On October 13, the Federal Trade Commission (FTC) sent letters to over 700 companies reminding each company of the law prohibiting the use of endorsements to deceive consumers. Specifically, the FTC sent these companies a cover letter with an attached “Notice of Penalty Offenses” which puts each company on notice that violating the law against deceptive endorsements could subject the company to civil penalties of up to $43,792 per violation. 15 U.S.C. § 45(m)(1)(B). See FTC, “FTC Puts Hundreds of Businesses on Notice about Fake Reviews and Other Misleading Endorsements” (Oct. 13, 2021)
- What is a “Notice of Penalty Offenses”?
Based on the FTC’s authority under Section 5(m)(1)(B) of the FTC Act (15 U.S.C. § 45(m)(1)(B)), referred to as the FTC’s “Penalty Offense Authority,” a “Notice of Penalty Offenses” puts a company on notice that certain conduct specified in the Notice is unfair or deceptive in violation of the FTC Act. The Notice does not mean that the company has engaged in any deceptive practices, but rather sets the framework for the FTC to later pursue civil penalties against the company if they do engage in the conduct specified in the Notice.
The FTC’s Penalty Offense Authority allows the FTC to bring a federal court action for civil penalties against a company if the FTC can prove that: (1) the company knew the conduct was unfair or deceptive in violation of the FTC Act, and (2) the FTC had already issued a written decision that such conduct is unfair or deceptive. See FTC, “Notices of Penalty Offenses.” The Notice satisfies the first requirement because it can later be used to show that the company had actual knowledge that the conduct was prohibited.
The October 13 Notice represents the second time the FTC has issued a Notice of Penalty Offense this month. On October 6, the FTC sent a Notice to for-profit higher education institutions regarding deceptive job prospect or employment claims. The FTC’s resurrected issuance of Notices of Penalty Offenses and reference to its Penalty Offense Authority comes in the wake of the Supreme Court’s April 22, 2021, decision in AMG Capital Management, LLC v. Federal Trade Commission, which rejected the FTC’s authority to use a different provision of the FTC Act, Section 13(b), to obtain monetary penalties.
- The Deceptive Practice – Deceptive Endorsements
The October 13 Notice identifies a number of endorsement practices that the FTC has found to be unfair or deceptive in violation of the FTC Act:
- falsely claiming an endorsement by a third party;
- misrepresenting that an endorser is an actual user, a current user, or a recent user;
- continuing to use an endorsement without good reason to believe that the endorser continues to subscribe to the views presented;
- misrepresenting that an endorsement represents the experience, views, or opinions of users or purported users;
- using an endorsement or testimonial to make deceptive performance claims (even if such testimonials are genuine);
- failing to disclose an unexpected material connection with an endorser (even if the endorsement is genuine); and
- misrepresenting that the experience of endorsers represents consumers’ typical or ordinary experience.
The cover letters accompanying the October 13 Notice requested that the companies take any steps necessary to ensure their practices do not violate the law and warned that “positive consumer reviews are a type of endorsement, so such reviews can be unlawful, e.g., when they are fake or when a material connection is not adequately disclosed.” FTC, Sample Cover Letter for Notice of Penalty Offenses Concerning Unlawful Practices Relating to the Use of Endorsements and Testimonials. For more information on the use of endorsements, see FTC’s Endorsement Guides.
Seemingly dusting off its old civil penalty authority (enacted in 1975 but seldomly used after the 1980s), the FTC appears to be making a public service announcement of sorts to warn companies to rein in their online endorsement practices while at the same time laying the groundwork to be able to impose civil monetary penalties in the wake of the Supreme Court’s decision in AMG Capital Management, LLC v. Federal Trade Commission. In view of this increased scrutiny, companies may wish to evaluate their advertising, websites, and any third-party websites that sell their products to verify that they do not contain any endorsements that FTC might find deceptive.