The Essential Guide to FTC Compliance, Investigations, and Enforcement

The Essential Guide to FTC Compliance, Investigations, and Enforcement

By Kronenberger Rosenfeld, LLP

Edition 1.0

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Introduction

For anyone conducting business over the internet, an understanding of FTC rules and regulations is not just important but essential. In fact, the lack of this knowledge may lead to severe consequences, including your business being shut down by the FTC.

If you become involved in an FTC investigation or an FTC lawsuit, an understanding of the FTC’s investigatory and decision-making processes are important for your own decision-making on how to respond to the FTC. This Essential Guide provides an overview of the three major areas that are relevant to those doing business over the internet:

  • FTC Compliance: how to comply with the vast array of FTC regulations and guidelines;
  • FTC Investigations: how to respond to FTC Civil Investigative Demands (“CIDs)” and other FTC inquiries; and
  • FTC Enforcement: how to respond to, and negotiate with, the FTC if they have threatened to file or have filed a federal FTC lawsuit or administrative complaint against you.

This Essential Guide is designed for business owners and attorneys who are not familiar with the FTC’s consumer protection rules and regulations. This Essential Guide is not an exhaustive treatise on every aspect of the FTC, but instead, it was designed by FTC defense attorneys at our law firm to be a highly usable tool for businesses and attorneys facing FTC consumer protection issues.

It was designed to help readers find information quickly via easy to use built-in navigation. For example, if you have been sued by the FTC, you may want to review the paragraphs of the Compliance section that are relevant, and then skip to the Enforcement section. Or, if you have received an FTC CID, you may want to skip right to the FTC Investigations section.

Finally, this guide only covers FTC consumer protection laws and regulations, and not any FTC antitrust law. 

I. Compliance

The Law - Compliance

The FTC Act

The Federal Trade Commission Act (the “FTC Act”) is a federal statute that appears in the U.S. Code at 15 U.S.C. §§41 through 58. The FTC Act creates and empowers the Federal Trade Commission (the “FTC” or, in its own publications, the “Commission”) to regulate trade to prevent unfair and deceptive acts and practices affecting consumers. As relates to e-commerce and internet advertising, Section 5 of the FTC Act prohibits making false and misleading statements to consumers in any form, including display ads, text and email communications, publisher or merchant websites, and labels and other product packaging. The FTC Act enables the FTC to investigate and prosecute businesses and people who engage in deceptive advertising.

FTC Rules and Publications

The FTC has expounded on the FTC Act with a series of publications and rules that apply to merchants and advertisers. Some of these rules address specific advertising practices, such as the use of testimonials and other endorsements in advertising. Others apply to high-risk products or verticals, including business opportunities and weight loss products. These rules and publications are available on the FTC’s website, and we go into several in more depth below.

FTC Enforcement of Other Laws

In addition to the FTC Act, the FTC has been put in charge of enforcing several U.S. laws that apply to advertising and e-commerce. These include the CAN-SPAM Act of 2003, 15 U.S.C. §7704 et seq., the Children's Online Privacy Protection Act of 1998, 15 U.S.C. §6501, et seq., the Consumer Review Fairness Act (“CRFA”), 15 U.S.C. §45(b), the Restore Online Shoppers’ Confidence Act (“ROSCA”) regarding negative options, 15 U.S.C. §8401 et seq., and the Fair Credit Reporting Act (“FCRA”), 15 USC §1681 et seq.  Thus, in addition to unfair or deceptive advertising, the FTC can investigate and enforce violations of these statutes.

High Risk Advertising Practices

Certain business activities present increased risk of an FTC investigation or FTC lawsuit—often because the FTC has determined that this activity is historically rife with unfair, deceptive, or otherwise non-compliant practices. As affects e-commerce merchants and those in the performance marketing industry, these areas of increased risk can be divided into four categories: (1) advertising practices (meaning, the substance of the advertising), (2) advertising methods (as in method of delivery), (3) billing practices, and (4) offers or verticals. This section focuses on the first category, high-risk advertising practices, and how to ensure compliance in your advertising content.

Benefit Claims and Substantiation

Advertising is any claim about the advertised product or service made to a consumer, regardless of whether that claim is made in a display ad, in a promotional email, on a website, on a radio or television commercial, in a video sales letter (“VSL”), on an Amazon marketplace listing, on product packaging or labels, on a billboard or in-store signage, or through any other means. Simply put, any time you make a claim about your product, you need to be able to back it up with proof. The type of proof, or “substantiation,” required is often dictated by the nature of the claim, and the more specific the claim is, the more nuanced the substantiation needs to be. The following are just a few examples that, together, demonstrate a spectrum of substantiation:

Claim Substantiation
Only $19.95! Sales records demonstrating product was sold to consumers for $19.95.
Comes in your choice of five colors Product samples showing the product was available in five colors.
Our lowest price of the year! Advertising and product listing records for the year demonstrating that, prior to the time the claim was made, the product was always sold at a higher price.
Certified organic A certificate from a USDA-accredited agency showing that the product has been deemed organic.
I lost 10 lbs. in 2 weeks! A testimonial affidavit (as described in Section 1.2.2) from the person to whom the quote is attributed testifying, under penalty of perjury, that after using the product, he lost 10 lbs. in 2 weeks, and preserving medical records or photographic evidence that can further back the statement up.
Supports a healthy heart Peer-reviewed studies, published in reputable medical journals, showing the active ingredient(s) in the product (taken in the same form and in approximately the same amount as is included in the product) have been shown to have a beneficial impact on cardiovascular health.
You can lose up to 10 lbs. in 2 weeks! A clinical weight loss study conducted by a recognized testing facility showing that study participants who used the specific product (and not just a similar product) lost up to 10 lbs. in 2 weeks.
You will look 10 years younger! It is impossible to prove that average users of a product look 10 years younger; therefore, this claim should not be made.

 

We recommend maintaining a “substantiation file” of all support for your product benefit claims and placing it in a secure location such that it will not be lost or deleted. The time to locate substantiation for your advertising claims is concurrent with—that is, at the same time as—your advertising. If you do so, you will have peace of mind from an FTC compliance perspective that you can back up everything you tell consumers about your product. Do not wait until you are facing an FTC investigation or FTC lawsuit to try and reverse engineer support for your advertising claims.

Testimonials, Endorsements, and Before/After Pictures

An endorsement is any advertisement or indication of sponsorship for your product by a third party. An endorsement can be as overt as a celebrity spokesperson saying “I endorse this product,” to something as subtle as an Instagram influencer posting a picture of herself with your product in her purse. A testimonial is a specific type of endorsement wherein the third party speaks to their own experience with the product, such as “I lost thirty pounds using this product.” Even before/after pictures can serve as a testimonial to the product’s effectiveness.

The FTC takes endorsements and testimonials very seriously. Any endorsement that does not disclose that the third party received something of benefit (e.g., money, commissions, equity in your company, or even free product) is considered false and misleading and therefore a violation of the FTC Act. Similarly, testimonials that are misleading in any manner—for example, by photoshopping before/after pictures, or attributing a testimonial to a non-customer or even a fake customer—are not compliant. In response to the growing use of social media influencers to advertise products, the FTC issued updated endorsement guidelines, which provide tips on disclosing sponsorship or payment when posting testimonials online, including by influencers on social media.

The key to ensuring your endorsements and testimonials are compliant is to make certain that they are (a) truthful and (b) transparent. Regarding truthfulness, do not say or do anything that would exaggerate or otherwise misstate the results the endorser experienced as a result of using the product. As for transparency, clear and conspicuous disclosure that the endorser was compensated is required.

When space is limited for disclosures, like in social media posts, disclosures such as #ad or #promotion may be adequate, depending on the circumstances. In situations where a product reviewer received free product in exchange for a review, that must be disclosed in the review itself.

Best practices for complying with the law governing endorsements and testimonials is in flux due to continually changing technology and internet advertising practices. Thus advice from experienced FTC defense lawyers is recommended for businesses facing these issues.

“Made in the U.S.A.” Claims

Claims that products are “Made in the U.S.A.” are regulated by the FTC. Just because you are a U.S. business does not mean you are able to make this claim with abandon.  The FTC requires that products advertised as “Made in the U.S.A.” be “all or virtually all” made in the United States. It is deceptive—and therefore a violation of the FTC Act—to sell merchandise advertised or marked as “Made in the U.S.A.” (or a similar phrase) if it has been entirely or substantially made, manufactured, or produced outside of the United States. Of course many products have components that are sourced internationally, and in those cases the question is whether the final product sold to consumers has been substantially transformed with processes in the United States. If you’re confident you meet these criteria and choose to use a “Made in the U.S.A.” designation in connection with your product, you need to have substantiation on file to support these claims, including supplier and manufacturing records showing the product was made, or substantially transformed, in the United States.

Time/Exclusivity Pressures

For years, a popular internet advertising technique has been to pressure customers into completing a sale with suggestions that supply is running out, a sales price will soon increase, or an exclusive invitation to participate in the offer will expire. However, such “pressures” are often demonstrably false—upon refresh of the page a week later, the limited supply remains the same, the sale never ends, and the invitation code always works. Because any effort to deceive or trick a customer into making a purchase, no matter how trivial, is a violation of the FTC Act, the FTC regularly takes action against companies engaging in false pressures.

Stock Photography & Fictional Spokespersons

Internet advertising as we know it would not exist without the availability of stock photography, but certain uses of stock photography can land you in trouble with the FTC.  Specifically, when stock photography featuring a model (as opposed to background, landscapes, or abstract graphics) is used in conjunction with your product, it can lead consumers to believe the model is a bona fide user of the product. The issue is whether the stock photography is used in a manner that suggests or implies certain product benefits. For example, if your offer is for an online learning course and you use stock photography featuring a model sitting at a computer, the image is merely illustrative of the product but does not promise certain benefits from using it. By contrast, if your offer is for a weight loss product and you use stock photography featuring a slender model in a bikini with a measuring tape around her waist, it suggests that she has actually used the product to lose weight and attain her good figure. Because the model did not use your product, the use of the stock photography in the second example is false and misleading and therefore non-compliant.

