At its core, Section 5(m)(1)(B) is premised on the notion that actual notice that a specific act or practice is deceptive or unfair can justify the imposition of civil penalties. In plain language, this provision concerns (a) final administrative cease and desist orders, (b) that are issued by the Commission, (c) that are not consent agreements, and (d) that have deemed certain practices to be deceptive or unfair under Section 5 of the FTC Act. This provision provides that if the Commission can demonstrate that a party that is not subject to a cease and desist order has “actual knowledge” that the practices at issue were found to be deceptive or unfair and still engages in such practices, the Commission can seek civil penalties against that party at the current rate of $46,517 per violation.
Many questions have been raised about the FTC’s recent use of this authority, particularly in such a broad manner. In this article, I take a closer look at both the historical use and the recent resurgence of this statutory provision and include a case study of how the agency used this provision in the early 2010s in a more targeted fashion, as well as an evaluation of the types of issues that will likely be raised if and when the agency attempts to obtain civil penalties premised on the Fall 2021 Notices.
Historical Background
Section 5(m)(1)(B) was added to the FTC Act in 1975 via Section 205 of the Magnuson-Moss Warranty FTC Improvement Act. It played a significant role in FTC enforcement from the mid-1970s to the late 1980s. One year after the provision’s enactment, the agency initiated its use of this new provision and, “mailed letters to selected businesses informing them of the new statutory provision and enclosing a synopsis of one or more relevant prior FTC decisions.” The FTC used this authority in a variety of areas such as credit advertising and advertising about cures for male pattern baldness. This initial program resulted in five civil penalty actions, and many more followed in subsequent years.
The agency’s use of Section 5(m)(1)(B) slowed down in 1988, after the case of United States v. Hopkins Dodge. There, the Court of Appeals for the Eighth Circuit rejected the FTC’s request for civil penalties pursuant to 5(m)(1)(B) because several of the cases the FTC cited did not involve actual findings of deception or unfairness, and the one that did alleged the use of bait-and-switch tactics by meat distributors, which was not sufficiently germane to allegations that automobile dealers had failed to adequately disclose credit terms in violation of Regulation Z.
The Resurgence of Section 5(m)(1)(B)—What’s Old is New Again
More than three decades after Hopkins Dodge, Section 5(m)(1)(B) is undergoing a resurgence. Several factors have contributed to this development.
Starting in the 1980s, Section 13(b) of the FTC Act was the primary tool that allowed the FTC to obtain equitable monetary relief in federal court for violations of Section 5 of the FTC Act. For decades, the agency used Section 13(b) to obtain billions of dollars in monetary relief. That changed dramatically with the April 2021 U.S. Supreme Court decision in AMG Capital Management, LLC v. FTC, in which the unanimous Court ruled that Section 13(b) of the Federal Trade Commission Act does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement. This sudden change in its authority, and a lack of a legislative fix from Congress, led the FTC to seek out and utilize replacement tools.
Since that time, the FTC has refocused its attention on other statutory and non-statutory ways to obtain monetary recovery. These efforts have included partnering with state law enforcement agencies that have such authority; alleging rule violations, which often allow for the imposition of penalties and possibly redress; and engaging in administrative litigation, which may also allow for monetary recovery in some matters that allege “dishonest or fraudulent” conduct. Section 5(m)(1)(B) is one of the tools that can allow the FTC to obtain monetary relief in federal court. Penalties, however, are the only allowable monetary remedy for this provision. Redress, disgorgement and damages are not authorized as forms of relief for violations of this provision, although there may be some other violation charged that allows for other monetary relief.
Another factor that contributed to the increased use of Section 5(m)(1)(B) is an article written by former FTC Commissioner Rohit Chopra and his-then Attorney Advisor Samuel Levine, The Case for Resurrecting the FTC Act’s Penalty Offense Authority. This article was a logical follow-up to issues that Commissioner Chopra had frequently raised during his time at the agency. During the tenure of former FTC Chair Joseph J. Simons, dissenting commissioners raised concerns on numerous occasions about the purported failure of the Commission to utilize all of the tools it had at its disposal, including rulemaking authorities, the “unfairness” authority under Section 5 of the FTC Act, and Section 5(m)(1)(B).
