The FTC Attempts (Again) to Lay the Groundwork for Use of Its Penalty Offense Authority: This Time for Deceptive Product Claims

The Federal Trade Commission (FTC) has taken yet another step in its campaign against misleading and deceptive claims. Recently, the FTC sent notice letters to hundreds of businesses with a clear warning: avoid making deceitful and/or unsubstantiated product claims or face substantial civil penalties. The notice has significant implications for direct sellers, particularly those involved in the marketing of over-the-counter (OTC) drugs, homeopathic products, dietary supplements, or functional foods. Let's take a closer look at the impact of this FTC notice on recipients.

Who Received the Notice?

The FTC released a list of the approximately 670 businesses to which it sent the notice. Many direct sellers also received the notice.

What’s in the Notice?

The notice outlines specific unlawful conduct, including failing to have adequate support for: (1) objective product claims; (2) claims relating to the health benefits or safety features of a product; or (3) claims that a product is effective in the cure, mitigation, or treatment of any serious disease. Unlawful conduct also includes misrepresenting the level or type of substantiation for a claim, and misrepresenting that a product claim has been scientifically or clinically proven.

As the notice makes clear, the FTC intends to seek steep penalties against businesses engaging in any of the described unlawful conduct. Yet, despite its strong warning, the notice does not provide instructions on how to abide by FTC rules. Rather, it suggests that the recipient consult the FTC staff’s recently issued “Health Products Compliance Guidance” and “take any steps necessary to ensure that your company’s practices do not violate the law.”

What Effect Does the Notice Have on Recipients?

The notice is not an indication that the recipient has done anything wrong or that it is under investigation by the FTC. Instead, the notice serves as a mechanism for the FTC to attempt to inflict additional penalties on recipients should they run afoul of the FTC’s rules against making unsubstantiated or deceptive claims. According to the FTC, because recipients are now on notice of the FTC’s rules, any conduct running afoul of these rules can be deemed a knowing violation, which subjects the targeted company to a $50,120 penalty per violation.

The FTC’s interpretation of its Penalty Offense Authority has not been tested in the courts, so it is not clear whether the FTC would be able to hold a letter recipient liable for the hefty penalty. Indeed, the use of potentially outdated administrative cases as the basis for the FTC’s purported “notice” authority is certainly questionable and will likely be challenged when, and if, the FTC seeks to impose penalties under these notices and others like it.

What Should You Do if You Received the Notice

It is time to make sure your company has strict policies prohibiting misleading claims and a compliance department and protocols that can identify and promptly cure any such claims. As we have discussed, misleading claims are the “low-hanging fruit” that entice FTC scrutiny. We specialize in legal and regulatory issues affecting direct sellers and are often called in to shore up policies and procedures, enhance compliance systems, and remove problematic elements from our client’s marketing plans. Please reach out to us if you would like to discuss. And remember, just a little diligence on these matters now goes a long way toward encouraging the FTC to devote its limited enforcement resources elsewhere.