Over the past few weeks, the Federal Trade Commission (“FTC” or “Commission”) has sent nearly two thousand letters with a “Notice of Criminal Offenses” to a large number of businesses across America, warning them that they could face a high civilian potential. sanctions if they engage in deceptive behavior. The letters targeted major consumer product companies, major retailers and retail platforms, major advertising agencies and other nationwide advertisers engaging in online marketing, multi-marketing levels, offer “big” jobs in the economy or are in the for-profit education sector.

Since the 1980s, the FTC has primarily obtained monetary relief under Section 13 (b) of the FTC Act, the provision of the FTC Act that empowers the Commission to obtain an injunction. However, in April 2021, the Supreme Court unanimously removed the option for the FTC to obtain pecuniary relief under Section 13 (b), which upended the FTC’s enforcement authority. As the FTC pushed Congress to amend §13 (b) to restore the Commission’s authority over monetary penalties, it sought creative ways to obtain monetary relief.

With these letters, the FTC resurrected its use of the Penalty Offense Authority under § 45 (m) (1) (B) of the FTC Act. While the FTC’s Penalty Offense Authority is much cheaper than the other primary option available for obtaining civil penalties, which requires the FTC to first obtain a cease-and-desist order and not authorize penalties pecuniary that if the defendant behaved in violation of this order that “a reasonable man would have known, in the circumstances, that it was dishonest or fraudulent”, the Penalty Offense Authority presents to the Commission substantial procedural and practical obstacles .

The FTC will have to show that the defendant had “real knowledge” that his actions violate FTC law

To obtain sanctions under section 45 (m) (1) (B), the Commission must prove two elements: (1) the company had indeed been informed that the conduct was unfair or deceptive in violation of the law FTC; and (2) the FTC must have already made an administrative decision that such conduct is unfair or deceptive. It is important to note that to meet the actual knowledge requirement, the FTC cannot rely on a consent order. Instead, there must be a prior administrative order that established that the specific conduct is unfair or deceptive to establish knowledge.

The high bar for the “real knowledge” element puts the FTC in a difficult position today. The available and old case law illustrates why. In USA vs. Hopkins Dodge, 849 F.2d 311 (8th Cir. 1988), the Commission sent (what it then called) a “synopsis” to companies regarding the conduct of the Truth in Lending Act which it said violated § 5 of the FTC Act, citing applicable cases and operations. The FTC has warned recipients of the summary that continued such conduct could result in civil penalties under § 45 (m) (1) (B). In a lawsuit against the recipient of this synopsis, the FTC lost its offer of civil penalties on summary judgment. On appeal, reviewing the cases that the FTC proposed in the summary to justify its position that the defendant had “a real opinion” that his conduct was against the law, the Eighth Circuit held “that nowhere in said decisions did the FTC determines that such a practice (ie a practice in which the Respondents admittedly engaged) is “unfair or deceptive”. ” Hopkins Dodge, 49 F.2d at 314. Thus, Circuit Eight made it clear that there must be a match between the cases cited in a notice and the conduct the FTC accuses is breaking the law in order to satisfy “real knowledge”.

A sin Hopkins Dodge, the FTC may find it difficult to establish a sufficient “fit” between the administrative matters cited in the notices and the conduct at issue to notify future defendants. In recent criminal offense notices, the FTC provides a light recitation of the law to justify its conclusion that certain behaviors are deceptive. The FTC lists the principles in bullet form, then adds citations to administrative orders from the 1940s to the early 1980s. Upon closer examination, not only are the cases older than the Internet, but many of them are not. ‘have no funds on the point.

For example, in notices regarding misleading endorsements and testimonials, the FTC relies heavily on Cliffdale Associates, Inc., 103 FTC 110 (1984) to assert that “[i]It is an unfair or deceptive trade practice not to disclose a link between an endorser and the seller of an advertised product or service “if their link materially affects the weight or credibility of the endorsement and” if the link is not reasonably expected by consumers. ” However, Cliffdale was a cause-and-claim case and the order itself did not mention any testimony. The FTC also relies heavily on MacMillan, 96 FTC 208 (1980) in for-profit education and approval letters. Corn MacMillan contains no detention because the FTC refused to apply and did not put the case on its roll. Thus, none of the cases “fit” with the conduct the FTC complains about in the notices and cannot serve as a reasonable basis for “real knowledge”.

