In recent weeks, the Federal Trade Commission (“FTC” or “Commission”) sent nearly two thousand letters with a “Notice of Penalty Offenses” to a who’s who of companies across America, putting them on notice that they might face steep potential civil penalties if they engage in deceptive conduct. The letters targeted top consumer products companies, leading retailers and retail platforms, major ad agencies, and other advertisers nationwide that engage in online marketing, multi-level marketing, offer “gig” economy jobs, or are in the for-profit education sector.

Since the 1980s, the FTC has primarily obtained monetary relief under § 13(b) of the FTC Act, the provision of the FTC Act that empowers the Commission to obtain injunctive relief. However, in April 2021, the Supreme Court unanimously eliminated the FTC’s ability to obtain monetary relief under § 13(b), upending the FTC’s enforcement authority. While FTC has pushed Congress to amend §13(b) to restore the Commission’s monetary penalty authority, it has looked for creative ways to obtain monetary relief.

With these letters, the FTC has resuscitated its use of the Penalty Offense Authority under § 45(m)(1)(B) of the FTC Act. While the FTC’s Penalty Offense Authority is far less onerous than the other primary available option for obtaining civil penalties, which requires the FTC to first obtain a cease and desist order and only allows for monetary penalties if the defendant has engaged in behavior in violation of that order that “a reasonable man would have known under the circumstances was dishonest or fraudulent,” the Penalty Offense Authority presents the Commission with substantial procedural and practical hurdles.

The FTC Will Have to Show that the Defendant Had “Actual Knowledge” that its Actions Violate the FTC Act

To obtain penalties under § 45(m)(1)(B), the Commission must prove two elements: (1) the company had actual notice that the conduct was unfair or deceptive in violation of the FTC Act; and (2) the FTC must have already issued an administrative decision that such conduct is unfair or deceptive. Importantly, to meet the actual knowledge requirement, the FTC cannot rely on a consent order. Instead, there must be a previous administrative order that established that the specific conduct is unfair or deceptive to establish knowledge.

The “actual knowledge” element’s high bar puts the FTC in a difficult position today. Available and longstanding case law illustrates why. In United States v. Hopkins Dodge, 849 F.2d 311 (8th Cir. 1988), the Commission sent (what it then called) a “synopsis” to companies regarding Truth in Lending Act conduct it believed violated § 5 of the FTC Act, citing applicable cases and holdings. The FTC warned the synopsis recipients that continuing the conduct could lead to civil penalties under § 45(m)(1)(B). In a lawsuit against the recipient of this synopsis, the FTC lost its bid to obtain civil penalties on summary judgment. On appeal, reviewing the cases the FTC offered in the synopsis to justify its position that the defendant had “actual notice” that its conduct violated the law, the Eighth Circuit opined “that nowhere in said decisions does the F.T.C. determine that such practice (namely a practice in which appellees admittedly have engaged) is ‘unfair or deceptive’.” Hopkins Dodge, 49 F.2d at 314. Thus, the Eighth Circuit made clear there must be a fit between the cases relied upon in a notice and the conduct the FTC charges violates the law to satisfy “actual knowledge.”

As in Hopkins Dodge, the FTC may have a difficult time establishing a sufficient “fit” between the administrative cases cited in the notices and the conduct at issue to provide notice to future defendants. In the recent Notices of Penalty Offenses, the FTC provides a thin recitation of the law to justify its conclusion that certain conduct is deceptive. The FTC lists principles in bullet points and then adds citations to administrative orders from the 1940s through the early 1980s. Upon closer review, not only are the cases older than the internet, many of them do not have on-point holdings.

For example, in the Notices regarding deceptive endorsements and testimonials, the FTC relies heavily on Cliffdale Associates, Inc., 103 F.T.C. 110 (1984) to assert that “[i]t is an unfair or deceptive trade practice to fail to disclose a connection between an endorser and seller of an advertised product or service” if their connection materially affects the weight or credibility of the endorsement and “if the connection would not be reasonably expected by consumers.” However, Cliffdale was a claim substantiation case and the order itself did not speak to testimonials. The FTC also heavily relies on MacMillan, 96 F.T.C. 208 (1980) in the for-profit education and endorsements letters. But MacMillan contains no holding at all because the FTC declined to enforce and did not place the case on its docket. Thus, neither case “fits” the conduct the FTC complains of in the notices and cannot serve as a reasonable basis for “actual knowledge.”

