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Cloudy with a Chance of AI: Navigating the FTC’s Regulatory Forecast

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<img decoding="async" loading="lazy" class="alignright wp-image-5584" src="https://www.adttorneyslawblog.com/wp-content/uploads/sites/33/2021/11/advertising-media-data-digital-GettyImages-913589018-scaled.jpg" alt="" width="409" height="230" />The FTC’s Notice of Penalty Offenses concerning endorsements and testimonials is barely a week old and it’s likely already had its intended effect. Hundreds, if not more, of consumer products companies are taking a second or third look at their practices when it comes to endorsements and testimonials and are beefing up their training and guidance materials. We <a href="https://www.adttorneyslawblog.com/ftc/ftc-cracks-down-on-endorsements-and-reviews/">blogged</a> about the basics concerning the FTC’s notice when it first came out, but it is perhaps time to take a closer look at the extent to which the FTC has a legal basis to assert the right to civil penalties. Please, however, do not take our analysis of the FTC’s legal authority as an invitation to go back to not caring about how your company uses endorsements and testimonials; no one likely wants to find themselves in the position of having to argue to a court about whether the FTC’s notice is legally sufficient. However, given that this is a tool the FTC has begun using extensively and promises to utilize even more in the future (just today, the FTC announced an additional round of letters), we thought it worth a closer look at the legal underpinnings of the FTC’s actions.
As we previously wrote, Section 45(m)(1)(B) of the FTC Act permits the FTC to notify companies that certain acts or practices have been found in administrative decisions, other than consent orders, to be deceptive or unfair and, having put those companies on notice, it permits the FTC to impose civil penalties should the companies engage in the same acts or practices. A key question regarding the FTC’s authority in this regard is how close the fit has to be between the act or practice found unlawful in the administrative proceeding and the subsequent act or practice engaged in by the party that has been put on notice. For example, suppose the FTC prevailed in an administrative proceeding with regard to a deceptive weight-loss health claim; could it then send a letter to hundreds of companies notifying them of the decision’s finding that making health claims without adequate substantiation is deceptive and putting the companies on notice that they are liable for civil penalties if they too make health claims without adequate substantiation? How close must the facts of the decided case match the facts in the subsequent matter? Does the answer to that question depend on how much factual context informs the legal conclusion? Given that the premise of Section 45(m)(1)(B) is actual notice that the act or practice is deceptive or unfair, presumably broad characterizations of an act or practice as unlawful in a situation where facts are important (e.g., what connections are material) are too broad. In the above hypothetical, companies still will not have actual notice as to whether the substantiation they may have for a specific type of health claim other than weight-loss claims is or is not reasonable.

The FTC has used this tool sparingly in the past, so court decisions delineating how close the fit has to be between the conduct in the litigation decision and any subsequent conduct are sparse, but there is at least one circuit decision which found the link asserted by the FTC too tenuous. In U.S. v. Hopkins Dodge, 849 F2d 311 (8th Cir. 1988), the 8th Circuit rejected the FTC’s request for civil penalties pursuant to 45(m)(1)(B) because several of the cited cases did not involve actual findings of deception or unfairness, and the one that did involved the use of bait-and-switch tactics by meat distributors and was not sufficiently germane to allegations that automobile dealers had failed to adequately disclose credit terms in violation of Regulation Z. What Hopkins Dodge leaves unanswered, however, is exactly how close the fit must be. Conversely, a 1983 district court decision involving Sears found that providing notice based upon prior decisions involving misrepresenting the down content of products was sufficient to seek civil penalties against the retailer for misrepresenting the contents of down filled products even though the particular acts and practices may not have been the same.<a href="#_ftn1" name="_ftnref1">[1]</a>  Neither case really addressed in detail, however, what level of specificity is required. In the down content case, the principle that one should not misstate the down content of a product seems like a fairly straightforward proposition that does not require a great deal of interpretation or factual context. But what about other “general determinations” that are more subjective or require factual context, do the specific circumstances have to match more closely in that circumstance?
