Stay ADvised: What's New This Week, October 18
In This Issue:
- FTC Issues Penalty Offense Notices and Companies Are Feeling the Heat
- Mattress Maker That Repeatedly Dreamed Up "Made in USA" Claims to Pay Up
- NAD Sustains Some of Quilted Northern Sustainability Claims, but Reminds Advertisers That "Context is Key"
- Coors Hard Seltzer Vitamin C Claims Are Hogwash, Say Plaintiffs in Pair of Class Actions
FTC Issues Penalty Offense Notices and Companies Are Feeling the Heat
It may sound like something Messi or Beckham might receive during a soccer game, but a Notice of Penalty Offense letter has nothing to do with soccer. Rather, these letters are a one-two punch as part of the FTC's announcement that it is "resurrecting" its power to issue Penalty Offense Notices under Section 5 of the FTC Act.
The agency's first action happened a couple of weeks ago with notices sent to 10 for-profit colleges. Round two, which has created a stir throughout the marketing world, happened shortly thereafter—this time with 700-such letters sent to a Who's Who of American business, these letters regarding endorsements, testimonials, and reviews.
The Notice of Penalty Offense letters are designed to let recipients know that in the event they engage in certain deceptive or unfair actions in the future, conduct already found false and deceptive through a prior administrative proceeding, they may be subject to fines of up to $43,792 per violation. The FTC has triggered this long dormant statutory authority as one avenue to obtain civil penalties in the wake of the U.S. Supreme Court's April 2021 decision in AMG Capital Management, LLC v. FTC.
The FTC emphasized in its letters that the Notices are not an indication that recipients have done anything wrong but, rather, are a warning and, of course ,a procedural prerequisite in order for the FTC to later obtain civil penalties. A Notice of Penalty Offense letter (also referred to as "Section 205 Synopsis") provides a basis for the FTC's later seeking and obtaining such penalties, in court, pursuant to the agency's Penalty Offense Authority under Section 5(m)(B)(1) of the FTC Act.
That provision allows imposition of the statutory penalty by a court (originally $10,000 per violation now adjusted for inflation since the 1970s), assuming the FTC can prove the company had "knowledge" its actions were deceptive in violation of Section 5 of the FTC Act (a/k/a the purpose of these Notice letters is to lay the basis for such knowledge) and that the company nonetheless committed acts similarly deceptive to those outlined in prior litigated cases and summarized in the Notice letters.
Toward that end, the FTC referenced three prior administrative decisions that purportedly lay out the deceptive conduct the Commission summarizes in the letters to for-profit educational institutions and five prior cases in the letters sent to major companies regarding endorsements and testimonials. Among the misrepresentations that could get the for-profit educational institutions on the hook are deceptive statements regarding the demand in the workforce for students who have graduated from the academic institution, the types of jobs available to graduates, and the amount of money students will make upon graduation.
The FTC, in a unanimous vote, said it targeted Notices at the for-profit education sector because of the industry's less than stellar track record for truthful marketing. As then-Commissioner Rohit Chopra (now leader of the CFPB) noted, "there is a long history of consumer protection risks in this market dating back decades," with enforcement actions culminating in lawsuits against the University of Phoenix and Career Education Corporation.
Following closely behind were the 700 letters sent in a bid to put some muscle into the FTC's commitment to combat the "explosion in deceptive endorsements across the marketplace." Although again stressing that the companies who received the Penalty Offense Notices are not being accused of any wrongdoing, the FTC Notices this time go to marketing practices—more specifically the use of testimonials, endorsements and reviews—practiced by virtually all companies.
Although pegged to prevent "deceptive" practices, these Notices provide a toehold to seeking and obtaining damages against recipients who:
- Falsely claim an endorsement by a third party;
- Misrepresent that an endorser uses a product;
- Use an endorsement to make false or deceptive performance claims;
- Misrepresent that an endorser's experience is typical of consumers' ordinary experience; or
- Fail to disclose a material connection between the endorser and advertiser.
The Notices, sent on October 13, 2021, went to all types of companies from ad agencies, to major consumer product companies, to big tech, chain restaurants, telecommunications giants, beverage companies, transportation, apparel and automotive companies, social media companies and more. The FTC's notice further asks recipients to put on notice their subsidiaries and affiliates that sell or market products or services for the companies.