For example, in June 2020, the FTC settled a case in which the Commission alleged that a company had violated the FTC Act through misrepresentations about its participation in the EU-U.S. Privacy Shield framework. Then-Commissioner Chopra dissented in that settlement for a variety of reasons, including the lack of disgorgement of ill-gotten revenue and the lack of redress in the settlement. His dissenting statement observed that “if the Commission entered a final cease-and-desist order at the conclusion of litigation, I believe this could trigger civil penalties, pursuant to Section 5(m)(1)(B) of the FTC Act.” He noted that there is a “paucity” of litigated cases in the data protection arena and that a final cease-and-desist order in this case would have had a disciplining effect on other companies or programs in similar situations.
A few months later, Chopra and Levine advocated in their article that the FTC should resurrect its use of Section 5(m)(1)(B) to “systematically eradicate unfair or deceptive practices through administrative adjudication and market participant notification” and called it “a unique tool in commercial regulation that has the potential to dramatically increase the agency’s effectiveness.” The authors discussed five areas where they believed the FTC should utilize Section 5(m)(1)(B): for-profit college fraud, false earnings claims targeting workers, online disinformation, deceptive data harvesting, and illegal targeted marketing.
Although Chopra and Levine focused on those five areas, that is certainly not the end of the provision’s potential use by the agency. Indeed, Levine – now the Director of the Bureau of Consumer Protection – later stated in a Capital Forum interview that “our vision for the agency long-term is that [Section 5(m)(1)(B)] becomes a regular part of the FTC’s toolkit. So we by no means intended to limit the article to these five areas.”
More Recent and Targeted Background – the Bamboo Cases
To understand how the FTC could use its authority under Section 5(m)(1)(B), a series of FTC enforcement actions using the provision in the 2010s warrants closer analysis. It started in 2009 when the FTC announced a series of cases against four companies that allegedly marketed their textile products as made of bamboo fiber, when in fact they were made of rayon. All four cases eventually settled administratively for an injunction and no monetary relief.
In February 2010, the FTC sent warning letters describing the 2009 bamboo cases to 78 retailers and encouraged them to “take corrective steps to avoid Commission action.” Included with each letter was a synopsis of Commission decisions holding that the failure to use proper fiber names in labeling and advertising textile products constituted a deceptive act or practice in violation of the FTC Act. The synopsis cited to a number of decades-old litigated FTC administrative decisions that stand for the proposition that it is a deceptive practice to falsely market or advertise “any textile fiber product with respect to the name or amount of constituent fibers contained therein.” The FTC stated that by enclosing the synopsis of cases, the agency was putting the retailers on notice that if they failed to correct the improper labeling of textile products, they could be subject to substantial civil penalties.
After the FTC sent the initial wave of bamboo warning letters, FTC staff continued to monitor the market for problematic bamboo marketing, resulting in a second sweep of the retailers. A January 2013 follow-up to the warning letters was a sweep of four cases against companies that had received the warning letters (along with the case synopsis) and had allegedly continued to deceptively market textiles as being made of bamboo fiber. The four companies agreed to settlements for a combined total of $1.26 million in civil penalties, whereas the 2009 sweep did not include any penalties.
Two years later, in 2015, the FTC did a third bamboo sweep, relying upon the same synopsis and a very similar complaint as in the second sweep. The agency sued four more retailers and obtained $1.3 million in combined civil penalties.
But the bamboo story did not end there; in April 2022, the agency announced two additional settlements against national retailers that had allegedly marketed bamboo products in violation of the 2010 bamboo Notices. The settlements, which totaled $5.5 million, were premised upon similar conduct and utilized the same legal authority as the 2013 and 2015 cases.
The Fall 2021 FTC Letter Writing Campaign
The FTC’s latest letter writing campaign started in October 2021, with 70 letters and notices sent to for-profit higher education institutions, putting them on collective notice that they could be subject to significant civil penalties if they engaged in certain practices, such as making deceptive representations about the types of jobs available to an institution’s graduates. One week later, the agency sent a second round of 700 letters and notices to many of the largest companies in the country regarding their use of endorsers and testimonials in advertising. The letters warned of significant penalties if the recipients, for example, failed 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.” And in late October a third round of 1,100 letters and notices were sent to companies involved in multi-level marketing and coaching services, franchises, and gig economy apps. These letters warned of potential civil penalties if the companies misrepresented, among other things, “that a substantial number of participants have made or can make the represented profits or earning.” The recipients of this third round of letters also received copies of the earlier letter and notice regarding endorsements and testimonials.
