Next Up – Earnings Claims: Notice of Penalty Offenses Sent to 1,100 Direct Selling Companies and Others in the Gig Economy

Donnelly L. McDowell — Tue, 26 Oct 2021 23:35:29 -0400

In its third recent Penalty Offense Authority notice, the FTC today notified more than 1,100 companies offering “money-making opportunities” that it intends to pursue civil penalties of up to $43,792 per violation for misrepresentations related to potential earnings and related characteristics about the opportunity. Recipients of the notice include virtually every major direct selling company and others in the gig economy such as Amazon, DoorDash, Lyft, and Uber.

That makes more than 1,800 companies that have been put on notice of penalty offenses in the past month. It also crosses another alleged deceptive practice off the list laid out in the October 2020 paper authored by current Bureau Director Sam Levine and former FTC Commissioner Rohit Chopra, entitled The Case for Resurrecting the FTC Act’s Penalty Offense Authority. Next up? Well, if the Chopra/Levine paper points the way (and it appears to), we should expect future notices that focus on allegedly unfair and deceptive data harvesting and targeted marketing.

In addition to the eight categories of misrepresentations in today’s notice ranging from the amount of earnings possible to the amount of training provided, the sample cover letter published online also includes a section on endorsements and testimonials. This means that each company receiving today’s notice also will receive the notice published last week on endorsements and testimonials, which over 700 companies also received (with some minimal overlap in that list).

From the FTC’s perspective, why not? Throwing in the notice on endorsements and testimonials along with today’s “money-making opportunities” notice opens up the companies on today’s list to threats of civil penalties both for misrepresentations related to the business opportunity and endorsements.

But as we’ve discussed in prior posts, the FTC’s legal authority to use the Penalty Offense Authority to circumvent notice and comment rulemaking and open up civil penalties in this way is far from certain.

It will be interesting to see how today’s action will fit with the FTC’s stated intention to review its longstanding Business Opportunity Rule, which it announced in June 2021. With today’s notice, one might wonder why the Commission thinks revisions to the BOR are even necessary, assuming that the rulemaking focuses on earnings representations. Perhaps the FTC is simply double-bagging, to ensure that civil penalties are available according to one theory or another. Or is it possible that the FTC regards the notices as mission accomplished for earnings rules and will push BOR in an entirely unexpected direction?

Today’s “money-making opportunity” notice (a previously unused and still undefined term) identifies eight categories of claims that the FTC intends to pursue civil penalties for:

Misrepresentations concerning the profits or earnings that may be anticipated by a participant in a money-making opportunity, including six sub-categories of earnings claims that generally mirror injunctive relief in prior FTC settlements with direct sellers and others offering business opportunities;
Misrepresentations that sales of a money-making opportunity will be made to only a limited number of prospective participants (including, for example, that sales will be made to only a limited number of prospective participants in a geographic region), when sales will be made to any person who is willing and able to pay;
Misrepresentations that prospective participants will be screened or evaluated for suitability to use or benefit from the money-making opportunity;
Misrepresentations that participants do not need experience in order to earn income;
Misrepresentations that a prospective participant must act immediately to purchase or to be considered for a money-making opportunity;
Misrepresentations that purchasing a money-making opportunity is risk-free or involves little risk;
Misrepresentations about the position being offered to prospective participants in a money-making opportunity, such as by failing to disclose that it is a sales position when such is the case; and
Misrepresentations about the amount or type of training that will be given to participants in a money-making opportunity.

We noted in our last post that the first two rounds of notices made little effort to describe the conduct that past FTC cases had found deceptive. Notably, today’s notice provides more detail than either of the previous recent notices by including short summaries of 12 litigated administrative decisions dating from 1941 to 1980 as support for its findings and the ability to rely on the Penalty Offense Authority. The letter also includes a number of references to federal court cases, notwithstanding that federal cases cannot serve as the predicate for a Penalty Offense Authority action. And the letter also emphasizes that “disclaimers are not always effective and are not a defense if the net impression is still misleading” and that companies can be held liable for deceptive earnings claims made by independent salespeople, although it’s not clear what findings from prior cases the FTC would rely upon to attack disclaimers.