Another common misuse of stock photography is to depict a fictional spokesperson or “face” of the offer. If it is clear from your advertising that the spokesperson is fictional (e.g., Progressive’s “Flo” or Jack in the Box’s “Jack”), then it is not misleading. However, if you use stock photography to depict someone identified as the CEO of your company, the inventor of your product, or a doctor endorsing the product, you’re deceiving consumers by leading them to believe the depicted persons are real. As such, it’s a violation of the FTC Act.

High Risk Advertising Methods

The advertising practices discussed in the preceding section deal with advertising content.  By contrast, advertising methods involve the means by which the advertising content is delivered.  Advertising methods include paid search, display advertising, email advertising, and so forth. The following are some of the advertising methods that are heavily regulated and/or frequently targeted by the FTC, meaning they come with increased risk.

Affiliate Advertising

Not every business has the time or resources to master the complex ins and outs of advertising on the internet. The affiliate advertising industry was created as a solution to this problem—businesses who sought to promote their products (often called “Advertisers”) could engage others with high-trafficked websites or specific advertising skills (interchangeably referred to as “Affiliates” or “Publishers,” but we will use the term “Affiliate” here) to help them do so. However, the need to engage and manage a stable of Affiliates presented its own problem—while large companies such as Target and Amazon have the staff to oversee in-house Affiliate programs, other businesses do not. Thus, Affiliate “Networks” grew in popularity as a means of connecting Advertisers with a stable of anonymous Affiliates who drive traffic to Advertiser’s offers through various means.

The risks inherent in Affiliate advertising are an issue of scale. It is impossible for every Advertiser, or every Network for that matter, to oversee the advertising actions of each Affiliate. This problem is compounded by Affiliates who intentionally conceal their websites and other advertising methods from Networks and Advertisers so as to prevent their methods from being stolen—the “secret sauce” of advertising, if you will. Moreover, the competitive nature of internet advertising provides ample incentive for Affiliates to go rogue—that is, to engage in risky and non-compliant advertising practices and methods to obtain a competitive edge over other affiliates promoting the same offer. The Rogue Affiliate willfully violates the FTC Act and other regulations even though he or she has often signed an affiliate agreement attesting to their legal compliance.

The FTC takes the position that the Advertiser and Network are responsible for the actions of the Rogue Affiliate, even if the Advertiser and Network did not know of the misconduct, did not authorize the misconduct (or even prevented it in their agreements), or did not know or have a direct relationship with the Rogue Affiliate. According to the FTC, if the Advertiser benefitted from the Rogue Affiliate’s misconduct, it should be responsible for reimbursing the affected consumers for the sales or other income the Advertiser generated as a result of the Rogue Affiliate. In our experience, the FTC has seldom initiates enforcement actions against Rogue Affiliates. Accordingly, there is little perceived downside to the Rogue Affiliate in engaging in non-compliant advertising practices and methods.

If you are an Advertiser, in addition to reviewing your own content for compliance, you need to stay informed about the advertising activities of those working for you. Often, this can be accomplished through simple internet searches for your own offer. This responsibility includes a need to review Affiliate conversion rates for any aberrations. If one Affiliate is able to drive unlimited traffic to your offer while others struggle to do so, you owe it to yourself and your customers to investigate whether that Affiliate is padding its conversion rate through unauthorized content and methods. By engaging in Affiliate advertising, you are assuming a certain amount of risk, but this risk can be mitigated by careful and consistent review of all your campaigns.

Sweepstakes

The FTC has taken an interest in cases involving online sweepstakes, prizes, promotions, and gaming, which are subject to FTC consumer protection statutes and a multitude of state laws. In particular, the FTC regulates sweepstakes as potential deceptive practices under the FTC Act. The FTC will view a sweepstakes as deceptive unless it includes the name and address of the sponsor, duration of the sweepstakes, the prizes given away, the retail value of the prizes, and the odds of winning. The rules must also disclose eligibility requirements, entrance conditions, and any other limitations. Furthermore, the FTC has taken expansive views of what constitutes requisite prizes and “chance” for the purpose of sweepstakes. Companies creating any type of online sweepstakes, prize, promotion, or lottery-type offer should carefully review the offers for compliance, including under the FTC Act and related state laws and cases.

Email

The United States has multiple laws governing the sending of unsolicited commercial email, otherwise known as spam. Most notably, the U.S. federal government has enacted the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, 15 U.S.C. §§7701 et seq. (“CAN-SPAM”). CAN-SPAM applies to all commercial emails that are sent to any computer used in or affecting interstate or foreign commerce, including computers outside of the U.S. The FTC has been charged with the enforcement of CAN-SPAM, even though private ISPs also have standing to sue under the statute.

CAN-SPAM prohibits a person or business from sending an email or having another person send an email with: (1) false or misleading header information, such as the use of domain names or “friendly from” lines that pretend the email is from someone other than the sender (e.g., from “Oprah Winfrey”); or (2) deceptive subject lines that mislead the recipient about the content of the email (e.g., “Your $1M Prize is Waiting for You!”). CAN-SPAM also regulates the registration of sending domains and sending email accounts using false contact information, or false or unauthorized use of IP addresses.

Additionally, to comply with CAN-SPAM, a person or business sending an email, or having another person (such as an Affiliate) send an email, must comply with the following:

  • Identification as Advertisement—the body of the email must conspicuously identify the email as an advertisement.
  • Postal Address—the body of an email must identify a valid physical postal address for the advertiser or for both the advertiser and the sender.
  • Unsubscribe Link—the sender must provide a conspicuous unsubscribe link in the body of the email and must honor opt-out requests within 10 days of receipt.

When it comes to FTC enforcement, the FTC is particularly prone to investigating so-called “aggravated violations” of CAN-SPAM. These violations include circumstances where emails are obtained through harvesting websites, the email list is generated through automatic means, or the emails “spoof” the known contacts or friends of the recipient (where the contact information of recipients is often obtained through criminal hacking). Aggravated violations can greatly increase the amount of damages recoverable in an enforcement action.

(Note: In addition to CAN-SPAM, several states and foreign entities have enacted anti-spam legislation.  This article speaks only to the compliance requirements of CAN-SPAM and not any other regulation, such as California’s Anti-Spam Act, which may differ.)

Telemarketing

Various laws and regulations govern telemarketing, most significantly, the Federal Telephone Consumer Protection Act, 47 U.S.C. §227 (“TCPA”) and the rules under the Telemarketing and Consumer Fraud and Abuse Prevention Act (“TCFPA”), 15 U.S.C. §87, and specifically the Telemarketing Sales Rule, 16 C.F.R. §310 (“TSR”). Additionally, many states have adopted their own telemarketing laws, which may impose additional restrictions on telemarketing. In order to avoid exposure to the risk of lawsuits, civil penalties, and possibly even criminal charges, telemarketers must familiarize themselves with these laws.

Text / SMS & Robocalls

The TCPA contains several restrictions on making commercial phone calls, the most important of which are summarized below.

  • The TCPA prohibits using an automatic telephone dialing system (“ATDS”) to call any mobile phone number without the prior written consent of the called party.
  • The TCPA prohibits using an ATDS to send text messages without the prior written consent of the texted party.
  • The TCPA prohibits calling a residential or mobile phone number using an artificial or prerecorded voice to deliver a message without the prior written consent of the called party.
  • The TCPA prohibits sending unsolicited fax advertisements.

The TCPA allows a person who has received calls or text messages in violation of the TCPA to bring a lawsuit to recover up to $500 in statutory damages per call (or up to $1,500 in statutory damages per call if the defendant acted willfully or knowingly). Additionally, the TCPA authorized the FTC to create the Do Not Call Registry, which is discussed below. The TCPA allows a person who has received more than one call in 12 months in violation of the Do Not Call Registry provisions to recover up $500 in statutory damages per call (or up to $1,500 in statutory damages per call if the defendant acted willfully or knowingly). Finally, an aggrieved person can seek to represent both him/herself and other similarly affected call recipients in a civil class action, and seek to recover up to $1,500 for each call to each affected person.

Entities such as lead generators, which do not actually place phone calls, may still come within the scope of the TCPA if they broker consumer leads generated by, or resulting in, phone calls. Such liability may arise in several ways. As an example, if an affiliate of a lead generator places a call promoting the lead generator’s own goods or services, the lead generator may face TCPA liability under traditional agency principles. As another example, even when a lead generator acts as a pass-through to a third party advertiser, the lead generator may face an indemnification claim by the advertiser if the advertiser places a violative call based on misinformation regarding consent.

Given this risk of significant TCPA liability at all levels of the lead generation and call center business models, any entity operating in this space (e.g., call centers, lead generators, and advertisers) should develop a set of thorough written compliance policies, which they should require all business partners and affiliates to review and to acknowledge compliance. Most businesses facing TCPA issues benefit greatly from the advice of experienced FTC defense attorneys on these issues.

Telemarketing with Live Telemarketers

Under the Telemarketing Sales Rule (“TSR”), “telemarketing” is a plan, program, or campaign to induce the purchase of goods or services or a charitable contribution through interstate phone calls. Subject to certain exceptions, any business that takes part in telemarketing activities must comply with the TSR and other applicable laws. This is true whether a telemarketer initiates phone calls to consumers or receives phone calls from consumers. Moreover, the TSR applies whether the telemarketer places calls from within the United States or from outside of the country. Finally, to the extent a telemarketing call is placed on behalf of a lead generator or to develop a lead to be brokered by a lead generator, that lead generator arguably falls within the scope of the TSR.

The TSR applies not only to telemarketers, but also to “sellers,” i.e., businesses that provide, offer to provide, or arrange to provide goods or services to consumers in exchange for payment. And contrary to popular belief, charitable solicitations made by for-profit telemarketers are covered by the TSR. Such businesses are referred to as “telefunders,” and they are subject to various regulations. Despite the general breadth of the TSR, some entities are wholly exempt, like non-profit organizations, banks, and common carriers. Please note that even when an exempt entity is involved, a business that contracts with that exempt entity to telemarket its services will still be subject to the TSR.

