Under the Magnuson-Moss Warranty Act, companies that offer warranties for consumer products that cost more than $5 generally can’t condition their warranties on a consumer’s use of any part or service identified by brand name, unless the warranty states that the part or service will be provided for free (or they have a waiver from the FTC). Under the FTC Act, it’s also deceptive for companies to create the misleading impression that a consumer will void their warranty by using unauthorized parts or service.

Letters to four air purifier sellers and one treadmill manufacturer raise concerns about the companies’ statements that consumers must use specified parts or service providers to keep their warranties valid. And letters to three companies that sell computer equipment raise concerns about stickers stating that a warranty will be void if the sticker is removed, when the inability to remove the sticker would prevent consumers from performing routine maintenance and repairs.

The letters include this warning: “This letter places you on notice that violations of the Warranty and FTC Acts may result in legal action. FTC investigators have copied and preserved the online pages in question, and we plan to review your company’s written warranty and promotional materials after 30 days.” Recipients of the letters should certainly review their warranty practices to ensure they comply with the law. And if you haven’t checked your practices recently, maybe you should, too.

• the product’s final assembly or processing must occur in the USA;

• all significant processing that goes into the product must occur in the USA; and

• all or virtually all ingredients or components of the product must be made and sourced in the USA.

Here are a few things that are new in the guidance:

• The FTC made updates to incorporate the Made in USA Labeling Rule, which codified the “all or virtually all” standard for product labels in 2021. Marketers may now be subject to civil penalties if they make unqualified “Made in the USA” claims on labels for a product that is not “all or virtually all” made in the USA, including online or in catalogs.

• The FTC adds that companies have an ongoing obligation to review their substantiation to make sure the claims remain accurate. If something changes and a company can no longer support a “Made in the USA” claim, the company must update its marketing materials. (Both this post and this post illustrate that principle.)

• The FTC notes that when companies make qualified claims that a product includes both foreign and domestic parts, the companies must be able to substantiate that the parts that designated as being domestic are “all or virtually all” made in the USA.

The FTC also updated some of its examples to better illustrate how the “all or virtually all” principles apply in different circumstances and made some of the examples more current. For example, an example that currently refers to a microchip used to refer to a “floppy drive.” (Younger readers may need look up that term.)

A blog post announcing the new guidance reminds readers that the FTC means business when it comes to “Made in the USA” claims. “That’s why we keep suing companies that don’t play by the rules, assessing penalties where appropriate, and returning money to consumers when we can.” If you haven’t reviewed your claims recently, now may be a good time to do that.

Loper Bright Enterprises v. Raimondo

Loper Bright overrules Chevron, eliminating the deference given to agencies’ interpretations of ambiguous statutes. Since 1984, courts have employed a two-step framework when reviewing an agency’s statutory interpretations. First, courts determined “whether Congress has directly spoken to the precise question at issue.”[1] If it had not and there was any ambiguity, courts moved on to the second step, deferring to the agency’s interpretation if it was a “permissible construction of the statute.”[2] Under Chevron, courts were obliged to cede their independent judgment to an agency’s reasonable interpretation.

In Loper Bright, the Supreme Court held that this deference “defies the command of the [Administrative Procedure Act] that ‘the reviewing court’—not the agency whose action it reviews—is to ‘decide all relevant questions of law’ and ‘interpret . . . statutory provisions.’”[3] Agencies, according to the Court, “have no special competence at resolving statutory ambiguities. Courts do.”[4] Going forward, courts must do what they do best and “use every tool at their disposal to determine the best reading of the statute and resolve the ambiguity.”[5]

For forty years, Chevron has given agencies an advantage in disputes over the statutes they administer. It has required courts to defer to agency interpretations, even when the agency’s interpretation has evolved (sometimes dramatically) over time. In his concurring opinion, Justice Gorsuch points to the FCC’s changing rules regarding the classification of broadband internet across four administrations as an example of the “regulatory whiplash that Chevron invites.”[6]

The death of Chevron deference will be felt across administrative agencies, including at the Federal Trade Commission (“FTC” or “Commission”). Most immediately, the decision may impact the Commission in legal challenges it faces to two rules: the Non-Competes Clause Rule and the Combating Auto Retail Scams (CARS) Rule. Previously, if there was a dispute about the meaning of the statute at issue, the FTC could simply point to Chevron and expect to prevail. For example, in National Automobile Dealers Association v. Federal Trade Commission, the court applied Chevron to determine that the FTC’s interpretation of “uses” under the Fair and Accurate Credit Transactions Act of 2003 was reasonable and entitled to deference.[7] [Full disclosure: the author worked on this case on behalf of the FTC.] Going forward, a reviewing court will now use its own judgment to resolve any ambiguity.

Beyond rulemaking, Loper Bright could also potentially impact any FTC efforts to expand its authority under Section 5 of the FTC Act. Section 5 is famously broad (and, some might even say, ambiguous). Entities and individuals that find themselves in a dispute with the agency over statutory questions, such as what constitutes an unfair method of competition, may now press their case before a “neutral party ‘to interpret and apply’ the law without fear or favor … .”[8]

Jarkesy v. S.E.C.

In Jarkesy v. S.E.C., the Court ruled that the Seventh Amendment right to a jury trial requires that the SEC seek civil penalties for securities fraud in district court. The Court found that, where an agency’s claims are legal in nature, they must be tried before a district court. In determining whether claims are legal (and not, for example, equitable or admiralty), courts must consider both the remedy and cause of action. When a monetary remedy is meant to punish rather than “restore the status quo,” it is legal rather than equitable, and implicates the Seventh Amendment.[9] In addition, the Court found that the “public rights” exception (Congress’s ability to assign certain matters to an agency without a jury) did not apply, because fraud is in the nature of an action at common law. Suits akin to those brought in common law “presumptively concern private rights, and adjudication by an Article III court is mandatory.”[10]

While this decision will affect administrative agencies beyond the SEC, its immediate impact on the FTC is likely to be limited. The Commission is already required to go to district court to obtain civil penalties. It is an open question whether there might be other remedies sought by the FTC in administrative litigation that are likewise legal in nature and implicate private rights, which may no longer be obtained in-house. For example, the FTC has sometimes issued cease and desist orders in deception cases which ban Respondents from doing business in a particular industry.[11] If this remedy is viewed as punitive and implicates a core private right, it could only be imposed by an Article III court. Other novel remedies the Commission has obtained in settlements, such as so-called algorithmic disgorgement, may also be off-limits in an agency cease and desist order.

Because the Seventh Amendment jury trial requirement resolved the case, the Court did not reach two other questions that could have affected the FTC. First, the Court did not determine whether the ability of an administrative agency to determine whether to bring an action administratively or in federal court violates the non-delegation doctrine. Second, the Court did not consider whether an ALJ’s two layers of for-cause removal protections violates separation of powers. These and other issues, such as whether the FTC’s role as both prosecutor and judge in administrative proceedings constitutes a due process violation, will continue to be the subject of litigation. If these questions ultimately find their way back to the Court, at least two Justices have signaled that Article III and the Due Process Clause of the Fifth Amendment also limit agencies’ ability to handle certain matters administratively. In a concurrence, Justice Gorsuch, joined by Justice Thomas, writes that, because the SEC would deprive Jarkesy of property, “due process demands ‘nothing less than the process and proceedings of the common law… .’”[12] This means use of an Article III court and “not the use of ad hoc adjudication procedures before the same agency responsible for prosecuting the law, subject only to hands-off judicial review.”[13]

The fight against the so-called administrative state seems destined to continue for a bit longer. We will keep you posted.

Notes

[1] Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842 (1984).

[2] Id. at 843.

[3] Loper Bright Enterprises v. Raimondo, 603 U.S. __(2024) (slip op., at 21).

[4] Id. (slip op., at 23).

[5] Id.

[6] Gorsuch, J., concurring at 24.

[7] Nat’l Auto. Dealers Ass’n, v. FTC, 864 F. Supp. 2d 65 (D.D.C. May 22, 2012).

[8] Id. at 6.

[9] SEC v. Jarkesy, 603 U.S. ___(2024) (slip op., at 9).

[10] Id. at 14.

[11] See, e.g., In the Matter of Traffic Jam Events, Docket No. 93-95 (Oct. 25, 2021), https://www.ftc.gov/legal-library/browse/cases-proceedings/x200041-202-3127-traffic-jam-events-llc-matter (cease and desist order bans Traffic Jam and David J. Jeansonne II from participating in any business relating to the advertising, marketing, promotion, distribution, or sale or leasing of motor vehicles).

