The Federal Trade Commission recently sent a letter to 700 leading brands, retailers, and advertising agencies. The communication arrived by Fed Ex. It came by surprise. And it cautioned recipients about interactions with those who endorse their products, especially social media influencers. Despite making no allegations, these communications unmistakably signal future enforcement.
FTC’s Message to Advertisers
The FTC’s letter focuses on endorsements and testimonials, saying it considers positive customer reviews to be endorsements. It points recipients to the FTC’s published resources, including What People are Asking and Endorsement Guides and warns that endorsements that are “fake” or fail to disclose an endorser’s connection with a brand can result in civil penalties of $43,792 per violation.
The FTC’s letter also includes a Notice of Penalty Offenses listing seven things it considers deceptive or unfair based on nine cases dating back to the 1940s. These boil down to ensuring endorsements are truthful and adequately disclose material financial connections between the endorser and the brand.
What Is a Notice of Penalty Offenses?
The FTC’s primary enforcement method is through administrative courts. Section 5 of the FTC Act, however, enables the agency to bypass this step for known violations of an FTC ruling. This is called standalone authority.
A Notice of Penalty Offenses serves as a “condemnation notice” of practices found violative in prior FTC cases. Under due process principles, a company receiving a notice is considered to have actual knowledge of prior FTC determinations. This knowledge would allow the FTC to use its standalone Section 5 authority to file a federal court action and seek money damages.
The FTC is concerned that consumers can be misled if corporate funding sways an influencer’s opinions, or sponsorship isn’t disclosed. It considers this unfair competition.
For example, six years ago, Lord & Taylor (now defunct) gave 50 influencers a dress, and paid them each $1,000 to $4,000 to post pictures of themselves wearing it. Their posts, which reached 11.4 million Instagram users, made no mention of the payment or free goods. The dress sold out in two days. The FTC got a consent order.
The FTC’s enforcement authority has been long-disputed. In 2015, the commissioners issued a Statement of Enforcement Principles restricting the FTC’s ability to use its standalone Section 5 authority in unfair competition cases.
After this, the agency began pursuing money damages through another avenue, Section 13 of the FTC Act. The agency used Section 13 to obtain $1.27 billion in restitution and disgorgement for deceptive payday loan practices.
The defendants, however, appealed and argued Section 13 only contemplates injunctive relief. Earlier this year, the U.S. Supreme Court confirmed in AMG Capital v. FTC, that despite a desirable outcome, Section 13 did not permit the court-ordered monetary relief the FTC obtained. The FTC asked Congress for a statutory fix.
Meanwhile, FTC Commissioner Rohit Chopra and FTC attorney, Samuel Levine, published an article in October 2020 arguing that the FTC could use its Notice of Penalty Offenses Authority “as part of a broader strategy to resurrect the FTC as a vigorous check against corporate malfeasance.” After AMG Capital, the agency began acting on the plan outlined in the article.
FTC Is Ramping Up
In mid-June, President Biden appointed Lina Khan, a strong consumer protection advocate and Big Tech critic as FTC Chair. By July 1, she led the commissioners in rescinding the 2015 statement to restore the agency’s standalone Section 5 authority.
In September, Khan appointed Levine director of the Bureau of Consumer Protection and outlined her priorities in an internal memo. On Oct. 6, the FTC issued notices to 70 for-profit educational institutions. The notices to advertisers went out the following week.
What Does FTC Want?
According to the FTC’s press release, “[t]he rise of social media has blurred the line between authentic content and advertising, leading to an explosion in deceptive endorsements across the marketplace.”
Chopra and Levine’s article appears to be the playbook, suggesting the FTC wants:
- Seller accountability: So far, the FTC has focused on influencer transparency. The authors, however, characterize some activity as “laundering” advertisements.
- Market-wide compliance: The authors argue the FTC can use the broad notices to correct practices market-wide.
- Deterrence: The authors state Section 5 violations can mount quickly, suggesting the agency may seek large penalties.
Bottom Line for Companies
Whether circulating a bulletpoint list of condemned practices gleaned from decades-old cases can resurrect the FTC’s enforcement power is not a fait accompli. Challenges may ensue. Nevertheless, the FTC has fired a shot across the bow. Enforcement appears likely.
As this unfolds, companies can review current compliance efforts. Good hygiene principles include:
- Be clear with influencers: If you provide content, train influencers about what they can—and cannot—say. Make sure they understand their disclosure obligations and point them to the FTC’s resources.
- Be clear with your own employees: Have a social media policy for staff and educate them on interacting with influencers. Be clear about which materials they can share.
- Consider reasonable monitoring: Although a rogue blogger is unlikely to trigger enforcement, the FTC expects companies to take reasonable steps to monitor influencers. Watch them periodically and act when they misstep.
- Review your policies and procedures: Make sure they’re consistent with FTC guidance.
- Watch this space: As this unfolds, the FTC’s expectations may evolve.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Mary Kohler is founder & principal of Kohler Health Law P.C. She advises life science companies on health-care law and compliance matters. Prior to founding Kohler Health Law, she was an in-house attorney and compliance professional in the biopharmaceutical industry.