), warning them not to deceive or mislead consumers about potential earnings.⁶ In particular, the Notice reminds recipients that the following are considered unfair or deceptive and therefore unlawful: misrepresenting the profits or earnings that may be anticipated by a participant (such as by misrepresenting that participants will likely be profitable or that a certain level of profits or earnings is typical or ordinary); and misrepresenting that sales of a money-making opportunity will only be made to a limited number of prospective participants when sales will actually be made to anyone who is willing and able to pay. Recipients of this Notice of Penalty Offenses related to money-making ventures were also provided copies of the Notice of Penalty Offenses related to endorsements and advertisements, putting companies on notice that it is unlawful to use testimonials that mislead consumers about the potential rewards of participating in a money-making opportunity.

In all three cases, companies may incur significant civil penalties — up to $43,792 per violation — if they engage in the prohibited conduct. The Notice makes clear that recipients are not alleged to have engaged in any wrongdoing.

Implications for Companies

While the FTC has suggested that these Notices are nothing new and only reinforce existing law, the FTC’s new reliance on a long-neglected authority and the broad distribution of the Notices signal an increased willingness to aggressively enforce the consumer protection laws. Companies that have received these Notices now have, in the FTC’s eyes, actual knowledge of the types of conduct prohibited by the FTC Act. With the issuance of a Notice, an investigation or enforcement action could move more quickly to a demand for monetary relief.

These Notices, however, are not the FTC’s first foray into taking enforcement action against deceptive online advertising and social media. For example, in 2017, the FTC settled a complaint against two social media influencers who endorsed an online gambling company without disclosing their joint ownership of the company.⁷ Around the same time, the FTC sent warning letters to social media influencers regarding their disclosures of material connections in their Instagram posts.⁸ In 2020, the FTC also settled a complaint against a skincare company that posted fake consumer reviews from company employees without disclosing the reviewers’ employment status.⁹ Likewise, the FTC recently took action against an allegedly bogus money-making company that used robocalls, text messaging, online ads, social media and other forms of marketing to make false and unsubstantiated claims about how much consumers could earn.¹⁰

The Notices now bring even greater attention to these issues, encourage companies to proactively take steps to avoid engaging in this conduct and squarely put monetary penalties on the line for violations. Accordingly, all companies and advertisers should review their internal policies and procedures to ensure they are compliant with existing law, regulations and FTC policy. This includes the FTC’s Endorsement Guides Concerning the Use of Endorsements and Testimonials in Advertising, as well as the FTC’s guidelines for social media influencers. Companies should be sure to avoid misleading claims or endorsements, confirm that any performance claims are or can be substantiated, and ensure they disclose any non-obvious and material connections with endorsers. As online advertising and marketing continue to be the norm, expect additional enforcement activity in the near future.

The antitrust and consumer protection laws are nuanced and complex and their application to particular business situations is a fact-specific inquiry. Businesses concerned about how recent developments will impact their risk of violating the antitrust and consumer protection laws are strongly advised to consult with legal counsel.