The Federal Trade Commission (FTC or Commission) recently signaled its readiness to take a more aggressive approach when it comes to enforcing consumer protection laws, especially for violations by for-profit colleges and institutions, advertisers, retailers, consumer products companies, multilevel marketing ventures, and even social media influencers. Over the course of October 2021, the FTC sent Notices of Penalty Offenses (Notices) to nearly 2,000 such companies, warning them that they could incur significant civil penalties — up to $43,792 per violation — if they engage in conduct that has been ruled unfair or deceptive in prior FTC administrative cases. While the enforcement of such laws by the FTC is nothing new, the source of the enforcement authority it is relying upon to issue these Notices is significant, along with the sheer volume in which it recently distributed them.
Resurrection of The Penalty Offense Authority
Since 1973, the FTC has relied upon the authority granted to it under Section 13(b) of the FTC Act to seek equitable monetary relief — which makes a violator pay money to consumers — for fraudulent and deceptive practices perpetrated on those consumers.[1] That all changed in April of this year when, in AMG Capital Management, LLC v. Federal Trade Commission, the U.S. Supreme Court unanimously held that the FTC does not have the statutory authority to seek such relief under Section 13(b) and reversed a $1.27 billion restitution and disgorgement order against a payday loan company.[2] Specifically, the Court found that Section 13(b)’s “permanent injunction” language “does not authorize the Commission directly to obtain court-ordered monetary relief.” That decision means that the FTC will no longer have the ability to secure federal court orders to force violators to pay restitution, unless there is an administrative proceeding first, before an FTC administrative law judge. In response, the Commission deployed one of the authorities it seemingly abandoned decades ago: Section 5(m)(1)(B) of the FTC Act, the Penalty Offense Authority. The Penalty Offense Authority grants the Commission the power to obtain civil penalties, which are paid to the government, not the consumers. However, in order to impose such penalties, the FTC must satisfy two requirements: First, the FTC must prove that the company had actual knowledge that its conduct was unfair or deceptive in violation of the FTC Act; and second, the FTC must have previously issued an administrative order, other than a consent order, that determined certain specific conduct to be unfair or deceptive. To establish “actual knowledge”, the FTC uses the Notice of Penalty Offenses, which is a document that lists certain types of conduct previously determined, by administrative order, to be unfair or deceptive in violation of the Act.
In October 2020, Rohit Chopra, then serving as FTC commissioner, and Samuel Levine, current director of the bureau of consumer protection, made an argument for resurrecting this dormant authority.[3] They saw cases such as AMG Capital Management and Federal Trade Commission v. Credit Bureau Center, LLC as “existential threats to the agency’s ability to hold wrongdoers accountable.”[4] Chopra and Levine argued that a revival of the Penalty Offense Authority could combat online disinformation and other emerging harms, including illegally targeted marketing and deceptive data harvesting, and restore faith in the FTC’s ability to protect consumers. Following the decision in AMG Capital Management, the agency needed to be creative in utilizing other provisions of the Act to obtain civil penalties. With its heightened use of Notices of Penalty Offenses, the FTC seems to be following the plan outlined by Chopra and Levine.
October 2021 Notices of Penalty Offenses
The recent issuance of Notices of Penalty Offenses took place in three waves over the month of October, the first of which targeted unfair and deceptive conduct in the educational marketplace. The FTC sent the Notices in early October to more than 70 for-profit colleges and institutions and outlined a variety of practices, many of which were related to claims made by institutions about the career outcomes of their graduates.[5] Specifically, the FTC warned against misrepresenting a particular career field as being in demand; the percentage of graduates who get jobs in their chosen field; whether the institution can help a graduate get a job; and the amount of money a graduate can expect to earn. In its press release concerning this initiative, the FTC stated that the number of education-related complaints they received surged roughly 70 percent between 2018 and 2020. FTC Chair Nina Khan commented that “[f]or too long, unscrupulous for-profit schools have preyed on students with impunity, facing no penalties when they defraud their students and drive them into debt. The FTC is resurrecting a dormant authority to deter wrongdoing and hold accountable bad actors who abuse students and taxpayers.”[6]
On October 13, the FTC sent out another batch of Notices, this one going to more than 700 companies, including advertisers, retailers, consumer product companies, and numerous household companies.[7] This round of letters focused on deceptive advertising, endorsements, and testimonials. The list of unfair and deceptive practices included making claims, whether express or implied, that someone has endorsed a product or its performance when they have not; misrepresenting that an endorsement is from an actual user of the product; continuing to use an endorsement unless the advertiser knows or has good reason to believe that the endorser still has the same views that are being presented in the endorsement; using testimonials to make unsubstantiated or deceptive performance claims, even if the testimonials are genuine; failing to disclose a connection between an endorser and the seller of the product they are endorsing in instances where that connection would not reasonably be expected by the consumer and materially affects the credibility of the claims; and misrepresenting that the experience described by the endorser represents the typical user experience. In their cover letter to recipients, the FTC also shared the multiple resources they created for businesses to use to ensure that they are following the law when using endorsements to advertise their products and services.