[12] Gorsuch, J., concurring at 12. See also, Axon Enterprise, Inc. v. FTC, 598 U.S. 175, 204 (2023) (Thomas, J., concurring).

[13] Id.

Background

Since the original Rule was issued in 2009, the use of health-related apps and other direct-to-consumer technologies collecting health information (e.g., fitness trackers and wearable blood pressure monitors) has proliferated. In September 2021, the FTC issued a “Policy Statement” reinterpreting the scope of the HBNR and signaling the FTC’s intent to treat these new products and technologies as covered by the Rule. The updated HBNR, finalized on April 24, 2024, formalizes this expansion of the HBNR as envisioned in the Policy Statement.

Who Is Subject to the HBNR?

The HBNR applies to entities offering or maintaining personal health records not covered by HIPAA. It covers vendors of PHRs, PHR-related entities, and third parties providing services to these entities. However, distinguishing among these categories can be challenging. Here are a few examples:

• Vendors of PHR. Companies providing online platforms or mobile apps that allow consumers to create comprehensive health records by storing and managing their health information from multiple sources are likely vendors of PHR. Examples include fitness tracking apps, diet and nutrition apps, and mental health apps that integrate data from the user and other sources, such as wearable devices or purchase histories stored with retailers.
• PHR-Related Entities. Businesses offering devices like remote blood pressure cuffs or internet-connected glucose monitors may qualify as PHR-related entities when users sync this health information with another health app.
• Third Party Service Providers. Third party service providers are roughly equivalent to processors or service providers. Businesses offering data security, advertising, or analytics services, for example, to a PHR vendor or a PHR-related entity with access to unsecured PHR data are considered third party service providers under the HBNR.

Businesses should be aware that where they fall under these categories depends heavily on the specific practices at hand, and they may move from one category to another. For instance, a third party may be considered a PHR-related entity if it offers services to a health app for its own purposes, such as research and development or product improvement. Similarly, a device manufacturer may be a PHR-related entity if it syncs health information with a third-party health app, but a vendor of PHR if it syncs health information with its own app (while integrating data from multiple sources).

What’s New

• Covered Health Care Providers. “Covered health care providers” constitute one category of the sources of PHR individually identifiable information (other categories of sources are employers and HIPAA-covered entities). The Rule expansively defines covered health care providers to include “any online service such as a website, mobile application, or internet-connected device” that supports the tracking of consumer health indicators, like fitness, sleep, mental health, and vital signs. Under the revised Rule, mobile apps are now considered covered PHR-related entities when they integrate with other devices or services, such as geolocation functions, calendars, or third party data, linking them to the user’s PHR. Crucially, the Rule only applies to services with the capacity to draw information from multiple sources. For example, businesses that integrate fitness data into third-party sleep apps could now be considered PHR-related entities under the Rule.
• “Breaches” Subject to the Rule. The revised Rule expands the scope of a “breach of security” to include any disclosures, including sharing or selling, of unsecured PHR that are not authorized by the individual. Covered providers should be mindful that this updated definition goes well beyond a traditional cybersecurity incident. For example, businesses that collect PHR for a legitimate purpose and subsequently share or use that information in a way not expressly authorized by the individual may have committed a “breach” under the new definition.
• Timing of Notice to the FTC. Businesses covered by the HBNR that experience a breach involving the unsecured data of more than 500 individuals now have sixty days to notify individuals and the FTC of the incident. This change will be helpful to businesses, particularly larger entities, as the previous Rule required notifications to be sent within ten days, regardless of the size of the data breach.
• Expanded Use of Electronic Notice. PHR vendors and related entities that discover a breach of security must provide written notice to individuals. Updates to the Rule now allow for the use of email and other electronic means to notify consumers of a breach, including text messages, in-app messages, and website banner messages. Additionally, breach notices must now include a brief description of the measures businesses are taking to protect affected individuals.

Why It’s Important

App developers and other companies providing health, wellness, fitness, and related apps should consider these updates to the HBNR, assess its applicability to their business, and comprehensively review their notification obligations in the event of an unauthorized disclosure. Firms offering data security, cloud computing, advertising, or analytics services to health apps should also review their potential obligations as third party service providers.

Summer Associate Joe Cahill contributed to this post.

The FTC alleges that Adobe and two of its executives did resort to trickery to make their subscription plans look more attractive. Specifically, the FTC alleges that Adobe pushed consumers towards an “annual paid monthly” subscription without adequately disclosing that cancelling the plan in the first year could cost hundreds of dollars. Consumers would only learn about the early termination fee (or “ETF”) if they discovered it in the fine print or hovered over small icons to find the disclosures.

In addition to failing to clearly disclose the ETF in the sign-up flow, the complaint alleges that Adobe made it difficult for consumers to cancel their subscriptions. For example, consumers had to deal with dropped calls, multiple transfers, and resistance from customer service representatives. Some people who thought they had cancelled continued to see charges on their credit card statements. The FTC said that a large volume of consumer complaints should have led the company to know something was wrong.

The complaint alleges that the defendants failed to comply with the Restore Online Shoppers’ Confidence Act (or “ROSCA”) and the FTC Act by failing to clearly and conspicuously disclose material terms of the transaction – including details of the ETF – before getting a consumer’s billing information. The complaint also alleges that Adobe violated ROSCA and the FTC Act by failing to provide “simple mechanisms” for consumers to stop recurring charges.

It’s too early to predict how this case will turn out, but we can still learn some important lessons at this stage. Federal and state regulators continue to focus on subscription plans, so you should make sure that your sign-up flows clearly present all material terms and that your cancellation process works smoothly. You should also monitor consumer complaints so that you can identify and fix problems before regulators become aware of them.

We all have our blemishes, but if you try too hard to hide them, that could lead to unpleasant surprises for everyone when they are finally discovered.

The set of principles recognize the role that carbon credits have in promoting the country’s climate goals and unlocking economic potential; however, the principles acknowledge that “widespread confidence in the integrity of credited emissions reductions and removals is critical for VCMs to reach their potential.”

We highlight some of the key takeaways below.

• The activities that generate the credits and the credits themselves should be certified to a robust standard that accounts for the following considerations:
  • The activity should be additional. The principles define additionality as an activity that would not have occurred in the absence of the incentives of the crediting mechanism and is not required by law or regulation. This definition accounts for “incentives” as well as legal requirements, so is broader than the FTC’s definition in the current Green Guides, which only accounts for legal requirements.
  • The credit should be unique in that it corresponds to only one tonne of carbon dioxide (or its equivalent) reduced or removed from the atmosphere and is not double-counted.
  • The claimed emissions reductions or removals are based on credible methodologies and leakage does not occur, which means the carbon dioxide is not just displaced outside the project or program boundary.
  • The activity design should be validated and the results should be verified by a qualified, accredited, independent third party.
  • The emissions removed or reduced should be permanent.
  • Baselines for emissions reductions and removals should be based on rigorous methodologies and avoid over-crediting.
• Corporate buyers that use credits should use VCMs to complement measurable within-value-chain emissions reductions as part of their net zero strategies. This includes working with suppliers on efforts to pursue decarbonization activities.
• The principles recommend that credit users disclose when credits are purchased, cancelled, or retired on an annual basis, a recommendation that the principles acknowledge may be more than what is required by applicable law.
• The principles note that standards for public claims based on carbon credits are constantly evolving, but that standards-setting organizations should allow companies to count reductions and removals based on carbon credits toward their Scope 3 emissions where it would be unreasonable to expect a company to fully abate those emissions within a given timeframe.

Some of these principles are addressed in the FTC’s current Green Guides, such as core integrity considerations around additionality and double counting, but overall the principles are far more robust than the FTC’s guidance on this topic. We do not expect the FTC will issue guidance in the revised Green Guides that would be contradictory to these principles, so marketers should closely review the principles and ensure that they are adhering to them when making claims based on carbon credits.

Pre-need cremation packages allow people to pre-pay for their cremation services while they are still alive. The lawsuit alleged that SCI deceptively marketed its products, including promoting benefits to veterans and telling consumers they had 30 days to cancel their plans, when California Business and Professions Code §7735 (“Short Act”) provides that funds must be kept in a trust and allows for a full refund at any time before services are provided. The lawsuit further alleged that SCI’s “Standard Plan,” which includes both cremation services and merchandise (a memento chest with a photo frame lid, an urn, a plaque, thank you cards, planning guide, and access to an online memorial), was marketed and sold as a single plan with a single price and priced to be cheaper than stand-alone cremation services. When customers went to sign, however, SCI allegedly presented them with a heavily marked up contract for merchandise and a deeply discounted contract for cremation services, placing only the discounted cremation services funds in a trust account. When a purchaser requested a refund down the line, SCI supposedly only refunded the portion it had allocated to cremation services, and withheld the money allocated to merchandise.