With these questions in mind, let’s take a quick look at the acts or practices listed in the FTC’s Notice of Penalty Offenses and the conduct at issue in the litigated decisions that support them.
<ol>
<li>Do not claim a third party has endorsed a product or its performance when the third party has not done so. </li>
</ol>
The Commission’s notice cites four decisions in support of this prohibition. The first (Mytinger) concluded that a company had violated Section 5 by claiming, among other things, that a list of permissible claims in a prior consent order amounted to an endorsement by the government that only the company was authorized to make such claims for its products. The second (Ar-Ex) involved a finding that a company had falsely represented that its products had been endorsed by a consumer magazine. The third (A.P. W. Paper) involved a finding that a company had falsely implied an endorsement of its product by the Red Cross. Finally, the fourth case (R.J. Reynolds), although it involves a finding that certain testimonials were false, does not appear to directly involve a false claim of endorsement (as opposed to a false endorsement). Putting Reynolds aside, the fit between the litigated decisions and the notice seems fairly close, but is it close enough where the allegation is an implied rather than an explicit endorsement claim? Suppose, for example, an advertiser states immediately adjacent to a picture of its product that flossing has been endorsed by a medical association, which the agency argues falsely implies that the association has endorsed not just flossing but also the advertiser’s product. Can the advertiser argue that the FTC has never litigated whether making a claim in this particular fashion falsely implies a third-party endorsement?
<ol start="2">
<li>Don’t falsely claim that an endorsement represents the experience, views or opinions of users or purported users of the product.</li>
</ol>
The FTC again cites the R.J. Reynolds case. It seems a better fit here, since it involves a finding that numerous testimonialists did not actually smoke cigarettes or had signed the testimonial without reading it and that it did not reflect their views. In this case, there seems little room to subsequently argue that factual context matters – either the endorser does or does not use the product, and either the endorsement does or does not represent the endorser’s views.
<ol start="3">
<li>Don’t falsely claim that an endorser is an actual, current or recent user of a product or service.</li>
</ol>
The case cited by the FTC (Cliffdale) does indeed involve a finding that the use of testimonials with statements such as “Now I’m getting . . . ” imply current or recent use of the product and that such a claim was false when the endorser’s last use of the product dated back two to three years. Once again, the fit seems fairly close, but what about an instance where the last use was 18 months ago; could the FTC argue this shorter time frame is also covered by the notice? Or suppose the use of some other phrase other than “now” is alleged to imply recent or current use; is this type of allegation covered by the notice? Could the advertiser successfully argue that it did not have actual notice that some other type of phrasing had been found to imply recent or current use?
<ol start="4">
<li>Don’t continue to advertise an endorsement unless you have good reason to believe that the endorser still holds the same views.</li>
</ol>
The Notice of Penalty Offenses relies on the National Dynamics case. Like Cliffdale, the issue here is that the testimonialists had not used the product for some time, and the Commission found that the advertising falsely implied that they were current or recent users. With regard to whether they still subscribed to the same views, the case is a bit harder to decipher. The ALJ stated that “although none of the testimonialists repudiated the truth or accuracy of their statements as of the time they wrote them – in fact, they affirmed them – they did not use or endorse VX-6 at the time they testified.” Perhaps the ALJ is saying they still believe what they said is true, but they can’t currently endorse the product because they aren’t currently using it. Unclear. In any event, what constitutes “good reason” – the case does not say – and would the Commission still ascribe to such a vague standard today? Certainly, a company should no longer use a testimonial or a review when it knows the consumer no longer holds that same view, but the Commission’s notice puts the onus on the advertiser to have good reason to believe that it is still true. Suppose an advertiser publishes an ad with a testimonial and then a month later republishes it. Does it have to go back to the testimonialist and reaffirm that the person’s opinion about the product remains the same? Similarly, suppose a company highlights dozens of particularly favorable product reviews on its website; how often must it reaffirm the continuing validity of the reviews? Depending on the answers to these questions, the burden on companies utilizing testimonials and product reviews could be considerable.
