FTC Tightens the Noose Around Accomplices to False Advertising

For years now, the Federal Trade Commission has been expanding the wheel of liability for deceptive advertising practices outward, from the advertising merchant at the hub to the various entities on the spokes that make the wheel move.  As documented in this space, the campaign has ensnared numerous victims, from accomplices to deceptive telemarketing schemes who have explicit aiding and abetting liability under the FTC’s Telemarketing Sales Rule, to service providers in non-telemarketing cases for which, under the FTC Act, the legal basis for aiding and abetting liability is far less clear.  (See, e.g., “FTC’s ‘Duty of Inquiry’ for Non-Marketers Gets a Judicial Boost,” July 2013; “Does the FTC Have Legal Authority Over Affiliate Networks,” July 2014.)  Targets have ranged from affiliate marketers to affiliate marketing networks to payment processors, and even to a product owner who had no role in or authority over advertising for the product.  Online merchants, likewise, have settled charges of legal responsibility based on theories of agency or vicarious liability for the deceptive behavior of their affiliates. (See, e.g., “FTC Orders Super-Policing of Affiliates,” March 2012.)

Having expanded the orbit of advertising liability, the FTC has experimented with different remedial approaches for enforcing third party accountability. One approach, used primarily in affiliate marketing settlements, has been the imposition of a monitoring duty.  Whether it be a merchant relying directly on affiliate marketers or on an affiliate network to drive traffic to its sales site, or an affiliate network sitting above the publishers operating within its network, the duty imposed is to “watch over the shoulders” of the affiliates to make sure there is no recurrence of the “bad behavior” that got the merchant or affiliate network in trouble in the first place.

The required monitoring typically entails: (1) obtaining full contact and banking information of every affiliate; (2) providing each affiliate and affiliate network a copy of the defendant’s FTC order; (3) informing each affiliate and network that engaging in prohibited conduct will result in immediate termination and forfeiture of all monies owed the affiliate; (4) requiring each affiliate or network to provide marketing materials prior to use; (5) reviewing marketing materials for compliance and denying payment for sales coming from unapproved materials; (6) thoroughly investigating any complaint against an affiliate or network; (7) immediately terminating and stopping payment to any affiliate or network who violates the order; and; (8) promptly refunding each consumer whose sale came from a non-compliant affiliate or network. Compliance with these specific steps creates a safe harbor; as long as the defendant has taken them, it has fulfilled its monitoring duty and cannot be held liable for misconduct of an affiliate.

After a few years of tinkering with the monitoring remedy, the FTC has made it known, through conversations in ongoing cases with defense counsel, including the author, that it has found the remedy to be wanting as an effective enforcement tool.  Apparently, despite compliance with their monitoring duties, advertising partners of the parties to these settlements are still engaging, in too many instances, in behavior the FTC finds objectionable. As a result, while not having necessarily abandoned the monitoring remedy entirely, the FTC has been exploring other “accountability mechanisms” to impose on a third party accused of assisting false advertising.

The results of this new experimentation are now evident in a settlement announced this month in a joint enforcement action between the FTC and the State of Maine against Marketing Architects, Inc. (“MAI”) a radio and TV ad agency.  The complaint alleged that MAI created and disseminated deceptive radio ads for weight loss products marketed by its client, Direct Alternatives, which reached an earlier separate settlement.  MAI allegedly was aware of and ignored the need for adequate substantiation to back up weight loss claims, developed and disseminated fictitious testimonials, and falsely disguised ads as news stories. It was also accused of creating inbound call scripts that failed to adequately disclose that consumers would be enrolled in negative option continuity plans.  MAI agreed to pay $2 million to settle the charges.

Given MAI’s meaningful role in creating and disseminating the allegedly deceptive weight loss ads for its client, the consent order bans it altogether from making substantial weight loss claims for any dietary supplement or OTC drug and prohibits it from making misleading or unsubstantiated weight loss or other health claims for any dietary supplement, food or drug product.  Significantly, these prohibitions apply not only to such advertising disseminated by MAI on its own behalf, but to advertising created for and disseminated on behalf of its clients. MAI thus will be as presumptively liable for unsubstantiated supplement, food and drug claims made by any of its clients as the client itself.

Under the terms of the settlement, MAI will be able to escape liability for a client’s unsubstantiated supplement, food or drug claim, fake testimonial, or fake news story only if it has no ownership or other financial interest in the client’s product and can show, after “reasonable inquiry,” that it “neither knew nor had reason to know” that such representation was unsubstantiated or false.  To avoid liability, it will not be enough for MAI to have a system for monitoring a client’s claim substantiation and advertising practices.  In each and every case in which a client is accused by the FTC of making an unsubstantiated weight loss or health claim for a supplement, food or drug, to avoid a contempt action for an order violation, MAI will have the burden of proof to show that it was justifiably ignorant of the client’s wrongdoing.  Given the typical need for close collaboration and information exchange between an ad agency and its client in the course of creating advertising campaigns, this could be a difficult burden to meet. And if MAI decides to become “incurious” about the basis of a client’s weight loss or health claim that turns out not to have one, it will have a hard time convincing the FTC it should not have known about it.

The facts of this case, with MAI playing such an integral role in its client’s allegedly deceptive ad campaign, make it the perfect first candidate for the rollout of this new, broadened remedial alternative to a monitoring duty.  In the months ahead, though, look for the FTC to include the same or similar type of third party liability provisions in settlements with service providers farther removed – in some cases even entirely removed – from their client’s advertising programs.  They too could be forced to accept liability for a client’s deceptive advertising unless they can rebut a “presumption of guilt” with proof of innocence.

Talking about Direct Response, FTC

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