California described this as a “scheme to underfund the preneed trust,” and explained that back in 2009 Neptune resolved similar allegations with Colorado’s Division of Insurance, and thereafter started its business practices in California. The lawsuit alleged that omitting the information about the fund allocation and refund policy violates the False Advertising Law. California further alleged the design of the business itself violates the Unfair Competition Law through omitting required mandatory disclosures under California’s retail installment contract law (the Unruh Act), violating the Short Act, and also failing to make proper disclosures as required under CLRA for veterans benefits.

The proposed settlement includes full restitution to consumers who cancelled their Standard Plans during the applicable period and did not receive a full refund, injunctive relief, and $23 million in civil penalties.

Federal regulation also covers this space — the Funeral Rule, among other things, gives consumers the right to buy only the funeral arrangements they want and get price information on the telephone. Earlier this year, the FTC conducted an undercover sweep, placing calls to funeral providers all over the country and discovering that providers violated the Funeral Rule on a substantial number of these undercover calls. The most common violation was providers refusing to answer price questions over the phone.

Funeral providers should remember that many states have their own funeral laws (or even departments, like California), in addition to the FTC’s Funeral Rule. In addition, all businesses should keep in mind that state AGs have broad authority over a variety of unique or even unusual types of businesses and they aren’t shy about bringing enforcement actions when they feel consumers are at risk.

IS IT REAL OR IS IT NOT? A DIVE INTO DEEP FAKES, DARK PRACTICES, AND INDUSTRY’S RESPONSE

In yet another AI-related panel for the year, speakers focused on the potential consumer protection issues that could occur from deepfakes, and how the deepfake technology has grown rapidly even in the last few months. The panelists expressed that they are often concerned more with the distribution channels for AI, referred to as “gatekeepers” and platforms, than with the manufacturers themselves. They gave the example of a large technology platform’s efforts to curb AI-generated book publications by limiting uploads to 3 books per day – a solution the panelists found to be inadequate. But the speakers acknowledged that it is not always simple to determine the “right” limits. They also predicted more personalization in advertising through AI. Overall, they emphasized obtaining consent to the use of content and disclosure of the use of AI to address the problem.

AG staff in attendance raised questions such as how to educate consumers about the proper use of AI, whether there are any clear lines for what should not be allowed for AI, and why they need to regulate the industry when scammers won’t comply. As a response, the panelists reminded the audience that they need to regulate the “good guys” and then go after the “bad guys” along the way.

PANEL OF ATTORNEYS GENERAL

Attorneys General Ellen Rosenblum of Oregon, Kwame Raoul of Illinois, and Edward Manibusan of the Northern Mariana Islands participated in a panel discussing their experiences with consumer protection issues as AGs. AG Rosenblum explained that we are all consumers, and having a free and fair marketplace is critical to consumers and businesses. AG Raoul discussed that he was often surprised by the extent that consumer protection impacted other areas of the office and how it could also be leveraged, for instance, to curb criminal activity. AG Manibusan noted prices and labeling as being especially important for his constituents given their geographic location.

On the power of the multistate consumer protection investigation, all three AGs agreed banding together for collective efforts is useful and involves compromise, with AG Raoul comparing the process to learning to play well together in a kindergarten sandbox. AG Raoul also emphasized the importance of injunctive relief and discouraged “unreasonable holdouts” from the group dynamic. AG Rosenblum noted that ideally multistate investigations could move faster, but pointed to some of the reasons they may not, including the complexity of the cases and the amount of documents to review. AG Rosenblum also mentioned that AGs are usually willing to take meetings, but it is important that they still communicate with staff to avoid “going behind their back.”

SOCIAL MEDIA LEGISLATION- A DISCUSSION OF EXISTING, PENDING, AND FUTURE LEGISLATION

Representatives from the AG offices of Minnesota, Arkansas, Utah, and New York presented on some of the latest social media laws that are pending or passed, and how they are working to overcome challenges. Many of these laws would require companies provide certain default privacy settings and parental controls for teens. The industry representative on the panel described the challenges in complying with these types of laws because of the variety of content on platforms, and free speech and access to information concerns. Furthermore, asking for certain age verification requires more collection of personal information, which could raise concerns both for privacy advocates and consumers wary of handing over their data.

When the panelists were asked why social media legislation is needed in addition to their existing UDAP laws, the states explained that UDAP laws work on a fact-specific level but where there is an industrywide problem, they need to level the playing field. For example, one bad company can ruin things for everyone. Additionally, panelists said these statutes help provide additional information to parents and encourage parental involvement.

OTHER PANELS

On the FTC Rulemaking session, Tom Dahdouh of the FTC described the agency’s recent rulemaking efforts. He described the importance of having a great relationship with State AG offices as “vital” to the agency as a result of the AMG decision. The FTC cannot get redress in many instances, but states can. Dahdouh pointed to the recent FTC Collaboration Report and the 33 joint actions with states and local DAs since 2020. He also described the need for rulemakings as a reaction to AMG.

In the State Privacy session, representatives from California, Colorado, and Indiana described the similarities and differences between their comprehensive privacy laws and the authority and makeups of their enforcement teams.

CONCLUSION

NAAG hosts two consumer protection conferences a year. These are good events to learn about issues important to attorneys general across the country, which can be helpful for the business community. Moreover, these events are great opportunities to hear from and interact with consumer protection staff, who are often driving the enforcement initiatives at AG offices. It is important to connect with AGs and staff alike to stay on top of office priorities.

The first accuses Amazon of using “dark patterns,” or digital design tricks, that make it difficult for consumers to cancel their Prime subscriptions. According to the lawsuit, Amazon used misleading graphics and wording and emphasized the benefits of Prime before allowing consumers to cancel their subscriptions to the service, among other hurdles designed to exploit cognitive biases and influence a user’s choices.

While the case was filed in state court under the Arizona Consumer Fraud Act, it is similar to the FTC’s existing case against Amazon raising similar cancellation concerns. This new focus on Amazon is a reminder of states interest in targeting companies over so-called dark patterns and demonstrates again that states have separate authority to pursue concurrent actions even once the FTC pursues enforcement of the same issue.

The second lawsuit alleges antitrust violations over the “Buy Box” algorithm Amazon uses to determine which products get priority placement on the platform and the terms it imposes on its third-party sellers. Arizona also claims that Amazon has unlawfully maintained market dominance through illegal restrictions on third-party sellers. Seventeen state AGs and the FTC filed suit in September 2023 alleging similar conduct.

Sum it Up: These latest actions by Arizona add to the government actions against Amazon, which include:

• The Federal Prime Case: In June of 2023, the FTC filed a lawsuit alleging that Amazon used dark patterns that tricked consumers into enrolling in Prime subscriptions that would automatically renew and intentionally made it difficult for consumers to cancel those subscriptions. The case is ongoing.
• The Federal Antitrust Case: In September of 2023, the FTC and 17 state AGs sued Amazon alleging that it uses its monopoly power to inflate prices, degrade quality, and stifle innovation. That case is currently set for trial in October of 2026.
• The District of Columbia’s Antitrust Case: In May of 2021, then Attorney General Karl Racine filed the inaugural suit against Amazon alleging its “most favored nation” agreements with third-party sellers violate the District of Columbia’s Antitrust Act. Amazon won dismissal in 2022 but the AG’s office has sought to revive it on appeal. A three-judge panel in the D.C. Court of Appeals heard arguments on whether the case was wrongfully dismissed in December. That appeal is ongoing.
• The California Antitrust Case: In September of 2022, Attorney General Rob Bonta announced a lawsuit alleging that Amazon’s third-party seller agreements violated the California’s Unfair Competition Law and Cartwright Act. The case survived a motion to dismiss and litigation is ongoing.

These interrelated but separate actions demonstrate that state consumer protection actions don’t exist in a vacuum – antitrust cases sometimes are brought alongside more traditional consumer protection cases, and sometimes with or parallel to the FTC. And with Big Tech under attack under both umbrellas, we’ll keep watching as these cases evolve. To stay up-to-date, subscribe to Kelley Drye’s AdLaw Access here.

For followers of this blog and the FTC, the Guidance will ring familiar as another recent attempt by the FTC to declare law through guidance, analogous to the FTC’s revised Health Products Compliance Guidance in December 2022. Despite its length, the Guidance conspicuously omits any reference to last fall’s landmark decision in FTC v. Neora where the district court rejected many of the same theories that Staff now recasts as guidance, such as an amorphous prohibition against a “focus” on recruitment. As noted in our earlier coverage of the Neora decision (here), we expected the Commission to remain undeterred and regroup to lay the groundwork for future litigation—which the Guidance certainly appears to be issued with an eye toward.