The TSR sets forth numerous requirements for placing telemarketing calls. Moreover, and not surprisingly, the TSR prohibits sellers and telemarketers from making false or misleading statements to induce sales or donations. First, the TSR requires sellers and telemarketers to provide material information before the consumer pays for the goods or services in a clear and conspicuous manner (for example, cost, quantity, restrictions). The information that must be provided is significant and detailed, and often depends on the type of offer involved or the marketing technique used (for example, negative options, sweepstakes, debt relief offers, and credit card loss prevention offers, all have unique requirements). In addition to the above-described disclosures, before any sales pitch is delivered, a telemarketer must provide prompt oral disclosure in sales calls of the following four items of information clearly and conspicuously: identity of the seller, purpose of the call, nature of the goods, and any prize promotion details.

The disclosure requirements for telefunders soliciting contributions to charities are less severe than with sales calls. Even so, telefunders must still make two clear and conspicuous oral disclosures before soliciting a donation to a charity: (1) the telefunder must identify the charitable organization; and (2) the telefunder must explain that the purpose of the call is to solicit a charitable contribution.

The TSR also prohibits: a) calls to any person who has asked not to receive calls from a particular seller; and b) calls to any number on the National Do Not Call Registry. When a consumer has asked not be called again, sellers must not call that person again. To accomplish this, sellers and telemarketers are responsible for maintaining their own individual Do Not Call lists, which are also called entity-specific Do Not Call lists. The TSR also contains calling time restrictions and restrictions on call abandonment, as well as several exceptions to the Do Not Call requirements, like the established business relationship exception and the written permission exception.

“Muzzling” Reviewers

The FTC is charged with enforcing the Consumer Review Fairness Act (the “CRFA”), 15 U.S.C. §45b. The CRFA was enacted in 2016 to address “muzzling”—that is, a growing practice of companies contractually preventing their customers from posting bad reviews, such as with a ban on negative reviews in their terms and conditions. Under the CRFA, it is now illegal to include any provision in your customer terms that:

  • prohibits or restricts the ability of the customer to review your business;
  • imposes a penalty or fee against the customer for posting a negative review; or
  • purports to require your customer to transfer the copyright in all of their reviews about your business to you, so that you can demand they be removed from review sites on the grounds of copyright infringement.

Violations of the CRFA are treated as violations of the FTC Act and are punishable with the same remedies. In addition, if the FTC is not interested in prosecuting you, a state attorney general is provided with the ability to do so in the FTC’s stead.

So what can you do to address false reviews without violating the CRFA? Unlike other FTC-enforced legislation, the CRFA addresses this issue, and says it’s OK to prohibit or remove a review that:

  • contains confidential or private information – for example, a person’s financial, medical, or personnel file information or a company’s trade secrets;
  • is libelous, harassing, abusive, obscene, vulgar, sexually explicit, or is inappropriate with respect to race, gender, sexuality, ethnicity, or other intrinsic characteristic;
  • is unrelated to the company’s products or services; or
  • is clearly false or misleading (however, it’s unlikely that a consumer’s assessment or opinion with which you disagree meets the “clearly false or misleading” standard).

While it may seem like a surefire way to protect your reputation, muzzling reviews only causes more trouble than it is worth. Most FTC investigations are initiated by consumer complaints. When you prevent your customers from expressing their honest opinion about your goods and services on your website or consumer review sites, you leave them with little choice but to take their complaints to the FTC, thereby increasing your risk of an FTC investigation.

High Risk Billing Practices

A surefire way to attract FTC attention is through high risk billing practices, such as subscription billing and upsells that are not clearly and conspicuously disclosed to consumers before they provide a merchant with their credit card information. When a consumer makes a purchase in a brick and mortar store, the price is communicated to the consumer before they pay for it – and often several times before they hand over cash or credit. For example, the price may be printed or tagged on the item itself, there may be a price displayed on the shelf or other signage adjacent to the product, the consumer notes the price as the item is rung up at the register, the total cost of the shopping trip is communicated verbally by the cashier and visually onscreen to the consumer, and the consumer is given a final opportunity to select “OK” at the pay terminal to approve the amount of the transaction. The aim of ROSCA (discussed below) and FTC Guidelines regarding billing practices is to replicate this real life experience to the extent possible in online transactions. However, billing methods like free trials that convert to subscriptions plans, or subscription plans that begin immediately, present a greater potential for the consumer to be surprised by the amount they end up being charged. Accordingly, these billing practices are high risk.

Negative Options / Free Trials / Subscription Billing

The FTC defines negative option billing as a plan where the seller discloses an offer to provide merchandise or services to a consumer, and thereafter the consumer is billed for the merchandise or services, unless by a certain date or within a time specified by the seller the consumer cancels the order or otherwise instructs the seller not to send the merchandise. The FTC’s  Negative Option Rule (16 CFR Part 425), the FTC Act, and the federal Restore Online Shoppers’ Confidence Act, 15 U.S.C. §8401 (ROSCA), all apply to negative option billing plans and can be enforced by the FTC. Sellers often describe negative option offers as “free trials,” where the consumer receives a product but is only charged if the product is not returned after a certain period of time.

Different rules regarding negative option offers apply in different factual circumstances, but the key requirement is that consumers must affirmatively consent to the terms of the negative option billing plan, which must be conspicuously disclosed to consumers in close proximity to the point where action is taken by the consumer to enter the agreement. Importantly, the key terms, including price and the period of time in which the consumer can cancel the agreement must not only be conspicuously disclosed, but must be disclosed prior to the point where a consumer provides credit card details to the seller.

Some negative option offers also contain subscription billing, where a consumer will continue to be charged (often monthly) for periodic delivery of new products, unless he or she cancels the subscription billing agreement. Just like negative option offers, subscription billing offers must contain details about the amount that will be billed, the frequency of billing, and the manner in which consumers may cancel the subscription.

There are also state laws that regulate subscription billing, like the California Automatic Renewal Law (California Bus. & Prof. Code §17600), which may have additional requirements like post-transaction email summaries of the key terms and the ability to cancel online if the transaction occurred online.

IBO Structures and “Credit Card Laundering”

Merchants that want to process credit card transactions must apply to an "acquiring bank" and enter a credit card processing contractual relationship. Acquiring banks have relationships with the card associations (i.e., Visa, MasterCard, etc.), and thus acquiring banks are subject to the various fraud monitoring programs of the card associations. The card associations and acquiring banks have various standards that apply to merchants processing credit cards, and if a merchant falls below a particular standard, the merchant may be terminated. For example, if a significant number of a merchant's customers initiate "chargeback" requests, then the bank may terminate the merchant. Or, if the merchant has a history of defrauding consumers and having credit card processing relationships terminated, then an acquiring bank may deny a merchant's application for a new credit card processing account.

Some unscrupulous merchants attempt to circumvent the rules of the card associations and acquiring banks. For example, the VISA and MasterCard chargeback monitoring programs apply only to merchants with at least 100 chargeback transactions per month, and as a result some fraudulent merchants can manipulate the system and avoid chargeback monitoring by spreading their transactions across multiple merchant accounts and ensuring that no single account has more than 100 chargebacks per month. One technique some merchants have used is opening many shell companies as fronts. The merchant then cuts deals with individuals with good credit scores to be the faces of the shell companies, which apply for merchant accounts. When credit cards are processed, all of the proceeds flow through the shell company and to the true merchant, who may replicate this structure many times with many shell companies. This business practice, referred to as "credit card laundering" by the FTC, is a violation of the FTC Act.

The practice of credit card laundering has become fairly common in the affiliate marketing industry, despite the FTC's position about how it is unlawful. In fact, many internet marketers refer to the people who are the faces of credit card laundering shell companies as "IBOs,” which is short for independent business operation. Despite the self-serving moniker, IBOs are unlawful if the "true merchant" is someone other than the so-called IBO. In other words, if the IBO is not getting the revenues and profits of the business, and if the IBO is not performing any significant work for the business, then the IBO structure is a sham and violates the FTC Act.

It is a high risk business practice for a merchant to conceal its identity to banks in a credit card processing scheme. However, some complex business relationships that are not created for the purpose of circumventing the rules and regulations of banks and card associations may pass muster with the FTC. The analysis needed for determining whether a business is engaging in credit card laundering is a fact-intensive inquiry best conducted with an experienced attorney knowledgeable about FTC guidelines and the credit card processing industry.

Upsells

“Upsells” are a high-risk advertising method wherein the consumer is encouraged to buy an extra product or service either just prior to completing the primary transaction, or just after. The intent of upsells is to capitalize on the consumer’s already-made decision to make a purchase by encouraging an extra impulse buy, not unlike the magazines, sodas, and candy displayed next to the cash register at the grocery store. Of course, grocery shoppers are well-aware at the time they add that pack of gum to the conveyor belt that it will result in an extra charge. The problem with upsells is that it is not always obvious or clear to the internet user that they are agreeing to purchase an additional item. Because of this tendency to mislead consumers, upsells are a good way to garner bad attention from the FTC.

There are three primary types of upsells the FTC investigates. The first type is third-party upsells, where the upsell product is sold by a different merchant than the one conducting the primary transaction. Third-party upsells are extremely high-risk due to the difficulty of adequately disclosing to the consumer that the upsell is offered by a third-party and the consumer’s financial and billing information will be transferred to the third-party.

Third-party upsells are governed by ROSCA, the Restored Online Shoppers Confidence Act. ROSCA comes up in compliance conversations frequently because it governs the “clear and conspicuous” disclosure requirements for negative options. However, ROSCA also has a section that requires additional disclosures for third-party upsells. What ROSCA aims to prevent is the transmission of the consumer’s credit card information to the upsell merchant without the consumer’s informed consent. Because such transfers implicate privacy and banking regulations in addition to ROSCA, they are highly-disfavored.

The second type of upsells are opt-out upsells, where the consumer is automatically enrolled in an upsell unless they take affirmative action to opt-out. Examples include pre-checked boxes opting in to the upsell, or situations where the consumer takes no action to opt-in, but is required to take some action (such as sending an email, making a phone call, or completing a form) to opt-out. The FTC usually takes the position that opt-out upsells are misleading and/or deceptive because they fail to give the consumer the opportunity to refuse to purchase certain products and services. As such, they are very high-risk.