On October 26, the FTC sent the third and final wave of Notices for the month to more than 1,100 businesses offering “money-making ventures” (e.g., multilevel marketing companies, “gig” employers, investment and business coaching, franchises, and other business opportunities).[8] The FTC, as it made clear in its press release on the same day the Notices went out, is particularly concerned with the proliferation of money-making pitches during the pandemic.[9] The Notice outlined a number of unfair and deceptive practices, including misrepresenting: the likelihood of profitability; that a substantial number of participants have made or can make the represented profits or earnings; the amount of earnings that a participant can make; and that sales of the money-making opportunity will only be made to a limited number of participants if they will actually be made to anyone who is willing and able to pay. The FTC also highlighted conduct related to false characterizations of how participants will be screened, the amount of training that will be provided to participants, what type of experience is necessary, and the overall risk of the venture. These recipients also received the same Notice of Penalty Offenses related to deceptive advertising, endorsements, and testimonials that were included in the October 13 batch, as companies frequently use testimonials to advertise money-making opportunities.
What This Means for Businesses and the Future of Consumer Protection Enforcement
The Notice of Penalty Offenses makes clear that receiving such a letter does not indicate that a company has engaged in any of the practices outlined therein, nor does it create any new obligations, requirements, or standards for recipients. However, sending a Notice will help the FTC establish that a company had “actual knowledge” of the outlined deceptive acts and practices. If a company then engages in any of those acts or practices following receipt of the Notice, the FTC will have the ability to seek civil penalties in federal court. However, while the Notice opens the door for the FTC, it will still be required to prove its claims in court.
The FTC’s October 13 press release specifically calls out “the rise of social media” for having “blurred the line between authentic content and advertising, leading to an explosion in deceptive endorsements across the marketplace.”[10] Interestingly, though, all of the cases cited in the Notices are from 1941 through 1984, and they deal with industries and practices that are far different than the online activities that have attracted the concern of the FTC. It remains to be seen whether the application of such case law today, and the blanket use of Notices containing a generic list of misconduct, could survive inevitable challenges, if the Commission were to press its position in court. One other obstacle the FTC faces here is that, unlike 13(b) actions, which the FTC can bring on its own, it has to refer these actions to the Department of Justice and persuade that agency to pursue them.
So, then, is this recent initiative just a matter of the FTC flexing its muscles in an attempt to deter companies from engaging in certain deceptive practices and encourage market-wide compliance? Businesses may not want to roll the dice to find out. Another thing to watch for will be any action from Congress. In the wake of AMG Capital Management, the FTC asked Congress to pass legislation to revive its authority to return money to consumers who were harmed by violations of the law and to stop the illegal conduct from reoccurring.[11] Any legislative changes now could be an indication of the level of confidence Congress has in the Commission’s ability to successfully wield its authority under Section 5(m)(1)(B). In the meantime, companies should review their practices and policies related to advertising and endorsement claims, particularly with online marketing and the use of social media to promote their brands. Whether it be through the Penalty Offense Authority, working collaboratively with state attorneys general, the use of its rulemaking authority to issue new regulations, or even its efforts to have Congress pass new legislation, the FTC has signaled that it is both motivated and prepared to begin seriously cracking down on consumer protection law violations.
[1] 15 U.S.C. § 53(b) (enacted in 1973).
[2] AMG Cap. Mgmt., LLC v. Fed. Trade Comm’n, 141 S. Ct. 1341 (2021).
[3] R. Chopra & S. Levine, The Case for Resurrecting the FTC Act’s Penalty Offense Authority (Oct. 29, 2020).
[4] Id.
[5] Fed. Trade Comm’n, Penalty Offenses Concerning Education.
[6] Fed. Trade Comm’n, FTC Targets False Claims by For-Profit Colleges.
[7] Fed. Trade Comm’n, Penalty Offenses Concerning Endorsements.
[8] Fed. Trade Comm’n, Penalty Offenses Concerning Money-Making Opportunities.
[9] Fed. Trade Comm’n, FTC Puts Businesses on Notice that False Money-Making Claims Could Lead to Big Penalties.
[10] Fed. Trade Comm’n, FTC puts Hundreds of Businesses on Notice about Fake Reviews and Other Misleading Endorsements.
[11] Fed. Trade Comm’n, The Urgent Need to Fix Section 13(b) of the FTC Act (Apr. 27. 2021)