Direct sellers included in Notices of Penalty Offense for Product Claims
By: David Bland
On April 13 the Federal Trade Commission (FTC) put 670 companies, including several direct selling companies, on notice regarding the need to substantiate product claims. In a fourth round of warning letters since the Commission resurrected the use of its Penalty Offense Authority (POA) in October of 2021, The Notice of Penalty Offenses Concerning Substantiation of Product Claims reminds the recipients that the promotion or advertising of products using deceptive or unfair practices is a violation of Section 5 of the FTC Act and subjects them to civil penalties of $50,120 per violation.
Companies receiving letters include major corporations such as Amazon, PepsiCo, Novartis and Walmart. Many direct sellers also received the notice, including Amway, Arbonne, Isagenix, Herbalife, Mannatech, Nature’s Sunshine and Nu Skin.
The FTC states that these letters are to serve as a warning to various companies likely to make health claims and is not an indication that the companies have done anything wrong.
The Notice of Penalty Offenses letter states: “A recipient’s inclusion on the list does not in any way suggest that it has engaged in deceptive or unfair conduct. Although the initial distribution of the notice is limited to those making or likely to make health claims, the notice is not limited to health claims and applies to any marketer making claims about the efficacy or performance of its products.”
FTC Details Requirements for Product Claims Substantiation
Following the 2021 letters sent to 70 for-profit colleges on earnings and success claims, letters to over 700 companies regarding endorsements and testimonials, and notices sent to over 1,000 marketers regarding money-making opportunity claims, the Commission’s most recent warning to marketers details five purportedly unfair and deceptive product substantiation practices.
- Advertisers may not make objective product claims without having a reasonable basis for the claim using competent and reliable evidence at the time the claim is made.
- Advertisers may not make a claim about a product’s health benefits or safety features without reliable and objective scientific evidence provided by qualified persons.
- Advertisers may not represent directly or by implication that a product will cure, mitigate or treat a serious disease without relying on at least one human clinical trial that (1) is randomized, (2) is well-controlled, (3) is double-blinded (unless the marketer can demonstrate that blinding cannot be effectively implemented given the nature of the intervention), (4) is conducted by persons qualified by training and experience to conduct such studies, (5) measures disease endpoints or validated surrogate markers, and (6) yields statistically significant results.
- Advertisers may not misrepresent the level or type of substantiation for a claim.
- Advertisers may not represent that a product claim is scientifically or clinically proven unless they possess evidence that is sufficient to satisfy the relevant scientific community of the claim’s truth.
Prior FTC Administrative Cases Cited
As with all FTC notices of penalty offenses, the April letter to marketers about claims substantiation cites previously settled administrative cases on the topic that represent a precedent for guiding future Commission actions and decisions.
Section 5 of the FTC Act authorizes the Commission to seek civil penalties against parties engaging in a particular conduct with knowledge that the conduct has been previously found unfair or deceptive. Thus, the objective of the warning letters is to establish for any future legal action that the letter recipients had actual knowledge that certain acts or practices were previously deemed by the Commission to be unfair or deceptive.
The administrative orders cited in the product substantiation letter, spanning cases from 1974 to 2017, cover a wide variety of product claims cases, including the efficacy of weight-loss treatments, health claims about cancer treatment and heart disease, the efficacy of automotive devices and fuel additives, and the biodegradability of certain plastics.
The April letters also include copies of the Commission’s October 13, 2021, Notices of Penalty Offenses regarding endorsements, reviews, and testimonials that addressed the deceptive practice of making false claims about third-party endorsements, misleading consumers about an endorser’s status as an actual or current product user, and failing to disclose an unexpected material connection with an endorser.
The warning letters conclude by reminding marketers to consult the FTC’s recent update of its Health Products Compliance Guidance. The guidance, updated in December 2022, explains the legal requirements for advertising and selling health products, including dietary supplements, weight-loss products and other health-related items. It also provides information on how to avoid making false or misleading claims about the benefits of these products.
Recent POA Actions Largely Untested
The FTC’s use of its Penalty Offense Authority to obtain monetary relief in the wake of the Supreme Court’s decision to end restitution and disgorgement via Section 13(b) has been largely untested, leaving several important questions for the courts to consider.
Many legal observers have questioned the use of decades-old and thus potentially outdated administrative cases to qualify the recent penalty offense notices, arguing that regulatory agencies should be required to justify their penalty offenses with current legal standards and regulations rather than relying solely on outdated cases. This would ensure that penalties are consistent with current legal standards and regulations and are not unfairly applied to those being penalized.
Commissioner Wilson Issues Lone Dissent on her Final Day as Commissioner
The Commission voted 3-1 on March 31 to approve the substantiation notice, with Commissioner Christine Wilson casting the lone “no” vote on her last day as an FTC commissioner. Wilson issued a separate statement detailing her dissent.
While applauding the Commission’s efforts to “use every tool in the FTC’s toolbox to obtain monetary relief for consumers subjected to unlawful conduct,” Wilson, the lone Republican on the Commission prior to her departure, expressed her concerns that the “complex and nuanced” nature of substantiating product claims through often-dueling experts would make it exceedingly difficult for the FTC to obtain civil penalties from targeted individuals and companies. Furthermore, she states that the process of identifying targets and monitoring businesses for violations would consume significant agency resources.
Although former Commissioner Wilson voted with her colleagues to approve the three previous Notices of Penalty Offenses that were sent in 2021, her rationale for the dissenting vote on the fourth letter mirrored her concerns about the expanded use of Section 13(b) prior to the AMG decision.
“During the Obama Administration, the Commission expanded the use of 13(b) to seek consumer redress even against legitimate companies. Some of these cases were premised on challenges to substantiation for claims made as part of national advertising campaigns. This expansion of the program prompted many FTC scholars and practitioners to begin questioning the FTC’s authority to seek monetary equitable monetary relief under Section 13(b),” Wilson said in her dissenting statement.
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