Some of these principles were previewed in last month’s letters to the Direct Selling Association and the Direct Selling Self-Regulatory Council, which we discussed here. Others are more detailed and provocative pronouncements on longstanding issues; others appear at least somewhat new. We address a few highlights below but note that there is a lot to unpack here. While the legal standard for pyramiding has never been black and white and has always been fact-specific, the Guidance muddies the water further – at least as to the FTC’s perspective of the law – by appearing to diminish the importance of retail sales validation and differentiation between distributors and customers, both practices that the FTC has long encouraged and required as injunctive relief in the Herbalife settlement.

Injecting Further Uncertainty Into Pyramiding

• No safe harbors for retail sales; repudiating the “primarily” test. Echoing comments made in last month’s letter to DSA, the Guidance repeatedly states Staff’s view that there are no safe harbors to avoid classification as a pyramid scheme, including where even the vast majority of an MLM’s revenue comes from retail customer sales or where rewards paid to participants are contingent upon sales. Staff adds a wholly new section to the Guidance seeking to repudiate the standard of whether a pyramid scheme is inherently based on rewards “primarily” unrelated to retail sales – a standard set forth both in longstanding case law and the FTC’s since renounced 2004 advisory opinion letter. Instead, Staff explains its current view that, where a compensation plan requires a certain level of downline participants for eligibility for rewards, even where a sale is required to trigger compensation, “[p]articipants will be incentivized to focus on recruitment to build a large downline, with the hope that someone in their downline will sell or buy products.”
• Prohibiting compensation plans “focused” on recruitment. Instead of evaluating whether a plan is primarily based on retail sales or rewards unrelated to retail sales, the Guidance suggests that FTC Staff will consider whether “the structure as a whole operates in practice” to “focus on recruiting rather than product sales to real customers who don’t also participate in the MLM network,” including based on “marketing representations,” “participant experiences,” “the compensation plan,” and the “incentives that the compensation structure creates for participants.” The Guidance does not dispute that legitimate direct selling companies can and must recruit participants to sell products, but suggests that any structure that over-emphasizes recruitment – either facially or in practice – may constitute a pyramid scheme. Similar arguments were advanced and rejected by the court in Neora.
• Personal consumption questioned. Courts have long accepted that MLM participants may purchase products to meet genuine demand for personal consumption and that such purchases within reasonable limits must be considered legitimate retail sales. The Guidance again casts doubt on the willingness of Staff to credit this consumption and demand, by listing potential scenarios that the FTC considers problematic, such as purchases used to meet thresholds to earn or maintain a level of compensation or rank, or purchases encouraged by a participant’s upline.
• Preferred customer purchases. The Guidance newly questions the validity of purchases by “preferred customers”—customers who have not registered as participants in the MLM opportunity—as potentially problematic if purchases “may be incentivized by the compensation plan.” The Guidance does not elaborate on what incentives would be permissible or prohibited for preferred customers.

Restricting Earnings Claims

• Atypical earnings claims. The Guidance strongly discourages claims of atypical earnings, stating that a “claim should reflect what the typical person to whom the representation is directed is likely to achieve” and emphasizing that even truthful testimonials from participants earning atypical amounts of money will likely generate a deceptive impression and must “at a minimum” be accompanied by “a clear, prominent, and unavoidable presentation of the typical participant’s revenue and expenses—all of which must be substantiated.” What’s more, Staff sets a remarkably low threshold for the types of claims that are likely to be considered deceptive. Whereas the 2018 Guidance discussed “expensive” houses and “luxury” automobiles, the updated Guidance now calls out claims about “modest or supplemental income” or that income from an MLM compensation funded gas or grocery purchases as potentially deceptive where the typical participant may not obtain that level of net income or without consumer perception evidence regarding how consumers interpret “modest or supplemental income.”
• Factoring in expenses. Without citing authority, Staff repeatedly assert that, to make any earnings claim, an MLM must first know the typical expenses of participants—not just to the company, but all expenses associated with pursuing the opportunity (travel, training, etc.)—and that any earnings claim must be based on these expenses being deducted from income. According to the Guidance, if a company “does not have access to data showing what participants typically spend pursuing the business opportunity (e.g., product or service purchases, website fees, party costs, and training or conference expenses), they should refrain from making any earnings claims.” In this regard, the Guidance seems to assume that reasonable consumers would assume that earnings claims would always be net of expenses, even though most earnings figures for occupations are not and even though many direct selling companies expressly disclose this fact.
• Income disclosure statements. The Guidance memorializes views expressed in Staff’s letter to the DSSRC in March which takes issue with the independent body’s issued guidance on income disclosure statements (covered here). Notably, the revised Guidance not only details Staff’s views on how income levels are determined such that expenses must be included, it also addresses who ought to be included in that calculation. Staff takes issue with disclosure statements excluding participants deemed “inactive” or who did not earn compensation, reasoning that such participants may have unsuccessfully tried to pursue the opportunity and that participants should not be omitted from earning statistics without evidence that they “affirmatively opted out of the income-earning opportunity, not merely failed to qualify for it or not merely exercised any inventory buy-back program.”

Agency Liability for Third-Party Claims

Despite the Commission’s Endorsement Guide acknowledging that it is “unrealistic” to expect a company to be aware of every statement made by a member of its network, Staff throughout the Guidance repeatedly notes that an MLM may be liable for the claims made by its participants and includes an entire section on this agency theory of liability and states there is “no safe harbor” for agency liability under existing law. Staff does, however, provide examples of potential actions to improve the effectiveness of compliance measures, including training, obtaining access to platforms used by participants (such as social media), and meaningful discipline for violations.

***

As we have discussed, Commission guidance does not have the force of law, although it does offer important insight into how current Staff intends to apply the law. To its credit, FTC Staff characterize the document as “non-binding guidance to assist multi-level marketers in applying those core principles to their business practices.” Elsewhere on the FTC’s website, Staff explains that guidance documents are “intended only to provide clarity to the public regarding existing legal requirements or agency policies.”

While this acknowledgment may offer some respite, the Guidance itself seems unlikely to advance its objective to “provide clarity,” except perhaps to emphasize that Staff is willing to selectively interpret precedent in a way that supports its long-held skepticism of the industry.

Please contact your regular Kelley Drye attorney if you have questions about these changes.

It has been fifty years since the FTC issued a competition rule, and then only as an adjunct to a conventional consumer-protection measure. The lone rule required octane disclosures on gas pumps. Since then, FTC officials disclaimed competition rulemaking authority and the agency aligned its competition policy with the larger body of antitrust law.

The current FTC reversed course on both fronts. It announced its intention to distance its competition policy from the rule of reason commonly applied in antitrust. And it criticized case-by-case enforcement as inadequate to deter competitive harms. A noncompete rule would be a climactic culmination of these ambitions.

Will the FTC succeed, and what would it mean? Clues will come in the course of the meeting. Here are some of the questions the Commission will have to answer persuasively if expects a rule to survive in the courts:

1. Does the Commission have the authority to promulgate competition rules?
   1. The Supreme Court could consider this a Major Question, subject to the analysis of West Virginia v. EPA. For a preview of how that analysis might apply, see my article, Regulating Beyond the Rule of Reason, and our post, The FTC’s Proposal to Ban Noncompetes is on Shaky Legal Ground.
2. Did the Commission apply a proper definition of anticompetitive practices?
   1. In the analysis supporting the proposal, the FTC noted that the weight of antitrust authority on noncompetes found them to be reasonable restraints. The analysis did not mention the cases from the FTC’s early years, when it held that soliciting or hiring employees from competitors was an unfair method of competition (cited at note 215here).
3. Did the Commission adduce adequate evidence of competitive harm?
   1. Academic studies (some collected here) generally find the aggregate evidence inconclusive, including one of the studies on which the Commission relied.
4. Would the rule adequately protect proprietary information?
   1. A principal purpose of noncompete clauses is to prevent companies from poaching intellectual property and proprietary information from competitors. Some of the consequences of banning the clauses are outlined in Proposed FTC Noncompete Ban Throws Out Good With Bad.
5. Did the Commission reasonably exempt valuable and harmless noncompete clauses?
   1. Some clauses would be exempt, for example those facilitating business sales and between franchisors and franchisees, which the analysis supporting the proposal considered worthwhile. Kelley Drye’s Corporate Group summarized them inThe FTC Proposes Ban on Non-Competes: The Implications for M&A Transactions, and our Employment and Labor Group looked at a future without noncompetes in FTC Proposed Ban of Noncompetes: Practical Guidance For Employers.