Each of these communications from the FTC included both a letter from the agency and a Notice. The letters accompanying the Notices stated that “Staff is not singling out your company or suggesting that you have engaged in deceptive or unfair conduct.” At the same time, however, the letters did somewhat threateningly state that “[r]eceipt of these notices of penalty offenses puts your company on notice that engaging in the conduct described therein could subject you to civil penalties of up to $43,792 per violation.”
The three sets of Notices vary somewhat but are similarly structured. The Notices generally set forth a series of acts or practices that have been found to be deceptive or unfair and cite to FTC administrative orders that support that finding. For example, the endorsements Notice states that “[i]t is an unfair or deceptive trade practice for an advertiser to use testimonials to make unsubstantiated or otherwise deceptive performance claims even if such testimonials are genuine” and cites to several cases, such as Cliffdale Associates, a 1984 FTC administrative decision involving fuel-efficiency claims, including claims made through consumer endorsements. The money-making Notices cite cases going as far back as 1941, including Von Schrader Manufacturing, a case that involved claims of profits from the sale of an “electric machine designated ‘Von Schrader Portable Carpet Washer.’” Notably, the money-making Notices and letter provided more details about the cases relied upon and also cited to a number of federal cases that have “confirmed” some of the determinations set forth in the Notice, even though the statutory authority at issue only applies to litigated administrative actions.
There are two significant differences, however, between what the agency did with respect to the bamboo campaign and this current campaign that warrant emphasis. The first is the overall limited scope of the bamboo synopsis. Unlike, for example, the endorsement and testimonial Notices, which have a broad scope that could arguably apply to virtually every marketer in the country making any type of substantive claims through endorsers or testimonials, the bamboo synopsis was narrowly targeted to retailers that market textiles, and specifically, to claims about fiber content. The second difference is that the bamboo letters were narrowly sent to companies that the agency believed might have been deceptively marketing textiles as bamboo; the Fall 2021 letters were sent far and wide, with seemingly no regard to the companies’ current or past marketing practices. These differences contributed to the outroar that was raised in the Fall of 2021 about the letters, and they also raise enforceability concerns.
What Comes Next
The approximately 1,800 letters that the FTC sent out in the fall of 2021 appear to have had some impact on industry practices. Anecdotally, a number of companies took these letters as a direct reminder to review the claims that they are making – including fact-checking earnings claims they are making for a money-making opportunity or making sure that the influencers they hire are making it clear in social media posts that they are being compensated for their posts.
But regardless of whether the agency is appropriately using Section 5(m)(1)(B), at a minimum, the Notices set forth generally well-established consumer protection principles that companies should address. It may or may not be an action pursuant to Section 5(m)(1)(B), but an enforcement action is a real possibility for companies violating those principles.
It is hard to imagine a scenario where the FTC sends out more than 1,800 warning letters and does not attempt to act upon any of them using the specific authority described in the letters. A closer question is when the agency will first attempt to do so and whether the initial targets will be companies lacking the wherewithal to defend that are likely to settle, or whether they will be entities that are willing to push back against the notion that the FTC can obtain civil penalties through this process.
Additionally, I have focused on the three most recent Notices issued by the FTC. In April 2022, the FTC announced the latest bamboo cases but also reminded companies that before the latest round of letters, the agency had, decades ago, issued many other Notices that were still purportedly active. Indeed, the April 2022 bamboo press release stated “In conjunction with this announcement, the FTC is reviving additional Notices of Penalty Offenses that were issued in the 1970s or 1980s but remain valid and relevant today. These notices cover, for example, textiles, energy savings, fur products, home improvement products, auto rentals, bait and switch, toys, and weight reduction. Businesses in these industries should familiarize themselves with the Commission’s determinations in these areas.” The agency also updated the portion of its website addressing the Notices to include the eight additional areas described in the press release. Thus far, however, there is no indication of how the agency intends to utilize the older penalty letters, most of which were issued more than 45 years ago. But at a minimum, the press release strongly suggests that the agency will be doing so going forward.
