The Federal Trade Commission (FTC) recently issued Notices of Penalty Offenses regarding for-profit education, endorsements and testimonials, and money-making opportunities. Prior to this year, the FTC had used its Penalty Offense authority only once in this century. So why the sudden rebirth? In this webinar, Venable attorneys examined the FTC’s authority in this area, the substance of the notices, and their broad implications.
What Is a Penalty Offense?
Under the Penalty Offense authority, the FTC can seek civil penalties against a company or individual if it proves that they had actual knowledge that the FTC had already issued a written decision (after an administrative trial) against another entity that the same conduct was unfair or deceptive in violation of Section 5(m)(1)(b) of the FTC Act. Section 5 enables the FTC to hold the person, partnership, or corporation liable for a civil penalty of up to $43,792 per violation.
In the last few weeks, the FTC has sent out three different notices. The purpose of these notices was to allow the FTC to argue that the recipients had actual knowledge that the FTC had previously ruled certain acts or practices to be unfair or deceptive. Each of the letters specifies that the FTC is not singling out recipients or suggesting recipients are violating the law, which signifies that this is part of an effort to effect broad changes in industry behavior.
History and Rebirth
The Penalty Offense provision of the FTC Act was added in 1975 to address criticisms that the FTC was toothless and the administrative orders it was issuing were nothing more than a slap on the wrist. It was also meant to be a tool enabling the Commission to address wide-ranging practices. Shortly after the statute was enacted, the FTC began sending out notices like those we have seen in the last few weeks.
In the early 1980s, the FTC stopped using its Penalty Offense authority, instead relying on Section 13(b) of the FTC Act, which authorized it to seek injunctive relief and equitable monetary relief in federal court. Over time, the FTC abandoned bringing cases in administrative proceedings in almost all instances, and the federal court became the predominant way in which the FTC challenged conduct—until this year.
In a unanimous decision on April 22, the Supreme Court found that the FTC lacks the authority to seek equitable monetary relief under Section 13(b). Since then, the effort to reinvigorate the Penalty Offense authority has picked up momentum.
Penalty Offenses Concerning Education
The first set of notices focused on the for-profit education marketplace. On October 6, the FTC issued letters to 70 of the largest for-profit institutions of higher education regarding earnings and success claims, stating that engaging in certain conduct could subject them to civil penalties.
The administrative decisions the FTC used to serve as the basis for the notice are antiquated—dating between 1952 and 1980. These cases deal with advertising misrepresentations concerning employment prospects, job demand, quality of training offered, quantity of graduates who have obtained work at desirable wages, performance of school career placement services, and associations with potential employers. The FTC will be focused on this type of conduct in the modern marketplace. With the stakes of noncompliance this high, every school that received a notice needs to identify and address compliance risks.
Penalty Offenses Concerning Endorsements
On October 13, the FTC sent notices to over 700 national advertisers and advertising agencies. The practices they highlighted as noncompliant involved misrepresenting endorsements and fake reviews and testimonials. The FTC is also targeting endorsements, reviews, and testimonials that make deceptive performance claims or fail to disclose a material connection between the endorser and the company. Again, the decisions the FTC relied on in its notice were from the last century, but the FTC will seek to apply those principles to modern uses of endorsements and testimonials, including on social media.
Whether soliciting feedback directly from customers, using an automation platform to collect and publish feedback, reposting a review from a third-party website, or contracting with a third-party review site, your company needs to brush up on best practices to ensure compliance.
Penalty Offenses Concerning Money-Making Claims
On October 26, the FTC issued notices to over 1,100 businesses concerning deceptive earnings claims and misrepresentations about money-making ventures and opportunities. Recipients included multilevel marketers, “gig” employers, investment and business coaching providers, franchisors, and sellers of business opportunities.
The overarching theme in the notice is that a company or an individual cannot make earnings claims that are false, misleading, or unsubstantiated. Falling under this umbrella are false sense of urgency claims and misrepresentations about the amount of work, training, or experience necessary to earn money. Earnings claims must be backed up with reliable data, and the claims must match the substantiation.
As the Notices of Penalty Offenses were sent only within the last few weeks, it remains to be seen how the FTC will pursue and penalize violations. What is clear is that the FTC is casting a wide net and becoming increasingly active. With more notices inevitably coming down the pipeline, now is the time to familiarize yourself with FTC guidelines and brush up on best practices to stay in compliance.