Federal Trade Commission Act

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Failing to have adequate substantiation for advertising claims can land companies in hot water.  Case in point: The Federal Trade Commission (“FTC”) recently announced that it had settled charges against a company and its CEO related to their advertising of anti-aging products using what the FTC believed were false or unsubstantiated claims.  According to the FTC’s Complaint, Telomerase Activation Sciences, Inc. and Noel Patton (“TA Sciences”) lacked scientific evidence to support claims that their topical cream product and capsule/power product provided certain anti-aging and other health benefits.  Specifically, the FTC alleged that it was false, misleading, or unsubstantiated for TA Sciences to make the following representations about one or both products:

  • reverses aging;
  • prevents and repairs DNA damage;
  • restores aging immune systems;
  • increases bone density;
  • reverses the effects of aging, including improving skin elasticity, increasing energy and endurance, and improving vision;
  • prevents or reduces the risk of cancer;
  • decreases recovery time of the skin after medical procedures.

Additionally, the FTC alleged that TA Sciences made misrepresentations related to a paid program being independent and educational, related to consumers in its ads being independent users, and in promotional materials provided to other marketers.

The FTC alleged that TA Sciences’ conduct violated section 5(a) of the Federal Trade Commission Act, which prohibits unfair or deceptive acts, thus allowing the FTC to bring suit to enjoin such conduct.  The FTC’s suit alleged counts of (1) false or unsubstantiated efficacy claims, (2) false establishment claims, (3) deceptive format, (4) deceptive failure to disclose material connections with consumer endorsers, (5) false independent users claims, and (6) means and instrumentalities to trade customers.  The FTC’s proposed settlement order prohibits TA Sciences from making a number of representations related to these counts.  It also requires TA Sciences to notify purchasers of the products at issue about the FTC settlement order.  After a period of public comment, the FTC will decide whether to make the order final.

Of course, companies should ensure that they have adequate substantiation for advertising claims, whether health-related or otherwise.  As a reminder, the FTC requires that advertisers have a reasonable basis for advertising claims before disseminating them.  For more information regarding claim substantiation, review the FTC Policy Statement Regarding Advertising Substantiation.

Earlier this week, the Federal Trade Commission (“FTC”) announced a settlement with PayPal, Inc. over allegations that Venmo, a PayPal-owned mobile payment and social networking application, misled customers on issues relating to account transfers and privacy settings and enabled fraud through inadequate security practices.

Founded in 2009, Venmo lets users easily transfer money to one another and share information regarding such payments through a social network feed.  From a user perspective, Venmo operates a lot like any other major social media network, letting users “pay” each other in the same way you “tag” a friend in an Instagram post.  Thanks to its familiar social media-style interface and the ease with which it lets users split everyday expenses like bar tabs and rent payments, Venmo quickly became a favorite among millennials and college students.

According to the FTC, however, Venmo’s perceived simplicity was deceptive.  In a complaint originally filed against Venmo-parent PayPal in 2016, the FTC alleged that Venmo’s notification policy misled consumers and constituted a “deceptive or unfair practice” under Section 5(a) of the Federal Trade Commission Act.  Under the policy, Venmo notified users that funds were credited to their account before Venmo had reviewed and verified the underlying transaction.  According to the complaint, this practice resulting in unexpected delays and reversals.  It also created an ideal environment for fraud.  By falsely conveying to sellers that transactions had cleared, scammers were able to buy goods and services with fake or fraudulent information, leaving sellers with nothing when the transactions were ultimately reversed.

The FTC further charged that Venmo misled consumers about the privacy of information about their transactions.  Under the application’s default settings, whenever a user pays or is paid through the application, a description of the transaction and its participants is shared with all of the user’s “friends” in a social networking feed.  While Venmo offers privacy settings that let users limit who can view their transactions, it failed to accurately explain to users how those privacy settings actually work.

Additional charges alleged that Venmo misrepresented the extent to which consumers’ accounts were protected by “bank grade security systems” and violated the Gramm-Leach-Bliley Act’s Safeguards and Privacy Rules.

“This case sends a strong message that financial institutions like Venmo need to focus on privacy and security from day one,” acting FTC chairman Maureen Ohlhausen said in a statement.  “Consumers suffered real harm when Venmo did not live up to the promises it made to users about the availability of their money.”

For businesses dealing directly with consumers, this case underscores the importance of taking your duty to educate consumers about your product seriously, especially when it comes to how customer information will be used.  Such businesses should regularly review disclosures and other consumer-facing messages to ensure they are not only accurate but also consistent with reasonable consumer expectations.  And whenever costumers are given options as to how their information will be used, make sure those options are clearly conveyed and, perhaps most importantly, honor their choices.

Customer feedback is a two-way street.  On the one hand, positive customers reviews can inspire trust in potential new customers who might otherwise be apprehensive about purchasing products or services from an unfamiliar company.  Negative reviews, on the other hand, typically have the opposite effect.  As such, businesses may be tempted to stifle or “bury” negative customer feedback in order to preserve their reputation.  Businesses that engage in such complaint suppression tactics, however, run the risk attracting the ire of federal enforcement agencies.

For example, just last week, a federal court ruled that the Federal Trade Commission (“FTC”) is likely to prevail in its case against World Patent Marketing, Inc. (“WPM”), a business that has marketed and sold research, patenting, and invention-promotion services to consumers since 2014.  According to the FTC, WPM intimidated and threatened customers to prevent them from complaining and to compel them to retract complaints, often through cease and desist letters from WPM’s lawyers frivolously insisting that such conduct constitutes unlawful defamation or even criminal extortion.