It is the FTC's hope that these letters will be sufficient to satisfy the Section 5(m) requirement of actual knowledge, for the companies who received the letters as well as for their subsidiaries. Ultimately, that will be for the courts to decide.
Regardless, remember that the overarching issue here is not whether a company is violating the FTC's Guides to the Use of Testimonials and Endorsements in advertising. Those guides are not law or regulation, they are just a roadmap for conduct the FTC believes violates Section 5 of the FTC Act which prohibits unfair or deceptive conduct. That is, of course, unless and until the FTC manages to use its rulemaking authority to turn the guidance into law. It is also interesting to note that although some recent FTC policy statements and initiatives have been accompanied by pointed dissents, the Commission voted 5-0 to authorize and distribute the penalty notices.
For now, in order for these letters to apply, the "conduct" alleged to be deceptive must be equivalent to the conduct the court found deceptive in the handful of very old cases (ranging from 1941 to 1984) cited by the FTC. Even assuming the letters are sufficient to bestow "knowledge" under the statute, the world has changed a great deal in the 40 years since the last of these cases, making it arguably difficult to prove equivalent conduct.
Whatever the FTC's next steps, it is clear that companies should make sure they have in place rigorous training, monitoring and compliance programs when engaging influencers big and small, and further sufficient oversight and disclosure requirements when incentivizing, and then gathering and using consumer reviews.
All of this begs the question, "Now what?" First, no need to respond to the FTC if you received one of these letters. Second, companies are well-advised to keep their social media policies current and to make sure they are adequately monitoring compliance with the Endorsement Guides.
Third, it seems unlikely the FTC is running to court anytime soon, given its burden in proving knowledge and equivalent, deceptive violations of the prior litigated orders. Fourth, litigation presents the very real risk for the FTC that companies will successfully defend these suits in ways that make it exceedingly difficult for the FTC to prosecute additional cases.
Finally, it may well be business as usual for the FTC, which will continue to commence investigations and continue to enter into consent orders where companies continue to agree to settle and pay, the change being they will do so in fear of suits raising the penalty notices.
Mattress Maker That Repeatedly Dreamed Up "Made in USA" Claims to Pay Up
"FTC orders are not suggestions." In a divided decision, the Federal Trade Commission (FTC) is signaling that violators of its recently enacted Made in USA Labeling Rule law are about to face stricter scrutiny.
The agency has settled claims against Nectar Sleep, a repeat offender of Made in USA marketing rules, for a fine just under $800,000 in what now former Commissioner Rohit Chopra couched as a new era of accountability against Made in the USA violators—and a settlement well within the agency's legal authority. This despite dissents by Commissioners Noah Joshua Phillips and Christine S. Wilson who wrote that the scope of the fine constitutes a penalty that exceeds the FTC's authority under Section 19 of the FTC Act. The majority made clear that in the wake of AMG's curtailing of the FTC's Section 13(b) authority, it would continue to look for other statutory authority, including Notice of Penalty letters discussed in greater detail in the follow articles.
Nectar Brand, its parent company Resident Home, and their owner Ran Reske have agreed to pay the fine in order to resolve allegations that they repeatedly made false U.S. origin claims about their DreamCloud mattress and violated a court order forbidding them from doing so. In a joint statement issued by Chair Lina Khan, Rohit Chopra, and Rebecca Slaughter, the three made clear that even if the fine exceeded provable damage to consumers, it was acceptable because it was part of a settlement.
According to the FTC, the company's marketing claimed that the mattress was "proudly made with 100 percent USA-made premium quality materials." In reality, these claims were false and misleading in violation of the FTC Act as all DreamCloud mattresses are finished abroad and in some cases fully imported or they use a significant amount of imported materials, said the FTC.
The settlement incorporates the terms of a 2018 order, imposes the monetary payment, and expands the application of the order to all corporate entities under Reske's control so that, in former Commissioner Chopra's words, the repeat offender may not play "corporate musical chairs" to "dodge the FTC's order."
Under the terms of the order, Resident Home and Reske are barred from making unqualified U.S. origin claims unless they can show that all significant product processing takes place in the United States. For any qualified Made in USA claims, they must include "a clear disclosure about the extent to which the product contains foreign parts, components or processing," and that qualification must appear "immediately adjacent to the representation." No tiny-type disclosures allowed.