This proceeding has the potential to transform employer-employee relations throughout the United States. But its reverberations will be more profound. As noted in my first piece on the proposal, this is the first of a host of competition rules the FTC contemplates. Others in various stages include surveillance, the right to repair, pay-for-delay pharmaceutical agreements, unfair competition in online marketplaces, occupational licensing, real-estate listing and brokerage, and unspecified industry-specific practices. The fate of the noncompete rule will either launch a new era of industrial regulation or realign the FTC with antitrust norms.

According to undisputed evidence in the record, some of I Dig Texas’ products had been assembled in the United States, while others had been assembled in China. Even for the products that I Dig Texas had assembled in the United States, some components – such as a nitrogen power cell – had come from other countries. If you’ve followed our coverage of Made in USA claims and the FTC’s strict standard for supporting those claims, you might think you know how this case turned out. In this instance, though, you’d probably be 110% wrong (give-or-take about 10%).

The 10^th Circuit noted that under the Lanham Act, “a statement can be literally false only if it is unambiguous” and that “a statement without objective meaning can’t be literally false.” The court then asked itself “what does it mean to make a product in the United States or in America” and didn’t come up with a clear answer to its question. The term “make” could refer “either to the origin of the components or to the assembly of the product itself.” The challenged ads “are thus ambiguous when they say that the products are made in the United States or in America” and cannot be literally false.

How does the 10^th Circuit square its reading with the FTC’s Made in USA Rule? It doesn’t. In a short footnote, the court writes that “even if the FTC policy were otherwise instructive, it would not bind us when addressing false advertising under the Lanham Act.” The court then went on to say that given the absence of a “bright line” rule in the FTC’s policy, “it doesn’t remove the ambiguity of the phrase made in the United States or American-made.” The decision doesn’t go into more detail or discuss the FTC’s specific guidance on this issue.

If you want to know more about the FTC’s specific guidance on this issue and the consequences of ignoring that guidance, take a look at this post in which we covered a recent settlement over “Made in USA” claims that involved a $2 million penalty. The requirements in that settlement provide a good outline of what you should consider when making these types of claims. Even if you dig the 10^th Circuit’s analysis, you should know that the decision is a probably an outlier. The FTC, NAD, and other courts are likely to have a much different view of what it means for a product to be “made” somewhere.

In December 2022, NAD recommended (among other things) that Smile Prep ​“avoid conveying the message that Smile Prep does not give preferential treatment” to its affiliate partners and that it ​“clearly and conspicuously disclose that Smile Prep’s rankings, reviews, and product information of the clear aligners of its affiliate partners are advertising.” Smile Prep appealed the decision, an NARB panel affirmed the decision in March 2023, and the panel opened a compliance inquiry later that year.

Smile Prep made a number of changes to its site in an attempt to comply with the NAD and NARB decisions. For example, with respect to the issues we’re focusing on in this post, Smile Prep included a box at the top of each clear aligner review page on the website that begins with the words ​“Advertising Disclosure” in bold and then explains that: ​“When you buy products and services through our links, we may earn commissions.”

NARB determined that the ​“disclosure is neither clear nor conspicuous.” Among other things, NARB was concerned that ​“by having the disclosure appear on each page of the website, Smile Prep has obscured the fact that the disclosure is meant to apply to references to affiliate partners and their products.” Moreover, it worried that consumers may not understand the disclosure to communicate that the rankings, reviews, and other information about Smile Prep’s affiliate partners are ​“advertising.”

Smile Prep advised NARB that it believed that it was already in compliance with the NAD and NARB decisions and with applicable law, and that it was not willing to make further changes. It further stated that, ​“in the event of a referral, it looked forward to working with the FTC to craft a meaningful and fair approach to the regulation of all affiliate review sites.” Most companies wouldn’t look forward to that, especially after the FTC’s recent update to the Endorsement Guides.

This month, the FTC released a letter in which it noted that “after FTC staff explained the reason for NARB’s referral and its potential consequences, the company agreed to re-engage with NARB and NAD.” The company subsequently took additional steps to comply with the original decisions, including by adding a prominent disclosure explaining that it has an economic motivation for its recommendations. NARB subsequently closed the inquiry.

This case demonstrates that how companies disclose incentivized reviews (including through affiliate review sites) continues to be a hot topic for regulators, NAD, and even competitors. The updated Endorsement Guides include more granular requirements on what it means for a disclosure to be ​“clear and conspicuous” and companies will be evaluated against those requirements. The case also demonstrates the potential consequences of ignoring an NAD or NARB decision.

On Friday, FTC staff put another stake in the ground when it sent a letter to the Direct Selling Association (“DSA”), doubling down on its reframing of the longstanding Koscot test for determining whether a business is an illegal pyramid scheme – a reframing that Judge Barbara Lynn soundly rejected in the Neora matter, as we previously discussed here. Also on Friday, the FTC sent a separate letter to the Direct Selling Self-Regulatory Council (“DSSRC”), taking issue with the independent body’s issued guidance on income disclosure statements.

We discuss these two letters in more detail below, but note the following key takeaways:

• Advisory opinions and letters such as the ones discussed below reflect the views of the current staff and are not official Commission positions. The Commission is not bound by these opinions, and future staff may rescind or modify them at any time (as illustrated below by staff’s disavowal of its 2004 Advisory Opinion, upon which many in the direct selling industry have relied over the years).
• Regardless of Commission staff’s opinions, Section 5 and associated case law ultimately control. Commission staff undoubtedly intends to raise the bar for compliance while attempting to improve its litigation position in future matters (and possibly avoiding a repeat of the Neora loss), but courts must ultimately look to the law and relevant precedent in determining whether a practice is unfair or deceptive under the FTC Act.

Repudiation of “Primary Source” Test

In 2004, when DSA sought guidance regarding FTC staff’s analysis of a pyramid scheme, staff clarified in a letter that “[t]he critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.” In other words, if compensation was “primarily” based on recruitment rather than product sales, the operation would be considered a pyramid scheme. This Advisory Opinion is well-known within the direct selling industry and has been cited in multiple complaints and decisions over the last 20 years, including in the recent Neora decision.

In last week’s letter to DSA, Division of Marketing Practices Associate Director Lois Greisman restated a position expressed during the Neora trial and at recent industry events that the “primary source” test for differentiating a legitimate business from an illegal pyramid scheme does not exist, and that industry has misinterpreted the 2004 Staff Advisory Opinion. The letter cites language in certain decisions such as Koscot, Noland, and Vemma to suggest that the dispositive inquiry for a pyramid analysis is whether a compensation plan incentivizes recruiting and/or relies on recruiting to unlock significant rewards – a position the agency advanced (and lost) in the Neora case.

While acknowledging that many FTC complaints and court decisions use the “primarily” or “primary source” language, the staff letter discounted that language as related to “litigation decisions” and/or “not key holdings in the decisions” and stated that the 2004 letter is no longer valid and therefore rescinded.

The disavowal of the 2004 Advisory Opinion demonstrates a shift in staff’s thinking on pyramid scheme standards, but – importantly – does not change applicable law. The FTC’s position did not hold in Neora, and future litigation will determine whether other courts accept the FTC’s reframing.

DSSRC IDS Guidance

The DSSRC, a national advertising self-regulatory program administered by BBB National Programs, is tasked with monitoring and addressing earnings and product claims made by the direct selling industry, and issuing guidance on lawful advertising and marketing practices. For example, DSSRC’s “Guidance on Earnings Claims for the Direct Selling Industry,” which was first issued in July 2020 and subsequently revised in 2022, lays out guiding principles for making truthful and non-misleading claims, including that companies refrain from making lavish lifestyle claims and focus on the overall “net impression” communicated by any product or earnings claims.

In fall 2023, DSSRC issued a new document, “Guidance on Income Disclosure Statements for the Direct Selling Industry,” to provide guiding principles to help direct selling companies develop income disclosure statements, which are commonly used in the industry to provide prospective participants with earnings and other key information that consumers may wish to consider.

In last week’s letter to DSSRC, FTC staff raised several concerns with this new IDS Guidance. For example, Ms. Greisman took issue with the Guidance’s discussion of business costs, arguing that all costs – mandatory and optional – must be tracked and accounted for when determining whether earnings claims have a “reasonable basis.” But this position does not account for the manner in which direct selling companies allow sellers to determine how to build their businesses and which costs to incur. DSSRC’s Guidance takes the balanced approach that companies should disclose mandatory costs, but that non-incidental expenses should be evaluated on a case-by-case basis, thus acknowledging that different sellers may engage in a variety of different marketing techniques.