Questions abound and are likely to be tested in litigation if the FTC makes good on its promise to use the Penalty Offense Authority as threatened in these notices and recipients of notices push back. For now, companies offering “money-making opportunities” should have another look to ensure income and lifestyle claims and compliance programs align with best practices. CIDs are undoubtedly in the offing.

FTC Blankets Companies With Warning Letters Over Endorsements and Reviews

William C. MacLeod — Wed, 13 Oct 2021 16:53:22 -0400

As we have noted in earlier posts, in the wake of the Supreme Court’s holding that Section 13(b) of the FTC Act does not allow for monetary restitution, the Federal Trade Commission has been attempting to creatively utilize other provisions of the Act in order to obtain money from the companies and individuals it prosecutes. One threat it seems the FTC is now making good on is the use of the FTC’s long dormant Penalty Offense Authority, found in Section 5(m)(1)(B) of the Act.

That provision, which has rarely been used, authorizes the Commission to seek civil penalties against other parties where (1) a final cease and desist order has been entered against a party in an administrative proceeding under Section 5(b) of the FTC Act, (2) there is a Commission determination that a specific practice is unfair or deceptive, as part of that order, and (3) a party with actual knowledge that the practice is unfair or deceptive has engaged in that practice after the order became final. Civil penalties can add up quickly – potentially nearly $44,000 per violation.

Earlier today, the FTC sent warning letters to more than 700 companies recommending that recipients review their practices related to endorsements and reviews to ensure that those practices comply with the law. The warning letters are explicitly meant to serve as a predicate for what could be a sweep of civil penalty investigations of advertisers. In the Commission’s announcement of the warning letters, it emphasized that, in the Commission’s view, the blanket warning letter to over 700 companies in nearly every industrial sector “puts those businesses on notice that deceptive practices in the future could result in penalties of up to $43,792 per violation.”

The warning letters outline a broad array of purportedly deceptive practices the FTC has determined to be unfair or deceptive in prior administrative cases, including:

claiming – directly or by implication – that a third party has endorsed a product or its performance when that’s not the case (this includes fake reviews);
misrepresenting that an endorsement reflects the experience, views, or opinions of users or purported users;
misrepresenting an endorser as an actual, current, or recent user of a product;
continuing to advertise an endorsement unless the advertiser has good reason to believe the endorser continues to subscribe to the views presented in the endorsement;
using testimonials to make unsubstantiated or otherwise deceptive performance claims – even if the testimonial is genuine;
failing to disclose a connection between an endorser and seller of a product if that connection might materially affect the weight or credibility of the endorsement or review and if consumers wouldn’t reasonably expect that connection; and
misrepresenting – explicitly or implicitly – that the experience of an endorser represents the typical or ordinary experience of users of the product.

The warning letter informs its more than 700 corporate recipients that “FTC staff is not singling out your company or suggesting that you have engaged in deceptive or unfair conduct.” Instead, staff is “widely distributing similar letters and the notice to large companies, top advertisers, leading retailers, top consumer product companies, and major advertising agencies.” It remains to be seen whether such a blanket “notice of penalty violation” will survive what will surely be multiple, inevitable court challenges.

These types of letters are usually precursors to investigations. The FTC recently passed resolutions giving staff wide latitude in issuing Civil Investigative Demands, so now may be a good time to review your practices. Be sure to read our other posts on endorsements, reviews, and influencers for tips on how to comply with the law.

Ad Law Access

Next Up – Earnings Claims: Notice of Penalty Offenses Sent to 1,100 Direct Selling Companies and Others in the Gig Economy

FTC Blankets Companies With Warning Letters Over Endorsements and Reviews