This decision is yet another indication the FTC is not taking AMG lying down and will continue to pursue creative avenues to sidestep its loss of 13(b) authority, which it has asked Congress to return to it via legislation. With Rohit Chopra's departure as of October 12th to run the CFPB however, the Commission will be tied 2-2, unless and until President's Biden nominee, Alvaro Bedoya, has been confirmed.
NAD Sustains Some of Quilted Northern Sustainability Claims, but Reminds Advertisers That "Context is Key"
Sustainability claims—in particular, vague sustainability claims—are seemingly everywhere, and the National Advertising Division (NAD) is weighing in. Most recently, the NAD gave the thumbs-up to qualified sustainability claims made by Georgia-Pacific for its Quilted Northern Ultra Soft & Strong Bathroom Tissue while cautioning against more generalized sustainability claims.
NAD brought a self-monitoring case challenging facially general claims made by Georgia-Pacific such as including "Premium comfort made sustainably," "Premium design with the environment in mind," "You don't have to choose between comfort and sustainability," as well as more specific claims regarding the company's tree-planting efforts, and the product's energy and water savings.
Claims appeared on the front of packaging, back of pack, and on the Quilted Northern website. NAD's greatest concern was with the general claims to the extent not linked to any specific environmental benefit, made on the front of the pack. NAD found that other, narrower claims that appeared separately were indeed substantiated but did not serve to limit or qualify the very broad meaning of a naked "sustainable" claim.
By way of contrast, NAD found that claims appearing on the back label were in direct proximity to and integrated with the qualifying language. There, Georgia-Pacific had sufficiently substantiated its claims. Similarly, on the website, the company's description of what it meant by "sustainable" appeared directly below the triggering claim.
NAD explained that "the term 'sustainable' can give rise to many different meanings and expectations with consumers." As a result, "the context and any qualifying or explanatory language made in conjunction with the claim is important to determine whether the claim may convey a general environmental benefit message to consumers." Moreover, though the FTC's Green Guides don't directly address the term "sustainable," they do explain that unqualified general environmental claims (such as "sustainable") are difficult to substantiate.
Georgia-Pacific argued that its sustainability claims were adequately qualified because they appeared beside more specific environmental claims that defined the precise ways in which the Quilted Northern Ultra Soft & Strong Bathroom Tissue is made sustainably, and that the sustainability claims did not constitute general environmental benefit claims.
Analyzing the sustainability claims, NAD looked at the context in which Georgia-Pacific made the claim "Premium comfort made sustainably." Centered at the top of the front of the toilet paper packaging, the claim was accompanied by a graphic of blue skies and trees; near the bottom of the front side of the package, a medallion including the messages "3 trees planted for every tree used" and "energy efficient manufacturing," and small symbols representing the Arbor Day Foundation and Forest Stewardship Council appeared.
NAD reasoned that because the tree-planting and energy efficiency claims appeared in a separate part of the package front from the sustainability claim, separated by other label elements, the specific environmental benefit claims found at the bottom did not "limit the message communicated by 'made sustainably' to tree planting and energy efficiencies" but, rather, communicated a separate, general environmental benefit claim. NAD recommended the sustainability claim in this context either be discontinued or modified so consumers could clearly understand the "made sustainably" claim was linked to the highlighted specific environmental benefits.
On the back of the pack, by contrast, the sustainability claim (along with a tree-related graphic) appeared front and center, serving as a header for an explanation of Georgia-Pacific's contributions to specific environmental efforts. "In direct proximity and integrated with qualifying language [including appearing in the same style of font over a unified background]," reasonable consumers were likely to understand that "made sustainably" referred to the company's specific claims about its contribution to healthy forests and energy efficiency. NAD found the "sustainability" claim was, therefore, supported in this context.
The Quilted Northern website likewise featured the sustainability claim as a header for information about various environmental practices. NAD found the claim was appropriately qualified because the description of what the company meant by "made sustainably" was directly below the sustainable claim.
Finally, the Georgia-Pacific website provided consumers three "real-life energy and water savings examples" in bullet point lists for its water savings and energy savings; for example, "If just one household switched to Quilted Northern Ultra Soft & Strong for a year, it would save enough energy to: Watch 21 college football games. Microwave 104 bags of popcorn. Charge a smart phone battery every day for 5 years." NAD found that consumers could reasonably believe that the three bullet point examples should be read in the aggregate, rather than the savings being enough to accomplish each example individually.