<ol start="5">
<li>Don’t use testimonials to make unsubstantiated or deceptive performance claims.</li>
</ol>
The Notice of Penalty Offenses relies on Cliffdale, Macmillan and Porter & Dietsch. Cliffdale involved testimonials asserting that use of a valve resulted in automobile fuel savings, a claim that the Commission found unsubstantiated. Similarly, Porter & Dietsch involved weight-loss testimonials, which the Commission also found falsely implied that they were typical or ordinary. Finally, Macmillan involved testimonials from graduates of an extension university that contained claims that were not found to be typical. Macmillan involved a somewhat unique set of procedural facts in that the ALJ’s decision was not appealed, and the Commission ultimately decided not to review the decision and simply adopted the ALJ’s decision and order as its own. Presumably this would satisfy the requirements of Section 45(m), but in any event, even if it does not, the other two cited decisions stand for the same proposition.
In this instance, the specific facts of each case seem less important. The Commission has long held that unless qualified, claims in testimonials are presumed to represent the average or typical consumer experience, so the nature of the claim or the product or service seems irrelevant to that conclusion. As many of you know, the Commission has modified its view as to how testimonial claims are qualified – moving away from simply saying that the experience is not typical to disclosing what the typical experience is – but this modified qualification is also not typically factually dependent.
<ol start="6">
<li>Don’t fail to disclose material connections between the endorser and the seller if the connection would not be reasonably expected by consumers.</li>
</ol>
The notice relies on Cliffdale here as well. In that case, the Commission found that the advertiser had failed to disclose that four of the testimonialists were relatives of persons associated with the company and one was a salesman for a supplier of the company’s products. At a minimum, therefore, advertisers are presumably on notice that they must disclose if an endorser is related to anyone at the company or works for a supplier. Back in the 1970s, before online reviews, when a company might use a handful of testimonials, that may not have been such a daunting task; but today, for very large companies or very large suppliers that may not be easy if they want to highlights dozens or even hundreds of highly favorable consumer reviews. How does an advertiser determine if any of them are related to an employee or work for one of its suppliers? Cliffdale offers no guidance as to what degree of due diligence is required. Further, whether a connection is material or whether the connection is unexpected are very fact-specific questions. Can Cliffdale serve to bind a company utilizing an endorsement where the endorser’s connection to the company is materially different? The Commission itself has kept busy offering updated guidance on the materiality of connections with respect to bloggers and social media influencers, and it has equivocated on questions like whether a company has to disclose that reviewers are incentivized to leave reviews by charitable donations. Finally, while there has been considerable debate over how material connections are disclosed, particularly with respect to social media, there was no attempt to disclose the connection in Cliffdale, and the penalty notice does not use the phrase “adequately disclose,” so presumably if an advertiser attempts to make the disclosure but does so in a way the Commission deems inadequate, the advertiser would have a good argument that such conduct is not covered by the notice.
<ol start="7">
<li>Don’t use testimonials to misrepresent that the experience described is typical or ordinary.</li>
</ol>
The last item is very similar to No. 5, though in addition to Cliffdale and Porter & Dietsch, it also relies on National Dynamics (described above). As noted earlier, the Commission’s standard in this regard has long been clear and does not depend on the specific facts of a given case, so there is likely a stronger argument that the notice with respect to this litigated finding is not limited to the specific facts or circumstances of the litigated decisions.
<a href="#_ftnref1" name="_ftn1">[1]</a> In another 1981 district court decision the FTC conceded that recipients of such letters could argue that they lacked actual knowledge, that their conduct was not the same as the conduct proscribed by the prior determinations, that there had been a change of law subsequent to the prior determinations and whether the FTC’s prior determinations are legally sustainable under Section 5.

Less to the FTC’s Notice of Penalty Offenses Than Meets the Eye?

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