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Responding to FTC’s 700 Product Claim Notices

K2VITAL®
 
Albion Minerals®

The Federal Trade Commission (FTC) in April sent out nearly 700 penalty offense notices to companies across a number of industries, including pharma, consumer goods and retail, cannabis, cosmetics, foods and dietary supplements, warning that failure to substantiate product claims could result in civil penalties of more than $50,000 per violation. While companies shouldn’t ignore the notices, advertising lawyer John Villafranco with Kelley Drye said he thinks this is primarily a workaround by the FTC to go after companies since they no long have power to collect monetary fines in federal court cases involving deceptive advertising.

Will the companies receiving these notices end up paying civil penalties?  “Some may end up paying civil penalties,” according to Villafranco, “but only if they agree to do so during consent negotiations.  If forced to litigate, I highly doubt that any company would be obligated to pay.  The FTC’s authority here is, at best, novel and vulnerable to challenge, on both statutory and constitutional grounds.  If a company were to litigate, I believe it could successfully assert the following:

  • Congress intended the FTC’s penalty offense authority to be limited. Using this authority to seek civil penalties against unrelated companies decades after the original orders were finalized is inconsistent with Congressional intent.
  • The challenged conduct must be sufficiently similar to the unlawful conduct identified in the prior cease and desist orders.  This will be difficult to demonstrate, given the variability between current advertising campaigns and the advertising identified in the notices, some of which is decades old.
  • The FTC must show that a company has “actual knowledge” that the challenged conduct is unfair or deceptive, and it is highly questionable that these generic notices meet the knowledge requirement.
  • Congress did not intend to authorize the use of this authority to create per se rules of general applicability. Instead, Congress separately provided the FTC with rulemaking authority and authorized the FTC to seek civil penalties for violations of such rules.
  • Relying on broad cease and desist orders that do not establish the specifically targeted practices as unlawful violates due process rights embodied in the Constitution. The cease and desist orders upon which the FTC proposes to rely do not address the identified companies’ specific practices and do not provide the fair notice that due process requires.”

To collect these fines, Villafranco said the  FTC would have to first allege that one of the listed companies engaged in a false or deceptive practice. It would then threaten civil penalties as part of consent negotiations.  If there is no agreement, the FTC would have to litigate and win to recover civil penalties.

The FTC’s bark is loud, but I would not underestimate its bite,” Villafranco added. “Having said that, the FTC’s legal theory is untested (and I believe, unsound). This might explain why it has not pressed the issue.  The FTC has sent nearly 3,000 notices to date in multiple groupings and has not litigated a single one.  I suspect the FTC likes being able to threaten penalty offense violations to advance its settlement positions, but is being careful about litigating the issue. One loss could effectively remove this arrow from their quiver.”

To protect themselves,  responsible marketers should ensure there is adequate support for claims, Villafrano said. “ If investigated, cooperate.  If the FTC alleges a penalty offense violation has occurred, stand your ground.  Litigate if necessary.”

He added that the 700 companies were put on notice because they feature product claims in their advertising and marketing—health claims, primarily.  “We don’t know exactly how the FTC came up with this list, but I suspect FTC staff merely consulted an alphabetical list of U.S. corporations and selected those that are active advertisers.  Inclusion does not mean that a company has engaged in questionable practices, nor does exclusion mean that a company is in the clear.”

Villafranco said the crackdown may have happened now because when the Supreme Court in AMG Capital Management ruled that the FTC does not have authority to recover money under Section 13(b) of the FTC Actthe FTC got creative and turned to other sources of authority that it might exploit to recover dollars to redress what it perceives to be consumer injury.

For more information, contact Villafranco at (202) 342-8423 or JVillafranco@KelleyDrye.com.

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