FTC staff also argued that even supplemental income claims may be misleading if most people are not making any money net of expenses. But this position ignores the low entry costs associated with a direct sales opportunity, and does not acknowledge that industry calculations of expected earnings, whether measured as averages or medians, do not account for the significant variability in the amount of time and effort invested in building sales businesses.

The letter also takes the position that any representations regarding substantial earnings must be qualified “at a minimum [by] a clear, prominent, and unavoidable presentation of the typical participant’s revenue minus expenses—all of which must be substantiated.” But FTC staff provides no support or precedent for why an appropriately qualified earnings claims could not be made based on gross earnings where the claim makes that fact clear and reiterates that expenses vary by seller.

***

With these two letters, FTC staff has unmistakably turned up the heat on the direct selling industry and reiterated that it will not cede ground based on its loss in the Neora trial. Yet the agency can’t make law by proclamation – that will be for a judge or jury to decide.

We previously covered the Commissioners’ confirmation hearings here; those hearings focused on restoring bipartisanship that had long been considered a bedrock of the agency but that has been called into question under Chair Lina Khan. The hearings appeared to go smoothly and the nominees were swiftly approved by the Senate Commerce Committee in October, but floor action had been stalled, in part due to Senator Hawley’s (R-MO) concerns with the Ferguson nomination. Senator Hawley issued a statement yesterday indicating that now Commissioner Ferguson had “answered a series of questions from me in writing and also spoke with me in person at length,” and that he was now “pleased to support his nomination."

Andrew Ferguson was previously Solicitor General for Virginia and helped lead a state-federal antitrust suit against Google for alleged monopolization of digital advertising markets, amongst other actions. Melissa Holyoak was the Solicitor General for Utah and also has been active in state-federal antitrust and consumer protection enforcement. Particularly given their litigation background, Ferguson and Holyoak will bring new and unique perspectives to the Commission’s litigation strategy from both the consumer protection and competition sides. Their relationships on the state level may also open up new channels for FTC partnership with state attorneys general.

Of course, at the end of the day, Chair Khan retains a strong and reliable majority with fellow democratic Commissioners Slaughter and Bedoya. But it will be interesting to see whether Commissioners Holyoak and Ferguson vocally push back on certain initiatives and enforcement priorities similar to Commissioners Wilson and Phillips before their departures.

Significant Changes

The FTC proposes to modify many of the Rule’s provisions. Some of the proposed changes could have far-reaching practical effects for companies assessing COPPA’s applicability and working to achieve COPPA compliance.

• Parental Consent for Third-Party Disclosures: The FTC’s proposal includes a major change to parental consent requirements, which currently permit a single consent for the collection, use, and disclosure of child personal information. Under proposed Rule, when verifiable parental consent is required, operators would be required to bifurcate consent and obtain one for collection/use and one for disclosure to third parties, except where such disclosure is “integral to the nature of the website or online service.” This proposal could require companies to not only manage the new requirements, but also address potential parental confusion created by a bifurcated model.
• Internal Operations Exception: The FTC proposes to modify the Rule’s internal operations exception to the general requirement that operators obtain parental consent. Under the proposal, an operator would be prohibited from using a persistent identifier collected under the internal operations exception “in connection with processes, including machine learning processes, that encourage or prompt use of a website or online service.” By way of example, the FTC noted this new limitation would “prohibit operators from using or disclosing persistent identifiers to optimize user attention or maximize user engagement with the website or online service, including by sending notifications to prompt the child to engage with the site or service.” How this new limitation would be reconciled with internal operations activities that companies currently use to operate their sites, including for personalization, is an important question to be answered.
• School Authorization Exception: The rulemaking includes an entirely new parental consent exception for education technology. In certain circumstances, an operator may rely on the consent of a school, as opposed to a parent, in collecting child information. The proposal specifies a number of requirements that must be satisfied to rely on the School Authorization exception, including: (1) that the information collected can only be used for a school-authorized education purpose and not a commercial one; (2) a written agreement between the authorizing school and the operator with specific terms; (3) direct supervision by the school over the operator’s use, disclosure, and maintenance of the personal information; (4) that the operator must post an online notice with proscribed information; and (5) the ability for the school to review and request deletion of any child personal information. Although the FTC’s proposal makes clear that the new School Authorization exception is merely a codification of existing guidance, both schools and operators will need to address issues left open under the exception, such as what activities fall within the educational purpose limitation.
• Data Security Obligations: The FTC’s proposal offers more granular and prescriptive terms on what is required by COPPA’s requirements to establish and maintain “reasonable procedures” to protect children’s data. Such reasonable procedures would include establishing, implementing, and maintaining a written children’s comprehensive security program. It would also include written assurances from third parties to which child personal information is disclosed that they can satisfy requirements to secure and protect child personal information.

• New Parental Consent Options: The FTC proposes allowing parents to provide consent through text messages, knowledge-based authentication, and facial recognition technology. The FTC is also proposing to eliminate the monetary transaction requirement for obtaining consent through a parent’s use of a credit card, debit card, or online payment system. Under this proposal, the parent would simply need to enter payment information and no charge would be transacted.
• Defining “Directed to Children”: The FTC is proposing to add “a non-exhaustive list of examples of evidence” it would use in its assessment of whether a site or online service is directed to children, including “marketing or promotional materials or plans, representations to consumers or to third parties, reviews by users or third parties, and the age of users on similar websites or services.” It also asks whether websites or online services be able to rebut that they are directed to children through an audience composition analysis.

Anticipated Clarifications

The NPRM also proposes important clarifications that have been previewed in recent COPPA settlements and guidance.

• Data Retention: The NPRM would expand the Rule’s express data retention and deletion requirements, making clear that “personal information collected online from a child may not be retained indefinitely” or used for a “secondary purpose” beyond the purpose(s) for which the information was collected. The FTC also proposes to require that companies establish internal policies to limit data retention and disclose their data retention policies in their COPPA privacy policies.
• Defining “Personal Information” to Include Biometrics: In FTC’s proposal would expand the definition of personal information to include biometric identifiers that can be used for the automated or semi-automated recognition of an individual, reasoning that “biometric recognition systems are sufficiently sophisticated to permit the use of identifiers . . . to identify and contact a specific individual either physically or online.”
• Voice Commands: The FTC proposes to largely codify its 2017 policy statement regarding COPPA and voice recordings (which comes up in the context of smart home assistants or similar technology). The FTC proposes that as long as a business uses the audio file to respond to a specific request and does not (1) use the information for another purpose, (2) disclose the information, or (3) retain the information after responding, COPPA direct notice and consent requirements do not apply.

Open Questions

Finally, the FTC asks a series of questions regarding its approach to COPPA rulemaking. Some of the questions that stood out to us include:

• Screen and User Names: The FTC asks whether it should expand the definition of “personal information” to include screen or user names that do not allow contacting an individual, despite the fact that the FTC’s rulemaking authority to define “personal information” is limited to identifiers that can be used to “contact[] . . . a specific individual.” The NPRM reasons that children may use the same screen or user name across websites or online services, and they may be able to be contacted on platforms not controlled by the operator.
• Limiting Personalization and Contextual Advertising: The existing COPPA Rule permits businesses to use persistent identifiers for internal operations without parental consent. The FTC asks whether certain types of personalization and contextual advertising remain appropriately categorized as internal operations. For example:
  • The NPRM explains that personalization that is “user driven” may be permitted under the internal operations exception, but it asks whether personalization that is “driven by an operator” and that is designed to “maximize user engagement” should be permitted.
  • Similarly, the NPRM questions whether to continue to permit contextual advertising under this exemption. It explains, “given the sophistication of contextual advertising today, including that personal information collected from users may be used to enable companies to target even contextual advertising to some extent, should the Commission consider changes to the Rule’s treatment of contextual advertising?”
• Role of Platforms: The NPRM asks whether platforms can play a role in establishing consent mechanisms to enable obtaining verifiable parental consent. In particular, the FTC states it would be interested in understanding the benefits that platform-based consent mechanisms would create for businesses and parents.

* * *

For 60 days after publication in the Federal Register—which should occur in the next couple of weeks—the FTC is accepting public comment on the proposed changes to the Rule and the questions the agency raises in its NPRM. We will continue to monitor developments.

