FTC Unveils Sweeping New Enforcement Strategy Following AMG

So, you’re an advertiser and one day a thick package arrives in the mail from the Federal Trade Commission.  It’s a letter accompanied by a notice of “penalty offenses” and a bunch of FTC cases. You’re not under investigation as far as you know and are told you aren’t being accused of anything, so you wonder why the FTC is sending this to you. You read the letter and it says that enclosed are FTC decisions and cease and desist orders governing endorsements, testimonials and product reviews. The letter goes on to say, in boldface, that Receipt of the notice puts your company on notice that engaging in conduct described therein could subject the company to civil penalties of up to $43,792 per violation.”

Last week, over 700 hundred businesses, comprised mainly of large companies, top advertisers, leading retailers, top consumer product companies, and major advertising agencies, got one of these letters. If you happen to have been one of the unlucky recipients, then you already know what I’m describing.

How in the world, you may ask, can the FTC sue and obtain civil penalties from someone for violating an order against someone else to which it was not a party, just because it sends you a copy of the order.  The answer is an obscure provision of the FTC Act, enacted decades ago, that until now has rarely if ever been used and has never been legally tested. The section, 15 U.S.C. § 45(m)(1)(B), specifically states that:

 “If the Commission determines in a proceeding…that any act or practice is unfair or deceptive, and issues a final cease and desist order, other than a consent order, with respect to such act or practice, then the Commission may commence a civil action to obtain a civil penalty in a district court of the United States against any person, partnership, or corporation which engages in such act or practice—

(1) after such cease and desist order becomes final (whether or not suchpersonpartnership, or corporation was subject to such cease and desist order), and

(2) with actual knowledge that such act or practice is unfair or deceptive….”  

(Emphasis added)

And you may ask, why is the FTC all of a sudden resorting to this heretofore dormant remedy. The answer to that may be more obvious and simpler: earlier this year, as I’ve written (see “Supreme Court Guts FTC’s Enforcement Powers and Clout,” April 2021), the Supreme Court, in a unanimous decision in AMG Capital Management v. FTC, stripped away the FTC’s most potent enforcement weapon, namely, the ability to get money from alleged wrongdoers in federal court actions.  Currently, therefore, unless you are violating a final FTC order or trade regulation rule for which monetary relief is still available, the only remedy the FTC can obtain is an injunction, which normally doesn’t have the same deterrent effect as a money judgment. So this newly used, so-called “penalty offense” authority is a nifty device which allows the FTC  (while waiting and hoping for Congress to restore its full monetary authority) to regain some measure of its prior enforcement clout by extending its ability to get money for order violations to any business in America who receives direct notice of that order from the FTC.

As noted, because this provision has hardly ever been used, it is totally untested legally and raises some obvious due process questions concerning sufficiency of notice.  How clear are the legal requirements set forth in the decisions and orders contained in the “penalty offense” notice? How applicable are the facts and circumstances in those cases to the business practices of the recipient? What constitutes “actual knowledge” that the practice is unfair or deceptive?  The statute anticipates these notice questions by providing that if the predicate order was not issued against the defendant in the civil penalty action, then “the issues of fact… shall be tried de novo” and upon request of any party, the court “shall also review” the FTC’s prior “determination of law that the act or practice…constituted an unfair or deceptive act or practice….”  Whether these procedural safeguards will be enough for this statutory provision to survive a due process challenge only time will tell, when a “penalty offense” case is brought.

Meanwhile, the FTC is hoping, of course, that the mere receipt of the notices will cause those getting them to review their testimonial and endorsement practices and conform them to the law. To the extent that happens, that would be a salutary effect of the program. But because this is also a way for the FTC to reassert itself as the consumer “cop on the beat” through deployment of a monetary weapon in federal court again, you can be sure that it also is closely monitoring these over 700 companies for the best enforcement targets among them to sue for civil penalties. And when (not if) that happens, the legality of this novel remedial power will be put to the test. Stay tuned here for further developments, including issuance of more “penalty offense” notices dealing with other advertising practices, as this new FTC enforcement strategy plays itself out.

Talking about Direct Response, FTC

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