The cases cited predate the Internet

The FTC relies on dated cases – the most recent administrative order dated 1984 – involving pre-Internet conduct. However, the reviews target categories of the industry that rely on the internet, social media, and mobile apps such as for-profit online colleges, influencers, consumer reviews, and the gig economy. Thus, the FTC, the parties in the cited administrative orders and the recipients of the notices could not have envisioned the unique marketing compliance issues related to the internet, smart devices, social media platforms and the rise of influencers present today. ‘hui. This can present significant problems to the FTC in issuing the notice.

For example, in the Notice of Criminal Offenses Regarding Endorsements, the FTC cites Cliffdale Partners for the principle that “It is an unfair or deceptive commercial practice not to disclose a link between an endorser and the seller of an advertised product or service, if such a link could materially affect the weight or credibility of the endorsement and whether the link would not be reasonably expected by consumers… ”To ensure compliance, companies should look beyond reviews to other sources such as FTC FAQs, testimonial guides and ordinances on consent. For example, in the Teami, LLC complaint, the FTC claimed that Instagram disclosures must appear above the waterline in an Instagram post when viewed on a mobile device. Teami would not have known that his conduct violated § 5 of the FTC Act solely on the basis of the administrative cases that the FTC provided in the notices, as they do not deal with modern technology or marketing techniques. This will present practical challenges for the FTC if it seeks to rely on the opinions to obtain civil penalties for very modern transgressions.

The authority responsible for criminal offenses has not been recently tested

The FTC’s Penalty Offense Authority has also not been tested. The FTC briefly resurrected its Penalty Offense Authority in the early 2000s when it sent letters with administrative case summaries to 78 retailers who advertised textiles as bamboo when those textiles are actually rayon. The bamboo summaries, like the current letters and notices, were based on old administrative records. The cases cited were former Textile Act cases which generally considered that failure to use the correct fiber names in textile labeling and advertising is misleading and violates the FTC Act. However, none of these administrative orders addressed the bamboo advertising specifically addressed in the FTC summaries and it is not clear whether the notices would have served as the basis for granting monetary penalties had they been challenged in court. courts. Thus, the success of the FTC in settling with the recipients of the Bamboo notices has no precedent value for the FTC today.

Additionally, there are notable differences between Bamboo Letters and current notices, which puts the FTC on an even more fragile footing. When the FTC sent letters to retailers regarding bamboo advertising, only retailers that advertised or had recently advertised textiles as bamboo received the letters. In contrast, in recent notices, the FTC has not targeted companies engaging in prohibited behavior. For example, the letter from the for-profit education sector reads “[t]his letter does not reflect any assessment as to whether you have engaged in deceptive or unfair conduct. And the testimony letter states that “FTC staff are not targeting your business or suggesting that you have engaged in deceptive or unfair conduct.”

Additionally, in the Bamboo Letters, the FTC also provided a detailed discussion of how it believes the cited administrative cases “fit” with the conduct at issue. In contrast, current opinions provide a bulleted list of principles with a few quotes. The inability to identify companies that have engaged in wrongdoing, coupled with the incredibly thin discussion of cases cited, makes it even more difficult for companies to identify conduct, if any, that could break the law. Thus, the addressees may not have received notification as required by § 45 (m) (1) (B) – in particular for conduct which deviates significantly from the conduct at issue in the cases. underlying administrative procedures.

Next steps

The FTC’s power to obtain civil penalties if it files a complaint to the recipient of one of these notices is uncertain and untested, the Commission has made clear that it continues to prioritize issues such as testimonials, online education, tiered marketing, and income opportunity claims. To avoid FTC scrutiny, companies should review their business and business practices to ensure compliance with applicable FTC guidelines.