The third type of upsells is opt-in upsells, where the consumer is not enrolled in an upsell unless they take affirmative action to opt-in. Examples include pre-checkout menus provided to the consumer where the consumer has to affirmatively check the box next to each upsell in order to add it to their cart. If the consumer does not check any boxes, the upsell is considered declined.

Historically, opt-in upsells have been considered more compliant than their more aggressive counterparts, but in recent years, the FTC has brought several enforcement actions against companies engaged in post-checkout upsells that appear to be a continuation of the first transaction. Generally, the consumer is taken through checkout to complete the transaction for the original product. However, after completing checkout, the next page in the sales funnel is not a thank-you or confirmation page, but an upsell page containing a call-to-action such as “Wait! Just one more thing to complete your order!” Thus, the consumer reasonably believes that they need to click an additional button to agree to the primary transaction, when, in fact, they are opting-in to the upsell. The FTC’s position is that such opt-in upsells are false and misleading and therefore a violation of the FTC Act.  

High Risk Categories or “Verticals”

Over the past twenty or so years, the FTC has filed more enforcement actions regarding specific types of offers than others, such as “be your own boss” business opportunities and weight loss products. In some cases, the FTC has gone so far as to formally announce an attack on a particular type of offer, or issue guidelines specific to sales of certain products. Because these high-risk product categories or verticals are subject to special FTC regulations and attract enhanced FTC scrutiny, they are high risk.

Business Opportunities

The FTC has jurisdiction to investigate and initiate enforcement actions against companies operating deceptive business opportunity offers. There are two types of business opportunity offers in the eyes of the FTC. First, there is a Business Opportunity Rule that is embodied in a federal regulation and enforced by the FTC. That regulatory definition of business opportunities is rather narrow, covering, in short, sellers that maintain some sort of business relationship with the consumer after the initial payment, to provide locations for equipment, to provide outlets or customers for the buyer of the business opportunity, or to buy back goods or services from the buyer of the business opportunity. There are many requirements for sellers of such business opportunities, such as the requirements to disclose certain documents, refund policies, disclose the names of others who have purchased the business opportunity in the last three years, as well as many other requirements.

The second type of business opportunity under the FTC's jurisdiction is general offers to provide information and other tools to allow a consumer to generate profits. Sometimes business opportunities include ongoing "coaching" services, along with ongoing payments for these coaching services. Some examples of internet business opportunities are offers to teach consumers how to make money a) in ways not disclosed until you purchase the business opportunity, b) buying and selling real estate (i.e., flipping houses), c) using various systems to game the stock market, and d) selling products on Amazon. The FTC often characterizes these sort of offers that violate the FTC Act as "get-rich-quick" schemes. Despite this negative moniker of the FTC, there are many ways to run lawful, FTC-compliant business opportunity offers on the internet, including offers that include ongoing coaching services.

To assess the lawfulness of a business opportunity offer, one must break down all the marketing claims. Most importantly, past claims of income success of other consumers who purchased the business opportunity must be true. Often this data is complex, so it must be presented in a manner that reasonable consumers would understand. Also, claims about the amount of time and money that a consumer will need to invest in the business opportunity in the future are also important. There is some overlap between the analysis of business opportunity offers and the FTC Endorsement Regulation. Specifically, if actors are used to sell a business opportunity (for example, in online videos), then one must disclose the use of actors if there is any implication that the characters played by the actors actually used and had success with the business opportunity. Also, if any actual customers provide testimonials about their success with a business opportunity, those testimonials must be truthful, and if the consumer was compensated (with either money or free product/services), the fact that he or she was compensated must be disclosed.

It should also be noted that the marketing of business opportunities, especially those falling outside the Business Opportunity Rule and viewed by the FTC as potential "get-rich-quick" schemes, are high risk offers. In other words, business opportunities is an area that the FTC knows will always be rife with fraud and deceptive practices, and for that reason the FTC will continually be on the lookout for business opportunity offers that violate the law.

Nutraceuticals/Supplements

Nutraceuticals and dietary supplements range from medium risk (e.g., daily vitamins) to high risk for certain verticals (e.g., weight loss, addressed more fully below). Within the United States, the advertising, labeling, and sale of foods, drugs, and cosmetics are regulated by the FDA. Through various regulations, including the Dietary Supplement Health and Education Act of 1994 (DSHEA), the FDA distinguishes between “drugs” and “dietary supplements.” Under the DSHEA, dietary supplements include products intended to supplement the diet, such as vitamins and minerals. 21 U.S.C. §321(ff). Drugs require a lengthy and expensive approval process before they can be sold, while supplements do not. Ingredients (and combinations thereof) that fall under the purview of DSHEA are legal for sale and consumption in the United States so long as they are manufactured, labeled, and advertised in accordance with FDA guidelines. Such products do not require a prescription and are legal to purchase over-the-counter or online.

There are important restrictions on the advertising claims that can be made about dietary supplements. The manufacturer or distributor of a dietary supplement must ensure that: (1) the supplement is safe for human consumption; (2) the product benefit claims are not false or misleading; and (3) no product benefit claims indicate the supplement is a treatment or cure for a specific disease or medical condition, or to alleviate the symptoms of such. Part of your ongoing compliance challenge is to ensure that the Products stay on the dietary supplement side of the line and that you do not make product benefit claims that require the Products to be treated as a drug regulated by the FDA.

If the FDA feels you are making unauthorized claims about your supplement, it will issue a warning letter to you and force a recall of your product. However, in more egregious cases – such as where (1) outrageous claims about the product’s benefits are made without the requisite substantiation, (2) the product purports to treat medical issues that only an approved drug can, (3) the product does not contain the active ingredients in the concentration promised in advertising or disclosed on the Supplement Facts label, or (4) the product contains undisclosed ingredients, such as drugs and known allergens – the FTC will get involved. The remedies available to the FTC under the FTC Act far exceed those of the FDA under DSHEA. Thus, if you are a nutraceutical merchant, it is imperative to ensure your product is what it purports to be, including by having the product tested by a third-party lab independent of the supplier, and to limit your product benefit claims to those that are appropriate for supplements and that are substantiated by peer-reviewed clinical studies about your active ingredient(s).

Weight Loss

Weight loss is arguably the highest-risk vertical when it comes to FTC enforcement. The FTC has regularly taken action against weight loss offers for over twenty years. In the early 1990s, the FTC initiated enforcement actions against each of the “big” programs – namely, Weight Watchers, Jenny Craig, Medifast, and Nutrisystem. In each case, the FTC accused the defendant of making promises of potential weight loss without adequate substantiation. On January 7, 2014, the FTC held a press conference to announce its renewed initiative against deceptive claims made by marketers of weight loss products. This time, the companies targeted by the FTC were not the blue-chip entities that had been around for decades, but new, internet-based businesses that downplayed the role of diet and exercise and overstated the benefit of their supplements, teas, and “hormone” therapies. The FTC has deemed these “bogus” or “fad” weight loss products and has often referred to the campaigns advertising them as “scams.”  

Concurrent with the January 2014 press conference, the FTC updated its weight loss advertising guidelines and created a “Gut Check Reference Guide” for consumers and advertisers. As part of this guide, the FTC compiled a list of seven statements in ads “that experts say simply can’t be true.” These statements include the following claims about advertised weight loss products or programs:  

  • Causes weight loss of two pounds or more a week for a month or more without dieting or exercise (“I lost 30 pounds in 30 days – and still ate all my favorite foods.”);
  • Causes substantial weight loss no matter what or how much the consumer eats;
  • Causes permanent weight loss even after the consumer stops using the product;
  • Blocks the absorption of fat or calories to enable consumers to lose substantial weight;
  • Safely enables consumers to lose more than three pounds per week for more than four weeks (“Take off up to 10 pounds a week safely and effectively. Imagine looking into the mirror two months from now and seeing a slim reflection.”);
  • Causes substantial weight loss for all users; or
  • Causes substantial weight loss by wearing a product on the body or rubbing it into the skin.

Since January 2014, the FTC’s enforcement actions in the weight loss industry have continued to focus on internet-based businesses as opposed to established brands. Through these actions, the FTC has made it clear that, in order to be compliant with the FTC Act, sellers of weight loss offers must have clinical substantiation for their weight-loss claims. Moreover, because individual weight loss results will always vary, any statement of weight loss must be accompanied by a clear and conspicuous disclosure of the measures the featured individual took to lose weight and the provable average amount of weight a user of the product can expect to lose. For example, if the weight loss product is a nutritional supplement, and “Cindy” is claiming it helped her lose 50 lbs. in six months, but in addition to taking the supplement, Cindy also reduced her caloric intake to 1,000 calories per day and worked out three times a week with a personal trainer, this must be disclosed along with the provable average amount of weight lost by users of the product.

One of the biggest problems in the weight loss vertical is that the products are easy to obtain, white label, and sell, but the average results are difficult to calculate. Too many merchants foolishly rely on their competitors to do research about the product, and naively copy their advertising claims with the belief they will be able to substantiate them down the road if needed. If you are selling weight loss products, you need to be willing to do the requisite research and studies. Moreover, you need to be willing to sell them in a manner that emphasizes the role of diet and exercise and otherwise complies with the “Gut Check” principles above.

Skincare/Anti-Aging

The FTC has initiated several enforcement actions against offers for wrinkle treatments and anti-aging products concerning, in particular, advertising containing unsubstantiated claims about the benefits of such treatments and products. There are a number of factors that have likely led to the FTC’s heightened interest in these offers:

Anti-Aging offers are often replete with unsubstantiatable claims, such as “Look ten years younger!”

The advertising for anti-aging offers is often peppered with claims or diagrams that tend to be scientific or clinical (e.g., “Our proprietary peptides dissolve the dry upper 10% layer of the epidermis, revealing smooth skin underneath,” or “Clinically Proven”), but are, at best, unsupported by peer-reviewed clinical research and, at worst, can be contradicted by basic dermatological principles.

Anti-aging offers often feature doctored before and after photos, or feature stock photography models that have never used the advertised product.

Anti-aging offers are often sold as subscriptions and/or in conjunction with misleading upsells.