Although when last updating the Green Guides in 2012 the FTC punted on providing guidance as to whether or when advertisers could make "sustainability" claims, courts and the NAD are filling the gap. For NAD, it is clear that sustainability claims must be tethered to a specific environmental message, given the near impossibility of supporting a general environmental (soup to nuts, life cycle) benefit. As often happens, the courts are not necessarily aligned.
In the 9th Circuit earlier this month, Judge Jon S. Tigar dismissed a lawsuit alleging that Subway's claims that its tuna is sustainable are false, on the grounds that plaintiffs hadn't identified the specific misrepresentations. But Judge Tigar gave plaintiffs leave to amend, so we may yet see "sustainable" tuna back on the litigation menu at the "Food Court" (as the Northern District of California is sometimes called due to the high number of food ligation lawsuits ruled on there).
Coors Hard Seltzer Vitamin C Claims Are Hogwash, Say Plaintiffs in Pair of Class Actions
Also at the Northern District of California's "Food Court," in separate but nearly identical actions filed a few months apart, two plaintiffs alleged that Molson Coors is falsely marketing its hard seltzer as "healthy" because the product contains vitamin C from acerola, a so-called superfood. Coors' use of the term "antioxidant" and other representations in its labeling and marketing is just a marketing gimmick to help Coors stand out in the incredibly crowded hard seltzer field, allege plaintiffs.
Plaintiffs charge that not only is the amount of vitamin C in Vizzy Hard Seltzer insufficient to convey any health benefit, but that by marketing an inherently unhealthy alcohol beverage as "healthy," Coors is attempting to capitalize on consumer thirst for "better-for-you" products by using false claims that the addition of the vitamin makes its drink healthier than its competitors'.
The complaints allege that plaintiffs purchased Vizzy Hard Seltzer based on its claim "With Antioxidant Vitamin C from Acerola Superfruit" because, when given a choice, plaintiffs prefer to drink a hard seltzer with additional health benefits. Other marketing for the drink acknowledged the crowded hard seltzer field and implied Vizzy Hard Seltzer was superior based on the presence of vitamin C: "Another hard seltzer? Yeah, but we've got antioxidant vitamin C," read one ad for the drink. Another asked consumers: "Given the choice, why wouldn't you choose the one with antioxidants and vitamin C?"
The most significant problem with these representations, say plaintiffs, is that alcoholic drinks are inherently harmful to consumers' health. The further problem with these claims is that adding vitamin C doesn't make the alcohol beverage healthier, they allege, noting that Vizzy's vitamin C content doesn't "overcome the deleterious health impact" of the products. "[L]ittle evidence supports the claim that a dusting of powder provides benefits associated with consumption of 'superfruit,'" they aver. In fact, plaintiffs assert that "[e]ven worse, alcohol consumption interferes with nutrient absorption."
Additionally, Coors' marketing violates Food and Drug Administration (FDA) law, allege plaintiffs. The FDA not only frowns on the fortification of carbonated beverages (which includes alcoholic beverages) but recognizes that to do so is misleading and deceptive, argue plaintiffs. Even if the claim meets the FDA's specific requirements for an antioxidant claim, plaintiffs allege that because Coors makes a nutrient content claim implying that the product is healthy and fails to comply with the requirements for fortified products, the product is misbranded.
Based on Coors' marketing, reasonable consumers would expect Vizzy Hard Seltzer to be a healthful source of nutrients labeled in accordance with FDA law, which they are not, allege plaintiffs. Reasonable consumers are also generally unable to ascertain the truth or falsity of the claims without specialized knowledge, they add. Thus, consumers are relying on Coors to label and market Vizzy in a truthful and not misleading way.
The lawsuit alleges violations of California consumer protection statutes, fraud, and deceptive trade practices.
Health benefit claims and alcohol beverages generally don't mix well. In addition, plaintiffs allege both that they purchased Vizzy Hard Seltzer because they wanted to benefit from the claimed health benefits, and that they would purchase the products again even if they were sold without the vitamin C.
Courts weighing similar fact patterns in false advertising of food cases have often found it difficult to reconcile these two types of allegations, for if plaintiffs allege they purchased the drinks because of the health benefits, how can they also allege they would again purchase the product if it did not contain the health benefit? Stay tuned for what happens next.