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In Attempt to Get Monetary Relief in Cases, FTC Resurrects "Penalty Offense Authority"

Client Updates

Earlier this year, the Supreme Court issued a unanimous ruling finding that Section 13(b) of the FTC Act does not authorize the FTC to obtain in federal court equitable monetary relief such as restitution or disgorgement. AMG Capital Management, LLC v. FTC, 141 S. Ct. 1341 (2021). Last month, FTC Chair Lina Khan issued a memorandum to Commission staff stating that, post-AMG, the FTC should utilize its “full set of tools and authorities” to police unlawful conduct across markets. To that end, the agency is seeking to use Section 5(m)(1)(B) of the FTC Act as a tool to side-step AMG and obtain civil penalty monetary relief in the consumer protection arena. 15 U.S.C. § 45(m)(1)(B). This provision authorizes the issuance of civil penalties following a litigated Commission determination that a practice was unfair or deceptive if the defendant had “actual knowledge” of that finding. Several requirements must be satisfied before the FTC may obtain civil penalties:

  • To seek civil penalties under Section 5(m)(1)(B), the FTC must rely on an existing litigated final cease-and-desist order (consent orders do not qualify) issued through its inhouse administrative litigation holding that a particular practice is unfair or deceptive and therefore unlawful. If a different party later engaged in that same practice – with actual knowledge that the practice was unfair or deceptive – the FTC may seek civil penalties up to $43,792 per violation in federal district court.
  • The requirement that the FTC show “actual knowledge” means that parties must be on notice that the Commission has condemned certain practices. To prove “actual knowledge,” the FTC typically shows that it provided the violator with a copy of the Commission determination about the practice (or a synopsis of that determination). There is no statute of limitations precluding the FTC from relying on dated final orders to establish “actual knowledge”—all prior final orders are potentially fair game.
  • FTC Sends Warnings Far and Wide

    The FTC has issued two notices so far invoking the Section 5(m)(1)(B) authority. On October 6, 2021, the FTC announced that it is “resurrecting its Penalty Offense Authority” and put 70 for-profit higher education institutions “on notice that the agency is cracking down on any false promises they make about their graduates’ job and earnings prospects and other outcomes and will hit violators with significant financial penalties.” The notice outlines several practices perpetrated by education institutions previously found to be unfair or deceptive, and notes that these practices could lead to civil penalties.

    That was just a warm up and, a week later, on October 13, 2021, the FTC announced that it sent a new notice to more than 700 companies, which it described as “an array of large companies, top advertisers, leading retailers, top consumer product companies, and major advertising agencies.” The notice warned a large swath of U.S. industry that those companies could incur civil penalties if they use endorsements or testimonials in ways that run counter to prior FTC administrative decisions. The notice highlights practices such as: (i) falsely claiming an endorsement by a third party; (ii) misrepresenting whether an endorser is an actual, current, or recent user; (iii) using an endorsement to make deceptive performance claims; (iv) failing to disclose an unexpected material connection with an endorser; and (v) misrepresenting that the experience of endorsers represents consumers’ typical or ordinary experience. The FTC has provided the full list of companies receiving this notice, which includes leading companies across industries such as technology, energy, media, pharmaceuticals, retail, and consumer products.

    Implications for Companies Receiving Notice

    Consistent with the statutory scheme described above, the FTC is careful to state in its listing of companies receiving the notices that, “The fact that a company is on this list is NOT an indication that it has done anything wrong.” However, the agency emphasizes in its letter that “Receipt of this Notice puts your company on notice that engaging in conduct described therein could subject the company to civil penalties of up to $43,792 per violation.”

    To obtain civil penalties, the agency will have to prove in federal court that the recipient of the notice engaged in the specific challenged practice – defendants are entitled to a de novo hearing on any issues of fact, including whether their conduct is sufficiently similar to that previously condemned in the FTC order. See 15 U.S.C. § 45(m)(2). In addition, defendants can challenge the prior order, forcing the Commission to defend its prior determination of unlawful conduct. Id. However, the possible monetary liability could be substantial if the agency succeeds, which will likely give the agency strong leverage to extract settlements even in relatively weak cases.

    What’s Next?

    Now that the FTC has revived the Penalty Offense Authority and issued two notices covering many industries and approximately 800 companies and educational institutions, we expect the agency to continue to roll out notices outlining practices implicating a wide range of industries and businesses. Chair Khan continues to deliver on her promise of using every tool at the FTC’s disposal to execute her agenda and dampen the impact of the AMG decision.

    Past FTC Commissioner Rohit Chopra (recently confirmed as CFPB Director) issued a statement lauding the resurrection of the Penalty Offense Authority, stating: “This legal tool is particularly important, given the Supreme Court’s recent ruling in AMG Capital Management.” Back in November 2020, Commissioner Chopra and now Director of the FTC Bureau of Consumer Protection Samuel Levine co-authored a paper arguing that the Commission can “substantially increase deterrence and reduce litigation risk by noticing whole industries of Penalty Offenses, exposing violators to significant civil penalties, while helping to ensure fairness for honest firms.” The paper highlighted five “key areas” where the Commission can “deploy the Penalty Offense Authority immediately,” including for-profit college fraud, false earnings claims targeting workers, online disinformation (including fake reviews and undisclosed material connections), deceptive data harvesting, and illegal targeted marketing. Given that two of the recommended areas have already been targeted (for-profit college fraud and “online disinformation”), Penalty Offense notices may soon be forthcoming in the other three recommended areas.

    To gauge their exposure for receiving future Penalty Offense notices, companies should consider a number of strategies, including some or all of the following:

    • Analyze prior FTC consumer protection orders to identify all orders addressing practices that have been challenged that are relevant to their industry and/or business. The orders cited by the FTC in the two notices to date stretch all the way back to 1984 and 1941, showing that, in the agency’s eyes, all prior FTC final orders are fair game to use as the basis for issuing future notices.
    • Develop a comprehensive understanding of all potentially applicable orders that the company should consider when developing new sales and marketing practices or when adjusting existing practices.
    • Ensure that the company keeps abreast of new orders that the agency could argue provide “actual knowledge” to the company that a practice has been determined to be unfair or deceptive.
    • Assess whether the company’s practices are sufficiently differentiated from those at issue in past orders. Such differentiation could prove beneficial in arguing that (1) the company lacked “actual knowledge” that a practice had been determined to be unfair or deceptive; and (2) the company did not engage in the specific challenged practice.
    • Assess whether there are significant weaknesses in any relevant prior FTC determinations of unlawful conduct, which could provide another avenue of defense and additional leverage for defendants, since upon any party’s request, courts must review the Commission’s original legal determinations made in its administrative proceedings that a certain practice constituted an unfair or deceptive practice under Section 5 of the FTC Act.

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