In order to run a compliant anti-aging offer, it is imperative to forego such deceptive advertising techniques. Instead, the use of actual users of the product as models, genuine, unretouched before and after pictures, and conservative, provable statements about how the product works are the way to avoid an FTC investigation.

Testosterone/ Erectile Dysfunction (ED)/ Muscle-building

Nutritional supplements advertised to men – such as testosterone “boosters,” male enhancement or erectile dysfunction, or muscle-building products – have seen increased FTC scrutiny, albeit less than weight-loss and anti-aging. As described above, the issue of whether a substance taken in pill form is a supplement or a highly-regulated drug depends, in large part, on whether it is advertised as treating or curing any known disease. The FDA considers both erectile dysfunction and low testosterone production to be diseases that can only be treated by drugs. Over the past several years, the FDA has paid increased attention to products advertised as “male enhancement” or “male performance” supplements, especially those that claim to provide a natural, over-the-counter alternative to popular prescription drugs for erectile dysfunction, such as Viagra. When tested by the FDA, these supplements proved to contain undisclosed chemical compounds such as sildenafil, the active ingredient in Viagra. In other words, the FDA determined these were not “natural” supplements at all, but were spiked with undeclared pharmaceuticals and subject to FDA regulation as drugs. The vast majority of these supplements had been imported from Asia and white-labeled by U.S. merchants who did not conduct independent testing to ascertain their contents.

Notably, however, FTC enforcement actions regarding male enhancement supplements do not usually focus on the products’ content, and enforcement actions concerning only male enhancement products are very rare. There is some credence to the belief that purchasers of male enhancement products are less likely to file formal FTC complaints about them, resulting in fewer enforcement actions. Indeed, many of the FTC enforcement actions that deal with male enhancement products also deal with other high-risk products and practices – for example, a defendant who sold both weight loss and male enhancement supplements on a subscription basis. Thus, it is possible for sellers of male enhancement products to substantially reduce their risk of FTC investigation by focusing entirely on this vertical and avoiding other high-risk areas.

Privacy Laws

The FTC regulates privacy and security issues under a number of laws, including the general FTC Act, which prohibits unfair and deceptive acts and practices. For example, companies have been targeted for making false and deceptive representations for failing to comply with their own online privacy policies.

The FTC has historically been active in protecting the privacy of children. The FTC enforces the Children’s Online Privacy Protection Act (COPPA), which imposes requirements on operators of websites, apps, or online services directed to children under 13 years of age or where there is knowledge of collection of personal information from a child under 13. COPPA requires websites and apps to post privacy policies with specific provisions about private data concerning children, notify parents directly about the information collection practices of the website or app, and get verifiable parental consent before collecting personal information from their children, or sharing this personal information with others.

The FTC also enforces key international privacy frameworks, such as the EU-U.S. Privacy Shield Framework (which provides a mechanism for companies to transfer personal consumer data from the EU to the US) and the Asia-Pacific Economic Cooperation (APEC) Cross-Border Privacy Rules (CPBR) System. In addition, the FTC, among other federal agencies, enforces portions of the Gramm-Leach-Bliley Act, which pertains to financial privacy issues, and applies to “financial institutions” such as banks and lenders; under this law, the Financial Privacy Rule, and the Safeguards Rule, financial institutions are subject to requirements for collecting and disclosing customers’ personal financial information and maintaining safeguards to protect that information.

Minimizing Risk of FTC Scrutiny

Above, we’ve identified advertising practices, methods, and product verticals that invite heightened FTC scrutiny; however, even if you are engaged in one of these high-risk areas, you can still avoid FTC investigation by mitigating your risk. Mitigation includes substantiating your product benefit claims, using true and accurate testimonials with adequate disclosures, and other practices as described herein. But another important way to mitigate your risk it to avoid compounding it by coupling high-risk practices. For example, if you are selling a high-risk weight loss supplement, you increase your risk of consumer complaints and FTC investigation by using a subscription billing model or affiliate advertising where you have little oversight on the weight loss claims made by the affiliate. Indeed, most FTC lawsuits are based on a combination of high-risk advertising practices, methods and products, as opposed to just one.

If you have an FTC legal matter, call us at 415-955-1155, ext. 120, or contact one of our FTC defense attorneys directly.

II. Investigations

The Law - Investigations

The FTC has broad-ranging investigation powers, including various forms of compulsory process relating to suspected violations of laws and regulations enforced by the FTC and of possible violations of FTC orders. 15 U.S.C. §§43, 46, 49, 57b-1, FTC Manual Ch. 3, Section .1.2.1. In particular, 15 U.S.C. section 57b-1 outlines the power to issue Civil Investigative Demands (“CIDs”), and 15 U.S.C. section 49 details powers to convene investigative hearings, which may involve subpoenas for witness testimony and for the production of documents relating to any matter under investigation.

Opening FTC Investigations

A variety of events may prompt the FTC to open an investigation. One way in which the FTC identifies targets for investigations is through the use of data obtained from the Consumer Sentinel Network. The Sentinel Network populates a database with consumer complaints from phone calls to the FTC, complaints submitted on the FTC website, complaints received by state Attorneys General, complaints to the Better Business Bureau, and other sources within the network. The Consumer Sentinel Network’s database is an investigative cyber tool that provides Sentinel Network members with access to millions of consumer complaints. Thus, complaints to any Sentinel Network member, even if the complaints are unverified, can trigger an investigation by the FTC or other state or federal agencies. The Consumer Sentinel database allows attorneys working at the FTC to identify trends in consumer complaints, or trends regarding complaints concerning specific companies and brands, which can lead to investigations. In other words, retaining counsel to proactively implement and continually review policies to ensure FTC compliance, and having sufficient call center and customer service staffing, is crucial to limit consumer complaints and thus limit the risk of an FTC investigation.

Other triggers for investigations include formal requests from members of Congress, publications (such as media, blogs, tweets) or reports by advocacy groups or competitors that happen to be reviewed by the FTC. Additionally, during FTC investigations and enforcement actions, the FTC often discovers conduct by third parties that the FTC believes is unlawful, thus triggering separate investigations into those third parties and their actions.

Major investigations involving many different respondents require approval at the Commission level; however, most investigations may be initiated by Regional Directors and Assistant Directors, who may pursue them for 100 hours before seeking review by the Bureau Director. Before opening an investigation, staff should ordinarily have information indicating that the Commission is likely to have jurisdiction of the proposed target and over the practices, that the volume of business in or affecting commerce is substantial, that the practices to be investigated are not the primary responsibility of another federal or state or local agency, and that there will be some benefit to consumers.

Civil Investigative Demands (CIDs)

Receipt of a Civil Investigative Demand (CID)

CIDs are judicially enforceable demands for documents, tangible things, written reports or answers to questions, or oral testimony (somewhat similar to conventional subpoenas) and may be issued when the FTC has “reason to believe” a person has possession, custody, control of materials or information “relevant to” an unfair or deceptive act or practice affecting commerce. CIDs will request responses under oath and may indicate that you are the target of an FTC investigation or that the FTC believes you have information relevant to an investigation.

The Commission must approve all forms of compulsory process, like CIDs, but requests identical to what may appear in a CID may be made prior to a formal CID, with compliance only voluntary. If an investigative target does not respond voluntarily, there is an obvious risk that the staff member may seek formal approval for a CID. Getting the advice of an experienced FTC defense attorney is highly recommended upon receipt of a CID.

Preservation of Documents

Upon receipt of a CID, it is crucial to read through the CID, preserve pertinent records and information, calendar deadlines, and consult counsel or appropriate vendors to initiate a “litigation hold” (i.e., preservation of documents) if needed. Reviewing and assessing the grounds for the FTC CID at an early stage is also important to preserve any legal arguments and defenses, including regarding confidentiality of records.

Obtaining Legal Counsel

Given the seriousness of a CID, it is important to consult with experienced FTC defense lawyers immediately upon receipt of a CID. Counsel can assist with, among other things:

  • negotiating deadlines and any extensions needed;
  • clarifying the scope and purpose of the requests;
  • evaluating potential document productions;
  • drafting written responses;
  • considering potential broader implications for the recipient;
  • balancing cooperating with the FTC with protecting business goals;
  • preserving legal objections, including for potential objections under the attorney-client privilege, the Fifth Amendment, and other privileges; and
  • researching applicable laws, strategy, and potential penalties.

Experienced FTC defense attorneys can also provide insights into the legal motivations of the FTC staff and negotiate with the FTC to minimize the possibility that the matter proceeds past the investigative phase.

Responding to a CID

Recipients of CIDs should weigh potential response options. If a CID is procedurally or substantively deficient, the recipient may be able either to meet and confer with the FTC to narrow the requests or to file a petition to quash or limit the CID. For example, a CID is required to state the nature of the conduct constituting the alleged violation that is under investigation and provide the applicable law; furthermore, the requested documents or other requests should be reasonably relevant to a legitimate investigation of a possible FTC action. Moreover, requests for documents and information must describe the requested material with definiteness and certainty and prescribe a response date within a reasonable period; and a request for oral testimony must state the date, time, and place where the testimony will be taken, as well as the process for obtaining transcripts. If a CID recipient is considering filing a petition to quash or limit the CID, there are special requirements to consider, including the requirement to meet and confer with the FTC before filing, and the requirement to file the petition within twenty days of service, or, if the response date is less than twenty days after service, prior to the response date. For any other written responses, the recipient may try to assert objections, including on grounds of relevance and indefiniteness, along with the substantive responses to the CID requests.

Consequences of Failing to Respond

CIDs should be taken seriously, as there are potentially serious consequences for failing to respond or insufficiently responding. Perhaps most importantly, a deficient response can lead to the FTC investigating further and potentially commencing an enforcement action in federal court, which can result in added risks and costs. In FTC lawsuits (covered below), the FTC generally has a broad range of remedies, from monetary redress (i.e., restitution and disgorgement) to equitable remedies (i.e., temporary restraining order, asset freeze, receiver, preliminary or permanent injunction). The FTC can also refer potentially criminal violations to the Department of Justice or Attorney’s General Office for further action. Thus, the stakes are high if a recipient does not respond to a CID.