• Regulators’ Favorite Shade – Dark Patterns: Following the FTC’s 2022 Dark Patterns Report and high profile enforcement action against Epic Games, regulators including the FTC, CFPB, and state AGs continued to bring enforcement and provide guidance on perceived “dark patterns” – primarily related to automatic renewal and continuous service options, but also as to chat bots, disclosures, and marketing practices more broadly. In January, the CFPB released guidance focused on dark patterns in negative option marketing. In March, the NAD joined the discussion in a decision highlighting potential issues with Pier 1’s advertising of discounted pricing only available with a paid subscription and its use of a pre-checked box for enrollment with that same subscription. The FTC continued to lead the charge – with dark patterns allegations playing a key role in a number of enforcement actions, including against Publishers Clearing House, Amazon, and fintech provider Brigit.

• Beyoncé and Taylor Swift Concerts Lead to War on Junk Fees: Okay, the war against junk fees may have predated the fees associated with the pop stars’ mega tours, but it continued in earnest throughout the year. As with dark patterns, the FTC, CFPB and state AGs all took on junk fees at various times. Most notably, the FTC proposed a far-reaching rule that could fundamentally alter how prices and fees are disclosed in businesses across the country. The comment period was just extended until February 7, 2024 for the proposed rule. Not to be outdone, California passed new legislation banning hidden fees and the Massachusetts AG issued draft regulations that would prohibit hidden “junk fees,” enhance transparency in various transactions, and make it easy for consumers to cancel subscriptions.

• Endorsement Guides: In June, the FTC released its long-awaited update to the Endorsement Guides. We noted that the Guides include some significant changes, including new examples of what constitutes an “endorsement,” details about what constitutes a “clear and conspicuous” disclosure, and an increased focus on consumer ratings and reviews. We also examined how the revisions could affect influencer campaigns. In November, we reported that the FTC had sent warning letters to two trade associations and 12 influencers over their posts, giving us a glimpse of enforcement to come. Meanwhile, NAD has also been active in this space and even referred a case to FTC for enforcement. Expect this to be a priority for both FTC and NAD in 2024.

• Green Guides: The FTC’s Green Guides review progressed this year with an initial comment period closing in April, followed by an FTC workshop on “recyclable claims,” which we attended and highlighted here. With its history of hosting several workshops on hot green topics, we expect to hear of more workshops in the new year. California has been active as well with the governor signing a new law in October that aims to regulate carbon claims and make businesses more transparent about their carbon reduction efforts by requiring certain website disclosures (see our summary of the law here). The effective date is the first of the new year, but according to a recent letter from the bill’s sponsor, we expect that California will defer enforcement until January 1, 2025 to give companies time to comply (see here). With ESG efforts continuing to be front and center for most companies, consumers and regulators are holding companies accountable for those claims by questioning messaging about their efforts, aspirations for the future, and basis for the claims (see, for example, here, here, and here).

• State Privacy Laws: It’s getting increasingly hard to remember a time before state privacy laws regulated data sales, targeted advertising, sensitive data, and privacy disclosures. At the start of the year, five states had enacted privacy laws, and now there are 13 comprehensive consumer privacy laws (CA, CO, CT, DE, FL, IN, IA, MT, OR, TN, TX, UT & VA) and an additional two health-focused laws (WA, NV). What does this mean for advertisers? (1) Know who your vendors are and their data practices. (2) Obtain consent before building inferences based on sensitive data, like race/ethnicity, religion, or health. (3) Disclose up-front the collection, use, and disclosure of personal information. (4) Finally, recognize the limitations of third-party data as new regulations and laws take effect.

• Children’s Privacy: Congress, regulators, and advocates focused time and energy on children’s privacy issues in 2023. The House and Senate held hearings focused on children’s safety and privacy. Although the Senate Commerce Committee advanced the Kids Online Safety Act, it never received a floor vote; Senators Markey and Cassidy continued to advocate for approval of the Children and Teens’ Online Privacy Protection Act (COPPA 2.0). The FTC reached settlements with companies about practices it alleged violated the Children’s Online Privacy Protection Act (COPPA) on the Xbox and Alexa platforms and with edtech provider, Edmondo. In September, the FTC released a ​“Staff Perspective” on digital advertising to children, which included recommendations on how to protect kids from the harms of “stealth advertising.” Also in September, a federal court agreed with industry advocates that California’s Age Appropriate Design Act, which imposes a variety of obligations on businesses that provide online services “likely to be accessed by children,” violated the First Amendment. California is appealing the decision, and regulators, including a number of Attorneys General and FTC Commissioner Alvaro Bedoya, have joined the state as amici. One of the most anticipated developments occurred with just 11 days left in the year, when the FTC proposed revisions to the COPPA Rule—more than four years after initiating its review process. Among other things, the proposed Rule would require new, additional consents for third-party disclosures and could affect operators’ approach to “internal operations.” Online services with children’s audiences have lots to consider in 2024 and beyond. Stay tuned for further updates.

• State AG: State Attorneys General continued to make their presence felt in 2023. State AGs continued to go after companies for using fake reviews and false endorsements, enforced and proposed new price gouging rules, pursued telehealth companies for deceptive practices, supported the FTC’s Negative Option Rulemaking while bringing their own auto-renewal actions, continued to impose significant penalties against companies for data breaches, pursued companies for misleading consumer financial practices, and focused efforts on so-called “junk fees.” But two topics continue to be the highest priority of AGs – the impact of developments in AI (which we’ve written about here, here, and here – just to name a few) and protecting the most vulnerable consumers – especially our nation’s youth. The incoming president of the National Association of Attorneys General president, Oregon Attorney General Ellen Rosenblum, has already made protecting youth, especially teens, this year’s presidential initiative. Look for AGs to continue to this focus well into 2024.

• Automatic Renewal: While auto-renewal service sign-up flows remain important, this year, we have seen a transition to cancellation processes being the hottest topic as states enforce their specific requirements and the FTC has drawn attention to “click to cancel” through its proposed rule. But we shouldn’t forget all of the FTC’s other proposals under the negative option rule NPRM, including expanding the scope, requiring more specific disclosures, separate consent for negative option, consent for save offers, and expanded notice requirements. Regardless of whether a federal rule formally comes into play in 2024, as referenced above certainly states have agreed are on board with FTC’s proposals, and they also resolved a multistate investigation this year requiring checkbox consent, online cancellation, and limiting save attempts. And don’t forget Massachusetts is working on its own rulemaking involving online cancellation.

• NAD: This year, NAD issued number of decisions that caught our attention. For example, a decision in February narrows the scope of what claims may be considered puffery. NAD later elaborated on what it thinks advertisers must do in order to substantiate aspirational claims about future goals. NAD also issued a number of decisions involving endorsements – including employee endorsements and disclosure requirements – and even referred a case to FTC for enforcement. In August, NAD held that emojis could convey claims, though NARB later disagreed with how NAD had applied that principle. As always, NAD plays a big role in the advertising law landscape, so companies will want to continue to watch what NAD does in 2024.

• Same Product/Different Label Litigation: We chronicled a Connecticut district court’s denial of a motion to dismiss in a case in which the plaintiff alleged that Beiersdorf, maker of Coppertone sunscreens, engaged in false advertising by selling the same sunscreen formula in two different packages, one of which was labeled as “FACE” and sold in a smaller tube at twice the price of the regular Coppertone Sport Mineral sunscreen. That case is one to watch but it is not the only one of its kind. In fact, 2023 saw several similar cases involving allegedly the same formula marketed as different products with varying price points, such that the plaintiffs alleged that they were misled into purchasing the more expensive item because they believed it was uniquely suited to their needs when, in fact, it was the same as the lower-priced item. These cases involved a range of products, such as baby/adult lotions, infant/children’s acetaminophen, children’s/adult cold remedies, to name a few. So far, decisions are mixed, with some courts being more willing than others to find that the differing prices were justified. Marketers of food and personal care brands that merchandise the same formula in varying iterations will want to remain mindful of these cases as they update packaging and claims.

Keep following us in 2024, and we’ll keep you posted on how these trends develop. In the meantime, have a great holiday!

The rule’s reach is expansive: it establishes prohibited claims, mandates disclosures, prohibits certain categories of add-on products, requires express, informed consent for charges and prescribes how to obtain that consent, and imposes weighty recordkeeping requirements. As drafted – and barring judicial review – the rule will result in fundamental changes to the way vehicles are currently marketed and sold in the U.S.

We first highlight three key takeaways, then take a closer look at the rule’s requirements below.