The Cited Cases Pre-Date the Internet

The FTC’s relies on dated cases – the most recent administrative order dates to 1984 – involves pre-internet conduct. However, the Notices target industry categories that rely on the internet, social media, and mobile apps such as for-profit online colleges, influencers, consumer reviews, and the gig economy. Thus, the FTC, the parties in the cited administrative orders, and the recipients of the Notices alike could not possibly have contemplated the unique marketing compliance issues the internet, smart devices, social media platforms, and the rise of influencers present today. This may present significant problems to the FTC in establishing notice.

For example, in the Notice of Penalty Offenses Concerning Endorsements, the FTC cites Cliffdale Associates for the principle that “It is an unfair or deceptive trade practice to fail to disclose a connection between an endorser and the seller of an advertised product or service, if such a connection might materially affect the weight or credibility of the endorsement and if the connection would not be reasonably expected by consumers…” To ensure compliance, companies have to look beyond the notices to other sources such as the FTC’s FAQs, the Testimonial Guides, and consent orders. For example, in the Teami, LLC Complaint, the FTC asserted that Instagram disclosures must appear above the fold in an Instagram post when viewed on a mobile device. Teami would not have known that its conduct violated § 5 of the FTC Act based solely on the administrative cases the FTC furnished in the notices because they do not address modern marketing technology or techniques. This will present practical challenges for the FTC if it seeks to rely on the Notices to obtain civil penalties for very modern transgressions.

The Penalty Offense Authority Has Not Been Tested Recently

The FTC’s Penalty Offense Authority is also untested. The FTC briefly resurrected its Penalty Offense Authority in the early 2000s when it sent letters with synopses of administrative cases to 78 retailers that advertised textiles as bamboo when such textiles are actually rayon. The bamboo synopses, like the current letters and Notices, relied on old administrative cases. The cited cases were old Textile Act cases that broadly held that the failure to use proper fiber names in textile labeling and advertising is deceptive and violates the FTC Act. However, none of those administrative orders addressed the bamboo advertising specifically addressed in the FTC’s synopses and it is unclear whether the notices would have stood up as a basis for awarding monetary penalties had they been challenged in court. Thus, the FTC’s success in settling with recipients of the Bamboo notices has no precedential value to the FTC today.

Moreover, there are some notable differences between the bamboo letters and the current Notices which puts the FTC on even more tenuous footing. When the FTC sent letters to retailers regarding bamboo advertising, only retailers that either were advertising or had recently advertised textiles as bamboo received the letters. In contrast, in the recent Notices, the FTC did not target companies engaging in prohibited conduct. For example, the for-profit education sector letter states “[t]his letter does not reflect any assessment as to whether you have engaged in deceptive or unfair conduct.” And the testimonial letter states “FTC staff is not singling out your company or suggesting that you have engaged in deceptive or unfair conduct.”

Additionally, in the bamboo letters, the FTC also provided a detailed discussion of how it believes the cited administrative cases “fit” the conduct at issue. In contrast, the current Notices provide a bare, bulleted list of principles with a few citations. The failure to identify companies that engaged in wrongdoing coupled with the incredibly thin discussion of the cited cases makes it even harder for companies to identify conduct, if any, could be violating the law. Thus, the recipients arguably have not received notice as required by § 45(m)(1)(B)—particularly for conduct that is a significant departure from the conduct at issue in the underlying administrative cases.

Next Steps

The FTC’s authority to obtain civil penalties if it issues a complaint to the recipient of one of these Notices is uncertain and untested, the Commission has made clear that it continues to prioritize issues like testimonials, online education, multilevel marketing and income opportunity claims. To avoid FTC scrutiny, companies should review their marketing and business practices to ensure compliance with applicable FTC guidance.