Potential Defenses Against the Use of Section 5(m)(1)(B)
Companies can employ several defenses against the FTC’s attempt to use its Section 5(m)(1)(B) authority.
Section 5(m)(1)(B) requires “actual knowledge” that a certain act or practice has been deemed deceptive or unfair. There are legitimate concerns that an overly broad characterization of an act or practice as deceptive or unfair does not and should not constitute adequate knowledge. For example, the Notices reflect a far greater breadth than may have been anticipated by the statute. The failings that formed the basis of an enforcement action 50 years ago are likely quite different than what happens in 2022, rendering it questionable whether companies have actual notice that their practices are subject to penalties. The products and services described in the cases cited in the Notices relating to endorsements may not have a great deal of relevance to the mobile devices and laptops of today.
Section 5(m)(2) describes ways that parties can challenge the FTC’s assertions in litigation. This provision generally allows a party to challenge de novo the Commission’s underlying finding that an act was deceptive or unfair if it is subject to one of these actions. This means that a party can ask the court to review the Commission’s determination of law that the act or practice which was the subject of the underlying proceeding constituted an unfair or deceptive act or practice, and the court will also review de novo the issue of fact as the defendant’s acts or practices.
The FTC has also emphasized the “unusually strong” due process rights that companies have when they are subject to actions under Section 5(m)(1)(B). Companies can argue that “the conduct the FTC condemned in that last case is not the same conduct they’re engaging in” and that “legal conclusion that the FTC made [in the previous case] does not or should not apply to the conduct we engaged in.” Further, companies can also challenge the FTC’s prior determination that the conduct at issue was deceptive or unfair. In effect, “they can say the FTC was wrong to even say this practice was illegal. So they can bring de novo challenges to the FTC’s previous determination.”
For the companies that do chose to contest a Section 5(m)(1)(B) action, there are many issues they will be able to raise in their defense. For starters, they can challenge the underlying cease and desist order and argue that the Commission’s determinations were erroneous. Depending on the case that the Commission is relying upon, this argument may or may not have traction, but overall, many of the older Commission cases are premised upon fairly fundamental consumer protection law. There may some cases that could be successfully challenged when viewed through a current, modern consumer protection lens, although this strategy may not succeed for a majority of cases.
The primary defense will turn on whether the defendant can successfully challenge the key foundational issue of whether there is a sufficient fit between the case relied upon in the old cease and desist order and the current challenged conduct. The case law on this is quite limited. The Hopkins Dodge case discussed above was a fairly egregious example of a disconnect between the old case relied upon and the current conduct. There is not significant case law describing the necessary closeness of the fit, and this will certainly be a big focus given the breadth of the notice orders and the reliance on decades-old case law.
For example, the endorsement Notice cites to RJ Reynolds and Cliffdale for the proposition that it is deceptive to “falsely claim that an endorser is an actual, current or recent user of a product or service.” In Cliffdale, the “experiences of the endorsers of the product did not extend beyond 1976 or 1977.” The Commission affirmed the administrative law judge’s finding that “respondents’ implied representation in 1979 that the statements were from persons who were current or recent users was false.” A two or three-year gap was found to be deceptive.
For companies served with the endorsement Notice, this raises many questions, such as how recent or current testimonials must be to be non-deceptive. At most, the cases suggest that a two or three-year time lag may be problematic if you are claiming recency, but that is certainly not much guidance.
The endorsement Notice also states that “[i]t is an unfair or deceptive trade practice for an advertiser to continue to advertise an endorsement unless the advertiser has good reason to believe that the endorser continues to subscribe to the views presented in the endorsement.” The case relied upon, National Dynamics, does not provide clarity on the bounds of this issue either, with the Commission stating that “respondents published testimonial letters without the authorization of the writers and continued to publish such testimonials for several years after the writers had discontinued using the product and no longer endorsed it.” The Commission further stated that for authorized testimonials, it is fine to use them “so long as respondent has good reason to believe, at the time it is being used, the author subscribes to the views therein contained.”
This of course leads to many questions, most notably, what constitutes “good reason”? A company should stop using a testimonial when it knows the endorser no longer holds that same view, but the Commission’s notice requires the advertiser to have good reason to believe that it is still true. If a company highlights favorable testimonials on its website, how often must it verify that those statements are still valid?