Investigative Hearings

Investigative hearings may be held to formalize the interview process by requiring a person to appear at a given time and place, to be sworn in, to produce documents, and to give testimony. A representative of the FTC will generally preside over the proceedings, and a transcript of the hearing will be created. For example, an investigational hearing may be conducted pursuant to a CID for the giving of oral testimony or in response to a subpoena duces tecum. Persons providing testimony or producing documents have the right to counsel and may want to consider the applicability of specific defenses, such as the privilege against self-incrimination.

Communicating with the FTC During Investigation

Communications with the FTC during an investigation include formal, sworn responses to a CID or subpoena, but also can include less formal communications, such as letters, emails, and phone conversations between counsel and the FTC to obtain more information about an investigation. Targets of investigations may also consider whether it makes sense under the circumstances to strengthen their positions using consumer surveys, research studies, or other more formal submissions. Generally, the FTC welcomes communications and questions, which can be a good way to determine the intent and focus of the investigation. Using experienced counsel is important in these high stakes communications, in order to increase your chances of resolving an investigation without a formal enforcement action, and also in making certain that in communicating with the FTC that defenses and privileges are not waived.

Post-Investigation Decisions

Following an investigation, the FTC may initiate an FTC lawsuit or administrative action if it has “reason to believe” that the law is being or has been violated. Specifically, a recommendation to the full commission may be made by the trial attorneys and FTC Bureau of Consumer Protection for authorization to file a court complaint or administrative action; or, if there is insufficient evidence or other factors warranting the closure of the matter, the FTC staff may make a recommendation to close the matter and take no further action.

Following an investigation, the FTC may either close the consumer protection investigation, or recommend proceeding with enforcement. Assistant Directors of the Bureau of Consumer Protection, Regional Directors, and the Director of Federal-State and Consumer Relations are authorized to close consumer protection investigations which have not exceeded 100 work-hours. However, if initiation of the investigation required approval by the Bureau Director, such approval must be obtained for closing. Additionally, if the FTC investigation has received previous Commission consideration, Commission approval must be obtained.

If FTC staff close an FTC investigation without recommendation of further action, FTC staff may consider obtaining informal correction of the practices if it appears that the target of the investigation has acted in good faith and will make the necessary changes promptly. Regardless of whether informal corrections are requested, the FTC staff may close an investigation with a private closing letter sent to the target of the investigation.

If, after an investigation, FTC staff believe that grounds exist to support a recommendation for a complaint, FTC staff ordinarily offer the instagatory target the ability to enter either a consent agreement with the FTC or a stipulated injunction and final order for entry in a federal court. If the investigatory target does not agree to a consent agreement or final court order (or if he or she is otherwise not offered one), FTC staff will recommend to the Commission that a complaint be filed. FTC staff normally informs the target of the investigation that the complaint recommendation will be forwarded to the Commission. The target of the potential enforcement action will ordinarily have an opportunity to make a written submission to the Bureau Director and the Commission. Additionally, the enforcement target may also request meetings with the Bureau Director and each Commissioner, which will be granted at the discretion of the Director and each Commissioner.

If the Commission votes to approve a complaint, FTC staff will promptly file the complaint in the appropriate forum and serve the complaint on the defendants.

If you have an FTC legal matter, call us at 415-955-1155, ext. 120, or contact one of our FTC defense lawyers directly.

III. Enforcement

The Law - Enforcement

If an FTC investigation reveals violations of laws or regulations, the FTC has the power to bring an enforcement action, either in federal court or as an administrative action. Under Section 3 of the FTC Act, the Commission may "prosecute any inquiry necessary to its duties in any part of the United States.”

Whether filed in court or administratively, FTC enforcement actions are a serious legal matter. FTC enforcement actions are different than garden-variety litigation, and the defense thereof requires the assistance of an attorney experienced in dealing with the FTC. As explained more fully below, the FTC has powers in an FTC enforcement action that a standard plaintiff does not. Moreover, only an experienced attorney will know that the FTC has a pattern of resolving enforcement actions differently, depending on the type of action and the defendant. For example, you may have read about the FTC assessing fines against large corporations such as Amazon and Google.  However, a business engaging in one of the high-risk verticals or advertising practices described above is highly unlikely to resolve the case with a mere fine—instead, the FTC is looking to close down the business and seize all assets—including personal assets—of those in charge.  If you learn you are a defendant or potential defendant in an FTC enforcement action, you must seek experienced legal counsel immediately.

Jurisdiction and International Sales

When it comes to avoiding FTC lawsuits, many ask whether they are immune to such an action because the business, the business owners, and/or the business assets are located outside the United States. The answer is that there is probably not immunity in these circumstances, so long as U.S. customers were affected by the alleged violations of the FTC Act. Our firm has worked on several FTC enforcement actions where the FTC obtained the cooperation of governmental agencies local to the defendant. Thus, if you are located abroad, you should not count on your international location to protect you against the reach of the FTC.

While international businesses may question whether the FTC Act and related statutes have extraterritorial application, the FTC has sought to use enforcement powers over claimed unfair or deceptive acts or practices that cause or are likely to cause reasonably foreseeable injury within the United States, or involve material conduct occurring within the United States. In addition, the FTC works with more than 100 foreign competition and consumer protection authorities around the world, and cooperates with foreign authorities on enforcement and policy i.e., matters through formal and informal agreements. This notwithstanding, companies that have international sales or offshore accounts should work with counsel, potentially in and outside the United States, to appropriately weigh risks and legal issues. This will lead to an understanding of what changes in business practices may decrease the risk of the FTC alleging jurisdiction over international operations.

Federal Lawsuits

Federal lawsuits are conducted before a district court judge or magistrate according to traditional federal court rules. For example, federal lawsuits include the filing of a complaint and response to a complaint, discovery between the parties and with third parties, and potential settlement of the claims in the form of a final stipulated judgment. As in any lawsuit, the defendants have a range of defenses available to them.

One important hallmark of a federal case is that, for the most part, all filings in the lawsuit are publically available and searchable through the federal courts’ PACER and ECF online dockets and filing systems. This means that if you are a defendant in a federal enforcement action, details about the FTC’s allegations against you are available to anyone, including the press and your acquaintances. Even after the case is resolved, the case filings remain accessible online. Of course, as a government agency, non-public records of the FTC, with the exception of any records still associated with ongoing investigations, can be obtained through a Freedom of Information Act, or “FOIA” request. However, FOIA requests take months to process, as opposed to the few seconds required for a PACER search.

Thus, federal lawsuits implicate publicity and reputational concerns and can be expensive to defend. Accordingly, defendants involved in federal lawsuits should immediately consult with experienced legal counsel to determine strategy and next steps.

What’s at Stake

A federal lawsuit is a serious matter and involves questions of monetary remedies (i.e., money the defendant is required to pay) as well as injunctive relief (i.e., things the defendant is required to do or is barred from doing). But lawsuits can take a toll on defendants that exceeds the ultimate judgment, as addressed below.    

Remedies

The FTC has historically asserted its rights to obtain a wide variety of remedies through federal litigation. Specifically, the FTC regularly seeks temporary, preliminary, and permanent injunctions, restitution, consumer redress, and civil penalties (either for violating a final cease-and-desist order or other FTC order, or under certain statutes). However, defendants should review whether each requested remedy is appropriate in a given case. For example, the FTC’s authority to obtain civil penalties is limited in certain cases.

When federal cases settle, the FTC settlement agreements are typically in the form of a stipulated final court order and injunction, with provisions regarding prohibited conduct, requirements to periodically report to the FTC, record keeping requirements, monetary relief payable to the FTC, and retention of court jurisdiction for at least fifteen or twenty years. Such consent orders are often stricter than the underlying legal requirements. Thus, as a penalty for not complying with the law, the defendant is held to an even higher standard moving forward.

Consumer Harm

One of the most controversial tactics of the FTC is to seek a monetary amount from defendants that equates to the full amount of “consumer harm.” Consumer harm is generally that total amount paid by consumers as a result of the defendants’ allegedly deceptive acts or practices. This argument is generally supported by Section 5 of the FTC Act and case law as a form of equitable-type relief. The reason this frequent position of the FTC is controversial is that the FTC does not subtract business expenses incurred by a defendant when calculating consumer harm. Thus, for example, if a defendant generated $10 million in sales based on allegedly deceptive marketing, but only kept $750,000 after paying for expenses like inventory and marketing fees, the FTC will still demand that the defendant pay $10 million to the FTC as “consumer harm.”

The FTC considers the extent of any consumer harm in deciding whether to file a federal action or an administrative action, in addition to deciding whether to seek civil penalties and/or consumer redress.

Criminal v. Civil

FTC actions are civil in nature, not criminal. This means that, while the FTC can seek large sums of money and a permanent injunction in an enforcement action, it cannot put you in jail or on probation, and you will not have a criminal record as a result of the enforcement action. However, the FTC has a Criminal Liaison Unit that assists prosecutors in criminal cases, including regarding criminal consumer fraud. For example, the FTC may work with or refer cases to the U.S. Department of Justice, federal and state criminal law enforcers, and other federal agencies, such as the U.S. Treasury. FTC cases may run parallel to criminal proceedings and make similar claims. Usually, when criminal and civil cases are proceeding at the same time, the FTC’s enforcement action will be stayed (i.e., paused) until the criminal action is resolved, because criminal defendants have a right to a speedy trial, while civil defendants do not. Although uncommon, it is not difficult for the same actions that violated the FTC Act (e.g., deceptive advertising) to be reasserted as a crime (e.g., mail fraud). Cases that may overlap include matters involving mortgage and debt relief services, health products, sweepstakes, telemarketing, cases that involve misrepresentations to banks and other financial institutions, and other cases. In addition, the FTC may seek a judicial finding of contempt for violations of court orders, which may have criminal implications.

Reputation

A federal lawsuit usually involves public filings and can negatively impact a company’s business. Compounding this factor is the FTC’s practice of issuing a negative press release about the defendants with each case it files, as discussed more fully below. For this reason, one factor in considering whether to settle is whether the defendants want to try to reach a settlement of the case to avoid ongoing publicity. Importantly, a federal lawsuit or other action by the FTC does not bar other investigations or lawsuits, including by Attorneys Generals, other government agencies, or private plaintiffs. Thus, engaging in a protracted fight with the FTC may result in the FTC referring the case to other government agencies as new facts are discovered.

