After years of relative silence, the Federal Trade Commission (FTC) has finally made its next move on the sponsored endorsement front—and it’s a big one. Yesterday, the FTC sent Notices of Penalty Offenses (Notices) to more than 700 of the nation’s most prominent retailers, consumer products companies, and ad agencies (listed here), setting the stage for the Commission to seek steep penalties—$43,792 per violation—against brands who use deceptive sponsored endorsement practices. Retailers that received the Notices (cover letter and notice) must act quickly to protect themselves.

The Notice Summarizes Conduct that FTC Has Previously Found to Be Illegal

The Notice outlines a number of endorsement-related practices that the FTC has previously 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 is 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.
  • Misrepresenting – explicitly or implicitly – that the experience of an endorser represents the typical experience of users of the product.

The Notices Reflect the FTC's New Creative Strategy to Pursue Penalties

This is not the first time the FTC has sent letters notifying brands of their obligations under the Guides Concerning the Use of Endorsements and Testimonials in Advertising (Endorsement Guides). In April 2017, the Commission sent more than 90 letters to brands such as Chanel and Adidas, and celebrities including Jennifer Lopez and Victoria Beckham, delineating the need to follow the Endorsement Guides. In September 2017, the FTC sent a follow-up warning letter to 21 of the recipients, citing specific social media posts that appeared to endorse a brand but failed to disclose clearly and conspicuously a material connection between the brand and the influencer.

While the 2017 letters were intended to notify advertisers about potential violations, the new Notices serve a different purpose: they are a procedural mechanism to allow the FTC to seek penalties under the FTC Act. As we have noted previously, in the several months since the Supreme Court held in AMG Capital Management, LLC v. FTC that Section 13(b) of the FTC Act does not allow for monetary restitution (for an overview of the decision, see our alerts here and here), the FTC has been attempting to creatively utilize other provisions of the Act in order to obtain money from the companies and individuals it prosecutes (see our alert here for one example).

Under Section 5(m)(1)(B) of the FTC Act, the FTC can pursue civil penalties against a company where: (1) it has already issued a final cease and desist order in which it determined that certain conduct is unfair or deceptive, and (2) the company knew the conduct was unfair or deceptive. While the FTC has resolved numerous cases involving allegedly deceptive sponsored enforcement, satisfying the first element, the Notices are explicitly intended to meet the second requirement by giving the recipients "actual knowledge" that certain practices violate the law.

The FTC has not pursued penalties under Section 5(m)(1)(B) for decades; however, in the wake of AMG Capital, the Commission will likely turn to its Penalty Offense Authority under Section 5(m)(1)(B) for future actions. Evidencing this, the FTC recently sent similar Notice of Penalty Offenses to for-profit educational institutions listing deceptive employment and earnings claims that can invoke financial penalties.

In contrast to its 2017 letters, the FTC specifies in its recent wave of letters that it has not reviewed the advertising of the 700 recipients, much less concluded that they have violated the law. Instead, the Notices are intended to put the recipients on notice of what is and is not illegal, so that if the brands do violate the law in the future, they will have done so "knowingly." For this reason, any future actions by the FTC will likely target companies who have received this type of notice.

Conclusion

The good news for retailers is that the Notices give retailers the opportunity to make sure they are buttoned up now, even if they have not complied with the Endorsement Guides in the past. While the FTC can now argue any future violations are done "knowingly," they will have a much weaker argument as to past violations. Retailers that received Notices should act quickly to ensure that they are complying with the Endorsement Guides and not engaging in the practices listed above, so they can stymie any potential argument that they are willfully violating the law.