The court agreed with the FTC that WPM’s tactics likely violate Section 5(a) of the FTC Act, which proscribes any unfair act or practice that “is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”  The court explained that complaint-suppression tactics like those employed by WPM cause substantial consumer injury “because they serve to limit the flow of truthful information” about the quality of a business’s services to prospective consumers, making it “nearly impossible for consumers to make informed decisions.”

The court also found that there are no countervailing benefits to such tactics, as “existing customers do not benefit from having their complaints suppressed and prospective consumers do not benefit from being denied access to material information.”  To the contrary, suppressing customer complaints in this manner permitted WPM  “to hinder competition and harm legitimate competitors in the marketplace.”

This case highlights a need for businesses to take special care when responding to customer complaints and negative online reviews.  However damaging a bad Yelp review may be for your business, getting sued by the federal government is certainly worse.

Paul Fling writes:

Fraud, deception, and unfair business practices are problems all companies and consumers are bound to come across. That is where the Federal Trade Commission (“FTC”) comes in. The FTC enforces federal consumer protection laws—in particular, laws focused on preventing fraud, deception, and unfair business practices. Largely, the FTC enforces federal antitrust and other unfair business practice laws to encourage fair competition in the marketplace and to keep consumer prices low.

U.S. Federal Trade Commission Building, Washington, D.C.Put simply, the FTC protects America’s consumers and promotes competition. For example, the FTC credits its anti-competitive antitrust enforcement efforts with improving access to health care—first, by helping prevent anti-competitive agreements that may raise health care prices, and second, by encouraging innovation in health care. Additionally, the FTC shields consumers from internet and telemarketing scams, price-fixing schemes, and even false and deceptive advertising. According to the FTC, its efforts benefit consumers in two crucial areas: their health and their economic well-being.

The FTC enforces over 70 laws. Those laws include acts that are familiar to many companies and consumers, such as the Federal Trade Commission Act, the Telemarketing Sale Rule, the Identity Theft Act, the Fair Credit Reporting Act, and the Clayton Act. However, the FTC has some level of responsibility in enforcing laws in a much wider range of areas, such as trademarks, credit reporting, internet privacy, college scholarship fraud, money lending, underage drinking, and more. With respect to advertising, for example, the FTC keeps an especially close watch on ads regarding food, medications, dietary supplements, alcohol, and tobacco—including monitoring and writing reports that assess alcohol and tobacco marketing practices.

The Federal Trade Commission Act provides the FTC with power to prevent unfair competition and business practices, seek retributions for injuries to consumers, conduct investigations, and make legislative recommendations. Consequently, the FTC enforces many of its wide-reaching laws under the Federal Trade Commission Act. A full list of laws the FTC may enforce and other information regarding FTC enforcement can be found on the FTC’s website.

Paul Fling is a summer associate, based in the firm’s Minneapolis office.

The Federal Trade Commission (“FTC”) recently filed a Complaint in the Southern District of California against six entities and four individuals, accusing them of deceiving customers with their use of “free” and “risk-free” trial period advertising related to cooking products, golf-related products, and online subscription services on their websites, in TV infomercials, and via email.

risk-free trial offer
Copyright: kchung / 123RF Stock Photo

The FTC’s Complaint alleges that the defendants violated section 5(a) of the FTC Act, which prohibits unfair or deceptive acts, by misrepresenting the trial offers applicable to their products.  Specifically, the FTC accuses the defendants of advertising their products as having a “risk-free” trial period when, in reality, the consumers are required to return the product at their expense before the trial period ends in order to avoid being charged additional amounts for the product.  The FTC also accuses the defendants of failing to adequately disclose the material terms and conditions of the trial offer, of their continuity/subscription plan offers, and of their refund and cancellation policy.  For example, the FTC takes issue with the defendants’ failure to clearly disclose that they would start charging the consumer if he/she did not cancel the trial period or return the product.

In addition to violations of the FTC Act, the FTC’s Complaint also alleges violations of the Restore Online Shoppers’ Confidence Act (“ROSCA”).  The FTC describes ROSCA as an act that “prohibits any post-transaction third party seller (a seller who markets goods or services online through an initial merchant after a consumer has initiated a transaction with that merchant) from charging any financial account in an Internet transaction unless it has disclosed clearly all material terms of the transaction and obtained the consumer’s express informed consent to the charge.”  The FTC’s Complaint against the defendants focuses on section 4 of ROSCA, which prohibits the sale of products through an improper “negative option” feature.  A “negative option” feature is a provision in an offer to sell goods or services under which the consumer’s silence is taken as an acceptance of the offer.  It is improper to utilize a “negative option” feature unless the seller satisfies the following requirements: (1) clearly and conspicuously disclose all material terms of the transaction before obtaining the consumer’s billing information, (2) obtain the consumer’s express written consent before charging the consumer, and (3) provide a simple mechanism for the consumer to stop recurring charges.  The FTC’s Complaint alleges that, in violation of section 4 of ROSCA, the defendants did not meet any of those three requirements with respect to their cooking and golf-related goods and services.

The FTC seeks an injunction preventing future violations of the FTC Act and ROSCA as well as other relief necessary to redress injury to consumers.  It is clear that the FTC looks closely at advertisements claiming to offer “free” and “risk-free” trial periods and that companies should make sure to adhere to the FTC’s and ROSCA’s requirements.