Initial Proceedings

Pleadings

A federal lawsuit is initiated by the filing of a written complaint, which outlines the basic factual allegations, the basis for jurisdiction, and the causes of action against the defendants. A defendant typically has 21 days, unless an extension or waiver is granted, to respond to the complaint. Types of responses by defendants include motions (for example, to dismiss a complaint for lack of personal jurisdiction over a foreign defendant) or an answer, which responds to each of the allegations in the complaint. Litigating against the FTC is complicated and different from other federal litigation, so fighting the FTC without counsel who are experienced in litigating against the FTC is rarely a wise choice.

Sealing of the Record

Court filings are generally a matter of public record. However, where confidential information is involved, parties can seek to seal the record or parts of it. For example, if a party has sensitive trade secret information that is pertinent to the case, it may try to seal the record so that the information does not become publicly known. Generally, courts will balance the competing interests of the public’s right to access and the party’s right to keep judicial records private; and a party seeking to seal judicial records should be prepared to demonstrate “compelling reasons” supported by factual findings justifying sealing of records. In addition or as an alternative, parties may consider a stipulation or motion for a protective order to safeguard certain information.

While uncommon in civil cases as a whole, it is common for the FTC to initially file the complaint under seal to prevent the defendants from learning it has been filed. As is explained below, it is common for the FTC to file an application for a TRO at the same time it files the complaint. Federal law allows a TRO application to be filed ex parte—that is, without notice to the defendant—if the party filing the application can show that the element of surprise is necessary to ensure the defendant doesn’t dispose of or conceal the assets at issue, or if the defendant is likely to take other irreparable action if it learns of the TRO application. Thus, the complaint, the TRO application, and the entire case is temporarily sealed until after the TRO has been issued and the defendant’s assets seized or frozen.

TROs and Asset Freezes

One of the most powerful weapons the FTC can wield is the TRO containing an “asset freeze.” A TRO and asset freeze can completely shut a company down, and freeze all of the assets of the company and its key executives. Section 13(b) of the FTC Act, 15 U.S.C. §53(b), authorizes the FTC to seek temporary restraining orders (TROs) and preliminary injunctions after sufficient notice if the agency has reason to believe (1) that a person or entity is violating or is about to violate a law enforced by the FTC; and (2) the TRO or preliminary injunction is in the public interest. Courts have broadly held that TROs and preliminary injunctions are “relief necessary to accomplish complete justice,” which often includes freezing of company and even individual assets so that funds will be available to compensate defrauded consumers. An asset freeze, which is a provision in a TRO or preliminary injunction, will prevent the company or even individuals from dissipating assets, based on the stated goal of preserving funds to compensate defrauded consumers. Importantly, courts often grant asset freezes within days or weeks of filing an action, thus severely limiting business operations and payment of defense costs. In fact, where assets are at risk of being dissipated, the FTC may file a complaint and TRO application with the court, under seal, without the defendants having any idea that the FTC has filed a lawsuit against them. Furthermore, FTC requests for asset freezes are subject to a significantly more lenient standard than in private litigation, as courts have found that the FTC need not show irreparable harm. Under §13(b), a court must only (1) determine the likelihood that the FTC will ultimately succeed on the merits; and (2) balance the equities. Under the first prong, the FTC must make a “prima facie showing of illegality” to the Court. Under the second prong involving balancing the equities, the goal of the protection of the public receives overwhelming weight, and some courts routinely rule that the FTC wins in this balancing test.

If the court grants the FTC’s request for a TRO and asset freeze, then the Court will set a hearing, usually in two or three weeks, to determine whether the TRO should be converted to a preliminary injunction, which will be in place for the duration of the lawsuit.

If a business is facing a potential FTC asset freeze, it is essential that the business consult with an experienced FTC defense attorney, due to the high stakes for the business.

Receivorship and Seizure

As part of requests to freeze assets, the FTC will sometimes also request that a receiver be appointed to review and seize assets pending or after litigation. A receiver is an individual or firm that is appointed by the court and acts as an agent of the court in taking custody and possession of assets at issue, potentially liquidating assets, conducting a review of assets, and collecting financial information. For example, a receiver may enter a business, seize all the files, take over supervision of employees, seize bank accounts, run the business as appropriate or even liquidate it. Additionally, the FTC may try seek control and/or seize assets from third parties that are not defendants to the litigation if the FTC believes that those third parties are in possession of funds traced to money paid by consumers as a result of deceptive trade practices. For example, a receiver may seize reserve funds held by merchant banks, seize funds held with Amazon, and drain any bank accounts held by the defendants. The FTC may also seek an order requiring defendants to repatriate any foreign assets back to the United States in order to preserve those assets for potential return to consumers. For example, the FTC may ask the judge to order defendants to transfer all funds held in foreign bank accounts back to the United States.

Press Releases

The FTC often issues press releases regarding filed cases, settlements, and judgments on its website, which usually link to copies of filed federal complaints and other court documents. Public information about federal lawsuits is also available on PACER, the government's repository of documents filed in federal courts nationwide. From the perspective of businesses, the press releases from the FTC are highly inflammatory and, in the opinion of many FTC defendants, harmful to the reputation of the defendants for years into the future. Even if defendants settle with the FTC, the initial press release from the filing of the complaint, and the press release about the settlement, will be republished by major news outlets and available on the internet for years. The best way to mitigate against the reputational harm of an FTC press release is to negotiate the best possible settlement terms with the FTC.  

Initial Disclosures

Pursuant to Federal Rule of Civil Procedure, parties in a federal case must identify and make certain initial discovery disclosures. Such disclosures are typically due before the court’s first case management conference, which is an initial hearing that the court may set through a scheduling order. More specifically, the parties must identify a list of “witnesses,” a list of “documents” relevant to the litigation, and either a “damages computation” (for plaintiffs) or any insurance information (for defendants). As part of the initial discovery process, the parties must also confer and discuss initial issues in the case and usually file a joint discovery plan or other statement according to each court’s local rules and any specific judge’s orders.

In FTC cases, defendants are also often required to make additional disclosures at the outset of the case. Usually, these requirements are part of a TRO or preliminary injunction, and may include immediate disclosure of defendant’s advertising and business affiliates, certain financial information by each defendant, and statements of consent by the defendants that their financial institutions may share account and other information with the receiver and/or the FTC. The stated purpose of most of these initial disclosure requirements is to allow the FTC to identify assets that need to be frozen, or to allow a receiver to transfer certain assets of the defendants into a receivership.

Notice to Employees and Business Associates

Another common requirement of the TRO is that each defendant provide a copy of the TRO to its employees, business associates (including advertising affiliates/ad networks), and other vendors, and thereafter provide the FTC with written notice that it has done so. The effect of this requirement is two-fold. First, the FTC is provided with a list of the defendant’s business associates, employees, and marketing affiliates, which it can use for discovery purposes. Second, to the extent the business associates did not learn of the enforcement action through industry gossip or the FTC’s press release, they are informed when they receive the notice. Upon receiving the notice, business associates tend to act quickly to terminate their relationship with the defendant and otherwise distance themselves, resulting in additional ostracization of the defendant.

Preliminary Injunctions

Another powerful weapon that the FTC often uses, or threatens to use, is the preliminary injunction. Instead of seeking an immediate TRO in a case, which may convert to a preliminary injunction in a matter of weeks after a hearing, the FTC can wait for a period of weeks or even months before filing a motion for a preliminary injunction. The FTC often asks defendants to voluntarily agree to enter a preliminary injunction, to avoid the time and expense for both parties in litigating the motion. If the parties cannot come to an agreement on an injunction, the FTC will file its motion, followed by formal notice to the defendants of the motion, under Federal Rule of Civil Procedure 65(a). Potentially, the FTC may seek a temporary restraining order and/or asset freeze, as outlined above, and then set a date and provide notice for a preliminary injunction hearing. Rule 65(a) also allows a court to consolidate a trial on the merits with a preliminary injunction hearing, which defendants may want to oppose if they need more time to prepare their defense. A preliminary injunction seeks to prohibit or sometimes mandate certain conduct pending the litigation, which may last for years. Just like a TRO, a preliminary injunction can contain an asset freeze, request for the appointment of a receiver, and other provisions that may threaten to shut down the business of a defendant.

In many FTC lawsuits, whether or not to oppose the preliminary injunction is one of the most important decisions in the case. The statistics are largely in the FTC’s favor, as most preliminary injunctions motions in FTC lawsuits are granted, and the instances where a judge has denied preliminary injunction motions are few. It can be quite expensive to oppose a preliminary injunction, and sometimes the testimony of expert witnesses and forensic accountants—persons who usually do not appear in litigation until summary judgment or trial—is required. However, even a partial win on a preliminary injunction motion can be critical for framing settlement discussions in the defendant’s favor. For example, the judge may exclude certain businesses or assets from the preliminary injunction, thus putting the FTC’s prospects of a full recovery of alleged consumer harm in question.

Of course, there are cases where it does not make sense to dedicate significant time or resources to opposing the preliminary injunction, such as when the defendant is already in settlement negotiations with the FTC, when the amount of alleged consumer harm is low, or when the defendant lacks the funds to file a meaningful opposition. In such situations, the defendant will often stipulate to the preliminary injunction without admitting any fault.

For these reasons, parties facing a potential preliminary injunction should consult with counsel about whether and how to file a written opposition and assert arguments at any hearing, or, alternatively, how to enter a negotiated stipulation on a preliminary injunction with the FTC.

Legal Counsel and Defense Costs

Lawsuits in federal court are a serious matter that typically require retention of experienced FTC defense attorneys. This may be difficult if there is an asset freeze or limited funds. However, if there is an asset freeze, counsel may be able to obtain a carve-out for the payment of legal fees and/or living expenses of the defendants. Attorneys can also work with their clients on creating an estimated litigation budget and strategy plan so that clients generally have an idea about projected defense costs. Importantly, litigation with the FTC involves specialized knowledge about FTC litigation and settlement practices, which are especially important when the future of a business, and the personal assets of the defendants, are at risk.