1. The final rule is narrower in scope than the proposed rule. Some disclosure and consumer consent requirements appearing in the FTC’s initial proposal from June 2022 are absent from the final rule. For example, the final rule does not require dealers to present consumers with “add-on lists” detailing all optional add-on products or services and their prices, or obtain signed declinations from consumers before charging for such optional add-ons. (“Add-ons” are generally defined as any products or services that consumers are charged for when buying a car and which are not installed or provided by the vehicle manufacturer.)
2. The FTC will be able to seek monetary relief, including consumer redress and civil penalties, for rule violations. Section 19 of the FTC Act specifically allows the FTC to seek monetary relief in cases involving rule violations. Once the final rule goes into effect (and assuming no court interference), the FTC will be able to seek monetary relief whenever dealerships make prohibited misrepresentations to consumers or fail to follow other enumerated requirements. Section 5 of the FTC Act separately authorizes the FTC to seek civil penalties for violations of rules.
3. The final rule’s recordkeeping requirements are extensive, and failure to follow them will subject dealers to monetary penalties as well. All motor vehicle dealers covered by the rule will be required to keep copies of records demonstrating compliance with the rule. This includes materially different ads, sales scripts, training and marketing materials, purchase orders, financing and lease documents, written communications with consumers about sales, consumer complaints and inquiries related to sales or add-ons, and others. Records must be kept for a period of two years from the date of creation, and failure to do so is considered a violation of the rule.

Prohibited Misrepresentations

The rule prohibits motor vehicle dealers from making misrepresentations regarding “material” information relating to a number of enumerated topics. Some are obvious and expected, such as misrepresentations about:

• costs or terms of purchasing, financing, or leasing a vehicle (for example, total costs, down payments, interest rates, repayment schedules, or financing options);

• costs and other features of add-ons (for example, that an add-on is required, the add-on’s benefits, or a consumer’s right to cancel an add-on);

• availability of a specific vehicle at an advertised price;

• whether the consumer is purchasing or leasing a vehicle;

• any information on or about a consumer’s application for financing, including the consumer’s income or down payment amount; or

• conditions of repossession.

Others, however, are not as straightforward. For example, dealers may not advertise a price that accounts for rebates or discounts not available to all consumers. For example, if a rebate or discount applies only to the most expensive version of a vehicle make and model or is only available to consumers with high credit scores, it cannot be included in the advertised price. Dealers may advertise limited rebates or discounts only if they clearly and conspicuously disclose those rebates’ limitations.

Yet other categories have little to do with car-buying specifically, such as the prohibition on misrepresenting that consumer reviews or ratings of the dealer’s services are unbiased, independent, or ordinary consumer reviews or ratings. This prohibition underlines the agency’s continued focus on endorsement and review practices across industries.

Required Disclosures

The rule requires dealers to disclose three types of information in a way that is “clear and conspicuous.”

First, dealers must disclose the offering price whenever referencing a specific vehicle, whether in ads or in a consumer communication. The “offering price” is the full cash price at which a dealer is willing to sell the car; dealers are permitted to exclude only required government charges from this amount. The offering price must include any preinstalled or required add-on charges. It also cannot reflect rebates or discounts not available to typical consumers.

Second, dealers who offer optional add-ons to consumers must disclose that the add-ons are not required in order to purchase the vehicle.

Third, any claims about monthly payment amounts trigger required disclosures regarding the total amount the consumer will pay based on those monthly payments. And if consumers are presented with multiple payment options at different monthly payment amounts, dealers must also disclose if opting for a lower monthly payment will increase the total cost of the vehicle. The goal here is to avoid framing a payment option as less costly based on lower monthly payments alone, when in fact the total cost is higher or the deal reflects a balloon payment at the end.

Prohibition on Add-Ons that Provide No Consumer Benefit

Perhaps one of the most vague and open-ended mandates in the rule is the prohibition on charges for add-ons “if the consumer would not benefit from such an Add-on Product or Service.”

Staff suggests it will use objective standards to evaluate consumer benefit, such as whether the consumer is eligible to use the add-on; whether the add-on’s coverage excludes the vehicle at issue; and whether the add-on will actually work on the vehicle.

It also provides several examples of add-ons it considers of no benefit, including: nitrogen-filled tires when the tires contain no more nitrogen than exists in the air; products or services that don’t cover the vehicle or are duplicative of the vehicle’s warranty; rust-proofing products that don’t prevent rust; theft-prevention products that don’t prevent theft; engine oil-change services for electric cars; or software subscription services for vehicles that do not support that software.

While the examples are illustrative, the “no benefit” standard remains amorphous and potentially subjective. Auto dealers will need to consider the standard in light of the provided examples and be able to provide a reasoned analysis to support benefits of add-on products and services.

Express, Informed Consent for Charges

Dealers are required to get express, informed consent for all charges. Consumers must affirmatively consent to charges after receiving information about the purpose and amount of the charge. Express, informed consent can’t be obtained through signed contracts alone, or through documents with pre-checked boxes or featuring any design or template intended to manipulate users.

Recordkeeping Requirements

All auto dealers will be required to create and retain any records necessary to demonstrate compliance with the rule. Enumerated categories of information include (but are not limited to) advertisements and marketing materials; sales scripts and training materials; purchase orders; financing and leasing materials; written consumer communications relating to sales, financing, or leasing; add-on service contracts and GAP agreements; and consumer complaints related to sales, financing, leasing, or add-ons. Records must be retained for two years from the date of creation.

In justifying the rule’s recordkeeping burden, the FTC references the Telemarking Sales Rule, 16 CFR 310.5 (“TSR”), and the Business Opportunity Rule, 16 CFR 437.7 (“BOR”), noting that both require covered entities to retain certain records for a specified period of time to demonstrate compliance. While it’s true that these rules do require some record retention, the burden here is indisputably higher and seems more akin to recordkeeping mandates in FTC consent orders. Indeed, Staff references such order requirements in justifying the rule’s recordkeeping burden. The obvious logical gap is that auto dealers covered by the rule have not been accused of any wrongdoing nor placed under an FTC order. Nevertheless, if they fail to maintain all records required under this section, they will be in violation of the rule and subject to monetary penalties under Section 19.

If the rule goes into effect as drafted, auto dealers will need to overhaul recordkeeping practices significantly to ensure they can demonstrate compliance with the rule if faced with an FTC investigation.

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As noted above, the rule’s effective date is in July 2024. We’ll be watching this space closely for possible court challenges and ensuing FTC enforcement activity.

The letters start with a reminder that influencers must “clearly and conspicuously” disclose any “material connection” they have to a brand (unless that connection is otherwise clear from the context) and then summarize the FTC’s view of what constitutes a “clear and conspicuous” disclosure. With that background, FTC staff goes on to express specific concerns about the posts. Here are some of the highlights about what caught their attention:

• Some of the posts didn’t include any disclosure or any other indication that the influencer was connected to the association.
• Some posts included a disclosure in the description, but not in the video. The letters state that because viewers can watch the videos without reading the descriptions, “there should be clear and conspicuous disclosures in the videos themselves, for example, by superimposing much larger text over the videos.” Audible endorsements require audible disclosures and visual endorsements require visual disclosures.
• Some of the disclosures in the descriptions weren’t sufficiently clear or conspicuous since they were truncated on TikTok and Instagram, such that viewers wouldn’t see them unless they clicked on the text. Staff also wrote that they “do not think that disclosure in a TikTok or Instagram Reels post’s text description is clear and conspicuous.”
• Some influencers relied upon the “paid partnership” disclosure tool offered by the platforms in making their disclosures. Staff reiterated previous “concerns about the conspicuousness of such built-in disclosure tools alone” and think it is “too easy for viewers” to miss them. Those tools are not a substitute for the other disclosures the FTC wants to see in the posts.
• Even if viewers read the “Paid partnership,” “#sponsored,” and “#ad” disclosures, FTC staff thought they might be inadequate in the context of the posts, because some of the influencers did not identify the sponsor of the posts. Viewers should know who is sponsoring the posts, not just that a post was sponsored.

The letters “strongly urge” the associations and influencers to review their posts to ensure they comply with FTC requirements and ask the recipients to respond within 15 business days. The letters also included the FTC’s Notice of Penalty Offenses Concerning Deceptive or Unfair Conduct Around Endorsements and Testimonials with a warning that the recipients – including the influencers – are “on notice that engaging in conduct described therein could subject you to civil penalties of up to $50,120 per violation.”

As we noted in our original post, making disclosures in the way the FTC outlines in the revised Endorsement Guides (and now in these warning letters) may be a departure from common industry practice, which usually involves an influencer making a single disclosure in the first few lines of a post. Companies and influencers who were waiting for FTC action before changing their practices may want to factor these warning letters into their decisions.