Similar issues are raised with respect to the money-making Notice. There, one of the principles set forth is that “[i]t is an unfair or deceptive trade practice to misrepresent, explicitly or implicitly, the amount or type of training that will be given to participants in a money-making opportunity.” One case is cited for this proposition, Encyclopaedia Britannica. The company there ran ads touting management training when in fact, they were seeking door-to-door sales people; management training was not provided. How is a company supposed to interpret this? What if the training is just shoddy or substandard or limited? What if the training consists of a detailed manual or guide that is provided to new employees? Does that count as training and do either of these scenarios justify the imposition of penalties?
More broadly, companies will argue that the facts are not similar enough to constitute sufficient notice for the imposition of substantial penalties. Indeed, given the age of the cases at issue, one has to anticipate a wealth of arguments focused on the many differences between the activities that were challenged in the 1950s and 1960s and the marketing behavior we see in the 2020s. Is an action involving a static print advertisement posted in a 1950s publication sufficiently similar to the issue of whether a sponsored TikTok video had an adequate disclosure? If the old FTC case involved a failure to disclose a material connection in a print ad that the company distributed, can we take that finding and apply it in the context of social media influencers who are constantly creating and disseminating new and unique content? A recent FTC case involved allegations of review suppression where the company posted four or five star reviews but withheld more critical reviews. Would this type of alleged review suppression be a close enough fit to old cases involving deceptive testimonials?
It may be instructive to again compare and contrast the latest Notices to what we saw in the bamboo context. The bamboo cases were far more analogous to a 1983 district court decision that 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. In the down content case, the principle that one should not misstate the down content of a product seems like a straightforward proposition that does not require a great deal of interpretation or factual context.
Future Areas the FTC Could Explore
Perhaps not surprisingly, in the Fall 2021 Notice letters, the FTC addressed three of the five areas that Chopra and Levine discussed in their article as candidates for Section 5(m)(1)(B). The remaining two – deceptive data harvesting and targeted marketing – would likely represent even more controversial invocations of Section 5(m)(1)(B) than the ones that were the subject of the Fall 2021 Notices given the intense interest in privacy issues these days and the paucity of litigated FTC administrative cases on point. Interestingly, the Fall 2021 Notices cite to a recent administrative decision involving Cambridge Analytica as one of the privacy cases that the agency could utilize for these purposes. The decision held, among other things, that it was a deceptive practice for Cambridge Analytica to misrepresent to app users that it would not collect their identifiable information.
The Cambridge Analytica decision itself is not particularly controversial in its holding, and the FTC staff’s motion for summary decision certainly does appear to support the conclusions that the Commission reached in its decision. It is worth noting, however, that Cambridge Analytica defaulted in the FTC litigation. The Commission decision is premised solely upon FTC staff’s unopposed motion for summary decision. While there is nothing controversial about the Commission’s issuing a decision after a party defaults, it would be far more questionable whether such a decision should then be used to form the basis of a future Section 5(m)(1)(B) action. The language of the statute, however, could allow this to happen. It expressly refers to a “final cease and desist order, other than a consent order.” A default order is by its nature not a consent order and the provision would seemingly allow a default decision to form the basis of a notice letter.
It is worth considering, however, whether it is fair to potentially seek significant penalties against future parties based on a default decision. One can imagine scenarios where the FTC brings cases against small targets that are likely to default, for the purpose of creating a foundation for future notice letters. Or there could be scenarios where litigation is not settled on favorable terms because of an overarching desire to obtain a final cease and desist order that is not a consent order. Using defaults to form the basis of Notice letters is inherently problematic as a policy matter, even if potentially allowed by the statute.
Conclusion
The AMG decision has required the FTC to resurrect old tools and approach its law enforcement actions differently and more strategically. One of those tools is Section 5(m)(1)(B). A decade ago, the agency brought a series of cases involving this statutory provision in a manner that was narrow and targeted and appeared to have provided clear notice of what conduct was deceptive or unfair. It remains to be seen how the agency will use the latest round of Notice letters, but at a minimum, it appears to be a far broader use of the authority that will raise concerns about the sufficiency of the notice and the factual distinctions that dictate against reliance on authorities that pre-date the Internet.