Discovery

Discovery is the process by which parties obtain evidence for the case. There are various forms of discovery in a federal lawsuit, including written requests (interrogatories and requests for admission) to the other party, requests for production of documents or other tangible things, and notices to depose a party. Discovery may also include subpoenas to third parties to obtain documents and/or oral testimony. Attorneys prepare discovery documents and take depositions, in addition to asserting written objections, preparing any necessary discovery motions, and preparing for and defending clients’ depositions.

One of the most critical components of discovery, which must be put in place long before an enforcement action is filed, is preservation of evidence. Many times, defendants believe the FTC’s allegations of their misconduct are exaggerated—such as when the FTC’s entire complaint is based on a screenshot of a webpage that did not receive much traffic. Problems arise, however, when the defendant did not preserve adequate records of its webpages, advertisements, or sales such that it can disprove the FTC’s allegations with the required level of certainty.

Settlement

In most cases, the FTC is open to settlement as a way to preserve time and resources. In fact, the FTC’s Operating Manual states that the FTC’s policy is to secure an effective order by consent if feasible, and only by litigation “if necessary.” Often, settlement discussions begin before a complaint is even filed or shortly thereafter. Unlike private litigation, cases involving settlement agreements with the FTC will often be public and available through the FTC website, as noted above. The FTC will also review whether defendants comply with settlement agreements and may file a motion for contempt if defendants are in violation of a final settlement order.

There usually are no private settlement agreements with the FTC. Instead, the terms of settlement agreements are embodied in final court orders, signed by the judge. So the words, “settlement with the FTC,” in this guide refer to the negotiations and finalization of a final court order, which a judge will sign.

Negotiations

Experienced counsel are essential for effective negotiating with the FTC, for drafting and reviewing written terms so they are the most favorable for defendants, and for ensuring that any settlement discussions remain confidential and are used only for the purpose of settlement. Experienced FTC defense lawyers are also essential in advising whether certain terms are standard (and thus not likely to be negotiated by the FTC) or whether there is room for bargaining (such as on monetary amounts where inability to pay is shown, and in a variety of other areas).

Monetary Settlement

Settlements with the FTC often include a monetary settlement amount paid by defendants, which is characterized as restitution, redress, or civil penalties. As explained above in the Consumer Harm section, the FTC usually seeks to settle at an amount equal to “consumer harm,” which does not include deductions for costs incurred. Thus, consumer harm amounts are often much higher than defendants could ever pay.

In the event that a defendant cannot pay a settlement because a defendant’s total business and personal assets are lower than the amount of consumer harm, the FTC may accept the payment of an amount lower than the full consumer harm number. In these situations, the FTC will request that defendants complete detailed business and personal financial statements, listing all liquid and non-liquid assets. Thereafter, the FTC would require a payment of all of defendants’ assets, with the difference between the amount of defendants’ assets and the full consumer harm being “suspended.” The suspended amount would never be due and payable, unless the FTC discovers that the defendants lied and failed to disclose assets on their financial disclosure statements.

The amounts of monetary settlements in FTC cases, both in cases where defendants can pay and when they do not have the ability to pay the full amount of consumer harm, varies widely depending on the claims. Importantly, experienced counsel are essential in minimizing what defendants actually pay to the government.

Non-monetary Settlement Provisions

Settlements with the FTC will also include non-monetary provisions. Common terms include findings of fact and definitions, which should be carefully reviewed by counsel, as the specific defined terms can make a crucial difference in the scope of a settlement and resulting court order. Other common non-monetary provisions include:

  • Specific prohibitions on false statements related to the FTC claims contained in the complaint, along with specific substantiation requirements for these claims. For example, the FTC may require randomized, double-blind, and placebo-controlled testing, conducted by qualified researchers, as substantiation supporting any weight loss claims in marketing.
  • General prohibitions on all marketing claims regarding broad sectors, without competent and reliable scientific evidence that substantiates that the marketing statements are true. For example, the FTC may require this sort of substantiation for any marketing claims about the benefits, safety, performance, or efficacy of anti-aging products.
  • An order to preserve all documents related to clinical studies, testing, or other substantiation for any marketing claims.
  • Prohibitions on specific business activity or business methods. For example, the FTC can prohibit a defendant from any negative option offers to consumers.
  • Prohibitions on a wide variety of activity that is already unlawful under the FTC Act, thereby making most violations of the FTC Act also violations of the final court order.
  • Prohibitions on engaging in affiliate marketing without a) having ad networks and affiliates provide their full contact information to a defendant; b) providing each ad network and affiliate a copy of the final FTC order and obtaining their agreement to comply with the order; and c) reviewing marketing materials of affiliates prior to the affiliate engaging in the marketing of defendant’s products.
  • An order to cooperate with the FTC in future investigations.
  • Requirements that defendants serve the final order on all owners, directors, and employees of defendant.
  • A requirement to respond to written requests of the FTC for information on defendant’s current business activity.
  • A variety of other requirements relating to the specific allegations in the case.

While some settlement provisions offered by the FTC are non-negotiable, many provisions may indeed be negotiable. Experienced counsel is highly recommended for negotiating settlements with the FTC.

Collection and Liquidation of Assets

As explained above, if defendants do not have the ability to pay the full amount of “consumer harm,” the FTC may ask the defendants to complete detailed financial schedules of all of their assets. Thereafter, the FTC and defendants negotiate about what defendants may keep and what assets will be collected and liquidated at the time of settlement. Importantly, the FTC often demands that defendants liquidate most of their major assets if they cannot pay the full consumer harm amount, including watches, cars, jewelry, and houses. In addition, the FTC will review whether any funds or other assets were improperly transferred or hidden to avoid payment to the FTC. There are some assets with may be kept by defendants in a negotiation with the FTC, which is why experienced counsel is so important in these negotiations.

Reporting Requirements

Orders after FTC settlements will often have one or more reporting requirements. Some reporting requirements include:

  • A requirement to provide a compliance report after one year identifying all of defendant’s business and contact information.
  • A requirement to notify the FTC of any change of address, change in corporate structure (i.e., any mergers or sales of the defendant’s companies or related subsidiaries, parents, and potentially affiliates), or change in business activities of a defendant for 20 years.
  • An order to keep a list of business records (for example, accounting, payroll, vendor records) for a specific period of time, over the course of 20 years.
  • A requirement to keep records for a number of years to show compliance with the order (for example, copies of advertisements for five years after a false advertising case) and provide copies of requested documents to the FTC shortly after an FTC request (for example, within 14 days).

Some reporting requirements are negotiable, depending on the allegations of the case and the overall dynamic of the negotiations.

Contempt

Where there is a violation of a final court order and injunction in an FTC case, even one that was entered through a settlement agreement, the FTC may initiate court proceedings alleging contempt of court, which is a quasi-criminal matter involving potential fines and even imprisonment. While contempt proceedings require certain formalities and are not commonplace, the FTC has sought a finding of contempt in many cases over the years. Importantly, federal court rules not only bind the defendant parties to the terms within a final order and injunction (violation of which can result in contempt), but the defendant’s agents, employees, and others that have notice of the final order and act in active concert or participation, may also be held in contempt. In contempt proceedings, the stakes are high, given the potential for fines and imprisonment. Thus, after entering a final court order with the FTC, defendants should develop clear policies for all defendant’s agents and employees to ensure compliance with the final order and avoid potential contempt proceedings.

Trial and Appeal

The FTC always tries to settle cases, and if a defendant fails to make an appearance in court, the FTC will obtain a default judgment. After the litigation starts, the FTC will eventually move for summary judgment against a defendant. However, if a case is not resolved with a settlement, default judgment, or summary judgment, the FTC will conduct a traditional trial in front of a federal judge on all the claims. The FTC must follow the federal rules of civil procedure and the federal rules of evidence for any trial it conducts in federal district courts around the country. Upon a final judgment, either side may appeal the judgment to a federal Circuit Court.

Administrative Actions

In contrast to lawsuits brought in federal district courts, an FTC administrative action is an administrative adjudication under administrative rules. Administrative actions are typically sought to obtain, and result in, a cease-and-desist order for allegedly unfair and deceptive acts or violations of other laws (and the parties may settle for restitution). Under Section 5(b) of the FTC Act, the Commission may challenge unfair or deceptive acts or practices, or violations of other consumer protection statutes, through an administrative adjudication. An administrative action begins with the FTC filing a complaint upon an affirmative vote of the Commission to initiate the complaint. The target of the action is called a respondent. If the respondent elects to settle the charges, the respondent may sign a consent agreement without admitting liability, agree to the entry of a final order, and waive all right to appeal. If the Commission accepts such a proposed consent agreement, it places the order on the public record for thirty days of public comment before determining whether to make the order final.

If the respondent does not settle and contests the charges, the matter is adjudicated in front of an administrative law judge. The result of a trial before an administrative law judge is a decision containing findings of fact and conclusions of law, and recommending either entry of an order to cease and desist or dismissal of the complaint. The Commission receives briefs, holds oral argument, and thereafter issues its own final decision and order. If a respondent violates a final order, it is liable for a civil penalty for each violation. Final administrative orders are enforced in federal courts, which can assess civil penalties and issue mandatory injunctions.

Post-Enforcement Game Plan

Whether defendants have settled a case with the FTC, or are bound by a judgment after contesting FTC claims, defendants need to engage in a significant amount of planning to comply with any final orders of a court and to minimize the possibility of future violations of court orders. Importantly, a final judgment does not end a defendant’s requirements to tend to the dispute with the FTC, as many requirements extend years into the future. Experienced counsel can help establish a game plan to minimize any future problems and keep a defendant off the radar of the FTC.

If you have an FTC legal matter, call us at 415-955-1155, ext. 120, or contact an FTC defense attorney at our firm directly.

Conclusion

We hope that you found our FTC Essential Guide helpful. As mentioned, the guide is designed for business owners and attorneys who are not familiar with the FTC’s consumer protection rules and regulations. This Essential Guide is not an exhaustive treatise on every aspect of the FTC, but, instead it was designed to be a highly usable tool for businesses and attorneys facing FTC consumer protection issues. If you have a question that was not answered in our Essential Guide, please contact us, and we will let you know how we can assist you.

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